As filed with the Securities and Exchange Commission on July 14, 2004
Registration No. 333-116048
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GULFWEST ENERGY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 6790 87-0444770
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
GULFWEST ENERGY INC. JIM C. BIGHAM
480 N. Sam Houston Parkway, Suite 300 Executive Vice President and Secretary
Houston, Texas 77060 480 N. Sam Houston Parkway, Suite 300
(281) 820-1919 (281) 820-1919
(ADDRESS INCLUDING ZIP CODE, AND Houston, Texas 77060
TELEPHONE NUMBER, INCLUDING AREA CODE, OF (NAME, ADDRESS, INCLUDING ZIP
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
BRAD L. WHITLOCK
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
(214) 953-5687
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement as selling
shareholders may decide.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |_X_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: |_|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
P R O S P E C T U S
GULFWEST ENERGY INC.
[19,179,192] SHARES OF GULFWEST ENERGY INC. CLASS A COMMON STOCK
(THE "SHARES")
This prospectus relates to the resale of up to 19,179,192 Shares issuable to
certain selling shareholders assuming the exercise of warrants or exchange of
certain preferred stock by those shareholders. This offering is not being
underwritten. The selling shareholders have advised us that they will sell the
shares from time to time in the open market, in privately negotiated
transactions or a combination of these methods at market prices prevailing at
the time of sale, at prices related to the prevailing market prices, at
negotiated prices, or otherwise as described under "Plan of Distribution." We
will pay all expenses of registration incurred in connection with this offering,
but the selling shareholders will pay all of their selling commission, brokerage
fees and related expenses.
Our common stock is traded over-the-counter under the symbol "GULF". On July 13,
2004, the average of the high and low bid and asked prices of our common stock
as traded over-the-counter was $.45 per share.
__________________
INVESTING IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE "RISK FACTORS"
BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER
BEFORE INVESTING.
__________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. The
selling shareholders may not sell or offer those securities until this
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
The date of this prospectus is July 14, 2004
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................2
WHERE YOU CAN FIND ADDITIONAL INFORMATION......................................4
RISK FACTORS...................................................................5
CAPITALIZATION................................................................11
DIVIDEND POLICY...............................................................12
FORWARD-LOOKING STATEMENTS....................................................12
MARKET PRICE OF COMMON STOCK..................................................13
SELLING SHAREHOLDERS..........................................................14
PLAN OF DISTRIBUTION..........................................................17
SELECTED HISTORICAL FINANCIAL DATA............................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................20
BUSINESS AND PROPERTIES.......................................................27
MANAGEMENT....................................................................34
EXECUTIVE COMPENSATION........................................................36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................39
CERTAIN TRANSACTIONS..........................................................40
DESCRIPTION OF SECURITIES.....................................................41
GLOSSARY OF INDUSTRY TERMS AND ABBREVIATIONS..................................45
LEGAL MATTERS.................................................................47
EXPERTS.......................................................................47
INDEX TO FINANCIAL STATEMENTS................................................F-1
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. THE FOLLOWING SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT. YOU SHOULD READ THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. CERTAIN TERMS
THAT WE USE IN OUR INDUSTRY ARE ITALICIZED AND DEFINED IN THE "GLOSSARY OF
INDUSTRY TERMS AND ABBREVIATIONS". UNLESS OTHERWISE INDICATED, ALL REFERENCES TO
"GULFWEST", THE "COMPANY", "WE", "US" AND "OUR" REFER TO GULFWEST ENERGY INC.
AND OUR SUBSIDIARIES.
OUR BUSINESS
We are primarily engaged in the acquisition, development, exploitation
and production of crude oil and natural gas. Our focus is on increasing
production from our existing properties through further exploitation,
development and exploration, and on acquiring additional interests in crude oil
and natural gas properties in the United States of America.
Since we made our first significant acquisition in 1993, we have
substantially increased the value of our crude oil and natural gas reserves
through a combination of acquisitions and the further exploitation and
development of our properties. At December 31, 2003, our estimated PROVED
RESERVES were approximately 5.0 million barrels (MBBL) of oil and 32.7 billion
cubic feet (BCF) of natural gas with a PRESENT VALUE DISCOUNTED AT 10% (PV-10)
of $114.4 million. Due to the limited available capital over the last three
years, we have not spent enough capital to maintain or increase our reserves.
This has led to a decrease in our proved reserves in each of the years. All of
our properties are located on land in Texas, Colorado, Louisiana, Oklahoma and
Mississippi, with the exception of Grand Lake in Louisiana. In the future, we
plan to expand by continued exploitation of our existing properties and through
the acquisition of additional properties.
Our operations are considered to fall within a single industry segment,
which is the acquisition, development, production and servicing of crude oil and
natural gas properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OUR COMPANY
We were formed as a corporation under the laws of the State of Utah in
1987 as Gallup Acquisitions, Inc., and subsequently changed our name to First
Preference Fund, Inc. and then to GulfWest Energy, Inc. We became a Texas
corporation by a merger effected in July 1992, in which our name became GulfWest
Oil Company. On May 21, 2001, we changed our name to GulfWest Energy Inc. Our
common stock is traded over-the-counter (OTC) under the symbol "GULF".
Our principal office is located at 480 North Sam Houston Parkway East,
Suite 300, Houston, Texas 77060 and our telephone number is (281) 820-1919.
RECENT TRANSACTIONS
On April 27, 2004, we completed an $18,000,000 financing package with
new energy lenders. We used $15,700,000 to retire existing debt of $27,584,145,
resulting in forgiveness of debt of $11,884,145, the elimination of a hedging
liability and the return to the Company of Series F Preferred Stock with an
aggregate liquidation preference of $1,000,000 (this preferred stock, at the
request of the Company, was transferred to a financial advisor to the Company
and to two companies affiliated with two directors of the Company. See "Certain
Relationships and Related Transactions.") This taxable gain resulting from these
transactions will be completely offset by available net operating loss
carryforwards. The term of the note is eighteen months and it bears interest at
the prime rate plus 11%. This rate increases by .75% per month beginning in
month ten. We paid the new lenders $1,180,000 in cash fees and also issued them
warrants to purchase 2,035,621 shares of our common stock at an exercise price
of $.01 per share, expiring in five years. The warrants are subject to
anti-dilution provisions. We are required by the terms of the warrants to
register the resale of the common stock underlying the warrants, and those
shares are offered by this prospectus. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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Simultaneously, our wholly-owned subsidiary, GulfWest Oil & Gas
Company, completed the initial phase of a private offering of its Series A
Preferred Stock for $4,000,000. The Series A Preferred Stock is exchangeable
into our common stock based on a liquidation value of $500 per share of Series A
Preferred Stock divided by $.35 per share of our common stock, or 11,428,571
shares. As part of an advisory fee, we issued $500,000 of the Series A Preferred
Stock to a financial advisor. One of our directors acquired $1,500,000 of the
Series A Preferred Stock. The resale of the shares of common stock to be issued
upon the exchange of the Series A Preferred Stock is offered by this prospectus.
The Series A Preferred Stock is entitled to receive dividends at the
rate of $45.00 per share per annum, payable quarterly, as declared by the Board
of Directors. The Series A Preferred Stock is redeemable in whole or in part at
any time, at the option of the issuer, at a price of $500 per share, plus all
accrued and undeclared unpaid dividends. The conversion price of the Series A
Preferred Stock is based upon $0.35 per share of common stock. None of the
Series A Preferred Stock has been redeemed or converted.
Pursuant to an agreement with the financial advisor, who provided
access to the lenders and raised $1,900,000 of the Series A Preferred Stock, we
paid the following: a cash fee of $400,000, at closing of the transaction;
$250,000 in cash, payable $10,000 per month for 25 months; and $500,000 issued
in Series A Preferred Stock (as mentioned above). In addition, the financial
advisor received 400 shares of our Series F Preferred Stock from a former
lender.
Of the $21,500,000 total cash raised, we used $15,700,000 to pay
existing debt and $1,580,000 to pay fees and commissions, leaving $4,220,000
available for capital expenditures and working capital.
OTHER SECURITIES BEING OFFERED
In addition to the transactions described above, this prospectus also
covers the resale of our common stock to be acquired upon conversion of our
preferred stock and upon exercise of certain other warrants we have issued.
As of July 9, 2004, there was a total of 19,000 shares of preferred
stock issued and outstanding in three series, including 8,000 shares of Series D
Preferred Stock, 9,000 shares of Series E Preferred Stock and 2,000 shares of
Series F Preferred Stock (collectively, "Preferred Stock"). The 8,000 shares of
Series D Preferred Stock are held by a former director, the 9,000 shares of
Series E Preferred Stock are held by a current director and the 2,000 shares of
Series F are held by a financial advisor to the Company, by an officer and by
two companies affiliated with two directors. See "Certain Relationships and
Related Transactions." On a fully converted basis, the 8,000 shares of Series D
Preferred Stock would convert to 500,000 shares of common stock. On a fully
converted basis, the 9,000 shares of Series E Preferred Stock would convert to
2,250,000 shares of common stock. On a fully converted basis, the 2,000 shares
of Series F Preferred Stock would convert to 1,000,000 shares of common stock.
Since 1996 we have occasionally issued warrants to employees,
consultants and directors as additional compensation. These warrants have
exercise prices ranging from $0.75 to $1.20 per share and entitle the warrant
holders to purchase up to 890,000 shares of common stock. The warrants contain
certain anti-dilution provisions and have expiration dates from January 6, 2005
to December 7, 2006.
-3-
Additionally, warrants have occasionally been issued to lenders or
guarantors on loans to the Company as additional consideration for entering into
the loans or guaranties. These warrants have an exercise price of $.75 per
warrant and entitle the warrant holders to purchase up to 1075,000 shares of
common stock. A director of the Company has 625,000 of these warrants. The
warrants contain certain anti-dilution provisions and have expiration dates
ranging from February 12, 2005 to April 1, 2008.
SUMMARY OF THE OFFERING
This prospectus relates to the resale of an aggregate of up to
19,179,192 shares of our common stock (the "Shares") issuable or issued to
certain selling shareholders, assuming the exchange or conversion of the
preferred stock described above and the exercise of the warrants described
above. The selling shareholders may offer to sell the Shares at fixed prices, at
prevailing market prices at the time of sale, or at varying negotiated prices.
We will not receive any proceeds from the resale of Shares by the holders
thereof.
As of July 14, 2004 the total number of shares of our common stock
outstanding was 18,492,541, not including the shares reserved for issuance upon
the exchange or conversion of the preferred stock and the exercise of the
warrants described above.
On July 7, 2004, the average of the high and low bid and asked prices
of our common stock as traded over-the-counter was $.45 per share.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1, as amended, to
register the shares of common stock being offered by this prospectus. In
addition, we file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. Prospective
purchasers may read and copy any reports, statements or other information we
file at the Securities and Exchange Commission's public reference facilities in
Washington, D.C., New York and Chicago, Illinois. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference facilities. Our Securities and Exchange Commission filings are also
available to the public from commercial document retrieval services, and at the
web site maintained by the Securities and Exchange Commission at
http://www.sec.gov. As allowed by Securities and Exchange Commission rules, this
prospectus does not contain all the information contained in the registration
statement or in exhibits to the registration statement.
-4-
RISK FACTORS
INVESTING IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT IN OUR STOCK. ANY OF
THE FOLLOWING RISKS COULD CAUSE THE TRADING PRICE OF THE SHARES TO DECLINE.
OUR SUCCESS DEPENDS HEAVILY UPON OUR ABILITY TO MARKET OUR CRUDE OIL
AND NATURAL GAS PRODUCTION AT FAVORABLE PRICES.
In recent decades, there have been both periods of worldwide
overproduction and underproduction of crude oil and natural gas, and periods of
increased and relaxed energy conservation efforts. Such conditions have resulted
in excess supply of, and reduced demand for, crude oil on a worldwide basis and
for natural gas on a domestic basis. At other times, there has been short supply
of, and increased demand for, crude oil and, to a lesser extent, natural gas.
These changes have resulted in dramatic price fluctuations.
THE DEGREE TO WHICH WE ARE LEVERAGED COULD POSSIBLY HAVE IMPORTANT
CONSEQUENCES TO OUR SHAREHOLDERS, INCLUDING THE FOLLOWING:
(i) Our indebtedness, acquisitions, working capital, capital
expenditures or other purposes may be impaired;
(ii) Funds available for our operations and general corporate
purposes or for capital expenditures will be reduced as a result of the
dedication of a substantial portion of our consolidated cash flow from
operations to the payment of the principal and interest on our
indebtedness;
(iii) We may be more highly leveraged than certain of our
competitors, which may place us at a competitive disadvantage;
(iv) The agreements governing our long-term indebtedness and
bank loans may contain restrictive financial and operating covenants;
(v) An event of default (not cured or waived) under financial
and operating covenants contained in our debt instruments could occur
and have a material adverse effect;
(vi) Certain of the borrowings under our debt agreements have
floating rates of interest, which causes us to be vulnerable to
increases in interest rates; and
(vii) Our substantial degree of leverage could make us more
vulnerable to a downturn in general economic conditions.
OUR ABILITY TO MAKE PRINCIPAL AND INTEREST PAYMENTS UNDER LONG-TERM
INDEBTEDNESS AND BANK LOANS WILL BE DEPENDENT UPON OUR FUTURE PERFORMANCE, WHICH
IS SUBJECT TO FINANCIAL, ECONOMIC AND OTHER FACTORS, SOME OF WHICH ARE BEYOND
OUR CONTROL.
We cannot assure you that our current level of operating results will
continue or improve. We believe that we will need to access capital markets in
the future in order to provide the funds necessary to repay a significant
portion of our indebtedness. We cannot assure you that any such refinancing will
be possible or that we can obtain any additional financing, particularly in view
of our anticipated high levels of debt. If no such refinancing or additional
financing were available, we could default on our debt obligations.
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WE HAVE INCURRED NET LOSSES IN THE PAST AND THERE CAN BE NO ASSURANCE
THAT WE WILL BE PROFITABLE IN THE FUTURE.
We have incurred net losses in three of the last five fiscal years. Our
accountants have included a "going concern" notation in their letter
accompanying our audited financial statements. See "Financial Statements." If we
continue to sustain net losses in future years, it will be difficult to continue
as an operating entity.
Our future operating results may fluctuate significantly depending upon
a number of factors, including industry conditions, prices of crude oil and
natural gas, rates of production, timing of capital expenditures and drilling
success. These variables could have a material adverse effect on our business,
financial condition, results of operations and the market price of our common
stock.
ESTIMATES OF CRUDE OIL AND NATURAL GAS RESERVES DEPEND ON MANY
ASSUMPTIONS THAT MAY TURN OUT TO BE INACCURATE.
Estimates of our PROVED RESERVES for crude oil and natural gas and the
estimated future net revenues from the production of such reserves rely upon
various assumptions, including assumptions as to crude oil and natural gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. The process of estimating crude oil and natural gas
reserves is complex and imprecise.
Actual future production, crude oil and natural gas prices, revenues,
taxes, development expenditures, operating expenses and quantities of
recoverable crude oil and natural gas reserves may vary substantially from the
estimates we obtain from reserve engineers. Any significant variance in these
assumptions could materially affect the estimated quantities and PRESENT VALUE
of reserves we have set forth. In addition, our PROVED RESERVES may be subject
to downward or upward revision due to factors that are beyond our control, such
as production history, results of future exploration and development, prevailing
crude oil and natural gas prices and other factors.
APPROXIMATELY 25% OF OUR TOTAL ESTIMATED PROVED RESERVES AT DECEMBER
31, 2003 WERE PROVED UNDEVELOPED RESERVES, WHICH ARE BY THEIR NATURE LESS
CERTAIN.
Recovery of such reserves requires significant capital expenditures and
successful drilling operations. The reserve data set forth in the reserve
engineer reports assumes that substantial capital expenditures are required to
develop such reserves. Although cost and reserve estimates attributable to our
crude oil and natural gas reserves have been prepared in accordance with
industry standards, we cannot be sure that the estimated costs are accurate,
that development will occur as scheduled or that the results of such development
will be as estimated.
YOU SHOULD NOT INTERPRET THE PRESENT VALUE REFERRED TO IN THIS
PROSPECTUS AS THE CURRENT MARKET VALUE OF OUR ESTIMATED CRUDE OIL AND NATURAL
GAS RESERVES.
In accordance with Securities and Exchange Commission requirements, the
estimated discounted future net cash flows from PROVED RESERVES are generally
based on prices and costs as of the date of the estimate. Actual future prices
and costs may be materially higher or lower.
The estimates of our PROVED RESERVES and the future net revenues from
which the PRESENT VALUE of our properties is derived were calculated based on
the actual prices of our various properties on a property-by-property basis at
December 31, 2003. The average prices of all properties were $29.51 per barrel
of oil and $5.82 per thousand cubic feet (MCF) of natural gas at that date.
-6-
Actual future net cash flows will also be affected by increases or
decreases in consumption by crude oil and natural gas purchasers and changes in
governmental regulations or taxation. The timing of both the production and the
incurring of expenses in connection with the development and production of crude
oil and natural gas properties affect the timing of actual future net cash flows
from PROVED RESERVES. In addition, the 10% discount factor, which is required by
the Securities and Exchange Commission to be used in calculating discounted
future net cash flows for reporting purposes, is not necessarily the most
appropriate discount factor. The effective interest rate at various times and
the risks associated with our business or the oil and gas industry in general
will affect the accuracy of the 10% discount factor.
EXCEPT TO THE EXTENT THAT WE ACQUIRE PROPERTIES CONTAINING PROVED
RESERVES OR CONDUCT SUCCESSFUL DEVELOPMENT OR EXPLOITATION ACTIVITIES, OUR
PROVED RESERVES WILL DECLINE AS THEY ARE PRODUCED.
In general, the volume of production from crude oil and natural gas
properties declines as reserves are depleted. Our future crude oil and natural
gas production is highly dependent upon our success in finding or acquiring
additional reserves.
THE BUSINESS OF ACQUIRING, ENHANCING OR DEVELOPING RESERVES REQUIRES
CONSIDERABLE CAPITAL.
Our ability to make the necessary capital investment to maintain or
expand our asset base of crude oil and natural gas reserves could be impaired to
the extent that cash flow from operations is reduced and external sources of
capital become limited or unavailable. In addition, we cannot be sure that our
future acquisition and development activities will result in additional PROVED
RESERVES or that we will be able to drill productive wells at acceptable costs.
CRUDE OIL AND NATURAL GAS DRILLING AND PRODUCTION ACTIVITIES ARE
SUBJECT TO NUMEROUS RISKS, MANY OF WHICH ARE BEYOND OUR CONTROL.
These risks include (i) the possibility that no commercially productive
oil or gas reservoirs will be encountered; and, (ii) that operations may be
curtailed, delayed or canceled due to title problems, weather conditions,
governmental requirements, mechanical difficulties, or delays in the delivery of
drilling rigs and other equipment that may limit our ability to develop, produce
and market our reserves. We cannot assure you that new wells we drill will be
productive or that we will recover all or any portion of our investment in such
new wells.
DRILLING FOR CRUDE OIL AND NATURAL GAS MAY NOT BE PROFITABLE.
Any wells that we drill may be dry wells or wells that are not
sufficiently productive to be profitable after drilling. Such wells will have a
negative impact on our profitability. In addition, our properties may be
susceptible to drainage from production by other operators on adjacent
properties.
OUR INDUSTRY EXPERIENCES NUMEROUS OPERATING RISKS THAT COULD CAUSE US
TO SUFFER SUBSTANTIAL LOSSES.
Such risks include fire, explosions, blowouts, pipe failure and
environmental hazards, such as oil spills, natural gas leaks, ruptures or
discharges of toxic gases. We could also suffer losses due to personnel injury
or loss of life; severe damage to or destruction of property; or environmental
damage that could result in clean-up responsibilities, regulatory investigation,
penalties or suspension of our operations. In accordance with customary industry
practice, we maintain insurance policies against some, but not all, of the risks
described above. Our insurance policies may not adequately protect us against
loss or liability. There is no guarantee that insurance policies that protect us
against the many risks we face will continue to be available at justifiable
premium levels.
-7-
As owners and operators of crude oil and natural gas properties, we may
be liable under federal, state and local environmental regulations for
activities involving water pollution, hazardous waste transport, storage,
disposal or other activities.
OUR PAST GROWTH HAS BEEN ATTRIBUTABLE TO ACQUISITIONS OF PRODUCING
CRUDE OIL AND NATURAL GAS PROPERTIES WITH PROVED RESERVES. THERE ARE RISKS
INVOLVED WITH SUCH ACQUISITIONS.
The successful acquisition of properties requires an assessment of
recoverable reserves, future crude oil and natural gas prices, operating costs,
potential environmental and other liabilities, and other factors beyond our
control. Such assessments are necessarily inexact and their accuracy uncertain.
In connection with such an assessment, we perform a review of the subject
properties that we believe to be generally consistent with industry practices.
Such a review, however, will not reveal all existing or potential problems, nor
will it permit us, as the buyer, to become sufficiently familiar with the
properties to fully assess their capabilities or deficiencies. We may not
inspect every well and, even when an inspection is undertaken, structural and
environmental problems may not necessarily be observable.
WHEN WE ACQUIRE PROPERTIES, IN MOST CASES, WE ARE NOT ENTITLED TO
CONTRACTUAL INDEMNIFICATION FOR PRE-CLOSING LIABILITIES, INCLUDING ENVIRONMENTAL
LIABILITIES.
We generally acquire interests in properties on an "as is" basis with
limited remedies for breaches of representations and warranties. In those
circumstances in which we have contractual indemnification rights for
pre-closing liabilities, we cannot assure you that the seller will be able to
fulfill its contractual obligations. In addition, the competition to acquire
producing crude oil and natural gas properties is intense and many of our larger
competitors have financial and other resources substantially greater than ours.
We cannot assure you that we will be able to acquire producing crude oil and
natural gas properties that have economically recoverable reserves for
acceptable prices.
WE MAY ACQUIRE ROYALTY, OVERRIDING ROYALTY OR WORKING INTERESTS IN
PROPERTIES THAT ARE LESS THAN THE CONTROLLING INTEREST.
In such cases, it is likely that we will not operate, nor control the
decisions affecting the operations, of such properties. We intend to limit such
acquisitions to properties operated by competent parties with whom we have
discussed their plans for operation of the properties.
WE WILL NEED ADDITIONAL FINANCING IN THE FUTURE TO CONTINUE TO FUND OUR
DEVELOPMENT AND EXPLOITATION ACTIVITIES.
We have made and will continue to make substantial capital expenditures
in our exploitation and development projects. We intend to finance these capital
expenditures with cash flow from operations, existing financing arrangements or
new financing. We cannot assure you that such additional financing will be
available. If it is not available, our development and exploitation activities
may have to be curtailed, which could adversely affect our business, financial
condition and results of operations, as was the case in 2003.
-8-
THE MARKETING OF OUR NATURAL GAS PRODUCTION DEPENDS, IN PART, UPON THE
AVAILABILITY, PROXIMITY AND CAPACITY OF NATURAL GAS GATHERING SYSTEMS, PIPELINES
AND PROCESSING FACILITIES.
We could be adversely affected by changes in existing arrangements with
transporters of our natural gas since we do not own most of the gathering
systems and pipelines through which our natural gas is delivered to purchasers.
Our ability to produce and market our natural gas could also be adversely
affected by federal, state and local regulation of production and
transportation.
THE CRUDE OIL AND NATURAL GAS INDUSTRY IS HIGHLY COMPETITIVE IN ALL OF
ITS PHASES.
Competition is particularly intense with respect to the acquisition of
desirable PRODUCING PROPERTIES, the acquisition of crude oil and natural gas
PROSPECTS suitable for enhanced production efforts, and the hiring of
experienced personnel. Our competitors in crude oil and natural gas acquisition,
development, and production include the major oil companies, in addition to
numerous independent crude oil and natural gas companies, individual proprietors
and drilling programs.
Many of these competitors possess and employ financial and personnel
resources substantially in excess of those which are available to us and may,
therefore, be able to pay more for desirable PRODUCING PROPERTIES and PROSpECTS
and to define, evaluate, bid for, and purchase a greater number of PRODUCING
PROPERTIES and pROSPECTS than our financial or personnel resources will permit.
Our ability to generate reserves in the future will be dependent on our ability
to select and acquire suitable PRODUCING PROPERTIES and PROSPECTS while
competing with these companies.
THE DOMESTIC OIL INDUSTRY IS EXTENSIVELY REGULATED AT BOTH THE FEDERAL
AND STATE LEVELS. ALTHOUGH WE BELIEVE WE ARE PRESENTLY IN COMPLIANCE WITH ALL
LAWS, RULES AND REGULATIONS, WE CANNOT ASSURE YOU THAT CHANGES IN SUCH LAWS,
RULES OR REGULATIONS, OR THE INTERPRETATION THEREOF, WILL NOT HAVE A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION OR THE RESULTS OF OUR OPERATIONS.
Legislation affecting the oil and gas industry is under constant review
for amendment or expansion, frequently increasing the regulatory burden on the
industry. There are numerous federal and state agencies authorized to issue
rules and regulations affecting the oil and gas industry. These rules and
regulations are often difficult and costly to comply with and carry substantial
penalties for noncompliance.
State statutes and regulations require permits for drilling operations,
drilling bonds, and reports concerning operations. Most states also have
statutes and regulations governing conservation matters, including the
unitization or pooling of properties, and the establishment of maximum rates of
production from wells. Some states have also enacted statutes prescribing price
ceilings for natural gas sold within their states.
Our industry is also subject to numerous laws and regulations governing
plugging and abandonment of wells, discharge of materials into the environment
and other matters relating to environmental protection. The heavy regulatory
burden on the oil and gas industry increases the costs of our doing business as
an oil and gas company, consequently affecting our profitability.
-9-
WE HAVE "BLANK CHECK" PREFERRED STOCK.
Our Articles of Incorporation authorize the Board of Directors to issue
preferred stock without further shareholder action in one or more series and to
designate the dividend rate, voting rights and other rights preferences and
restrictions. The issuance of preferred stock could have an adverse impact on
holders of common stock. Preferred stock is senior to common stock.
Additionally, preferred stock could be issued with dividend rights senior to the
rights of holders of common stock. Finally, preferred stock could be issued as
part of a "poison pill", which could have the effect of determining offers to
acquire the Company See "Description of Securities"
WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.
Our board of directors presently intends to retain all of our earnings
for the expansion of our business, therefore we do not anticipate distributing
cash dividends on our common stock in the foreseeable future. Any decision of
our board of directors to pay cash dividends will depend upon our earnings,
financial position, cash requirements and other factors.
THE HOLDERS OF OUR COMMON STOCK DO NOT HAVE CUMULATIVE VOTING RIGHTS,
PREEMPTIVE RIGHTS OR RIGHTS TO CONVERT THEIR COMMON STOCK TO OTHER SECURITIES.
We are authorized to issue 80,000,000 shares of common stock, $.001 par
value per share. As of July 14, 2004, there were 18,492,541 shares of common
stock issued and outstanding. Since the holders of our common stock do not have
cumulative voting rights, the holder(s) of a majority of the shares of common
stock present, in person or by proxy, will be able to elect all of the members
of our board of directors. The holders of shares of our common stock do not have
preemptive rights or rights to convert their common stock into other securities.
MANAGEMENT CONTROLS THE COMPANY.
Mr. J. Virgil Waggoner, our Chairman of the Board and one of the
selling shareholders, owns 9,601,829 shares of our common stock, which
represents almost 52% of the currently outstanding common stock. Additionally,
Mr. Waggoner has the right to acquire an additional 7,180,714 shares pursuant to
conversion of preferred stock and exercise of currently exercisable warrants and
options. See "Security Ownership of Certain Beneficial Owners and Management."
Additionally, all current directors and officers as a group own almost 70% of
the outstanding common stock (assuming they convert all preferred stock and
exercise all currently exercisable warrants and options held by them). For as
long as Mr. Waggoner and the other directors and officers continue to own over a
majority of the outstanding common stock, they will be able to control elections
to the board of directors and other matters submitted to shareholders. The
percentage ownership of directors and officers could be reduced by the issuance
of common stock on conversion of preferred stock and the exercise of warrants,
although it is impossible to say how many shares will be actually issued.
THE NUMBER OF SHARES OF OUTSTANDING COMMON STOCK COULD INCREASE
SIGNIFICANTLY AS A RESULT OF OUR RECENT TRANSACTIONS.
If all of the common stock offered by this prospectus is issued by the
Company, the number of our outstanding shares of common stock will more than
double. It is impossible to say how many shares, if any, will be issued by the
Company and how many shares, in turn, will be resold under this prospectus.
However, it is possible that our stock price could decline significantly as a
result of an increased number of shares being offered into the market.
-10-
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2004
and as adjusted to give effect to the transaction listed under "Summary - Recent
Transactions and - Other Securities Being Offered" and the issuance of the
shares offered by this prospectus, assuming conversion of all of the preferred
stock described in this prospectus and exercise of all of the outstanding
warrants. You should read this table in conjunction with our financial
statements, "Selected Financial Data" and "Management's Discussion and Analysis
of Results of Operations and Financial Condition" included elsewhere in this
prospectus.
March 31, 2004
Actual As Adjusted
---------------------- ------------------
Total long-term debt, less current portion $ 27,759 $ 18,027,759
Total current liabilities 45,069,515 17,485,370
---------------------- ------------------
Total debt $ 45,097,274 $ 35,513,129
---------------------- ------------------
Shareholders' equity
Series D Preferred Stock, $.01 par value, $500
liquidation value, 8,000 shares outstanding 80 -
Series E Preferred Stock, $.01 par value, $500
liquidation value, 9,000 shares outstanding 90 -
Series F Preferred Stock, $.01 par value, $500
liquidation value, 2,000 shares outstanding 20 -
Class A Common Stock, $.001 par value, 18,492,541
shares outstanding actual, 37,671,733 as adjusted 18,493 37,672
Additional paid-in equity 29,283,692 34,777,558
Accumulated deficit (23,746,355) (11,590,097)
---------------------- ------------------
Total shareholders' equity 5,556,020 23,225,133
---------------------- ------------------
Total capitalization $ 50,653,294 $ 58,738,262
====================== ==================
-11-
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and to fund future growth. We do not anticipate
paying any cash dividends in the foreseeable future.
FORWARD-LOOKING STATEMENTS
We make forward-looking statements throughout this prospectus. Whenever
you read a statement that is not simply a statement of historical fact (such as
when we describe what we "believe," "expect" or "anticipate" will occur, and
other similar statements), you must remember that our expectations may not be
correct, even though we believe they are reasonable. We do not guarantee that
the transactions and events described in this prospectus will happen as
described (or that they will happen at all). The forward-looking information
contained in this prospectus is generally located in the material set forth
under the headings "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" but
may be found in other locations as well. These forward-looking statements
generally relate to our plans and objectives for future operations and are based
upon our management's reasonable estimates of future results and trends.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF WHEN THIS PROSPECTUS IS DELIVERED OR THE DATE OF ANY
SALE OF OUR COMMON STOCK.
-12-
MARKET PRICE OF COMMON STOCK
Our common stock is traded over-the-counter (OTC) under the symbol
"GULF". Fidelity Transfer Company, 1800 South West Temple, Suite 301, Box 53,
Salt Lake City, Utah 84115, (801) 484-7222 is the transfer agent for the common
stock. The high and low trading prices for the common stock for each quarter in
2004, 2003 and 2002 are set forth below. The trading prices represent prices
between dealers, without retail mark-ups, mark-downs, or commissions, and may
not necessarily represent actual transactions.
HIGH LOW
---- ---
2004
-----
First Quarter $.56 $.32
2003
----
First Quarter $.45 $.42
Second Quarter .47 .35
Third Quarter .47 .43
Fourth Quarter .47 .32
2002
-----
First Quarter $.66 $.55
Second Quarter .60 .46
Third Quarter .51 .20
Fourth Quarter .44 .32
We are authorized to issue 80,000,000 shares of Class A common stock,
par value $.001 per share (the "common stock"). As of July 12, 2004, there were
18,492,541 shares of common stock issued and outstanding (not including shares
issuable upon exercise of outstanding warrants or upon conversion of preferred
stock) and held by approximately 580 beneficial owners.
-13-
SELLING SHAREHOLDERS
The selling shareholders may offer and sell, from time to time, any or
all of the Shares. Because the selling security holders may offer all or only
some portion of the 19,179,192 Shares to be registered, no estimate can be given
as to the amount or percentage of these Shares that will be held by the selling
shareholders upon termination of the offering.
The following table sets forth the name and relationship with us, if
any, of certain of the selling shareholders and (i) the number of shares of
common stock beneficially owned by the selling shareholders as of July 14, 2004,
(ii) the maximum number of shares of common stock which may be offered for the
account of the selling shareholders under this prospectus and (iii) the amount
and percentage of common stock that would be owned by the selling shareholders
after completion of the offering, assuming a sale of all of the common stock
which may be offered hereunder. Except as otherwise noted below, the selling
shareholders have not, within the past three years, had any position, office or
other material relationship with us.
Beneficial ownership is determined under the rules of the Securities
and Exchange Commission. The number of shares beneficially owned by a person
includes shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of the date of this
prospectus. The shares issuable under these securities are treated as if
outstanding for computing the percentage ownership of the person holding these
securities but are not treated as if outstanding for the purposes of computing
the percentage ownership of any other person.
----------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF TOTAL SHARES % OF OWNERSHIP TOTAL SHARES
SELLING SECURITY HOLDER REGISTERED OWNED(1)
----------------------------------------------------------------------------------------------------
Petrobridge Investment Management, LLC 2,035,621 9.9 2,035,621
1600 Smith Street, Suite 4250
Houston, TX 77002
----------------------------------------------------------------------------------------------------
Petro Capital Advisors 1,628,571 8.1 1,628,571
1845Woodall Rodgers Frwy. ,Suite1700
Dallas, TX 75201
----------------------------------------------------------------------------------------------------
Virgil Waggoner(2) 7,160,714 65.4 16,782,543
6605 Cypresswood Drive, Suite 250
Spring, TX 77379
----------------------------------------------------------------------------------------------------
Patrick Parker 857,143 4.4 857,143
Scarbrough Building, 6th and Congress,
101 W. 6th St. Suite 610
Austin, TX 78701
----------------------------------------------------------------------------------------------------
Douglas Moreland 1,428,571 7.2 1,428,571
1655 East Layton Drive
Englewood, CO 80110
----------------------------------------------------------------------------------------------------
Stanley Chason 71,429 * 71,429
1230 Watervale Court,
Pasadena, MD 21122
----------------------------------------------------------------------------------------------------
XMen, LLC 1,714,286 8.9 1,714,286
520 Lake Cook Road, Suite105
Deerfield, IL 60015
----------------------------------------------------------------------------------------------------
-14-
----------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF TOTAL SHARES % OF OWNERSHIP TOTAL SHARES
SELLING SECURITY HOLDER REGISTERED OWNED(1)
----------------------------------------------------------------------------------------------------
Bruce Goldstein 57,143 * 57,143
1934 Deercrest Lane
Northbrook, IL 60062
----------------------------------------------------------------------------------------------------
Barry S. Cohn Revocable Trust 214,286 1.2 214,286
2505 Astor Court
Glenview, IL 60025
----------------------------------------------------------------------------------------------------
Bargus Partnership 714,286 3.7 714,286
664 South Evergreen Ave
Woodbury Heights, NJ 08097
----------------------------------------------------------------------------------------------------
Edwin J. Hagerty 371,429 2.0 371,429
5100 West Grove Dr.
Dallas, TX 75248
----------------------------------------------------------------------------------------------------
Star-Tex Trading Company 285,713 * 370,381
16300 Addison Rd., Suite 300
Addison, TX 75001
----------------------------------------------------------------------------------------------------
ST Advisory Corp./John E. Loehr(3) 270,000 3.3 617,491
16300 Addison Rd., Suite 300
Addison, TX 75001
----------------------------------------------------------------------------------------------------
Thomas R, Kaetzer(4) 325,000 3.9 733,852
480 N. Sam Houston Parkway, Suite 300
Houston, TX 77060
----------------------------------------------------------------------------------------------------
Jim C. Bigham(5) 125,000 1.3 245,985
480 N. Sam Houston Parkway, Suite 300
Houston, TX 77060
----------------------------------------------------------------------------------------------------
Marshall A. Smith III(6) 270,000 4.7 889,005
480 N. Sam Houston Parkway, Suite 300
Houston, TX 77060
----------------------------------------------------------------------------------------------------
Intermarket Management LLC(7) 500,000 2.7 500,000
170 Broadway., Suite 1700
New York, NY 10038
----------------------------------------------------------------------------------------------------
Star Investments , LTD 100,000 * 139,500
3421 Causeway Blvd., Suite 103
Metairie, LA 70002
----------------------------------------------------------------------------------------------------
Ray B. Nesbitt 150,000 * 393,333
1 Winston Woods
Houston, TX 77024
----------------------------------------------------------------------------------------------------
J. T. Thompson 40,000 * 40,000
1212 Woodhollow Drive, No. 15101
Houston, TX 77057
----------------------------------------------------------------------------------------------------
-15-
----------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF TOTAL SHARES % OF OWNERSHIP TOTAL SHARES
SELLING SECURITY HOLDER REGISTERED OWNED1
----------------------------------------------------------------------------------------------------
Rick Gardner 100,000 * 100,000
1615 Poydras, 5th Floor
New Orleans, LA 70112
----------------------------------------------------------------------------------------------------
Ron Zimmerman 60,000 * 60,000
1212 Woodhollow Drive, No. 15101
Houston, TX 77057
----------------------------------------------------------------------------------------------------
Steven M. Morris 500,000 * 500,000
P.O. Box 941828
Houston, TX 77094
----------------------------------------------------------------------------------------------------
* Less than 1%
1 Includes shares registered hereunder.
2 Mr. Waggoner is Chairman of the Board of the Company. See "Management."
3 Mr. Loehr is Chief Executive Officer and a director of the Company. See
"Management." Reflects 270,000 shares issuable to Mr. Loehr pursuant
immediately exercisable warrants and 200,000 shares issuable upon
conversion of preferred stock held by ST Advisory Corp. ST Advisory Corp.
is owned by John E. Loehr.
4 Mr. Kaetzer is President, Chief Operating Officer and a director of the
Company. See "Management."
5 Mr. Bigham is Vice President and Secretary of the Company. See
"Management."
6 Mr. Smith is a director of the Company. See "Management."
7 Mr. M. Scott Manolis, one of our directors, is Chairman, Chief Executive
Officer and an owner of this Company. See "Management" and "Certain
Relationships and Related Transactions."
-16-
PLAN OF DISTRIBUTION
The selling shareholders may, from time to time, sell all or a portion
of the shares of common stock on any market upon which the common stock may be
quoted (currently the OTC Bulletin Board), in privately negotiated transactions
or otherwise. Such sales may be at fixed prices prevailing at the time of sale,
at prices related to the market prices or at negotiated prices. The shares of
common stock being offered by this prospectus may be sold by the selling
shareholders using one or more of the following methods, without limitation:
(a) Block trades in which the broker or dealer so engaged will
attempt to sell the shares of common stock as agent but may
position and resell a portion of the block as principal to
facilitate the transaction;
(b) purchases by broker or dealer as principal and resale by the
broker or dealer for its account pursuant to this prospectus;
(c) an exchange distribution in accordance with the rules of the
applicable exchange;
(d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
(e) privately negotiated transactions;
(f) market sales (both long and short to the extent permitted
under the federal securities laws);
(g) at the market to or through market makers or into an existing
market for the shares;
(h) through transactions in options, swaps or other derivatives
(whether exchange listed or otherwise); and
(i) a combination of any aforementioned methods of sale.
In the event of the transfer by the selling shareholder of its shares
to any pledgee, donee or other transferee, we will amend this prospectus and the
registration statement of which this prospectus forms a part by the filing of a
post-effective amendment in order to have the pledgee, donee or other transferee
in place of the selling shareholder who has transferred his or her shares.
In effecting sales, brokers and dealers engaged by a selling
shareholder may arrange for other brokers or dealers to participate. Brokers or
dealers may receive commissions or discounts from the selling shareholder or, if
any of the broker-dealers act as an agent for the purchaser of such shares, from
the purchaser in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with a
selling shareholder to sell a specified number of the shares of common stock at
a stipulated price per share. Such an agreement may also require the
broker-dealer to purchase as principal any unsold shares of common stock at the
price required to fulfill the broker-dealer commitment to the selling
shareholder if such broker-dealer is unable to sell the shares on behalf of the
selling shareholder. Broker-dealers who acquire shares of common stock as
principal may thereafter resell the shares of common stock from time to time in
transactions which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above. Such sales
by a broker-dealer could be at prices and on terms then prevailing at the time
of sale, at prices related to the then-current market price or in negotiated
transactions. In connection with such resales, the broker-dealer may pay to or
receive from the purchasers of the shares commissions as described above.
A selling shareholder and any broker-dealers or agents that participate
with that selling shareholder in the sale of the shares of common stock may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with these sales. In that event, any commissions received
by the broker-dealers or agents and any profit on the resale of the shares of
common stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act of 1933, as amended.
-17-
From time to time, a selling shareholder may pledge its shares of
common stock pursuant to the margin provisions of its customer agreements with
its brokers. Upon a default by a selling shareholder, the broker may offer and
sell the pledged shares of common stock from time to time. Upon a sale of the
shares of common stock, the selling shareholders intend to comply with the
prospectus delivery requirements under the Securities Act of 1933 by delivering
a prospectus to each purchaser in the transaction. We intend to file any
amendments or other necessary documents in compliance with the Securities Act of
1933 which may be required in the event a selling shareholder defaults under any
customer agreement with brokers.
To the extent required under the Securities Act of 1933, a post
effective amendment to this registration statement will be filed, disclosing the
name of any broker-dealers, the number of shares of common stock involved, the
price at which the common stock is to be sold, the commissions paid or discounts
or concessions allowed to such broker-dealers, where applicable, that such
broker-dealers did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and other facts material to
the transaction.
We and the selling shareholders will be subject to applicable
provisions of the Securities Exchange Act of 1934, as amended, and the rules and
regulations under it, including, without limitation, Rule 10b-5 and, insofar as
a selling shareholder is a distribution participant and we, under certain
circumstances, may be a distribution participant, under Regulation M. All of the
foregoing may affect the marketability of the common stock.
All expenses of the registration statement including, but not limited
to, legal, accounting, printing and mailing fees are and will be borne by us.
Any commissions, discounts or other fees payable to brokers or dealers in
connection with any sale of the shares of common stock will be borne by the
selling shareholder, the purchasers participating in such transaction, or both.
Any shares of common stock covered by this prospectus that qualify for
sale pursuant to Rule 144 under the Securities Act of 1933, as amended, may be
sold under Rule 144 rather than pursuant to this prospectus.
-18-
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of
our Company for the three-month period ended March 31, 2004 and 2003, and as of
December 31, 2003, 2002, 2001, 2000 and 1999, and for each of the periods then
ended. See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The income statement data for the years
ended December 31, 2003, 2002 and 2001 and the balance sheet data at December
31, 2003 and 2002 are derived from our audited financial statements contained
elsewhere herein. The income statement data for the years ended December 31,
2000 and 1999 and the balance sheet data at December 31, 2001, 2000 and 1999 are
derived from our Annual Report on Form 10-K for those periods. You should read
this data in conjunction with our consolidated financial statements and the
notes thereto included elsewhere herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three-Month Period
Ended March 31,
(unaudited) Year Ended December 31,
------------ ----------- ------------ ------------ ------------ ----------- ------------
2004 2003 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA
---------------------
Operating Revenues $ 2,538,729 $ 3,250,603 $ 11,010,723 $ 10,839,797 $ 12,990,581 $ 8,984,175 $ 2,812,639
Net income (loss) from
operations 363,693 862,683
917,571 927,655 3,451,875 2,464,017 (1,464,094)
Net income (loss) (268,628) 120,659
(3,024,426) (4,502,313) 1,044,291 352,774 (2,269,506)
Dividends on preferred stock (34,375) -- (127,083) (112,500) (56,250) -- (450,684)
Net income (loss) available
to common shareholders (303,003) 120,659 (3,151,509) (4,614,813) 988,401 352,774 (2,720,190)
Net income (loss), per share
of common stock $ (.02) $ .01 $ (.17) $ (.25) $ .05 $ .02 $ (.34)
Weighted average number
of shares of common
stock outstanding 18,492,541 18,492,541 18,492,541 18,492,541 18,464,343 17,293,848 7,953,147
BALANCE SHEET DATA
------------------
Current assets 2,003,513 2,953,646 $ 1,742,689 $ 2,353,046 $ 2,205,862 $ 2,934,804 $ 1,357,465
Total assets 52,334,478 53,355,980 52,428,774 53,088,941 51,379,209 32,374,128 20,009,793
Current liabilities 45,069,515 44,160,887 44,619,652 43,998,566 12,492,365 7,594,986 4,650,691
Long-term obligations 1,405,323 115,223 1,393,607 137,808 26,541,957 18,077,371 11,304,318
Other liabilities 303,620 1,110,137 591,467 1,128,993 -- -- --
Shareholders' Equity 5,556,020 7,969,733 $ 5,824,648 $ 7,823,574 $ 12,344,887 $ 6,701,771 $ 4,054,784
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR OUR PREDICTIONS. PLEASE
SEE "RISK FACTORS" AND "FORWARD-LOOKING STATEMENTS" FOR A DISCUSSION OF THE
UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED WITH THESE STATEMENTS.
OVERVIEW
We are engaged primarily in the acquisition, development, exploitation,
exploration and production of crude oil and natural gas. Our focus is on
increasing production from our existing crude oil and natural gas properties
through the further exploitation, development and exploration of those
properties, and on acquiring additional interests in crude oil and natural gas
properties. Our gross revenues are derived from the following sources:
1. OIL AND GAS SALES that are proceeds from the sale of crude
oil and natural gas production to midstream purchasers;
2. OPERATING OVERHEAD AND OTHER INCOME that consists of
earnings from operating crude oil and natural gas properties for other
WORKING INTEREST owners, and marketing and transporting natural gas.
This also includes earnings from other miscellaneous activities.
3. WELL SERVICING REVENUES that are earnings from the
operation of well servicing equipment under contract to other
operators. During 2003, we worked only for our own account.
The following is a discussion of our consolidated financial condition,
results of operations, financial condition and capital resources. You should
read this discussion in conjunction with our Consolidated Financial Statements
and the Notes thereto contained elsewhere herein. See "Financial Statements."
RESULTS OF OPERATIONS
The factors which most significantly affect our results of operations
are (1) the sales price of crude oil and natural gas, (2) the level of total
sales volumes of crude oil and natural gas, (3) the cost and efficiency of
operating our properties, (4) depletion and depreciation of oil and gas property
costs and related equipment, (5) the level of and interest rates on borrowings,
(6) the level and success of new acquisitions and development of existing
properties, and (7) the adoption of changes in accounting rules.
We consider depletion and depreciation of oil and gas properties and
related support equipment to be critical accounting estimates, based upon
estimates of oil and gas reserves.
The estimates of oil and gas reserves utilized in the calculation of
depletion and depreciation are estimated in accordance with guidelines
established by the Securities and Exchange Commission and the Financial
Accounting Standards Board, which require that reserve estimates be prepared
under existing economic and operating conditions with no provision for price and
cost escalations over prices and costs existing at year end, except by
contractual arrangements.
We emphasize that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. Our policy is to amortize capitalized oil and gas costs on
the unit of production method, based upon these reserve estimates. It is
reasonably possible the estimates of future cash inflows, future gross revenues,
the amount of oil and gas reserves, the remaining estimated lives of the oil and
gas properties, or any combination of the above may be increased or reduced in
the near term. If reduced, the carrying amount of capitalized oil and gas
properties may be reduced materially in the near term.
-20-
Comparative results of operations for the periods indicated are
discussed below.
THREE-MONTH PERIOD ENDED MARCH 31, 2004 COMPARED TO THREE MONTH PERIOD
ENDED MARCH 31, 2003.
REVENUES
OIL AND GAS SALES. Revenues from the sale of crude oil and natural gas
for the first quarter decreased 22% from $3,204,900 in 2003 to $2,500,600 in
2004. This was due to a decrease in oil and natural gas sales volumes. The lower
sales volumes were due to (1) the natural decline in production from our Gulf
Coast fields; (2) the temporary shut-in of some natural gas wells in the Grand
Lake and Madisonville Fields, as a result of gas compressor and sales pipeline
maintenance and operational changes; and (3) the non-availability of capital
funds needed to restore production in certain wells with down-hole mechanical
problems.
OPERATING OVERHEAD AND OTHER INCOME. Revenues from these activities
decreased 17% from $45,700 in 2003 to $38,100 in 2004, due primarily to a
decrease in sales volume in fields where we transport for other working interest
owners.
COSTS AND EXPENSES
LEASE OPERATING EXPENSES. Lease operating expenses decreased 4% from
$1,369,900 in 2003 to $1,314,300 in 2004 due to lower production taxes.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD AND A). DD and A decreased
27% from $603,900 in 2003 to $439,200 in 2004 due to lower sales volumes.
GENERAL AND ADMINISTRATIVE (G AND A) EXPENSES. Our G and A expenses
decreased 3% from $414,000 in 2003 to $401,200 in 2004.
INTEREST EXPENSE. Interest expense increased 21% from $760,900 in 2003
to $920,200 in 2004, primarily due to penalty interest charged in January 2004,
by our largest debt holder.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUES
OIL AND GAS SALES. Our operating revenues from the sale of crude oil
and natural gas increased by 4% from $10,447,000 in 2002 to $10,844,000 in 2003.
This increase was due to higher sales prices but offset by normal oil and gas
production declines. We were unable to offset the production declines through
development efforts because of limited development capital.
WELL SERVICING REVENUES. There were no revenues from our well servicing
operations in 2003 compared to $39,000 in 2002 since we ceased performing work
for other operators and concentrated on our own properties.
OPERATING OVERHEAD AND OTHER INCOME. Revenues from these activities
decreased 53% from $354,000 in 2002 to $166,000 in 2003, primarily due to (1)
the loss of an oil and gas marketing contract and (2) lower pipeline volumes
resulting in less transportation revenue.
-21-
COSTS AND EXPENSES
LEASE OPERATING EXPENSES. Lease operating expenses increased 2% from
$5,430,000 in 2002 to $5,528,000 in 2003 due to increased vendor prices and
increased production taxes.
COST OF WELL SERVICING OPERATIONS. There were no well servicing
expenses in 2003 compared to $56,000 in 2002 since we did not work for other
operators.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD AND A). DD and A decreased
17% from $2,698,000 in 2002 to $2,226,000 in 2003, principally due to lower
production volumes. We also recorded income of $262,000 related to the
cumulative effect of adopting SFAS 143.
ACCRETION EXPENSE. We recorded accretion expense of $77,000 as a result
of adopting SFAS 143 "Asset Retirement Obligation", effective January 1, 2003.
GENERAL AND ADMINISTRATIVE (G AND A) EXPENSES. G and A expenses
increased 31% from $1,728,000 in 2002 to $2,262,000 in 2003 due to expenses
associated with financing efforts that were not culminated.
INTEREST INCOME AND EXPENSE. Interest expense increased 6% from
$3,159,000 in 2002 to $3,363,000 in 2003 due to penalty interest paid to our
largest lender.
OTHER FINANCING COSTS. In 2003, we recorded an expense of $1,000,000 to
account for the issuance of 2,000 shares of our preferred stock to our largest
lender under a financial agreement.
UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS. The estimated future
fair value of derivative instruments at December 31, 2003 resulted in an
unrealized gain of $537,000 in 2003 compared to an unrealized loss of $1,597,000
in 2002.
DRY HOLES, ABANDONED PROPERTY AND IMPAIRED ASSETS. The cost of
abandoned property in 2003 was $359,000 because the lack of capital to complete
projects resulted in the loss of leases. This compared to combined costs of dry
holes, abandoned property and impaired assets of $617,000 in 2002.
DIVIDENDS ON PREFERRED STOCK. In 2003, accrued and unpaid dividends on
preferred stock due were $127,000. In 2002, dividends on preferred stock due and
paid were $112,000.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES
OIL AND GAS SALES. Our operating revenues from the sale of crude oil
and natural gas decreased by 16% from $12,426,000 in 2001 to $10,447,000 in
2002. This decrease was due to normal oil and gas production declines of 6% and
oil and gas price declines of 10%.
WELL SERVICING REVENUES. Revenues from our well servicing operations
decreased by 77% from $169,000 in 2001 to $39,000 in 2002. This decrease was due
to performing less work for third parties and the sale of one of our workover
rigs.
OPERATING OVERHEAD AND OTHER INCOME. Revenues from these activities
decreased 10% from $395,000 in 2001 to $354,000 in 2002, primarily as a result
of the termination of a gas transportation sales contract with a local utility.
-22-
COSTS AND EXPENSES
LEASE OPERATING EXPENSES. Lease operating expenses increased 5% from
$5,155,000 in 2001 to $5,430,000 in 2002 due to increased vendor prices which
more than offset a decrease in production taxes.
COST OF WELL SERVICING OPERATIONS. Well servicing expenses decreased
69% from $182,000 in 2001 to $56,000 in 2002 due to less work under contract to
third parties and the sale of one workover rig.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD AND A). DD and A increased
8% from $2,491,000 in 2001 to $2,698,000 in 2002, due to a reduction in proved
reserves at year end 2002.
GENERAL AND ADMINISTRATIVE (G AND A) EXPENSES. G and A expenses were
essentially unchanged from $1,710,000 in 2001 to $1,728,000 in 2002.
INTEREST INCOME AND EXPENSE. Interest expense increased 15% from
$2,757,000 in 2001 to $3,159,000 in 2002 due to increased debt associated with
the funding of acquisitions in August, 2001, capital used in our development
program and issuance of warrants associated with working capital loans.
UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS. The estimated future
fair value of derivative instruments at December 31, 2002 resulted in an
unrealized loss of $1,597,000 in 2002 compared to an unrealized gain of
$4,215,000 in 2001. Also in 2001, an unrealized loss of $3,747,000, resulting
from the cumulative effect of adopting SFAS No. 133 "Accounting for Derivative
Instruments and Other Hedging Activities," was recorded.
DRY HOLES, ABANDONED PROPERTY, IMPAIRED ASSETS. The costs of a dry hole
in Louisiana of $339,000, abandoned property in Oklahoma of $222,000 and
impaired assets in Mississippi of $55,000 totaled $617,000 in 2002 compared to
none in 2001.
DIVIDENDS ON PREFERRED STOCK. In 2002, dividends on Preferred Stock due
and paid were $112,000. Dividends on Preferred Stock due were $56,000 and paid
were $28,000 in 2001.
FINANCIAL CONDITION AND CAPITAL RESOURCES
At March 31, 2004, our current liabilities exceeded our current assets
by $43,066,002. We had a loss available to common shareholders of $303,003 for
the quarter compared to an income of $120,659 for the period in 2003.
During the first quarter of 2004, our sales volumes were 45,184 barrels
of crude oil and 253,756 Mcf of natural gas compared to 61,209 barrels of crude
oil and 317,547 Mcf of natural gas in the first quarter of 2003. Revenue for
crude oil sales for the quarter was $1,263,863 in 2004 compared to $1,501,723 in
2003 and for natural gas sales was $1,236,777 in 2004 compared to $1,703,140 in
2003.
In a subsequent event on April 27, 2004, we completed an $18,000,000
financing package with new energy lenders. We used $15,700,000 to retire
existing debt of $27,584,145, resulting in forgiveness of debt of $11,884,145,
the cancellation of a hedging liability and the return of $1,000,000 in Series F
Preferred Stock. The resulting taxable gain will be completely offset by
available net operating loss carryforwards. The term of the note is eighteen
months and it bears interest at the prime rate plus 11%. This rate increases by
..75% per month beginning in month ten. We paid the new lenders $1,180,000 in
cash fees and also issued them warrants to purchase 2,035,621 shares of our
common stock at an exercise price of $.01 per share, expiring in five years.
The new $18,000,000 credit facility has a term of 18 months. However,
if the loan has not been repaid by the end of nine months the lender is entitled
to receive a 0.5% overriding royalty interest on all of the oil and gas
properties in GulfWest Oil & Gas Company for each month the loan continues to be
outstanding up until the 18th month. In addition, the lender may at its option
control the revenue stream of the Company and any resulting disbursements
starting in month ten. Further, the lender will receive a fee of $270,000 upon
the repayment of the credit facility.
Simultaneously with the financing, our wholly-owned subsidiary,
GulfWest Oil & Gas Company, completed the initial phase of a private offering of
its Series A Preferred Stock for $4,000,000. The Series A Preferred Stock is
exchangeable into our common stock based on a liquidation value of $500 per
share of Series A Preferred Stock divided by $.35 per share of our common stock
or 11,428,571 shares. As part of an advisory fee, we issued $500,000 of the
Series A Preferred Stock to a financial advisor. One of our directors acquired
$1,500,000 of the Series A Preferred Stock.
-23-
Pursuant to an agreement with the financial advisor who provided access
to the lender and raised $1,900,000 of the Series A Preferred Stock, we paid a
cash fee of $400,000, in addition to the $500,000 issued in Series A Preferred
Stock, plus an additional $250,000 paid over 25 months.
Of the $21,500,000 total cash raised, we used $15,700,000 to pay
existing debt and associated obligations and $1,580,000 to pay fees and
commissions, leaving $4,220,000 available for capital expenditures and working
capital.
Effective December 1, 200l and amended August 16, 2002, we entered into
an Oil and Gas Property Acquisition, Exploration and Development Agreement (the
"Summit Agreement") with Summit Investment Group-Texas, L.L.C., an unrelated
party, ("Summit"). Under the agreement, Summit provided payments in the
aggregate of $1,200,000 in advanced funds for our use in the acquisition of oil
and gas leases and other mineral and royalty interests, and production
activities, and was to recoup and recover those advanced funds.
On March 5, 2004, we entered into an Option Agreement for the Purchase
of Oil and Gas Leases (the "Addison Agreement") with W. L. Addison Investments
L.L.C., a private company owned by Mr. J. Virgil Waggoner and Mr. John E. Loehr,
two of our directors, (`Addison"). Under the Addison Agreement, Addison agreed
to pay Summit, on our behalf, the non-recouped and outstanding advanced funds
amounting to $1,200,000, thereby retiring the Summit Agreement. For
consideration of such payment, Addison acquired certain oil and gas leases and
wellbores from Summit but agreed to grant us a 180-day redemption option (which
may be extended by mutual consent) to purchase the same for $1,200,000, plus
interest at the prime rate plus 2%. We tendered Addison a promissory note in the
amount of $600,000, with interest at the prime rate plus 2%, to substitute for
an account payable to Summit, pursuant to the Summit Agreement, in the same
amount. The note will be considered paid in full if we exercise the redemption
option and pay the $1,200,000, plus interest. Summit retained the right to
participate up to a 25% WORKING INTEREST in the drilling of any wells on the
leases acquired by Addison. In the event we exercise the redemption option,
Addison may, at its sole option, retain up to a 25% WORKING INTEREST in the
leases.
We are pursuing the consolidation of all of our debt, including notes
payables and bridge loans. Our goal is to simplify our financial structure and
provide adequate capitalization for the development of our oil and gas assets.
INFLATION AND CHANGES IN PRICES
While the general level of inflation affects certain costs associated
with the petroleum industry, factors unique to the industry result in
independent price fluctuations. Such price changes have had, and will continue
to have a material effect on our operations; however, we cannot predict these
fluctuations.
The following table indicates the average crude oil and natural gas
prices received over the last three years by quarter. Average prices per barrel
of oil equivalent, computed by converting natural gas production to crude oil
equivalents at the rate of 6 MCF per barrel, indicate the composite impact of
changes in crude oil and natural gas prices.
-24-
Average Prices
------------------------------------------------------------
Crude Oil Per
And Natural Equivalent
Liquids Gas Barrel
----------------- ---------------- ----------------
(per Bbl) (per Mcf)
2003
----
First $24.53 $5.36 $28.08
Second 23.53 4.47 25.04
Third 23.85 4.32 24.86
Fourth 24.99 4.56 25.02
2002
----
First $19.40 $2.81 $18.31
Second 20.75 3.16 19.83
Third 22.04 2.87 19.67
Fourth 22.38 3.56 22.11
2001
----
First $24.15 $5.27 $27.87
Second 24.14 3.88 23.71
Third 23.25 3.08 21.08
Fourth 19.94 2.62 17.96
CONTROLS AND PROCEDURES
Our principal executive officer and our principal financial officer,
based on their evaluation of our disclosure controls and procedures (as defined
in Rules 13a-14(c) of the Securities Exchange Act of 1934) as of March 31, 2004,
have concluded that as of such date, our disclosure controls and procedures are
adequate to ensure material information and other information requiring
disclosure is identified and communicated on a timely basis.
During the year ended December 31, 2003 and the three months ended
March 31, 2004, there were no significant changes in our internal control over
financial reporting that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to qualitative disclosures about material risk
is contained in "Risk Factors".
Information with respect to quantitative disclosures about material
risk follow:
All of our financial instruments are for purposes other than trading.
We only enter derivative financial instruments in conjunction with our oil and
gas hedging activities.
Hypothetical changes in interest rates and prices chosen for the
following stimulated sensitivity effects are considered to be reasonably
possible near-term changes generally based on consideration of past fluctuations
for each risk category. It is not possible to accurately predict future changes
in interest rates and product prices. Accordingly, these hypothetical changes
may not be an indicator of probable future fluctuations.
INTEREST RATE RISK
We are exposed to interest rate risk on debt with variable interest
rates. At May 26, 2004, we carried variable rate debt of $28,875,565. Assuming a
one percentage point change at May 26, 2004 on our variable rate debt, the
annual pretax income (loss) would change by $288,756.
-25-
COMMODITY PRICE RISK
In the past we have entered into and may in the future enter into
certain derivative arrangements with respect to portions of our oil and natural
gas production to reduce our sensitivity to volatile commodity prices. During
2003, 2002, and 2001, we entered into price swaps and put agreements. We believe
that these derivative arrangements, although not free of risk, allow us to
achieve a more predictable cash flow and to reduce exposure to price
fluctuations. However, derivative arrangements limit the benefit to us of
increases in the prices of crude oil and natural gas sales. Moreover, our
derivative arrangements apply only to a portion of our production and provide
only partial price protection against declines in price. Such arrangements may
expose us to risk of financial loss in certain circumstances. We expect that the
daily volume of derivative arrangements will vary from time to time. We
continuously reevaluate our derivative program in light of market conditions,
commodity price forecasts, capital spending and debt service requirements. For
2004, we have hedged approximately 70% of our projected oil production and gas
production.
CRUDE OIL DAILY VOLUME PRICE PER BBL
------------------------------------- ------------- --------------
May 1, 2004 to October 31, 2005 329 Bbls $32.00
November 1, 2005 to April 30, 2006 (1) 231 Bbls $25.75 put
May 1, 2006 to October 31, 2006 (1) 198 Bbls $25.75 put
November 1, 2006 to April 30, 2007 (1) 165 Bbls $25.75 put
NATURAL GAS DAILY VOLUME PRICE PER MMBTU
------------------------------------- ------------- ---------------
May 1, 2004 to October 31, 2005 1,865 MMBTU $5.15
November 1, 2005 to April 30, 2006 (1) 1,698 MMBTU $4.50 put
May 1, 2006 to October 31, 2006 (1) 1,319 MMBTU $4.50 put
November 1, 2006 to April 30, 2007 (1) 989 MMBTU $4.50 put
(1) These are "put" derivative instruments we purchased and we will receive the
difference between the actual market price and the put price only if the actual
market price is below the put price. If the actual market price is equal to or
above the put price, we do not pay or receive any settlement amount.
Oil and gas sales are adjusted for gains or losses related to the
effective portion of hedging transactions as the underlying hedged production is
sold. Changes in fair value of the ineffective portion of designated hedges or
for derivative arrangements that do not qualify as hedges are recognized in the
consolidated statement of income as derivative gain or loss. None of our
derivative instruments at March 31, 2004 were designated as hedges under the
terms of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activity." Adjustments to oil and gas sales from our hedging activities resulted
in a reduction in revenues of $1,496,303, $368,776 and $762,480 in 2003, 2002
and 2001, respectively. In addition, we recognized a gain/(loss) on derivatives
of $537,526, ($1,596,575) and $4,215,017 in 2003, 2002 and 2001, respectively.
See Note 1 to our Consolidated Financial Statements included in this Form S-1
for additional discussion on derivative instruments.
Based on NYMEX futures prices, the fair value of our hedging
arrangements at March 31, 2004 was a net loss of $591,467. All hedges which were
in existence at March 31, 2004 were canceled as part of our debt restructuring
on April 27, 2004.
More generally, dramatic price volatility in the natural gas and oil
markets has existed the past several years. In fact, the average quoted prices
for natural gas hovered around the low levels of $2.10 per MCf in January 2002,
with the expectation of further decreases. However, the market price
dramatically reversed in the summer months of 2002 and have continued to
improve, which lead natural gas to trade at an average NYMEX price of $5.44 per
MMBTU for 2003.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this our financial statements and
supplementary data is contained in our financial statements beginning on Page
F-1 of the financial section of this Prospectus.
-26-
BUSINESS AND PROPERTIES
OUR BUSINESS
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. THE FOLLOWING SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT. YOU SHOULD READ THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. CERTAIN TERMS
THAT WE USE IN OUR INDUSTRY ARE ITALICIZED AND DEFINED IN THE "GLOSSARY OF
INDUSTRY TERMS AND ABBREVIATIONS.". UNLESS OTHERWISE INDICATED, ALL REFERENCES
TO "GULFWEST", THE "COMPANY", "WE", "US" AND "OUR" REFER TO GULFWEST ENERGY INC.
AND OUR SUBSIDIARIES.
We are primarily engaged in the acquisition, development, exploitation
and production of crude oil and natural gas. Our focus is on increasing
production from our existing properties through further exploitation,
development and exploration, and on acquiring additional interests in crude oil
and natural gas properties.
Since we made our first significant acquisition in 1993, we have
substantially increased our ownership in PRODUCING PROPERTIES and the value of
our crude oil and natural gas reserves through a combination of acquisitions and
the further exploitation and development of our properties. At December 31,
2003, our part of the estimated PROVED RESERVES these properties contain was
approximately 5.0 million barrels (MBBL) of oil and 32.7 billion cubic feet
(BCF) of natural gas with a PRESENT VALUE DISCOUNTED 10% (PV-10) of $114.4
million. At present, all of our properties are located on land in Texas,
Colorado, Louisiana and Oklahoma, except for the property on Grand Lake,
Louisiana. In the future, we plan to expand by acquiring additional properties
in those areas, and in similar properties located in other areas of the United
States.
Our operations are considered to fall within a single industry segment,
which is the acquisition, development, production and servicing of crude oil and
natural gas properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OUR COMPANY
We were formed as a corporation under the laws of the State of Utah in
1987 as Gallup Acquisitions, Inc., and subsequently changed our name to First
Preference Fund, Inc. and then to GulfWest Energy, Inc. We became a Texas
corporation by a merger effected in July 1992, in which our name became GulfWest
Oil Company. On May 21, 2001, we changed our name to GulfWest Energy Inc.
Our principal office is located at 480 North Sam Houston Parkway East,
Suite 300, Houston, Texas 77060 and our telephone number is (281) 820-1919.
GulfWest Energy Inc. has six active and three inactive, direct or
indirect, wholly owned subsidiaries: The active subsidiaries are:
1. GULFWEST OIL AND GAS COMPANY, a Texas corporation, was
organized February 18, 1999 and is the owner of record of interests in
certain crude oil and natural gas properties located in Colorado,
Texas, and Louisiana. It has one wholly owned subsidiary, GULFWEST OIL
AND GAS COMPANY (LOUISIANA) LLC, a Louisiana company, that was formed
July 31, 2001 and is the owner of record of interests in certain crude
oil and natural gas properties in Louisiana.
2. SETEX OIL AND GAS COMPANY, a Texas corporation, was
organized August 11, 1998 and is the operator of crude oil and natural
gas properties in which we own the majority WORKING INTEREST.
3. RIGWEST WELL SERVICE, INC., a Texas corporation, was
organized September 5, 1996 and operates well servicing equipment for
our own account.
-27-
4. DUTCHWEST OIL COMPANY, a Texas corporation, was organized
July 28, 1997 and is the owner of record of interests in certain crude
oil and natural gas properties located along the Gulf Coast of Texas.
5. GULFWEST DEVELOPMENT COMPANY, a Texas corporation, was
organized November 9, 2000 and is the owner of record of interests in
certain crude oil and natural gas properties located in Texas, Oklahoma
and Mississippi.
OUR BUSINESS STRATEGY
We have pursued a business strategy of acquiring interests in crude oil
and natural gas PRODUCING PROPERTIES where production and reserves can be
increased through exploitation activities. Such activities include WORKOVERs,
development drilling, RECOMPLETIONs, replacement or addition of equipment and
WATERFLOOD or other secondary recovery techniques. We have expanded our business
plan to include an increased but controlled emphasis on development drilling for
additional crude oil and natural gas reserves. Key elements of our business
strategy include:
CONTINUED ACQUISITION PROGRAM. We acquired properties in four crude oil
and natural gas fields in Texas and Louisiana in the year 2001. We intend to
continue to pursue interests in crude oil and natural gas properties (i) held by
small, under-capitalized operators and (ii) being divested by larger independent
and major oil and gas companies.
DEVELOPMENT AND EXPLOITATION OF EXISTING PROPERTIES. Our intent is to
increase crude oil and natural gas production and reserves of our existing
assets through relatively low-risk development activities, such as WORKOVERs,
RECOMPLETIONs, HORIZONTAL DRILLING from existing wellbores and infield drilling,
as well as the more efficient use of production facilities and the expansion of
existing WATERFLOOD operations.
SIGNIFICANT OPERATING CONTROL. Currently, we are the operator of all
the wells, except two, in which we own WORKING INTERESTS. This operating control
enables us to better manage the nature, timing and costs of development of such
wells, and marketing of the resulting production.
-28-
OWNERSHIP OF WORKOVER RIGS. We currently own three workover service
rigs and one swabbing unit that we operate for our own account. By owning and
operating this equipment, we are better able to control costs, quality of
operations and availability of equipment and services.
GREATER NATURAL GAS OWNERSHIP. At December 31, 2003, our reserves were
comprised of 48% crude oil and 52% natural gas. We will continue to expand our
role in the domestic natural gas industry by (i) acquiring additional interests
in natural gas properties, (ii) increasing the production and reserve base of
our existing natural gas properties, and (iii) acquiring ownership of more
natural gas gathering systems and pipelines. We are presently focusing our
WORKOVER and development efforts on both crude oil and natural gas reserves to
take advantage of the higher prices of both commodities. We are also seeking to
expand our ownership of gas gathering systems and pipelines located in our main
field areas. Our goal is to have greater control of our natural gas
transportation and marketing, and an expanded role in the transportation of
natural gas produced by other parties in our area of operations.
EXPANDED EXPLORATION AND EXPLOITATION ROLE. Historically, we have not
drilled exploratory wells due to the cost and risk associated with drilling
prospective locations. However, since the end of 1998, we have acquired
PRODUCING PROPERTIES that have included significant acreage for prospective oil
and gas exploration. These include producing wells and acreage in Crockett,
Grimes, Hardin, Jim Wells, Kimble, Madison, Palo Pinto, Refugio, Sutton, Wharton
and Zavala, Counties, Texas; Adams, Arapaho, Elbert and Weld Counties, Colorado;
Creek County, Oklahoma; and, Cameron Parish, Louisiana. These acquisitions have
added existing natural gas and crude oil production to our asset base and, as
importantly, have provided us with immediate geological databases for drilling
opportunities. We have expanded our evaluation efforts in these fields and
intend to increase our development of reserves, not only through workovers of
existing wells, but by drilling additional wells.
OUR EMPLOYEES
At December 31, 2003, we had 34 full time employees, of whom 22 were
field personnel.
OUR PROPERTIES
At December 31, 2003, we owned a total of 684 GROSS WELLS, of which 266
were PRODUCING, 351 were shut-in or temporarily abandoned and 67 were injection
or saltwater wells. We owned an average 94% WORKING INTEREST in the 266 GROSS
(249.90 NET) PRODUCING WELLS. GROSS WELLS are the total wells in which we own a
WORKING INTEREST. NET WELLS are the sum of the fractional WORKING interests we
own in GROSS WELLS. Our part of the estimated PROVED RESERVES these properties
contain was approximately 5.0 million barrels (MBBL) of oil and 32.7 billion
cubic feet (BCF) of natural gas. Substantially all of our properties are located
in Texas, Colorado, Louisiana and Oklahoma.
-29-
PROVED RESERVES
The following table reflects our estimated PROVED RESERVES at December
31 for each of the preceding three years.
2003 2002 2001
---- ---- ----
Crude Oil (MBBL)
Developed
Undeveloped 3,773 4,026 3,940
1,265 1,496 1,932
------ ------ ------
Total
5,038 5,522 5,872
====== ====== ======
Natural Gas (MMCF)
Developed
Undeveloped 24,642 25,374 21,204
8,018 8,785 18,054
------ ------ ------
Total
32,660 34,159 39,258
====== ====== ======
Total (MBOE)
10,481 11,215 12,415
====== ====== ======
(a) Approximately 75% of our total PROVED RESERVES were classified as
PROVED DEVELOPED at December 31, 2003.
(B) BARREL OF OIL EQUIVALENT (BOE) is based on a ratio of 6,000 cubic feet
of natural gas for each barrel of oil.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following table sets forth as of December 31 for each of the
preceding three years, the estimated future net cash flow from and STANDARDIZED
MEASURE of discounted future net cash flows of our PROVED RESERVES, which were
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Future net cash flow represents future gross cash flow from
the production and sale of PROVED RESERVES, net of crude oil and natural gas
production costs (including production taxes, ad valorem taxes and operating
expenses) and future development costs. The calculations used to produce the
figures in this table are based on current cost and price factors at December 31
for each year. We cannot assure you that the PROVED RESERVES will all be
developed within the periods used in the calculations or that prices and costs
will remain constant.
2003 2002 2001
------------- ------------- --------------
Future cash inflows $ 336,795,385 $ 308,381,837 $ 199,162,921
Future production and development costs-
Production 109,468,727 105,629,872 77,526,278
Development 21,460,459 23,350,811 23,610,596
------------- ------------- -------------
Future net cash flows before income taxes 205,866,199 179,401,154 98,026,047
Future income taxes (46,885,360) (38,611,577) (13,281,358)
------------- ------------- -------------
Future net cash flows after income taxes 158,980,839 140,789,577 84,744,689
10% annual discount for estimated timing
of cash flows
(70,653,419) (63,165,742) (35,895,306)
-------------- ------------- -------------
Standardized measure of discounted
Future net cash flows(1) $ 88,327,420 $ 77,623,835 $ 48,849,383
============= ============= =============
(1) The average prices of our proved reserves were $29.51 per Bbl and $5.82 per
MCF, $28.72 per Bbl and $4.43 per MCF, and $17.67 and $2.43 per MCF at
December 31, 2003, 2002 and 2001 respectively.
-30-
SIGNIFICANT PROPERTIES
Summary information on our properties with PROVED RESERVES is set forth
below as of December 31, 2003.
Productive Wells Proved Reserves Present
----------------------------- ------------------------------------- ---------
Gross Net VALUE (1)
ProductiveWells Productive Crude Natural
Wells Oil Gas Total Amount
-------------- ------------- ---------- ---------- ------------ ---------
(MBBL) (MMCF) (MBOE) ($M)
Texas 185 181.03 2,969 18,717 6,088 $ 67,235
Colorado 35 23.62 355 6,090 1,370 11,303
Oklahoma 28 28.00 150 - 150 1,301
Louisiana 17 16.88 1,558 7,853 2,867 34,484
Mississippi 1 .37 6 - 6 73
--------------- ------------- ----------- ---------- ------------ ---------
Total 266 249.90 5,038 32,660 10,481 $ 114,396
=============== ============= =========== ========== ============ =========
(1) The average prices of our proved reserves were $29.51 per Bbl and $5.82 per
MCF at December 31, 2003.
All information set forth herein relating to our PROVED RESERVES,
estimated future net cash flows and PRESENT VALUES is taken from reports
prepared by Pressler Petroleum Consultants, independent petroleum engineers. The
estimates of these engineers were based upon their review of production
histories and other geological, economic, ownership and engineering data
provided by and relating to us. No reports on our reserves have been filed with
any federal agency. In accordance with the Securities and Exchange Commission's
guidelines, our estimates of PROVED RESERVES and the future net revenues from
which PRESENT VALUES are derived are made using year end crude oil and natural
gas sales prices held constant throughout the life of the properties (except to
the extent a contract specifically provides otherwise). Operating costs,
development costs and certain production-related taxes were deducted in arriving
at estimated future net revenues, but such costs do not include debt service,
general and administrative expenses and income taxes.
There are numerous uncertainties inherent in estimating crude oil and
natural gas reserves and their values, including many factors beyond our
control. The reserve data set forth in this report are based upon estimates.
RESERVOIR engineering is a subjective process, which involves estimating the
sizes of underground accumulations of crude oil and natural gas that cannot be
measured in an exact manner. The accuracy of any reserve estimate is a function
of the quality of available data, engineering and geological interpretation of
that data, and judgment. As a result, estimates of different engineers,
including those used by us, may vary. In addition, estimates of reserves are
subject to revision based upon actual production, results of future development,
exploitation and exploration activities, prevailing crude oil and natural gas
prices, operating costs and other factors. Such revisions may be material.
Accordingly, reserve estimates are often different from the quantities of crude
oil and natural gas that are ultimately recovered and are highly dependent upon
the accuracy of the assumptions upon which they are based. We cannot assure you
that the estimates contained in this report are accurate predictions of our
crude oil and natural gas reserves or their values. Estimates with respect to
PROVED RESERVES that may be developed and produced in the future are often based
upon volumetric calculations and upon analogy to similar types of reserves
rather than upon actual production history. Estimates based on these methods are
generally less reliable than those based on actual production history.
Subsequent evaluation of the same reserves based upon production history will
result in potentially substantial variations in the estimated reserves.
-31-
PRODUCTION, REVENUE AND PRICE HISTORY
The following table sets forth information (associated with our PROVED
RESERVES) regarding production volumes of crude oil and natural gas, revenues
and expenses attributable to such production (all net to our interests) and
certain price and cost information for the years ended December 31, 2003, 2002
and 2001.
2003 2002 2001
----------- ----------- -----------
Production
Oil (BBL) 221,433 278,374 294,276
Natural gas (MCF) 1,191,350 1,487,048 1,594,899
----------- ----------- -----------
Total (BOE) 419,991 526,215 560,092
Revenue
Oil production $ 5,362,657 $ 5,859,568 $ 6,690,338
Natural gas production 5,481,803 4,587,601 5,735,765
----------- ----------- -----------
Total $10,844,460 $10,447,169 $12,426,103
Operating Expenses $ 5,527,841 $ 5,430,205 $ 5,155,500
Production Data
Average sales price
Per barrel of oil $ 24.22 $ 21.05 $ 22.73
Per MCF of natural gas 4.60 3.09 3.60
Per BOE 25.82 19.85 22.19
Average expenses per BOE
Lease operating 13.16 10.32 9.20
Depreciation, depletion and
amortization 5.30 5.13 4.45
General and administrative $ 5.39 $ 3.28 $ 3.05
PRODUCTIVE WELLS AT DECEMBER 31, 2003
The following table shows the number of productive wells we own by
location:
Gross Net Gross Net
Oil Wells Oil Wells Gas Wells Gas Wells
------------ ------------ ------------- ------------
Texas 109 108.81 76 72.22
Colorado 22 14.37 13 9.25
Oklahoma 28 28.00 - -
Louisiana 13 12.88 4 4.00
Mississippi 1 .37 - -
------------ ------------ ------------- -----------
Total 173 164.43 93 85.47
============ ============ ============= ===========
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DEVELOPED ACREAGE AT DECEMBER 31, 2003
The following table shows the developed acreage that we own, by
location, which is acreage spaced or assigned to productive wells. GROSS ACRES
are the total acres in which we own a WORKING INTEREST. NET ACRES are the sum of
the fractional WORKING interests we own in GROSS ACRES.
Gross Acres Net Acres
----------- ---------
Texas 18,380 14,255
Colorado 5,000 2,700
Louisiana 1,695 1,256
Oklahoma 900 684
Total 25,975 18,895
UNDEVELOPED ACREAGE AT DECEMBER 31, 2003
The following table shows the undeveloped acreage that we own, by
location. Undeveloped acreage is acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of crude oil and natural gas.
Gross Acres Net Acres
----------- ---------
Texas 18,070 14,749
Colorado 10,000 6,000
Louisiana 80 55
Oklahoma 900 684
Total 29,050 21,488
DRILLING RESULTS
We did not drill any wells in 2003. In 2002, we drilled one exploratory
well, in which we own 18% WORKING INTEREST, that resulted in a dry hole and one
development well, in which we own 100% WORKING INTEREST, that is productive. We
drilled three wells in 2001, all of which were development wells and are
currently productive. These development wells included two horizontal wells, in
which we own 96% and 89% WORKING INTEREST, drilled by sidetracking from existing
wellbores in the Madisonville Field, Texas, and one well, in which we own 100%
WORKING INTEREST THAT was deepened in our Leona River Field, Texas.
LEGAL PROCEEDINGS
>From time to time, we are involved in litigation relating to claims
arising out of our operations or from disputes with vendors in the normal course
of business. As of July 12, 2004, we were not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on us.
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MANAGEMENT
The following table sets forth information on our directors and
executive officers:
YEAR FIRST ELECTED
NAME AGE POSITION DIRECTOR OR OFFICER
--------------------------- --- ------------------------ ------------------
J. Virgil Waggoner(1)(2) 76 Chairman of the Board 1997
John E. Loehr 58 Chief Executive Officer and 1992
Director
Thomas R. Kaetzer 45 President, Chief Operating 1998
Officer and Director
Marshall A. Smith III 56 Director 1989
M. Scott Manolis(1)(2) 50 Director 2003
Richard L. Creel 55 Vice President of Finance and 1998
Controller
Jim C. Bigham 68 Vice President and Secretary 1991
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
--------------------
J. VIRGIL WAGGONER has served as a director of GulfWest since December
1, 1997 and was elected Chairman of the Board in May, 2002. Mr. Waggoner's
career in the petrochemical industry began in 1950 and included senior
management positions with Monsanto Company and El Paso Products Company, the
petrochemical and plastics unit of El Paso Company. He served as president and
chief executive officer of Sterling Chemicals, Inc. from the firm's inception in
1986 until its sale and his retirement in 1996. He is currently chief executive
officer of JVW Investments, Ltd., a private company.
JOHN E. LOEHR was appointed Chief Executive Officer on May 12, 2004 and
has served as a director of GulfWest since 1992, was chairman of the board from
September 1, 1993 to July 8, 1998 and was chief financial officer from November
22, 1996 to May 28, 1998. He is also currently president and sole shareholder of
ST Advisory Corporation, an investment company, and vice-president of Star-Tex
Trading Company, also an investment company. He was formerly president of
Star-Tex Asset Management, a commodity-trading advisor, and a position he held
from 1988 until 1992 when he sold his ownership interest. Mr. Loehr is a CPA and
a member of the American Institute of Certified Public Accountants.
THOMAS R. KAETZER was appointed senior vice president and chief
operating officer of GulfWest on September 15, 1998 and on December 21, 1998
became president and a director. He was Chief Executive Officer from March 20,
2001 until May12, 2004. Prior to joining GulfWest, Mr. Kaetzer had 17 years
experience in the oil and gas industry, including 14 years with Texaco Inc.,
which involved the evaluation, exploitation and management of oil and gas
assets. He has both onshore and offshore experience in operations and production
management, asset acquisition, development, drilling and workovers in the
continental U.S., Gulf of Mexico, North Sea, Colombia, Saudi Arabia, China and
West Africa. Mr. Kaetzer has a Masters Degree in Petroleum Engineering from
Tulane University and a Bachelor of Science Degree in Civil Engineering from the
University of Illinois.
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MARSHALL A. SMITH III founded GulfWest and served as an officer in
various capacities, including president, chief executive officer and chairman of
the board, from July 1989 until his resignation in May 2002. He is currently a
paid consultant and remains a director.
M. SCOTT MANOLIS is the chairman and chief executive officer of
Intermarket Management, LLC and Intermarket Brokerage, LLC. He has over twenty
years experience in commodity risk management, commodity finance and
commodity-based investments. Prior to founding Intermarket, Mr. Manolis
concurrently served as managing director of Commodity Strategies for Refco
Group, LTD. and Managing Director of Global Derivatives Strategies for
Forstmann-Leff International (an asset management firm wholly owned by Refco
Group, LTD), where he directed commodity-based investments. Prior to that, he
served as a vice president and director of the Commodity Portfolio Management
Group at Jefferies & Company. He received a B. S. in Economics from the
University of South Dakota in 1979.
RICHARD L. CREEL has served as controller of GulfWest since May 1, 1997
and was elected vice president of finance on May 28, 1998. Prior to joining
GulfWest, Mr. Creel served as Branch Manager of the Nashville, Tennessee office
of Management Reports and Services, Inc. He has also served as controller of TLO
Energy Corp. He has extensive experience in general accounting, petroleum
accounting and financial consulting and income tax preparation.
JIM BIGHAM has served as secretary since 1991 and as executive vice
president of GulfWest since 1996. Prior to joining GulfWest, he held management
and sales positions in the real estate and printing industries. Mr. Bigham is
also a retired United States Air Force Major. During his military career, he
served in both command and staff officer positions in the operational,
intelligence and planning areas.
Directors are elected annually and hold office until the next annual
meeting or until their successors are duly elected and qualified.
CODE OF ETHICAL CONDUCT
The Board recently adopted a Code of Ethical Conduct (the "Code of
Conduct"), which requires that all employees, directors and officers, including
our Chief Executive Officer and Chief Financial Officer, adhere to the Code of
Conduct in addressing legal and ethical issues encountered in conducting their
work. The Code of Conduct requires that these individuals avoid conflict of
interests, comply with all laws and other legal requirements, conduct business
in an honest and ethical manner and otherwise act with integrity and in our best
interest. The Code of Conduct contains additional provisions that apply
specifically to our Chief Financial Officer and other financial officers with
respect to full and accurate reporting.
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BOARD MEETINGS AND COMMITTEES
Our board of directors has established an audit committee and a
compensation committee. The functions of these committees, their members and the
number of meetings held during 2003 are described below.
The audit committee was established to review and appraise the audit
efforts of our independent auditors, and monitor our accounts, procedures and
internal controls. The committee was comprised of Mr. John E. Loehr (Chairman),
Mr. J. Virgil Waggoner, and Mr. M. Scott Manolis. The committee met twice in
2003. The Board of Directors had made a determination that Mr. Loehr was an
independent financial expert. When Mr. Loehr was elected Chief Executive Officer
on May 12, 2004, he resigned from the audit committee. Mr. Manolis was elected
Chair of the audit committee and Mr. Marshall A. Smith III has been appointed to
that committee. The Board of Directors has not had an opportunity to conclude
whether the newly constituted audit committee has an independent financial
expert.
The function of the compensation committee is to fix the annual
salaries and other compensation for our officers and key employees. The
committee was comprised of Mr. J. Virgil Waggoner (Chairman), Mr. John E. Loehr
and Mr. M. Scott Manolis. The committee met twice in 2003. Mr. Loehr resigned
from the committee on May 12, 2004 when he became Chief Executive Officer.
COMPENSATION OF DIRECTORS
The shareholders approved an amended and restated Employee Stock Option
Plan on May 28, 1998, which included a provision for the payment of reasonable
fees in cash or stock to directors. No fees were paid to directors in 2003.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid
to our executive officers whose total annual compensation is $100,000 or more
during each of the last three fiscal years.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------------------- --------------------------------
OTHER
ANNUAL RESTRICTED ALL
OTHER
YEAR COMPEN- STOCK COMPEN-
NAME AND PRINCIPAL POSITION END SALARY($) BONUS($) SATION($) AWARDS($) OPTIONS(#) SATION($)
--------------------------- ------- --------- -------- --------- --------- ---------- ---------
Thomas R. Kaetzer (1) 2003 150,000 - 25,000 - -
President and 2002 144,167 - 25,000 - 100,000 -
Chief 2001 131,249 - 25,000 - 135,000 -
Executive Officer
Marshall A. Smith III (2) 2001 150,000 - - - - -
--------------
(1) Mr. Kaetzer joined us as chief operating officer in September, 1998, was
elected president in December, 1998 and chief executive officer on March
20, 2001. He receives a base annual salary $150,000, plus a $25,000 annual
contribution to a life insurance savings account paid monthly. He was also
awarded 5-year options to purchase 300,000 shares of common stock to be
issued 100,000 each year over a three year period.
(2) Mr. Smith served as chief executive officer until March 20, 2001 and as
chairman of the board until his resignation on May 11, 2002. As chairman of
the board, Mr. Smith devoted full time to the business. Effective June 1,
2002, he resigned as an executive officer and became a paid consultant at
an annual fee of $150,000, plus a $25,000 annual contribution to a life
insurance savings account to be paid monthly. His consulting agreement
expires September 30, 2004.
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OPTION GRANTS DURING 2003
THERE WERE NO OPTIONS GRANTED DURING 2003.
OPTION EXERCISES DURING 2003 AND
YEAR END OPTION VALUES (1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END (#) AT FY-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
------------------------------- ----------------------------- ---------------------
Thomas R. Kaetzer 335,000 -0-
-0- -0-
(1) No shares were acquired or value realized upon the exercise of options
since no options were exercised by Mr. Kaetzer in 2003.
EMPLOYMENT AGREEMENTS
Effective October 1, 2001, we entered into an Employment Agreement with
Mr. Thomas R. Kaetzer, president and chief executive officer for a period of
three years. Under the Employment Agreement, Mr. Kaetzer receives a base annual
salary of $150,000, plus a $25,000 annual contribution to a life insurance
savings account to be paid monthly. He was also awarded 5-year options to
purchase 300,000 shares of common stock to be issued 100,000 each year over a
three year period.
In the event of a change of control, Mr. Kaetzer will have the option
to continue as an employee under the terms of the Employment Agreement or
receive a lump-sum cash severance payment equal to 200% of his annual base
salary for the year following the change of control.
Effective June 1, 2002, we entered into a Consulting Agreement with Mr.
Marshall A. Smith III, which expires September 30, 2004 Under the Consulting
Agreement, Mr. Smith receives an annual consulting fee of $150,000, plus a
$25,000 annual contribution to a life insurance savings account to be paid
monthly.
In the event of a change of control, Mr. Smith will have the option to
continue as a consultant under the terms of the Consulting Agreement or receive
a lump-sum cash severance payment equal to 200% of his annual consulting fee for
the year following the change of control.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 2003, Messrs. Waggoner, Loehr and Manolis served on
the Compensation Committee. No interlocking relationship exists between any
member of the Board or Compensation Committee and any member of the Board or
Compensation Committee of any other company, nor has any such interlocking
relationship existed in the past.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 26 , 2004
regarding the beneficial ownership of common stock by each person known to us to
own beneficially 5% or more of the outstanding common stock, each director,
certain named executive officers, and the directors and executive officers as a
group. The persons named in the table have sole voting and investment power with
respect to all shares of common stock owned by them, unless otherwise noted.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For the purpose of calculating the number of
shares beneficially owned by a shareholder and the percentage ownership of that
shareholder, shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of the date of this prospectus by that
shareholder are deemed outstanding.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT %
--------------------------------- -------------------- ---------
J. Virgil Waggoner(1,2) 16,782,543 65.4
Thomas R. Kaetzer(2,3) 733,852 3.9
Jim C. Bigham(2,4) 245,985 1.3
Richard L. Creel(2,5) 110,000 .6
John E. Loehr(2,6) 617,491 3.3
Marshall A. Smith III(2,7) 889,005 4.7
M. Scott Manolis(2,8) 500,000 2.7
All current directors and officers
as a group (8 persons)(9) 19,878,876 72.7
1 Includes 4,285,714 shares underlying exchangeable preferred stock,625,000
shares subject to currently exercisable warrants,225,000 underlying
convertible preferred stock and 20,000 shares subject to currently
exercisable options.
2 Shareholder's address is 480 N. Sam Houston Parkway East, Suite 300,
Houston, Texas 77060.
3 Includes 196,226 shares owned directly, 2,626 shares owned by his wife and
435,000 shares subject to currently exercisable warrants and options and
100,000 shares subject to currently exchangeable preferred stock.
4 Includes 155,000 shares subject to currently exercisable warrants and
options.
5 Includes 80,000 subject to currently exercisable options.
6 Includes 62,653 shares held directly; and 64,838 shares held by ST Advisory
Corporation and 290,000 shares subject to currently exercisable warrants
and options. Mr. Loehr is president and sole shareholder of ST Advisory
Corporation. 200,000 shares held by ST Advisory Corp subject to currently
exchangeable preferred stock.
7 Includes 596,046 shares owned directly, 2,959 shares owned by his wife and
290,000 shares subject to currently exercisable warrants and options.
8 Includes 500,000 shares held by Intermarket Management LLC subject to
currently exchangeable preferred stock .
9 Includes 1,236,754 shares subject to currently exercisable warrants and
options and 6,535,714 shares underlying convertible or exchangeable
preferred stock.
-39-
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
On October 23, 1995, we sold $25,000 each of 9% promissory notes in a
private offering to two trusts, the trustee of whom is John E. Loehr, an officer
and director. The balance of the notes was $50,000, plus accrued interest at May
26, 2004.
In June, 1999, we issued a promissory note with interest at 8.5% to Mr.
Marshall A. Smith III, an officer and director at the time and currently a
director, in the amount of $124,083 for accrued compensation. The note has a
balance of $71,354 and is being paid in monthly installments of approximately
$1,500 per month.
On November 6, 2002, Mr. J. Virgil Waggoner, a director, provided us a
loan in the initial amount of $1,200,000, which was subsequently increased to a
total of $1,500,000, which is outstanding at May 26, 2004. We issued Mr.
Waggoner a promissory note with interest at the prime rate (prime rate 4.0% at
May 26, 2004), secured by common stock our of wholly-owned subsidiary, DutchWest
Oil Company. Mr. Waggoner also received warrants to purchase 625,000 shares of
our Common Stock at an exercise price of $.75 per share. Those underlying shares
are included in this prospectus.
On April 26, 2001, we obtained a line of credit of up to $2,500,000
from a bank for which two directors, Mr. J. Virgil Waggoner and Mr. Marshall A.
Smith, were guarantors. On April 3, 2002, the balance of the line of credit was
retired and a new line of credit of up to $3,000,000 was obtained from the bank
for which Mr. Waggoner and Mr. Smith were guarantors.
On March 5, 2004, we entered into an Option Agreement for the Purchase
of Oil and Gas Leases (the "Addison Agreement") with W. L. Addison Investments
L.L.C., a private company owned by Mr. J. Virgil Waggoner and Mr. John E. Loehr,
two of our directors, (`Addison"). Under the Addison Agreement, Addison agreed
to pay Summit, on our behalf, the non-recouped and outstanding advanced funds
amounting to $1,200,000, thereby retiring the Summit Agreement. For
consideration of such payment, Addison acquired certain oil and gas leases and
wellbores from Summit but agreed to grant us a 180-day redemption option (which
may be extended by mutual consent) to purchase the same for $1,200,000, plus
interest at the prime rate plus 2%. We tendered Addison a promissory note in the
amount of $600,000, with interest at the prime rate plus 2%, to substitute for
an account payable to Summit, pursuant to the Summit Agreement, in the same
amount. The note will be considered paid in full if we exercise the redemption
option and pay the $1,200,000, plus interest. Summit retained the right to
participate up to a 25% WORKING INTEREST in the drilling of any wells on the
leases acquired by Addison. In the event we exercise the redemption option,
Addison may, at its sole option, retain up to a 25% WORKING INTEREST in the
leases.
As part of our recent refinancing, our former lender agreed to return
all 2000 shares of our Series F Preferred Stock held by it. Rather than receive
the shares as treasury shares (which would have meant cancellation of the
series) at our request the former lender transferred 400 of the shares to ST
Advisory Corp., an entity owned by John Loehr, our CEO and a director, 400 of
the shares to a financial advisor to the Company, and 200 of the shares to
Thomas R. Kaetzer, our President and Directorand 1000 shares to Intermarket
Management LLC, an entity partially owned by M. Scott Manolis, one of our
directors. These transfers were to compensate the financial advisor and Mr.
Loehr, Kaetzer and Manolis for service to the Company.
-40-
DESCRIPTION OF SECURITIES
GENERAL
The following descriptions are summaries of material terms of our
common stock, preferred stock, articles of incorporation and bylaws. This
summary is qualified by reference to our articles of incorporation, bylaws and
the designations of our preferred stock, which have been previously filed as
exhibits to our public filings with the Securities and Exchange Commission, and
by the provisions of applicable law.
On July 8, 2004, at the Annual Meeting of Shareholders, our
shareholders increased the amount of shares we are authorized to issue from
40,000,000 to 80,000,000 shares of common stock, par value $.001 per share. As
of July 14, 2004, there were 18,492,541 shares of our sole class of common
stock, designated Class A, issued and outstanding, and held by approximately 580
beneficial owners. Our common stock is traded over-the-counter (OTC) under the
symbol "GULF". Fidelity Transfer Company, 1800 South West Temple, Suite 301, Box
53, Salt Lake City, Utah 84115, (801) 484-7222 is the transfer agent for the
common stock.
OUR COMMON STOCK
The holders of our common stock are entitled, among other things, to
one vote per share on each matter submitted to a vote of shareholders and, in
the event of liquidation, to share ratably in the distribution of assets
remaining after payment of liabilities (including preferential distribution and
dividend rights of holders of preferred stock). They have no cumulative voting
rights, and, accordingly, the holders of a majority of the outstanding shares of
the common stock have the ability to elect all of the directors.
Holders of common stock have no preemptive or other rights to subscribe
for shares. Holders of common stock are entitled to such dividends as may be
declared by the Board out of funds legally available therefore. We have never
paid cash dividends on the common stock and do not anticipate paying any cash
dividends in the foreseeable future.
OUR PREFERRED STOCK
Our board of directors is authorized, without further shareholder
action, to issue preferred stock in one or more series and to designate the
dividend rate, voting rights and other rights, preferences and restrictions of
each such series.
As of July 14, 2004, there was a total of 19,000 shares of preferred
stock issued and outstanding in three series, including 8,000 shares of Series D
Preferred Stock, 9,000 shares of Series E Preferred Stock and 2,000 shares of
Series F Preferred Stock (collectively, Preferred Stock). The 8,000 shares of
Series A Preferred Stock is held by multiple parties including 3,000 shares by a
director of the Company. The 8,000 shares of Series D Preferred Stock are held
by a former director, the 9,000 shares of Series E Preferred Stock are held by a
current director and the 2,000 shares of Series F are held by a financial
advisor to the Company by an officer and director and by two companies
affiliated with two of our current directors. Our preferred stock is senior to
our common stock regarding liquidation. The holders of the preferred stock do
not have voting rights or preemptive rights nor are they subject to the benefits
of any retirement or sinking fund.
The Series D Preferred Stock is not entitled to dividends, nor is it
redeemable, however it is convertible to common stock at any time. None of the
8,000 outstanding shares of Series D Preferred Stock has been converted. On a
fully converted basis, the 8,000 shares of Series D Preferred Stock would
convert to 500,000 shares of common stock.
-41-
The Series E Preferred Stock is entitled to receive dividends at the
rate of $12.50 per share per annum, payable quarterly, as declared by the Board
of Directors, until June 20, 2004 when the dividend rate shall be increased to
$30.00 per share per annum. The Board of Directors did not declare payment of
dividends during 2003. The Series E Preferred Stock is redeemable in whole or in
part at any time, at the option of the issuer, at a price of $500 per share,
plus all accrued and undeclared or unpaid dividends; except that, prior to our
redemption of the remaining, the holders of record shall be given a 60-day
written notice of the issuer's intent to redeem and the opportunity to convert
the Series E Preferred Stock to common stock. The conversion price for the
Series E Preferred Stock is based on $2.00 per share of common stock. None of
the 9,000 outstanding shares of Series E Preferred Stock has been redeemed or
converted. On a fully converted basis, the 9,000 shares of Series E Preferred
Stock would convert to 2,250,000 shares of common stock.
The Series F Preferred Stock is entitled to receive dividends at the
rate of $12.50 per share per annum, payable quarterly, as declared by the Board
of Directors, until May 30, 2006 when the dividend rate shall be increased to
$30.00 per share per annum. The Series F Preferred Stock is redeemable in whole
or in part at any time, at the option of the issuer, at a price of $500 per
share, plus all accrued and undeclared or unpaid dividends; except that, after
two years from the date of the original issuance, June 1, 2003, prior to our
redemption of the remaining shares, the holders of record shall be given a
60-day written notice of the issuer's intent to redeem and the opportunity to
convert the Series F Preferred Stock to common stock. The conversion price for
the Series F Preferred Stock is based on $1.00 per share of common stock. None
of the 2,000 outstanding shares of Series F Preferred Stock has been redeemed or
converted. On a fully converted basis, the 2,000 shares of Series F Preferred
Stock would convert to 1,000,000 shares of common stock.
OUTSTANDING OPTIONS AND WARRANTS
At July 14, 2004, we had outstanding warrants and options for the
purchase of 5,102,621 shares of common stock at prices ranging from $.01 to
$.875 per share, including employee stock options to purchase 1,102,000 shares
at prices ranging from $.75 to $1.81 per share. If we issue additional shares,
the existing shareholders' percentage ownership of the Company may be further
diluted.
ANTI-TAKEOVER EFFECTS OF TEXAS LAWS AND OUR CHARTER AND BYLAWS PROVISIONS
ARTICLES OF INCORPORATION AND BYLAWS. Certain provisions in our
Articles of Incorporation and Bylaws summarized below may be deemed to have an
anti-takeover effect and may delay, deter or prevent a tender offer or takeover
attempt that a shareholder might consider to be in its best interests, including
attempts that might result in a premium being paid over the market price for the
shares held by shareholders.
Our Articles of Incorporation and Bylaws contain provisions that:
o permit us to issue, without any further vote or action by the
shareholders, additional shares of preferred stock in one or more
series and, with respect to each such series, to fix the number of
shares constituting the series and the designation of the series, the
voting powers (if any) of the shares of the series, and the
preferences and relative, participating, optional and other special
rights, if any, and any qualification, limitations or restrictions, of
the shares of such series; and
o Require consent of shareholders owning over 50% of the outstanding
common stock to call special meetings.
-42-
The foregoing provisions of our Articles of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the board of directors and in the
policies formulated by the board of directors and to discourage certain types of
transactions that may involve an actual or threatened change of control. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal. The provisions also are intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, they also may inhibit fluctuations in the market price of our
common stock that could result form actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in our management.
TEXAS TAKEOVER STATUTE. We are subject to Article 13.03 of the Texas
Business Corporation Act, which, subject to certain exceptions, prohibits a
Texas corporation from engaging in any "business combination" (as defined below)
with any "affiliated shareholder" (as defined below) for a period of three years
following the date that such shareholder became an affiliated shareholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
shareholder becoming an affiliated shareholder; or (ii) not more than six months
subsequent to such date, the business combination is approved by the affirmative
vote of at least 66 2/3% of the outstanding voting stock that is not owned by
the affiliated shareholder.
The Texas Business Corporation Act defines "business combination" to
include: (i) any merger, share exchange or conversion involving the corporation
and the affiliated shareholder or an affiliate; (ii) any sale, transfer, pledge
or other disposition of 10% or more of the assets of the corporation involving
the affiliated shareholder or an affiliate; (iii) subject to certain exceptions,
any transaction that results in the issuance or transfer of the corporation of
any stock of the corporation to the affiliated shareholder or an affiliate; (iv)
the adoption of a plan of liquidation or dissolution proposed by or under an
agreement with, the affiliated shareholder or an affiliate; (v) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series of the corporation beneficially owned
by the affiliated shareholder; or (vi) the receipt by the affiliated shareholder
of the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, an "affiliated
stockholder" is any entity or person beneficially owning 20% or more of the
outstanding voting stock of the corporation.
LIMITATION ON LIABILITY OF DIRECTORS
Our articles of incorporation and bylaws indemnify our directors to the
fullest extent permitted by the Texas Business Corporation Act. Article 2.01 of
the Texas Business Corporation Act provides that a corporation may indemnify a
person who was, is, or is threatened to be made a named defendant or respondent
in a proceeding because the person is or was a director only if it is determined
that the person:
(1) conducted himself in good faith;
(2) reasonably believed:
(a) in the case of conduct in his official capacity as a
director of the corporation, that his conduct was in the corporation's best
interests; and
-43-
(b) in all other cases, that his conduct was at least not
opposed to the corporation's best interests; and
(3) in the case of any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful.
Except to a limited extent, a director may not be indemnified in
respect of a proceeding:
(1) in which the person is found liable on the basis that personal
benefit was improperly received by him, whether or not the benefit resulted from
an action taken in the person's official capacity; or
(2) in which the person is found liable to the corporation.
Additionally, our Articles of Incorporation limit a director's
liability to the company to the fullest extent permitted by the Texas Business
Corporation Act. The Texas laws permit a corporation to limit or eliminate a
director's personal liability to the corporation or the holders of its capital
stock for breach of duty. This limitation is generally unavailable to the extent
the director is found liable for: (1) a breach of the director's duty of loyalty
to the corporation or its shareholders or members; (2) an act or omission not in
good faith that constitutes a breach of duty of the director to the corporation
or an act or omission that involves intentional misconduct or a knowing
violation of the law; (3) a transaction from which the director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; or (4) an act or omission for which
the liability of a director is expressly provided by an applicable statute. The
Texas laws also prohibit limitations on director liability for acts or omissions
which resulted in a violation of a statute prohibiting certain dividend
declarations and certain payments after dissolution. The effect of these
provisions is to eliminate the rights of our company and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
monetary damages against a director for breach of fiduciary duty as a director
excepting the situations described above. These provisions will not limit the
liability of directors under the federal securities laws of the United States.
-44-
GLOSSARY OF INDUSTRY TERMS AND ABBREVIATIONS
The following are definitions of certain industry terms and
abbreviations used in this report:
BBL. Barrel.
BOE. Barrel of oil equivalent, based on a ratio of 6,000 cubic feet of natural
gas for each barrel of oil.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be, in
which a WORKING INTERESTs is owned.
HORIZONTAL DRILLING. High angle directional drilling with lateral penetration of
one or more productive RESERVOIRs.
MCF. One thousand cubic feet.
NET ACRES OR NET WELLS. The sum of the fractional WORKING INTERESTs owned in
GROSS ACRES or GROSS WELLS.
OVERRIDING ROYALTY INTEREST. The right to receive a share of the PROCEEDS OF
PRODUCTION from a well, free of all costs and expenses, except transportation
and severance taxes.
PRESENT VALUE. The pre-tax present value, discounted at 10%, of future net cash
flows from estimated proved reserves, calculated holding prices and costs
constant at amounts in effect on the date of the report (unless such prices or
costs are subject to change pursuant to contractual provisions) and otherwise in
accordance with the Commission's rules for inclusion of oil and gas reserve
information in financial statements filed with the Commission.
PROCEEDS OF PRODUCTION. Money received (usually monthly) from the sale of oil
and gas produced from PRODUCING PROPERTIES.
PRODUCING PROPERTIES. Properties that contain one or more productive wells.
PRODUCTIVE WELL. A well that is producing oil or gas or that is capable of
production.
PROSPECT. A lease or group of leases containing possible reserves, capable of
producing crude oil, natural gas, or natural gas liquids in commercial
quantities, either at the time of acquisition, or after vertical or horizontal
drilling, completion of workovers, RECOMPLETIONs, or operational modifications.
PROVED RESERVES. Estimated quantities of crude oil, natural gas, and natural gas
liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known RESERVOIRs under existing
economic conditions; i.e., prices and costs as of the date the estimate is made.
RESERVOIRs are considered proved if either actual production or a conclusive
formation test supports economic production.
The area of a RESERVOIR considered proved includes:
a. That portion delineated by drilling and defining by gas-oil
or oil-water contacts, if any; and
b. The immediately adjoining portions not yet drilled but
which can be reasonably judged as economically productive on the basis
of available geological and engineering data. In the absence of
information on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.
-45-
Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
PROVED RESERVES do not include:
a. Oil that may become available from known RESERVOIRs but is
classified separately as "indicated additional reserves";
b. Crude oil, natural gas, and natural gas liquids, the
recovery of which is subject to reasonable doubt because of uncertainty
as to geology, RESERVOIR characteristics, or economic factors;
c. Crude oil, natural gas, and natural gas liquids that may
occur in undrilled PROSPECTs; and
d. Crude oil, natural gas, and natural gas liquids that may be
recovered from oil shales and other sources.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. Additional oil and
gas expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery should be included as PROVED DEVELOPED only after testing by
a pilot project or after operation of an installed program has confirmed through
production response that increased recovery will be achieved.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered from new
wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for RECOMPLETION. Reserves on undrilled acreage shall be
limited to those drilling units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for other units that have
not been drilled can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for PROVED UNDEVELOPED RESERVES be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proven effective by actual tests in the area and in the same RESERVOIR.
RECOMPLETION. The completion for production of an existing wellbore in another
formation from that in which the well has previously been completed.
RESERVOIR. A porous and permeable underground formation containing a natural
accumulation of producible oil or gas that is confined by impermeable rock or
water barriers and is individual and separate from other reservoirs.
ROYALTY. The right to a share of production from a well, free of all costs and
expenses, except transportation.
ROYALTY INTEREST. An interest in an oil and gas property entitling the owner to
a share of oil and natural gas production free of costs of production.
-46-
STANDARDIZED MEASURE. The present value, discounted at 10%, of future net cash
flows from estimated proved reserves, after income taxes, calculated holding
prices and costs constant at amounts in effect on the date of the report (unless
such prices or costs are subject to change pursuant to contractual provisions)
and otherwise in accordance with the Commission's rules for inclusion of oil and
gas reserve information in financial statements filed with the Commission.
WATERFLOOD. An engineered, planned effort to inject water into an existing oil
RESERVOIR with the intent of increasing oil reserve recovery and production
rates.
WORKING INTEREST. The operating interest under a lease, the owner of which has
the right to explore for and produce oil and gas covered by such lease. The full
working interest bears 100 percent of the costs of exploration, development,
production, and operation, and is entitled to the portion of gross revenue from
the PROCEEDS OF PRODUCTION which remains after proceeds allocable to ROYALTY and
oVERRIDING ROYALTY INTERESTs or other lease burdens have been deducted.
WORKOVER. Rig work performed to restore an existing well to production or
improve its production from the current existing RESERVOIR.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Jackson Walker L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements of GulfWest Energy Inc. and
subsidiaries have been included herein and in the registration statement filed
in connection with this offering in reliance upon the report of Weaver and
Tidwell, L.L.P., independent certified public accountants, appearing elsewhere
herein and upon the authority of said firm as experts in accounting and
auditing.
Our oil and gas reserves have been reviewed by our independent reserve
engineers, Pressler Petroleum Consultants. Our disclosures of our oil and gas
reserves included in this prospectus have been presented in reliance upon the
authority of such firm as experts in petroleum engineering.
-47-
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL
STATEMENTS...................................................................... f-2
FINANCIAL STATEMENTS
Consolidated balance sheets................................................ F-3
Consolidated statements of operations...................................... F-5
Consolidated statements of shareholders' equity............................ F-6
Consolidated statements of cash flows...................................... F-8
Notes to consolidated financial statements................................. F-9
INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENT SCHEDULE................ F-36
FINANCIAL STATEMENT SCHEDULE.................................................... F-37
Schedule II - Valuation and Qualifying Accounts
All other Financial Statement Schedules have been omitted because they are
either inapplicable or the information required is included in the
financial statements or the notes thereto.
F-1
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and
Board of Directors
GULFWEST ENERGY INC.
We have audited the accompanying consolidated balance sheets of GulfWest Energy
Inc. (a Texas Corporation) and Subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
GulfWest Energy Inc. and Subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred a net loss of $3,151,509 during the
year ended December 31, 2003, and, as of that date, had a working capital
deficiency of $42,876,963. Those conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
those matters described in Note 2, "Operations and Management Plans". The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As explained in Note 1 to the Financial Statements, effective January 1, 2003,
the Company changed its accounting method for Asset Retirement Obligations.
\s\ WEAVER AND TIDWELL, L.L.P
----------------------------
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
March 19, 2004
F-2
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 483,618 $ 687,694
Accounts receivable - trade, net of allowance
for doubtful accounts of $-0- in 2003 and 2002 1,099,802 1,361,446
Prepaid expenses 159,269 303,906
------------ ------------
Total current assets 1,742,689 2,353,046
------------ ------------
OIL AND GAS PROPERTIES,
using the successful efforts method of accounting 58,472,886 56,786,043
OTHER PROPERTY AND EQUIPMENT 2,132,220 2,121,410
Less accumulated depreciation, depletion and amortization (10,017,931) (8,498,497)
------------ ------------
Net oil and gas properties and other property and equipment 50,587,175 50,408,956
------------ ------------
OTHER ASSETS
Deposits 20,142 37,442
Debt issue cost, net 78,768 289,497
------------ ------------
Total other assets 98,910 326,939
------------ ------------
TOTAL ASSETS $ 52,428,774 $ 53,088,941
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-3
LIABILITIES AND SHAREHOLDERS' EQUITY
------------ ------------
2003 2002
------------ ------------
CURRENT LIABILITIES
Notes payable $ 8,182,165 $ 4,936,088
Notes payable - related parties 1,465,000 1,290,000
Current portion of long-term debt 29,396,092 33,128,447
Current portion of long-term debt - related parties 130,152 256,967
Accounts payable - trade 5,002,675 3,928,477
Accrued expenses 443,568 458,587
------------ ------------
Total current liabilities 44,619,652 43,998,566
------------ ------------
NONCURRENT LIABILITIES
Long-term debt, net of current portion 35,801 126,552
Long-term debt - related parties -- 11,256
Asset retirement obligations 1,357,206 --
------------ ------------
Total noncurrent liabilities 1,393,007 137,808
------------ ------------
OTHER LIABILITIES
Derivative instruments 591,467 1,128,993
------------ ------------
Total Liabilities 46,604,126 45,265,367
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock 190 170
Common stock 18,493 18,493
Additional paid-in capital 29,283,692 28,258,212
Retained deficit (23,477,727) (20,453,301)
------------ ------------
Total shareholders' equity 5,824,648 7,823,574
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 52,428,774 $ 53,088,941
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
OPERATING REVENUES
Oil and gas sales $ 10,844,460 $ 10,447,169 $ 12,426,103
Well servicing revenues -- 39,116 169,167
Operating overhead and other income 166,263 353,512 395,311
------------ ------------ ------------
Total Operating Revenues 11,010,723 10,839,797 12,990,581
------------ ------------ ------------
OPERATING EXPENSES
Lease operating expenses 5,527,841 5,430,205 5,155,500
Cost of well servicing operations -- 56,295 182,180
Depreciation, depletion and amortization 2,226,123 2,697,784 2,491,385
Accretion expense 76,823 -- --
General and administrative 2,262,425 1,727,858 1,709,641
------------ ------------ ------------
Total Operating Expenses 10,093,212 9,912,142 9,538,706
------------ ------------ ------------
INCOME FROM OPERATIONS 917,511 3,451,875 927,655
------------ ------------ ------------
OTHER INCOME AND EXPENSE
Interest expense (3,363,330) (3,159,381) (2,756,912)
Other financing costs (1,000,000)
Gain (Loss) on sale of assets (19,848) (56,647) (118,254)
Unrealized gain (loss) on derivative instruments 537,526 (1,596,575) 4,215,017
Dry holes, abandoned property and impaired assets (358,737) (617,365) --
------------ ------------ ------------
Total Other Income and (Expense) (4,204,389) (5,429,968) 1,339,851
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT
OF CHANGE IN
ACCOUNTING PRINCIPLES (3,286,878) (4,502,313) 4,791,726
------------ ------------ ------------
INCOME TAXES
INCOME (LOSS) BEFORE CUMULATIVE (3,286,878) (4,502,313) 4,791,726
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLES
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES, NET OF INCOME
TAXES 262,452 -- (3,747,435)
------------ ------------ ------------
NET INCOME (LOSS) $ (3,024,426) $ (4,502,313) $ 1,044,291
DIVIDENDS ON PREFERRED STOCK
(PAID 2003-$-0-; 2002-$112,500; 2001-$28,125) (127,083) (112,500) (56,250)
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON $ (3,151,509) $ (4,614,813) $ 988,041
SHAREHOLDERS
============ ============ ============
NET INCOME (LOSS) PER SHARE, BASIC
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLES $ (.18) $ (.25) $ .25
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES .01 -- (.20)
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE BASIC $ (.17) $ (.25) $ .05
============ ============ ============
NET INCOME (LOSS) PER SHARE, DILUTED BEFORE
CUMULATIVE EFFECT
OF CHANGE IN
ACCOUNTING PRINCIPLES $ (.18) $ (.25) $ .23
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES .01 -- (.18)
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE, DILUTED $ (.17) $ (.25) $ .05
============ ============ ============
F-5
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Number of Shares
------------------------
Preferred Common
Stock Stock
--------- -----------
8,000 18,445,041
BALANCE, DECEMBER 31, 2000
Issuance of 9,000 shares of Series E preferred stock for the
acquisition of assets 9,000 --
Issuance of 47,500 shares of common stock for the acquisition of
assets -- 47,500
Issuance of warrants for the acquisition of assets -- --
Net income -- --
Dividends paid on preferred stock -- --
BALANCE, DECEMBER 31, 2001 17,000 18,492,541
Issuance of warrants for additional financing -- --
Net loss -- --
Dividends paid on preferred stock -- --
BALANCE, DECEMBER 31, 2002 17,000 18,492,541
Issuance of warrants for additional financing -- --
Issuance of preferred stock related to current financing 2,000 --
Net loss -- --
BALANCE, DECEMBER 31, 2003 19,000 18,492,541
The Notes to Consolidated Financials are an integral part of these statements.
F-6
PREFERRED COMMON ADDITIONAL RETAINED
STOCK STOCK PAID-IN CAPITAL DEFICIT
------------------ ------------------- ------------------ -----------------
$ 80 $ 18,445 $ 23,537,900 $ (16,854,654)
$ 90 - 4,499,910 -
- - 35,402 -
- - 91,500 -
- - - 1,044,291
- - - (28,125)
------------------ ------------------- ------------------ -----------------
$ 170 $ 18,493- $ 28,164,712 (15,838,488)
================== =================== ================== =================
- - 93,500 -
- - ----- (4,502,313)
- - ----- (112,500)
------------------ ------------------- ------------------ -----------------
$ 170 $ 18,493 $ 28,258,212 $ (20,453,301)
================== =================== ================== =================
- - 25,500 -
20 - 999,980 -
- - - (3,024,426)
------------------ ------------------- ------------------ -----------------
$ 190 $ 18,493 29,283,692 $ (23,477,727)
================== =================== ================== =================
The Notes to Consolidated Financials are an integral part of these statements.
F-7
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
--------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,024,426) $ (4,502,313) $ 1,044,291
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation, depletion and amortization 2,226,123 2,697,784 2,491,385
Accretion expense 76,823 - -
Common stock and warrants issued and charged to
operations 25,500 93,500 -
Other financing costs 1,000,000 - -
Loss on sale of assets 19,848 56,647 118,254
Dry holes, abandoned property, impaired assets 358,737 617,365 -
Unrealized (gain) loss on derivative instruments (537,526) 1,596,575 (4,215,017)
Cumulative effect of accounting change (262,452) - 3,747,435
Provision for bad debts 29,201 - -
(Increase) decrease in accounts receivable -
trade, net 232,443 (109,437) 765,939
(Increase) decrease in prepaid expenses 144,637 (179,825) (40,730)
Increase (decrease) in accounts payable and
accrued expenses 1,235,503 1,043,994 797,800
--------------- ---------------- ---------------
Net cash provided by operating activities 1,524,411 1,314,290 4,709,357
--------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits - - (9,804)
Proceeds from sale of property and equipment 38,561 675,440 394,423
Purchase of property and equipment (1,067,924) (5,861,969) (6,962,650)
--------------- ---------------- ---------------
Net cash used in investing activities (1,029,363) (5,186,529) (6,578,031)
--------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (1,672,288) (3,410,778) (6,577,928)
Proceeds from debt issuance 973,164 7,394,181 8,530,269
Debt issue cost - - (29,544)
Dividends paid - (112,500) (28,125)
--------------- ---------------- ---------------
Net cash provided by (used in) financing (699,124) 3,870,903 1,894,672
activities
--------------- ---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (204,076) (1,336) 25,998
CASH AND CASH EQUIVALENTS,
Beginning of year 687,694 689,030 663,032
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS,
End of year $ 483,618 $ 687,694 $ 689,030
=============== ================ ===============
CASH PAID FOR INTEREST $ 3,216,034 $ 3,004,015 $ 2,811,677
=============== ================ ===============
The Notes to Consolidated Financial Statements are an integral part of
these statements.
F-8
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies
consistently applied by management in the preparation of the
accompanying consolidated financial statements.
Organization/Concentration of Credit Risk
GulfWest Energy Inc. and our subsidiaries intend to
pursue the acquisition of quality oil and gas prospects, which
have proved developed and undeveloped reserves, and the
development of prospects with third party industry partners.
The accompanying consolidated financial statements
include our company and its wholly-owned subsidiaries: (1)
RigWest Well Service, Inc. ("RigWest"); (2) GulfWest Texas
Company ("GWT"), both formed in 1996; (3) DutchWest Oil
Company formed in 1997; (4) SETEX Oil and Gas Company
("SETEX") formed August 11, 1998; (5) Southeast Texas Oil and
Gas Company, L.L.C. ("Setex LLC") acquired September 1, 1998;
(6) GulfWest Oil and Gas Company formed February 18, 1999; (7)
LTW Pipeline Co. formed April 19, 1999; (8) GulfWest
Development Company ("GWD") formed November 9, 2000 and (9)
GulfWest Oil and Gas Company (Louisiana) LLC, formed July 31,
2001. All material intercompany transactions and balances are
eliminated upon consolidation.
We grant credit to independent and major oil and gas
companies for the sale of crude oil and natural gas. In
addition, we grant credit to joint owners of oil and gas
properties, which we, through our subsidiary, SETEX, operate.
Such amounts are secured by the underlying ownership interests
in the properties. We also grant credit to various third
parties through RigWest for well servicing operations.
We maintain cash on deposit in non-interest bearing
accounts, which, at times, exceed federally insured limits. We
have not experienced any losses on such accounts and believe
we are not exposed to any significant credit risk on cash and
equivalents.
Statement of Cash Flows
We consider all highly liquid investment instruments
purchased with remaining maturities of three months or less to
be cash equivalents for purposes of the consolidated
statements of cash flows.
Non-Cash Investing and Financing Activities:
During the twelve month period ended December 31, 2003, we adopted Statement of
Financial Accounting Standard No. 143 "Asset Retirement Obligations" (SFAS 143).
As a result of adopting SFAS 143, effective January 1, 2003, we recorded an
asset retirement obligation liability of $1,280,383, an increase in the carrying
value of our oil and gas properties of $1,058,445, a reduction in accumulated
depletion of $484,390 and an adjustment to prior income of $262,452. This
liability was increased during 2003 by recognizing $76,823 in accretion expense.
Also, we decreased the current portion of long term debt-related parties by
applying $17,300 in deposits and reclassified $176,320 from accrued expenses to
current portion of long term debt.
During the twelve month period ended December 31, 2002, we acquired $74,653 in
property and equipment through notes payable to financial institutions. We also
acquired $182,742 of oil producing properties in exchange of accounts receivable
from a related party. In addition, we sold property and equipment, which
included an account receivable of $42,000. This receivable was collected in
January 2003.
F-9
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)
Statement of Cash Flows - Non-cash Investing and Financing Activities
- continued
During the twelve month period ended December 31, 2001, we acquired $15,068,774
in property and equipment through $10,441,824 in notes payable to financial
institutions and related parties, by issuing 9,000 shares of preferred stock
valued at $4,500,000, by issuing 47,500 shares of common stock valued at $35,450
and by issuing 150,000 warrants valued at $91,500. Also, debt issue costs
increased $170,000 in notes payable.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Oil and Gas Properties
We use the successful efforts method of accounting for
oil and gas producing activities. Costs to acquire mineral
interests in oil and gas properties, to drill and equip
exploratory wells that find proved reserves, and to drill and
equip development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves, and
geological and geophysical costs are expensed.
As we acquire significant oil and gas properties, any
unproved property that is considered individually significant
is periodically assessed for impairment of value, and a loss
is recognized at the time of impairment by providing an
impairment allowance. Capitalized costs of producing oil and
gas properties and support equipment, after considering
estimated dismantlement and abandonment costs and estimated
salvage values, are depreciated and depleted by the
unit-of-production method.
On the sale of an entire interest in an unproved
property, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the
property has been assessed individually. If a partial interest
in an unproved property is sold, the amount received is
treated as a reduction of the cost of the interest retained.
On the sale of an entire or partial interest in a proved
property, gain or loss is recognized, based upon the fair
values of the interests sold and retained.
F-10
Other Property and Equipment
The following tables set forth certain information with
respect to our other property and equipment. We provide for
depreciation and amortization using the straight-line method
over the following estimated useful lives of the respective
assets:
Assets Years
--------------------------------- -------------
Automobiles 3-5
Office equipment 7
Gathering system 10
Well servicing equipment 10
F-12
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Other Property and Equipment - continued
Capitalized costs relating to other properties and equipment:
2003 2002
-------------------- --------------------
Automobiles $ 420,776 $ 420,776
Office equipment 148,172 137,362
Gathering system 529,486 529,486
Well servicing equipment 1,033,786 1,033,786
-------------------- --------------------
2,132,220 2,121,410
Less accumulated depreciation (1,268,330) (1,037,076)
-------------------- --------------------
Net capitalized cost $ 863,890 $ 1,084,334
==================== ====================
Revenue Recognition
We recognize oil and gas revenues on the sales method as
oil and gas production is sold. Differences between sales and
production volumes during the years ended December 31, 2003,
2002, and 2001 were not significant. Well servicing revenues
are recognized as the related services are performed.
Operating overhead income is recognized based upon monthly
contractual amounts for lease operations and other income is
recognized as earned.
Trade Accounts Receivable
Trade accounts receivable are reported in the
consolidated balance sheet at the outstanding principal
adjusted for any chargeoffs. An allocation for doubtful
accounts is recognized by management based upon a review of
specific customer balances, historical losses and general
economic conditions.
Fair Value of Financial Instruments
At December 31, 2003 and 2002, our financial instruments
consist of notes payable and long-term debt. Interest rates
currently available to us for notes payable and long-term debt
with similar terms and remaining maturities are used to
estimate fair value of such financial instruments.
Accordingly, the carrying amounts are a reasonable estimate of
fair value.
Debt Issue Costs
Debt issue costs incurred are capitalized and
subsequently amortized over the term of the related debt on a
straight-line basis.
Earnings (Loss) Per Share
Earnings (loss) per share are calculated based upon the
weighted-average number of outstanding common shares. Diluted
earnings (loss) per share are calculated based upon the
weighted-average number of outstanding common shares, plus the
effect of dilutive stock options, warrants, convertible
preferred stock and convertible debentures.
F-11
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Earnings (Loss) Per Share - continued
We have adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share", which requires
that both basic earnings (loss) per share and diluted earnings
(loss) per share be presented on the face of the statement of
operations. Basic earnings (loss) per share are based on the
weighted-average number of outstanding common shares. Diluted
earnings (loss) per-share are based on the weighted-average
number of outstanding common shares and the effect of all
potentially diluted common shares.
Impairments
Impairments, measured using fair market value, are
recognized whenever events or changes in circumstances
indicate that the carrying amount of long-lived assets (other
than unproved oil and gas properties discussed above) may not
be recoverable and the future undiscounted cash flows
attributable to the asset are less than its carrying value.
Stock Based Compensation
In October 1995, SFAS No. 123, "Stock Based
Compensation," (SFAS 123) was issued. This statement requires
that we choose between two different methods of accounting for
stock options and warrants. The statement defines a
fair-value-based method of accounting for stock options and
warrants but allows an entity to continue to measure
compensation cost for stock options and warrants using the
accounting prescribed by APB Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." Use of the APB 25
accounting method results in no compensation cost being
recognized if options are granted at an exercise price at the
current market value of the stock or higher. We will continue
to use the intrinsic value method under APB 25 but are
required by SFAS 123 to make pro forma disclosures of net
income (loss) and earnings (loss) per share as if the fair
value method had been applied in its 2003, 2002 and 2001
financial statements.
During 2003, 2002 and 2001, we issued options and warrants totaling: 2003 -
35,000 (all exercisable); 2002 - 405,000 (all exercisable); and 2001 - 184,000
(all exercisable), respectively, to employees and directors as compensation. If
we had used the fair value method required by SFAS 123, our net income (loss)
and per share information would approximate the following amounts:
2003 2002 2001
--------------------------- --------------------------- ------------------------
As Reported ProForma As Reported ProForma As ProForma
Reported
------------ ----------- ------------ ----------- ---------- ----------
SFAS 123 $ - $ - $ -
compensation cost $ - $ 7,350 $ - 38,300 99,360
- -
APB 25
compensation cost $ - $ - $ - $ - $ - $ -
Net income (loss) $(3,151,509) $(3,158,859) $(4,614,813) $(4,653,113) $988,041 $888,681
Income (loss) per
common share-basic $ (.17) $ (.17) $(.25) $(.25) $.05 $.05
Income (loss) per
common share-diluted $ (.17) $ (.17) $(.25) $(.25) $.05 $.04
F-12
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Stock Based Compensation - continued
The effects of applying SFAS 123 as disclosed above are
not indicative of future amounts. We anticipate making
additional stock based employee compensation awards in the
future.
We use the Black-Sholes option-pricing model to estimate
the fair value of the options and warrants (to employee and
non-employees) on the grant date. Significant assumptions
include (1) risk free interest rate 2003 - 3.0%; 2002 - 3.0%;
2001 - 4.5%; (2) weighted average expected life 2003 - 3.4;
2002 - 3.6; 2001 - 5.0; (3) expected volatility of 2003 -
147.43; 2002 - 101.73%; 2001 - 103.27%; and (4) no expected
dividends.
Implementation of New Financial Accounting Standards
Effective January 1, 2001, we adopted SFAS No. 133
"Accounting for Derivative Instruments and Other Hedging
Activities", as amended by SFAS No. 137 and No. 138. As a
result of a financing agreement with an energy lender, we were
required to enter into an oil and gas hedging agreement with
the lender. It has been determined this agreement meets the
definition of SFAS 133 "Accounting for Derivative Instruments
and Hedging Activities" and is accounted for as a derivative
instrument.
The estimated change in fair value of the derivatives is reported in Other
Income and Expense as unrealized (gain) loss on derivative instruments. The
estimated fair value of the derivatives is reported in Other Assets (or Other
Liabilities) as derivative instruments.
The estimated fair value of the derivative instruments at January 1, 2001, the
date of initial application of SFAS 133, of $3,747,435 is reported in the
Statement of Operations as the cumulative effect of a change in accounting
principle.
In June, 2001, SFAS No. 141 "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets were
issued. We presently have no goodwill or intangible assets and
are thus not affected by SFAS No. 142.
Effective January 1, 2002, we adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement requires the following three-step
approach for assessing and recognizing the impairment of
long-lived assets: (1) consider whether indicators of
impairment of long-lived assets are present; (2) if indicators
of impairment are present, determine whether the sum of the
estimated undiscounted future cash flows attributable to the
assets in question is less than their carrying amount; and (3)
if less, recognize an impairment loss based on the excess of
the carrying amount of the assets over their respective fair
values. In addition, SFAS No. 144 provides more guidance on
estimating cash flows when performing a recoverability test,
requires that a long-lived asset to be disposed of other than
by sale (such as abandoned) be classified as "held and used"
until it is disposed of, and establishes more restrictive
criteria to classify an asset as "held for sale". The adoption
of SFAS No. 144 did not have a material impact on our
financial statements since it retained the fundamental
provisions of SFAS No. 121, "Accounting for the Impairment or
Disposal of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," related to the recognition and measurement of
the impairment of long-lived assets to be "held and used".
F-13
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Implementation of New Financial Accounting Standards - continued
In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability
is incurred. Under EITF Issue No. 94-3, a liability for an
exit cost as defined was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 also establishes that
the fair value is the objective for the initial measurement of
the liability. SFAS No. 146 is effective for exit and disposal
activities that are initiated after December 31, 2002. This
statement will impact the timing of our recognition of
liabilities for costs associated with exit or disposal
activities.
Beginning in 2003, Statement of Financial Accounting
Standards No. 143, "Asset Retirement Obligations" ("SFAS 143")
requires us to recognize an estimated liability for the
plugging and abandonment of our oil and gas wells and
associated pipelines and equipment. Consistent with industry
practice, historically we had assumed the cost of plugging and
abandonment would be offset by salvage value received. This
statement requires us to record a liability in the period in
which our asset retirement obligation ("ARO") is incurred.
After initial recognition of the liability, we must capitalize
an additional asset cost equal to the amount of the liability.
In addition to any obligation that arises after the effective
date of SFAS 143, upon initial adoption we must recognize (1)
a liability for any existing ARO's, (2) capitalized cost
related to the liability, and (3) accumulated depreciation,
depletion and amortization on that capitalized cost adjusting
for the salvage value of related equipment.
The estimated liability is based on historical experience
in plugging and abandoning wells, estimated remaining lives of
those wells based on reserves estimates and federal and state
regulatory requirements. The liability is discounted using an
assumed credit-adjusted risk-free rate of 7.5%. Revisions to
the liability could occur due to changes in estimates of
plugging and abandonment costs, changes in the risk-free rate
or remaining lives of the wells, or if federal or state
regulators enact new plugging and abandonment requirements. At
the time of abandonment, we will be required to recognize a
gain or loss on abandonment if the actual costs do not equal
the estimated costs.
The adoption of SFAS 143 resulted in a January 1, 2003
cumulative effect adjustment to record (i) a $1,058,445
increase in the carrying value of proved properties, (ii) a
$484,390 decrease in accumulated depreciation, depletion and
amortization, (iii) a $1,280,383 increase in noncurrent
liabilities, and (iv) a $262,452 gain, net of tax.
Note 2. Operations and Management Plans
At December 31, 2003, our current liabilities exceeded our current
assets by $42,876,963. We had a loss available to common shareholders of
$3,151,509 compared to a loss available to common shareholders of $4,614,813 at
December 31, 2002. This loss included non-cash items of $537,526 for unrealized
gain on derivative instruments, a loss of $358,737 for abandonment of properties
and a $262,452 gain from the recording of Asset Retirement Obligations
("ARO's"), as required by SFAS 143, at January 1, 2003.
In 2004, we will continue the recapitalization of debt and funding of
our capital development program that we began in 2003. Following are the steps
we are taking and plan to take to achieve that purpose:
F-14
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Operations and Management Plans - continued
(a) The first step is to close the refinancing of our largest debt of
$27.8 million held by Concert Capital Resources LP ("CCR") and loaned to our
wholly-owned subsidiary, GulfWest Oil & Gas Company. We have entered into an
agreement with a new lending source that, subject to due diligence, will fund
approximately $14 million to purchase the $27.8 million note. The new debt
financing will also provide for the payment of closing costs. CCR has agreed to
sell the note to our new financier for a $14 million cash payment and a $4
million subordinated note from us.
(b) Secondly, we are continuing to work with our financial advisor to
raise an additional $4 to $5 million through the sale of our preferred stock.
Proceeds from this equity sale will be used for working capital and fund our new
development projects. The refinancing of the CCR debt and sale of new equity are
both currently scheduled to close in April, 2004.
(c) Effective December 1, 200l and amended August 16, 2002, we entered
into an Oil and Gas Property Acquisition, Exploration and Development Agreement
(the "Summit Agreement") with Summit Investment Group-Texas, L.L.C., an
unrelated party, ("Summit"). Under the agreement, Summit provided payments in
the aggregate of $1,200,000 in advanced funds for our use in the acquisition of
oil and gas leases and other mineral and royalty interests, and production
activities, and was to recoup and recover those advanced funds.
In a subsequent event on March 5, 2004, we entered into an Option
Agreement for the Purchase of Oil and Gas Leases (the "Addison Agreement") with
W. L. Addison Investments L.L.C., a private company owned by Mr. J. Virgil
Waggoner and Mr. John E. Loehr, two of our directors, (`Addison"). Under the
Addison Agreement, Addison agreed to pay Summit, on our behalf, the non-recouped
and outstanding advanced funds amounting to $1,200,000, thereby retiring the
Summit Agreement. For consideration of such payment, Addison acquired certain
oil and gas leases and wellbores from Summit but agreed to grant us a 180-day
redemption option (which may be extended by mutual consent) to purchase the same
for $1,200,000, plus interest at the prime rate plus 2%. We tendered Addison a
promissory note in the amount of $600,000, with interest at the prime rate plus
2%, to substitute for an account payable to Summit, pursuant to the Summit
Agreement, in the same amount. The note will be considered paid in full if we
exercise the redemption option and pay the $1,200,000, plus interest. Summit
retained the right to participate up to a 25% WORKING INTEREST in the drilling
of any wells on the leases acquired by Addison. In the event we exercise the
redemption option, Addison may, at its sole option, retain up to a 25% WORKING
INTEREST in the leases.
(d) Finally, after completing the above, we will pursue the
consolidation of all of our debt, including other asset and bridge loans. Our
goal is to simplify our financial structure and provide adequate capitalization
for the development of our oil and gas assets.
F-15
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties
The following tables set forth certain information with respect
to our oil and gas producing activities for the periods presented:
Capitalized Costs Relating to Oil and Gas Producing Activities:
2003 2002
---------------- ----------------
Unproved oil and gas properties $ 261,650 $ 439,926
Proved oil and gas properties 54,669,482 52,847,625
Support equipment and facilities 3,541,754 3,498,492
---------------- ----------------
58,472,886 56,786,043
Less accumulated depreciation, depletion and
Amortization (8,749,601) (7,461,421)
---------------- ----------------
Net capitalized costs $49,723,285 $49,324,622
================ ================
Results of Operations for Oil and Gas Producing Activities:
2003 2002 2001
--------------- ---------------- ---------------
Oil and gas sales $10,844,466 $10,447,169 $ 12,426,103
Production costs (5,527,841) (5,430,205) (5,155,500)
Depreciation, depletion and amortization (1,527,727) (2,187,036) (2,018,890)
Accretion expense (76,823) - -
--------------- ---------------- ---------------
Income tax expense - - _
--------------- ---------------- ---------------
Results of operations for oil and gas $ 5,251,713
producing activities - income $ 3,712,075 $ 2,829,928
=============== ================ ===============
Costs Incurred in Oil and Gas Producing Activities:
2003 2002 2001
--------------- ---------------- ---------------
Property Acquisitions
Proved $- $ 562,760 $ 15,236,808
Unproved 110,119 14,401 154,076
Development Costs 2,024,663 5,141,075 6,317,527
--------------- ---------------- ---------------
$ 2,134,782 $ 5,718,236 $ 21,708,411
=============== ================ ===============
F-16
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties - continued
Effective July 1, 2001, we acquired interests in oil and gas
properties located in Texas and Louisiana from an unrelated party,
Grand Goldking L.L.C. The acquisition cost was $15,077,358, consisting
of 9,000 shares of Series E preferred stock valued at $4,500,000 and
$10,000,000 in debt. In addition, we paid $545,300 in commissions to
unrelated parties. The commissions were paid by issuing 10,000 shares
of common stock valued at $8,800, 150,000 warrants valued at $91,500
and $445,000 in cash. We incurred additional cash costs of $33,058
related to the acquisition. On the same date, we transferred its
ownership interest in these properties to our wholly owned subsidiary,
GulfWest Oil and Gas Company.
Supplemental unaudited pro forma information (under the purchase
method of accounting) presenting the results of operations for the
year ended December 31, 2001, as if the Grand Goldking acquisition had
occurred as of January 1, 2001:
Year Ended
December 31,
2001
----------------
Operating revenues $ 15,649,329
Operating expenses 10,652,222
----------------
Income from operations 4,997,107
Other income and expense (3,325,166)
Income taxes -
----------------
Net income 1,671,941
Preferred dividends (112,500)
----------------
Net income to common shareholders $ 1,559,441
================
Earnings per share
Basic $ 0.08
================
Diluted $ 0.07
================
Effective January 1, 2002, we acquired oil and gas properties
located in Louisiana from a related party for $182,742. The
acquisition price was the amount of accounts receivable due us.
Note 4. Accrued Expenses
Accrued expenses consisted of the following:
December 31, December 31,
2003 2002
---------------- -----------------
Payroll and payroll taxes $ 5,833 $ 1,863
Interest 395,735 414,724
Professional fees 42,000 42,000
---------------- -----------------
$ 443,568 $ 458,587
================ =================
F-17
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Notes payable is as follows:
2003 2002
------------- ------------------
Non-interest bearing note payable to an unrelated party; payable out $ 40,300 $ 40,300
of 50% of the net transportation revenues from a certain natural gas
pipeline; no due date.
Promissory note payable to a former director at 8%; due May, 2001;
unsecured. 40,000 40,000
Promissory note payable to an unrelated party at 10%; payable on
demand; unsecured. 45,000 45,000
Line of credit (up to $2,500,000) to a bank; due October, 2002; secured
by guaranty of a director; interest greater of prime rate less .25% or
5.25%, (prime rate 4.0% at December 31, 2003). Line of
credit increased to $3,000,000 and due date extended to April, 2004. 2,995,488 2,995,488
Note payable to a bank; due March, 2003; interest at prime rate plus 1%
(prime rate 4.0% at December 31, 2003); secured by guaranty of
three of our directors; retired September 2003. 500,000
Promissory note payable to an unrelated party; payable on demand;
interest at 8%; interest increased to 12% on January 1, 2003; secured
by certain oil and gas properties. 300,000 300,000
Note payable to a bank; due July, 2004; secured by guaranty of a
director; interest at prime rate (prime rate 4.0% at December 31,
2003 with a floor of 4.75% and a ceiling of 8.0%. 948,400 1,000,000
Promissory note payable to unrelated party; interest at 6%; due
June, 2003. 55,300 55,300
Promissory note payable to one of our directors; interest at 8%; due
on demand; unsecured. 50,000 50,000
Promissory note payable to one of our directors; interest at prime rate
(prime rate 4.0% at December 31, 2003); due May, 2003; secured by
common stock of DutchWest Oil Company, our wholly owned
subsidiary. 1,375,000 1,200,000
Promissory note payable to an unrelated party at 8%; due June 2003;
secured by 4% of the common stock of DutchWest Oil Company, our
wholly owned subsidiary 100,000 -
Promissory note payable to an unrelated party at 8%; due May 2003;
secured by 8% of the common stock of DutchWest Oil Company, our
wholly owned subsidiary 200,000 -
F-18
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Notes payable is as follows - continued:
2003 2002
-------------- -------------------
Line of credit (up to $3,500,000) to a bank; due June 2004; secured
by the guaranty of a director; interest at prime rate (prime rate
4.0% at December 31, 2003) with a floor of 4.75% and a ceiling of
8.0% 3,497,677 -
-------------- -------------------
$ 9,647,165 $ 6,226,088
============== ===================
The weighted average interest rate for notes payable at December
31, 2003 and 2002 was 5.0% and 4.7%, respectively.
Long-term debt is as follows:
2003 2002
------------- ------------------
Line of credit (up to $3,000,000) to a bank; due July, 2003;
secured by the guaranty of a director; interest at prime rate
(prime rate 4.0% at December 31, 2003); replaced by a short-term line
of credit (up to $3,500,000) from the same bank. $ - $ 2,999,515
Subordinated promissory notes to various individuals at 9.5% interest
per annum; amounts include $50,000 due to related parties; past due. 150,000 150,000
Notes payable to finance vehicles, payable in aggregate monthly
installments of approximately $4,000, including interest of.9% to 13%
per annum; secured by the related equipment; due
various dates through 2007. 69,500 116,721
Note payable to related party to finance equipment with monthly
installments of $5,200, including interest at 13.76% per annum; final
payment due October, 2003; secured by related equipment;
retired June, 2003. - 48,850
Promissory note to a director; interest at 8.5%; due December 31,
2003. 78,941 95,670
Note payable to a bank with monthly principal payments of $2,300;
interest at 9.5%; due May, 2003; secured by related equipment;
retired May, 2003. - 11,630
Note payable to an energy lender; interest at prime plus 3.5% (prime
rate 4.0% at December 31, 2003) payable monthly out of 90% net profits
from certain oil and gas properties; final payment
due May, 2004; secured by related oil and gas properties. 27,574,769 27,907,509
F-19
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Long-term debt is as follows - continued:
2003 2002
------------------ -----------------
Note payable to a bank with monthly principal payments of
$36,000; interest at prime plus 1% (prime rate 4.0% at December
31, 2003) with a minimum prime rate of 5.5%; final payment due
November, 2003; secured by related oil and gas properties;
Extended to March, 2004. 1,564,000 1,996,000
Note payable to unrelated party to finance saltwater disposal well with
monthly installments of $4,540, including interest at 10% per annum;
final payment due January, 2005; secured by
related well. 123,624 123,624
Note payable to related party to finance equipment with monthly
installments of $5,109, including interest at 13.75% per annum; final
payment due February, 2004; secured by related
equipment; retired June, 2003. - 65,743
Note payable to related party to finance equipment with monthly
installments of $608, including interest at 11% per annum; final
payment due February, 2004; secured by related
equipment. 1,211 7,960
------------------ -----------------
29,562,045 33,523,222
Less current portion
(29,526,244) (33,385,414)
------------------ -----------------
Total long-term debt $ 35,801 $ 137,808
================== =================
Estimated annual maturities for long-term debt are as follows:
2004 $ 29,526,244
2005 27,292
2006 7,150
2007 1,359
2008 -
------------------
$ 29,562,045
==================
F-20
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Shareholders' Equity
COMMON STOCK
2003 2002
----------------- --------------
Par value $.001; 40,000,000 shares authorized; 18,492,541
shares issued and outstanding as of December 31, 2003 and 2002,
respectively $ 18,493 $ 18,493
================= ==============
PREFERRED STOCK
Series D, par value $.01; 12,000 shares authorized; 8,000 shares issued
and outstanding at December 31, 2003 and 2002. The Series D preferred
stock does not pay dividends and is not redeemable. The liquidation
value is $500 per share. After three years from the date of issue, and
thereafter, the shares are convertible to common stock based upon a
value of $500 per Series
D share divided by $8 per share of common stock. 80 80
Series E, par value $.01; 9,000 shares authorized; 9,000 shares issued
and outstanding at December 31, 2003 and 2002. The Series E preferred
stock pays dividends, as declared, at a rate of 2.5% per annum, has a
liquidation value of $500 per share, may be redeemed at our option and,
if not redeemed after two years, is convertible to common stock based
upon a value of $500 per Series
E share divided by $2 per share of common stock. 90 90
Series F, par value $.01; 2,000 shares authorized; 2,000 shares issued
and outstanding at December 31, 2003. The Series F preferred stock pays
dividends, as declared, at a rate of 2.5% per annum, has a liquidation
value of $500 per share, may be redeemed at our option and, if not
redeemed after two years, is convertible to common stock based upon a
value of $500 per Series E share divided by $1 per share of common
stock. 20 -
----------------- --------------
$ 190 170
================= ==============
All classes of preferred shareholders have liquidation preference
over common shareholders of $500 per preferred share, plus accrued
dividends. Dividends in arrears at December 31, 2003 we $127,083
(Series E $112,500; Series F $14,583).
STOCK OPTIONS
We maintain a Non-Qualified Stock Option Plan (as amended and
restated, the "Plan"), which authorizes the grant of options of up to
2,000,000 shares of common stock. Under the Plan, options may be
granted to any of our key employees (including officers), employee and
nonemployee directors, and advisors. A committee appointed by the
Board administers the Plan. Prior to 1999, options granted under the
Plan had been granted at an option price of $3.13 and $1.81 per share.
In July 1999, the Board authorized that all then current employee and
director options under the plan be reduced to a price of $.75 per
share. Following is a schedule by year of the activity related to
stock options, including weighted-average ("WTD AVG") exercise prices
of options in each category.
F-21
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Shareholders' Equity - continued
2003 2002 2001
--------------------------- ----------------------------- ------------------------
Wtd Avg Wtd Avg Wtd Avg
Prices Number Prices Number Prices Number
-------- --------------- ---------- --------------- --------- -----------
Balance, January 1 $ .90 1,067,000 $ 1.03 1,097,000 $ .09 923,000
Options issued $ .75 35,000 $ .75 35,000 $ .83 184,000
Options expired $ - - $ 3.00 (65,000) $ 3.00 (10,000)
--------------- --------------- -----------
Balance, December 31 $ .90 1,102,000 $ .90 1,067,000 $ 1.03 1,097,000
=============== =============== ===========
All options were exercisable at December 31, 2003. Following is a
schedule by year and by exercise price of the expiration of our stock
options issued as of December 31, 2003:
2004 2005 2006 2007 Thereafter Total
---------- ----------- ---------- ---------- ------------ -----------
$ .75 432,000 35,000 185,000 652,000
$ .83 184,000 184,000
$1.13 100,000 100,000
$1.20 106,000 106,000
$1.81 60,000 60,000
---------- ----------- ---------- ---------- ------------ -----------
432,000 206,000 184,000 35,000 210,000 1,102,000
========== =========== ========== ========== ============ ===========
STOCK WARRANTS
We have issued a significant number of stock warrants for a
variety of reasons, including compensation to employees, additional
inducements to purchase our common or preferred stock, inducements
related to the issuance of debt and for payment of goods and services.
Following is a schedule by year of the activity related to stock
warrants, including weighted-average exercise prices of warrants in
each category:
2003 2002 2001
-------------------------- -------------------------- ---------------------------
Wtd Avg Wtd Avg Wtd Avg
Prices Number Prices Number Prices Number
--------- ------------- --------- ------------- --------- --------------
--------- ------------- --------- ------------- --------- --------------
Balance, January 1 $ 1.24 2,181,754 $2.15 1,306,754 $ 2.31 1,392,254
Warrants issued $ .75 150,000 $ .75 1,145,000 $ .75 150,000
Warrants exercised
or expired $(3.61) (366,754) $3.57 (270,000) $ 2.22 (235,500)
------------- ------------- --------------
Balance, December 31 $ .76 1,965,000 $1.24 2,181,754 $ 2.15 1,306,754
============= ============= ==============
Included in the "warrants issued" and "warrants exercised/expired"
columns in 2002 were 270,000 warrants whose price was reduced in 2002
to $.75.
F-22
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Shareholders' Equity - continued
Following is a schedule by year and by exercise price of the
expiration of our stock warrants issued as of December 31, 2003:
2004 2005 2006 2007 2008 TOTAL
---- ---- ---- ---- ---- -----
$ .75 225,000 1,590,000 1,815,000
.875 150,000 150,000
---------- ---------- ------------- ------------ ----------- ------------
- 375,000 1,590,000 - - 1,965,000
========== ========== ============= ============ =========== ============
Warrants outstanding to our officers, directors and employees at
December 31, 2003 and 2002 were approximately 1,515,000 and 1,682,000,
respectively. The exercise prices on these warrants range from $.75 to $.88
and expire various dates through 2006.
Note 7. Income (Loss) Per Common Share
The following is a reconciliation of the numerators and denominators
used in computing income (loss) per share:
2003 2002 2001
------------------ ----------------- ------------------
Net income (loss) $ (3,024,426) $ (4,502,313) $ 1,044,291
Preferred stock dividends (127,083) (112,500) (56,250)
------------------ ----------------- ------------------
Income (loss) available to common
shareholders (numerator) $ (3,151,509) $ (4,614,813) $ 988,041
================== ================= ==================
Weighted-average number of shares
of common stock basic 18,492,541 18,492,541 18,464,343
(denominator)
------------------ ----------------- ------------------
Income (loss) per share - basic $ (.17) $ (.25) $ .05
================== ================= ==================
Potential dilutive securities (stock options, stock warrants and
convertible preferred stock) in 2003 and 2002 have not been considered
since we reported a net loss and, accordingly, their effects would be
antidilutive. Potential dilutive securities (stock options, stock
warrants and convertible preferred stock) totaling 2,780,520 weighted
average shares in 2001 have been considered but there is no effect on
income per common share.
Note 8. Related Party Transactions
On December 1, 1992, Ray Holifield and Associates, Inc. executed
an unsecured promissory note to us for $118,645 with interest at 10%
per annum, due on October 1, 1993. At December 31, 1993, the note was
still outstanding. During 1994, we entered into an agreement with the
Holifield Trust in which Holifield will make payments on the past due
note from future oil and gas revenue. During 1995, $10,995 of interest
payments were received. At December 31, 2001 the unsecured promissory
note had been fully reserved. At December 31, 2002, the unsecured
promissory note had been fully written off.
ON DECEMBER 1, 1992, PARKWAY PETROLEUM COMPANY, A RAY HOLIFIELD RELATED
COMPANY, EXECUTED AN UNSECURED PROMISSORY NOTE TO US FOR $54,616 WITH INTEREST
AT 10% PER ANNUM, DUE ON OCTOBER 1, 1993. THE NOTE WAS ISSUED FOR AMOUNTS DUE
FROM CONTRACT DRILLING SERVICES WE PROVIDED PARKWAY PETROLEUM
F-23
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Related Party Transactions - continued
Company. At December 31, 1993, the note was still outstanding. During
1994, we entered into an agreement with the Holifield Trust in which
Holifield will make payments on the past due note from future oil and
gas revenue.
During 1995, $6,250 of interest payments were received. At December
31, 2001, the unsecured promissory note had been fully reserved. At
December 31, 2002, the unsecured promissory note had been fully
written off.
On January 10, 1994, we entered into a consulting agreement with
Williams Southwest Drilling Company, Inc. ("Williams") whereby we
would provide management and accounting services for $25,000 per month
for a period of one year. We accrued the consulting fees with an
offset to deferred income until payment of the fees is actually
received. During 1994, $172,140 was recorded as consulting fee income.
Beginning in the second quarter 1994, we began recognizing consulting
income only as cash payments were received. Prior to the second
quarter, $75,000 in consulting fee revenue was accrued. We received
$97,140 in consulting fee payments. As of December 31, 1994, the
receivable from Williams of $202,860 for consulting fees has been
offset by deferred income of $127,860 and a provision for doubtful
accounts of $75,000. Effective January 1, 1995, we received a
promissory note from Williams in the amount of $202,860, bearing
interest at the rate of 10% per annum, and payable in quarterly
installments of principal and interest of $15,538.87. At December 31,
2001, the unsecured promissory note had been fully reserved. At
December 31, 2002, the unsecured promissory note had been fully
written off.
From July 22 to August 13, 1998, we advanced sums totaling
$102,000 to Gulf Coast Exploration, Inc. At December 31, 2001, the
debt had been fully reserved. At December 31, 2002, the debt had been
fully written off.
On October 1, 1998, Toro Oil Company executed an unsecured
promissory note to us for the purchase of 100% of WestCo for $150,000,
with interest at the prime rate per annum and due September 30, 1999.
To date, no principal payments have been received. At December 31,
2001, the promissory note had been fully reserved. At December 31,
2002, the debt had been fully written off.
In a subsequent event on March 5, 2004, we entered into an Option
Agreement for the Purchase of Oil and Gas Leases (the "Addison
Agreement") with W. L. Addison Investments L.L.C., a private company
owned by Mr. J. Virgil Waggoner and Mr. John E. Loehr, two of our
directors, (`Addison"). Effective December 1, 200l and amended August
16, 2002, we had entered into an Oil and Gas Property Acquisition,
Exploration and Development Agreement (the "Summit Agreement") with
Summit Investment Group-Texas, L.L.C., an unrelated party, ("Summit").
Under the agreement, Summit provided payments in the aggregate of
$1,200,000 in advanced funds for our use in the acquisition of oil and
gas leases and other mineral and royalty interests, and production
activities, and was to recoup and recover those advanced funds. Under
the Addison Agreement, Addison agreed to pay Summit, on our behalf,
the non-recouped and outstanding advanced funds amounting to
$1,200,000, thereby retiring the Summit Agreement. For consideration
of such payment, Addison acquired certain oil and gas leases and
wellbores from Summit but agreed to grant us a 180-day redemption
option (which may be extended by mutual consent) to purchase the same
for $1,200,000, plus interest at the prime rate plus 2%. We tendered
Addison a promissory note in the amount of $600,000, with interest at
the prime rate plus 2%, to substitute for an account payable due to
Summit, pursuant to the Summit Agreement, in the same amount. The note
will be considered paid in full if we exercise the redemption option
and pay the $1,200,000, plus interest. Summit retained the right to
participate up to a 25% WORKING INTEREST in the drilling of any wells
on the leases acquired by Addison. In the event we exercise the
redemption option, Addison may, at its sole option, retain up to a 25%
WORKING INTEREST in the leases.
F-24
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Related Party Transactions - continued
Interest expensed on related party notes totaled approximately
$76,000, $53,000 and $128,000 for the years ended December 31, 2003,
2002 and 2001 respectively.
Note 9. Income Taxes
The components of the net deferred federal income tax assets
(liabilities) recognized in our consolidated balance sheets were as
follows:
F-25
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes - continued
December 31, December 31,
2003 2002
---- ----
Deferred tax assets
Net operating loss carryforwards $ 6,352,507 $ 5,236,485
Oil and gas properties 610,381 542,131
Capital loss carryforwards - 93,211
Derivative instruments 201,099 383,858
Accretion 26,120 -
----------------- ---------------
Net deferred tax assets before
valuation allowance 7,190,107 6,255,685
Valuation allowance (7,190,107) (6,255,685)
----------------- -------------------
Net deferred tax assets (liabilities) $ - $ -
================= ===================
As of December 31, 2003 and 2002, we did not believe it was more
likely than not that the net operating loss carryforwards would be
realizable through generation of future taxable income; therefore, they
were fully reserved.
The following table summarizes the difference between the actual
tax provision and the amounts obtained by applying the statutory tax
rate of 34% to the income (loss) before income taxes for the years
ended December 31, 2003, 2002 and 2001.
2003 2002 2001
----------------- ----------------- ----------------
Tax (benefit) calculated at statutory rate $ (1,028,305) $ (1,530,786) $ 355,059
Increase (reductions) in taxes due to:
Effect on non-deductible expenses 362,910 65,174 18,157
Change in valuation allowance 934,422 1,586,988 (345,754)
Other (269,027) (121,376) (27,462)
----------------- ----------------- ----------------
Current federal income tax provision $ - $ - $ -
================= ================= ================
As of December 31, 2003 we had net operating loss carryforwards
of approximately $18,700,000, which are available to reduce future
taxable income and capital gains, respectively, and the related income
tax liability. The net operating loss carryforward expires at various
dates through 2023.
Note 10. Commitments and Contingencies
Oil and Gas Hedging Activities
We entered into an agreement with an energy lender commencing in
May, 2000, to hedge a portion of our oil and gas sales for the period
of May, 2000 through April, 2004. The agreement called for initial
volumes of 7,900 barrels of oil and 52,400 Mmbtu of gas per month,
declining monthly thereafter. We entered into a second agreement with
the energy lender, commencing September, 2001, to hedge an additional
portion of our oil and gas sales for the periods of September, 2001
through July, 2004 and September, 2001 through December 2002,
respectively. The agreement called for initial volumes of 15,000
barrels of oil and
F-26
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments and Contingencies - continued
50,000 Mmbtu of gas per month, declining monthly thereafter. Volumes
at December 31, 2003 had declined to 6,400 barrels of oil and 21,200
Mmbtu of gas. As a result of these agreements, we realized a reduction
in revenues of $1,496,303, $368,776 and $762,480 for the twelve-month
periods ended December 31, 2003, 2002 and 2001, respectively, which is
included in oil and gas sales.
Lease Obligations
We lease office space at one location under a sixty-four (64)
month lease, which commenced December 1, 2001 and was amended May 30,
2002 after expansion. Annual commitments under the lease are: 2004 -
$130,050, 2005 - $132,979, 2006 - $135,323 and 2007 - $33,977. Total
rent expense for the years ended December 31, 2003, 2002 and 2001 were
approximately $134,500, $91,000 and $60,000, respectively.
Litigation
>From time to time, we are involved in litigation arising out of
our operations or from disputes with vendors in the normal course of
business. As of March 29, 2004, we were not engaged in any legal
proceedings that are expected, individually or in the aggregate, to
have a material effect on our consolidated financial statements.
The estimates of proved oil and gas reserves utilized in the
preparation of the financial statements are estimated in accordance
with guidelines established by the Securities and Exchange Commission
and the Financial Accounting Standards Board, which require that
reserve estimates be prepared under existing economic and operating
conditions with no provision for price and cost escalations over
prices and costs existing at year end except by contractual
arrangements.
We emphasize that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current
information becomes available. Our policy is to amortize capitalized
oil and gas costs on the unit of production method, based upon these
reserve estimates. It is reasonably possible that, because of changes
in market conditions or the inherent imprecision of these reserve
estimates, that the estimates of future cash inflows, future gross
revenues, the amount of oil and gas reserves, the remaining estimated
lives of the oil and gas properties, or any combination of the above
may be increased or reduced in the near term. If reduced, the carrying
amount of capitalized oil and gas properties may be reduced materially
in the near term.
F-27
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
The following unaudited table sets forth proved oil and gas
reserves, all within the United States, at December 31, 2003, 2002,
and 2001, together with the changes therein.
Crude Oil Natural Gas
(BBls) (MCF)
--------------- ----------------
QUANTITIES OF PROVED RESERVES:
Balance December 31, 2000 4,575,179 24,811,919
Revisions (386,078) 238,595
Extensions, discoveries and additions 5,676 895,333
Purchase 2,078,561 14,905,837
Sales (107,225) 1,122
Production (294,276) (1,594,899)
--------------- ----------------
Balance December 31, 2001 5,871,837 39,257,907
Revisions (125,468) (4,959,229)
Extensions, discoveries and additions 22,129 1,090,024
Purchase 52,480 1,090,025
Sales (20,698) (837,856)
Production (278,374) (1,487,048)
--------------- ----------------
Balance December 31, 2002 5,521,906 34,158,823
Revisions (262,608) (308,080)
Extensions, discoveries and additions - -
Purchase - -
Sales - -
Production (221,335) (1,190,624)
--------------- ----------------
Balance December 31, 2003 5,037,963 32,660,119
=============== ================
PROVED DEVELOPED RESERVES:
December 31, 2001 3,939,593 21,203,989
=============== ================
December 31, 2002 4,025,552 25,374,113
=============== ================
December 31, 2003 3,772,926 24,642,407
=============== ================
F-28
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
STANDARDIZED MEASURE:
Standardized measure of discounted future net cash flows relating to
proved reserves:
2003 2002 2001
------------------- ----------------- -----------------
Future cash inflows $ 336,795,385 $ 308,381,837 $ 199,162,921
Future production and development costs
Production 109,468,727 105,629,872 77,526,278
Development 21,460,459 23,350,811 23,610,596
------------------- ----------------- -----------------
Future cash flows before income taxes 205,866,199 179,401,154 98,026,047
Future income taxes (46,885,360) (38,611,577) (13,281,358)
------------------- ----------------- -----------------
Future net cash flows after income taxes 158,980,839 140,789,577 84,744,689
10% annual discount for estimated
timing of cash flows (70,653,419) (63,165,742) (35,895,306)
------------------- ----------------- -----------------
Standardized measure of discounted
future net cash flows $ 88,327,420 $ 77,623,835 $ 48,849,383
=================== ================= =================
The following reconciles the change in the standardized measure of discounted
future net cash flows:
Beginning of year $ 77,623,835 $ 48,849,383 $ 90,381,127
Changes from:
Purchases - 3,054,793 27,032,359
Sales - (953,159) (443,324)
Extensions, discoveries and improved
recovery, less related costs - 2,002,176 427,192
Sales of oil and gas produced net of
production costs (5,316,619) (5,016,964) (7,270,603)
Revision of quantity estimates (3,751,921) (9,974,557) (1,783,276)
Accretion of discount 9,889,881 5,649,945 12,414,073
Change in income taxes (4,793,281) (13,624,917) 26,109,535
Changes in estimated future
development costs 2,003,801 (5,254,561) (6,360,990)
Development costs incurred that
reduced future development costs 2,024,663 5,569,881 5,945,369
Change in sales and transfer prices,
net of production costs 16,470,113 46,903,282 (89,573,528)
Changes in production rates (timing)
and other (5,823,052) 418,533 (8,028,551)
------------------- ----------------- -----------------
End of year $ 88,327,420 $77,623,835 $ 48,849,383
=================== ================= =================
F-29
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Quarterly Results (Unaudited)
Summary data relating to the results of operations for each
quarter for the years ended December 31, 2003 and 2002 follows:
Three Months Ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------- ---------------- ---------------- ----------------
2003
Net sales $ 3,250,603 $ 2,790,124 $ 2,436,063 $ 2,533,933
Gross profit 862,683 406,576 81,573 (433,321)
Net income (loss) 120,659 (1,231,883) (399,457) (1,640,828)
Income (loss) per common
share - basic and diluted $ .01 $ (.07) $ (.02) $ (.09)
2002
Net sales $ 2,648,873 $ 2,951,798 $ 2,641,626 $ 2,597,500
Gross profit 450,255
239,912 100,527 136,961
Net income (loss) (1,964,010) (305,060) (924,750) (1,420,993)
Income (loss) per common
share - basic and diluted $ (0.11) $ (0.02) $ (0.05) $ (0.07)
F-30
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors GULFWEST ENERGY INC.
Our report on the consolidated financial statements of GulfWest Energy Inc. and
Subsidiaries as of December 31, 2003 and 2002 and for each of the three years in
the period ended December 31, 2003, is included on page F-2. In connection with
our audit of such consolidated financial statements, we have also audited the
related financial statement schedule for the years ended December 31, 2003, 2002
and 2001 on page F-31.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
\S\WEAVER AND TIDWELL, L.L.P.
--------------------------
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
March 19, 2004
F-31
GULFWEST ENERGY INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
BALANCE BALANCE
AT AT
BEGINNING PROVISIONS/ RECOVERIES/ END
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
-------------------------------------- ---------------- ----------------- ----------------- --------------
For the year ended
December 31, 2001
Accounts and notes
receivable related parties $ 740,478 $ - $ - $ 740,478
================ ================= ================= ==============
Valuation allowance for
deferred tax assets $ 5,014,451 $ (345,754) $- $ 4,668,697
================ ================= ================= ==============
For the year ended
December 31, 2002
Accounts and notes
Receivable related parties $ 740,478 $ - $ (740,478) $ -
================ ================= ================= ==============
Valuation allowance for
deferred tax assets $ 4,668,697 $ 1,586,988 $ - $ 6,255,685
================ ================= ================= ==============
For the year ended
December 31, 2003
Valuation allowance for
deferred tax assets $ 6,255,685 $ 934,422 $ - $ 7,190,107
================ ================= ================= ==============
F-32
GULFWEST ENERGY, INC.
19,179,192 Shares
Class A Common Stock
July 14, 2004
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be paid by the Company
in connection with the offering described in this Registration Statement. All
amounts are estimates, except the Securities and Exchange Commission
Registration Fee.
Securities and Exchange Commission $924
Registration Fee............................
Legal Fees and Expenses..................... 40,000
Accounting Fees and Expenses................ 20,000
Miscellaneous............................... 4,076
-------
Total............................. $65,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our articles of incorporation and bylaws provide that we will
indemnify, to the fullest extent permitted by the Texas Business Corporation
Act, any and all persons who we have power to indemnify under that Act from and
against any and all of the expenses, liabilities or other matters referred to or
covered by that Act. Additionally, our Articles of Incorporation provide that a
director will not be liable to the Company or its shareholders for an act or
omission in the director's capacity as a director to the fullest extent
permitted under Texas law.
Article 2.01 of the Texas Business Corporation Act provides that a
corporation may indemnify a person who was, is, or is threatened to be made a
named defendant or respondent in a proceeding because the person is or was a
director only if it is determined that the person:
(1) conducted himself in good faith;
(2) reasonably believed:
(a) in the case of conduct in his official capacity as a
director of the corporation, that his conduct was in the corporation's best
interests; and
(b) in all other cases, that his conduct was at least not
opposed to the corporation's best interests; and
(3) in the case of any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful.
Except to a limited extent, a director may not be indemnified in
respect of a proceeding:
(1) in which the person is found liable on the basis that personal
benefit was improperly received by him, whether or not the benefit resulted from
an action taken in the person's official capacity; or
(2) in which the person is found liable to the corporation.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
>From July 15, 2002 to February 12, 2003, we issued promissory notes to
two accredited investors in the total amount of $300,000, with interest at 8%
per annum and warrants to purchase a total of 100,000 shares of our common stock
at $.75 per share; a promissory note to one accredited investor in the total
amount of $300,000, with an original interest rate of 8% that increased to 12%
on January 1, 2003 and warrants to purchase 150,000 shares of our common stock
at an exercise price of $.75 per share; and, a promissory note to a director in
the amount of $1,200,000, with interest at the prime rate and warrants to
purchase 625,000 shares of our common stock at $.75 per share. The common stock
underlying the above warrants is included in this registration.
On April 27, 2004, we completed an $18,000,000 financing package with
new energy lenders. We used $15,700,000 to retire existing debt of $27,584,145,
resulting in forgiveness of debt of $11,884,145, the elimination of a hedging
liability and the return to the Company of Series F Preferred Stock with an
aggregate liquidation preference of $1,000,000 (this preferred stock, at the
request of the Company, was transferred to two companies affiliated with two
directors of the Company. See "Certain Transactions.") This taxable gain
resulting from these transactions will be completely offset by available net
operating loss carryforwards. The term of the note is eighteen months and it
bears interest at the prime rate plus 11%. This rate increases by .75% per month
beginning in month ten. We paid the new lenders $1,180,000 in cash fees and also
issued them warrants to purchase 2,035,621 shares of our common stock at an
exercise price of $.01 per share, expiring in five years. The warrants are
subject to anti-dilution provisions. We are required by the terms of the
warrants to register the resale of the common stock underlying the warrants, and
those shares are offered by this prospectus. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Simultaneously, our wholly-owned subsidiary, GulfWest Oil & Gas
Company, completed the initial phase of a private offering of its Series A
Preferred Stock for $4,000,000. The Series A Preferred Stock is exchangeable
into our common stock based on a liquidation value of $500 per share of Series A
Preferred Stock divided by $.35 per share of our Common Stock, or 11,428,571
shares. As part of an advisory fee, we issued $500,000 of the Series A Preferred
Stock to a financial advisor. One of our directors acquired $1,500,000 of the
Series A Preferred Stock. The resale of the shares of Common Stock to be issued
upon the exchange of the Preferred Stock is offered by this prospectus.
The Series A Preferred Stock is entitled to receive dividends at the
rate of $45.00 per share per annum, payable quarterly, as declared by the Board
of Directors. The Series A Preferred Stock is redeemable in whole or in part at
any time, at the option of the issuer, at a price of $500 per share, plus all
accrued and undeclared unpaid dividends. The conversion price of the Series A
Preferred Stock is based upon $0.35 per share of common stock. None of the
Series A Preferred Stock has been redeemed or converted.
Pursuant to an agreement with the financial advisor, who provided
access to the lenders and raised $1,900,000 of the Series A Preferred Stock, we
paid a cash fee of $400,000, in addition to the $500,000 issued in Series A
Preferred Stock. The advisor contends that additional fees are due, however we
disagree, at this time, and do not know what the outcome of the disagreement
will be.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits:
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of the Registrant. (Previously
filed with our Registration Statement (on Form S-1, Reg. No.
33-53526), filed with the Commission on October 21, 1992.)
3.2 Bylaws of the Registrant. (Previously filed with our
Registration Statement (on Form S-1, Reg. No. 33-53526),
filed with the Commission on October 21, 1992.)
4.1 Statement of Resolution Establishing and Designating a
Series of Shares of GulfWest Oil & Gas Company Series A
Preferred Stock, as filed with the Secretary of State of
Texas on April 26, 2004. (Previously filed with our Current
Report on Form 8-K dated April 29, 2004 and filed with the
Commission on May 10, 2004.)
*4.2 Statement of Resolution Establishing and Designating a
Series of Shares of GulfWest Energy Inc. Series D Preferred
Stock, as filed with the Secretary of State of Texas on June
11, 2000.
4.3 Statement of Resolution Establishing and Designating a
Series of Shares of GulfWest Energy Inc. Series E Preferred
Stock, as filed with the Secretary of State of Texas on
August 14, 2001. (Previously filed with our Current Report
on Form 8-K dated August 16, 2001 and filed Commission on
August 31, 2001.)
*4.4 Statement of Resolution Establishing and Designating a
Series of Shares of GulfWest Energy Inc. Series F Preferred
Stock, as filed with the Secretary of State of Texas on June
18, 2003.
4.5 Letter Agreement by and among GulfWest Energy Inc., a Texas
corporation, GulfWest Oil & Gas Company and the investors
listed on the signature page thereof, dated April 22, 2004.
(Previously filed with our Current Report on Form 8-K, dated
April 29, 2004 and filed with the Commission on May 10,
2004.)
4.6 Warrant Agreement made by and between GulfWest Energy Inc.,
and Highbridge/Zwirn Special Opportunities FUND, L.P., and
Drawbridge Special Opportunities Fund LP, Grantees, dated
and effective April 29, 2004. (Previously filed with our
Current Report on Form 8-K dated April 29, 2004 and filed
with the Commission on May 10, 2004.)
4.7 GulfWest Oil Company 1994 Stock Option and Compensation
Plan, amended and restated as of April 1, 2001 and approved
by the shareholders on May 18, 2001. (Previously filed with
our Proxy Statement on Form DEF 14A, filed with the
Commission on April 16, 2001.)
II-3
*5.1 Opinion of Jackson Walker L.L.P.
*10.1 Employment Agreement with Thomas R. Kaetzer, dated
October 1, 2001
*10.2 Consulting Agreement with Marshall A. Smith III, dated
June 1, 2002
*10.3 Oil and Gas Property Acquisition, Exploration and
Development Agreement with Summit Investment
Group-Texas, L.L.C. effective December 1, 2001.
*10.4 Option Agreement for the Purchase of Oil and Gas Leases
with W.L. Addison Investments L.L.C. dated March 5,
2004
*10.5 Credit Facility between GulfWest Energy, Inc. and
Highbridge/Zwirn Special Opportunities FUND, L.P., and
Drawbridge Special Opportunities Fund LP, Grantees,
dated and effective April 29, 2004.
*10.6 Credit Agreement between GulfWest Development Company
and Texas Capital Bank, dated November 30, 2000.
*10.7 First Amendent to Credit Agreement between GulfWest
Development Company and Texas Capital Bank, dated
October 24, 2001
*10.8 Revolving Letter Loan Agreement between GulfWest
Energy, Inc. and Texas Capital Bank, N.A. dated April
3, 2002
*10.9 Change in Terms Agreement between GulfWest Energy, Inc.
and Southwest Bank of Texas N.A. dated April 29, 2003.
*22.1 Subsidiaries of the Registrant
23.1 Consent of Jackson Walker L.L.P. (included in Exhibit
5.1)
23.2 Consent of Weaver and Tidwell, L.L.P.
23.3 Consent of Pressler Petroleum Consultants
*25 Power of Attorney
-------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
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person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of the Securities Act, if, in
the aggregate, the changes in volume and price represent not more than a 20%
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
2. That for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
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S I G N A T U R E S
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas on July 9, 2004.
GULFWEST ENERGY INC.
By \S\ JOHN E. LOEHR
------------------
John E. Loehr, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons, on behalf of the registrant, and in the capacities and on the
dates indicated.
Signature Title Date
-------------------------------------------- ----------------------------------------- -------------------------
J. Virgil Waggoner Chairman of the Board July 8, 2004
Thomas R. Kaetzer President, Chief Operating Officer July 8, 2004
and Director
Jim C. Bigham Executive Vice President and Secretary July 8, 2004
Richard L. Creel Vice President of Finance, Controller July 8, 2004
Marshall A. Smith III Director July 8, 2004
John E. Loehr Chief Executive Officer and Director July 8, 2004
M. Scott Manolis Director July 8, 2004
* By /S/ JOHN E. LOEHR /S/ THOMAS R. KAETZER
----------------- ---------------------
John E. Loehr and Thomas R. Kaetzer, Attorneys in Fact
II-6
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of the Registrant.
(Previously filed with our Registration Statement (on
Form S-1, Reg. No. 33-53526), filed with the
Commission on October 21, 1992.)
3.2 Bylaws of the Registrant. (Previously filed with our
Registration Statement (on Form S-1, Reg. No.
33-53526), filed with the Commission on October 21,
1992.)
4.1 Statement of Resolution Establishing and Designating
a Series of Shares of GulfWest Oil & Gas Company
Series A Preferred Stock, as filed with the Secretary
of State of Texas on April 26, 2004. (Previously
filed with our Current Report on Form 8-K dated April
29, 2004 and filed with the Commission on May 10,
2004.)
*4.2 Statement of Resolution Establishing and Designating
a Series of Shares of GulfWest Energy Inc. Series D
Preferred Stock, as filed with the Secretary of State
of Texas on June 11, 2000.
4.3 Statement of Resolution Establishing and Designating
a Series of Shares of GulfWest Energy Inc. Series E
Preferred Stock, as filed with the Secretary of State
of Texas on August 14, 2001. (Previously filed with
our Current Report on Form 8-K dated August 16, 2001
and filed Commission on August 31, 2001.)
*4.4 Statement of Resolution Establishing and Designating
a Series of Shares of GulfWest Energy Inc. Series F
Preferred Stock, as filed with the Secretary of State
of Texas on June 18, 2003.
4.5 Letter Agreement by and among GulfWest Energy Inc.,
a Texas corporation, GulfWest Oil & Gas Company and
the investors listed on the signature page thereof,
dated April 22, 2004. (Previously filed with our
Current Report on Form 8-K, dated April 29, 2004 and
filed with the Commission on May 10, 2004.)
4.6 Warrant Agreement made by and between GulfWest Energy
Inc., and Highbridge/Zwirn Special Opportunities
FUND, L.P., and Drawbridge Special Opportunities Fund
LP, Grantees, dated and effective April 29, 2004.
(Previously filed with our Current Report on Form 8-K
dated April 29, 2004 and filed with the Commission on
May 10, 2004.)
4.1 GulfWest Oil Company 1994 Stock Option and
Compensation Plan, amended and restated as of April
1, 2001 and approved by the shareholders on May 18,
2001. (Previously filed with our Proxy Statement on
Form DEF 14A, filed with the Commission on April 16,
2001.)
*5.1 Opinion of Jackson Walker L.L.P.
II-7
*10.1 Employment Agreement with Thomas R. Kaetzer, dated October
1, 2001
*10.2 Consulting Agreement with Marshall A. Smith III, dated June
1, 2002
*10.3 Oil and Gas Property Acquisition, Exploration and
Development Agreement with Summit Investment Group-Texas,
L.L.C. effective December 1, 2001.
*10.4 Option Agreement for the Purchase of Oil and Gas Leases with
W.L. Addison Investments L.L.C. dated March 5, 2004
*10.5 Credit Facility between GulfWest Energy, Inc. and
Highbridge/Zwirn Special Opportunities FUND, L.P., and
Drawbridge Special Opportunities Fund LP, Grantees,
dated and effective April 29, 2004.
*10.6 Credit Agreement between GulfWest Development Company and
Texas Capital Bank, dated November 30, 2000.
*10.7 First Amendent to Credit Agreement between GulfWest
Development Company and Texas Capital Bank, dated October
24, 2001
*10.8 Revolving Letter Loan Agreement between GulfWest Energy,Inc.
and Texas Capital Bank, N.A. dated April 3, 2002
*10.9 Change in Terms Agreement between GulfWest Energy, Inc. and
Southwest Bank of Texas N.A. dated April 29, 2003.
*22.1 Subsidiaries of the Registrant
23.1 Consent of Jackson Walker L.L.P. (included in Exhibit 5.1)
23.2 Consent of Weaver and Tidwell, L.L.P.
23.3 Consent of Pressler Petroleum Consultants
*25 Power of Attorney
--------------------
* Previously filed.
II-8