UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10753
GULFPORT ENERGY CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 73-1521290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6307 Waterford Blvd.
Building D, Suite 100
Oklahoma City, Oklahoma 73118
(405) 848-8807
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Issuer was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No[ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock, $0.50 par value,
outstanding as of October 29, 1999 was 10,145,400.
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GULFPORT ENERGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q QUARTERLY REPORT
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998.....4
Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998 (unaudited)...............................5
Statement of Stockholders' Equity for the nine Months Ended
September 30, 1999 (unaudited) and the year ended
December 31, 1998.....................................................6
Statements of Cash Flow for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)...............................7
Notes to Financial Statements............................................8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................20
PART II OTHER INFORMATION
Item 1 Legal Proceedings....................................................23
Item 6 Exhibits and Reports on Form 8-K.....................................24
Signatures.......................................................... 25
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GULFPORT ENERGY CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
September 30, 1999 and 1998
Forming a part of Form 10-Q Quarterly Report to the
Securities and Exchange Commission
This quarterly report on Form 10-Q should be read in conjunction with Gulfport
Energy Corporation's Annual Report on Form 10-K for the year ended December 31,
1998.
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<PAGE>
GULFPORT ENERGY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, 1999 December 31, 1998
------------------ -----------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 5,773,000 $ 2,778,000
Cash, restricted - 936,000
Accounts receivable, net of allowance for
doubtful accounts of $244,0000 and
$244,000 for September 30, 1999
and December 31, 1998, respectively 1,359,000 1,656,000
Prepaid expenses and other 152,000 110,000
-------------- --------------
Total current assets 7,284,000 5,480,000
-------------- --------------
Property and equipment:
Oil and natural gas properties 81,644,000 77,042,000
Building and land 480,000 480,000
Other property and equipment 1,386,000 1,387,000
Accumulated depletion, depreciation and
amortization (61,490,000) (58,919,000)
-------------- --------------
Property and equipment, net 22,020,000 19,990,000
-------------- --------------
Other assets:
Oil and gas plugging and abandonment funds 1,987,000 1,854,000
Other 136,000 244,000
-------------- --------------
2,123,000 2,098,000
-------------- --------------
Total assets $ 31,427,000 $ 27,568,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,976,000 $ 3,890,000
Note payable to related party 208,000 -
Current maturities of long-term debt 2,896,000 4,794,000
-------------- -------------
Total current liabilities 7,080,000 8,684,000
-------------- -------------
Long-term liabilities:
Building mortgage 182,000 195,000
Other non-current liabilities - 186,000
-------------- -------------
182,000 381,000
-------------- -------------
Commitments and contingencies - -
-------------- -------------
Shareholders' equity:
Preferred stock - $.01 par value 1,000,000
authorized, none issued - -
Common stock - $.50 par value, 250,000,000
authorized, 10,145,400 and 3,445,400 issued
and outstanding at September 30, 1999
and December 31, 1998, respectively 5,073,000 1,723,000
Paid-in capital 79,221,000 77,598,000
Accumulated deficit (60,129,000) (60,818,000)
-------------- -------------
Total shareholders' equity 24,165,000 18,503,000
-------------- -------------
Total liabilities and shareholders' equity $ 31,427,000 $ 27,568,000
============== =============
</TABLE>
See accompanying notes to financial statements.
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GULFPORT ENERGY CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Gas sales $ 76,000 $ 694,000 $ 219,000 $ 3,541,000
Oil and condensate sales 2,436,000 1,610,000 6,621,000 5,485,000
Other Income, net 49,000 90,000 177,000 436,000
------------- ------------- ------------- -------------
Total revenues 2,561,000 2,394,000 7,017,000 9,462,000
------------- ------------- ------------- -------------
Expenses:
Operating expenses including
production taxes 1,083,000 3,160,000 3,260,000 8,330,000
Depreciation, depletion and amortization 720,000 8,768,000 2,574,000 28,866,000
General and administrative expenses 369,000 533,000 1,265,000 1,855,000
------------- ------------- ------------- -------------
2,172,000 12,461,000 7,099,000 39,051,000
------------- ------------- ------------- -------------
Income (loss) from operations 389,000 (10,067,000) (82,000) (29,589,000)
Proceeds from Litigation Trust 75,000 - 1,342,000 -
Lawsuit settlement (87,000) - (87,000) -
Interest expense (199,000) (310,000) (484,000) (1,068,000)
------------- ------------- ------------- -------------
Income (loss) before income tax expense 178,000 (10,377,000) 689,000 (30,657,000)
Income tax expense - - - -
------------- ------------- ------------- -------------
Net income (loss) 178,000 (10,377,000) 689,000 (30,657,000)
Undeclared dividends on preferred stock - - - -
------------- ------------- ------------- -------------
Net income (loss) available to
common shareholders $ 178,000 $(10,377,000) $ 689,000 $(30,657,000)
============= ============= ============= =============
Per common share:
Income (loss) per common and
common equivalent share $ 0.04 $ (23.50) $ 0.18 $ (69.43)
============= ============= ============= =============
Average common and common
equivalent shares outstanding 4,537,796 441,720 3,813,537 441,720
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
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GULFPORT ENERGY CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Common
Stock Additional
Preferred -------------------------- Paid-In Accumulated
Stock Shares Amount Capital Deficit
- --------------------------------------------------------------------------------------------
Balance,
<S> <C> <C> <C> <C> <C>
December 31, 1997 - 441,720 $221,000 $71,772,000 $ (1,713,000)
Stock Rights offering - 3,003,680 1,502,000 5,826,000 -
Net loss - - - - (59,105,000)
----------------------------------------------------------------------
Balance,
December 31, 1998 - 3,445,400 1,723,000 77,598,000 (60,818,000)
Regulation D Private
Placement - 6,700,000 3,350,000 1,666,000 -
Additional Offering Costs-
Stock rights offering - - - (43,000) -
Net income - - - - 689,000
----------------------------------------------------------------------
Balance,
September 30, 1999 - 10,145,400 $5,073,000 $79,221,000 $(60,129,000)
======================================================================
</TABLE>
See accompanying notes to financial statements.
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GULFPORT ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 689,000 $ (30,657,000)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation, depletion, and amortization 2,574,000 28,866,000
Amortization of debt issuance costs 102,000 145,000
(Gain) loss on sale of asset - 9,000
Changes in operating assets and liabilities:
Decrease in accounts receivable 298,000 1,743,000
(Increase) decrease in prepaid expenses and other (42,000) 126,000
Increase in accounts payable and accrued liabilities 86,000 453,000
(Decrease) in other long-term liabilities - -
-------------- --------------
Net cash provided by operating activities 3,707,000 685,000
-------------- --------------
Cash flow from investing activities:
Additions to cash held in escrow (128,000) (60,000)
Additions to other assets - (219,000)
Additions to other property, plant and equipment (10,000) -
Proceeds from sale of other property, plant and equipment 8,000 1,100,000
Costs capitalized to the full cost pool (4,602,000) (1,524,000)
Net cash used in investing activities (4,732,000) (703,000)
-------------- --------------
Cash flow from financing activities:
Proceeds from private placement 5,016,000 -
Other payments (43,000) -
Proceeds from borrowings 3,213,000 3,000,000
Principal payments on borrowings (5,102,000) (4,894,000)
-------------- --------------
Net cash provided by (used in) financing activities 3,084,000 (1,894,000)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 2,059,000 (1,912,000)
Cash and cash equivalents - beginning of period 3,714,000 3,263,000
Cash and cash equivalents - end of period $ 5,773,000 $ 1,351,000
============== ==============
Supplemental Disclosures of Cash Flow Information
Interest paid $ 382,000 $ 921,000
</TABLE>
See accompanying notes to financial statements.
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GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Reorganization Proceedings
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this document. Unless otherwise stated, the term "Company" means
Gulfport Energy Corporation, formerly known as WRT Energy Corporation, either
prior to or after the Effective Date (as defined herein), as the context
requires and the term "WRT" or "Debtor" means WRT Energy Corporation and its
subsidiaries taken as a whole prior to the Effective Date.
Gulfport Energy Corporation owns and operates mature oil and gas properties
in the Louisiana Gulf Coast area. The Company's strategy is to continue to
increase cash flows generated by these properties by undertaking new drilling,
workover, sidetrack and recompletion projects in the fields to exploit its
extensive reserves. The Company has upgraded its infrastructure by enhancing its
existing facilities to increase operating efficiencies, increase volume
capacities and lower lease operating expenses. Additionally, the Company has
undertaken the reprocessing of its 3D seismic data in its principal property,
West Cote Blanche Bay. The reprocessed data will enable the Company's geophyists
to generate new prospects and enhance existing prospects in the intermediate
zones in the field thus creating a portfolio of new drilling opportunities in
the most prolific depths of the field.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months of less to be cash equivalents for purposes of the
statement of cash flows.
Fair Value of Financial Instruments
At September 30, 1999 and December 31, 1998, the carrying amounts of all
financial instruments approximate their fair market values.
Oil and Natural Gas Properties
The Company uses the full cost pool method of accounting for oil and gas
operations. Accordingly, all costs including nonproductive costs and certain
general and administrative costs associated with acquisition, exploration and
development of oil and natural gas properties are capitalized. Net capitalized
costs are limited to the estimated future net revenues, after income taxes,
discounted at 10% per year, from proved oil and natural gas reserves and the
cost of the properties not subject to amortization. Such capitalized costs,
including the estimated future development costs and site remediation costs, if
any, are depleted by an equivalent units-of-production method, converting
natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of
oil. No gain or loss is recognized upon the disposal of oil and gas properties,
unless such dispositions significantly alter the relationship between
capitalized costs and proved oil and natural gas reserves.
Included in costs capitalized to the full cost pool are $93,000 and
$314,000 in general and administrative costs incurred in the three months and
nine months ended September 30, 1999, respectively. General and administrative
costs capitalized to the full cost pool are those incurred directly related to
exploration and development activities such as geological costs and other
administrative costs associated with overseeing the exploration and development
activities. All general and administrative costs not directly associated with
exploration and development activities were charged to expense as they were
incurred. During 1998, no general and administrative costs were capitalized to
the full cost pool.
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Other Property and Equipment
Depreciation of other property and equipment is provided on a straight-line
basis over estimated useful lives of the related assets, which range from 7 to
30 years.
Revenue Recognition
Natural gas revenues are recorded in the month produced using the
entitlement method, whereby any production volumes received in excess of the
Company's ownership percentage in the property are recorded as a liability. If
less than the Company's entitlement is received, the underproduction is recorded
as a receivable. Oil revenues are recorded in the month produced.
Concentration of Credit Risk
The Company operates in the oil and natural gas industry in the state of
Louisiana with sales to refineries, re-sellers such as pipeline companies, and
local distribution companies. While certain of these customers are affected by
periodic downturns in the economy in general or in their specific segment of the
natural gas industry, the Company believes that its level of credit-related
losses due to such economic fluctuations has been immaterial and will continue
to be immaterial to the Company's results of operations in the long term.
The Company maintains cash balances at several banks. Accounts at each bank
are insured by the Federal Deposit Insurance Corporation up to $100,000. Cash
balances in excess of insured limits total $5,564,000 and $3,614,000 at
September 30, 1999 and December 31, 1998, respectively. In addition, the Company
maintains an escrow account for plugging and abandonment costs of which
$1,587,000 and $1,354,000 were in excess of the insured limits as of September
30, 1999 and December 31, 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgements
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses during the
reporting period. The financial statements are highly dependent on oil and gas
reserve estimates, which are inherently imprecise. Actual results could differ
materially from those estimates.
Reclassification of Prior Year Balances
The classification of certain items within the financial statements for the
year ended December 31, 1998 have been changed to be consistent with the
classifications adopted by the Company in 1999.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a liability
has been incurred and the amount can be reasonably estimated.
2. RELATED PARTY TRANSACTIONS
DLB Oil & Gas, Inc. ("DLB") and Wexford Management LLC and its affiliates
("Wexford") were, along with the Company, co-proponents in the Plan of
Reorganization. As of March 31, 1998, DLB and Wexford owned approximately 49%
and 8% respectively of the Company's outstanding common stock. During April of
1998, DLB distributed all of its shares in the Company to its shareholders prior
to its acquisition by Chesapeake Energy Corporation. As a result of the spin-off
of the Company's shares owned by DLB, Charles Davidson, Mike Liddell and Mark
Liddell collectively received 37.5% of the Company's stock. As of September 30,
1999, Wexford and its affiliates owned approximately 17.7% of the Company's
outstanding stock. Charles Davidson, Mike Liddell and Mark Liddell collectively
owned 46.5% of the Company's outstanding stock as of September 30, 1999.
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<PAGE>
Administrative Service Agreement
After emerging from bankruptcy, the Company entered into an Administrative
Service Agreement with DLB. The Administrative Service Agreement was terminated
in June 1999. Prior to termination of the Agreement and pursuant to the terms
and conditions of the Administrative Services Agreement, DLB agreed to make
available to the Company personnel, services, facilities, supplies, and
equipment as the Company may need, including executive and managerial,
accounting, auditing and tax, engineering, geological and geophysical, legal,
land and administrative and clerical services. The initial term was one year
beginning on the date of the Administrative Services Agreement. The
Administrative Services Agreement was to continue for successive one-year
periods unless terminated by either party by written notice no less than 60 days
prior to the anniversary date of the Administrative Services Agreement. On April
28, 1998, in connection with the acquisition of DLB by Chesapeake Energy
Corporation, the obligations of DLB under the Administrative Services Agreement
were assigned to DLB Equities, L.L.C. Until the Administrative Services
Agreement was terminated in June 1999, the services of Mike Liddell, Chief
Executive Officer, and Mark Liddell, President, were provided under the
Administrative Services Agreement. DLB Equities, L.L.C. is owned equally by Mike
and Mark Liddell.
At December 31, 1997, the Company owed DLB approximately $1,600,000 for
services rendered pursuant to the Administrative Services Agreement. In March
1998, in order to facilitate the acquisition of DLB by Chesapeake Energy
Corporation, Mike Liddell, Mark Liddell and Charles Davidson purchased the
receivable from DLB for its then outstanding amount of approximately $1,600,000.
Each of Messrs. Mike Liddell, Mark Liddell and Charles Davidson subsequently
transferred his portion of the receivable to Liddell Investments, L.L.C.,
Liddell Holdings, L.L.C. and CD Holdings, L.L.C., respectively. The receivable
accrued interest at the rate of LIBOR plus 3% per annum. Liddell Investments,
L.L.C., Liddell Holdings, L.L.C., and CD Holdings, L.L.C., exercised 632,484
rights in the November 20, 1998 Rights Offering through debt forgiveness as
payment for the receivable.
In return for the services rendered under the Administrative Services
Agreement, the Company paid a monthly service charge based on the pro rata
proportion of the Company's use of services, personnel, facilities, supplies and
equipment provided by DLB Equities, L.L.C. as determined by DLB Equities, L.L.C.
in a good-faith, reasonable manner. The service charge was calculated as the sum
of (i) DLB Equities, L.L.C.'s fully allocated internal costs of providing
personnel and/or performing services, (ii) the actual costs to DLB Equities,
L.L.C. of any third-party services required, (iii) the equipment, occupancy,
rental, usage, or depreciation and interest charges, and (iv) the actual cost to
DLB Equities, L.L.C. of supplies. The fees provided for in the Administrative
Services Agreement were approved by the Bankruptcy Court as part of the Plan and
the Company believes that such fees are comparable to those that would be
charged by an independent third party. The Company paid fees totaling $532,000
and $139,000 during the nine and six months ended September 30, 1998,
respectively.
During June 1999, the Administrative Services Agreement was terminated by
mutual agreement between DLB Equities, L.L.C. and the Company's Board of
Directors. All services previously provided by the Administrative Services
Agreement were transferred directly to the Company. The Company did not pay
management fees to DLB Equities during the nine months ended September 30, 1999.
During the nine months ended September 30, 1998, the Company sold $877,000
in oil to a DLB subsidiary, GEMCO. These sales occurred at prices which the
Company could be expected to obtain from an unrelated third party. On April 29,
1998, GEMCO was acquired by an independent third party.
Stockholder Line of Credit
On August 18, 1998, the Company entered into the Stockholder Credit
Facility, a $3,000,000 revolving credit facility with CD Holdings, L.L.C.,
Liddell Investments, L..L.C., Liddell Holdings, L.L.C. and Wexford Entities
(collectively the "Affiliated Stockholders"). Borrowing under the Stockholder
Credit Facility was due on August 17, 1999 and bore interest at LIBOR plus 3%.
Pursuant to the Stockholder Credit Facility, the Company paid the Affiliated
Stockholders an aggregate commitment fee equal to $60,000. The Company repaid
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$2,000,000 of principal under the Amended ING Credit Agreement with borrowings
under the Stockholder Credit Facility. The remaining $1,000,000 was used for
working capital and general corporate purposes. On November 20, 1998, the
Affiliated Stockholders converted this debt to 1,200,000 shares of the Company's
common stock in the Rights Offering.
On August 5, 1999, the Company entered into the Line of Credit for
$3,238,000 with the Affiliated Stockholders. Borrowing under the Line of Credit
was due on September 15, 1999 and bore interest at LIBOR plus 3%. Pursuant to
the Line of Credit, the Company paid the Affiliated Eligible Stockholders an
aggregate commitment fee equal to $65,000 in common stock and interest totaling
$31,131. On September 15, 1999, the Affiliated Shareholders converted $3,030,000
of this line of credit into 4,040,011 shares of the Company's common stock in
the Regulation D Private Placement Offering. The Company repaid $208,314 of this
Line of Credit in cash subsequent to September 30, 1999.
3. PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated
depreciation, depletion and amortization as of September 30, 1999 and December
31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Oil and gas properties $ 81,239,000 $ 77,042,000
Office furniture and fixtures 1,389,000 1,390,000
Building 217,000 217,000
Land 260,000 260,000
------------- -------------
Total property and equipment 83,105,000 78,909,000
Accumulated depreciation, depletion,
amortization and impairment reserve (61,438,000) (58,919,000)
------------- -------------
Property and equipment, net $ 21,667,000 $ 19,990,000
============= =============
</TABLE>
During 1998, the Company sold oil and gas properties totaling $8,800,000,
the proceeds of which were recorded as a reduction of the full cost pool.
4. LONG-TERM LIABILITIES
As of September 30, 1999 and December 31, 1998, a break down of long term
debt is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Long-term debt:
Credit facility $ 2,880,000 $ 4,779,000
Priority tax claims - 186,000
Building loan 198,000 210,000
------------ ------------
3,078,000 5,175,000
Less current portion 2,896,000 4,794,000
------------ ------------
$ 182,000 $ 381,000
============ ============
</TABLE>
Credit Facility
On the Effective Date, the Company entered into a new $15,000,000 Credit
Agreement (the "ING Credit Agreement") with ING (U.S.) Capital Corporation
("ING") that was secured by substantially all of the Company's assets. Initial
loan fees of $188,000 were paid on or prior to closing with two additional loan
fee payments of $100,000; a $100,000 payment was made on December 31, 1997 and a
loan fee of $100,000 was due on or before December 31, 1998. Under the original
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terms of the loan agreement, the loan was to mature on July 11, 1999, with
interest to be paid quarterly and with three interim principal payments of
$1,000,000 each to be made in September 1998, December 1998, and March 1999.
This loan bears interest at the option of the Company at either (1) LIBOR plus
3% or (2) ING's fluctuating "reference rate" plus 1.25%. This loan is
collateralized by substantially all of the Company's assets. At September 30,
1999, this rate was 9.5%.
On August 18, 1998, the Company amended the ING Credit Agreement (the
"Amended ING Credit Agreement") to, among other things: (i) delete the coverage
ratio set forth in the ING Credit Agreement and (ii) require interest payments
to be made by the Company on a monthly basis. The principal amount and the
interest rate set forth in the ING Credit Agreement remain unchanged. The
Company and ING further agreed that (a) the Company would pay a $250,000
amendment fee to ING on July 11, 1999, provided that such amendment fee will be
waived if the amounts owed to ING under the Amended ING Credit Agreement have
been paid in full by July 10, 1999; and (b) the Company would issue warrants to
ING enabling ING to purchase 2% of the outstanding shares of Common Stock on a
fully diluted basis after giving effect to future Rights Offerings.
On November 20, 1998, the Company and ING entered into a letter agreement
wherein ING consented to the sale of oil and gas properties totaling $8.8
million dollars and the Company agreed to issue ING warrants to purchase .05% of
the outstanding shares of Common Stock on a fully diluted basis if (1) the
Company elected not to complete the November 20, 1998 Rights Offering, (2) did
not spend the proceeds from the Rights Offering as specified in the letter
agreement or (3) raise less than $10,000,000 in the November 20, 1998 Rights
Offering. The Rights Offering was completed and raised $7,500,000. On November
20, 1998, ING was issued the additional warrants.
On July 10, 1999, the Company and ING entered into the Second Amendment to
the Credit Agreement. Under the Second Amendment, the maturity date of the loan
was extended to June 30, 2000 with interim payment of $1,000,000 due by
September 30, 1999 and with $379,000 due on March 31, 2000. The $100,000
December 31, 1998 payment was extended until December 31, 1999 and the $250,000
amendment fee was extended to June 30, 2000 provided that such amendment fee
would be waived if the loan was paid in full by June 30, 2000. Additionally, ING
surrendered the 2.5% warrants that were granted on August 10, 1998 and November
20, 1998. ING waived all events of default occurring as a result of missed
payments prior to the Second Amendment.
Priority Tax Claims
In accordance with the Plan of Reorganization, priority taxes are to be
paid in four annual installments without interest. As of September 30, 1999 and
December 31, 1998, this liability totaled $377,000.
Building Loan
In 1996, the Company purchased a building in Lafayette, Louisiana to be
used as the Company's Louisiana headquarters. The building is 12,480 square feet
with approximately 6,180 square feet of finished office area and 6,300 square
feet of warehouse space. This building allows the Company to provide office
space for Louisiana personnel, have access to meeting space close to the fields
and to maintain a corporate presence in Louisiana.
In connection with the purchase of the building, the Company entered into a
loan agreement with MC Bank & Trust Company. The original loan balance was
$215,000 and called for monthly principal and interest payments totaling $3,000
per month through 2005 with the unpaid balance due at that time.
During 1998, the Company renegotiated this loan agreement with MC Bank &
Trust Company. The Company borrowed an additional $35,000 for building
improvements. The loan agreement calls for monthly principal and interest
payments of $2,900 per month through March 2008. The loan bears interest at 9.5%
per annum and is collateralized by the land and building. As of September 30,
1999, the Company owed $198,000 on the Lafayette building.
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Long Term Debt Maturities
As of September 30, 1999, following are the Maturities of long-term
liabilities for each of the next five years:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 16,000
2000 2,898,000
2001 18,000
2002 20,000
2003 22,000
Thereafter 104,000
------------
$ 3,078,000
============
</TABLE>
5. COMMON STOCK OPTIONS AND WARRANTS AND CHANGES IN CAPITALIZATION
In connection with the Plan of Reorganization, new warrants for 221,000
shares of the Company Common Stock were issued to the former shareholders of
WRT. Under the warrant agreement, warrants are currently exercisable for .234
shares of common stock at an initial exercise price of $10.00 per share. For
example, a warrant holder could obtain one share of common stock by exercising
four warrants and paying $40.00. The warrants will expire on July 11, 2002.
Mr. Ray Landry, a former employee of the Company, was granted 60,000 stock
options pursuant to an employment agreement. The 60,000 options were reduced to
1,200 shares after the reverse stock split in March 1999, with an exercise price
of $3.50 a share. The options will expire in 2002.
On June 1, 1999, Mike Liddell, Chief Executive Officer and Chairman of the
Board, received a grant of options for 2.5% of the outstanding shares of Common
Stock at an exercise price of $2.00 per share. The options shall be exercisable
and vest as to 35% of the shares on June 1, 2000, an additional 35% of the
shares will become exercisable and vest on June 1, 2001, and the remaining
shares will become exercisable and vest on June 1, 2002.
On June 1, 1999, Mark Liddell, President, received a grant of options for
2.5% of the outstanding shares of Common Stock at an exercise price of $2.00 per
share. The options shall be exercisable and vest as to 35% of the shares on June
1, 2000, an additional 35% of the shares will become exercisable and vest on
June 1, 2001, and the remaining shares will become exercisable and vest on June
1, 2002.
The Option Agreement for both Mike Liddell and Mark Liddell provides that
if the Company at any time increases the number of outstanding shares of the
Company or alters the capitalization of the Company in any other way, the stock
options shall be adjusted to reflect such changes. At all times, each Mike
Liddell and Mark Liddell's options are intended to equal 2.5% of the outstanding
shares of the Common Stock.
On September 15, 1999, the non-employee board members were granted 10,000
options each with an exercise price of $2.00. The options shall vest 3,333 on
October 1, 1999, 3,333 on October 1, 2000, and 3,334 on October 1, 2001. The
number of options will be adjusted to reflect any change in the capitalization
of the Company.
Rights Offering
On November 20, 1998, the Company completed a $7,500,000 Rights Offering.
The Company distributed to its existing shareholders 200,000,000 nontransferable
rights at an exercise price of $0.05 per right equal to 4,000,000 rights at
$2.50 per right, after giving the effect of the reverse stock split. Each right
entitled the holder thereof to subscribe to purchase one share of common stock
at the exercise price. Each shareholder who exercised in full his basic
subscription privilege was entitled to oversubscribe for additional rights. A
total of 150,183,199 rights (3,003,664 rights after the effect of the reverse
stock split) were exercised for $7,509,000. As of the date of the Rights
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<PAGE>
Offering, Affiliated Shareholders were owed $4,600,000 by the Company. In the
Rights Offering, the Affiliated Shareholders exercised 87,609,761 rights
(1,752,195 rights after the effect of the reverse stock split) through the
forgiveness of $4,380,000 of debt. (See Related Parties' Transactions.) The
balance of $220,000 was repaid in cash prior to December 31, 1998.
Reverse Stock Split
On March 5, 1999, the Board of Directors authorized a 50-to-1 reverse stock
split, thereby decreasing the number of issued and outstanding shares to
3,445,400, and increasing the par value of each share to $.50. All references in
the accompanying financial statements to the number of common shares and per
share amounts for 1998 have been restated to reflect the reverse stock split.
Regulation D Private Placement Offering
During the three months ended September 31, 1999, the Company conducted a
private placement of stock (the "Regulation D Offering"). The Common Stock
issued in the Regulation D Offering was not registered under the Securities Act
of 1933, as amended, in reliance on the availability of the exemptions provided
by Section 4(2) of said Act and/or Rule 506 of Regulation D promulgated
thereunder. In accordance with the provisions of those exemptions, the
Regulation D Offering is being made only to Accredited Investors as defined in
Regulation D.
The Company offered 6,700,000 common shares at an exercise price of $0.75
per share. Each shareholder who exercised in full his basic subscription
privilege was entitled to oversubscribe for additional shares. A total of
6,700,000 shares were subscribed for yielding $5,016,000, net of offering costs
of $9,000. As of the date of the Regulation D Offering, Affiliated Shareholders
were owed $3,238,000 by the Company. In the Regulation D Offering, the
Affiliated Shareholders exercised 4,040,011 rights through the forgiveness of
$3,030,000 of debt. (See Related Parties' Transactions.) The balance of $208,000
was repaid in cash subsequent to September 30, 1999.
6. EARNINGS (LOSS) PER SHARE
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding totaling 4,537,796 and 3,813,537,
respectively, for the three and nine months ended September 30, 1999.
7. COMMITMENTS
Leases
As of September 30, 1999 and December 31, 1998, the Company had a
long-term, non-cancelable operating lease commitment for office space through
August 2001.
Rental expense for all operating leases for the three and nine months ended
September 30, 1999 was $28,000 and $91,000, respectively. Rental expense for the
three and nine months ended September 30, 1998 was paid through the
Administrative Service Agreement.
Lac Blanc Escrow Account
During 1998, the Company sold the Lac Blanc field to an unrelated third
party. The Company maintained an escrow account related to the future plugging
and abandonment of oil and gas wells for the field. As part of the sale of the
field, this escrow was to be transferred to the purchaser. At the time of the
sale, the Company and the purchaser were working to cure a title defect in the
field. Once that title defect was cured, the escrow of $936,000 was transferred
to the purchaser and the purchase price for the field was released to ING.
Accordingly, the Company treated the $936,000 as restricted cash until May 1999
when the escrow was broken.
Plugging and Abandonment Funds
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<PAGE>
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Company assumed the obligation to contribute approximately
$18,000 per month through March 2004 to a plugging and abandonment trust and the
obligation to plug a minimum of 20 wells per year for 20 years commencing March
11, 1997. Texaco Exploration and Production, Inc. retained a security interest
in production at WCBB and the plugging and abandonment trust until such time as
the Company's plugging and abandonment obligations have been fulfilled. Once the
plugging and abandonment trust is fully funded, the Company can access it for
use in plugging and abandonment charges associated with the property. The
Company ceased making monthly deposits to this escrow account in June 1999 and
is currently in negotiations with Texaco to settle this obligation. As of
September 30, 1999 and December 31, 1998, the plugging and abandonment trust
totaled $1,587,000 and $1,454,000, respectively. The funds are invested in a
U.S. Treasury Money Market.
In addition, the Company has letters of credit backed by certificate of
deposits totaling $400,000 to be used for plugging obligations for fields
previously owned and operated by the Company. Once the subsequent operators have
plugged and abandoned specific wells, the $400,000 will be returned to the
Company.
Reimbursement of Employee Expenses & Contributions to 401(k) Plan
The Company sponsored a 401(k) savings plan under which eligible employees
chose to contribute up to 15% of salary income on a pre-tax basis, subject to
certain IRS limits. The Company contribution to the 401(k) plan was
discretionary and was 25% of employee contributions up to 6% of their salary.
This benefit vested to employees over a five-year employment period or at a rate
of 20% per each year of participation. During year ended December 31, 1998, the
Company incurred $4,000 in matching contributions expense associated with this
plan. On February 17, 1999, the Company sponsored 401(k) savings plan was
terminated and all contributions were distributed to the participants.
Pricing Agreement
In May 1999, the Company hedged 1,000 BOPD at a fixed price of $14.75 per
barrel (f.o.b. WCBB) for the period beginning with June 1, 1999 and ending
November 1, 1999. This hedge is based on an average Merc price of $16.35 a
barrel. the difference between the $14.75 per barrel and the $16.35 per barrel
is the $1.00 WTI adjustment for the region and transportation and marketing
fees.
8. INCOME TAXES
As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $67,000,000, which will not begin to expire until 2013. In
addition, the Company had a substantially higher income tax basis in its oil and
gas properties than it did for generally accepted accounting purposes, the
reversal of which could potentially save the Company up to $23,000,000 in
federal and state income expense in the future.
The Company uses the asset and liability method of accounting for income
taxes. As of December 31, 1998, the above net operating loss carryforwards and
timing differences resulted in the Company having a deferred tax asset of
approximately $42,000,000. For financial reporting purposes, this deferred tax
asset was fully reserved as of that date. The benefits from this deferred tax
asset will be recognized for financial reporting purposes in the years in which
it is realized.
Due to the above, the Company recorded no provision for income taxes on its
reported income of $529,000 for the nine months ended September 30, 1999.
9. LITIGATION TRUST ENTITY
Pursuant to the Plan of Reorganization, all of the Company's possible
causes of action against third parties (with the exception of certain litigation
related to recovery of marine and rig equipment assets and claims against
Tri-Deck), existing as of the Effective Date of the Plan, were transferred to
the "Litigation Trust" controlled by an independent party. The litigation
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<PAGE>
related to recovery of marine and rig equipment and the Tri-Deck claims were
subsequently transferred to the litigation trust as described below.
The Litigation Trust was funded by a $3,000,000 cash payment from the
Company, which was made on the Effective Date. The Company owns a 12% interest
in the Litigation Trust with the other 88% being owned by the former general
unsecured creditors of the Company. For financial statement reporting purposes,
the Company has not recognized the potential value of recoveries which may
ultimately be obtained, if any, as a result of the actions of the Litigation
Trust, treating the entire $3,000,000 payment as a reorganization cost incurred
during the period commencing January 1, 1997 and ending on July 10, 1997.
On January 20, 1998, the Company and the Litigation Trust entered into a
Clarification Agreement whereby the rights to pursue various claims reserved by
the Company in the Plan of Reorganization were assigned to the Litigation Trust.
In connection with this agreement, the Litigation Trust agreed to reimburse the
Company $100,000 for legal fees the Company had incurred in connection these
claims. As additional consideration for the contribution of this claim to the
Litigation Trust, the Company is entitled to 20% to 80% of the net proceeds from
these claims.
In June 1999, the Company received proceeds of $1,267,000 from the Trust as
its pro rata entitlement to settlement funds recovered by the Trust in an action
assigned to the Trust by the Company under the Clarification Agreement. Since
the Company had no basis in the Litigation Trust, the Company recognized the
entire proceeds of $1,267,000 as income in the month in which it was received.
In addition, the Company received additional proceeds of $75,000 from the Trust
during the three months ended September 30, 1999.
10. CONTINGENCIES
On October 1, 1999, Plymouth Resources Group 1998 LLC filed a complaint in
the Western District of Louisiana alleging breach of contract regarding rework
operations at West Cote Blanch Bay. Plymouth has challenged the Company's right
to conduct rework operations in late 1998 and 1999. Plymouth has requested
damages in excess of $100,000, specific performance and an accounting. The
Company does not believe that it breached any contract with Plymouth and is
vigorously defending this lawsuit. Management does not expect this litigation to
have a material impact on the financial statements.
Other Litigation
With the exception of one remaining claim from bankruptcy, the Company is
not a party to any additional litigation. The ultimate resolution of the
bankruptcy matter is not expected to have a material adverse effect on the
Company's financial condition or results of operations for the periods presented
in the financial statements.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All
statements, other than statements of historical facts, included in this Form
10-Q that address activities, events or developments that Gulfport Energy
Corporation ("Gulfport" or the "Company"), a Delaware corporation, expects or
anticipates will or may occur in the future, including such things as estimated
future net revenues from oil and gas reserves and the present value thereof,
future capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's business and operations, plans, references
to future success, references to intentions as to future matters and other such
matters are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties; general economic, market or business conditions; the
opportunities (or lack thereof) that may be presented to and pursued by the
Company; competitive actions by other oil and gas companies; changes in laws or
regulations; and other factors, many of which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in this Form
10-Q are qualified by these cautionary statements and there can be no assurance
that the actual results or developments anticipated by the Company will be
realized, or even if realized, that they will have the expected consequences to
or effects on the Company or its business or operations.
The following discussion is intended to assist in an understanding of the
Company's financial position as of September 30, 1999 and its results of
operations for the three month and the nine month periods ended September 30,
1999 and 1998. The Consolidated Financial Statements and Notes included in this
report contain additional information and should be referred to in conjunction
with this discussion. It is presumed that the readers have read or have access
to Gulfport Energy Corporation's 1998 annual report on Form 10-K.
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<PAGE>
FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Gas sales $ 76,000 $ 694,000 $ 219,000 $ 3,541,000
Oil and condensate sales 2,436,000 1,610,000 6,621,000 5,485,000
Other income, net 49,000 90,000 177,000 436,000
------------ ------------ ----------- ------------
2,561,000 2,394,000 7,017,000 9,462,000
------------ ------------ ----------- ------------
Expenses:
Operating expenses including
production taxes 1,083,000 3,160,000 3,359,000 8,330,000
Lawsuit settlement 87,000 - 87,000 -
General & administrative 369,000 533,000 1,265,000 1,855,000
------------ ------------ ----------- ------------
1,539,000 3,693,000 4,711,000 10,185,000
------------ ------------ ----------- ------------
Proceeds from Litigation Trust 75,000 - 1,342,000 -
------------ ------------ ----------- ------------
EBITDA (1) 1,097,000 (1,299,000) 3,648,000 (723,000)
Depreciation, depletion & amortization 720,000 8,768,000 2,574,000 28,866,000
------------ ------------ ----------- ------------
Income (loss) before interest, and taxes 377,000 (10,067,000) 1,074,000 (29,589,000)
Interest expense 199,000 310,000 546,000 1,068,000
------------ ------------ ----------- ------------
Income (loss) before income taxes 178,000 (10,377,000) 528,000 (30,657,000)
Income taxes - - - -
------------ ------------ ----------- ------------
Net income (loss) $ 178,000 $(10,377,000) $ 528,000 $(30,657,000)
============ ============ =========== ============
Earnings per share:
Primary $ 0.04 $ (23.50) $ 0.18 $ (69.43)
============ ============ =========== ============
</TABLE>
(1) EBITDA is defined as earnings before interest, taxes, depreciation,
depletion and amortization. EBITDA is an analytical measure frequently used
by securities analysts and is presented to provide additional information
about the Company's ability to meet its future debt service, capital
expenditure and working capital requirements. EBITDA should not be
considered as a better measure of liquidity than cash flow from operations.
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<PAGE>
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 1999 and 1998
During the three months ended September 30, 1999, the Company reported a
net income of $0.2 million, a $10.6 million increase from a net loss of $10.4
million for the corresponding period in 1998. This increase is primarily due to
the following factors:
Oil and Gas Revenues. During the three months ended September 30, 1999, the
Company reported oil and gas revenues of $2.5 million, a 8% increase from $2.3
million for the comparable period in 1998. This increase was due in part to a
36,000 barrel net increase in oil production attributable to increased
production from the West Cote Blanche Bay field and an increase in average price
of $1.71 per barrel. The increase in oil revenues was offset in part by a $0.6
million decrease in gas revenues attributed primarily to a 1,439 Mmcf decrease
in gas sales. The decrease in gas sales is the result of the sale in April 1998
of the Bayou Pigeon, Bayou Penchant, Lac Blanc, Golden Meadow and Deer Island
fields, which produced significant amounts of natural gas. The following table
summarizes the Company's oil and gas production and related pricing for the
three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Oil production volumes (Mbbls) 138 102
Gas production volumes (Mmcf) 32 535
Average oil price (per Bbl) $17.65 $15.78
Average gas price (per Mcf) $2.38 $1.30
</TABLE>
Production Costs. Production costs, including lease operating costs and
gross production taxes, decreased $2.1 million, or 66%, from $3.2 million for
the three months ended September 30, 1998 to $1.1 million for the comparable
period in 1999. This decrease was due in part to the reduction in field related
services performed by third party contractors. The Company has also reduced
facility charges through capital expenditures performed by enhancing the
saltwater disposal facility, acidizing and repairing the saltwater disposal
wells, repairing the compressor, and reduction in gas lift costs. Gas lift costs
were reduced by enhancing gas production at its West Cote Blanche Bay field
which had relied primarily on purchased gas to perform its gas lift procedures
during the comparable period in 1998.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $8.1 million, or 92% from $8.8 million for the three
months ended September 30, 1998 to $0.7 million for the comparable period in
1999. As prescribed by the full cost pool method of reporting oil and gas
properties, ceiling tests are performed to determine if the carrying value of
oil and gas assets exceeds the sum of the discounted estimated future cash
flows.
General and Administrative Expenses. General and administrative expenses
decreased $0.16 million, or 31%, from $0.53 million for the three months ended
June 30, 1998 to $0.37 million for the comparable period in 1999. This decrease
was due primarily to the Company's efforts to reduce personnel and overall
general and administrative costs.
Other Income. Other income decreased slightly due primarily to a decrease
in interest income during the three months ended September 30, 1998 and 1999.
Interest Expense. Interest expense decreased $0.11 million, or 35%, from
$0.31 million for the three months ended September 30, 1998 to $0.20 million for
the comparable period in 1999. This decrease was due to principal reductions of
$5.3 million, $0.9 million, and $1.0 million on the note payable during November
1998, May 1999, and September 1999, respectively.
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<PAGE>
Litigation Trust. In September 1999, the Company received proceeds of
$75,000 from the Trust. The $75,000 represents a portion of the Company's pro
rata entitlement to settlement funds recovered by the Trust in an action
assigned to the Trust by the Company under the Clarification Amendment. See Note
9 to the financial statements. Since the Company had no basis in the Litigation
Trust, the Company recognized the entire proceeds of $75,000 as income in the
month in which it was received.
Income Taxes. As of December 31, 1998, the Company had a net operating loss
carryforward of approximately $67 million, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately $43
million, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. No
income tax provision was provided for the three month period ending September
30, 1999 due to the above.
Comparison of the Nine Months Ended September 30, 1999 and 1998
During the nine months ended September 30, 1999, the Company reported a net
income of $0.7 million, a $31.4 increase from a net loss before of $30.7 million
for the corresponding period in 1998. This increase was primarily due to the
following factors:
Oil and Gas Revenues. During the nine months ended September 30, 1999, the
Company reported oil and gas revenues of $6.8 million, a 24% decrease from $9
million for the comparable period in 1998. This decrease in gas sales is the
result of the sale in April 1998 of the Bayou Pigeon, Bayou Penchant, Lac Blanc,
Golden Meadow and Deer Island fields, which produced significant amounts of
natural gas. This decrease was offset in part by increases in sales prices of
$1.71 per barrel for oil during the first three quarters of 1999 when compared
to the first three quarters of 1998 and in part by an increase in oil production
from the West Cote Blanche Bay field. The following table summarizes the
Company's oil and gas production and related pricing for the nine months ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Oil production volumes (Mbbls) 422 377
Gas production volumes (Mmcf) 93 1,532
Average oil price (per Bbl) $15.69 $14.55
Average gas price (per Mcf) $2.35 $2.31
</TABLE>
Production Costs. Production costs, including lease operating costs and
gross production taxes, decreased $5.1 million, or 61%, from $8.3 million for
the nine months ended September 30, 1998 to $3.2 million for the comparable
period in 1999. This decrease was due primarily to the reduction in field
related services performed by third party contractors and the sale of various
oil and gas producing properties. The producing properties, which were sold,
represented 27% of production costs during the nine months ended September 30,
1998. In addition, due to the extensive workover procedures performed to gas
reserves, the gas lift costs were significantly reduced. The Company has reduced
facility charges through capital expenditures performed by enhancing the
saltwater disposal facility, acidizing and repairing the saltwater disposal
wells, and repairing the compressor
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $26.3 million, or 91% from $28.9 million for the nine
months ended September 30, 1998 to $2.6 million for the comparable period in
1999.
General and Administrative Expenses. General and administrative expenses
decreased $0.6 million, or 32% from $1.9 million for the nine months ended
September 30, 1998 to $1.3 million for the comparable period in 1999. This
decrease was due primarily to the Company's efforts to reduce personnel and
overall general and administrative costs.
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<PAGE>
Other Income. Other income decreased $0.2 million, or 59% from $0.4 million
for the nine months ended September 30, 1998 to $0.2 million for the comparable
period in 1999. This decrease was due primarily to interest and overhead income.
Interest Expense. Interest expense decreased $0.6 million, or 55%, from
$1.1 million for the nine months ended September 30, 1998 to $0.5 million for
the comparable period in 1999. This decrease was due to principal reductions of
$5.3 million, $0.9 million, and $1.0 million on the note payable during November
1998, May 1999, and September 1999, respectively.
Litigation Trust. In September 1999, the Company received proceeds of $1.3
million from the Trust. The $1.3 million represents a portion of the Company's
pro rata entitlement to settlement funds recovered by the Trust in an action
assigned to the Trust by the Company under the Clarification Amendment. See Note
9 to the financial statements. Since the Company had no basis in the Litigation
Trust, the Company recognized the entire proceeds of $1.3 million as income in
the month in which it was received.
Income Taxes. As of December 31, 1998, the Company had a net operating loss
carryforward of approximately $67 million, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately $42
million, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. No
income tax provision was provided for the nine month period ending September 30,
1999 due to the above.
Liquidity and Capital Resources
Operating Activities
Net cash flow provided by operating activities for the nine months ended
September 30, 1999 was $3.5 million, as compared to net cash flow provided by
operating activities of $0.7 million for the comparable period in 1998. This
increase is due primarily to the following factors: (1) increased oil production
from the West Cote Blanche Bay field; (2) increased oil prices; (3) a
significant reduction in lease operating expenses; and (4) a significant
reduction in general and administrative expenses.
The Company's strategy is to continue to increase cash flows generated by
these properties by undertaking new drilling, workover, sidetrack and
recompletion projects in the fields to exploit its extensive reserves. The
Company has upgraded its infrastructure by enhancing its existing facilities to
increase operating efficiencies, increase volume capacities and lower lease
operating expenses. Additionally, the Company has undertaken the reprocessing of
its 3D seismic data in its principal property, West Cote Blanche Bay. The
reprocessed data will enable the Company's geophyists to generate new prospects
and enhance existing prospects in the intermediate zones in the field thus
creating a portfolio of new drilling opportunities in the most prolific depths
of the field.
Capital Requirements and Resources
The primary capital commitments faced by the Company are the required
principal payments on its ING Credit Facility and the significant capital
expenditures required to continue developing the Company's proved reserves.
The Company's Credit Facility at ING of $2,880,000 at September 30, 1999
requires principal reductions of $379,000 in March 2000 and $2,518,000 in June
2000. The Company must pay an additional $100,000 in loan commitment fees by
December 31, 1999. In addition, if the Credit Agreement is not paid in full by
June 30, 2000, the Company will have to pay an additional fee of $250,000.
In the Company's January 1, 1999 reserve report, 95% of the Company's
reserves were categorized as non-developed non-producing. The proved reserves of
the Company will generally decline as reserves are depleted, except to the
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<PAGE>
extent that the Company conducts successful exploration or development
activities or acquires properties containing proved developed reserves, or both.
To realize reserves and increase production, the Company must commence
exploratory drilling, undertake other replacement activities or utilize third
parties to accomplish those activities. It is anticipated that these reserve
development projects will be funded either through the use of cash flow from
operations when available or by accessing the capital markets.
Net cash flow provided by operating activities for the nine months ended
September 30, 1999 was $3.5 million as compared to net cash flow provided by
operating activities of $0.7 million for nine months ended September 30, 1998.
After making reductions in production costs, finding costs, general and
administrative expenses, taxes and interest expenses, the Company believes it
has substantially improved its cash flow position.
During the first nine months of 1999, the Company invested $4.6 million in
property and equipment and other long-term assets as compared to $1.5 million
during the comparable period in 1998.
Net cash provided by financing activities was $3.3 million for the nine
months ended September 30, 1999 compared to $1.9 million used in financing
activities for the same period in 1998. This increase is the result of the
Company's private placement offering during September 1999 offset in part by
$1.9 million in principal reduction on its ING Credit Facility. For more
information on the Regulation D Offering, see Note 6.
Related Party Transactions
On August 1, 1999, certain Affiliated Shareholders, who include Chuck
Davidson, Mike Liddell, Mark Liddell and their affiliates, advanced to the
Company the subscription price for their Basic Subscription under a Line of
Credit totaling approximately $3,255,000. The Line of Credit bears interest at
LIBOR plus 3 with a 2% Commitment Fee to paid in stock and matures on August 1,
2000. A portion of the Subscription Price paid for the Shares acquired in the
Regulation D Offering by the Affiliated Shareholders was paid through the
forgiveness of an equal amount owed to them by the Company with any outstanding
amounts repaid to such stockholders in cash out of the proceeds of the Offering
or other available funds. At a Subscription Price of $0.75 per Share, the
Affiliated Shareholders purchased 4,040,011 shares through the conversion of
$3,030,000 of debt to equity. The balance of $208,000 was repaid in cash
subsequent to September 30, 1999.
COMMITMENTS
Lac Blanc Escrow Account
During 1998, the Company sold the Lac Blanc field to an unrelated third
party. Prior to the sale, the Company maintained an escrow account related to
the future plugging and abandonment of oil and gas wells for the field. As part
of the sale of the field, this escrow was to be transferred to the purchaser. At
the time of the sale, the Company and the purchaser were working to cure a title
defect in the field. Once that title defect was cured, the escrow of $936,000
was transferred to the purchaser and the purchase price for the field was
released to ING. Accordingly, the Company treated the $936,000 as restricted
cash until May 1999 when the escrow was broken.
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Company assumed the obligation to contribute approximately
$18,000 per month through March 2004 to a plugging and abandonment trust and the
obligation to plug a minimum of 20 wells per year for 20 years commencing March
11, 1997. TEPI retained a security interest in production from these properties
and the plugging and abandonment trust until such time the Company's obligations
plugging and abandonment obligations to TEPI have been fulfilled. Once the
plugging and abandonment trust is fully funded, the Company can access it for
use in plugging and abandonment charges associated with the property. The
Company ceased making the required monthly contributions to the plugging and
abandonment escrow account in June 1999 and is currently negotiating a
settlement of this issue with Texaco. As of September 30, 1999, the plugging and
abandonment trust totaled $1,587,000. These finds are invested in a U.S.
Treasury Money Market.
-22-
<PAGE>
In addition, the Company has letters of credit totaling $400,000 secured by
certificates of deposit being held for plugging costs in fields previously owned
and operated by the Company. Once specific wells are plugged and abandoned the
$400,000 will be returned to the Company.
-23-
<PAGE>
YEAR 2000 COMPLIANCE
The Company has and will continue to make investments in software systems
and applications to ensure it is Year 2000 compliant. It is not anticipated that
the process of ensuring that the Company is Year 2000 compliant will have a
material impact on the Company's financial condition.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Title to Oil and Gas Properties
On October 1, 1999, Plymouth Resources Group 1998 LLC filed a complaint in
the Western District of Louisiana alleging breach of contract regarding rework
operations at West Cote Blanch Bay. Plymouth has challenged the Company's right
to conduct rework operations in late 1998 and 1999. Plymouth has requested
damages in excess of $100,000, specific performance and an accounting. The
Company does not believe that it breached any contract with Plymouth and is
vigorously defending this lawsuit. Management does not expect this litigation to
have a material impact on the financial statements.
-24-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports filed on Form 8-K during the quarter.
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULFPORT ENERGY CORPORATION
Date: November 14, 1999
/s/Mark Liddell
------------------
Mark Liddell
President
-26-
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