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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10753
GULPORT 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, $0.01 par value,
outstanding as of November 13, 2002 was 10,146,566.
1
GULFPORT ENERGY CORPORATION
TABLE OF CONTENTS
FORM 10-Q QUARTERLY REPORT
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets at September 30, 2002 (unaudited) and December 31, 2001 4
Statements of Income for the Three and Nine Month Periods Ended
September 30, 2002 and 2001 (unaudited) 5
Statements of Common Stockholders' Equity for the Nine Months Ended
September 30, 2002 and 2001 (unaudited) 6
Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 (unaudited) 7
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
Item 4 Controls and Procedures 25
PART II OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities and Use of Proceeds 25
Item 3 Defaults upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 27
2
GULFPORT ENERGY CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
September 30, 2002 and 2001
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,
2001.
3
GULFPORT ENERGY CORPORATION
BALANCE SHEETS
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,165,000 $ 1,077,000
Accounts receivable, net of allowance
for doubtful accounts of $239,000 as
of September 30, 2002 and December 31, 2001 589,000 1,096,000
Accounts receivable - related party 95,000 160,000
Prepaid expenses and other current assets 204,000 253,000
------------ ------------
Total current assets 5,053,000 2,586,000
------------ ------------
Property and equipment:
Oil and natural gas properties 110,889,000 103,344,000
Other property and equipment 1,985,000 1,976,000
Accumulated depletion, depreciation,
amortization (72,043,000) (69,597,000)
------------ ------------
Property and equipment, net 40,831,000 35,723,000
------------ ------------
Other assets 2,763,000 2,583,000
------------ ------------
$ 48,647,000 $ 40,892,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 3,919,000 $ 2,637,000
Note payable - related party - 3,000,000
Current maturities of long-term debt 22,000 1,120,000
------------ ------------
Total current liabilities 3,941,000 6,757,000
------------ ------------
Long-term debt 119,000 143,000
------------ ------------
Total liabilities 4,060,000 6,900,000
------------ ------------
Commitments and contingencies - -
Redeemable 12% cumulative preferred stock,
Series A, $.01 par value, with a
redemption and liquidation value of
$1,000 per share; 15,000 and 0 authorized,
10,001 and 0 issued and outstanding at
September 30, 2002 and December 31, 2001,
respectively 10,001,000 -
Preferred stock, $.01 par value; 4,985,000
and 1,000,000 authorized at September 30,
2002 and December 31, 2001, respectively,
none issued - -
Common stockholders' equity:
Common stock - $.01 par value, 20,000,000
and 15,000,000 authorized, 10,146,566
issued and outstanding at September 30,
2002 and December 31, 2001, respectively 101,000 101,000
Paid-in capital 84,192,000 84,192,000
Accumulated deficit (49,707,000) (50,301,000)
------------ ------------
34,586,000 33,992,000
------------ ------------
Total liabilities and
stockholders' equity $ 48,647,000 $ 40,892,000
============ ============
The "full cost" method of accounting for oil and gas exploration and production
activities has been followed in preparing this balance sheet.
See accompanying notes to financial statements.
4
GULFPORT ENERGY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Gas sales $ 92,000 $ 56,000 $ 280,000 $ 222,000
Oil and condensate sales 3,655,000 4,068,000 9,253,000 12,245,000
Other income 2,000 58,000 236,000 118,000
----------- ----------- ----------- -----------
3,749,000 4,182,000 9,769,000 12,585,000
----------- ----------- ----------- -----------
Costs and expenses:
Operating expenses 1,240,000 1,059,000 3,630,000 3,630,000
Production taxes 414,000 447,000 1,061,000 1,391,000
Depreciation, depletion, and
amortization 871,000 991,000 2,459,000 2,787,000
General and administrative 428,000 273,000 1,255,000 1,132,000
----------- ----------- ----------- -----------
2,953,000 2,770,000 8,405,000 8,940,000
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS: 796,000 1,412,000 1,364,000 3,645,000
----------- ----------- ----------- -----------
OTHER (INCOME) EXPENSE:
Gain on settlement of disputed
items - - - (482,000)
Interest expense 3,000 103,000 109,000 274,000
Interest income (16,000) (28,000) (48,000) (115,000)
----------- ----------- ----------- -----------
(13,000) 75,000 61,000 (323,000)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 809,000 1,337,000 1,303,000 3,968,000
INCOME TAX EXPENSE (BENEFIT):
Current 324,000 535,000 521,000 1,587,000
Deferred (324,000) (535,000) (521,000) (1,587,000)
----------- ----------- ----------- -----------
- - - -
----------- ----------- ----------- -----------
NET INCOME 809,000 1,337,000 1,303,000 3,968,000
Less: Preferred stock dividends (356,000) - (709,000) -
----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 453,000 $ 1,337,000 $ 594,000 $ 3,968,000
=========== =========== ========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.04 $ 0.13 $ 0.06 $ 0.39
=========== =========== ========== ===========
Diluted $ 0.04 $ 0.13 $ 0.06 $ 0.38
=========== =========== ========== ===========
See accompanying notes to financial statements.
5
GULFPORT ENERGY CORPORATION
Statements of Common Stockholders' Equity
(Unaudited)
Additional
Preferred Stock Common Stock Paid-in Accumulated
--------------- -----------------
Shares Amount Shares Amount Capital Deficit
------ ------ ---------- -------- ----------- -------------
Balance at December 31, 2000 - $ - 10,145,400 $101,000 $84,190,000 $(55,718,000)
Common shares issued - - 1,166 - 2,000 -
Net income - - - - - 3,968,000
------ ------ ---------- -------- ----------- -------------
Balance at September 30, 2001 - $ - 10,146,566 $101,000 $84,192,000 $(51,750,000)
====== ====== ========== ======== =========== =============
Balance at December 31, 2001 - $ - 10,146,566 $101,000 $84,192,000 $(50,301,000)
Net income - - - - - 1,303,000
Preferred stock dividends - - - - - (709,000)
------ ------ ---------- -------- ----------- -------------
Balance at September 30, 2002 - $ - 10,146,566 $101,000 $84,192,000 $(49,707,000)
====== ====== ========== ======== =========== =============
See accompanying notes to financial statements.
6
GULFPORT ENERGY CORPORATION
Statements of Cash Flows
(Unaudited)
For the Nine Months
Ended September 30,
--------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 1,303,000 $ 3,968,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depletion, depreciation and amortization 2,446,000 2,760,000
Amortization of debt issuance costs 13,000 27,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivabl 507,000 1,916,000
(Increase) decrease in accounts receivable -
related 65,000 (239,000)
(Increase) decrease in prepaid expenses 36,000 (35,000)
(Decrease) increase in accounts payable
and accrued liabilities 1,545,000 (1,457,000)
------------ ------------
Net cash provided by operating activities 5,915,000 6,940,000
------------ ------------
Cash flows from investing activities:
(Additions) to cash held in escrow (180,000) (469,000)
(Additions) to other assets - -
(Additions) to other property, plant
and equipment (9,000) (50,000)
(Additions) to oil and gas properties (7,545,000) (11,871,000)
------------ ------------
Net cash used in investing activities (7,734,000) (12,390,000)
Cash flows from financing activities:
Borrowings on note payable - related party - 3,000,000
Borrowings on note payable - 960,000
Principal payments on borrowings (1,122,000) (556,000)
Proceeds from issuance of preferred
and common stock 6,029,000 2,000
------------ ------------
Net cash provided by financing activities 4,907,000 3,406,000
------------ ------------
Net increase (decrease) in cash and
cash equivalents 3,088,000 (2,044,000)
Cash and cash equivalents at beginning of period 1,077,000 3,657,000
------------ ------------
Cash and cash equivalents at end of period $ 4,165,000 $ 1,613,000
============ ============
Supplemental disclosure of cash flow information:
Interest payments $ 31,000 $ 81,000
============ ============
Supplemental disclosure of non-cash transactions:
Repayment of note payable to related
party through issuance of Series A
Preferred Stock $ 3,000,000 $ -
============ ============
Repayment of accrued interest due on
note payable to related party through
issuance of Series A Preferred Stock $ 263,000 $ -
============ ============
Payment of Series A Preferred Stock
dividends through issuance of Series A
Preferred Stock $ 709,000 $ -
============ ============
See accompanying notes to financial statements.
7
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
These condensed financial statements have been prepared by Gulfport Energy
Corporation (the "Company") without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission, and reflect all adjustments, which
are in the opinion of management, necessary for a fair statement of the results
for the interim periods, on a basis consistent with the annual audited financial
statements. All such adjustments are of a normal recurring nature. Certain
information, accounting policies, and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and the summary of significant
accounting policies and notes thereto included in the Company's most recent
annual report on Form 10-K.
1. ACCOUNTS RECEIVABLE - RELATED PARTY
Included in the accompanying September 30, 2002 balance sheet are amounts
receivable from entities that have similar controlling interests as those
controlling the Company. These receivables represent amounts billed by the
Company for general and administrative functions performed by Gulfport's
personnel on behalf of the related party companies during 2001 and 2002.
Gulfport has reduced its corresponding expenses for the three and nine-month
periods ending September 30, 2002 by $18,000 and $231,000, respectively, billed
to the companies for performance of these services. As of September 30, 2001,
the Company had billed the companies a total of $239,000 and reduced its
corresponding expenses accordingly.
2. PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated
depreciation, depletion and amortization are as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Oil and gas properties $ 110,889,000 $ 103,344,000
Office furniture and fixtures 1,508,000 1,499,000
Building 217,000 217,000
Land 260,000 260,000
---------------- ---------------
Total property and equipment 112,874,000 105,320,000
Accumulated depreciation, depletion,
amortization and impairment reserve (72,043,000) (69,597,000)
---------------- ---------------
Property and equipment, net $ 40,831,000 $ 35,723,000
================ ===============
8
3. OTHER ASSETS
Other assets consist of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Plugging and abandonment escrow account
on the WCBB properties $ 2,452,000 $ 2,272,000
CD's securing letter of credit 200,000 200,000
Deposits 111,000 111,000
------------ -----------
$ 2,763,000 $ 2,583,000
============ ===========
4. LONG-TERM DEBT
The building loan of $141,000 relates to a building in Lafayette,
Louisiana, purchased in 1996 to be used as the Company's Louisiana headquarters.
The building is 12,480 square feet with approximately 6,180 square feet of
finished office area and 6,300 square feet of warehouse space. This building
allows 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.
A break down of long-term debt is as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Note payable $ - $ 1,100,000
Building loan 141,000 163,000
--------------- ---------------
- 1,263,000
Less - current maturities of
long-term debt (22,000) (1,120,000)
--------------- ---------------
Debt reflected as long term $ 119,000 $ 143,000
=============== ===============
5. NOTE PAYABLE - RELATED PARTY
On March 29, 2002, the outstanding balance of the Company's note payable
due to Gulfport Funding, LLC ("Gulfport Funding") along with all related
accumulated interest on the note, were retired through Gulfport Funding's
participation in the Company's Private Placement Offering as described in Note
10.
9
6. REVOLVING LINE OF CREDIT
On June 20, 2002, the Company entered into a line of credit with Bank of
Oklahoma. Under the terms of the new agreement, the Company was extended a
commitment to borrow up to $2,300,000. Amounts borrowed under the line bear
interest at Chase Manhattan Prime plus 1%, with payments of interest on
outstanding balances due monthly beginning August 1, 2002. Any principal
amounts borrowed under the line will be due on July 1, 2003. As of September
30, 2002, no amounts had been borrowed under this line.
7. CASTEX BACK-IN
Gulfport sold its interest in the Bayou Penchant, Bayou Pigeon, Deer Island
and Golden Meadow fields to Castex Energy 1996 Limited Partnership (Castex)
effective April 1, 1998 subject to a 25% reversionary interest in the
partnership after Castex had received 100% of the initial investment. Castex
informed Gulfport that the investment had paid out effective September 1, 2001.
In lieu of a 25% interest in the partnership, Gulfport elected to take a
proportionately reduced 25% working interest in the properties. During March,
2002 the Company received approximately $220,000 from Castex which the Company
believes consists of sales income for the period after payout net of operating
expenses, although the Company has not received confirmation of such. As a
result, this amount received has been included in the accompanying statement of
income for the nine months ended September 30, 2002 as "Other Income".
8. EARNINGS PER SHARE
A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:
For the Three Months Ended September 30,
------------------------------------------------------------
2002 2001
---------------------------- -----------------------------
Per Per
Income Shares Share Income Shares Share
-------- ---------- ------ ---------- --------- ------
Basic:
Income attributable to
common stock $453,000 10,146,566 $0.04 $1,337,000 10,146,566 $0.13
===== =====
Effect of dilutive securities
Stock options - 232,904 - 325,187
-------- ---------- ---------- ----------
Diluted:
Income attributable to
common stock, after
assumed dilutions $453,000 10,379,470 $0.04 $1,337,000 10,471,753 $0.13
======== ========== ===== ========== ========== =====
10
For the Nine Months Ended September 30,
------------------------------------------------------------
2002 2001
---------------------------- -----------------------------
Per Per
Income Shares Share Income Shares Share
-------- ---------- ------ ---------- --------- ------
Basic:
Income attributable to
common stock $594,000 10,146,566 $0.06 $3,968,000 10,145,960 $0.39
===== =====
Effect of dilutive securities
Stock options - 281,726 - 345,081
-------- ---------- ---------- ----------
Diluted:
Income attributable to
common stock, after
assumed dilutions $594,000 10,428,292 $0.06 $3,968,000 10,491,041 $0.38
======== ========== ===== ========== ========== =====
Common stock equivalents not included in the calculation of diluted
earnings per share at September 30, 2001, above consists of 1,163,195 warrants
issued at the time of the Company's reorganization. By their terms, these
warrants expired in July 2002. Not included in the calculation of 2002 diluted
earnings per share are 108,625 warrants issued in connection with the Company's
revolving line of credit with Gulfport Funding and 2,322,893 warrants issued in
connection with the Company's Private Placement Offering as discussed in Note
10. These potential common shares were not considered in the calculation due to
their anti-dilutive effect during the periods presented.
9. COMMITMENTS
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Company assumed the obligation to contribute approximately
$18,000 per month through March, 2004, to a plugging and abandonment trust and
the obligation to plug a minimum of 20 wells per year for 20 years commencing
March 11, 1997. Texaco (acquired by Chevron USA during 2001) retained a
security interest in production from these properties until abandonment
obligations to Texaco have been fulfilled. Once the plugging and abandonment
trust is fully funded, the Company can access it for use in plugging and
abandonment charges associated with the property. As of September 30, 2002, the
plugging and abandonment trust totaled $2,452,000, including interest received
during 2002 of approximately $22,000.
During March 2002, Gulfport began to fulfill its yearly plugging commitment
of 20 wells at WCBB for the twelve-month period ending March 31, 2002. As of the
date of this filing, the plugging had been completed.
During July 2002, the Company commenced its plugging commitment program for
the twelve-month period ending March 31, 2003. As of the date of this filing,
the plugging had been completed.
11
Office Lease
On August 8, 2002, the Company executed a 60-month lease on 12,035 square
feet of office space to commence on or around December 1, 2002. Payments due
under the lease during its term are as follows:
For the 12 months ended September 30,
----------------------------------------------------
2003 $ 198,000
2004 217,000
2005 217,000
2006 217,000
2007 217,000
2008 17,000
----------
Total $1,083,000
==========
10. PRIVATE PLACEMENT OFFERING
In March 2002, the Company commenced a Private Placement Offering of $10
million dollars consisting of 10,000 Units. Each Unit consists of (i) one (1)
share of Cumulative Preferred Stock, Series A, of the Company (Preferred) and
(ii) a warrant to purchase up to 250 shares of common stock, par value $0.01 per
share. Dividends accrue on the Preferred prior to the Mandatory Redemption Date
at the rate of 12% per annum payable quarterly in cash or, at the option of the
Company for a period not to exceed two (2) years from the Closing Date, payable
in whole or in part in additional shares of the Preferred based on the
Liquidation Preference of the Preferred at the rate of 15% per annum. No other
dividends shall be declared or shall accrue on the Preferred. To the extent
funds are legally available, the Company is obligated to declare and pay the
dividends on the Preferred. The Warrants have a term of ten (10) years and an
exercise price of $4.00. The Company is required to redeem the Preferred on the
fifth anniversary of the first issuance and the Company may at its sole option,
choose to redeem the Preferred at any time before the expiration of the five
years. Accordingly, the Preferred issued in connection with this Offering is
treated as redeemable stock in the accompanying balance sheet.
Two-thirds of the Preferred Stockholders can affect any Company action,
which would effect their preference position. The Preferred cannot be sold or
transferred by its holders and the Company must use its best efforts to register
with the Securities and Exchange Commission ("SEC") the common stock issued in
connection with the exercise of the Warrants or, if possible, piggyback the
issued common stock if the Company participates in a public offering with the
SEC.
The Offering was made available to stockholders (some of whom were
affiliates) of the Company as of December 31, 2001 who were known to be
accredited investors by the Company. Purchasers were able to participate up to
their pro rata share of ownership in the Company as of December 31, 2001. The
Offering's initial closing began March 29, 2002 and continued until April 15,
2002, with a total subscription of $9,292,000 or 9,291.85 units. Mike Liddell,
the Company's Chief Executive Officer, had the option to subscribe for his
proportionate share of the Offering until September 30, 2002. On September 30,
2002, Mike Liddell elected not to participate.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3.0 million dollar loan along with the accumulated
12
interest due from the Company for 3,262.98 Units. Additionally, on March 29,
2002 entities controlled by the majority shareholder initially funded a share of
the Preferred Offering in the amount of $2,738,000.
11. DIVIDENDS ON SERIES A PREFERRED STOCK
As discussed in Note 10, the Company may, at its option, accrue additional
shares of Preferred for the payment of dividends at a rate of 15% per annum
rather than accrue cash dividends payable at a rate of 12% per annum during the
initial two years following the closing date of its Offering. The Company has
chosen to do so for the three and nine-month periods ended September 30, 2002
and has therefore accrued additional shares payable totaling 356.13 and 709.42,
respectively, for those periods related to the Preferred Stock Series A shares
issued and outstanding during that time period. These dividends payable were
calculated based upon their $1,000 per share redemptive value and are reflected
as "Series A preferred stock" in the accompanying balance sheet.
12. RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 financial statements
presentation in order to conform to the 2002 financial statements presentation.
Net income and total assets were not affected by these reclassifications.
13. ACCOUNTING PRONOUNCEMENT
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
The Company is required to implement SFAS No. 143 beginning January 1, 2003.
The effect of implementation on the Company's financial statements has not yet
been determined.
14. SUBSEQUENT EVENT
Hurricane Lili hit the southern gulf coast of Louisiana on October 3, 2002
with estimated sustained winds over 120 mph and a 9 1/2' tidal surge. The eye of
the hurricane came onshore directly East of Gulfport's WCBB field. The storm
caused significant damage to the Company's production facilities and the WCBB
field, which normally provides approximately 80% of the Company's overall
production. WCBB was totally without production for seventeen days. When
production was first restored, the facilities were only able to handle wells
that contributed approximately 50% of the total average daily production of the
field. As of November 10, 2002, the field's production had been restored to
approximately 75% and was expected to be at or near 100% by mid-November. The
total cost to restore production to the field and the portion of those costs
which will be reimbursed by the Company's insurer were not yet determinable as
of the date of this filing.
During the third quarter of 2002, the Company underwent a royalty audit,
which was conducted by the State of Louisiana. The audit covered the period from
January 1, 1999 through December 31, 2001. The Company was notified during
October of 2002 that the total additional royalty to be paid as a result of the
audit approximated $400,000. The Company anticipates recording the liability for
payment of these royalties during the fourth quarter of 2002 once the final
amount of the liability is determined.
13
ITEM 2
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, 2002 and its results of
operations for the three and nine-month periods ended September 30, 2002 and
2001. The 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 2001 annual report on Form 10-K.
Overview
Gulfport is an independent oil and gas exploration and production company
with properties located in the Louisiana Gulf Coast. Gulfport has a market
enterprise value (the Company's diluted shares multiplied by the trading price
plus long-term debt less cash and short-term investments on a given day) of
approximately $20.5 million dollars on November 12, 2002 and generated EBITDA
(earnings before interest, taxes and depletion, depreciation and amortization)
of $3.9 million and $6.5 million dollars for the nine months ended September 30,
2002 and 2001, respectively.
As of January 1, 2002, the Company had in excess of 28.9 MMBOE proved
reserves with a present value (discounted at 10%) of estimated future net
14
reserves of $130 million dollars and a standardized measure of discounted future
net cash flows of $128.9 million dollars.
Gulfport is actively pursuing further development of its properties in
order to fully exploit its reserves. The Company has a portfolio of
developmental projects for the next several years. Gulfport's developmental
program is designed to penetrate several producing horizons increasing the
probability of success.
Additionally, Gulfport owns 3-D seismic data which will be used by the
Company's geophysicists and geologists to identify exploratory prospects and
test undrilled fault blocks in its existing fields.
The Company's operations are concentrated in two fields: West Cote Blanche
Bay and the Hackberry Fields. In addition, during the first quarter of 2002,
the Company backed in to a working interest in the Bayou Penchant, Bayou Pigeon,
Deer Island and Golden Meadow fields operated by Castex Energy.
West Cote Blanche Bay
Background
West Cote Blanche Bay ("WCBB") Field lies approximately five miles off the
coast of Louisiana primarily in St. Mary's Parish in a shallow bay, with water
depths averaging eight to ten feet. WCBB overlies one of the largest salt dome
structures in the Gulf Coast. There are over 100 distinct sandstone reservoirs
throughout most of the field and nearly 200 major and minor discrete intervals
have been tested. Within almost 900 wellbores that have been drilled to date in
the field, over 4,000 potential zones have been penetrated. The sands are
highly porous and permeable reservoirs primarily with a strong water drive.
As of September 30, 2002, there have been 877 wells drilled at WCBB, and of
these: 40 are currently producing, 297 are shut-in and five are utilized as salt
water disposal wells. The balance of the wells (or 535) have been plugged and
abandoned.
Activity for the Nine Months Ended September 30, 2002
During the first quarter of 2002, Gulfport performed two re-completions and
one workover at the West Cote Blanche Bay Field. Some of this work commenced
during the fourth quarter of 2001.
In March 2002, Gulfport began work on the yearly 20 well plugging commitment at
West Cote Blanche Bay. As of the date of this filing, the pluggings were
completed.
During July 2002, the Company commenced its plugging commitment program for
the twelve-month period ending March 31, 2003. As of the date of this filing,
the pluggings were completed.
Gulfport began a seven well drilling program in April and finished it in
July of 2002. The Company completed and is currently producing five wells
drilled during the program. Four of the five wells that are currently producing
are directional wells that were steered by downhole motors so as to encounter
multiple hydrocarbon targets at the best structural position possible. The four
directional wells drilled during this program encountered a total of 328 feet of
15
net pay with a combined initial production rate of 460 barrels of oil, 548 mcf
of gas and 233 barrels of water per day. Gulfport drilled two non-productive
wells in the most recent drilling program. One of these wells was a shallow
exploratory well drilled near the lease boundary, while the other well
encountered the target zones but the zones were deemed to be too thin to justify
completion.
During the three months ended September 30, 2002, Gulfport's net current
daily production in this field averaged 1,365 barrels of oil equivalent.
Effective August 1, 2002 Gulfport acquired additional interest in the deep
rights, those rights located below the base of the Rob C formation found at a
depth of approximately 10,000', at the West Cote Blanche Bay Field. This
acquisition brings Gulfport's interest to a total of 40.40% working interest and
29.95% net revenue interest in the deep rights at this field to go with 100%
working interest and 78.665% net revenue interest in the shallow rights. The
Company continues to work to increase its interest in its primary asset, West
Cote Blanche Bay.
Subsequent Events
Hurricane Lili hit the southern gulf coast of Louisiana on October 3, 2002
with estimated sustained winds over 120 mph and a 9 ' tidal surge. The eye of
the hurricane came on shore directly East of Gulfport's WCBB field. The storm
caused significant damage to the Company's production facilities and the WCBB
field, which normally provides approximately 80% of the Company's overall
production. WCBB was totally without production for seventeen days. When
production was first restored, the facilities were only able to handle wells
that contributed approximately 50% of the total average daily production of the
field. As of November 10, 2002, the field's production had been restored to
approximately 75% and was expected to be at or near 100% by mid-November. The
total cost to restore production to the field and the portion of those costs
which will be reimbursed by the Company's insurer were not yet determinable as
of the date of this filing.
Gulfport plans to commence a four to six well drilling program at West Cote
Blanche Bay around December 1, 2002. These wells will have total depths ranging
from 2,500' to 5,000' and each well will test at least two zones. The Company
is drilling generally shallower wells in this drilling program in order to lower
risk and reduce drilling costs.
Gulfport has three recompletions planned in the next 30 to 60 days at West
Cote Blanche Bay. These projects will be done while the rig is in the field for
the drilling program.
Gulfport is in the process of filing for a permit to convert a well that is
currently inactive to a saltwater disposal well. The Company is nearing
capacity with its current saltwater disposal system and feels that adding an
another disposal well will not only service additional production that it hopes
to discover in the field, but will allow Gulfport to put into production wells
that are currently inactive due to a high salt water cut.
16
Hackberry Fields
Background
The Hackberry fields are located along the shore of Lake Calcasieu in
Cameron Parish, Louisiana. The Hackberry Field is a major salt intrusive
feature, elliptical in shape with East Hackberry on the east end of the ridge
with West Hackberry located on the western end of the ridge. There are over 30
pay zones in this field. The salt intrusion formed a series of structurally
complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age
rocks. These fault blocks serve as traps for hydrocarbon accumulation. West
Hackberry consists of a series of fault-bounded traps in the Oligocene-age
Vincent and Keough sands associated with the Hackberry Salt Ridge.
The East Hackberry field was discovered in 1926 by Gulf Oil Company (now
Chevron Corporation) by a gravitational anomaly survey. The massive shallow salt
stock presented an easily recognizable gravity anomaly indicating a productive
field. Initial production began in 1927 and has continued to the present. The
estimated cumulative oil and condensate production through 1999 was 111 million
barrels of oil with casinghead gas production being 60 billion cubic feet of
gas. There have been a total of 170 wells drilled on Gulfport's portion of the
field with 17 having current daily production; 3 produce intermittently; 69
wells are shut-in and 4 wells have been converted to salt water disposal wells.
The remaining 77 wells have been plugged and abandoned.
On Gulfport's West Hackberry lease blocks, the first discovery well was
drilled in 1938 and was developed by Superior Oil Company (now Exxon-Mobil
Corporation) between 1938 and 1988. The estimated cumulative oil and condensate
production through 2000 was 170 million barrels of oil with casinghead gas
production of 120 billion cubic feet of gas. There have been 36 wells drilled to
date on Gulfport's portion of West Hackberry and currently 1 is producing, 26
are shut-in and 1 well has been converted to a saltwater disposal well. The
remaining 8 wells have been plugged and abandoned.
Gulfport's continued plan of development includes the testing of additional
wells that are currently inactive, mostly in the southern portion of State Lease
50. These additional tests should allow the Company to restore more wells to
productive status in the near future.
Activity for the Nine Months Ended September 30, 2002
During the first quarter of 2002, Gulfport worked over one salt-water
disposal well at the East Hackberry Field. The Company also commenced a four
well plugging program on the State Lease 50 portion of East Hackberry and
completed the work in the second quarter.
During September 2002, total net production per day for both Hackberry
fields averaged 221 barrels of oil equivalent.
Subsequent Events
Gulfport is in the process of recompleting a well at the SL 50 portion of
its East Hackberry field. Before the rig could be moved on the well, the
Company had to perform major dredging work to access the location. While the
17
dredge was in the field Gulfport also chose to scour an area that had filled
with silt that will allow easier access to the southern side of the SL 50
portion of East Hackberry.
Gulfport shut-in the Hackberry field production for about ten days during
September and October of 2002 in conjunction with hurricanes. The field
suffered no major damage due to hurricanes.
During the fourth quarter of 2002, Gulfport plans to drill a new saltwater
disposal well at the Erwin Lease. The Company also plans to workover four wells
on the M. P. Erwin portion of East Hackberry and recomplete one well at State
Lease 50.
Gulfport has filed a permit with the State of Louisiana in order to drill
an additional saltwater disposal well at the Erwin portion of the East Hackberry
field. This disposal well will allow the Company to fully activate wells that
have been inactive or occasionally productive thereby increasing production at
the Erwin portion of East Hackberry. Gulfport also plans to replace the
saltwater tanks at both SL 50 and the Erwin portions of East Hackberry.
Gulfport is in the process of re-mapping the East Hackberry field, has
found four new drilling locations and is in the process of compiling costs and
running economics on these projects. If the wells prove to be economic, between
one and four wells will likely be drilled during the first half of 2003.
Gulfport has several wells that it plans to workover or recomplete at the
Hackberry field within the next year.
Castex Back-In
Gulfport sold its interest in the Bayou Penchant, Bayou Pigeon, Deer Island
and Golden Meadow fields to Castex Energy 1996 Limited Partnership effective
April 1, 1998 subject to a 25% reversionary interest in the partnership after
Castex had received 100% of the initial investment. Castex informed Gulfport
that the investment had paid out effective September 1, 2001. In lieu of a 25%
interest in the partnership, Gulfport elected to take a proportionately reduced
25% working interest in the properties. During March, 2002 the Company received
approximately $220,000 from Castex which the Company believes consists of sales
income for the period after payout net of operating expenses, although the
Company has not received confirmation of such. As a result, this amount
received has been included in the accompanying statement of income for the nine
months ended September 30, 2002 as "Other Income".
18
The following financial table recaps the Company's operating activity for the
three and nine-month periods ended September 30, 2002 as compared to the same
periods in 2001.
FINANCIAL DATA (unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Gas sales $ 92,000 $ 56,000 $ 280,000 $ 222,000
Oil and condensates sales 3,655,000 4,068,000 9,253,000 12,245,000
Other income, net 18,000 86,000 284,000 233,000
----------- ----------- ----------- -----------
3,765,000 4,210,000 9,817,000 12,700,000
Expenses
Lease operating expenses 1,240,000 1,059,000 3,630,000 3,630,000
Production taxes 414,000 447,000 1,061,000 1,391,000
General and administrative 428,000 273,000 1,255,000 1,132,000
----------- ----------- ----------- -----------
2,082,000 1,779,000 5,946,000 6,153,000
EBITDA (1) 1,683,000 2,431,000 3,871,000 6,547,000
Depreciation, depletion
and amortization 871,000 991,000 2,459,000 2,787,000
----------- ----------- ----------- -----------
Income before interest and taxes 812,000 1,440,000 1,412,000 3,760,000
Gain on settlement of
disputed items - - - 482,000
Interest expense (3,000) (103,000) (109,000) (274,000)
----------- ----------- ----------- -----------
Income before taxes 809,000 1,337,000 1,303,000 3,968,000
Income tax expense (benefit):
Current 324,000 535,000 521,000 1,587,000
Deferred (324,000) (535,000) (521,000) (1,587,000)
----------- ----------- ----------- -----------
Net income $ 809,000 $ 1,337,000 $ 1,303,000 $ 3,968,000
Less: Preferred stock dividends 356,000 - 709,000 -
----------- ----------- ----------- -----------
Net income available to
common shareholders $ 453,000 $ 1,337,000 $ 594,000 $ 3,968,000
=========== =========== =========== ===========
Per share data:
Net income $ 0.04 $ 0.13 $ 0.06 $ 0.39
=========== =========== =========== ===========
Weighted average common shares 10,146,566 10,146,566 10,146,566 10,145,960
=========== =========== =========== ===========
(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.
19
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2002 and 2001
During the three months ended September 30, 2002, the Company reported net
income of $.81 million, a decrease from net income of $1.3 million for the
corresponding period in 2001. This decrease is primarily due to the following
factors:
Oil and Gas Revenues. For the three months ended September 30, 2002, the
Company reported oil and gas revenues of $3.7 million, a decrease from $4.1
million for the comparable period in 2001. This decrease was due principally to
a decrease in oil production from 156,000 mbbls to 137,000 mbbls for the three
months ended September 30, 2001 and 2002, respectively. This decrease in
production was primarily a result of expected decline rates from the initial
targeted zones of wells drilled last year and from decline rates of the older
existing producing wells. This decrease in production was partially offset by a
slight increase in the average oil and gas prices for the three months ended
September 30, 2002 as compared to the same period in 2001.
The following table summarizes the Company's oil and gas production and
related pricing for the three months ended September 30, 2002 and 2001:
Three Months Ended September 30,
-------------------------------------
2002 2001
---- ----
Oil production volumes (Mbbls) 137 156
Gas production volumes (Mmcf) 25 20
Average oil price (per Bbl) $26.70 $26.05
Average gas price (per Mcf) $ 3.71 $ 2.81
Operating Expenses. Lease operating expenses increased $.1 million from
$1.1 million for the three months ended September 2001 to $1.2 million for the
comparable period in 2002. This increase was due primarily to slight increases
miscellaneous expenses as a result of the new wells drilled and completed during
2001.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $.12 million from $.99 million for the three months ended
September 30, 2001 to $.87 million for the comparable period in 2002. This
decrease was attributable primarily to a decrease in production to 141 MBOEs for
the three months ended September 30, 2002 as compared to 159 MBOEs for the same
period in 2001.
General and Administrative Expenses. General and administrative expenses
increased from $.27 million for the three months ended September 30, 2001 to
$.43 million for the comparable period in 2002. This $.16 million increase is
due mainly to a reduction in administrative services reimbursement of $.22
million. Of the $.22 million total difference however, $.12 million related to
reimbursements for prior periods in 2001 booked during the third quarter so the
actual change in general and administrative services for the three months ended
September 30, 2002 as compared to the same period in 2001 was only $.1 million.
This reduction resulted from the Company's allocation of some its resources to
entities that have similar controlling interests as those controlling the
Company. During 2002, several of those similarly controlled entities were sold
which eliminated the need for the Company to allocate its resources to those
entities and also eliminated the corresponding reimbursement of those expenses.
Interest Expense. Interest expense decreased from $.10 million for the
three months ended September 30, 2001 to $3,000 for the comparable period in
20
2002. This decrease was primarily the result of the payoff of the loan from a
related party (see Note 5 to Financial Statements). In addition, at September
30, 2002, the Company had reduced the outstanding balance on its existing credit
facility with Bank of Oklahoma from $1.43 million at September 30, 2001 to $0.
Income Taxes. As of December 31, 2001, the Company had a net operating
loss carryforward of approximately $83 million, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately $47
million, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. A
current tax provision of $.32 million was provided for the three-month period
ended September 30, 2002, which was fully offset by an equal income tax benefit
due to operating loss carryforwards.
Comparison of the Nine Months Ended September 30, 2002 and 2001
During the nine months ended September 30, 2002, the Company reported net
income of $1.3 million, a decrease from net income of $4.0 million for the
corresponding period in 2001. This decrease is primarily due to the following
factors:
Oil and Gas Revenues. For the nine months ended September 30, 2002, the
Company reported oil and gas revenues of $9.5 million, a decrease from $12.5
million for the comparable period in 2001. This decrease was due to a decrease
in oil production from 445 mbbls to 381 mbbls for the nine months ended
September 30, 2001 and 2002, respectively. This decrease in production was
primarily a result of expected decline rates from the initial targeted zones of
wells drilled last year and from decline rates of the older existing producing
wells. In addition, there was a decrease in total revenues due to lower product
prices from $25.86 per MBOE to $24.13 per MBOE for the nine months ended
September 30, 2001 and 2002 respectively
The following table summarizes the Company's oil and gas production and related
pricing for the nine months ended September 30, 2002 and 2001:
Nine Months Ended September 30,
-------------------------------------
2002 2001
---- ----
Oil production volumes (Mbbls) 381 445
Gas production volumes (Mmcf) 84 45
Average oil price (per Bbl) $24.28 $27.50
Average gas price (per Mcf) $ 3.35 $ 4.96
Operating Expenses. Lease operating expenses remained constant for the
nine months ended September 30, 2001 compared to the same period in 2002.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $.3 million from $2.8 million for the nine months ended
September 30, 2001 to $2.5 million for the comparable period in 2002. This
decrease was attributable primarily to a decrease in production to 395 MBOEs for
the nine months ended September 30, 2002 as compared to 453 MBOEs for the same
period in 2001.
21
General and Administrative Expenses. General and administrative expenses
increased slightly from $1.1 million for the nine months ended September 30,
2001 to $1.3 million for the comparable period in 2002. This increase is due to
overall increases in the premiums charged to the Company for both general
business insurance and for director's and officer's liability insurance, as well
as an increase in legal costs incurred in conjunction with the Company's Private
Placement Offering which took place during March and April of 2002.
Interest Expense. Interest expense decreased from $.27 million for the
nine months ended September 30, 2001 to $.11 million for the comparable period
in 2002. This decrease was primarily the result of the payoff of the loan from
a related party (see Note 5 to Financial Statements). In addition, at September
30, 2002, the Company had reduced its outstanding balance on its current line to
$0 from $1.43 million at September 30, 2001.
Income Taxes. As of December 31, 2001, the Company had a net operating
loss carryforward of approximately $83 million, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately $47
million, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. A
current tax provision of $521,000 was provided for the nine-month period ended
September 30, 2002, which was fully offset by an equal income tax benefit due to
operating loss carryforwards.
Capital Expenditures, Capital Resources and Liquidity
Net cash flow provided by operating activities for the nine-month period
ended September 30, 2002 was $5.9 million, as compared to net cash flow provided
of $6.9 million for the comparable period in 2001. This decrease was primarily
due to a decrease in the Company's net income related to a decline in oil and
gas volumes produced and sold as well as a decline in oil and gas prices.
Net cash used in investing activities during the nine months ended
September 30, 2002 was $7.7 million as compared to $12.4 million used during the
same period of 2001. This decrease was a result of the Company's more expensive
drilling and workover/recompletion program it initiated and completed in 2001 as
compared to the Company's initial 2002 program completed in July 2002.
Net cash provided in financing activities for the nine months ended
September 30, 2002 was $4.9 million as compared to net cash provided of $3.4
million during the same period of 2001. The increase is primarily a result of
the proceeds received as a result of the Private Placement Offering initiated in
March 2002 and completed in April 2002 (see Note 10 to the Financial
Statements).
Capital Expenditures. During the nine months ended September 30, 2002,
Gulfport invested $7.5 million in oil and gas properties and other property and
equipment as compared to $11.9 million invested during the comparable period in
2001. Of the $7.5 million spent on capital expenditures during the nine months
ended September 30, 2002, $4.6 was spent on drilling activity and $2.9 was spent
on capitalized recompletions, workovers and plugging and abandonment costs.
During the nine month period ended September 30, 2002, Gulfport financed
its capital expenditure payment requirements with cash flows provided by
22
operations, borrowings under the Company's credit facilities and proceeds from
the Private Placement Offering completed in April 2002.
Gulfport's strategy is to continue to increase cash flows generated by its
properties by undertaking new drilling, workover, sidetrack and recompletion
projects in the fields to exploit its reserves. The Company has upgraded its
infrastructure by enhancing its existing facilities to increase operating
efficiencies, increase volume capacities and lower lease operating expenses.
Additionally, Gulfport completed the reprocessing of its 3-D seismic data in its
principal property, West Cote Blanche Bay. The reprocessed data will enable the
Company's geophysicists to generate new prospects and enhance existing prospects
in the intermediate zones in the field thus creating a portfolio of new drilling
opportunities.
Capital Resources. On July 11, 1997 Gulfport entered into a $15,000,000
credit facility with ING (U.S.) Capital Corporation ("ING"). During 1998 and
1999, there were two amendments to the facility and the maturity date was reset
to September 30, 2000. On September 28, 2000, the Company repaid in full its
credit facility at ING and established a new credit facility at Bank of Oklahoma
("BOK"). Gulfport was advanced $1.6 million on this new facility, which called
for interest payments to be made monthly in addition to twelve monthly principal
payments of $100,000, with the remaining unpaid balance due on August 31, 2001.
On March 22, 2001, Gulfport executed a new note with BOK increasing the
availability to $1,760,000, increasing the monthly payments slightly to $110,000
beginning July 1, 2001 and extending the maturity date to October 1, 2002. This
new note replaces the original BOK note dated September 28, 2000. In April 2001,
the Company borrowed the amount remaining and available on its BOK credit
facility.
On May 22, 2001, the Company entered in to a revolving line of credit
agreement with Gulfport Funding, LLC, ("Gulfport Funding") which has ownership
in common with the Company. Under the terms of the agreement, the Company may
borrow up to $3,000,000, with borrowed amounts bearing interest at Bank of
America Prime Rate plus four percent. All outstanding principal amounts along
with accrued interest were due on February 22, 2002. At March 29, 2002, the
Company had borrowed the $3,000,000 available under this line. As a result of
the Private Placement Offering initiated in March 2002, this debt along with its
accumulated interest was retired in exchange for shares of preferred stock and
related detachable warrants.
23
In March 2002, the Company commenced a Private Placement Offering of $10
million dollars consisting of 10,000 Units. Each Unit consists of (i) one (1)
share of Cumulative Preferred Stock, Series A, of the Company (Preferred) and
(ii) a warrant to purchase up to 250 shares of common stock, par value $0.01 per
share. Dividends accrue on the Preferred prior to the Mandatory Redemption Date
at the rate of 12% per annum payable quarterly in cash or, at the option of the
Company for a period not to exceed two (2) years from the Closing Date, payable
in whole or in part in additional shares of the Preferred based on the
Liquidation Preference of the Preferred at the rate of 15% per annum. No other
dividends shall be declared or shall accrue on the Preferred. To the extent
funds are legally available, the Company is obligated to declare and pay the
dividends on the Preferred. The Warrants have a term of ten (10) years and an
exercise price of $4.00. The Company is required to redeem the Preferred on the
fifth anniversary of the first issuance and the Company may at its sole option,
choose to redeem the Preferred at any time before the expiration of the five
years. Accordingly, the Preferred issued in connection with this Offering is
treated as redeemable stock in the accompanying balance sheet.
Two-thirds of the Preferred Stockholders can affect any Company action,
which would effect their preference position. The Preferred cannot be sold or
transferred by its holders and the Company must use its best efforts to register
with the Securities and Exchange Commission ("SEC") the common stock issued in
connection with the exercise of the Warrants or, if possible, piggyback the
issued common stock if the Company participates in a public offering with the
SEC.
The Offering was made available to stockholders (some of whom were
affiliates) of the Company as of December 31, 2001 and who were known to be
accredited investors by the Company. Purchasers were able to participate up to
their pro rata share of ownership in the Company as of December 31, 2001. The
Offering's initial closing began March 29, 2002 and continued until April 15,
2002, with a total subscription of $9,292,000 or 9,291.85 units. Mike Liddell,
the Company's Chief Executive Officer, had the option to subscribe for his
proportionate share of the Offering until September 30, 2002. On September 30,
2002, Mike Liddell elected not to participate.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3.0 million dollar loan along with the accumulated
interest due from the Company for 3,262.98 Units. Additionally, on March 29,
2002 entities controlled by the majority shareholder initially funded a share of
the Preferred Offering in the amount of $2,738,000.
On June 20, 2002, the Company entered into a new line of credit with BOK.
Under the terms of the new agreement, the Company was extended a commitment to
borrow up to $2,300,000. Amounts borrowed under the line bear interest at Chase
Manhattan Prime plus one percent, with payments of interest on outstanding
balances due monthly beginning August 1, 2002. Any principal amounts borrowed
under the line will be due on July 1, 2003. The outstanding balance under this
credit facility was $0 at September 30, 2002.
Liquidity. The primary capital commitments faced by the Company are the
capital requirements needed to continue developing the Company's proved reserves
and to continue meeting the required principal payments on its Credit
Facilities.
In Gulfport's January 1, 2002 reserve report, 85% of Gulfport's net
reserves were categorized as proved undeveloped. The proved reserves of
Gulfport will generally decline as reserves are depleted, except to the extent
that Gulfport conducts successful exploration or development activities or
acquires properties containing proved developed reserves, or both.
To realize reserves and increase production, the Company must continue its
exploratory drilling, undertake other replacement activities or utilize third
parties to accomplish those activities. In the year 2002, Gulfport expects to
undertake several intermediate drilling programs. It is anticipated that these
reserve development projects will be funded either through the use of cash flow
from operations when available, funds received through its Preferred Stock
Offering, interim bank financing or related third party financing, a long-term
credit facility or by accessing the capital markets. The cash flow generated
from these new projects will be used to make the Company's required principal
24
payments on its debt with the remainder reinvested in the field to complete more
capital projects.
COMMITMENTS
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Company assumed the obligation to contribute approximately
$18,000 per month through March 2004 to a plugging and abandonment trust and the
obligation to plug a minimum of 20 wells per year for 20 years commencing March
11, 1997. Texaco retained a security interest in production from these
properties and the plugging and abandonment trust until such time the Company's
obligations to Texaco have been fulfilled. Once the plugging and abandonment
trust is fully funded, the Company can access it for use in plugging and
abandonment charges associated with the property. As of September 30, 2002, the
plugging and abandonment trust totaled $2,452,000. These funds are invested in
a U.S. Treasury Money Market.
During March 2002, Gulfport began to fulfill its yearly plugging commitment
of 20 wells at WCBB for the twelve-month period ending March 31, 2002. As of
this date of this filing, the pluggings were completed.
During July 2002, the Company commenced its plugging commitment program for
the twelve-month period ending March 31, 2003. As of the date of this filing,
the pluggings were completed.
In addition, the Company has letters of credit totaling $200,000 secured by
certificates of deposit being held for plugging costs in the East Hackberry
field. Once specific wells are plugged and abandoned the $200,000 will be
returned to the Company.
Office Lease
On August 8, 2002, the Company executed a 60-month lease on 12,035 square
feet of office space to commence on or around December 1, 2002. Monthly
payments under the lease are approximately $18,000.
SUBSEQUENT EVENTS
During the third quarter of 2002, the Company underwent a royalty audit,
which was conducted by the State of Louisiana. The audit covered the period from
January 1, 1999 through December 31, 2001. The Company was notified during
October of 2002 that the total additional royalty to be paid as a result of the
audit approximated $400,000. The Company anticipates recording the liability for
payment of these royalties during the fourth quarter of 2002 once the final
amount of the liability is determined.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 4. CONTOLS AND PROCEDURES
Gulfport Energy Corporation, under the direction of the Chief Executive
Officer and the Vice President and Chief Financial Officer, has established
disclosure controls and procedures that are designed to ensure that information
required to be disclosed by Gulfport in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. The
disclosure controls and procedures are also intended to ensure that such
information is accumulated and communicated to Gulfport's management, including
the Chief Executive Officer and the Vice President and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosures.
Within 90 days prior to the filing of this Form 10-Q, an evaluation was
performed under the supervision and with the participation of Gulfport
management, including the Chief Executive Officer and the Vice President and
Chief Financial Officer, of Gulfport's disclosure controls and procedures (as
those terms are defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon their evaluation, the Chairman and Chief Executive Officer
and the Executive Vice President and Chief Financial Officer have concluded that
Gulfport's disclosure controls and procedures are effective as of the date of
this Form 10-Q. In compliance with Section 302 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350), each of these officers executed a Certification
included in this Form 10-Q.
As of the date of this Form 10-Q, there have not been any significant
changes in Gulfport's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
No significant deficiencies or material weaknesses in such internal controls
were identified in the evaluation and as a consequence, no corrective action was
required to be taken.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Gulfport has been named as a defendant in various lawsuits. The ultimate
resolution of these matters is not expected to have a material adverse effect on
the Company's financial condition or results of operations for the periods
presented in the financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
25
ITEM 3. DEFAULTS UPON SENIOR SECURITES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 5, 2002, the holders of a majority of the outstanding shares of
the Company's common stock executed a written consent electing five directors
for the next year.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2.1 Form 8-K filed on March 8, 2002 between Registrant and
Gulfport Funding, LLC.
10.1 Credit Agreement dated June 28, 2000 between Registrant
and Bank of Oklahoma filed March 30, 2001 (1)
10.2 Stock Option Plan filed March 30, 2001 (1)
10.3 Credit Agreement dated February 1, 2001 between Registrant
and Bank of Oklahoma (1)
10.4 Credit Agreement dated May 22, 2001 between Registrant
and Gulfport Funding, LLC (1)
10.5 Warrant Agreement dated May 22, 2001 between Registrant
and Gulfport Funding, LLC (1)
10.6 Promissory Note dated May 22, 2001 between Registrant
and Gulfport Funding, LLC (1)
10.7 Confidential Disclosure Statement Relating to Offer and
Sale of Up to 10,000 Units dated March 29, 2002
--------------------------------------------------------------------------------
(1) Previously filed as an exhibit to Form 10-K for the year ended
December 31, 2001, and incorporated herein by reference.
26
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, 2002
/s/Mike Liddell
-----------------------------------------
Mike Liddell
Chief Executive Officer
/s/Mike Moore
-----------------------------------------
Mike Moore
Chief Financial Officer
27
CERTIFICATION
I, Mike Liddell, Chief Executive Officer of Gulfport Energy Corporation, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Gulfport Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statement made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a----14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/Mike Liddell
-------------------------
Mike Liddell
Chief Executive Officer
CERTIFICATION OF PERIODIC REPORT
I, Mike Liddell, Chief Executive Officer of Gulfport Energy Corporation,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that, to the best of my knowledge:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended September 30, 2002 (the "Report") fully complies with the
requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78M or 78o(d); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 14, 2002 /s/Mike Liddell
-------------------------
Mike Liddell
Chief Executive Officer
CERTIFICATION
I, Michael G. Moore, Chief Financial Officer of Gulfport Energy Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gulfport Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statement made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a----14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/Mike Moore
-------------------------
Mike Moore
Chief Financial Officer
CERTIFICATION OF PERIODIC REPORT
I, Michael G. Moore, Chief Financial Officer of Gulfport Energy Corporation,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that, to the best of my knowledge:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended September 30, 2002 (the "Report") fully complies with the
requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78M or 78o(d); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 14, 2002 /s/Mike Moore
-------------------------
Mike Moore
Chief Financial Officer