UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2003
Commission File Number 000-19514
Gulfport Energy Corporation
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(Name of small business issuer in its charter)
Delaware 73-1521290
- ------------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
14313 North May Avenue, Suite 100
Oklahoma City, Oklahoma 73134
(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
Common Stock, $0.01 par value None
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $15,947,000
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days: $8,690,847 (based upon minority owned
shares of 3,729,565 and a stock Price of $2.65 as of March 3, 2004).
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 [ ] No [ ]
As of February 29, 2004, 10,146,566 shares of common stock were
outstanding.
Documents Incorporated by Reference
Certain information called for by Part III is incorporated by reference to
certain sections of the Proxy Statement for the 2004 Annual Meeting of our
stockholders which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2003.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
TABLE OF CONTENTS
Page
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
PART I
Item 1. Description of Business 1
Item 2. Description of Properties 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Registrant's Purchases
of Equity Security 14
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7. Financial Statements 21
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 21
Item 8A. Controls and Procedures 22
PART III
Item 9. Directors and Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 22
Item 10. Executive Compensation 23
Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 23
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits and Reports on Form 8K 24
Item 14. Principal Accountant Fees and Services 25
SIGNATURES 26
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB 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-KSB 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-KSB 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. We have no intention, and disclaim any obligation, to update or
revise any forward looking statements, whether as a result of new information,
future results or otherwise.
Item 1. Description of Business
Description of Business
Gulfport is an independent oil and gas exploration and production company
with properties located along the Louisiana Gulf Coast. As of December 31,
2003, the Company had 22 MMBOE proved reserves with a present value (10%) of
estimated future net reserves of $210 million dollars and associated
standardized measure of discounted future net cash flows of $194 million.
The Company's operations are concentrated in two fields: West Cote Blanche
Bay and the Hackberry Fields.
Principal Oil and Gas Properties
Gulfport owns interests in a number of producing oil and gas properties
located along the Louisiana Gulf Coast.
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. The following
table presents certain information as of January 1, 2004 reflecting Gulfport's
net interest in its producing oil and gas properties.
1
Net Proved Reserves
Non-Producing As of 1/1/04
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Field NRI/WI (1) Producing Wells (2) Wells Acreage (3) Gas Oil Total
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Percentages Gross Net Gross Net Gross Net MBOE MBOE MBOE
- ---------------------------------------------------------------------------------------------------------------------------
E Hackberry 78.7/100 11 11 72 70 3,147 3,147 518 2,627 3,145
W Hackberry 87.5/100 1 1 26 26 592 592 - 43 43
West Cote
Blance Bay
(4)(5)(6) 78.7/100 48 46 288 287 4,590 4,590 1,727 17,195 18,922
Overrides/Royalty Various 20 1 21 3 4,956 586 10 18 28
Non-operated
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Total 80 59 407 386 13,285 8,915 2,254 19,883 22,137
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(1) Net Revenue Interest (NRI) Working Interest (WI)
(2) The following wells produce on an intermittent basis: East Hackberry
- 7; West Hackberry - 0; and West Cote Blanche Bay -9.
(3) Most of Gulfport's acreage is Developed Acreage.
(4) Includes 2 producing wells and 1 shut-in well attributable to depths
below the Rob "C" Marker ("Deep Rights"). Gulfport has a 40.40%
non-operated working interest (29.95% NRI) in the Deep Rights outside
of the producing wells and a 7% non-operated interest in the
producing wells. The Deep Rights were operated by ChevronTexaco
Corporation prior to 1/1/2004.
(5) Gulfport is required to plug and abandon almost 400 wellbores. In
order to meet this obligation, Gulfport must plug at least twenty
wells a year at WCBB and invest monthly in a plugging escrow account
through March 2004. The Company has continually deposited money in
the West Cote Blanche Bay Escrow Account, which has a current balance
of approximately $2.7 million dollars.
(6) This chart does not include interests acquired from ChevronTexaco
effective January 1, 2004.
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
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
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.
2
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 formed a series of structurally complex and steeply
dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault
blocks serve as traps for hydrocarbon accumulation. 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 2003
was over 111 million barrels of oil with casinghead gas production being over 60
billion cubic feet of gas. There have been a total of 170 wells drilled on
Gulfport's portion of the field. As of December 31, 2003, 11 wells had current
daily production; 7 produced intermittently; 72 wells were shut-in, and 4 wells
had been converted to salt water disposal wells. The remaining 76 wells have
been plugged and abandoned. During 2003, daily net production averaged 195
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.
2003 Activity
During 2003 Gulfport cleaned out two salt-water disposal wells with coiled
tubing on the Erwin portion of East Hackberry. The Company also repaired two
electronic submersible pumps on the Erwin lease. At the State Lease 50 portion
of East Hackberry, Gulfport worked over one well and recompleted another well as
well as replacing tubing on the salt water disposal well at State Lease 50.
Gulfport also performed maintenance on the production facilities at East
Hackberry.
Future Activity
During 2003 the saltwater disposal capacity at the Erwin portion of East
Hackberry was significantly curtailed and Gulfport was forced to shut-in wells
that were capable of production. During the first quarter of 2004, the Company
drilled and completed a new saltwater disposal well on the Erwin lease that
allowed Gulfport to put five wells back on line plus the installation of
submersible pumps on two wells raised the Company's production over 700%.
The Gulfport technical staff continues to work on additional drilling,
workover and recompletion candidates at East Hackberry.
West Hackberry Field
3
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. Gulfport owns 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. 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
cumulative production of almost 700 BOE.
Area History and Production
The first discovery well at West Hackberry was drilled in 1938 and the
field was developed by Superior Oil Company (now Exxon-Mobil Corporation)
between 1938 and 1988. The estimated cumulative oil and condensate production
through 2003 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 1 is producing, 26 are
shut-in and 1 well has been converted to a saltwater disposal well. The
remaining 8 wells have been plugged and abandoned. During 2003, daily net
production averaged 18 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. Gulfport maintains a field office that serves both the East and West
Hackberry fields.
West Cote Blanche Bay Field
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. 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 40.40% non-operated working interest (29.95% NRI) in depths
below the Rob "C" marker. ChevronTexaco 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.
Deep Rights Acquisition
Effective August 1, 2002 Gulfport acquired additional interest in the deep
rights, those rights located below the base of the Rob C formation found at a
depth of approximately 10,000', at the West Cote Blanche Bay Field. This
acquisition brings Gulfport's interest to a total of 40.40% working interest and
4
29.95% net revenue interest in the deep rights at this field to go with 100%
working interest and 78.665% net revenue interest in the shallow rights.
Preferred Rights Acquisition
On February 27, 2004, effective January 1, 2004, Gulfport acquired
additional interest in State Lease 340 by exercising a preferential right to
purchase interest that ChevronTexaco was selling. Gulfport acquired 100%
working interest (81.5533% average net revenue) from the surface to the base of
the 13900 Sand found at approximately 11,320' in an additional 1,447.01 acres
lying adjacent to and in the vicinity of the Company's existing acreage position
at West Cote Blanche Bay bringing the Company's total acreage to 6,037.25 acres.
In the same transaction, Gulfport also acquired additional interest in the
Company's existing acreage, which gives it a 100% working interest and
operations from the surface to the base of the 13900 Sand and 40.40% working
interest with ChevronTexaco retaining operations below the 13900 Sand. In
addition to the interest in State Lease 340 Gulfport also acquired operations
and 100% working interest in ten additional wells and associated production
equipment at the field. In March 2004, the Company has put two of the recently
acquired wells on production and they are producing an average gross total of
approximately 300 mcf of gas and over 200 barrels of oil per day.
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 (a downthrown area bounded by normal faults) 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 875 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.
WCCB is a structurally and stratigraphically complex field. All of the
Proved Undeveloped (PUD) locations at WCBB are adjacent to faults and abut at
least one fault. Gulfport's Proved Undeveloped (PUD) drilling program is
designed to penetrate each PUD trap with a new wellbore in a structurally
optimum position, usually very close to the fault seal. The majority of these
wells are directionally drilled using steering tools and downhole motors. The
tolerance for error in getting near the fault is low, so the complex faulting
does introduce a risk factor of crossing the fault before encountering the zone
of interest, which could result in part or all of the zone being absent in the
borehole. This in turn can result in lower than expected or zero reserves for
that zone. The new wellbores eliminate the mechanical risk associated with
trying to produce the zone from an old existing wellbore, while the wellbore
locations are situated so as to more efficiently drain each reservoir. The vast
majority of the PUD targets are up-dip offsets to wells which produced from a
sub-optimum position within a particular zone. Gulfport's PUD drilling schedule
calls for the drilling of 137 wells, starting in 2004 with 12 wells with
additional drilling continuing through 2011. All costs for the directional
drilling has been figured into the overall well cost budget.
Area History and Production
5
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 peak in the 1970's when over 300 of the over 800 total
wells were drilled in the field. Of the 875 wells drilled, only 80 were dry
holes. As a result, the field has an historic success rate of over 90% for all
wells drilled. Past successes do not assure similar results going forward. The
historical average cumulative gross production for a producer in the field is
237 MBO, with over 100 of those wells (14% of total wells) producing in excess
of 500 MBO. As of January 1, 2004, field cumulative gross production was 192
MMBO and 233 BCF of gas.
There have been 875 wells drilled in WCBB. Of these, 48 are currently
producing, 268 are shut-in and five are salt water disposal wells. The balance
of the wells (or 553) have been plugged and abandoned. During 2003, Gulfport's
net current daily production averaged 1,326 barrels of oil, 1,132 MCF of gas and
14,155 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
to the seismic data. In December 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. Through a portion of July 2003, the Company generated
cash flow by handling other companies' oil and gas and disposing of their
saltwater through the facility for a fee. In July 2003, the company begin
barging its production and ceased taking the third parties production and
therefore the related processing fees were eliminated.
2002 Activity
In 2002, Gulfport continued to use the reprocessed 3-D seismic data to
identify and confirm intermediate and shallow prospects at WCBB.
During the first quarter of 2002, Gulfport performed two re-completions and
one workover at the West Cote Blanche Bay Field. Some of this work commenced
during the fourth quarter of 2001.
During 2002, Gulfport met its plugging obligation for the period ending
March 31, 2003 and plugged 22 wells at WCBB at an average cost of $12,741 per
well. (Two of the wells plugged will count towards the 2003 plugging liability).
The Company has plugged 112 wells at WCBB since it began its plugging program in
1997.
6
Gulfport began a seven well drilling program in April and finished it in
July of 2002. The Company completed and is currently producing five wells
drilled during the program. Four of the five wells that are currently producing
are directional wells that were steered by downhole motors so as to encounter
multiple hydrocarbon targets at the best structural position possible. The four
directional wells drilled during this program encountered a total of 328 feet of
net pay with a combined initial production rate of 460 barrels of oil, 548 mcf
of gas and 233 barrels of water per day. Gulfport drilled two non-productive
wells in this drilling program. One of these wells was a shallow exploratory
well drilled near the lease boundary, while the other well encountered the
target zones but the zones were deemed to be too thin to justify completion.
Effective August 1, 2002 Gulfport acquired additional interest in the deep
rights, those rights located below the base of the Rob "C" formation found at a
depth of approximately 10,000', at the West Cote Blanche Bay Field. This
acquisition brings Gulfport's interest to a total of 40.40% working interest and
29.95% net revenue interest in the deep rights at this field to go with 100%
working interest and 78.665% net revenue interest in the shallow rights.
Hurricane Lili hit the southern gulf coast of Louisiana on October 3, 2002
with estimated sustained winds over 120 miles per hour and a 9- foot tidal
surge. The eye of the hurricane came on shore directly East of Gulfport's WCBB
field. The storm caused significant damage to the Company's production
facilities and the WCBB field. The total cost to restore production to the
field was estimated by the Company's personnel and insurance carrier to be
$3,510,000. As of December 31, 2002, the Company had received a $1,000,000
advance payment from its insurance carrier in order to commence repairs to the
field and facility. The remaining $2,510,000 in insurance settlement proceeds
was received during early 2003 and is included in the accompanying balance sheet
in the financial statements as "Insurance settlement receivable" at December 31,
2002.
Gulfport commenced a six well drilling program at West Cote Blanche Bay on
December 1, 2002, four of the wells were drilled or spud in 2002 and the
remaining two were drilled in 2003. These wells had total depths ranging from
2,500' to 5,000' and each well tested at least two zones. The Company generally
drilled shallower wells in this drilling program in order to lower risk and
reduce drilling costs. The six wells encountered a total of 536' of net pay and
27 productive zones. The six wells had initial daily total gross production of
849 barrels of oil, 55 mcf of gas and 47 barrels of water.
During 2002, Gulfport filed for a permit to convert a well that is
currently inactive to a saltwater disposal well. The Company is nearing
capacity with its current saltwater disposal system and feels that adding an
another disposal well will not only service additional production that it hopes
to discover in the field, but will allow Gulfport to put into production wells
that are currently inactive due to a high salt water cut. As of the date of
this filing, the permit is still pending.
2003 Activity
Gulfport commenced a seven well drilling program at West Cote Blanche Bay
on April 20, 2003 resulting in six successful completions and one dry hole.
These wells had total depths ranging from 2,500' to 6,800' and most wells tested
multiple zones. The six successful completions encountered a total of 467 feet
of net pay and 30 productive zones. The six successful completions had initial
daily total gross production of 354 barrels of oil, 186 mcf of gas and 90
barrels of water.
7
During various times during 2003 Gulfport recompleted zones in eight
different wells that had an initial gross production total of 723 barrels of
oil, 729 mcf of gas and 605 barrels of water. The Company worked over one well
during 2003. Gulfport also laid a new oil sales line, installed an oil storage
barge and also put in a vapor recovery to the production facilities.
Future Activity
During the first quarter of 2004 Gulfport plugged eighteen wells at West Cote
Blanche Bay that, together with the two extra wells the Company plugged in 2002
over their agreed twenty wells, fulfilled their 2003 plugging commitment.
Gulfport is planning a twelve well drilling program to begin in the summer
of 2004 with wells ranging in depth from approximately 2,500' to 9,900' all with
multiple production horizon targets. The Company also plans to convert an
inactive well to a salt water disposal well during the second quarter of 2004.
On February 27, 2004, effective January 1, 2004, Gulfport acquired
additional interest in State Lease 340 by exercising a preferential right to
purchase interest that ChevronTexaco was selling. Gulfport acquired 100%
working interest (81.5533% average net revenue) from the surface to the base of
the 13900 Sand found at approximately 11,320' in an additional 1,447.01 acres
lying adjacent to and in the vicinity of the Company's existing acreage position
at West Cote Blanche Bay bringing the Company's total acreage to 6,037.25 acres.
In the same transaction, Gulfport also acquired additional interest in the
Company's existing acreage, which gives it a 100% working interest and
operations from the surface to the base of the 13900 Sand and 40.40% working
interest with ChevronTexaco retaining operations below the 13900 Sand. In
addition to the interest in State Lease 340 Gulfport also acquired operations
and 100% working interest in ten additional wells and associated production
equipment at the field. In March 2004, the Company has put two of the recently
acquired wells on production and they are producing an average gross total of
approximately 300 mcf of gas and over 200 barrels of oil per day.
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 2003 average daily gross production from
five producing wells was 1,320 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 120 gross barrels of oil per day in
2003.
8
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 marginally 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:
Acreage Producing Non-Producing
Field Parish Working Interest Wells Wells
Bayou Penchant Terrebonne 3.125% 6 9
Bayou Pigeon Iberia 6.250% 6 6
Deer Island Terrebonne 6.250% 3 3
Golden Meadow Lafourche 3.125% 0 1
Bayou Long Iberia 3.125% 1 0
During early 2003, Apache Corporation ("Apache") took over as operator of
most of the properties Gulfport received from Castex.
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. See additional discussion regarding the Litigation
Trust in the footnotes to the accompanying financial statements.
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, Historically, Gulfport sold 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 2003 was sold on fixed price
contracts with the remainder sold based on the average closing price on NYMEX
for each trading day during the month of delivery. In July 2003, Gulfport was
notified by a subsidiary of Shell Western Exploration and Production, Inc.
("Shell") that the Shell pipeline that transported the oil from the production
facility at West Cote Blanche Bay to the purchaser was being deactivated. As a
9
result, the Company is now using a barge to transport the oil production to the
purchaser.
During 2003, oil sales to Shell Trading Company and Equiva Trading Company
accounted for 74% and 16%, respectively, of Gulfport's oil sales. Gulfport had
no other purchasers that accounted for greater than 10% of its oil sales during
2003. During 2002, oil sales to Gulfmark Energy Inc., Williams Energy Marketing
& Trading Company, Shell Trading Company and Equiva Trading Company accounted
for 56%, 19%, 12% and 10%, respectively, of Gulfport's oil sales.
Beginning in January 2003, Gulfport entered into various fixed price contracts
for a portion of the WCBB production for periods during 2003 and January 2004.
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
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,
10
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 12,035 square feet. The monthly rent is approximately
$18,000.
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 6,180 square feet of finished office area and 6,300
square feet of clear span warehouse area. The mortgage balance was
approximately $118,000 as of December 31, 2003 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, 2003 Gulfport had 25 employees. A Louisiana well
servicing company serves as contract operator of the fields and provides all
necessary field personnel.
Item 2. Description of 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 January 1, 2004, as estimated by Netherland, Sewell & Associates,
an independent engineering firm.
JANUARY 1, 2004
---------------
Proved Reserves Developed Undeveloped Total
--------- ----------- -----
Oil (MBBLS) 1,790 18,093 19,883
Gas (MMCF) 1,257 12,267 13,524
11
MBOE 1,999 20,138 22,137
Year-end present value 10% of
estimated future net revenue $ 25,350,000 $ 184,188,000 $ 209,538,000
(Pre-tax)
Total proved reserves decreased to 22,137 MBOE at January 1, 2004 from
26,090 at January 1, 2003. This decrease in reserves is mainly attributable to
normal production declines and engineering revisions.
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 January
1, 2004. The estimated future production is priced at December 31, 2003 without
escalation using $32.52 per BBL and $6.19 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. The reserves reported in Gulfport's
filing to the U.S. Department of Energy do not differ more than five percent
from those disclosed in this Form 2003 10KSB.
Production, Prices, and Production Costs
The following is a table and graph of Gulfport's net production in 2003
2003 2002
------------ ------------
Production Volumes:
Oil (MBBLS) 571 464
Gas (MMCF) 123 103
Oil Equivalents (MBOE) 592 481
Average Prices:
Oil (per BBL) $ 27.66 (1) $ 24.69
Gas (per MCF) $ 4.04 $ 3.66
Oil Equivalents (per MBOE) $ 26.70 $ 24.59
Average Production Costs (per BOE) $ 9.93 (2) $ 10.65 (2)
Average Production Taxes (per BOE) $ 3.17 $ 2.81
- --------------------------------------
(1) Includes fixed contract prices of
January 2003 $ 28.50
February 2003 $ 28.34
March 2003 $ 27.95
April 2003 $ 27.08
May 2003 $ 26.95
June 2003 $ 24.27
July 2003 $ 24.33
August 2003 $ 24.42
September 2003 $ 24.45
October 2003 $ 24.45
November 2003 $ 24.25
December 2003 $ 24.10
12
Excluding the effect of the fixed price contracts, the average oil price
for 2003 would have been $32.38 per BBL and $32.08 per BBL oil equivalent price.
(2) Does not include production taxes.
Drilling and Recompletion Activities
The following table contains data with respect to certain of Gulfport's
field operations during the years ended December 31, 2003 and 2002.
2003 2002
------------- -------------
Gross Net Gross Net
----- --- ----- ---
Recompletions, Sidetracks
and Deepenings:
Oil 8 8 4 4
Gas 0 0 0 0
Non-Productive 1 1 0 0
-------------- -------------
TOTAL: 9 9 4 4
============== =============
Exploratory - non-productive 0 0 1 1
============== =============
Development Wells:
Oil 7 7 8 8
Gas 0 0 0 0
Non-Productive 1 1 1 1
-------------- -------------
TOTAL: 8 8 9 9
============== =============
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.
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 March 5, 2004, the holders of a majority of the outstanding shares of
the Company's common stock executed a written consent electing five persons to
serve on the board of directors of Gulfport. Each director will serve until the
13
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, 2003 has been scheduled for April 30, 2004.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Registrant's Purchases of Equity Securities
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:
2003 2002
-------------- --------------
YEAR ENDED DECEMBER 31 LOW HIGH LOW HIGH
---------------------------- ---- ----- ----- ------
First Quarter $2.50 $3.00 $3.50 $5.40
Second Quarter $2.60 $3.40 $2.80 $4.20
Third Quarter $2.69 $2.80 $2.75 $3.65
Fourth Quarter $2.75 $3.30 $2.10 $3.05
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not represent actual transactions.
Holders of Record
At the close of business on March 22, 2004 there were 396 shareholders of
record holding 10,146,566 shares of Common Stock outstanding.
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. In addition, as a result of the Private Placement Preferred Offering,
Gulfport is prohibited from the payment of any dividends to the holders of the
Common Stock.
Recent Sales of Unregistered Securities
None
Item 6. 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 June 20, 2002, the Company entered into a new line of credit with BOK. Under
the terms of the agreement, the Company was extended a commitment to borrow up
to $2,300,000. Amounts borrowed under the line bear interest at Chase Manhattan
Prime plus one percent, with payments of interest on outstanding balances due
14
monthly beginning August 1, 2002. On July 1, 2003, the Company renewed its line
of credit and extended the maturity date to July 1, 2004. The outstanding
balance under this credit facility was $2.2 million at December 31, 2003.
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.
2003 2002
------------ ------------
Production Volumes:
Oil (MBBLS) 571 464
Gas (MMCF) 123 103
Oil Equivalents (MBOE) 592 481
Average Prices:
Oil (per BBL) $ 27.66 (1) $ 24.69
Gas (per MCF) $ 4.04 $ 3.66
Oil Equivalents (per MBOE) $ 26.70 $ 24.59
Average Production Costs (per BOE) $ 9.93 (2) $ 10.65 (2)
Average Production Taxes (per BOE) $ 3.17 $ 2.81
- --------------------------------------
(1) Includes fixed contract prices of
January 2003 $ 28.50
February 2003 $ 28.34
March 2003 $ 27.95
April 2003 $ 27.08
May 2003 $ 26.95
June 2003 $ 24.27
July 2003 $ 24.33
August 2003 $ 24.42
September 2003 $ 24.45
October 2003 $ 24.45
November 2003 $ 24.25
December 2003 $ 24.10
Excluding the effect of the fixed price contracts, the average oil price
for 2003 would have been $32.38 per BBL and $32.08 per BBL oil equivalent price.
(2) Does not include production taxes.
Comparison of Years Ended December 31, 2003 and 2002
Gulfport reported a net loss attributable to common stock of $219,000 for
the year ended December 31, 2003, as compared with a net loss attributable to
common stock of $625,000 for the year ended December 31, 2002. The decrease in
15
loss attributable to common stock of $400,000 was primarily due to an increase
in oil and gas sales during 2003 as a result of increased production
attributable to the Company's drilling program initiated in December 2002. In
addition, during 2003, Gulfport had twelve full months of production. During
2002, as a result of Hurricane Lili, the Company experienced down time on its
WCBB facility which resulted in a loss of production. Additionally, contributing
to income was a 12% increase in average oil prices received for the year ended
December 31, 2003 as compared to the same period in 2002. This reduction of net
loss from 2003 was offset in part by an increase in operating expenses,
depreciation, depletion and amortization and interest expense on the preferred
stock.
Oil and Gas Revenues. For the year ended December 31, 2003, Gulfport
reported oil and gas revenues of $15,809,000, a 34% increase from revenues of
$11,450,000 in 2002. This $3,980,000 increase in revenues is attributable to a
23% increase in BOE produced to 592 BOE for the year ended December 31, 2003 as
compared to 481 BOE for the same period in 2002. This increase in production
was due mainly to the Company's drilling program initiated in December 2002. In
addition, during 2003, Gulfport had twelve full months of production. During
2002, as a result of Hurricane Lili, the Company experienced down time on its
WCBB facility which resulted in a loss of production. Additionally, contributing
to the increase in oil and gas revenue was a 12% increase in average oil prices
received for the year ended December 31, 3003 as compared to the same period in
2002.
Operating Expenses Including Production Taxes. Total lease operating
expenses including production taxes increased to $7,768,000 for the year ended
December 31, 2003 as compared to $6,474,000 for the same period in 2002. This
increase was due to primarily to non-capitalized LOE workovers performed during
the period. In addition, production taxes increased for the year ended December
31, 2003 as compared to the same period in 2002 due to an increase in oil and
gas revenues.
General and Administrative Expenses. Net general and administrative
expenses decreased slightly to $1,843,000 for the year ended December 31, 2003
from $1,873,000 for the same period in 2002. This decrease was due primarily to
a increase in administrative reimbursements from related entities of $764,000
for the year ended December 31, 2003 as compared to $250,000 for the same period
during 2002.
Accretion Expense. In August 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations".
SFAS No. 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. The
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related long-lived asset. Any
difference between costs incurred upon settlement of an asset retirement
obligation and the recorded liability will be recognized as a gain or loss in
the Company's earnings. Gulfport adopted SFA No. 143 effective January 1, 2003.
For the year ended December 31, 2003, Gulfport recognized $393,000 in accretion
expense related to SFAS No. 143. (See Note 21 to the Company's Financial
Statement included herein).
Interest Expense. Ordinary interest expense decreased by $69,000 or 62% to
$112,000 for the year ended December 31, 2003 from $181,000 for the same period
in 2003. This decrease was due to a reduction of average debt outstanding
during 2003.
Interest Expense - Preferred Offering. In May 2003, the FASB issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS No. 150 establishes standards for how an
16
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or as
an asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS No. 150 is generally effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Previously, the Series A Preferred Stock had been classified on the
balance sheet between total liabilities and equity. The Company has recorded a
liability related to the Series A Preferred Stock of $12,071,000. As a result
of the adoption of SFAS No. 150 in May 2003, the Company has recorded $875,000
of interest expense for the last six months of 2003 on the preferred offering
which would have previously been classified as a reduction in equity. (See Note
21 to the Company's Financial Statement included herein).
Litigation Trust. The Company received $160,000 from the Litigation Trust during
2002. No revenues were received from the Litigation Trust in 2003.
Other changes in income for the year ended December 31, 2003 as compared to the
year ended December 31, 2002 were attributable to the following factors:
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense was $4,637,000 for the year ended December 31, 2003,
consisting of $4,421,000 in depletion on oil and gas properties, $210,000 in
depreciation of other property and equipment and $6,000 in amortization expense.
This is a 37% increase when compared to the 2002 depreciation, depletion and
amortization expense of $3,386,000. This increase is due primarily to an
increase in production for the year ended December 31, 2003 to 592 MBOE as
compared to 481 MBOE for the same period in 2002 and the loss of barrels due to
engineering revisions in the reserve report dated January 1, 2004. In addition,
as a result of the adoption of SFAS 143 "Accounting for Asset Retirement
Obligations," the amount to amortize increased by $7,500,000 which resulted in
additional depletion, depreciation and amortization. (See Note 21 to the
Company's Financial Statement included herein).
Income Taxes. As of December 31, 2003, the Company had a net operating
loss carryforward of approximately $98,000,000, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately
$45,000,000, 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 $490,000 was provided for the year ended 2003, 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, 2003 was $9,400,000, as compared to net cash flow provided by operating
activities of $4,000,000 for the comparable period in 2002. The increase was
mainly due to the collection of an insurance settlement related to damage to the
WCBB facility caused by Hurricane Lili, an increase in depreciation, depletion
and amortization and an increase in production due to factors above and an
increase in interest expense as a result of the adoption of SFAS No. 150.
Net cash used in investing activities during for the year ended December
31, 2003 was $11,100,000 as compared to $8,900,000 used during the same period
of 2002. Mainly as a result of the Company's drilling programs initiated in
December 2002 and April 2003, the Company spent $10,100,000 in additions to oil
17
and gas properties. Of this amount, the Company spent $5,600,000 on drilling
activity and $4,000,000 on other workover and recompletion activities. In
addition, another $700,000 was spent on the clean up and repair of hurricane
damage.
Net cash provided by financing activities for 2003 was $2.2 million as
compared to $4,900,000 provided during 2002. Net cash provided by financing
activities in 2003 related to $2,200,000 in proceeds received from borrowings on
the Company's line of credit as opposed to the $6,000,000 from the issuance of
the preferred stock during 2002.
Capital Expenditures. In 2003, Gulfport invested $10,100,000 in oil and
gas properties and other property and equipment as compared to $8,500,000 during
the comparable period in 2002. Of the $10,100,000 that the Company spent during
2002, $5,600,000 was spent on drilling and completion activity on new wells,
$4,000,000 was spent on workover activity on existing wells, $40,000 was spent
on the acquisition of other property and equipment, and the remaining
expenditures were attributable to general and administrative costs capitalized
to the full cost pool. During 2003, Gulfport financed its capital expenditures
with cash flow provided by operations, borrowings from the Company's line of
credit and the remaining proceeds from the issuance of the preferred stock.
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 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 completed the reprocessing of its 3-D 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.
Capital Resources. On June 20, 2002, the Company entered into a new line of
credit with BOK. Under the terms of the agreement, the Company was extended a
commitment to borrow up to $2,300,000. Amounts borrowed under the line bear
interest at Chase Manhattan Prime plus one percent, with payments of interest on
outstanding balances due monthly beginning August 1, 2002. On July 1, 2003, the
Company renewed its line of credit and extended the maturity date to July 1,
2004. The outstanding balance under this credit facility was $2,200,000 at
December 31, 2003.
On May 22, 2001, the Company entered into a revolving line of credit
agreement with Gulfport Funding, LLC, ("Gulfport Funding") an affiliate of 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 were due
on February 22, 2002. The Company paid a facility commitment fee of $60,000 in
connection with this line of credit. This fee was amortized over the life of the
agreement. On March 29, 2002, the outstanding balance of this note payable,
together with all accrued and unpaid interest was satisfied in full through
Gulfport Funding's participation in the Company's Private Placement Offering as
described below.
In March 2002, the Company commenced a Private Placement Offering of
$10,000,000 consisting of 10,000 Units. Each Unit consists of (i) one 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
of the Company. Dividends accrue on the Preferred prior to the mandatory
redemption date 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
18
based on the liquidation preference 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 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 fifth anniversary
of the issuance. Accordingly, the Preferred issued in connection with this
Offering is treated as redeemable stock on the Company's balance sheet.
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, subject to certain exceptions. The Company granted
to holders of the Warrants certain demand and piggyback registration rights with
respect to shares of common stock issuable upon exercise of the warrants.
The Offering was made available to stockholders (some of whom were
affiliates) of the Company as of December 31, 2001 and who were accredited
investors. 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
began March 29, 2002 and continued until April 15, 2002, with a total
subscription of $9,292,000 or 9,291.85 units.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3,000,000 loan along with the accumulated interest
due from the Company for 3,262.98 Units. Additionally, on March 29, 2002
multiple entities controlled by the Company's majority shareholder initially
funded a share of the Offering in the amount of $2,738,000.
During 2003, the Company hired Petrie Parkman & Co. to create a data room
for the possible sale of West Cote Blanche Bay. As of the date of this filing, a
sale is not imminent. The Board of Directors has determined that if a sale of
WCBB is not consummated that it is in the best interests of the Company to
conduct an equity offering. The Board has approved a registered rights offering
in the amount of $12.0 million dollars for a commitment fee of 2%. The Rights
Offering will be backstopped by the Company's principal shareholder. As a
result, the company is guaranteed proceeds of $12.0 million if the Offering is
commenced. Therefore, the Company shall have required liquidity either through
the sale of the property or the proceeds from the Rights Offering. Shareholders
choosing not to participate will suffer substantial dilution.
Liquidity. The primary capital commitments faced by the Company are the
capital requirements needed to continue developing the Company's proved reserves
and obligations under Gulfport's credit facilities and the Private Placement
Offering.
In Gulfport's January 1, 2004 reserve report, 91% 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. In the year 2004, Gulfport expects to
undertake a drilling program. It is anticipated that this reserve development
project will be funded either through the use of cash flow from operations when
available, or debt or equity financing, as discussed above. The cash flow
generated from the drilling activity and other replacement activities will be
used to make the Company's required principal payments on its debt with the
remainder reinvested in the field to develop its oil and gas properties.
Commitments and Contingencies
Plugging and Abandonment Funds
19
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. Beginning in 2007, the Company can access it for use in plugging and
abandonment charges associated with the property. As of December 31, 2003, the
plugging and abandonment trust totaled approximately $2,749,000, including
interest received during 2003 of approximately $14,000. The company has plugged
112 wells at WCBB since it began its plugging program in 1997.
In July 2002, the Company commenced its plugging commitment program for the
twelve-month period ending March 31, 2003. As of the date of this filing, the
pluggings were completed. A total of 22 wells were plugged.
In January 2004, the Company commenced its plugging commitment program for
the twelve-month period ending March 31, 2004. As of the date of this filing,
the pluggings were completed. A total of 20 wells were plugged.
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,
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, 2003, Gulfport was in the process of
releasing these properties to the State of Louisiana.
Accounting and Reporting Changes
SFAS No. 143
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which requires the Company to record a liability equal to the fair value
of the estimated cost to retire an asset. The asset retirement liability is
recorded in the period in which the obligation meets the definition of a
liability, which is generally when the asset is placed into service. When the
liability is initially recorded, the Company will increase the carrying amount
of the related long-lived asset by an amount equal to the original liability.
The liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related long-lived asset. Any
difference between costs incurred upon settlement of an asset retirement
obligation and the recorded liability will be recognized as a gain or loss in
the Company's earnings. The asset retirement obligation is based on a number of
assumptions requiring professional judgment. The Company cannot predict the
type of revisions to these assumptions that will be required in future periods
due to the availability of additional information, including prices for oil
field services, technological changes, governmental requirements and other
20
factors. Upon adoption of SFAS No. 143, the Company recorded a net benefit of
$270,000 as the cumulative effect of a change in accounting principle. The
non-cash transition adjustment increased oil and natural gas properties and
asset retirement obligations by $7,590,000 and $7,370,000, respectively, and
decreased accumulated depreciation by $50,000.
The asset retirement obligation recognized by the Company at December 31, 2003,
relates to the estimated costs to dismantle and abandon its investment in
producing oil and gas properties and the related facilities. Of the total asset
retirement liability, $480,000 that has been classified as short-term is the
estimated portion of the total liability to be settled during the next year as
the Company meets its plugging and abandonment requirements as discussed in Note
8.
The pro forma asset retirement obligation as of December 31, 2002, was
$7,370,000. Pro forma net income for the period December 31, 2002, assuming
SFAS No. 143 had been applied retroactively, is shown in the following table:
December 31, 2002
-----------------
Net income available to common stockholders -
As reported $ (625,000)
Pro forma (340,000)
Net income per common share -
As reported, basic $ (0.06)
Pro forma, basic (0.03)
As reported, diluted (0.06)
Pro forma, diluted (0.03)
SFAS No. 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or as an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
generally effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company has recorded a liability
related to the Series A Preferred Stock of $12,071,000. Previously, the Series
A Preferred Stock had been classified on the balance sheet between total
liabilities and equity. This amount represents the 12,071 preferred shares
issued and outstanding as of December 31, 2003, at the redemption and
liquidation value of $1,000 per share. In the opinion of management, the $1,000
per share redemption and liquidation value approximates fair value. The shares
are mandatorily redeemable on the fifth anniversary of the first issuance of
Series A Preferred Stock.
Item 7. Financial Statements
The information required by this item appears on pages F-1 through F-22
following the signature pages of this Report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
21
Item 8A. Controls and Procedures
Gulfport Energy Corporation, under the direction of the Chief Executive
Officer and the Vice President and Chief Financial Officer, has established
disclosure controls and procedures that are designed to ensure that information
required to be disclosed by Gulfport in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. The
disclosure controls and procedures are also intended to ensure that such
information is accumulated and communicated to Gulfport's management, including
the Chief Executive Officer and the Vice President and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosures.
As of December 31, 2003, an evaluation was performed under the supervision
and with the participation of Gulfport management, including the Chief Executive
Officer and the Vice President and Chief Financial Officer, of the effectiveness
of the design and operation of Gulfport's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon
their evaluation, the Chairman and Chief Executive Officer and the Executive
Vice President and Chief Financial Officer have concluded that as of December
31, 2003, Gulfport's disclosure controls and procedures are effective. In
compliance with Rule 13a-14 promulgated under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, each
of these officers executed a Certification attached as an exhibit to this Form
10-KSB.
There have not been any significant changes in Gulfport's internal controls
over financial reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, internal
controls over financial reporting.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The officers and directors of Gulfport are as follows:
Name Age Position
---- --- -------
Mike Liddell 50 Chairman of the Board, Chief Executive
Officer, President and Director
Michael G. Moore 47 Vice President and Chief Financial
Officer
Lisa Holbrook 33 Vice President, General Counsel and
Secretary
*Robert E. Brooks 57 Director
*David L. Houston 51 Director
Mickey Liddell 42 Director
*Dan Noles 56 Director
*Members of Gulfport's Audit Committee.
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
22
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 a partner in Berlanti-Liddell Entertainment which produces
the current WB Network show "Everwood". They are also in development on several
other television and film projects. Until 2002, he served as 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
Finance from the University of Oklahoma in 1970. Mr. Noles is the
brother-in-law to Mike Liddell and Mickey Liddell.
Items 10 & 11. Executive Compensation, Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
23
For information concerning Item 10 - Executive Compensation and Item 11 -
Security Ownership of Certain Beneficial owners and Management, see the
definitive Information Statement of Gulfport Energy Corporation for the 2004
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's previous
fiscal year and is incorporated herein by this reference (with the exception of
portions noted therein that are not incorporated by reference).
Item 12. Certain Relationships and Related Transactions
For information concerning Item 12 - Certain Relationships and Related
Transactions, see the definitive Information Statement of Gulfport Energy
Corporation for the 2004 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission with 120 days after the close of the
Company's previous fiscal year and is incorporated herein by this reference
(with the exception of portions noted therein that are not incorporated by
reference).
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Credit Agreement dated June 28, 2000 between Registrant and Bank of
Oklahoma filed March 30, 2001 (1)
10.2 Stock Option Plan filed March 30, 2001 (1)
10.3 Credit Agreement dated February 1, 2001 between Registrant and Bank
of Oklahoma (1)
10.4 Credit Agreement dated May 22, 2001 between Registrant and Gulfport
Funding, LLC (1)
10.5 Warrant Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.6 Promissory Note dated May 22, 2001 between Registrant and Gulfport
Funding, LLC (1)
10.7 Confidential Disclosure Statement Relating to Offer and Sale of Up
to 10,000 Units dated March 29, 2002
10.8 Credit Agreement dated June 28, 2000 between Registrant and Bank of
Oklahoma filed March 30, 2001 (1)
10.9 Stock Option Plan filed March 30, 2001 (1)
10.10 Credit Agreement dated February 1, 2001 between Registrant and
Bank of Oklahoma (1)
10.11 Credit Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.12 Warrant Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.13 Promissory Note dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.14 Credit Agreement dated June 28, 2000 between Registrant and
Bank of Oklahoma filed March 30, 2001 (1)
10.15 Stock Option Plan filed March 30, 2001 (1)
10.16 Credit Agreement dated February 1, 2001 between Registrant and
Bank of Oklahoma (1)
10.17 Credit Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.18 Warrant Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.19 Promissory Note dated May 22, 2001 between Registrant and G
Gulfport Funding, LLC (1)
14.0 Code of Ethics
*21 Subsidiaries of the Registrant.
*23.1 Consent of Independent Auditors.
*23.2 Consent of Netherland, Sewell & Associates, Inc.
24
*24 Power of Attorney (included on the signature page hereto).
*31.1 Certification of Chief Executive Officer of the Registrant pursuant
to Rule 13a-14 (a) promulgated under the Securities Exchange Act
of 1934, as amended.
*31.2 Certification of Chief Financial Officer of the Registrant pursuant
to Rule 13a-14 (a) promulgated under the Securities Exchange
Act of 1934, as amended.
*32.1 Certification of Chief Executive Officer of the Registrant pursuant
to Rule 13a-14 (b) promulgated under the Securities Exchange
Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18
of the United States Code.
*32.2 Certification of Chief Financial Officer of the Registrant pursuant
to Rule 13a-14 (b) promulgated under the Securities Exchange
Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18
of the United States Code.
* Filed herewith
(1) Previously filed as an exhibit to Form 10-K for the year ended
December 31, 2001, and incorporated herein by reference.
None
(b). Reports on Form 8-K
2.1 No Current Reports on Form 8-K were filed by Gulfport during the
last quarter of 2003.
Item 14. Principal Accountant Fees and Services
For information concerning Item 14 - Executive Compensation and Item 11 -
Security Ownership of Certain Beneficial owners and Management, see the
definitive Information Statement of Gulfport Energy Corporation for the 2004
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's previous
fiscal year and is incorporated herein by this reference (with the exception of
portions noted therein that are not incorporated by reference).
25
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: April 14, 2004.
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: April 14, 2004 By:/s/Mike Liddell
-------------------------------------
Mike Liddell, Chief Executive
Officer And Director
Date: April 14, 2004 By:/s/Robert Brooks
-------------------------------------
Robert Brooks, Director
Date: April 14, 2004 By:/s/David L. Houston
-------------------------------------
David L. Houston, Director
Date: April 14, 2004 By:/s/Mickey Liddell
-------------------------------------
Mickey Liddell, Director
Date: April 14, 2004 By:/s/Dan Noles
-------------------------------------
Dan Noles, Director
Date: April 14, 2004 By:/s/Michael G. Moore
-------------------------------------
Michael G. Moore, Vice President and
Chief Financial Officer
26
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Balance Sheet, December 31, 2003 F-3
Statements of Operations, Years Ended December 31, 2003 and 2002 F-4
Statements of Common Stockholders' Equity, Years Ended December
31, 2003 and 2002 F-5
Statements of Cash Flows, Years Ended December 31, 2003 and 2002 F-6
Notes to Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Stockholders of Gulfport Energy Corporation:
We have audited the accompanying balance sheet of Gulfport Energy
Corporation (a Delaware corporation) as of December 31, 2003, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 2003 and 2002. 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, 2003, and the results of its operations and its cash flows
for the years ended December 31, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 21 to the financial statements, Gulfport changed its
method of accounting for asset retirement obligations and its redeemable 12%
cumulative preferred stock as required by the provisions of Statement of
Financial Accounting Standards No. 143 and 150, respectively.
HOGAN & SLOVACEK
Oklahoma City, OK
April 14, 2004
F-2
GULFPORT ENERGY CORPORATION
BALANCE SHEET
December 31,
2003
-------------
Assets
Current assets:
Cash and cash equivalents $ 1,542,000
Accounts receivable 1,340,000
Accounts receivable - related party 379,000
Prepaid expenses and other current assets 179,000
-------------
Total current assets 3,440,000
-------------
Property and equipment:
Oil and natural gas properties 127,991,000
Other property and equipment 1,912,000
Accumulated depletion, depreciation, amortization (77,423,000)
-------------
Property and equipment, net 52,480,000
-------------
Other assets 3,060,000
-------------
Total assets $ 58,980,000
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 3,274,000
Accrued payable - royalty audit 212,000
Asset retirement obligation - current 480,000
Current maturities of long-term debt 2,318,000
-------------
Total current liabilities 6,284,000
-------------
Asset retirement obligation - long-term 7,356,000
Accrued payable - royalty audit 121,000
Redeemable 12% cumulative preferred stock, Series A, $.01
par value, with a redemption and liquidation value of
$1,000 per share; 30,000 authorized, 12,071 issued and
outstanding at December 31, 2003 12,071,000
-------------
Total liabilities 25,832,000
-------------
Commitments and contingencies
Preferred stock, $.01 par value; 5,000,000 authorized
at December 31, 2003, none issued -
Common stockholders' equity:
Common stock - $.01 par value, 20,000,000 authorized,
10,146,566 issued and outstanding at December 31, 2003 101,000
Paid-in capital 84,192,000
Accumulated deficit (51,145,000)
-------------
Total stockholders' equity 33,148,000
-------------
Total liabilities and stockholders' equity $ 58,980,000
=============
See accompanying notes to financial statements.
F-3
GULFPORT ENERGY CORPORATION
STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------
2003 2002
------------ ------------
Revenues:
Gas sales $ 498,000 $ 379,000
Oil and condensate sales 15,311,000 11,450,000
Other income 138,000 305,000
------------ ------------
15,947,000 12,134,000
------------ ------------
Costs and expenses:
Operating expenses 5,886,000 5,163,000
Production taxes 1,882,000 1,311,000
Depreciation, depletion, and amortization 4,637,000 3,386,000
General and administrative 1,843,000 1,873,000
------------ ------------
14,248,000 11,733,000
INCOME FROM OPERATIONS: 1,699,000 401,000
------------ ------------
OTHER (INCOME) EXPENSE:
Accretion expense 393,000 -
Interest expense 112,000 181,000
Interest expense - preferred stock 875,000 -
Interest income (30,000) (61,000)
Proceeds from Litigation Trust - (160,000)
------------ ------------
1,350,000 (40,000)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 349,000 441,000
------------ ------------
INCOME TAX EXPENSE (BENEFIT):
Current 490,000 176,000
Deferred (490,000) (176,000)
------------ ------------
- -
------------ ------------
NET INCOME (LOSS) BEFORE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 349,000 441,000
Cumulative effect of change in
accounting principle 270,000 -
------------ ------------
NET INCOME (LOSS) 619,000 441,000
------------ ------------
Less: Preferred stock dividends (838,000) (1,066,000)
------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (219,000) $ (625,000)
============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC:
Per common share before effect of change
in accounting principle $ (0.05) $ (0.06)
Effect per common share of change in
accounting principle 0.03 -
------------ ------------
$ (0.02) $ (0.06)
============ ============
NET INCOME (LOSS) PER COMMON SHARE - DILUTED:
Per common share before effect of change
in accounting principle $ (0.05) $ (0.06)
Effect per common share of change in
accounting principle 0.03 -
------------ ------------
$ (0.02) $ (0.06)
============ ============
See accompanying notes to financial statements.
F-4
GULFPORT ENERGY CORPORATION
Statements of Common Stockholders' Equity
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
---------- -------- ---------- -------------
Balance at December 31, 2001 10,146,566 $101,000 $84,192,000 $(50,301,000)
Net income - - - 441,000
Preferred stock dividends - - - (1,066,000)
---------- -------- ----------- ------------
Balance at December 31, 2002 10,146,566 $101,000 $84,192,000 $(50,926,000)
Net income - - - 619,000
Preferred stock dividends - - - (838,000)
---------- -------- ----------- ------------
Balance at December 31, 2003 10,146,566 $101,000 $84,192,000 $(51,145,000)
========== ======== =========== ============
See accompanying notes to financial statements.
F-5
GULFPORT ENERGY CORPORATION
Statements of Cash Flows
Year Ended December 31,
---------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 619,000 $ 441,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of change in accounting
principle (270,000) -
Accretion of discount 393,000 -
Interest expense - preferred stock 875,000 -
Depletion, depreciation and amortization 4,631,000 3,366,000
Amortization of debt issuance costs 6,000 20,000
Changes in operating assets and liabilities:
Decrease in insurance settlement receivable 2,510,000 -
Decrease (increase) in accounts receivable 493,000 (682,000)
(Increase) decrease in accounts receivable -
related party (321,000) 47,000
Decrease in prepaid expenses 26,000 31,000
Increase in accounts payable
and accrued liabilities 420,000 807,000
------------ ------------
Net cash provided by operating activities 9,382,000 4,030,000
------------ ------------
Cash flows from investing activities:
(Additions) to cash held in escrow (235,000) (242,000)
(Additions) to other property, plant
and equipment (40,000) (16,000)
(Additions) to oil and gas properties (10,145,000) (8,513,000)
Expenditures related to oil and gas
properties due to hurricane (707,000) (133,000)
------------ ------------
Net cash used in investing activities (11,127,000) (8,904,000)
------------ ------------
Cash flows from financing activities:
Borrowings on note payable 2,200,000 -
Principal payments on borrowings (22,000) (1,123,000)
Proceeds from issuance of preferred stock - 6,029,000
------------ ------------
Net cash provided by financing activities 2,178,000 4,906,000
------------ ------------
Net increase in cash and cash equivalents 433,000 32,000
Cash and cash equivalents at beginning of period 1,109,000 1,077,000
------------ ------------
Cash and cash equivalents at end of period $ 1,542,000 $ 1,109,000
============ ============
Supplemental disclosure of cash flow information:
Interest payments $ 112,000 $ 42,000
============ ============
Supplemental disclosure of non-cash transactions:
Repayment of note payable to related
party through issuance of Series A
Preferred Stock $ - $ 3,000,000
============ ============
Repayment of accrued interest due on
note payable to related party through
issuance of Series A
Preferred Stock $ - $ 263,000
============ ============
Payment of Series A Preferred Stock dividends
through issuance of Series A Preferred Stock $ 838,000 $ 1,066,000
============ ============
See accompanying notes to financial statements.
F-6
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
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 and totaled $1,600 at December 31, 2003. 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 7
to 30 years.
Reclassifications
Certain reclassifications have been made to the 2002 financial statement
presentation in order to conform to the 2003 financial statement presentation.
F-7
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing income or
loss attributable to common stock by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per common share
reflects the potential dilution that could occur if options or other contracts
to issue common stock were exercised or converted into common stock. Diluted
net loss per common share does not reflect dilution from potential common
shares, because to do so would be anti-dilutive. Calculations of basic and
diluted net income (loss) per common share are illustrated in Note 16.
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, 2003.
Oil revenues are recognized when ownership transfers, which occurs 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
F-8
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
The Company's only revenue generating activity is the production and sale
of oil and gas from properties located on the Louisiana Gulf Coast. Therefore,
no reporting of business segments has been included in these financial
statements or the notes thereto.
2. INSURANCE SETTLEMENT RECEIVABLE
Hurricane Lili hit the southern gulf coast of Louisiana on October 3, 2002
with estimated sustained winds over 120 miles per hour and a 9-1/2 foot tidal
surge. The eye of the hurricane came on shore directly East of Gulfport's WCBB
field. The storm caused significant damage to the Company's production
facilities and the WCBB field. The total cost to restore production to the
field was estimated by the Company's personnel and insurance carrier to be
$3,510,000. As of December 31, 2003, the Company had received the $3,510,000 in
insurance settlement proceeds. Hurricane related repairs for the years ended
December 31, 2003 and 2002, were $707,000 and $1,133,000 respectively.
3. ACCOUNTS RECEIVABLE - RELATED PARTY
Included in the accompanying December 31, 2003 balance sheet are amounts
receivable from entities that have similar controlling interests as those
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. At the end of 2003, this
receivable amount totaled $379,000.
4. PROVISION FOR ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the activity in the allowance for doubtful accounts for the
year ended December 31, 2003 is as follows:
Balance, beginning of the year $ 239,000
Provision for bad debts -
Bad debts written off (239,000)
--------------
Balance, end of year $ -
==============
Charges to bad debt expense totaling $7,000 were made during the year ended
December 31, 2003. The Company wrote off a receivable of $246,000 during the
year resulting in bad debt expense of $7,000 after fully utilizing the provision
for allowance for doubtful accounts of $239,000. Charges to bad debt expense
for the year ended December 31, 2002 were $87,000.
5. PROPERTY AND EQUIPMENT
F-9
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
The major categories of property and equipment and related accumulated
depreciation, depletion and amortization as of December 31, 2003 are as follows:
Oil and gas properties $ 127,991,000
Office furniture and fixtures 1,435,000
Building 217,000
Land 260,000
----------------
Total property and equipment 129,903,000
Accumulated depreciation, depletion,
amortization and impairment reserve (77,423,000)
----------------
Property and equipment, net $ 52,480,000
================
Included in oil and gas properties at December 31, 2003 are $2,113,000 in
general and administrative costs incurred and capitalized to the full cost pool.
General and administrative costs capitalized to the full cost pool represent
management's estimate of costs 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.
6. OTHER ASSETS
Other assets as of December 31, 2003 consist of the following:
Plugging and abandonment escrow account
on the WCBB properties (Note 8) $ 2,749,000
CD's securing letter of credit 200,000
Deposits 111,000
----------------
$ 3,060,000
================
7. ACCRUED PAYABLE - ROYALTY AUDIT
During the third quarter of 2002, the Company underwent a royalty audit
which was conducted by the State of Louisiana. The audit covered the period
from January 1, 1999 through December 31, 2001. The Company was notified during
the fourth quarter of 2002 that the total amount to be paid as a result of the
audit was $492,000, including $146,000 in penalties and interest. As of
December 31, 2003, the liability was $333,000. Amounts to be paid in the next
twelve months total $212,000 and have been classified as "Accrued payable -
F-10
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
royalty audit" in the current liability section of the accompanying balance
sheet. The portion of the liability that will be due in periods beginning after
the next twelve months total $121,000 and have been classified as "Accrued
payable - royalty audit" in the non-current liability section of the
accompanying balance sheet.
8. LONG-TERM DEBT
Long-term debt as of December 31, 2003 is as follows:
Building loan $ 118,000
Amounts borrowed under line of credit (Note 10) 2,200,000
----------------
2,318,000
Less - current maturities of long term debt 2,318,000
----------------
Debt reflected as long term $ -
================
All debt outstanding as of December 31, 2003 will mature during 2004.
Building Loan
The building loan of $118,000 relates to a building in Lafayette,
Louisiana, purchased in 1996 to be used as the Company'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.
9. NOTE PAYABLE - RELATED PARTY
On March 29, 2002, the outstanding balance of the Company's note payable to
Gulfport Funding, LLC ("Gulfport Funding"), along with all accumulated interest
due on the note, were retired through Gulfport Funding's participation in the
Company's Private Placement Offering as described in Note 11.
10. REVOLVING LINE OF CREDIT
The Company maintains a line of credit with Bank of Oklahoma, under which
the Company may borrow up to $2,300,000. Amounts borrowed under the line bear
interest at Chase Manhattan Prime plus 1%, with payments of interest on
outstanding balances due monthly. Any principal amounts borrowed under the line
will be due on July 1, 2004. As of December 31, 2003, $2,200,000 had been
borrowed under this line.
11. COMMON STOCK OPTIONS, WARRANTS AND CHANGES IN CAPITALIZATION
Options
F-11
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
The Company sponsors the 1999 Stock Option Plan (the "Plan"), which is
administered by the Compensation Committee (the "Committee") of the Board of
Directors of the Company. Under the terms of the Plan, the Committee may
determine: to which eligible participants options shall be granted, the number
of shares covered by such options, the purchase price or exercise price of such
options, the vesting period of such options and the exercisable period of such
options. Eligible participants are defined as (i) all directors of the Company;
(ii) all officers of the Company; and (iii) all key employees of the Company
with a customary work week of at least 40 hours in the employ of the Company.
The maximum number of shares for which options may be granted under the Plan, as
adjusted for changes in capitalization which have taken place since the Plan's
adoption, is 883,000.
The Company accounts for stock options under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure". Presented below is a summary of the status of stock
options and related activity for the years ended December 31, 2003 and 2002:
Weighted
Average
Exercise Price
Shares per Share
------- ---------------
Options outstanding at December 31, 2001 607,337 $ 2.00
Granted 20,000 2.00
Exercised - -
Forfeited/expired - -
------- ----------
Options outstanding at December 31, 2002 627,337 $ 2.00
Granted - -
Exercised - -
Forfeited/expired - -
------- ----------
Options outstanding at December 31, 2003 627,337 $ 2.00
======= ==========
All options granted, exercised and outstanding have an exercise price of
$2.00.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model and an expected life of 5 years. No
options were granted during the year ended December 31, 2003.
Options outstanding at December 31, 2003 totaled 627,337. Of this total,
612,520 options were exercisable at December 31, 2003, with the remaining
options vesting in future periods.
Warrants
In accordance with the origination of the note payable to Gulfport Funding
(retired during 2002 as discussed in Note 9), the Company issued 108,625
warrants to CD Holdings, LLC. The exercise price of these warrants is $5.25 and
was estimated as the average closing price of the Company's common stock for the
F-12
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
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.
Also, on July 11, 2002, 1,163,195 previously exercisable warrants expired.
The issuance of these warrants had stemmed from a reorganization which took
place in 1997.
Private Placement Offering
In March 2002, the Company commenced a Private Placement Offering of
$10,000,000 consisting of 10,000 Units. Each Unit consists of (i) one 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
of the Company. Dividends accrue on the Preferred prior to the mandatory
redemption date 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 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 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 fifth anniversary
of the issuance. Accordingly, the Preferred issued in connection with this
Offering is treated as redeemable stock on the Company's balance sheet.
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, subject to certain exceptions. The Company granted
to holders of the Warrants certain demand and piggyback registration rights with
respect to shares of common stock issuable upon exercise of the warrants.
The Offering was made available to stockholders (some of whom were
affiliates) of the Company as of December 31, 2001 and who were accredited
investors. 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
began March 29, 2002 and continued until April 15, 2002, with a total
subscription of $9,292,000 or 9,291.85 units.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3,000,000 loan along with the accumulated interest
due from the Company for 3,262.98 Units. Additionally, on March 29, 2002
multiple entities controlled by the Company's majority shareholder initially
funded a share of the Offering in the amount of $2,738,000.
12. DIVIDENDS ON SERIES A PREFERRED STOCK
As discussed in Note 11, the Company may, at its option, accrue additional
shares of Preferred for the payment of dividends at a rate of 15% per annum
during the initial two years following the closing date of its Offering. The
F-13
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
Company has chosen to do so for the quarterly periods ending March 31, June 30,
September 30, and December 31, 2003 and has therefore accrued additional shares
payable totaling 838,000 at December 31, 2003 related to the Preferred Stock
Series A shares issued and outstanding during those time periods. Subsequent to
the adoption of SFAS 150 in the third quarter (see Note 21), the dividends were
recognized as interest expense. The $875,000 shown as "Interest expense -
preferred stock" in the accompanying statement of operations represents the
dividends accrued on the Preferred Stock Series A for the quarterly periods
ended September 30 and December 31, 2003. These dividends payable were
calculated based upon the Preferred's $1,000 per share redemptive value and are
reflected as "Series A preferred stock" in the accompanying balance sheet.
Beginning with the period ended June 30, 2004, the Company will be required to
pay cash dividends at a rate of 12% per annum on the Series A Preferred Stock.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments carried as assets and liabilities on the
accompanying balance sheet at December 31, 2003 are carried at cost, which
approximates market value. The outstanding shares of Series A preferred stock
have been stated on the accompanying balance sheet at their redemptive value of
$1,000 per share.
14. 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 (Castex)
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. During March
2002, the Company received approximately $220,000 from Castex which the Company
believes consists of sales income for the period after payout net of operating
expenses, although the Company has not received confirmation of such. As a
result, this amount received has been included in the accompanying statements of
operations for the year ended December 31, 2002 as "Other income". The Company
received an additional $66,000 from Castex in March of 2003, which is also
included in the accompanying statement of income for the year ended December 31,
2003 as "Other Income".
15. INCOME TAXES
A reconciliation of the statutory federal income tax amount to the recorded
expense follows:
2003 2002
--------------- ---------------
Income before federal income taxes $ 349,000 $ 441,000
--------------- ---------------
Expected income tax at statutory rate 140,000 176,000
Increase in tax resulting from interest
expense not tax deductible 350,000 -
Provision for income taxes 490,000 176,000
Net operating loss carryforward
utilized (490,000) (176,000)
Other deferred tax assets utilized - -
--------------- ---------------
Income tax expense recorded $ - $ -
=============== ===============
F-14
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
Subsequent to the adoption of SFAS 150, the Company recognized interest
expense of $875,000 for the year ended December 31, 2003. This interest is not
deductible for tax purposes. This resulted in a taxable difference of $350,000
when the interest expense is applied to the statutory rate of 40%. The
difference in taxable income is fully nullified by the Company's net operating
loss carryforward.
The tax effects of temporary differences and net operating loss carryforwards,
which give rise to deferred tax assets at December 31, 2003 are estimated as
follows:
2003 2002
--------------- ---------------
Net operating loss carryforward $ 39,349,000 $ 36,356,000
Oil and gas property basis difference 5,564,000 12,540,000
--------------- ---------------
Total deferred tax asset 44,913,000 48,896,000
Valuation allowance (44,913,000) (48,896,000)
--------------- ---------------
Net deferred tax asset (liability) $ - $ -
=============== ===============
The Company has an available tax net operating loss carry forward estimated
at approximately $98,372,000 as of December 31, 2003. This carryforward will
begin to expire in the year 2013.
16. NET INCOME (LOSS) PER COMMON SHARE
A reconciliation of the components of basic and diluted net income (loss)
per common share is presented in the table below:
2003 2002
---------------------------------- ----------------------------------
Per Per
Income (loss) Shares Share Income (loss) Shares Share
-------------------------------------------------------------------------
Basic:
Income before effect of change
in accounting principle $ 349,000 $ 441,000
Less: preferred stock
dividends (838,000) (1,066,000)
---------- -----------
$ (489,000) 10,146,566 $(0.05) $ (625,000) 10,146,566 $(0.06)
====== ======
Effect of change in
accounting principle 270,000 10,146,566 0.03 - 10,146,566 -
---------- ----- ----------- ------
$ (219,000) $(0.02) $ (625,000) $(0.06)
========== ====== =========== ======
Effect of dilutive securities:
Stock options 0 0
========== ==========
The Company recorded a net loss from continuing operations after preferred
stock dividends for the years ended December 31, 2003 and 2002. Due to this, no
potentially dilutive shares were used in the computation of dilutive earnings
per share as the use of such shares would be anti-dilutive.
17. 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
F-15
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
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, 2003,
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 52.6% of the Company's outstanding stock as of December 31,
2003.
18. COMMITMENTS
Office Lease
On August 8, 2002, the Company executed a 60-month lease on 12,035 square
feet of office space which commenced on November 15, 2002. Payments due under
the lease during its term are as follows:
For the year ended December 31,
2004 $ 217,000
2005 217,000
2006 217,000
2007 162,000
----------------
$ 813,000
================
Payments made under this lease during the year ended December 31, 2003
totaled $217,000. Rental expense for all operating leases for the years ended
December 31, 2003 and 2002 totaled $233,000 and $165,000, 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. ChevronTexaco retained a security interest in production from
these properties until abandonment obligations to ChevronTexaco have been
fulfilled. Beginning in 2007, the Company can access it for use in plugging and
abandonment charges associated with the property. As of December 31, 2003, the
plugging and abandonment trust totaled approximately $2,749,000, including
interest received during 2003 of approximately $14,000. The Company has plugged
132 wells at WCBB since it began its plugging program in 1997.
In July 2002, the Company commenced its plugging commitment program for the
twelve-month period ending March 31, 2003. As of the date of this filing, the
pluggings were completed. A total of 22 wells were plugged.
In January 2004, the Company commenced its plugging commitment program for
the twelve-month period ending March 31, 2004. As of the date of this filing,
the pluggings were completed. A total of 20 wells were plugged.
F-16
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
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, 2003, Gulfport was in the process of releasing these
properties to the State of Louisiana.
Contributions to 401(k) Plan
Gulfport sponsors a 401(k) and Profit Sharing plan 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, 2003 and 2002, Gulfport incurred $71,000 and
$56,000, respectively, in contributions expense related to this plan.
Employment Agreement
At December 31, 2003, 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.
19. 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. During
2003, Gulfport wrote off bad debts of $7,000. Bad debt expense of $87,000 was
incurred during 2002.
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
F-17
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
$100,000. At December 31, 2003 Gulfport held cash in excess of insured limits
in these banks totaling $1,442,000.
During the year ended December 31, 2003, approximately 99% of Gulfport's
revenues from oil and gas sales were attributable to three purchasers: Shell
Trading Company, Apache Corporation, and ChevronTexaco. During the year ended
December 31, 2002, approximately 87% of Gulfport's revenues from oil and gas
sales were attributable to Gulfmark Energy Inc.
20. 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.
During 2002, Gulfport received $160,000 in proceeds from the Litigation Trust.
No proceeds were received from the Litigation Trust in 2003.
21. ACCOUNTING PRONOUNCEMENTS
SFAS No. 143
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
F-18
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The Company was required to implement SFAS No. 143 beginning
January 1, 2003.
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which requires the Company to record a liability equal to the fair value
of the estimated cost to retire an asset. The asset retirement liability is
recorded in the period in which the obligation meets the definition of a
liability, which is generally when the asset is placed into service. When the
liability is initially recorded, the Company will increase the carrying amount
of the related long-lived asset by an amount equal to the original liability.
The liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related long-lived asset. The
accretion of the asset retirement obligation resulted in an expense of $393,000
for the year ended December 31, 2003, as shown in the accompanying statement of
operations. Any difference between costs incurred upon settlement of an asset
retirement obligation and the recorded liability will be recognized as a gain or
loss in the Company's earnings. The asset retirement obligation is based on a
number of assumptions requiring professional judgment. The Company cannot
predict the type of revisions to these assumptions that will be required in
future periods due to the availability of additional information, including
prices for oil field services, technological changes, governmental requirements
and other factors. Upon adoption of SFAS No. 143, the Company recorded a net
benefit of $.27 million as the cumulative effect of a change in accounting
principle. The non-cash transition adjustment increased oil and natural gas
properties and asset retirement obligations by $7.59 million and $7.37 million,
respectively, and decreased accumulated depreciation by $.05 million.
The asset retirement obligation recognized by the Company at December 31,
2003, relates to the estimated costs to dismantle and abandon its investment in
producing oil and gas properties and the related facilities. Of the total asset
retirement liability, $480,000 that has been classified as short-term is the
estimated portion of the total liability to be settled during the next year as
the Company meets its plugging and abandonment requirements as discussed in Note
18.
The pro forma asset retirement obligation as of December 31, 2002, was
$7.37 million. Pro forma net income for the period December 31, 2002, assuming
SFAS No. 143 had been applied retroactively, is shown in the following table:
December 31, 2002
-----------------
Net income available to common stockholders -
As reported $ (625,000)
Pro forma (340,000)
Net income per common share -
As reported, basic $ (0.06)
Pro forma, basic (0.03)
As reported, diluted (0.06)
Pro forma, diluted (0.03)
SFAS No. 150
F-19
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or as an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
generally effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company has recorded a liability
related to the Series A Preferred Stock of $12,071,000. Previously, the Series
A Preferred Stock had been classified on the balance sheet between total
liabilities and equity. This amount represents the 12,071 preferred shares
issued and outstanding as of December 31, 2003, at the redemption and
liquidation value of $1,000 per share. In the opinion of management, the $1,000
per share redemption and liquidation value approximates fair value. The shares
are mandatorily redeemable on the fifth anniversary of the first issuance of
Series A Preferred Stock.
22. SUBSEQUENT EVENT
The Board of Directors has determined that if a sale of WCBB is not
consummated that it is in the best interests of the Company to conduct an equity
offering. The Board has approved a registered rights offering in the amount of
$12.0 million dollars. The Rights Offering will be backstopped by the company's
principal shareholder. As a result, the company is guaranteed proceeds of $12.0
million if the Offering is commenced for a commitment fee of 2%. Therefore, the
Company shall have required liquidity either through the sale of the property or
the proceeds from the Rights Offering.
23. 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
2003
--------------
Proven Properties $ 127,991,000
Accumulated depreciation, depletion
amortization and impairment reserve (76,158,000)
--------------
Proven properties, net $ 51,833,000
==============
Costs Incurred in Oil and Gas Property Acquisition and Development Activities
2003 2002
------------ ------------
Acquisition $ - $ 63,000
Development of Proved
Undeveloped Properties 6,320,000 5,270,000
Exploratory - 126,000
Recompletions/Workovers 3,825,000 3,054,000
------------ ------------
Total $ 10,145,000 $ 8,513,000
============ ============
Results of Operations for Producing Activities
F-20
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
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.
2003 2002
----------- -----------
Revenues $15,809,000 $11,829,000
Production costs (7,768,000) (6,474,000)
Depletion (4,421,000) (3,106,000)
----------- -----------
3,620,000 2,249,000
----------- -----------
Income tax expense
Current 1,448,000 900,000
Deferred (1,448,000) (900,000)
----------- -----------
- -
----------- -----------
Results of operations
from producing activities $ 3,620,000 $ 2,249,000
=========== ===========
Oil and Gas Reserves
The following table presents estimated volumes of proven and proven
undeveloped oil and gas reserves as of December 31, 2003 and 2002 and changes in
proven reserves during the last two 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, 2003 used for reserve
report purposes are $32.52 and $6.19, adjusted by lease for transportation fees
and regional price differentials, fixed price contracts, and 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.
F-21
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
2003 2002
---------------- ----------------
Oil Gas Oil Gas
------ ------ ------ ------
Proven Reserves
Beginning of the period 23,005 18,510 24,823 24,725
Purchases in oil and gas
reserves in place 377 555 - -
Extensions, discoveries and
other additions - - - -
Revisions of prior reserve
estimates (2,928) (5,417) (1,354) (6,112)
Current production (571) (123) (464) (103)
Sales of oil and gas
reserves in place - - - -
------ ------ ------ ------
End of period 19,883 13,525 23,005 18,510
====== ====== ====== ======
Proven developed reserves 1,790 1,258 3,232 3,773
====== ====== ====== ======
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,
2003 and 2002, 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,
---------------------------
2003 2002
------------ ------------
Future cash flows $ 715,751,000 $ 768,573,000
Future development costs (128,487,000) (130,762,000)
Future production costs (104,677,000) (87,370,000)
Future production taxes (81,866,000) (87,692,000)
------------- -------------
Future net cash flows before income taxes 400,721,000 462,749,000
10% discount to reflect timing of cash flows (191,182,000) (217,417,000)
------------- -------------
Discounted future net cash flows 209,539,000 245,332,000
Future income taxes, net of 10% discount (15,530,000) (34,294,000)
------------- -------------
Standardized measure of discounted future
net cash flows $194,009,000 $211,038,000
============ ============
In order to develop it's proved undeveloped reserves according to the
drilling schedule used by the engineers in Gulfport's reserve report, the
Company will need to spend $6,605,900, $13,266,000 and $16,058,000 during years
2004, 2005 and 2006 respectively.
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proven Oil and Gas Reserves
F-22
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
Year ended December 31,
2003 2002
------------- -------------
Sales and transfers of oil and gas produced,
net of production costs $ (8,041,000) $ (5,355,000)
Net changes in prices and production costs 11,592,000 265,326,000
Acquisition of oil and gas reserves in place,
less related production costs 15,340,000 -
Extensions, discoveries and improven
recovery, less related costs - -
Revisions of previous quantity estimates, less
related production costs (80,919,000) (45,538,000)
Sales of reserves in place - -
Accretion of discount 26,235,000 (99,498,000)
Net changes in income taxes 18,764,000 (32,819,000)
Other - -
------------- -------------
Total change in standardized measure of
discounted future net cash flows $ (17,029,000) $ 82,116,000
============= =============
The standardized measure includes a deduction of $138,200 from the P.W. 10%
value of the reserves to reflect the cumulative effect of hedges in place at
year-end for future periods as calculated at the time of the reserve report
using year-end SEC pricing.
Comparison of Standardized Measure of Discounted Future Net Cash Flows to
the Net Carrying Value of Proven Oil and Gas Properties at December 31, 2003 is
as follows:
2003 2002
------------ ------------
Standardized measure of discounted future
and net cash flows $194,009,000 $211,038,000
Proven oil and gas properties 127,991,000 109,480,000
Less accumulated depreciation, depletion,
amortization and impairment reserve (76,158,000) (71,791,000)
------------ ------------
Net carrying value of proven oil
and gas properties 51,833,000 37,689,000
------------ ------------
Standardized measure of discounted
future net cash flows in excess of
net carrying value of proven oil and
gas properties $142,176,000 $173,349,000
============ ============
F-23