Filed Pursuant To Rule 424(b)(3)
Registration File No. 333-115396
Prospectus
Gulfport Energy Corporation
10,000,000 Shares of Common Stock
Common Stock Subscription Rights
We are distributing at no charge to the holders of our common stock
transferable subscription rights to purchase up to an aggregate of 10,000,000
shares of our common stock, par value $0.01 per share, at a cash subscription
price of $1.20 per share. This rights offering is being made to help fund a
portion of our capital expenditure requirements and for general corporate
purposes.
The total purchase price of shares offered in this rights offering will be
approximately $12,000,000. You will not be entitled to receive any subscription
rights unless you are a stockholder of record as of the close of business on
July 16, 2004.
The subscription rights will expire if they are not exercised by 5:00 p.m.,
Dallas time, on August 17, 2004, the expected expiration date of this rights
offering. We, in our sole discretion, may extend the period for exercising the
subscription rights. Subscription rights that are not exercised by the
expiration date of this rights offering will expire and will have no value.
Once a holder has exercised any subscription rights, such exercise may not be
revoked. You should carefully consider whether or not to exercise or sell your
subscription rights before the expiration date.
There is no minimum number of shares of our common stock that must be
subscribed for in this rights offering for it to be completed. Subscription
payments will not be placed in an escrow account. Once a holder has paid the
subscription price, we will not refund any portion of such subscription price.
Shares of our common stock are quoted on the NASD OTC Bulletin Board under
the symbol "GPOR.OB." The closing bid price of our common stock on July 21, 2004
was $2.19 per share.
Per Share Aggregate
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Subscription Price $1.20 $12,000,000
Estimated Expenses $0.01 $ 110,000
Net Proceeds to us $1.19 $11,890,000
An investment in our common stock involves risks. You should consider
carefully the risk factors beginning on page 5 in this prospectus before
exercising or selling your subscription rights.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense. The securities are not being offered in any jurisdiction
where the offer is not permitted.
The date of this prospectus is July 22, 2004
TABLE OF CONTENTS
Page
----
Prospectus Summary 1
Risk Factors 5
Forward-Looking Statements 10
Use Of Proceeds 11
Capitalization 12
Market For Common Stock And Related Stockholder Matters 13
The Rights Offering 14
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 24
Business 34
Management 44
Principal Stockholders 48
Certain Relationships And Related Transactions 50
Description Of Securities 51
Certain United States Federal Income Tax Consequences 53
Legal Matters 54
Experts 54
Where You Can Find More Information 54
Index to Consolidated Financial Statements F-55
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. This prospectus is not an offer to sell
or a solicitation of an offer to buy shares in any jurisdiction where this offer
or any sale of shares would be unlawful. The information in this prospectus is
complete and accurate only as of the date on the front cover regardless of the
time of delivery of this prospectus or of any sale of shares.
i
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus includes specific terms of this rights offering, as well as
information regarding our business. We encourage you to read this prospectus in
its entirety. You should pay special attention to the "Risk Factors" section of
this prospectus. All references to "we," "our," "ours," and "us," or "Gulfport"
in this prospectus are to Gulfport Energy Corporation and its subsidiaries,
unless otherwise indicated.
Our Company
Gulfport is an independent oil and gas exploration and production company
with properties located along the Louisiana Gulf Coast. Our operations are
concentrated in two fields: West Cote Blanche Bay and the Hackberry Fields. We
seek to achieve reserve growth and increase our cash flow by undertaking
multiple drilling programs each year. In addition, we intend to shoot 3-D
seismic at our East Hackberry Field to allow us to undertake drilling at that
field. As of January 1, 2004, we had 22 MMBOE of proved reserves with a present
value of estimated future net revenues, discounted at 10%, of approximately
$210,000,000 and associated standardized measure of discounted future net cash
flows of approximately $194,000,000. We were organized in July 1997 and merged
with WRT Energy Corporation, a Texas corporation, referred to as Old WRT, on
July 11, 1997 upon the consummation of Old WRT's bankruptcy reorganization.
Our principal executive offices are located at 14313 North May Avenue,
Suite 100 Oklahoma City, Oklahoma 73134, and our telephone number is (405)
848-8807.
Summary of the Rights Offering
Rights We will distribute to each stockholder
of record of our common stock, as of the
close of business on July 16, 2004, at no
charge, one transferable subscription right
for each 1.0146 shares of common stock owned,
for a total of approximately 10,000,000
subscription rights.
Basic Subscription Privilege Each right will enable its holder to
purchase one share of our common stock
at a subscription price of $1.20. You are
not required to exercise all of your
subscription rights unless you wish to
purchase shares under your over-subscription
privilege.
Over-Subscription Privilege Each holder of common stock who elects to
exercise its basic subscription privilege in
full may also subscribe for additional shares
at the same subscription price per share, to
the extent that other stockholders do not
exercise their subscription rights in full.
If an insufficient number of shares is
available to fully satisfy the
over-subscription privilege requests, the
available shares will be sold pro rata among
subscription rights holders who exercised
their over-subscription privilege based on
the number of shares each subscription rights
holder subscribed for under the basic
subscription privilege. Any excess
subscription payments will be returned,
without interest or deduction, promptly after
the expiration of this rights offering.
Conditions to the Rights Offering This rights offering is subject to the
conditions described under "The Rights
Offering-Conditions to this Rights Offering."
Back-Stop CD Holding, L.L.C., one of our principal
stockholders, has agreed, subject to certain
1
conditions, to back-stop this rights offering
by purchasing any and all of the shares of
our common stock offered in this rights
offering that are not otherwise subscribed
for by the other holders of subscription
rights. CD Holding's obligations under the
back-stop agreement are triggered if and to
the extent that all 10,000,000 shares of
common stock offered in this rights offering
are not subscribed for. For example, if none
of our stockholders exercise their basic
subscription privilege, CD Holding would
acquire all 10,000,000 shares of common
stock offered in this rights offering. If
all rights are exercised under the basic
subscription privilege, CD Holding will not
purchase any shares in the offering except
the shares that CD Holding will purchase
pursuant to its exercise of its basic
subscription privilege as one of our
stockholders. In return for its agreement to
back-stop this rights offering, CD Holding
will be entitled to receive a commitment fee
equal to 2% of the gross proceeds of this
rights offering, which CD Holding, at its
option, may apply to the subscription price
payable upon its exercise of the rights
issued to it in this rights offering.
Subscription Price $1.20 per share. For more information as
to how the subscription price was determined,
see "The Rights Offering-Reasons for the
Rights Offering and Determination of
Subscription Price."
Rights Offering Record Date July 16, 2004.
Expiration Date The subscription rights will expire, if not
exercised, at 5:00 p.m., Dallas time, on
August 17, 2004, unless we decide to extend
this rights offering until some later time.
Since CD Holding has agreed to back-stop this
rights offering, we do not anticipate the
need to extend the exercise period.
No Revocation Once a holder of rights has exercised
subscription rights, such exercise may not be
revoked.
Transferability of Rights The subscription rights will be evidenced by
transferable subscription rights
certificates. The subscription rights are
transferable until the close of business on
the last trading day preceding the expiration
date. However, we can give no assurance that
a market for the subscription rights will
develop or, if a market does develop, how
long it will continue. See "The Rights
Offering-Method of Transferring and Selling
Subscription Rights."
Procedure For Exercising Rights You may exercise your subscription rights by
properly completing and signing your
subscription rights certificate. You must
deliver your subscription rights certificate
with full payment of the subscription price
to the subscription agent on or prior to the
expiration date of this rights offering. If
you use the mail, we recommend that you use
insured, registered mail, return receipt
requested. If you cannot deliver your
subscription rights certificate to the
subscription agent on time, you may follow
the guaranteed delivery procedures described
under "The Rights Offering-Guaranteed
Delivery Procedures." Once you have exercised
your basic subscription privilege or your
over-subscription privilege, you may not
revoke your exercise. Subscription rights not
exercised prior to the expiration of this
rights offering will have no value.
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How Rights Holders Can
Exercise Subscription Rights
Through Others If you hold shares of our common stock as of
the rights offering record date through a
broker, custodian bank or other nominee, we
will ask your broker, custodian bank or other
nominee to notify you of this rights
offering. If you wish to sell or exercise
your subscription rights, you will need to
have your broker, custodian bank or other
nominee act for you. To indicate your
decision, you should complete and return to
your broker, custodian bank or other nominee
the form entitled "Beneficial Owner Election
Form." You should receive this form from
your broker, custodian bank or other nominee
with the other subscription rights offering
materials. You should contact your broker,
custodian bank or other nominee if you do not
receive this form, but you believe you are
entitled to participate in this rights
offering.
Certain United States Federal
Income Tax Consequences For United States federal income tax
purposes, the receipt of subscription rights
in this rights offering and the exercise of
the subscription rights should not be a
taxable event. You should, however, consult
your own financial and tax advisor.
Issuance of Our Common Stock We will issue certificates representing
shares of our common stock purchased in this
rights offering as soon as practicable after
the expiration of this rights offering.
No Recommendation To
Rights Holders We are not making any recommendations as to
whether or not you should subscribe for
shares of our common stock. You should decide
whether to subscribe for such shares based
upon your own assessment of your best
interests and after considering all of the
information in this prospectus, including the
"Risk Factors" section of this prospectus.
You should not view the agreement of CD
Holding to back-stop this rights offering as
a recommendation or other indication that the
exercise or sale of your subscription rights
is in your best interests.
OTC Bulletin Board Symbol
For Our Common Stock "GPOR.OB"
Market For Our Common Stock On April 13, 2004, the last trading day prior
to the decision of our board of directors to
commence this rights offering, the closing
bid price of our common stock on the OTC
Bulletin Board, was $3.10 per share. On July
21, 2004, the closing price of our common
stock on the OTC Bulletin Board was $2.19 per
share.
Use of Proceeds Our total gross proceeds from this rights
offering will be approximately $12,000,000.
The net cash proceeds from this rights
offering are estimated to be approximately
$11,890,000 minus the amount of any
outstanding borrowings under our $3.0 million
revolving credit facility with CD Holding
that CD Holding elects to apply to the
subscription price for rights that it
exercises in this rights offering. The net
proceeds will be used primarily to fund a
portion of our currently proposed seismic and
drilling programs. To the extent that CD
Holding pays cash upon the exercise of its
rights rather than reduces the outstanding
obligations under its credit facility, we
also intend to use a portion of the net
proceeds to repay any remaining balance under
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that credit facility which we entered into
on April 30, 2004.
Subscription Agent The subscription agent is UMB Bank, N.A.
The address for delivery to the subscription
agent are as follows:
UMB Bank, N.A.
Corp Trust Department
2401 Grand Blvd.
Kansas City, MO 64108
You may call the subscription agent at (816)
860-3020.
Your delivery to an address other than the
address set forth above will not constitute
valid delivery.
Amendment and Termination Our board of directors may, in its sole
discretion, amend the terms and conditions of
this rights offering or terminate the rights
offering and revoke the rights at any time
prior to the expiration date. In the event
of a material change in the terms, conditions
or plan of distribution of this rights
offering, we will redistribute an amended
prospectus to stockholders of record of our
common stock. Since CD Holding has agreed to
back-stop this rights offering, we do not
anticipate the need to extend the exercise
period.
Dilution To the extent a stockholder does not exercise
its rights in full, such stockholder's voting
power and percentage equity interest in us,
including its percentage interest in any
future earnings, would suffer substantial
dilution.
Common Stock Outstanding 10,146,566 shares issued and outstanding as
of June 1, 2004.
Common Stock Outstanding after
the Rights Offering 20,146,566 shares issued and outstanding
(assuming all rights are exercised and based
upon actual shares issued and outstanding as
of June 1, 2004).
For additional information concerning the subscription rights and our
common stock, see "The Rights Offering" below.
Risk Factors
You should carefully consider the information under "Risk Factors" and all
other information in this prospectus before deciding to exercise or sell your
subscription rights.
4
RISK FACTORS
The value of your investment will be subject to the significant risks
inherent in our business. You should carefully consider the risks and
uncertainties described below and other information included in this prospectus
before exercising your rights and purchasing our common stock. If any of the
events described below occur, our business and financial results could be
adversely affected in a material way. This could cause the trading price of our
common stock to decline, perhaps significantly, and you therefore may lose all
or part of your investment.
Risks Related to Our Business and Industry
Our method of accounting for investments in oil and gas properties may result in
impairment of asset value.
We use the full cost method of accounting for our investment in oil and gas
properties. Under the full cost method of accounting, all costs of acquisition,
exploration and development of oil and gas reserves are capitalized into a "full
cost pool"as incurred, and properties in the pool are depleted and charged to
operations using the units-of-production method based on the ratio of current
production to total proved oil and gas reserves. To the extent that such
capitalized costs, net of depletion and amortization, exceed the present value
of estimated future net revenues, discounted at 10%, from proved oil and gas
reserves, after income tax effects, such excess costs are charged to operations.
Once incurred, a write down of oil and gas properties is not reversible at a
later date, even if oil or gas prices increase.
The volatility of oil and gas prices due to factors beyond our control greatly
affects our profitability.
Our revenues, operating results, profitability, future rate of growth and
the carrying value of our oil and gas properties depend primarily upon the
prevailing prices for oil and gas. Historically, oil and natural gas prices
have been volatile and are subject to fluctuations in response to changes in
supply and demand, market uncertainty and a variety of additional factors that
are beyond our control. The NYMEX spot prices for crude oil and natural gas at
the close of business on December 31, 2001 were $19.84 per Bbl and $2.57 per
Mmbtu and at December 31, 2003 were $32.52 per Bbl and $6.19 per Mmbtu. The
NYMEX spot prices for crude oil and natural gas at the close of business on
April 15, 2004 were $37.55 per Bbl and $5.74 per Mmbtu. Any substantial
decline in the price of oil and gas will likely have a material adverse effect
on our operations, financial condition and level of expenditures for the
development of its oil and gas reserves, and may result in additional writedowns
of the Company's investments due to ceiling test limitations. The marketability
of the Company's production depends in part upon the availability, proximity and
capacity of gathering systems, pipelines and processing facilities. Federal and
state regulation of oil and gas production and transportation, general economic
conditions, tax and energy policies, changes in supply and changes in demand all
could adversely affect the Company's ability to produce and market its oil and
gas. If market factors were to change dramatically, the financial impact on the
Company could be substantial. The availability of markets and the volatility of
product prices are beyond the control of the Company and thus represent a
significant risk.
Historically, the markets for oil and gas have been volatile and they are
likely to continue to be volatile. Wide fluctuations in oil and gas prices may
result from relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and other factors that are beyond our control,
including:
- worldwide and domestic supplies of oil and gas;
- weather conditions;
- the level of consumer demand;
- the price and availability of alternative fuels;
- risks associated with owning and operating drilling rigs;
- the availability of pipeline capacity;
- the price and level of foreign imports;
5
- domestic and foreign governmental regulations and taxes;
- the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production
controls;
- political instability or armed conflict in oil-producing regions; and
- the overall economic environment.
These factors and the volatility of the energy markets make it extremely
difficult to predict future oil and gas price movements with any certainty.
Declines in oil and gas prices would not only reduce revenue, but could reduce
the amount of oil and gas that we can produce economically and, as a result,
could have a material adverse effect on our financial condition, results of
operations and reserves.
In accordance with customary industry practice, we rely on independent
third party service providers to provide most of the services necessary to drill
new wells, including drilling rigs and related equipment and services,
horizontal drilling equipment and services, trucking services, tubulars, fracing
and completion services and production equipment. The industry has experienced
significant price increases for these services during the last year and this
trend is expected to continue into the future. These cost increases could in
the future significantly increase the Company's development costs and decrease
the return possible from drilling and development activities, and possibly
render the development of certain proved undeveloped reserves uneconomical.
Our success depends on acquiring or funding additional reserves.
Our future success depends upon our ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. The proved
reserves of the Company will generally decline as reserves are depleted, except
to the extent that the Company conducts successful exploration or development
activities or acquires properties containing proved reserves, or both. To
increase reserves and production, the Company must commence exploratory
drilling, undertake other replacement activities or utilize third parties to
accomplish these activities. There can be no assurance, however, that the
Company will have sufficient resources to undertake these actions, that the
Company's exploratory projects or other replacement activities will result in
significant additional reserves or that the Company will have success drilling
productive wells at low finding and development costs. Furthermore, although
the Company's revenues may increase if prevailing oil and gas prices increase
significantly, the Company's finding costs for additional reserves could also
increase.
Estimates of oil and gas reserves are uncertain and may vary substantially from
actual production.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
expenditures, including many factors beyond our control. The reserve
information set forth in this prospectus represents only estimates based on
reports prepared by Netherland, Sewell & Associates, Inc., as of January 1,
2004. Petroleum engineering is not an exact science. Information relating to
the Company's proved oil and gas reserves is based upon engineering estimates.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows necessarily depend upon a number of variable factors and assumptions,
such as historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, capital expenditures and workover and remedial
costs, all of which may in fact vary considerably from actual results. For
these reasons, estimates of the economically recoverable quantities of oil and
gas attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of the future net cash flows
expected therefrom prepared by different engineers or by the same engineers at
different times may vary substantially. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances may be material.
6
Operating hazards and uninsured risks may result in substantial losses.
The Company's operations are subject to all of the hazards and operating
risks inherent in drilling for and production of oil and gas, including the risk
of fire, explosions, blow-outs, pipe failure, abnormally pressured formations
and environmental hazards such as oil spills, gas leaks, ruptures or discharges
of toxic gases. The occurrence of any of these events could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, clean-up responsibilities, regulatory investigation
and penalties and suspension of operations. In accordance with customary
industry practice, the Company maintains insurance against some, but not all, of
these risks. There can be no assurance that any insurance will be adequate to
cover any losses or liabilities. The Company cannot predict the continued
availability of insurance, or its availability at premium levels that justify
its purchase. In addition, the Company may be liable for environmental damage
caused by previous owners of properties purchased by the Company, which
liabilities would not be covered by insurance.
Our operations are subject to various governmental regulations which require
compliance that can be burdensome and expensive.
The Company's oil and gas operations are subject to various federal, state
and local governmental regulations which may be changed from time to time in
response to economic and political conditions. Matters subject to regulation
include discharge permits for drilling operations, drilling bonds, reports
concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity to conserve supplies of oil
and gas. In addition, the production, handling, storage, transportation and
disposal of oil and gas, by-products thereof and other substances and materials
produced or used in connection with oil and gas operations are subject to
regulation under federal, state and local laws and regulations primarily
relating to protection of human health and the environment. These laws and
regulations have continually imposed increasingly strict requirements for water
and air pollution control and solid waste management. Significant expenditures
may be required to comply with governmental laws and regulations applicable to
the Company. The Company believes the trend of more expansive and stricter
environmental legislation and regulations will continue.
We face extensive competition in our industry.
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and gas companies, many of whom have
financial and other resources substantially in excess of those available to the
Company. These competitors may be better positioned to take advantage of
industry opportunities and to withstand changes affecting the industry, such as
fluctuations in oil and gas prices and production, the availability of
alternative energy sources and the application of government regulation.
Risks Related to Our Common Stock
The control of the Company by officers, directors and controlling stockholder
may limit or preclude the control exercised by other stockholders.
As of June 1, 2004, the Company's executive officers and directors, in the
aggregate, beneficially own approximately 12.5% of our outstanding common stock.
Additionally, Mr. Davidson beneficially owns approximately 67.2% of our
outstanding common stock. As a result, these stockholders acting together are,
and after completion of this rights offering, depending on the exercise of
subscription rights by the holder of the rights, will continue to be, able to
control most matters requiring approval by the stockholders of the Company,
including the election of directors. Such a concentration of ownership may have
the effect of delaying or preventing a change in control of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. See "Management," "Principal
Stockholders" and "Description of Securities."
7
We could issue additional preferred stock which could be entitled to dividend,
liquidation and other special rights and preferences not shared by holders of
our common stock or which could have anti-takeover effects.
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). Shares of Preferred
Stock may be issued from time to time in one or more series as the Board of
Directors, by resolution or resolutions, may from time to time determine, each
of said series to be distinctively designated. The voting powers, preferences
and relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions thereof, if any, of each such series
of Preferred Stock may differ from those of any and all other series of
Preferred Stock at any time outstanding, and, subject to certain limitations of
the Company's Certificate of Incorporation and the Delaware General Corporation
Law (the "DGCL"), the Board of Directors may fix or alter, by resolution or
resolutions, the designation, number, voting powers, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions thereof, of each such series Preferred Stock. The
issuance of any such Preferred Stock could materially adversely affect the
rights of holders of our common stock and, therefore, could reduce the value of
our common stock.
The Company has designated 30,000 shares of its Preferred Stock as
Cumulative Preferred Stock, Series A and had 12,533.58 shares of its Series A
preferred stock outstanding as of March 31, 2004. Holders of Series A preferred
stock are entitled to receive dividends at the rate of 12% of the liquidation
preference per annum payable quarterly in cash or, at the option of the Company
for all quarters ending on or prior to March 31, 2004, payable in whole or in
part in additional shares of Series A preferred stock at the rate of 15% of the
liquidation preference per annum. For all quarters after March 31, 2004,
dividends are payable in cash. However, the Board of Directors of the Company
has approved and the Company has received the consent of holders of the
requisite number of shares of Series A preferred stock to the amendment of the
Company's Certificate of Designation with respect to the Series A preferred
stock to give the Company the ability to pay dividends on the Series A preferred
stock with additional shares of Series A preferred stock after March 31, 2004
for so long as such shares remain outstanding and prior to the mandatory
redemption date. Upon a liquidation of the Company, whether voluntary or
mandatory, the shares of Series A preferred stock will rank prior to the shares
of our common stock. Consequently, holders of Series A preferred stock will
receive distributions in an amount per share equal to $1,000 and all accrued and
unpaid dividends thereon, whether or not declared or payable, before holders of
our common stock will receive any distribution.
In addition, specific rights granted to future holders of Preferred Stock
could be used to restrict the Company's ability to merge with, or sell its
assets to, a third party. The ability of the Board of Directors to issue
Preferred Stock could discourage, delay or prevent a takeover of the Company,
thereby preserving control of the Company by the current stockholders.
Our common stock traded over the counter and we can give no assurances as to the
market for it.
Shares of our common stock are quoted on the NASD OTC Bulletin Board. The
rights are transferable, but will not be listed for trading in the
over-the-counter or any other market. We can give you no assurance that a
market for the subscription rights will develop or, if a market does develop,
how long it will continue.
The subscription price was determined by the Board of Directors in its sole
discretion.
The subscription price for each share of our common stock to be issued
pursuant to the rights offering will be $1.20. The Subscription Price was
determined by the Company. In determining the Subscription Price, consideration
was given to such factors as the current market price of our common stock, the
availability of financing alternatives and the level, volatility of commodity
prices and the ability to secure an agreement from CD Holding to back-stop this
rights offering. The Subscription Price should not be considered an indication
of the actual value of the Company or our common stock. There can be no
assurance that the market price of our common stock will not decline during the
subscription period or that, following the issuance of the common stock upon
exercise of rights, a subscribing holder of rights will be able to sell shares
of common stock purchased in the rights offering at a price equal to or greater
than the Subscription Price.
8
Non-participants in the offering will suffer substantial dilution
To the extent a stockholder does not exercise its rights in full, such
stockholder's voting power and percentage equity interest in the Company,
including its percentage interest in any future earnings, will suffer
substantial dilution. Assuming all subscription rights are subscribed for on a
pro rata basis by all of the stockholders to whom the subscription rights were
issued, no shares would be exercisable in the over-subscription privilege and CD
Holding would not be required to purchase any shares pursuant to its agreement
to back-stop this rights offering and CD Holding's resulting beneficial
ownership, together with that of its affiliates, would be 67.2%. Assuming CD
Holding is the only stockholder to acquire shares of our common stock, which
number of shares is equivalent to the full number of shares of our common stock
it would have been entitled to subscribe for in this rights offering in
accordance with its basic subscription privilege, and, through the back-stop, CD
Holding acquires all of the remaining shares offered in this rights offering, CD
Holding's resulting beneficial ownership, together with that of its affiliates,
would be 90.2%.
We do not currently pay dividends on our common stock and do not anticipate
doing so in the future.
The Company has paid no cash dividends on its common stock, and there is no
assurance that the Company will achieve sufficient earnings to pay cash
dividends on its common stock in the future. The Company intends to retain any
earnings to fund its operations. Therefore, the Company does not anticipate
paying any cash dividends on the common stock in the foreseeable future. In
addition, the terms of the Company's outstanding Series A preferred stock
prohibit the payment of any dividends to the holders of its common stock.
Subscriptions, once exercised, will be irrevocable.
The election to exercise rights is irrevocable. Stockholders exercising
rights could be committed to buying shares of common stock above the prevailing
market price. Until certificates representing such shares are delivered,
subscribing rights holders may not be able to sell such shares. Certificates
representing shares of common stock purchased in the rights offering will be
delivered by mail as soon as practicable following the Expiration Date. No
interest will be paid to rights' holders on funds delivered to the Subscription
Agent pursuant to the exercise of rights pending delivery of such certificates
and return of any excess funds not applied to the purchase of shares. Further,
subscriptions payments will not be placed in an escrow account. Once a holder
has paid the subscription price, we will not refund any portion of such
subscription price, even if the rights offering is terminated before we raise
$12,000,000.
There are material federal income tax considerations that should be considered.
Holders of our common stock should recognize no income or gain for federal
income tax purposes upon the receipt, exercise or lapse of the rights.
Nevertheless, the federal income tax treatment of the distribution of rights to
holders of our common stock and any subsequent exercise or lapse of such rights
is subject to some uncertainty. In addition, purchasers of our common stock
should consider the federal income tax implications arising from the payment of
dividends on or the sale of shares of our common stock. See "Certain United
States Federal Income Tax Consequences" for a more detailed discussion of
certain federal income tax consequences resulting from the purchase, ownership
and disposition of rights and shares of our common stock.
A change of control could limit the Company's use of net operating losses.
As of March 31, 2004, the Company has accrued a net operating loss ("NOL")
carry forward of approximately $98,000,000. The Company believes that the
distribution and exercise of rights received in the rights offering will not
result in an ownership change within the meaning of Section 382 of the Internal
Revenue Code. However, transfers of the Company's stock in the future could
result in such an ownership change. In such a case, the ability of the Company
to use its NOLs accrued through the ownership change date could be limited. In
general, the amount of NOL the Company could use for any tax year after the date
of the ownership change would be limited to the value of the stock of the
Company (as of the ownership change date) multiplied by the long-term tax-exempt
rate.
9
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical facts, included in
this prospectus that address activities, events or developments that Gulfport
Energy Corporation ("Gulfport" or the "Company"), a Delaware corporation,
formerly known as WRT Energy Corporation ("WRT"), expects or anticipates will or
may occur in the future, including such things as estimated future net revenues
from oil and gas reserves and the present value thereof, future capital
expenditures (including the amount and nature thereof), business strategy and
measures to implement strategy, competitive strength, goals, expansion and
growth of Gulfport's business and operations, plans, references to future
success, reference to intentions as to future matters and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by Gulfport in light of its experience and its perception of
historical trends, current conditions and expected future developments as well
as other factors it believes are appropriate in the circumstances. However,
whether actual results and developments will conform with Gulfport's
expectations and predictions is subject to a number of risks and uncertainties,
general economic, market, or business conditions; the opportunities (or lack
thereof) that may be presented to and pursued by Gulfport; competitive actions
by other oil and gas companies; changes in laws or regulations; and other
factors, many of which are beyond the control of Gulfport. Consequently, all of
the forward-looking statements made in this prospectus are qualified by these
cautionary statements and there can be no assurances that the actual results or
developments anticipated by Gulfport will be realized, or even if realized, that
they will have the expected consequences to or effects on Gulfport, its business
or operations. We have no intention, and disclaim any obligation, to update or
revise any forward looking statements, whether as a result of new information,
future results or otherwise.
10
USE OF PROCEEDS
Our gross proceeds from this rights offering will be approximately
$12,000,000. The net cash proceeds from this rights offering are estimated to
be approximately $11,890,000 minus the amount of any outstanding borrowings
under our $3.0 million revolving credit facility with CD Holding that CD Holding
elects to apply to the subscription price for rights that it exercises in this
rights offering. As of the date of this prospectus, we had outstanding
borrowings of $500,000 under this facility.
The net proceeds will be used primarily to fund a portion of our currently
proposed seismic and drilling programs. We have budgeted approximately $4.5
million for a 3-D seismic survey at our East Hackberry Field, approximately $9.6
million for drilling 12 wells at West Cote Blanche Bay (of which approximately
$800,000 has been expended to date) and approximately $1.0 million for workovers
on ten wells in the WCBB field. To the extent that CD Holding pays cash upon
the exercise of its rights rather than reduces the outstanding obligations under
its credit facility, we also intend to use a portion of the net proceeds to
repay any remaining balance under that credit facility which we entered into on
April 30, 2004. The $3,000,000 revolving credit facility matures on the earlier
of the closing of this rights offering and August 1, 2005 and bears interest at
the rate of 10.0% per annum. The borrowings under the revolving credit facility
were used to fund a portion of our drilling program. The credit facility
provides that if this rights offering is not completed, CD Holding has the right
to convert any borrowings plus any accrued but unpaid interest under the
facility into shares of our common stock at a conversion price equal to $1.20
per share of common stock.
Pending the above uses, we may repay outstanding borrowings under our line
of credit with the Bank of Oklahoma. We expect that this line of credit will be
extended and that any amounts repaid will be available to us for the uses
described above. Amounts borrowed under this line of credit bear interest at
the prime rate charged from time to time by JPMorgan Chase plus 1%, with
payments of interest on outstanding balances due monthly. The outstanding
balance under this credit facility was $2.2 million at March 31, 2004.
11
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2004, and
each as adjusted to reflect the sale of all 10,000,000 shares in this rights
offering and the application of the net proceeds from this rights offering as if
such sale had occurred on March 31, 2004. The table should be read in
conjunction with our consolidated financial statements and the notes to those
financial statements included in this prospectus.
As of March 31, 2004
-----------------------
Actual As Adjusted
------ -----------
(Unaudited)
-----------
(Dollars in Thousands, Except Share Data)
Current maturities of long-term debt $ 2,311 $ 2,311
========= =========
Redeemable 12% cumulative preferred
stock, Series A, $0.01 par value, with
redemption and liquidation value of
$1,000 per share; 30,000 authorized,
12,534 issued and outstanding,
actual and as adjusted $ 12,534 $ 12,534
--------- ---------
Total long-term liabilities $ 14,845 $ 14,845
Stockholders' equity:
Common stock, $0.01 par value,.
20,000,000 authorized, 10,146,566
issued and outstanding and 20,146,566
issued and outstanding as adjusted 101 201
Additional paid in capital 84,192 96,092
Accumulated deficit (51,105) (51,105)
--------- ---------
Total Stockholders' equity 33,188 45,188
--------- ---------
Total capitalization $ 48,033 $ 60,033
========= =========
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MARKET FOR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASD OTC Bulletin Board under the symbol
"GPOR.OB." The following table sets forth the high and low sales prices for our
common stock in each quarter:
Year Ended December 31, 2004 Low High
--- ----
First Quarter $2.80 $3.40
Second Quarter (through July 21, 2004) $2.15 $3.10
Year Ended December 31, 2003 Low High
--- ----
First Quarter $2.50 $3.00
Second Quarter $2.60 $3.40
Third Quarter $2.69 $2.80
Fourth Quarter $2.75 $3.30
Year Ended December 31, 2002 Low High
--- ----
First Quarter $3.50 $5.40
Second Quarter $2.80 $4.20
Third Quarter $2.75 $3.65
Fourth Quarter $2.10 $3.05
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not represent actual transactions.
Holders of Record
At the close of business on June 1, 2004, there were 396 stockholders of
record holding 10,146,566 shares of our outstanding common stock.
Dividend Policy
Gulfport has never paid dividends on its common stock. We currently
intends to retain all earnings to fund our operations. Therefore, Gulfport does
not intend to pay any cash dividends on the common stock in the foreseeable
future. In addition, the terms of Gulfport's outstanding Series A preferred
stock prohibit the payment of any dividends to the holders of our common stock.
13
THE RIGHTS OFFERING
The Rights
We will distribute to each holder of our common stock who is a record
holder of our common stock as of the close of business on the rights offering
record date, which is July 16, 2004, at no charge, one transferable subscription
right for each 1.0146 shares of common stock owned, for a total of approximately
10,000,000 subscription rights. The subscription rights will be evidenced by
transferable subscription rights certificates. Each subscription right will
allow you to purchase one share of our common stock at a price of $1.20. If you
elect to exercise your basic subscription privilege in full, you may also
subscribe, at the subscription price, for additional shares of our common stock
under your over-subscription privilege. We have not engaged an underwriter in
connection with this rights offering.
Determination of Subscription Price
The subscription price for a share of common stock to be issued on exercise
of a right will be $1.20. The subscription price was determined by the Company.
In determining the subscription price, consideration was given to such factors
as the current market price of our common stock, the availability of financing
alternatives, the level and volatility of commodity prices and the ability to
secure an agreement from CD Holding to back-stop this rights offering. The
subscription price should not be considered an indication of the actual value of
the Company or the common stock. There can be no assurance that the market
price of the common stock will not decline during the subscription period or
that, following the issuance of shares upon exercise of rights, a subscribing
rights holder will be able to sell shares of common stock purchased in the
rights offering at a price equal to or greater than the subscription price.
No Fractional Rights
No fractional rights or cash in lieu thereof will be issued or paid, and
the number of rights distributed to each holder of common stock will be rounded
up to the nearest whole number of rights. Because the number of rights
distributed to each record holder will be rounded up to the nearest whole
number, beneficial owners of common stock who are also the record holders of
such shares may receive more rights than beneficial owners of common stock who
are not the record holders of their shares.
You may request that the subscription agent divide your subscription rights
certificate into transferable parts, for instance, if you are the record holder
for a number of beneficial holders of our common stock. However, the
subscription agent will not divide your subscription rights certificate so that
you would receive any fractional subscription rights.
Expiration of the Rights Offering
You may exercise your subscription rights at any time before 5:00 p.m.,
Dallas time, on August 17, 2004, the expiration date for this rights offering.
We may, in our sole discretion, extend the time for exercising the subscription
rights. We may extend the expiration date of this rights offering by giving
oral or written notice to the subscription agent on or before the scheduled
expiration date. If we elect to extend the expiration of this rights offering,
we will issue a press release announcing such extension no later than 9:00 a.m.,
Dallas time, on the next business day after the most recently announced
expiration date. In the event of a material change in the terms, conditions or
the plan of distribution of this rights offering, we will redistribute an
amended prospectus to stockholders of record of our common stock. Since CD
Holding has agreed to back-stop this rights offering, we do not anticipate the
need to extend the exercise period.
If you do not exercise your subscription rights before the expiration date
of this rights offering, your unexercised subscription rights will be null and
void. We will not be obligated to honor your exercise of subscription rights if
the subscription agent receives the documents relating to your exercise after
this rights offering expires, regardless of when you transmitted the documents,
except if you have timely transmitted the documents under the guaranteed
delivery procedures described below.
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Subscription Privileges
Your subscription rights entitle you to a basic subscription privilege and
an over-subscription privilege.
Basic Subscription Privilege. With your basic subscription privilege, you
may purchase one share of our common stock per subscription right, upon delivery
of the required documents and payment of the subscription price of $1.20 per
share. You are not required to exercise all of your subscription rights unless
you wish to purchase shares under your over-subscription privilege. We will
deliver to you or your broker certificates representing the shares that you
purchased with your basic subscription privilege as soon as practicable after
this rights offering has expired.
Over-Subscription Privilege. In addition to your basic subscription
privilege, you may subscribe for additional shares of our common stock, upon
delivery of the required documents and payment of the subscription price of
$1.20 per share, before the expiration of this rights offering. You may only
exercise your over-subscription privilege if you exercised your basic
subscription privilege in full.
Pro Rata Allocation. If there are not enough shares of our common stock to
satisfy all subscriptions made under the over-subscription privilege, we will
allocate the remaining shares of our common stock pro rata, after eliminating
all fractional shares, among those over-subscribing rights holders. "Pro
rata"means in proportion to the number of shares of our common stock that you
and the other subscription rights holders have purchased by exercising your
basic subscription privileges. If there is a pro rata allocation of the
remaining shares of our common stock and you receive an allocation of a greater
number of shares than you subscribed for under your over-subscription privilege,
then we will allocate to you only the number of shares for which you subscribed.
We will allocate the remaining shares pro rata among all other holders
exercising their over-subscription privileges.
Full Exercise of Basic Subscription Privilege. You may exercise your
over-subscription privilege only if you exercise your basic subscription
privilege in full. To determine if you have fully exercised your basic
subscription privilege, we will consider only the basic subscription privileges
held by you in the same capacity. For example, suppose that you were granted
subscription rights for shares of our common stock that you own individually and
shares of our common stock that you own collectively with your spouse. If you
wish to exercise your over-subscription privilege with respect to the
subscription rights you own individually, but not with respect to the
subscription rights you own collectively with your spouse, you only need to
fully exercise your basic subscription privilege with respect to your
individually owned subscription rights. You do not have to subscribe for any
shares under the basic subscription privilege owned collectively with your
spouse to exercise your individual over-subscription privilege.
When you complete the portion of your subscription rights certificate to
exercise your over-subscription privilege, you will be representing and
certifying that you have fully exercised your subscription privileges as to
shares of our common stock that you hold in that capacity. You must exercise
your over-subscription privilege at the same time you exercise your basic
subscription privilege in full.
Return of Excess Payment. If you exercised your over-subscription
privilege and are allocated less than all of the shares of our common stock for
which you wished to subscribe, your excess payment for shares that were not
allocated to you will be returned to you by mail, without interest or deduction,
as soon as practicable after the expiration date of this rights offering. We
will deliver to you or your broker certificates representing the shares of our
common stock that you purchased as soon as practicable after the expiration date
of this rights offering and after all pro rata allocations and adjustments have
been completed.
Method of Subscription-Exercise of Rights
You may exercise your subscription rights by delivering the following to
the subscription agent, at or prior to 5:00 p.m., Dallas time, on August 17,
2004, the expiration date of this rights offering:
- Your properly completed and executed subscription rights certificate with
any required signature guarantees or other supplemental documentation;
and
15
- Your full subscription price payment for each share subscribed for under
your subscription privileges.
If you are a beneficial owner of shares of our common stock whose shares
are registered in the name of a broker, custodian bank or other nominee, you
should instruct your broker, custodian bank or other nominee to exercise your
rights and deliver all documents and payment on your behalf prior to 5:00 p.m.
Dallas time on August 17, 2004, the expiration date of this rights offering.
Your subscription rights will not be considered exercised unless the
subscription agent receives from you, your broker, custodian or nominee, as the
case may be, all of the required documents and your full subscription price
payment prior to 5:00 p.m., Dallas time, on August 17, 2004, the expiration date
of this rights offering.
Back-stop Agreement
Pursuant to an agreement between us and CD Holding, L.L.C., dated April 14,
2004, CD Holding agreed, subject to certain conditions, to back-stop this rights
offering by purchasing any and all of the shares of our common stock offered in
this rights offering that are not otherwise subscribed for by the other holders
of subscription rights under their basic subscription privileges and
over-subscription privileges. CD Holding's obligations under the back-stop
agreement are triggered if and to the extent that all 10,000,000 shares of
common stock offered in this rights offering are not subscribed for. For
example, if none of our stockholders exercise their basic subscription
privilege, CD Holding would acquire all 10,000,000 shares of common stock
offered in this rights offering. If all rights are exercised under the basic
subscription privilege, CD Holding will not purchase any shares in the offering
except the shares that CD Holding will purchase pursuant to its exercise of its
basic subscription privilege as one of our stockholders. In return for its
agreement to back-stop this rights offering, CD Holding will receive a
commitment fee equal to 2% of the gross proceeds of this rights offering, which
CD Holding, at its option, may apply to the subscription price payable by it
upon exercise of the rights issued to it in this rights offering.
Method of Payment
Your payment of the subscription price must be made in U.S. dollars for the
full number of shares of common stock for which you are subscribing by either:
- check or bank draft drawn upon a U.S. bank or postal, telegraphic or
express money order payable to the subscription agent; or
- wire transfer of immediately available funds, to the subscription account
maintained by the subscription agent at UMB Bank, Kansas City, MO,
ABA #101000695, Acct #9800006823, Ref: Gulfports Rights Offering.
Receipt of Payment
Your payment will be considered received by the subscription agent only
upon:
- Clearance of any uncertified check;
- Receipt by the subscription agent of any certified check or bank draft
drawn upon a U.S. bank or of any postal, telegraphic or express money
order; or
- Receipt of collected funds in the subscription account designated above.
Clearance of Uncertified Checks
If you are paying by uncertified personal check, please note that
uncertified checks may take at least five business days to clear. If you wish
to pay the subscription price by uncertified personal check, we urge you to make
payment sufficiently in advance of the time this rights offering expires to
ensure that your payment is received by the subscription agent and clears by the
rights offering expiration date. We urge you to consider using a certified or
cashier's check, money order or wire transfer of funds to avoid missing the
16
opportunity to exercise your subscription rights should you decide to exercise
your subscription rights.
Delivery of Subscription Materials and Payment
You should deliver your subscription rights certificate and payment of the
subscription price or, if applicable, notices of guaranteed delivery, to the
subscription agent at the following address:
UMB Bank, N.A.
Corp Trust Department
2401 Grand Blvd.
Kansas City, MO 64108
You may call the subscription agent at 816-860-3020.
Your delivery to an address other than the addresses set forth above will
not constitute valid delivery.
Calculation of Subscription Rights Exercised
If you do not indicate the number of subscription rights being exercised,
or do not forward full payment of the total subscription price payment for the
number of subscription rights that you indicate are being exercised, then you
will be deemed to have exercised your basic subscription privilege with respect
to the maximum number of subscription rights that may be exercised with the
aggregate subscription price payment you delivered to the subscription agent.
If your aggregate subscription price payment is greater than the amount you owe
for your subscription, you will be deemed to have exercised your
over-subscription privilege to purchase the maximum number of shares of our
common stock with your over-payment. If we do not apply your full subscription
price payment to your purchase of shares of our common stock, we or the
subscription agent will return the excess amount to you by mail, without
interest or deduction, as soon as practicable after the expiration date of this
rights offering.
Exercising a Portion of Your Subscription Rights
If you subscribe for fewer than all of the shares of our common stock
represented by your subscription rights certificate, you may receive from the
subscription agent a new subscription rights certificate representing your
unused subscription rights. However, all subscription rights must be exercised
prior to the expiration date of this rights offering, or else your subscription
rights will be null and void. We will not issue any subscription rights
certificates for unexercised subscription rights after the rights offering
expiration date.
Your Funds will be Held by the Subscription Agent Until Shares of our Common
Stock are Issued
The subscription agent will hold your payment of the subscription price
payment in a segregated account with other payments received from other
subscription rights holders until we issue your shares of our common stock to
you upon consummation of the rights offering.
No Fractional Shares
No fractional shares will be issued upon exercise of the subscription
rights. We will instead round the number of shares upon exercise of the
subscription rights, as appropriate, to the nearest whole number.
Medallion Guarantee May Be Required
Your signature on each subscription rights certificate must be guaranteed
by an eligible institution, such as a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States, subject to standards and procedures adopted
by the subscription agent, unless:
17
- Your subscription rights certificate provides that shares are to be
delivered to you as record holder of those subscription rights; or
- You are an eligible institution.
Notice to Beneficial Holders
If you are a broker, a trustee or a depositary for securities who holds
shares of our common stock for the account of others on July 16, 2004, the
rights offering record date, you should notify the respective beneficial owners
of such shares of this rights offering as soon as possible to find out their
intentions with respect to exercising or selling their subscription rights. You
should obtain instructions from the beneficial owner with respect to their
subscription rights, as set forth in the instructions we have provided to you
for your distribution to beneficial owners. If the beneficial owner so
instructs, you should complete the appropriate subscription rights certificates
and submit them to the subscription agent with the proper payment. If you hold
shares of our common stock for the account(s) of more than one beneficial owner,
you may exercise the number of subscription rights to which all such beneficial
owners in the aggregate otherwise would have been entitled had they been direct
record holders of our common stock on the rights offering record date, provided
that, you, as a nominee record holder, make a proper showing to the subscription
agent by submitting the form entitled "Nominee Holder Certification" that we
will provide to you with your rights offering materials. If you did not receive
this form, you should contact the subscription agent to request a copy.
Beneficial Owners
If you are a beneficial owner of shares of our common stock or will receive
your subscription rights through a broker, custodian bank or other nominee, we
will ask your broker, custodian bank or other nominee to notify you of this
rights offering. If you wish to exercise or sell your subscription rights, you
will need to have your broker, custodian bank or other nominee act for you. If
you hold certificates of our common stock directly and would prefer to have your
broker, custodian bank or other nominee act for you, you should contact your
nominee and request it to effect the transactions for you. To indicate your
decision with respect to your subscription rights, you should complete and
return to your broker, custodian bank or other nominee the form entitled
"Beneficial Owners Election Form." You should receive this form from your
broker, custodian bank or other nominee with the other rights offering
materials. If you wish to obtain a separate subscription rights certificate,
you should contact the nominee as soon as possible and request that a separate
subscription rights certificate be issued to you. You should contact your
broker, custodian bank or other nominee if you do not receive this form, but you
believe you are entitled to participate in this rights offering. We are not
responsible if you do not receive the form from your broker, custodian bank or
nominee or if you receive it without sufficient time to respond.
Instructions for Completing Your Subscription Rights Certificate
You should read and follow the instructions accompanying the subscription
rights certificates carefully.
You are responsible for the method of delivery of your subscription rights
certificate(s) with your subscription price payment to the subscription agent.
If you send your subscription rights certificate(s) and subscription price
payment by mail, we recommend that you send them by registered mail, properly
insured, with return receipt requested. You should allow a sufficient number of
days to ensure delivery to the subscription agent prior to the time this rights
offering expires. Because uncertified personal checks may take at least five
business days to clear, you are strongly urged to pay, or arrange for payment,
by means of a certified or cashier's check, money order or wire transfer of
funds.
Determinations Regarding the Exercise of Your Subscription Rights
We will decide all questions concerning the timeliness, validity, form and
eligibility of the exercise of your subscription rights and any such
determinations by us will be final and binding. We, in sole discretion, may
waive, in any particular instance, any defect or irregularity, or permit, in any
particular instance, a defect or irregularity to be corrected within such time
18
as we may determine. We will not be required to make uniform determinations in
all cases. We may reject the exercise of any of your subscription rights
because of any defect or irregularity. We will not accept any exercise of
subscription rights until all irregularities have been waived by us or cured by
you within such time as we decide, in our sole discretion.
Neither we, nor the subscription agent, will be under any duty to notify
you of any defect or irregularity in connection with your submission of
subscription rights certificates and we will not be liable for failure to notify
you of any defect or irregularity. We reserve the right to reject your exercise
of subscription rights if your exercise is not in accordance with the terms of
this rights offering or in proper form. We will also not accept the exercise of
your subscription rights if our issuance of shares of our common stock to you
could be deemed unlawful under applicable law or is materially burdensome to us.
Regulatory Limitation
We will not be required to issue to you shares of our common stock pursuant
to this rights offering if, in our opinion, you would be required to obtain
prior clearance or approval from any state or federal regulatory authorities to
own or control such shares if, at the time this rights offering expires, you
have not obtained such clearance or approval.
Guaranteed Delivery Procedures
If you wish to exercise your subscription rights, but you do not have
sufficient time to deliver the subscription rights certificate evidencing your
subscription rights to the subscription agent on or before the time this rights
offering expires, you may exercise your subscription rights by the following
guaranteed delivery procedures:
- Deliver to the subscription agent on or prior to the rights offering
expiration date your subscription price payment in full for each share
you subscribed for under your subscription privileges in the manner set
forth above in "Method of Payment;"
- Deliver to the subscription agent on or prior to the expiration date the
form entitled "Notice of Guaranteed Delivery," substantially in the
form provided with the "Instructions as to Use of Subscription Rights
Certificates" distributed with your subscription rights certificates;
and
- Deliver the properly completed subscription rights certificate evidencing
your subscription rights being exercised and the related nominee holder
certification, if applicable, with any required signature guarantee,
to the subscription agent within three business days following the date
of your Notice of Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in substantially the
same form provided with the Instructions as to the Use of Subscription Rights
Certificates, which will be distributed to you with your subscription rights
certificate. Your Notice of Guaranteed Delivery must come from an eligible
institution, or other eligible guarantee institutions which are members of, or
participants in, a signature guarantee program acceptable to the subscription
agent.
In your Notice of Guaranteed Delivery, you must state:
- Your name;
- The number of subscription rights represented by your subscription rights
certificates, the number of shares of our common stock you are
subscribing for under your basic subscription privilege and the number of
shares of our common stock you are subscribing for under your
over-subscription privilege, if any; and
- Your guarantee that you will deliver to the subscription agent any
subscription rights certificates evidencing the subscription rights you
are exercising within three business days following the date the
subscription agent receives your Notice of Guaranteed Delivery.
19
You may deliver your Notice of Guaranteed Delivery to the subscription
agent in the same manner as your subscription rights certificates at the address
set forth above under "-Delivery of Subscription Materials and Payment." You may
alternatively transmit your Notice of Guaranteed Delivery to the subscription
agent by facsimile transmission Telecopy No.: (816) 860-3029. To confirm
facsimile deliveries, you may call (816) 860-3020.
The subscription agent will send you additional copies of the form of
Notice of Guaranteed Delivery if you request them. Please call (816) 860-3020
to request any copies of the form of Notice of Guaranteed Delivery. Banks and
brokerage firms please call collect at (816) 860-3020 to request any copies of
the form of Notice of Guaranteed Delivery.
Questions About Exercising Subscription Rights
If you have any questions or require assistance regarding the method of
exercising your subscription rights or requests for additional copies of this
prospectus, the Instructions as to the Use of Subscription Rights Certificates
or the Notice of Guaranteed Delivery, you should contact the subscription agent
at the address and telephone number set forth above under "Prospectus Summary -
Summary of the Rights Offering" included elsewhere in this prospectus.
Subscription Agent
We have appointed UMB Bank, N.A. to act as subscription agent for this
rights offering. We will pay all fees and expenses of the subscription agent
related to this rights offering and have also agreed to indemnify the
subscription agent from liabilities that they may incur in connection with this
rights offering.
No Revocation
Once you have exercised your subscription privileges, you may not revoke
your exercise. Subscription rights not exercised prior to the expiration date
of this rights offering will expire and will have no value.
Procedures for DTC Participants
We expect that the exercise of your basic subscription privilege and your
over-subscription privilege may be made through the facilities of the Depository
Trust Company. If your subscription rights are held of record through DTC, you
may exercise your basic subscription privilege and your over-subscription
privilege by instructing DTC to transfer your subscription rights from your
account to the account of the subscription agent, together with certification as
to the aggregate number of subscription rights you are exercising and the number
of shares of our common stock you are subscribing for under your basic
subscription privilege and your over-subscription privilege, if any, and your
subscription price payment for each share of our common stock that you
subscribed for pursuant to your basic subscription privilege and your
over-subscription privilege.
Foreign and Other Stockholders
Subscription rights certificates will not be mailed to subscription rights
holders whose addresses are outside the United States or who have an APO or FPO
address, but will be held by the subscription agent for such holders' accounts.
To exercise such subscription rights, you must notify the subscription agent,
and take all other steps which are necessary to exercise your subscription
rights on or prior to the expiration date of this rights offering. Your
subscription rights will expire and will have no value if the procedures set
forth in the preceding sentence are not followed prior to the expiration date.
Expiration Date, Extensions and Termination
We may extend this rights offering and the period for exercising your
subscription rights, in our sole discretion. The subscription rights will
expire at 5:00 p.m., Dallas time, on August 17, 2004, unless we decide to extend
this rights offering. In the event of a material change in the terms,
20
conditions or plan of distribution of this rights offering, we will redistribute
an amended prospectus to stockholders of record of our common stock. Since CD
Holding has agreed to back-stop this rights offering, we do not anticipate the
need to extend the exercise period. If you do not exercise your basic
subscription privilege prior to the expiration date of this rights offering,
your subscription rights will be null and void and will have no value. We will
not be required to issue shares of our common stock to you if the subscription
agent receives your subscription certificate or your payment after that time,
regardless of when you sent the subscription certificate and payment, unless you
send the documents in compliance with the guaranteed delivery procedures
described above. In addition, we may terminate this rights offering, in whole
or in part, at any time prior to the time this rights offering expires.
Method of Transferring and Selling Subscription Rights
We do not intend to apply to have the subscription rights traded on the
NASD OTC Bulletin Board or any exchange or other quotation system. We expect
that subscription rights may be purchased or sold through usual investment
channels until the close of business on the last trading day preceding the
expiration date. However, there has been no prior public market for the
subscription rights, and we cannot assure you that a trading market for the
subscription rights will develop or, if a market develops, that the market will
remain available throughout the subscription period. We also cannot assure you
of the price at which the subscription rights will trade, if at all. If you do
not exercise or sell your subscription rights you will lose any value inherent
in the subscription rights. See "-General Considerations Regarding the Partial
Exercise, Transfer or Sale of Subscription Rights" below.
Transfer of Subscription Rights. You may transfer subscription rights in
whole by endorsing the subscription rights certificate for transfer. Please
follow the instructions for transfer included in the information sent to you
with your subscription rights certificate. If you wish to transfer only a
portion of the subscription rights, you should deliver your properly endorsed
subscription rights certificate to the subscription agent. With your
subscription rights certificate, you should include instructions to register
such portion of the subscription rights evidenced thereby in the name of the
transferee (and to issue a new subscription rights certificate to the transferee
evidencing such transferred subscription rights). You may only transfer whole
subscription rights and not fractions of a subscription right. If there is
sufficient time before the expiration of this rights offering, the subscription
agent will send you a new subscription rights certificate evidencing the balance
of your subscription rights which you did not transfer to the transferee. You
may also instruct the subscription agent to send the subscription rights
certificate to one or more additional transferees. If you wish to sell your
remaining subscription rights, you may request that the subscription agent send
you certificates representing your remaining (whole) subscription rights so that
you may sell them through your broker or dealer.
If you wish to transfer all or a portion of your subscription rights, you
should allow a sufficient amount of time prior to the time the subscription
rights expire for the subscription agent to:
- receive and process your transfer instructions; and
- issue and transmit a new subscription rights certificate to your
transferee or transferees with respect to transferred subscription
rights, and to you with respect to any subscription rights you
retained.
If you wish to transfer your subscription rights to any person other than a
bank or broker, the signatures on your subscription rights certificate must be
guaranteed by an eligible institution.
General Considerations Regarding the Partial Exercise, Transfer or Sale of
Subscription Rights. The amount of time needed by your transferee to exercise
or sell its subscription rights depends upon the method by which you, as the
transferor, deliver the subscription rights certificates, the method of payment
made by your transferee and the number of transactions which the holder
instructs the subscription agent to effect. You should also allow up to ten
business days for your transferee to exercise or sell the subscription rights
that you transferred to it. Neither we nor the subscription agent will be
liable to a transferee or transferor of subscription rights if subscription
rights certificates or any other required documents are not received in time for
exercise or sale prior to the expiration time.
21
You are responsible for all commissions, fees and other expenses (including
brokerage commissions and transfer taxes) incurred in connection with the
purchase, sale or exercise of your subscription rights, except that we will pay
any fees of the subscription agent associated with this rights offering. Any
amounts you owe will be deducted from your account.
If you do not exercise your subscription rights before the expiration date,
your subscription rights will expire without value and will no longer be
exercisable.
Cancellation Rights
Our board of directors may cancel this rights offering, in whole or in
part, in its sole discretion at any time prior to the time this rights offering
expires for any reason (including a change in the market price of our common
stock). If we cancel this rights offering, all outstanding subscription rights
will expire without value and any funds you paid to the subscription agent will
not be refunded. Holders of rights who exercised subscription rights prior to
any such cancellation of this rights offering will receive certificates
representing the shares of common stock purchased.
No Board or Management Recommendation
An investment in shares of our common stock must be made according to each
investor's evaluation of its own best interests and after considering all of the
information in this prospectus, including the "Risk Factors" section of this
prospectus. Our board of directors and our management makes no recommendation
to subscription rights holders regarding whether they should exercise or sell
their subscription rights. You should not view CD Holding's agreement to
back-stop this rights offering as a recommendation or other indication by CD
Holding or our board of directors that the exercise of your subscription rights
is in your best interests.
Shares of Common Stock Outstanding After the Rights Offering
Based on the 10,146,566 shares of our common stock issued and outstanding
as of June 1, 2004, approximately 20,146,566 shares of our common stock will be
issued and outstanding after this rights offering expires (assuming all of the
rights are exercised), an increase in the number of outstanding shares of our
common stock of approximately 98.5%. The 12,533.58 shares of our Series A
preferred stock outstanding as of March 31, 2004 will remain outstanding.
Effects of Rights Offering on Stock Option Plan
As of June 1, 2004, there were outstanding options to purchase 627,337
shares of our common stock at an exercise price of $2.00 per share. The
agreements governing these options have antidilution provisions that will be
triggered by this rights offering. The number of shares of common stock for
which options may be exercised will be increased and the exercise price per
share will be decreased based upon the subscription price per share of the
rights issued in this rights offering, the number of shares issuable in this
rights offering and the current market price of our common stock. The aggregate
exercise price applicable to the options will remain unchanged. After giving
effect to this offering, there will be outstanding options to purchase 1,245,612
shares of our common stock at an exercise price of $1.01 per share.
Effects of Rights Offering on Outstanding Warrants
As of June 1, 2004, there were outstanding warrants to purchase 2,431,517
shares of our common stock. The agreements governing these warrants have
antidilution provisions that will be triggered by this rights offering. The
exercise price of the warrants will be reduced to the subscription price, and
the number of shares to be purchased under the warrants will be increased by
dividing the subscription price into the aggregate exercise amount of the
warrant prior to the reduction in the exercise price. Currently, the exercise
price is $4.00. This will be reduced to $1.20, and the number of shares to be
22
purchased under the warrants will be 8,105,057, the amount equal to 2,431,517
divided by $1.20 and multiplied by $4.00. Additionally, if the holder of any
warrant should exercise a warrant while there are rights outstanding, the total
number of outstanding shares to be used in the determination of the number of
shares to be purchased under the warrant will include the maximum number of
shares deliverable upon the exercise of all of the rights.
Dilutive Effects of Rights Offering
To the extent an stockholder does not exercise its rights in full, such
stockholder's voting power and percentage equity interest in us, including its
percentage interest in any future earnings, would suffer substantial dilution.
Other Matters
We are not making this rights offering in any state or other jurisdiction
in which it is unlawful to do so, nor are we distributing or accepting any
offers to purchase any shares of our common stock from subscription rights
holders who are residents of those states or other jurisdictions or who are
otherwise prohibited by federal or state laws or regulations to accept or
exercise the subscription rights. We may delay the commencement of this rights
offering in those states or other jurisdictions, or change the terms of this
rights offering, in whole or in part, in order to comply with the securities law
or other legal requirements of those states or other jurisdictions. We may
decline to make modifications to the terms of this rights offering requested by
those states or other jurisdictions, in which case, if you are a resident in
those states or jurisdictions or if you are otherwise prohibited by federal or
state laws or regulations from accepting or exercising the subscription rights
you will not be eligible to participate in this rights offering.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations is based in part on the financial statements and the
notes thereto included elsewhere in this prospectus and should be read in
conjunction therewith.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. Our significant accounting policies
are described in Note 1 to our consolidated financial statements included
elsewhere in this prospectus. We have identified certain of these policies as
being of particular importance to the portrayal of our financial position and
results of operations and which require the application of significant judgment
by our management. We analyze our estimates, including those related to oil and
gas properties, revenues recognition, income taxes and commitments and
contingencies, and base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
Oil and Gas Properties. The Company uses the full cost method of accounting
for oil and gas operations. Accordingly, all costs, including nonproductive
costs and certain general and administrative costs associated with acquisition,
exploration and development of oil and gas properties, are capitalized. Net
capitalized costs are limited to the estimated future net revenues, after income
taxes, discounted at 10% per year, from proven oil and gas reserves and the cost
of the properties not subject to amortization. Such capitalized costs,
including the estimated future development costs and site remediation costs, if
any, are depleted by an equivalent units-of-production method, converting gas to
barrels at the ratio of six MCF of gas to one barrel of oil. No gain or loss is
recognized upon the disposal of oil and gas properties, unless such dispositions
significantly alter the relationship between capitalized costs and proven oil
and gas reserves. Oil and gas properties not subject to amortization consist of
the cost of undeveloped leaseholds and totaled $1,600 at December 31, 2003 and
March 31, 2004. These costs are reviewed periodically by management for
impairment, with the impairment provision included in the cost of oil and gas
properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results by Gulfport and other operators,
the terms of oil and gas leases not held by production, and available funds for
exploration and development.
Income Taxes. Gulfport uses the asset and liability method of accounting
for income taxes, under which deferred tax assets and liabilities are recognized
for the future tax consequences of (1) temporary differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities and (2) operating loss and tax credit carryforwards. Deferred income
tax assets and liabilities are based on enacted tax rates applicable to the
future period when those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income during the period the rate change is
enacted. Deferred tax assets are recognized as income in the year in which
realization becomes determinable.
Revenue Recognition. Gas revenues are recorded in the month produced using
the entitlement method, whereby any production volumes received in excess of the
Company's ownership percentage in the property are recorded as a liability. If
less than Gulfport's entitlement is received, the underproduction is recorded as
a receivable. There is no such liability or asset recorded at March 31, 2004 or
December 31, 2003. Oil revenues are recognized when ownership transfers, which
occurs in the month produced.
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.
24
Results of Operations
The markets for oil and gas have historically been, and will continue to
be, volatile. Prices for oil and gas may fluctuate in response to relatively
minor changes in supply and demand, market uncertainty and a variety of factors
beyond the control of Gulfport. Set forth in the tables below are the average
prices received by the Company and production volumes during the periods
indicated.
Three Months Ended March 31,
2004 2003
------------ ------------
Production Volumes:
Oil (MBBLS) 133 142
Gas (MMCF) 15 26
Average oil price (per Bbl) $ 32.56 $ 28.91
Average gas price (per Mcf) $ 3.30 $ 4.23
2003 2002 2001
------------ ------------ ------------
Production Volumes:
Oil (MBBLS) 571 464 595
Gas (MMCF) 123 103 71
Oil Equivalents (MBOE) 592 481 607
Average Prices:
Oil (per BBL) $ 27.66 (1) $ 24.69 (2) $ 25.50
Gas (per MCF) $ 4.04 $ 3.66 $ 4.20
Oil Equivalents (per MBOE) $ 26.70 $ 24.59 $ 25.48
Average Production Costs (per BOE) $ 9.93 (3) $ 10.65 (3) $ 7.85
Average Production Taxes (per BOE) $ 3.17 $ 2.81 $ 2.88
--------------------------------------
(1) Includes fixed contract prices of
January 2003 $ 28.50
February 2003 $ 28.34
March 2003 $ 27.95
April 2003 $ 27.08
May 2003 $ 26.95
June 2003 $ 24.27
July 2003 $ 24.33
August 2003 $ 24.42
September 2003 $ 24.45
October 2003 $ 24.45
November 2003 $ 24.25
December 2003 $ 24.10
Excluding the effect of the fixed price contracts, the average oil price
for 2003 would have been $32.38 per BBL and $32.08 per BBL oil equivalent
price.
(2) Includes fixed contract prices of $26.50 for the months May through October
2002 and $25.90 for November and December
(3) Does not include production taxes.
25
Comparison of the Three Months Ended March 31, 2004 and 2003
Gulfport reported net income attributable to common stock of $40,000 for
the three months ended March 31, 2004, as compared with net income attributable
to common stock of $850,000 for the three months ended March 31, 2003. The
decrease in income attributable to common stock was primarily due to an increase
in operating expenses, depreciation, depletion and amortization and interest
expense on our Series A preferred stock. This decrease was partially offset
by a 13% increase in average oil prices received for the three months ended
March 31, 2004 as compared to the same period in 2003.
Oil and Gas Revenues. For the three months ended March 31, 2004, Gulfport
reported oil and gas revenues of $4,395,000, a 4% increase from revenues of
$4,218,000 during the same period in 2003. This increase in revenues is
attributable to a 13% increase in the average oil price received for the three
months ended March 31, 2004 of $32.56 as compared to $28.91 for the same period
in 2003. This was partially offset by a 7% decrease in barrels of oil
equivalents ("BOE's") produced to 136 BOE for the three months ended March 31,
2004 as compared to 142 BOE for the same period in 2003. This decrease in
production was due mainly to natural production declines as well as additional
declines from the high initial production rates attributable to the initial
production from the Company's drilling program initiated in December 2002
during the three months ended March 31, 2004.
Operating Expenses. Lease operating expenses not including production taxes
increased to $1,448,000 for the three months ended March 31, 2004 as compared to
$1,251,000 for the same period in 2003. This increase was due primarily to
non-capitalized LOE workovers performed during the period.
Production Taxes. Production taxes increased slightly for the three months
ended March 31, 2004 as compared to the same period in 2003 due to an increase
in oil and gas revenues.
General and Administrative Expenses. Net general and administrative
expenses increased to $686,000 for the three months ended March 31, 2004 from
$572,000 for the same period in 2003. This increase was due to increases in the
Company's reserve report costs, salary and benefits, legal expenses, 401(k)
Company matching, and director's insurance which were partially offset by
increases in capitalized general and administrative expenses of $342,000 for
the three months ended March 31, 2004 as compared to $110,000 for the same
period during 2003.
Interest Expense. Ordinary interest expense increased to $42,000 for the
three months ended March 31, 2004 from $3,000 for the same period in 2003. This
increase was due to an increase in the average debt outstanding for the three
months ended March 31, 2004 as compared to the same period in 2003.
Interest Expense - Preferred Offering. In May 2003, the FASB issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or as
an asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS No. 150 is generally effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Previously, our Series A preferred stock had been classified on our
balance sheet between total liabilities and equity. Currently, the Company has
recorded a liability related to the Series A preferred stock of $12,534,000. As
a result of the adoption of SFAS No. 150 in May 2003, the Company has recorded
$463,000 of interest expense for the three months ended March 31, 2004 on the
preferred offering which would have previously been classified as a reduction in
equity if there had been any for the same period in 2003.
Other changes in income for the three months ended March 31, 2004 as
compared to the three months ended March 31, 2003 were attributable to the
following factors:
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense was $1,133,000 for the three months ended March 31, 2004,
consisting of $1,080,000 in depletion on oil and gas properties, and $53,000 in
depreciation of other property and equipment. This is a 13% increase when
compared to the 2003 depreciation, depletion and amortization expense of
$1,000,000. This increase is due primarily to the loss of barrels due to
engineering revisions in the reserve report dated January 1, 2004.
26
Income Taxes. As of March 31, 2004, the Company had a net operating loss
carryforward of approximately $98,000,000, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately
$45,000,000, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. No
current tax provision was provided for the three-month period ended March 31,
2004.
Cumulative Effect of Accounting Change. On January 1, 2003, the Company
adopted Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"), which requires the Company to
record a liability equal to the fair value of the estimated cost to retire an
asset. The asset retirement liability is recorded in the period in which the
obligation meets the definition of a liability, which is generally when the
asset is placed into service. When the liability is initially recorded, the
Company will increase the carrying amount of the related long-lived asset by an
amount equal to the original liability. The liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related long-lived asset. Any difference between costs
incurred upon settlement of an asset retirement obligation and the recorded
liability will be recognized as a gain or loss in the Company's earnings. The
asset retirement obligation is based on a number of assumptions requiring
professional judgment. The Company cannot predict the type of revisions to
these assumptions that will be required in future periods due to the
availability of additional information, including prices for oil field services,
technological changes, governmental requirements and other factors. For the
three months ended March 31, 2003 and upon adoption of SFAS No. 143, the Company
recorded a net benefit of $270,000 as the cumulative effect of a change in
accounting principle. The non-cash transition adjustment increased oil and
natural gas properties and asset retirement obligations by $7,590,000 and
$7,370,000, respectively, and decreased accumulated depreciation by $50,000.
Comparison of Years Ended December 31, 2003 and 2002
Gulfport reported a net loss attributable to common stock of $219,000 for
the year ended December 31, 2003, as compared with a net loss attributable to
common stock of $625,000 for the year ended December 31, 2002. The decrease in
loss attributable to common stock of $406,000 was primarily due to an increase
in oil and gas sales during 2003 as a result of increased production
attributable to the Company's drilling program initiated in December 2002. In
addition, during 2003, Gulfport had twelve full months of production. During
2002, as a result of Hurricane Lili, the Company experienced down time on its
WCBB facility which resulted in a loss of production. Additionally, Gulfport's
higher revenues was partially attributable to a 12% increase in average oil
prices received for the year ended December 31, 2003 as compared to 2002. This
reduction of net loss from 2003 was offset in part by an increase in operating
expenses, depreciation, depletion and amortization and interest expense on the
preferred stock.
Oil and Gas Revenues. For the year ended December 31, 2003, Gulfport
reported oil and gas revenues of $15,809,000, a 34% increase from revenues of
$11,450,000 in 2002. This $3,980,000 increase in revenues is attributable to a
23% increase in BOE produced to 592 BOE for the year ended December 31, 2003 as
compared to 481 BOE for 2002. This increase in production was due mainly to the
Company's drilling program initiated in December 2002. In addition, during
2003, Gulfport had twelve full months of production. During 2002, as a result
of Hurricane Lili, the Company experienced down time on its WCBB facility which
resulted in a loss of production. Additionally, contributing to the increase in
oil and gas revenue was a 12% increase in average oil prices received for the
year ended December 31, 3003 as compared to 2002.
Operating Expenses Including Production Taxes. Total lease operating
expenses including production taxes increased to $7,768,000 for the year ended
December 31, 2003 as compared to $6,474,000 for the same period in 2002. This
increase was due to primarily to non-capitalized lease operating expense for
workovers performed during the period. In addition, production taxes increased
for the year ended December 31, 2003 as compared to the same period in 2002 due
to an increase in oil and gas revenues.
General and Administrative Expenses. Net general and administrative
expenses decreased slightly to $1,843,000 for the year ended December 31, 2003
27
from $1,873,000 for 2002. This decrease was due primarily to an increase in
administrative reimbursements from affiliated entities of $764,000 for the year
ended December 31, 2003 as compared to $250,000 during 2002.
Accretion Expense. In August 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. The liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related long-lived
asset. Any difference between costs incurred upon settlement of an asset
retirement obligation and the recorded liability will be recognized as a gain or
loss in the Company's earnings. Gulfport adopted SFAS No. 143 effective January
1, 2003. For the year ended December 31, 2003, Gulfport recognized $393,000 in
accretion expense related to SFAS No. 143. (See Note 21 to the Company's
financial statements for the fiscal year ended December 31, 2003 included
elsewhere in this prospectus).
Interest Expense. Ordinary interest expense decreased by $69,000, or 62%,
to $112,000 for the year ended December 31, 2003 from $181,000 for 2003. This
decrease was due to a reduction of average debt outstanding during 2003.
Interest Expense - Preferred Offering. In May 2003, the FASB issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or as
an asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS No. 150 is generally effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Previously, our Series A preferred stock had been classified on the
balance sheet between total liabilities and equity. The Company has recorded a
liability related to the Series A preferred stock of $12,071,000. As a result
of the adoption of SFAS No. 150 in May 2003, the Company has recorded $875,000
of interest expense for the last six months of 2003 related to the outstanding
Series A preferred stock which would have previously been classified as a
reduction in equity. (See Note 21 to the Company's financial statements for the
fiscal year ended December 31, 2003 included elsewhere in this prospectus).
Litigation Trust. Pursuant to Old WRT's 1997 plan of reorganization, all
of Old WRT'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 Oil and Gas Company ("Tri-Deck")), existing as of the
effective date of that plan, were transferred into a "Litigation Trust"
controlled by an independent party for the benefit of most of Old WRT's existing
unsecured creditors. The litigation related to recovery of marine and rig
equipment and the Tri-Deck claims were subsequently transferred to the
Litigation Trust as described below.
The Litigation Trust was funded by a $3,000,000 cash payment which was made
on the effective date of reorganization. Gulfport owns a 12% interest in the
Litigation Trust with the other 88% being owned by the former general unsecured
creditors of Old WRT. For financial statement reporting purposes, Gulfport has
not recognized the potential value of recoveries which may ultimately be
obtained, if any, as a result of the actions of the Litigation Trust, treating
the entire $3,000,000 payment as a reorganization cost at the time of the
reorganization.
On January 20, 1998, Gulfport and the Litigation Trust entered into a
Clarification Agreement whereby the rights to pursue various claims reserved by
Gulfport under the plan of reorganization were assigned to the Litigation Trust.
In connection with this agreement, the Litigation Trust agreed to reimburse
Gulfport $100,000 for legal fees Gulfport had incurred in connection these
claims. As additional consideration for the contribution of this claim to the
Litigation Trust, Gulfport is entitled to 20% to 80% of the net proceeds from
these claims.
During 2002, Gulfport received $160,000 in proceeds from the Litigation
Trust. No proceeds were received from the Litigation Trust in 2003. Gulfport
received $160,000 from the Litigation Trust during 2002. No revenues were
received from the Litigation Trust in 2003.
Other changes in income for the year ended December 31, 2003 as compared to
the year ended December 31, 2002 were attributable to the following factors:
28
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense was $4,637,000 for the year ended December 31, 2003,
consisting of $4,421,000 in depletion on oil and gas properties, $210,000 in
depreciation of other property and equipment and $6,000 in amortization expense.
This is a 37% increase when compared to the 2002 depreciation, depletion and
amortization expense of $3,386,000. This increase is due primarily to an
increase in production for the year ended December 31, 2003 to 592 MBOE as
compared to 481 MBOE in 2002 and the loss of reserves due to engineering
revisions in the reserve report dated January 1, 2004. In addition, as a result
of the adoption of SFAS 143 "Accounting for Asset Retirement Obligations," the
amount to amortize increased by $7,500,000 which resulted in additional
depletion, depreciation and amortization. (See Note 21 to the Company's
financial statements for the fiscal year ended December 31, 2003 included
elsewhere in this prospectus).
Income Taxes. As of December 31, 2003, the Company had a net operating
loss carryforward of approximately $98,000,000, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately
$45,000,000, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. A
current tax provision of $490,000 was provided for the year ended 2003, which
was fully offset by an equal income tax benefit due to operating loss
carryforwards and other deferred tax assets.
Capital Expenditures, Capital Resources and Liquidity
Net cash flow provided by operating activities for the three months ended
March 31, 2004 was $553,000, as compared to net cash flow provided by operating
activities of $6,525,000 during the same period in 2003. This was mainly due to
the collection during 2003 of an insurance settlement in the amount of
$2,510,000 related to damage to the WCBB facility caused by Hurricane Lili (an
additional $1,000,000 advance had been paid to the Company during 2002), a
reduction of net income of $1,000,000, an increase in accounts receivable of
$979,000, a decrease in accounts payable and an increase in interest expense of
$463,000 as a result of the adoption of SFAS No. 150. Net cash flow provided by
operating activities for the year ended December 31, 2003 was $9,382,000, as
compared to net cash flow provided by operating activities of $4,030,000 for
2002. The increase was mainly due to the collection during 2003 of the
insurance settlement, an increase in depreciation, depletion and amortization of
$1,265,000 and an increase in production due to factors described above and an
increase in interest expense as a result of the adoption of SFAS No. 150.
Net cash used in investing activities for the three months ended March 31,
2004 was $1,062,000 as compared to $4,389,000 used during the same period in
2003. Mainly as a result of the Company's drilling programs initiated in
December 2002, the Company spent $3,778,000 in additions to oil and gas
properties in the first three months of 2003 as compared to $987,000 for the
same period in 2004. This amount was primarily used for workover and
recompletion activities on existing wells. During 2004, Gulfport financed its
capital expenditures with cash flow provided by operations. Net cash used in
investing activities for the year ended December 31, 2003 was $11,127,000 as
compared to $8,904,000 used during 2002. Mainly as a result of the Company's
drilling programs initiated in December 2002 and April 2003, the Company spent
$10,145,000 in additions to oil and gas properties in 2003. This amount consists
primarily of $5,600,000 for drilling activity and $4,000,000 for other workover
and recompletion activities on existing wells. In addition, another $707,000 was
spent on the clean up and repair of hurricane damage, $40,000 was spent on the
acquisition of other property and equipment, and the remaining expenditures were
attributable to general and administrative costs capitalized to the full cost
pool. During 2003, Gulfport financed its capital expenditures with cash flow
provided by operations, borrowings from the Company's line of credit and the
remaining proceeds from the issuance of the Series A preferred stock.
Net cash used in by financing activities for the three months ended March
31, 2004 and March 31, 2003 were $6,000 and $5,000, respectively, related to
principal payments on borrowings. Net cash provided by financing activities for
2003 was $2,178,000 as compared to $4,906,000 provided during 2002. Net cash
provided by financing activities in 2003 related to $2,200,000 in proceeds
received from borrowings on the Company's line of credit. Net cash provided by
financing activities for 2002 consisted of $6,029,000 from the issuance of the
Series A preferred stock in 2002 and reduction of debt of $1,123,000 during
2002.
29
Capital Resources. In addition to cash generated by operating activities
primarily related to funds from our producing oil and gas properties, our main
capital resources are derived from the issuance of equity securities and
borrowings under our bank and other credit facilities.
Credit Facilities. On June 20, 2002, the Company entered into a line of
credit with the Bank of Oklahoma. Under the terms of the agreement, the Company
was extended a commitment to borrow up to $2,300,000. Amounts borrowed under
the line bear interest at the prime rate charged from time to time by JPMorgan
Chase plus 1%, with payments of interest on outstanding balances due monthly.
On July 1, 2003, the Company renewed this line of credit and extended the
maturity date to July 1, 2004. The outstanding balance under this credit
facility was $2,200,000 at March 31, 2004. The Company intends to extend the
maturity date of this credit facility and, pending application of the net
proceeds from the rights offering, may use a portion of the net proceeds from
this rights offering to repay amounts outstanding under this credit facility.
In connection with this rights offering, on April 30, 2004, the Company
entered into a $3,000,000 revolving credit facility with CD Holding, L.L.C., a
principal stockholder of the Company. Borrowings under the credit facility are
due on the earlier of the closing of this rights offering and August 1, 2005 and
bear interest at 10.0% per annum. Under the credit facility, CD Holding may, if
it elects to do so, apply the outstanding principal amount and any accrued but
unpaid interest either (1) to the subscription price payable upon exercise of
the rights issued to CD Holding in the rights offering, or (2) to the purchase
price for our common stock. Any amounts that remain outstanding after such
application will be repaid with a portion of the net proceeds from the rights
offering to the extent such funds are available. The credit facility provides
that if this rights offering is not completed, CD Holding has the right to
convert any borrowings plus any accrued but unpaid interest under the facility
into shares of our common stock at a conversion price equal to $1.20 per share
of common stock.
On May 22, 2001, the Company entered into a revolving line of credit
agreement with Gulfport Funding, LLC ("Gulfport Funding"), an affiliate of the
Company. Under the terms of the agreement, the Company could borrow up to
$3,000,000, with borrowed amounts bearing interest at the prime rate charged
from time to time by the Bank of America plus 4%. All outstanding principal
amounts along with accrued interest were due on February 22, 2002. The Company
paid a facility commitment fee of $60,000 in connection with this line of
credit. This fee was amortized over the life of the agreement. On March 29,
2002, the outstanding balance of this note payable, together with all accrued
and unpaid interest, was satisfied in full through Gulfport Funding's
participation in the Company's private placement offering of its Series A
preferred stock as described below.
Issuance of Equity. In March 2002, the Company commenced a private
placement offering of 10,000 units. Each unit consisted of (i) one share of
Cumulative Preferred Stock, Series A, of the Company and (ii) a warrant to
purchase up to 250 shares of common stock, par value $0.01 per share, of the
Company. Holders of the Series A preferred stock are entitled to receive
dividends at the rate of 12% of the liquidation preference per annum payable
quarterly in cash or, at the option of the Company for all quarters ending on or
prior to March 31, 2004, payable in whole or in part in additional shares of
Series A preferred stock at the rate of 15% of the liquidation preference per
annum. The Company chose to pay dividends on the shares of Series A preferred
stock with additional shares of Series A preferred stock for the quarterly
periods ended March 31, June 30, September 30 and December 31, 2003 and March
31, 2004 and, as a result, had issued an additional 3,241.73 shares of Series A
preferred stock as of March 31, 2004. For all quarters after March 31, 2004,
dividends are payable in cash. However, the Board of Directors of the Company
has approved and the Company has received the consent of holders of the
requisite number of shares of Series A preferred stock to the amendment of the
Company's Certificate of Designation with respect to the Series A preferred
stock to give the Company the ability to pay dividends on the Series A preferred
stock with additional shares of Series A preferred stock after March 31, 2004
for so long as such shares remain outstanding and prior to the mandatory
redemption date. To the extent funds are legally available, the Company is
obligated to declare and pay the dividends on the Series A preferred stock. The
Series A preferred stock may be redeemed at any time for an amount per share
equal to $1,000 and all accrued and unpaid dividends thereon, whether or not
declared or payable, and must be redeemed on March 29, 2007 for an amount per
share equal to $1,000 and all accrued and unpaid dividends thereon, whether or
not declared or payable. Accordingly, the outstanding Series A preferred stock
is treated as redeemable stock on the Company's balance sheet.
The Warrants have a term of ten years and an exercise price of $4.00 per
share of common stock, subject to adjustment under certain circumstances
including the occurrence of this rights offering. See "the Rights
30
Offering-Effects of Rights Offering on Outstanding Warrants." The Company
granted to holders of the Warrants certain demand and piggyback registration
rights with respect to shares of common stock issuable upon exercise of the
warrants.
The Series A preferred stock offering was made available to stockholders
(some of whom were affiliates) of the Company as of December 31, 2001 and who
were accredited investors. Purchasers were able to participate up to their pro
rata share of ownership in the Company as of December 31, 2001. As of April 15,
2002, the Company had closed on subscriptions totaling $9,292,000 for 9,291.85
units, which included the conversion by Gulfport Funding, LLC of its $3,000,000
loan along with the accumulated interest due from the Company for 3,262.98
units. Additionally, multiple entities controlled by the Company's majority
stockholder participated in the offering by subscribing for 2,738 units at a
cost of $2,738,000.
During 2003, the Company hired Petrie Parkman & Co. to assist in a possible
sale of its West Cote Blanche Bay Field (WCBB). As of the date of this
prospectus, no sale is pending. It is the Board of Directors' determination that
if a sale of WCBB is not consummated that it is in the best interests of the
Company to undertake this rights offering. CD Holding, one of our principal
stockholders, has agreed subject to certain conditions, to back-stop this rights
offering for a commitment fee of 2% of the gross proceeds from this rights
offering, which, at the option of CD Holding, may be applied to the subscription
price payable upon exercise of the rights issued to it in this rights offering.
Liquidity and Capital Expenditures. Historically, our primary sources of
funds have been cash flow from our producing oil and gas properties, the
issuance of equity securities, borrowings under our bank and other credit
facilities and, from time to time, the sale of oil and gas properties. Our
ability to access any of these sources of funds can be significantly impacted by
unexpected decreases in oil and natural gas prices. To mitigate the effects of
dramatic commodity price fluctuations, we have entered into fixed price
contracts for the WCBB production as follows:
May 2004 1000 bbls @ day $30.85
June 2004 1000 bbls @ day $30.85
July-December 2004 1000 bbls @ day $33.60
January-June 2005 1000 bbls @ day $33.10
The primary capital commitments faced by the Company are the capital
requirements needed to continue developing the Company's proved reserves and
obligations under Gulfport's credit facilities and its outstanding Series A
preferred stock.
Gulfport's strategy is to continue to increase cash flows generated by its
properties by undertaking new drilling, workover, sidetrack and recompletion
projects in the fields to exploit its reserves. The Company has upgraded its
infrastructure by enhancing its existing facilities to increase operating
efficiencies, increase volume capacities and lower lease operating expenses.
Additionally, Gulfport completed the reprocessing of its 3-D seismic data in its
principal property, WCBB. The reprocessed data will continue to enable the
Company's geophysicists to generate new prospects and enhance existing prospects
in the intermediate zones in the field, thus creating a portfolio of new
drilling opportunities.
In Gulfport's January 1, 2004 reserve report, 91% of Gulfport's net
reserves were categorized as proved undeveloped. The proved reserves of
Gulfport will generally decline as reserves are depleted, except to the extent
that Gulfport conducts successful exploration or development activities or
acquires properties containing proved developed reserves, or both. To realize
reserves and increase production, the Company must continue its exploratory
drilling, undertake other replacement activities or utilize third parties to
accomplish those activities.
Gulfport's inventory of prospects includes 137 proved undeveloped (PUD)
wells at WCBB. The drilling schedule used in the reserve report anticipates that
all of those wells will be drilled by 2011. Gulfport's proposed 2004 drilling
program includes 12 wells at WCBB during 2004 at an estimated aggregate cost of
$9,600,000. In addition, Gulfport intends to workover ten existing wells at WCBB
through the first quarter of 2005 at an estimated aggregate cost of $1,000,000.
31
Beginning in 2004, Gulfport intends to shoot 3-D seismic at East Hackberry
Field at a total estimated cost of approximately $4,500,000.
Gulfport recently purchased the office building in Oklahoma City, Oklahoma
in which it had been leasing approximately 12,035 square feet at a monthly rent
of approximately $18,000. The building contains approximately 24,823 total
rentable square feet. Upon the closing, the Company had access to an additional
3,000 square feet of space and the balance of the space was leased for 12 months
by the previous owner. At the end of the twelve-month period, the Company will
either occupy or sub-lease any unused space. The purchase price was $3.7
million, of which approximately $300,000 was paid in cash at closing. The
effect on the Company's liquidity is expected to be minimal, as debt service
costs are projected to be covered by the rental income generated.
The Company intends to use cash flows from operations and the net proceeds
from this rights offering to meet its capital expenditure, debt repayment and
other financial obligations during 2004.
Commitments and Contingencies
Plugging and Abandonment Funds
In connection with the acquisition of a portion of its interest in the WCBB
properties, the Company assumed the seller's obligation to contribute
approximately $18,000 per month through March 2004, to a plugging and
abandonment trust and the obligation to plug a minimum of 20 wells per year for
20 years commencing March 11, 1997. ChevronTexaco retained a security interest
in production from these properties until these abandonment obligations have
been fulfilled. Beginning in 2007, the Company can access the trust for use in
plugging and abandonment charges associated with the property. As of March 31,
2004, the plugging and abandonment trust totaled approximately $2,807,000,
including interest received during 2004 of $3,000. The Company has plugged 132
wells at WCBB since it began its plugging program in 1997 and is current in its
funding and plugging obligations.
In addition, the Company has letters of credit totaling $200,000 secured by
certificates of deposit being held for plugging costs in the East Hackberry
field. Once specific wells are plugged and abandoned, the $200,000 will be
returned to the Company.
Texaco Global Settlement
Pursuant to the terms of a global settlement between ChevronTexaco and the
State of Louisiana which includes the State Lease No. 50 portion of Gulfport's
East Hackberry Field, Gulfport was obligated to commence drilling a well or
other qualifying development operation on certain non-producing acreage in the
field prior to March 1998. Because of prevailing market conditions during 1998,
the Company believed it was commercially impractical to shoot seismic or
commence drilling operations on the subject property. As a result, Gulfport has
agreed to surrender approximately 440 non-producing acres in this field to the
State of Louisiana. At March 31, 2004, Gulfport was in the process of releasing
such acreage to the State of Louisiana.
Accounting and Reporting Changes
SFAS No. 143
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which requires the Company to record a liability equal to the fair value
of the estimated cost to retire an asset. The asset retirement liability is
recorded in the period in which the obligation meets the definition of a
liability, which is generally when the asset is placed into service. When the
liability is initially recorded, the Company will increase the carrying amount
of the related long lived asset by an amount equal to the original liability.
The liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related long-lived asset. Any
32
difference between costs incurred upon settlement of an asset retirement
obligation and the recorded liability will be recognized as a gain or loss in
the Company's earnings. The asset retirement obligation is based on a number of
assumptions requiring professional judgment. The Company cannot predict the
type of revisions to these assumptions that will be required in future periods
due to the availability of additional information, including prices for oil
field services, technological changes, governmental requirements and other
factors. Upon adoption of SFAS No. 143, the Company recorded a net benefit of
$270,000 as the cumulative effect of a change in accounting principle. The
non-cash transition adjustment increased oil and natural gas properties and
asset retirement obligations by $7,590,000 and $7,370,000, respectively, and
decreased accumulated depreciation by $50,000.
The asset retirement obligation recognized by the Company at December 31,
2003, relates to the estimated costs to dismantle and abandon its investment in
producing oil and gas properties and the related facilities. Of the total asset
retirement liability, $480,000 that has been classified as short-term is the
estimated portion of the total liability to be settled during the next year as
the Company meets its plugging and abandonment requirements as discussed in Note
8.
The pro forma asset retirement obligation as of December 31, 2002, was
$7,370,000. Pro forma net income for the period December 31, 2002, assuming
SFAS No. 143 had been applied retroactively, is shown in the following table:
December 31, 2002
-----------------
Net income available to common stockholders -
As reported $ (625,000)
Pro forma (340,000)
Net income per common share -
As reported, basic $ (0.06)
Pro forma, basic (0.03)
As reported, diluted (0.06)
Pro forma, diluted (0.03)
SFAS No. 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or as an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is generally
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company has recorded a liability related to
the Series A preferred stock of $12,071,000. Previously, the Series A preferred
stock had been classified on the balance sheet between total liabilities and
equity. This amount represents the 12,071 preferred shares issued and
outstanding as of December 31, 2003, at the redemption and liquidation value of
$1,000 per share. In the opinion of management, the $1,000 per share redemption
and liquidation value approximates fair value. The shares are mandatorily
redeemable on the fifth anniversary of the first issuance of Series A preferred
stock.
33
BUSINESS
Description of Business
Gulfport is an independent oil and gas exploration and production company
with properties located along the Louisiana Gulf Coast. The Company's
operations are concentrated in two fields: WCBB and the Hackberry Fields. As
of January 1, 2004, the Company had 22 MMBOE of proved reserves with a present
value of estimated future net reserves, discounted at 10%, of approximately
$210,000,000 and associated standardized measure of discounted future net cash
flows of approximately $194,000,000.
Principal Oil and Gas Properties
Gulfport owns interests in a number of producing oil and gas properties
located along the Louisiana Gulf Coast. The following table presents certain
information as of June 1, 2004 reflecting Gulfport's net interest in its
producing oil and gas properties.
NRI/WI (1) Producing Wells (2) Wells Acreage (3) Gas Oil Total
-------------------------------------------------------
Field Percentages Gross Net Gross Net Gross Net MBOE MBOE MBOE
---------------------------------------------------------------------------------------------------------------------------
West Cote Blanche
Bay (4)(5) 79.443/100 48 46 288 287 4,590 4,590 1,727 17,195 18,922
E Hackberry 78.7/100 11 11 72 70 3,147 3,147 518 2,627 3,145
W Hackberry 87.5/100 1 1 26 26 592 592 - 43 43
Overrides/Royalty
Non-operated Various 20 1 21 3 4,956 586 10 18 28
-- -- --- --- ------ ----- ----- ------ ------
Total 80 59 407 386 13,285 8,915 2,254 19,883 22,137
== == === === ====== ===== ===== ====== ======
--------------------
(1) Net Revenue Interest (NRI)/Working Interest (WI)
(2) Additionally, East Hackberry has seven wells that produce intermittently,
and WCBB has nine wells that produce intermittently.
(3) All of Gulfport's acreage is developed acreage. All of the oil and gas
leases in which Gulfport owns an interest have been perpetuated by
production. The operator may surrender the leases at any time by notice to
the lessors, or by the cessation of production.
(4) Gulfport has a 100% working interest (79.443% average NRI) from the surface
to the base of the 13,900 Sand which is located at 11,320 feet. Below the
base of the 13,900 Sand, Gulfport has a 40.40% non-operated working
interest (29.95% NRI).
(5) By the time the field is retired, Gulfport will be required to plug and
abandon approximately 400 wellbores. In order to meet this obligation,
Gulfport has plugged at least twenty wells each year at WCBB since July of
1997 and, through March 2004, invested monthly in a plugging escrow
account. The Company has met its funding obligation for the West Cote
Blanche Bay Escrow Account. The account has a current balance of
approximately $2,800,000.
West Cote Blanche Bay Field
Location and Land
The WCBB lies approximately five miles off the coast of Louisiana,
primarily in St. Mary Parish, in a shallow bay with water depths averaging eight
to ten feet. Currently, Gulfport owns a 100% working interest (79.443% average
34
NRI) and is the operator in the depths above the base of the 13,900 Sand which
is located at 11,320 feet. In addition, Gulfport owns a 40.40% non-operated
working interest (29.95% NRI) in depths below the base of the 13,900 Sand.
ChevronTexaco is the operator below the base of the 13,900 Sand. Gulfport's
leasehold at WCBB covers a portion of Louisiana State Lease 340 and contains
4,590 gross acres.
Area History and Production
Texaco drilled the discovery well in this field in 1940 based on a seismic
and gravitational anomaly. WCBB was subsequently developed on an even 160-acre
pattern for much of the remainder of the decade. Developmental drilling
continued and reached its peak in the 1970's when over 300 wells were drilled in
the field. Of the 880 wells drilled to date, only 80 were dry holes. As a
result, the field has a historic success rate of over 90% for all wells drilled.
Past successes do not assure similar results going forward. The historical
average cumulative gross production for a producer in the field is 237 MBO, with
over 100 of those wells (14% of total wells) producing in excess of 500 MBO. As
of January 1, 2004, field cumulative gross production was 192 MMBO and 233 BCF
of gas.
Of the 880 wells drilled in WCBB, 48 are currently producing, 273 are
shut-in and five are salt water disposal wells. The other 554 wells have been
plugged and abandoned. During 2003, Gulfport's net current daily production at
WCBB averaged 1,326 MBO, 1,132 MCF of gas and 14,155 barrels of water. For the
three months ended March 31, 2004, Gulfport's net daily production in this field
averaged 1,467 barrels of oil.
In 1991, Texaco conducted a 70 square mile 3-D seismic survey with 1,100
shot points per mile that processed out 100 fold. In 1993, an undershoot survey
around the crest and production facilities was added. Gulfport owns the rights
to the seismic data. In December 1999, Gulfport completed the reprocessing of
the seismic data and its technical staff developed prospects from the data. The
reprocessed data has enabled Gulfport to identify prospects in areas of the
field that would otherwise remain obscure.
Since Gulfport's acquisition of WCBB in 1997, Gulfport has drilled 37 new
wells resulting in 32 producers and six dry holes, for an 83% success rate. In
addition, we drilled two sidetrack re-entries, one of which was successful.
These drilling projects have produced 1,914 gross MBOE with a total wellbore
gross estimated ultimate recovery (EUR) of 5,599 MBOE. Gulfport has also
re-completed 36 existing wells resulting in 24 producers and 12 failures for a
67% success rate. These re-completed wells have produced 700 gross MBOE with an
estimated gross EUR of 851 MBOE.
Geology
WCBB overlies one of the largest salt dome structures on the Gulf Coast.
The field is characterized by a piercement salt dome, which created traps from
the Pleistocene through the Miocene formation. The relative movements affected
deposition and created a complex system of fault traps. The compensating fault
sets generally trend northwest to southeast and are intersected by sets having a
major radial component. Later-stage movement caused extension over the dome and
a large graben system (a downthrown area bounded by normal faults) was formed.
There are over 100 distinct sandstone reservoirs recognized throughout most
of the field, and nearly 200 major and minor discrete intervals have been
tested. Within the 880 wellbores that have been drilled to date in the field,
over 4,000 potential zones have been penetrated. These sands are highly porous
and permeable reservoirs primarily with a strong water drive.
WCBB is a structurally and stratigraphically complex field. All of the
proved undeveloped (PUD) locations at WCBB are adjacent to faults and abut at
least one fault. Gulfport's PUD drilling program is designed to penetrate each
PUD trap with a new wellbore in a structurally optimum position, usually very
close to the fault seal. The majority of these wells have been and new wells
drilled in connection with our drilling program will be directionally drilled
using steering tools and downhole motors. The tolerance for error in getting
35
near the fault is low, so the complex faulting does introduce the risk of
crossing the fault before encountering the zone of interest, which could result
in part or all of the zone being absent in the borehole. This, in turn, can
result in lower than expected or zero reserves for that zone. The new wellbores
eliminate the mechanical risk associated with trying to produce the zone from an
old existing wellbore, while the wellbore locations are situated so as to more
efficiently drain each reservoir. The vast majority of the PUD targets are
up-dip offsets to wells that produced from a sub-optimum position within a
particular zone. Gulfport's inventory of prospects includes 137 PUD wells. The
drilling schedule used in the reserve report anticipates that all of those wells
will be drilled by 2011. Gulfport intends to drill 12 wells during 2004.
Facilities
Gulfport owns and operates a production facility at WCBB. The platform for
the production facility stretches over a mile and is equipped with a 50 MMCF
capacity dehydrating system and three 140 horsepower triplex saltwater disposal
pumps.
Future Activity
Gulfport is planning a 11 well drilling program for 2004 to begin in the
summer of 2004. The wells are expected to range in depth from approximately
2,500 feet to 9,900 feet; all with multiple production horizon targets. The
Company also plans to workover seven existing wells and convert an inactive well
to a salt water disposal well during the second quarter of 2004.
East Hackberry Field
Location and Land
The East Hackberry Field is located along the western shore of Lake
Calcasieu in Cameron Parish, Louisiana approximately 80 miles west of Lafayette
and 15 miles inland from the Gulf of Mexico. Gulfport owns a 100% working
interest (approximately 79% average NRI) in certain producing oil and gas
properties situated in the East Hackberry Field. The interest includes two
separate lease blocks, the Erwin Heirs Block which is located on land and the
adjacent State Lease 50 Block which is located primarily in the shallow waters
of Lake Calcasieu. The two lease blocks together contain 3,147 acres.
Area History and Production
The East Hackberry field was discovered in 1926 by Gulf Oil Company (now
ChevronTexaco Corporation) by a gravitational anomaly survey. The massive
shallow salt stock presented an easily recognizable gravity anomaly indicating a
productive field. Initial production began in 1927 and has continued to the
present. The estimated cumulative oil and condensate production through 2003
was over 111 MBO with casinghead gas production being over 60 BCF of gas. There
have been a total of 170 wells drilled on Gulfport's portion of the field. As
of December 31, 2003, 11 wells had current daily production, 7 produced
intermittently, 72 were shut-in and 4 had been converted to salt water disposal
wells. The remaining 76 wells have been plugged and abandoned. During 2003,
daily net production averaged 195 barrels of oil with a limited amount of net
gas production.
Geology
The Hackberry Field is a major salt intrusive feature, elliptical in shape
as opposed to a classic "dome," divided into East and West field entities by a
saddle. Structurally, Gulfport's East Hackberry acreage is located on the
eastern end of the Hackberry salt ridge. There are over 30 pay zones at this
field. The salt intrusion formed a series of structurally complex and steeply
dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault
blocks serve as traps for hydrocarbon accumulation. Gulfport's wells currently
produce from perforations found between 5,100 feet and 12,200 feet.
36
Facilities
Gulfport has land-based production and processing facilities located at the
East Hackberry Field. The facilities are comprised of two dehydrating units and
four disposal pumps. Gulfport also has a field office that serves both the East
and West Hackberry fields.
The Gulfport technical staff continues its effort to identify additional
drilling, workover and recompletion candidates at East Hackberry. During 2004,
Gulfport intends to shoot 3-D seismic at East Hackberry Field to allow us to
undertake drilling at that field. Gulfport intends to image shallow horizons at
depths of approximately 5,000 feet to 7,000 feet, and image steeply dipping
targets as deep as 15,000 feet.
West Hackberry Field
Location and Land
The West Hackberry Field is located on land and is five miles West of Lake
Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette
and 15 miles inland from the Gulf of Mexico. Gulfport owns a 100% working
interest (approximately 87.5% NRI) in 592 acres within the West Hackberry Field.
Gulfport's leases at West Hackberry are located within two miles of one of the
United States Department of Energy's Strategic Petroleum Reserves. This West
Hackberry storage facility occupies 525 acres and has capacity to store 222 MBO
in underground salt caverns.
Area History and Production
The first discovery well at West Hackberry was drilled in 1938 and the
field was developed by Superior Oil Company (now Exxon-Mobil Corporation)
between 1938 and 1988. The estimated cumulative oil and condensate production
through 2003 was 170 MBO and 120 BCF of gas. There have been 36 wells drilled
to date on Gulfport's portion of West Hackberry. Currently, one is producing,
26 are shut-in and one has been converted to a saltwater disposal well. The
remaining eight wells have been plugged and abandoned. During 2003, daily net
production averaged 18 barrels of oil and a limited amount of gas. Total net
production per day for both Hackberry fields was 220 barrels of oil for the
three-month period ended March 31, 2004.
Geology
Structurally, Gulfport's West Hackberry acreage is located on the western
end of the Hackberry salt ridge. There are over 30 pay zones at this field.
West Hackberry consists of a series of fault-bounded traps in the Oligocene-age
Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries
from these thick, porous, water-drive reservoirs have resulted in per well
cumulative production of almost 700 BOE.
Facilities
Gulfport has land-based production and processing facilities located at the
West Hackberry field. Gulfport has two dehydrating units and one disposal pump.
Gulfport maintains a field office that serves both the East and West Hackberry
fields.
37
Additional Properties
In addition to its interests in WCBB, East Hackberry and West Hackberry,
Gulfport owns working interests and overriding royalty interest in various
fields as described in the following table:
Acreage Overriding Non-Producing
Field Parish Working Interest Royalty Interests Producing Wells Wells
---------------------------------------------------------------------------------------------------
Bayou Long Iberia 3.125% 0% 1 0
Bayou Penchant Terrebonne 3.125% 10.0% 8 9
Bayou Pigeon Iberia 6.250% 0% 6 6
Deer Island Terrebonne 6.250% 0% 3 3
Golden Meadow Lafourche 3.125% 0% 0 1
Napoleonville Assumption 10.000% 2.5% 3 0
Other Interests
Litigation Trust
Gulfport owns a 12% interest in the Trust (the "Litigation Trust") that was
established in WRT's bankruptcy to pursue litigation connected with WRT. The
Litigation Trust filed approximately 400 preference actions and several
substantive actions alleging fraud, malpractice and other wrongdoings. At this
time, Gulfport cannot estimate what the potential future recovery from the
litigation will be. See additional discussion regarding the Litigation Trust in
the footnotes to the Company's financial statements included elsewhere in this
prospectus.
Oil and Gas Marketing
Gulfport sells its oil to Shell Trading Company ("Shell"). Shell takes
custody of the oil at the barge inlet. Gulfport has entered into fixed price
contracts for the first barrels of production in a day with the remainder being
sold in accordance with posted price for West Texas/New Mexico Intermediate
crude plus Platt's trade month average P+ value, plus or minus the Platt's
WII/LLS differential less $0.83 per barrel for transportation.
During 2003, Gulfport sold all of its oil production to Shell Trading
Company and all of its gas production to ChevronTexaco. During 2002,
approximately 87% of Gulfport's revenues from oil and gas sales were
attributable to Shell.
Competition and Markets
Availability of Markets
The availability of a ready market for any oil and/or gas produced by
Gulfport depends on numerous factors beyond the control of management, including
but not limited to, the extent of domestic production and imports of oil, the
proximity and capacity of gas pipelines, the availability of skilled labor,
materials and equipment, the effect of state and federal regulation of oil and
gas production and federal regulation of gas sold in interstate commerce. Oil
and gas produced by Gulfport in Louisiana is sold to various purchasers who
service the areas where Gulfport's wells are located. Gulfport's wells are not
subject to any agreements that would prevent Gulfport from either selling its
production on the spot market or committing such gas to a long-term contract;
however, there can be no assurance that Gulfport will continue to have ready
access to suitable markets for its future oil and gas production.
Impact of Energy Price Changes
Oil and gas prices can be extremely volatile and are subject to substantial
seasonal, political and other fluctuations. The prices at which oil and gas
38
produced by Gulfport may be sold is uncertain and it is possible that under some
market conditions the production and sale of oil and gas from some or all of its
properties may not be economical. The availability of a ready market for oil
and gas and the prices obtained for such oil and gas, depend upon numerous
factors beyond the control of Gulfport, including competition from other oil and
gas suppliers and national and international economic and political
developments. Because of all of the factors influencing the price of oil and
gas, it is impossible to accurately predict future prices.
Regulation
Regulation of Gas and Oil Production
Gas and oil operations are subject to various types of regulation by state
and federal agencies. Legislation affecting the gas and oil industry is under
constant review for amendment or expansion. Also, numerous departments and
agencies, both federal and state, are authorized by statute to issue rules and
regulations binding on the gas and oil industry and its individual members, some
of which carry substantial penalties for failure to comply. The regulatory
burden on the gas and oil industry increases the Company's cost of doing
business and, consequently, affects its profitability.
Gulfport owns interests in a number of producing oil and gas properties
located along the Louisiana Gulf Coast. The state of Louisiana regulates the
production and sale of natural gas and crude oil, including requirements for
obtaining drilling permits, the method of developing new fields, the spacing and
operation of wells. In addition, regulations governing conservation matters
aimed at preventing the waste of gas and oil resources could affect the rate of
production and may include maximum daily production allowables for wells on a
market demand or conservation basis.
Oil Price Controls
Sales of crude oil, condensate and gas liquids by the Company are not
regulated and are made at market prices.
Environmental Regulation
The Company's natural gas and oil exploration, development and production
operations are subject to stringent federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental agencies,
such as the U.S. Environmental Protection Agency (EPA), issue regulations to
implement and enforce such laws, which often require difficult and costly
compliance measures that carry substantial administrative, civil and criminal
penalties or may result in injunctive relief for failure to comply. These laws
and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentrations of various
substances that can be released into the environment in connection with drilling
and production activities, limit or prohibit construction or drilling activities
on certain lands lying within wilderness, wetlands, ecologically sensitive and
other protected areas, require remedial action to prevent pollution from former
operations, such as plugging abandoned wells or closing pits, and impose
substantial liabilities for pollution resulting from the Company's operations.
The regulatory burden on the natural gas and oil industry increases the cost of
doing business and consequently affects profitability. Changes in environmental
laws and regulations occur frequently, and any changes that result in more
stringent and costly waste handling, storage, transport, disposal or cleanup
requirements could materially adversely affect the Company's operations and
financial position, as well as the gas and oil industry in general. Management
believes that the Company is in substantial compliance with current applicable
environmental laws and regulations and the Company has not experienced any
material adverse effect from compliance with these environmental requirements;
this trend, however, may not continue in the future.
The Comprehensive Environmental Response, Compensation and Liability Act,
as amended, also known as CERCLA or Superfund, and comparable state laws impose
liability without regard to fault or the legality of the original conduct on
certain classes of persons who are considered to be responsible for the release
of a "hazardous substance" into the environment. These persons include the
owner or operator of the disposal site or sites where the release occurred and
39
companies that disposed or arranged for the disposal of the hazardous substances
found at the site. Under CERCLA, such persons may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and
for the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances or other
pollutants into the environment.
The Resource Conservation and Recovery Act (RCRA), as amended, generally
does not regulate most wastes generated by the exploration and production of
natural gas and oil. RCRA specifically excludes from the definition of
hazardous waste "drilling fluids, produced waters, and other wastes associated
with the exploration, development, or production of crude oil, natural gas or
geothermal energy." However, these wastes may be regulated by the EPA or state
agencies as solid waste. Moreover, ordinary industrial wastes, such as paint
wastes, waste solvents, laboratory wastes and waste compressor oils, may be
regulated as hazardous waste. Although the costs of managing solid and
hazardous waste may be significant, the Company does not expect to experience
more burdensome costs than similarly situated companies involved in natural gas
and oil exploration and production.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of gas and oil. Although the Company has utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other wastes may have been disposed of or released on or under the properties
owned or leased by the Company or on or under other locations where such wastes
have been taken for disposal. In addition, many of these properties have been
operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under the Company's control. These
properties and the wastes disposed thereon may be subject to CERCLA, RCRA and
analogous state laws. Under such laws the Company could be required to remove
or remediate previously disposed wastes or property contamination, or to perform
remedial plugging or pit closure operations to prevent future contamination.
The Federal Water Pollution Control Act of 1972, as amended, also known as
the Clean Water Act, and analogous state laws impose restrictions and strict
controls regarding the discharge of pollutants, including produced waters and
other gas and oil wastes, into state waters or waters of the United States. The
discharge of pollutants into regulated waters is prohibited, except in
accordance with the terms of a permit issued by the EPA or the state. These
proscriptions also prohibit certain activity in wetlands unless authorized by a
permit issued by the U.S. Army Corps of Engineers. The EPA has also adopted
regulations requiring certain gas and oil exploration and production facilities
to obtain permits for storm water discharges. Costs may be associated with the
treatment of wastewater or developing and implementing storm water pollution
prevention plans. The Company's management believes that the Company has
obtained or applied for all permits required under the Clean Water Act.
Sanctions for failure to comply with Clean Water Act requirement include
administrative, civil and criminal penalties, as well as injunctive relief.
The Clean Air Act (CAA), as amended, restricts the emission of air
pollutants from many sources, including natural gas and oil operations. New
facilities may be required to obtain permits before work can begin, and existing
facilities may be required to incur capital costs in order to remain in
compliance. In addition, more stringent regulations governing emissions of
toxic air pollutants are being developed by the EPA, and may increase the costs
of compliance for some facilities. The Company's management believes that the
Company is in substantial compliance with all air emissions regulations and that
the Company has or has applied for all necessary permits for its operations.
Operational Hazards and Insurance
Gulfport's operations are subject to all of the risks normally incident to
the production of oil and gas, including blowouts, cratering, pipe failure,
casing collapse, oil spills and fires, each of which could result in severe
damage to or destruction of oil and gas wells, production facilities or other
property, or injury to persons. The energy business is also subject to
environmental hazards, such as oil spills, gas leaks, and ruptures and discharge
of toxic substances or gases that could expose Gulfport to substantial liability
due to pollution and other environmental damage. Although Gulfport maintains
40
insurance coverage considered to be customary in the industry for a company its
size, it is not fully insured against certain of these risks, either because
such insurance is not available or because of high premium costs. The
occurrence of a significant event that is not fully insured against could have a
material adverse effect on Gulfport's financial position.
Headquarters and Other Facilities
Gulfport recently purchased the office building in Oklahoma City, Oklahoma
in which it had been leasing approximately 12,035 square feet. See "Management
Discussion and Analysis of Financial Condition and Results of Operations-Capital
Expenditures, Capital Resources and Liquidity" for additional information
regarding the purchase.
In 1996, Gulfport purchased a building in Lafayette, Louisiana to be used
as Gulfport's Louisiana headquarters. The 16 year-old building contains 12,480
total square feet with 6,180 square feet of finished office area and 6,300
square feet of clear span warehouse area. This building allows Gulfport to
provide office space for Louisiana personnel, have access to meeting space close
to the fields and maintain a corporate presence in Louisiana.
Employees
At March 31, 2004, Gulfport had 28 employees. A Louisiana well servicing
company serves as contract operator of the fields and provides all necessary
field personnel.
Oil & Gas Reserves
The oil and gas reserve information set forth below represents estimates as
prepared by the independent engineering firm of Netherland, Sewell & Associates,
Inc. Reserve engineering is a subjective process of estimating volumes of
economically recoverable oil and gas that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation. As a result, the
estimates of different engineers often vary. In addition, the results of
drilling, testing and production may justify revisions of such estimates.
Accordingly, reserve estimates often differ from the quantities of oil and gas
that are ultimately recovered. Estimates of economically recoverable oil and
gas and of future net revenues are based on a number of variables and
assumptions, all of which may vary from actual results, including geologic
interpretation, prices, and future production rates and costs.
The following table sets forth estimates of the proved oil and gas reserves
of Gulfport at January 1, 2004, as estimated by Netherland, Sewell & Associates,
an independent engineering firm.
JANUARY 1, 2004
---------------
Proved Reserves Developed Undeveloped Total
--------- ----------- -----
Oil (MBBLS) 1,790 18,093 19,883
Gas (MMCF) 1,257 12,267 13,524
MBOE 1,999 20,138 22,137
Year-end present value of
estimated future net
revenue,.discounted
at 10% (Pre-tax) $ 25,350,000 $ 184,188,000 $ 209,538,000
Total proved reserves decreased to 22,137 MBOE at January 1, 2004 from
26,090 at January 1, 2003. This decrease in reserves is mainly attributable to
normal production declines and engineering revisions.
The estimated future net revenues set forth above were determined by using
reserve quantities of proved reserves and the periods in which they are expected
to be developed and produced based on economic conditions prevailing at January
1, 2004. The estimated future production is priced at December 31, 2003 without
escalation using $32.52 per BBL and $6.19 per MCF, adjusted by lease for
transportation fees and regional price differentials.
41
In compliance with federal law, Gulfport files annual reports with the
Energy Information Agency of the U.S. Department of Energy with respect to its
production of oil and gas during each calendar year and its estimated oil and
gas reserves at the end of each year. The reserves reported in Gulfport's filing
to the U.S. Department of Energy do not differ more than five percent from those
disclosed in this prospectus.
Production, Prices, and Production Costs
The following are tables of Gulfport's average prices received and
production volumes during the periods indicated:
Three Months Ended March 31,
2004 2003
------------ ------------
Production Volumes:
Oil (MBBLS) 133 142
Gas (MMCF) 15 26
Average oil price (per Bbl) $ 32.56 $ 28.91
Average gas price (per Mcf) $ 3.30 $ 4.23
2003 2002 2001
------------ ------------ ------------
Production Volumes:
Oil (MBBLS) 571 464 595
Gas (MMCF) 123 103 71
Oil Equivalents (MBOE) 592 481 607
Average Prices:
Oil (per BBL) $ 27.66 (1) $ 24.69 (2) $ 25.50
Gas (per MCF) $ 4.04 $ 3.66 $ 4.20
Oil Equivalents (per MBOE) $ 26.70 $ 24.59 $ 25.48
Average Production Costs (per BOE) $ 9.93 (3) $ 10.65 (3) $ 7.85
Average Production Taxes (per BOE) $ 3.17 $ 2.81 $ 2.88
--------------------------------------
(1) Includes fixed contract prices of
January 2003 $ 28.50
February 2003 $ 28.34
March 2003 $ 27.95
April 2003 $ 27.08
May 2003 $ 26.95
June 2003 $ 24.27
July 2003 $ 24.33
August 2003 $ 24.42
September 2003 $ 24.45
October 2003 $ 24.45
November 2003 $ 24.25
December 2003 $ 24.10
Excluding the effect of the fixed price contracts, the average oil price for
2003 would have been $32.38 per BBL and $32.08 per BBL oil equivalent price.
(2) Includes fixed contract prices of $26.50 for the months May through October
2002 and $25.90 for November and December.
42
(3) Does not include production taxes.
Drilling and Recompletion Activities
The following table contains data with respect to certain of Gulfport's
field operations during the years ended December 31, 2003, 2002 and 2001.
2003 2002 2001
------------- ------------- -------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Recompletions, Sidetracks
and Deepenings:
Oil 8 8 4 4 6 6
Gas 0 0 0 0 0 0
Non-Productive 1 1 0 0 0 0
-------------- ------------- ---------------
TOTAL: 9 9 4 4 6 6
============== ============= ===============
Exploratory - non-productive 0 0 1 1 0 0
============== ============= ===============
Development Wells:
Oil 7 7 8 8 7 7
Gas 0 0 0 0 0 0
Non-Productive 1 1 1 1 0 0
-------------- ------------- ---------------
TOTAL: 8 8 9 9 7 7
============== ============= ===============
Title to Oil and Gas Properties
It is customary in the oil and gas industry to make only a cursory review
of title to undeveloped oil and gas leases at the time they are acquired and to
obtain more extensive title examinations when acquiring producing properties.
In future acquisitions, Gulfport will conduct title examinations on material
portions of such properties in a manner generally consistent with industry
practice. Certain of Gulfport's oil and gas properties may be subject to title
defects, encumbrances, easements, servitudes or other restrictions, none of
which, in management's opinion, will in the aggregate materially restrict
Gulfport's operations.
43
MANAGEMENT
The officers and directors of Gulfport are as follows:
Name Age Position
------------------------- --- --------------------------------------
Mike Liddell 50 Chairman of the Board, Chief Executive
Officer, President and Director
Michael G. Moore 47 Vice President and Chief Financial
Officer
Lisa Holbrook 34 Vice President, General Counsel and
Secretary
*Robert E. Brooks 57 Director
*David L. Houston 51 Director
Mickey Liddell 42 Director
*Dan Noles 56 Director
*Members of Gulfport's Audit Committee.
Mike Liddell has served as a director of Gulfport since July 11, 1997, as
Chief Executive Officer since April 28, 1998 and as Chairman of the Board since
July 28, 1998. Mr. Liddell has served as President of Gulfport since July 2000.
In addition, Mr. Liddell served as Chief Executive Officer of DLB from October
1994 to April 28, 1998, and as a director of DLB from 1991 through April 1998.
From 1991 to 1994, Mr. Liddell was President of DLB. From 1979 to 1991, he was
President and Chief Executive Officer of DLB Energy. He received a B.S. degree
in education from Oklahoma State University. He is the brother of Mickey
Liddell and brother in law of Dan Noles.
Michael G. Moore has served as Vice President and Chief Financial Officer
since July 2000. From May 1998 through July 2000, Mr. Moore served as Vice
President and Chief Financial Officer of Indian Oil Company. From September
1995 through May 1998, Mr. Moore served as Controller of DLB Oil & Gas, Inc.
Prior to that, Mr. Moore served as Controller of LEDCO, Inc., a Houston based
gas marketing company. Mr. Moore received his B.B.A degree in finance from the
University of Central Oklahoma in 1982 and in 1987 also completed his M.B.A.
from the University of Central Oklahoma.
Lisa Holbrook has served as Vice President and Secretary of Gulfport since
November 5, 1999, and as General Counsel since April 28, 1998. In addition, Ms.
Holbrook served as Assistant General Counsel of DLB until April 1998. In 1996,
Ms. Holbrook received her J.D. from Oklahoma City University Law School where
she graduated with highest distinction.
Robert E. Brooks has served as a director of Gulfport since July 11, 1997.
Mr. Brooks is currently president of Delphi Oil & Gas, Inc. From 1997 to 2002,
Mr. Brooks was a partner with Brooks Greenblatt, a commercial finance company
located in Baton Rouge, Louisiana that was formed by Mr. Brooks in July 1997.
Mr. Brooks is a Certified Public Accountant and was Senior Vice President in
charge of Asset Finance and Managed Assets for Bank One, Louisiana between 1993
and July 1997. He received his B.S. degree from Purdue University in mechanical
engineering in 1969. He obtained graduate degrees in finance and accounting
from the Graduate School of Business at the University of Chicago in 1974.
David Houston has served as a director of Gulfport since July 1998. Since
1991, Mr. Houston has been the principal of Houston & Associates, a firm that
offers life and disability insurance, compensation and benefits plans and estate
planning. Prior to 1991, he was President and Chief Executive Officer of Equity
Bank for Savings, F.A., a $600,000,000, Oklahoma-based savings bank. He
currently serves on the board of directors and executive committee of Deaconess
Hospital, Oklahoma City, Oklahoma, and is the former chair of the Oklahoma State
Ethics Commission and the Oklahoma League of Savings Institutions. He received a
Bachelor of Science degree in business from Oklahoma State University and a
graduate degree in banking from Louisiana State University.
Mickey Liddell has served as a director of the Company since January 1999.
Since 2001, Mr. Liddell has been the President of Berlanti-Liddell
Entertainment, LLC, a television and motion picture production company. From
2000 through 2001, Mr. Liddell served as President of Entertainment Services,
44
LLC. From 1994 through 1999, Mr. Liddell served as President of Banner
Entertainment, LLC. Both Banner Entertainment LLC and Mr. Liddell filed for
bankruptcy in 1999. Mr. Liddell received a Bachelor of Arts from the University
of Oklahoma in Communications in 1984 and a graduate degree from Parson School
of Design in New York, New York in 1987. He is the brother of Mike Liddell and
brother-in-law of Dan Noles.
Dan Noles has served as a director of the Company since January 2000. Mr.
Noles is the President of Dan Noles Construction LLC. Prior to that he served
as the President of Atoka Management Company, an oilfield equipment company.
Mr. Noles received his Bachelor degree in Finance from the University of
Oklahoma in 1970. Mr. Noles is the brother-in-law of Mike Liddell and Mickey
Liddell.
Executive Compensation
The following table sets forth the compensation information earned during
2003, 2002 and 2001 by the Chief Executive Officer and by the two other most
highly compensated executive officers of the Company whose annual salary and
bonus exceeded $100,000 (the "named executives"), in all capacities in which
they served during that period.
Annual Compensation (1) All Other
-----------------------
Name and Principal Position Year Salary Bonus Compensation (2)
--------------------------- ---- ------ ----- ----------------
Mike Liddell 2003 $218,566 $24,000 $19,500
Chief Executive Officer 2002 200,000 24,000 19,142
2001 200,000 16,667 17,516
Michael Moore 2003 105,000 13,800 $7,128
Vice President & 2002 105,000 23,800 8,094
Chief Financial Officer 2001 105,000 12,600 6,623
Lisa Holbrook 2003 105,000 $13,800 $7,128
Vice President & 2002 103,750 23,650 7,983
General Counsel 2001 90,000 10,800 5,448
-------------------------
(1) Amounts shown include cash and non-cash compensation earned and received by
the named executives as well as amounts earned but deferred at their
election. The Company provides various perquisites to certain employees,
including the named executives. In each case, the aggregate value of the
perquisite provided to the named executives did not exceed 10% of such
named executive's total annual salary and bonus.
(2) Amounts for Mike Liddell include the Company's matching 401(k) plan
contributions of $12,000, $13,717 and $10,291 during 2003, 2002 and 2001
respectively and life insurance premium payments of $7,500, $5,425 and
$7,225 during 2003, 2002 and 2001 respectively. Amounts for Michael Moore
and Lisa Holbrook represent the Company's matching 401(k) plan
contributions during each of the indicated years.
Stock Options
No options were granted to the named executives or directors in 2003.
45
The following table sets forth the number of unexercised options held by
named executives as of December 31, 2003. No options were exercised by named
executives in 2001, 2002 or 2003.
Number of Securities
Underlying Unexercised Value of Unexercised In
Options at Fiscal Year End the Money Options Year End
------------------------------- ------------------------------
Name Exercisable Un-exercisable Exercisable Unexercisable
----------- -------------- ----------- -------------
Mike Liddell (1) 457,270 - $411,543 -
Lisa Holbrook (1) 10,000 - 9,000 -
Mike Moore (1) 10,000 - 9,000 -
---------------------------
(1) These options were exercisable at $2.00 per share. The Company's common
stock closed at $2.90 on December 31, 2003 as reported by the NASD OTC
Bulletin Board.
Employment Agreements
In June 2003, the Company renewed a five year employment agreement with its
Chief Executive Officer, Mike Liddell. The employment agreement terminates on
June 1, 2009. The employment agreement provides an annual base salary of
$200,000 adjusted for cost of living increases. The employment agreement
contains a change of control provision which guarantees Mr. Liddell one-year
salary upon the occurrence of a change of control in the Company.
Liability of Directors and Officers and Indemnification
As permitted by the DGCL, the Company's Certificate of Incorporation
eliminates in certain circumstances the monetary liability of the directors for
a breach of their fiduciary duty. These provisions do not eliminate liability
of the directors for (i) a breach of the director's duty of loyalty to the
Company or its Stockholders, (ii) acts or omissions by a director not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) liability arising under Section 174 of the DGCL (relating to the
declaration of dividends and purchase or redemption of shares in violation of
the DGCL) or (iv) any transaction from which the director derived an improper
personal benefit. In addition, these provisions do not eliminate the liability
of a director for violations of the Federal securities laws, nor do they limit
the rights of the Company or its Stockholders, in appropriate circumstances, to
seek equitable remedies such as injunctive or other forms of non-monetary
relief. Such remedies may not be effective in all cases.
The Bylaws provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by the DGCL. Under such provisions, any
director or officer, who in his capacity as such, is made or threatened to be
made a party to any suit or proceeding, may be indemnified if the Board of
Directors determines such director or officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
the Company. The Bylaws and the DGCL, further provide that such indemnification
is not exclusive of any other rights to which such individuals may be entitled
under the Certificate of Incorporation, the Bylaws, any agreement, vote of
Stockholders or disinterested directors or otherwise.
46
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information, as of December 31,
2003, with respect to all compensation plans previously approved by the
Company's security holders, as well as compensation plans not previously
approved by the Company's security holders.
Number of Securities
Remaining Available
For Future Issuance
Number of Securities Under Equity
To be Issued Upon Weighted Average Compensation Plans
Exercise of Outstanding Exercise Price of (Excluding Securities
Options, Warrants and Outstanding Options, Reflected in Far Left
Rights Warrants and Rights Column)
----------------------- -------------------- ---------------------
Equity compensation plans
approved by security
holders 627,337 $2.00 255,663
---- --------
Equity compensation plans
not approved by
security holders -- -- --
------- ----- -------
Total 627,337 $2.00 255,663
======= ===== =======
47
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of June 1, 2004, without giving effect to this
rights offering, by (i) each director, (ii) each named executive officer, (iii)
each person known or believed by the Company to own beneficially five percent or
more of our common stock, and (iv) all directors and executive officers as a
group.
Beneficial Ownership
--------------------
Name and Address of Beneficial Owner (1) Shares Percentage (2)
--------------------------------------------- ------ --------------
Charles E. Davidson (3)
411 West Putnam Avenue
Greenwich, CT 06830 8,177,595 67.2%
Peter M. Faulkner (4)
767 Third Avenue, Fifth Floor
New York, NY 10017 602,565 5.9%
Mike Liddell (5) 1,169,416 11.0%
Robert Brooks (6) 20,000 *
David Houston (7) 20,000 *
Mickey Liddell (8) 20,000 *
Dan Noles (9) 20,000 *
Lisa Holbrook (10) 10,000 *
Michael G. Moore (11) 10,000 *
All directors and executive
officers as a group
(7 individuals) 1,269,416 12.5%
-----------------------------
* Less than one percent
(1) Unless otherwise indicated, each person or group has sole voting and sole
dispositive power with respect to all listed shares. The address of the
Company's directors and executive officers is 14313 N. May Avenue, Suite
100, Oklahoma City, Oklahoma 73134.
(2) Beneficial ownership is determined in accordance with the SEC's rules. In
computing percentage ownership of each person, shares of common stock
subject to options held by that person that are currently exercisable, or
exercisable within 60 days of the Record Date, are deemed to be
beneficially owned. These shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of each other person. The
percentage of shares beneficially owned is based on 10,146,566 shares of
common stock outstanding as of June 1, 2004.
(3) Includes 3,574,722 shares of our common stock held by CD Holding, L.L.C.
and 784,273 shares of our common stock held in an IRA for Mr. Davidson. Mr.
Davidson is the sole member of CD Holding, L.L.C. Mr. Davidson is the
Chairman and controlling member of Wexford Management, L.L.C. In addition,
the amount includes 1,795,860 shares of common stock owned by the following
investment funds (the "Wexford Entities") that are affiliated with Wexford
Management: Wexford Special Situations 1996, L.P.; Wexford Special
Situations 1996 Institutional, L.P.; Wexford Special Situations 1996,
Limited; Wexford-Euris Special Situations 1996, L.P.; Wexford Spectrum
48
Investors, L.L.C.; Wexford Capital Partners II, L.P.; Wexford Overseas
Partners I, L.P. Includes 2,022,740 shares of common stock issuable upon
the exercise of warrants that are currently exercisable owned by the
following investment funds that are affiliated with Wexford Management:
Wexford Special Situations 1996, Limited; Wexford-Euris Special Situations
1996, L.P.; Wexford Spectrum Investors, L.L.C.; Wexford Capital Partners
II, L.P.; Wexford Overseas Partners I, L.P. Mr. Davidson disclaims
beneficial ownership of the 1,795,860 shares of our common stock and
warrants to purchase 2,022,740 shares of our common stock owned by the
Wexford Entities.
(4) Represents shares of our common stock owned by Rumpere Capital Trading
Partners, Ltd. and PMF Partners, LLC.
(5) Includes 712,146 shares of our common stock held of record by Liddell
Investments, L.L.C. Mr. Liddell is the sole member of Liddell Investments,
L.L.C. Also includes 457,270 shares of common stock issuable upon the
exercise of options that are currently exercisable or exercisable within 60
days of June 1, 2004.
(6) Represents 20,000 shares of our common stock issuable upon the exercise of
stock options that are currently exercisable or exercisable within 60 days
of June 1, 2004.
(7) Represents 20,000 shares of our common stock issuable upon the exercise of
stock options that are currently exercisable or exercisable within 60 days
of June 1, 2004.
(8) Represents 20,000 shares of our common stock issuable upon the exercise of
stock options that are currently exercisable or exercisable within 60 days
of June 1, 2004.
(9) Represents 20,000 shares of our common stock issuable upon the exercise of
stock options that are currently exercisable or exercisable within 60 days
of June 1, 2004.
(10) Represents 10,000 shares of our common stock issuable upon the exercise of
stock options that are currently exercisable or exercisable within 60 days
of June 1, 2004.
(11) Represents 10,000 shares of our common stock issuable upon the exercise of
stock options that are currently exercisable or exercisable within 60 days
of June 1, 2004.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Services
The Company's personnel help manage oil and gas and oil and gas related
assets owned by affiliates of its largest stockholder. The Company is
reimbursed an amount equal to the pro rata share of time its employees spend
performing such services and overhead. In 2003, the amount billed by the
Company for such services and overhead totaled approximately $764,000, of which
$379,000 remained outstanding as of December 31, 2003. At March 31, 2004, the
receivable amount totaled $542,000.
Issuance of Series A Preferred Stock
In March 2002, the Company commenced a private placement offering of 10,000
units. Each unit consisted of (i) one share of Cumulative Preferred Stock,
Series A, of the Company and (ii) a warrant to purchase up to 250 shares of
common stock, par value $0.01 per share, of the Company. Gulfport Funding, LLC
and several of its affiliates purchased an aggregate of 6,000.98 units in that
offering. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Capital Resources - Issuance of Equity" for additional
information.
Back-stop Agreement
Pursuant to an agreement between us and CD Holding, L.L.C., dated April 14,
2004, CD Holding agreed, subject to certain conditions, to back-stop this rights
offering by purchasing all of the shares of our common stock that are not
otherwise subscribed for by the other holders of subscription rights under their
basic subscription privileges and over-subscription privileges. In return for
its agreement to back-stop this rights offering, CD Holding will receive a
commitment fee equal to 2% of the gross proceeds of this rights offering, which,
at the option of CD Holding, may be applied to the subscription price payable
upon exercise of the rights issued to it in this rights offering.
Credit Agreement
In connection with this rights offering, on April 30, 2004, the Company
entered into a $3,000,000 revolving credit facility with CD Holding, L.L.C., a
principal stockholder of the Company. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations - Capital Resources - Credit
Facilities" for additional information regarding this credit facility.
50
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Company's Certificate of
Incorporation and Bylaws, each of which is filed as an exhibit to the
Registration Statement.
Common Stock
The Company is currently authorized to issue up to 20,000,000 shares of
common stock, par value $.01 per share, of which there were 10,146,566 shares
outstanding as of June 1, 2004. Holders of our common stock are entitled to
cast one vote for each share held of record on each matter submitted to a vote
of stockholders. There is no cumulative voting for election of directors.
Subject to the prior rights of any series of preferred stock which may from time
to time be outstanding, if any, holders of our common stock are entitled to
receive ratably dividends when, as, and if declared by the Board of Directors
out of funds legally available therefor and, upon the liquidation, dissolution
or winding up of the Company, are entitled to share ratably in all assets
remaining after payment of liabilities and payment of accrued dividends and
liquidation preferences on the preferred stock, if any. There are no redemption
or sinking fund provisions that are applicable to our common stock. Subject
only to the requirements of the DGCL, the Board of Directors may issue shares of
our common stock without stockholder approval, at any time and from time to
time, to such persons and for such consideration as the Board of Directors deems
appropriate. Holders of our common stock have no preemptive rights and have no
rights to convert their common stock into any other securities. The outstanding
common stock is validly authorized and issued, fully paid, and nonassessable.
On April 14, 2004, our Board of Directors adopted resolutions approving, and as
of April 15, 2004, the holders of more than a majority of the outstanding shares
of our common stock approved, an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of our common stock
from 20,000,000 shares to 35,000,000 shares. The amendment will become
effective upon filing with the Secretary of State of the State of Delaware,
which will occur before the closing of the rights offering.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock, par value $.01 per share, of which there were 12,533.58 shares
outstanding as of March 31, 2004. Shares of Preferred Stock may be issued from
time to time in one or more series as the Board of Directors, by resolution or
resolutions, may from time to time determine, each of said series to be
distinctively designated. The voting powers, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations or restrictions thereof, if any, of each such series of Preferred
Stock may differ from those of any and all other series of Preferred Stock at
any time outstanding, and, subject to certain limitations of the Certificate of
Incorporation and the DGCL, the Board of Directors may fix or alter, by
resolution or resolutions, the designation, number, voting powers, preferences
and relative, participating, optional and other special rights, and
qualifications, limitations and restrictions thereof, of each such series of
Preferred Stock.
The issuance of any such Preferred Stock could adversely affect the rights
of the holders of our common stock and therefore, reduce the value of the common
stock. The ability of the Board of Directors to issue Preferred Stock could
discourage, delay, or prevent a takeover of the Company. See "Risk Factors."
Series A Preferred Stock
The Company has designated 30,000 shares of its Preferred Stock as
Cumulative Preferred Stock, Series A and had 12,533.58 shares of our Series A
preferred stock outstanding as of March 31, 2004. Holders of the Series A
preferred stock are entitled to receive dividends at the rate of 12% of the
liquidation preference per annum payable quarterly in cash or, at the option of
the Company for all quarters ending on or prior to March 31, 2004, payable in
whole or in part in additional shares of Series A preferred stock at the rate of
15% of the liquidation preference per annum. For all quarters after March 31,
2004, dividends are payable in cash. However, the Board of Directors of the
Company has approved and the Company has received the consent of holders of the
requisite number of shares of Series A preferred stock to amend the Company's
Certificate of Designation with respect to the Series A preferred stock to give
the Company the ability to pay dividends on the Series A preferred stock with
51
additional shares of Series A preferred stock after March 31, 2004 for so long
as such shares remain outstanding and prior to the mandatory redemption date.
The Series A preferred stock may be redeemed at any time for an amount per
share equal to $1,000 and all accrued and unpaid dividends thereon, whether or
not declared or payable. All then outstanding shares of Series A preferred
stock will be redeemed on March 29, 2007 for an amount per share equal to $1,000
and all accrued and unpaid dividends thereon, whether or not declared or
payable. Upon a liquidation of the Company, whether voluntary or mandatory, the
shares of Series A preferred stock will rank prior to the shares of our common
stock. Consequently, holders of Series A preferred stock will receive
distributions in an amount per share equal to $1,000 and all accrued and unpaid
dividends thereon, whether or not declared or payable, before holders of our
common stock will receive any distribution.
The affirmative vote of at least two thirds of the votes entitled to be
cast by holders of the Series A preferred stock is necessary for any amendment
to the certificate of incorporation which (1) adversely affects the rights and
privileges of the Series A preferred stock or (2) creates or authorizes an
increase in any shares ranking senior to the Series A preferred stock or
securities convertible into the foregoing. The Series A preferred stock cannot
be sold or transferred by its holders, subject to certain exceptions.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is UMB Bank, N.A.
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES
The following discussion is a summary of certain federal income tax
consequences of this rights offering to holders of our common stock that hold
such stock as a capital asset for federal income tax purposes. This discussion
is based on laws, regulations, rulings and decisions in effect on the date
hereof, all of which are subject to change (possibly with retroactive effect)
and to differing interpretations. This discussion applies only to holders that
are U.S. persons and does not address all aspects of federal income taxation
that may be relevant to holders in light of their particular circumstances or to
holders who may be subject to special tax treatment under the Internal Revenue
Code, including, without limitation, holders of preferred stock or warrants,
holders who are dealers in securities or foreign currency, foreign persons,
insurance companies, tax-exempt organizations, banks, financial institutions,
broker-dealers, holders who hold common stock as part of a hedge, straddle,
conversion or other risk reduction transaction, or who acquired common stock
pursuant to the exercise of compensatory stock options or otherwise as
compensation.
We have not sought, and will not seek, an opinion of counsel or a ruling
from the Internal Revenue Service regarding the federal income tax consequences
of this rights offering or the related share issuance. The following summary
does not address the tax consequences of this rights offering or the related
share issuance under foreign, state, or local tax laws. Accordingly, each
holder of common stock should consult its Tax Advisor with respect to the
particular tax consequences of this rights offering or the related share
issuance to such holder.
For U.S. federal income tax purposes, neither the receipt nor the exercise
of the subscription rights should result in taxable income to you. Moreover, you
should not realize a loss if you do not exercise the subscription rights. The
holding period for a share acquired upon exercise of a subscription right begins
with the date of exercise. The basis for determining gain or loss upon the sale
of a share acquired upon the exercise of a subscription right will be equal to
the sum of:
- the subscription price per share;
- any servicing fee charged to you by your broker, bank or trust company;
and
- the basis, if any, in the subscription rights that you exercised.
A gain or loss recognized upon a sale of a share acquired upon the exercise
of a subscription right should be a capital gain or loss assuming the share is
held as a capital asset at the time of sale. This gain or loss will be a
long-term capital gain or loss if the share has been held at the time of sale
for more than one year.
As noted above, your basis in a share issued under the subscription rights
offer includes your basis in the subscription rights underlying that share. If
the aggregate fair market value of the subscription rights at the time they are
distributed is less than 15% of the aggregate fair market value of our common
stock at such time, the basis of the subscription rights issued to you will be
zero unless you elect to allocate a portion of your basis of previously owned
common stock to the subscription rights issued to you in this rights offering.
If the aggregate fair market value of the subscription rights at the time they
are distributed is 15% or more of the aggregate fair market value of our common
stock at such time, or if you elect to allocate a portion of your basis of
previously owned common stock to the subscription rights issued to you in this
offering, then your basis in previously owned common stock will be allocated
between such common stock and the subscription rights based upon the relative
fair market value of such common stock and the subscription rights as of the
date of the distribution of the subscription rights. Thus, if such an
allocation is made and the rights are later exercised, the basis in the common
stock you originally owned will be reduced by an amount equal to the basis
allocated to the subscription rights. An election must be made in a statement
attached to your federal income tax return for the year in which the
subscription rights are distributed. If the subscription rights expire without
exercise, you will realize no loss and no portion of your basis in the common
stock will be allocated to the unexercised subscription rights.
If you sell, exchange or otherwise dispose of subscription rights received
in the rights offering prior to the expiration date, you should recognize
53
capital gain or loss equal to the difference between (i) the amount of cash and
the fair market value of any property received, and (ii) your tax basis (if any)
in the subscription rights disposed of. Any such capital gain or loss will be
long-term capital gain or loss if your holding period for the subscription
rights exceeds one year at the time of disposition. Your holding period for the
subscription rights received in the rights offering will include your holding
period for the common stock with respect to which the rights were received.
LEGAL MATTERS
The validity of the subscription rights and the shares of common stock
offered pursuant to this rights offering will be passed upon for us by Akin Gump
Strauss Hauer & Feld LLP.
EXPERTS
Our consolidated financial statements of as of December 31, 2003 and for
each of the two years in the period ended December 31, 2003 appearing in this
prospectus and registration statement have been audited by Hogan & Slovacek,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file information statements and annual, quarterly and special reports
with the Securities and Exchange Commission. You may read and copy any document
that we file at the Securities and Exchange Commission's public reference room
in Washington, D.C. located at 450 Fifth Street N.W., Washington, D.C. 20549.
You may also call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. The Securities and Exchange
Commission maintains a web site that contains reports, proxy statements and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission, including us. Our
Securities and Exchange Commission filings are also available to you free of
charge at the Securities and Exchange Commission's web site at www.sec.gov.
This prospectus is part of a registration statement on Form SB-2 we have
filed with the Securities and Exchange Commission under the Securities Act of
1933.
You may request a copy of our filings, at no cost, by writing or
telephoning us at:
Gulfport Energy Corporation
14313 North May Avenue, Suite 100
Oklahoma City, Oklahoma 73134
(405) 848-8807
54
INDEX TO FINANCIAL STATEMENTS
Page
----
Audited Financial Statements
Independent Auditors' Report F-2
Balance Sheet, December 31, 2003 F-3
Statements of Operations, Years Ended December 31, 2003 and 2002 F-4
Statements of Common Stockholders' Equity, Years Ended
December 31, 2003 and 2002 F-5
Statements of Cash Flows, Years Ended December 31, 2003 and 2002 F-6
Notes to Financial Statements F-7
Unaudited Financial Statements
Balance Sheet, March 31, 2004 F-21
Statements of Income, Three Months Ended
March 31, 2004 and 2003 F-22
Statements of Common Stockholders' Equity,
Three Months Ended March 31, 2004 and 2003 F-23
Statements of Cash Flows, Three Months Ended
March 31, 2004 and 2003 F-24
Notes to Financial Statements F-25
55
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Stockholders of Gulfport Energy Corporation:
We have audited the accompanying balance sheet of Gulfport Energy
Corporation (a Delaware corporation) as of December 31, 2003, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 2003 and 2002. These financial statements are the
responsibility of Gulfport's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gulfport Energy Corporation
as of December 31, 2003, and the results of its operations and its cash flows
for the years ended December 31, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 21 to the financial statements, Gulfport changed its
method of accounting for asset retirement obligations and its redeemable 12%
cumulative preferred stock as required by the provisions of Statement of
Financial Accounting Standards No. 143 and 150, respectively.
HOGAN & SLOVACEK
Oklahoma City, OK
May 10, 2004
F-2
GULFPORT ENERGY CORPORATION
BALANCE SHEET
December 31,
2003
-------------
Assets
Current assets:
Cash and cash equivalents $ 1,542,000
Accounts receivable 1,340,000
Accounts receivable - related party 379,000
Prepaid expenses and other current assets 179,000
-------------
Total current assets 3,440,000
-------------
Property and equipment:
Oil and natural gas properties 127,991,000
Other property and equipment 1,912,000
Accumulated depletion, depreciation, amortization (77,423,000)
-------------
Property and equipment, net 52,480,000
-------------
Other assets 3,060,000
-------------
Total assets $ 58,980,000
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 3,274,000
Accrued payable - royalty audit 212,000
Asset retirement obligation - current 480,000
Current maturities of long-term debt 2,318,000
-------------
Total current liabilities 6,284,000
-------------
Asset retirement obligation - long-term 7,356,000
Accrued payable - royalty audit 121,000
Redeemable 12% cumulative preferred stock, Series A, $.01
par value, with a redemption and liquidation value of
$1,000 per share; 30,000 authorized, 12,071 issued and
outstanding at December 31, 2003 12,071,000
-------------
Total liabilities 25,832,000
-------------
Commitments and contingencies
Preferred stock, $.01 par value; 5,000,000 authorized
at December 31, 2003, none issued -
Common stockholders' equity:
Common stock - $.01 par value, 20,000,000 authorized,
10,146,566 issued and outstanding at December 31, 2003 101,000
Paid-in capital 84,192,000
Accumulated deficit (51,145,000)
-------------
Total stockholders' equity 33,148,000
-------------
Total liabilities and stockholders' equity $ 58,980,000
=============
See accompanying notes to financial statements.
F-3
GULFPORT ENERGY CORPORATION
STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------
2003 2002
------------ ------------
Revenues:
Gas sales $ 498,000 $ 379,000
Oil and condensate sales 15,311,000 11,450,000
Other income 138,000 305,000
------------ ------------
15,947,000 12,134,000
------------ ------------
Costs and expenses:
Operating expenses 5,886,000 5,163,000
Production taxes 1,882,000 1,311,000
Depreciation, depletion, and amortization 4,637,000 3,386,000
General and administrative 1,843,000 1,873,000
------------ ------------
14,248,000 11,733,000
INCOME FROM OPERATIONS: 1,699,000 401,000
------------ ------------
OTHER (INCOME) EXPENSE:
Accretion expense 393,000 -
Interest expense 112,000 181,000
Interest expense - preferred stock 875,000 -
Interest income (30,000) (61,000)
Proceeds from Litigation Trust - (160,000)
------------ ------------
1,350,000 (40,000)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 349,000 441,000
------------ ------------
INCOME TAX EXPENSE (BENEFIT):
Current 490,000 176,000
Deferred (490,000) (176,000)
------------ ------------
- -
------------ ------------
NET INCOME (LOSS) BEFORE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 349,000 441,000
Cumulative effect of change in
accounting principle 270,000 -
------------ ------------
NET INCOME (LOSS) 619,000 441,000
------------ ------------
Less: Preferred stock dividends (838,000) (1,066,000)
------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (219,000) $ (625,000)
============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC:
Per common share before effect of change
in accounting principle $ (0.05) $ (0.06)
Effect per common share of change in
accounting principle 0.03 -
------------ ------------
$ (0.02) $ (0.06)
============ ============
NET INCOME (LOSS) PER COMMON SHARE - DILUTED:
Per common share before effect of change
in accounting principle $ (0.05) $ (0.06)
Effect per common share of change in
accounting principle 0.03 -
------------ ------------
$ (0.02) $ (0.06)
============ ============
See accompanying notes to financial statements.
F-4
GULFPORT ENERGY CORPORATION
Statements of Common Stockholders' Equity
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
---------- -------- ---------- -------------
Balance at December 31, 2001 10,146,566 $101,000 $84,192,000 $(50,301,000)
Net income - - - 441,000
Preferred stock dividends - - - (1,066,000)
---------- -------- ----------- ------------
Balance at December 31, 2002 10,146,566 $101,000 $84,192,000 $(50,926,000)
Net income - - - 619,000
Preferred stock dividends - - - (838,000)
---------- -------- ----------- ------------
Balance at December 31, 2003 10,146,566 $101,000 $84,192,000 $(51,145,000)
========== ======== =========== ============
See accompanying notes to financial statements.
F-5
GULFPORT ENERGY CORPORATION
Statements of Cash Flows
Year Ended December 31,
---------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 619,000 $ 441,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of change in accounting
principle (270,000) -
Accretion of discount 393,000 -
Interest expense - preferred stock 875,000 -
Depletion, depreciation and amortization 4,631,000 3,366,000
Amortization of debt issuance costs 6,000 20,000
Changes in operating assets and liabilities:
Decrease in insurance settlement receivable 2,510,000 -
Decrease (increase) in accounts receivable 493,000 (682,000)
(Increase) decrease in accounts receivable -
related party (321,000) 47,000
Decrease in prepaid expenses 26,000 31,000
Increase in accounts payable
and accrued liabilities 420,000 807,000
------------ ------------
Net cash provided by operating activities 9,382,000 4,030,000
------------ ------------
Cash flows from investing activities:
(Additions) to cash held in escrow (235,000) (242,000)
(Additions) to other property, plant
and equipment (40,000) (16,000)
(Additions) to oil and gas properties (10,145,000) (8,513,000)
Expenditures related to oil and gas
properties due to hurricane (707,000) (133,000)
------------ ------------
Net cash used in investing activities (11,127,000) (8,904,000)
------------ ------------
Cash flows from financing activities:
Borrowings on note payable 2,200,000 -
Principal payments on borrowings (22,000) (1,123,000)
Proceeds from issuance of preferred stock - 6,029,000
------------ ------------
Net cash provided by financing activities 2,178,000 4,906,000
------------ ------------
Net increase in cash and cash equivalents 433,000 32,000
Cash and cash equivalents at beginning of period 1,109,000 1,077,000
------------ ------------
Cash and cash equivalents at end of period $ 1,542,000 $ 1,109,000
============ ============
Supplemental disclosure of cash flow information:
Interest payments $ 112,000 $ 42,000
============ ============
Supplemental disclosure of non-cash transactions:
Repayment of note payable to related
party through issuance of Series A
Preferred Stock $ - $ 3,000,000
============ ============
Repayment of accrued interest due on
note payable to related party through
issuance of Series A
Preferred Stock $ - $ 263,000
============ ============
Payment of Series A Preferred Stock dividends
through issuance of Series A Preferred Stock $ 838,000 $ 1,066,000
============ ============
See accompanying notes to financial statements.
F-6
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Gulfport is a domestic independent oil and gas exploration, development and
production company with properties located in the Louisiana Gulf Coast.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents for purposes of the
statement of cash flows.
Oil and Gas Properties
The Company uses the Full Cost method of accounting for oil and gas
operations. Accordingly, all costs, including nonproductive costs and certain
general and administrative costs associated with acquisition, exploration and
development of oil and gas properties, are capitalized. Net capitalized costs
are limited to the estimated future net revenues, after income taxes, discounted
at 10% per year, from proven oil and gas reserves and the cost of the properties
not subject to amortization. Such capitalized costs, including the estimated
future development costs and site remediation costs, if any, are depleted by an
equivalent units-of-production method, converting gas to barrels at the ratio of
six MCF of gas to one barrel of oil. No gain or loss is recognized upon the
disposal of oil and gas properties, unless such dispositions significantly alter
the relationship between capitalized costs and proven oil and gas reserves. Oil
and gas properties not subject to amortization consist of the cost of
undeveloped leaseholds and totaled $1,600 at December 31, 2003. These costs are
reviewed periodically by management for impairment, with the impairment
provision included in the cost of oil and gas properties subject to
amortization. Factors considered by management in its impairment assessment
include drilling results by Gulfport and other operators, the terms of oil and
gas leases not held by production, and available funds for exploration and
development.
Other Property and Equipment
Depreciation of other property and equipment is provided on a straight-
line basis over estimated useful lives of the related assets, which range from 7
to 30 years.
Reclassifications
Certain reclassifications have been made to the 2002 financial statement
presentation in order to conform to the 2003 financial statement presentation.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing income or
loss attributable to common stock by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per common share
reflects the potential dilution that could occur if options or other contracts
to issue common stock were exercised or converted into common stock. Diluted
net loss per common share does not reflect dilution from potential common
shares, because to do so would be anti-dilutive. Calculations of basic and
diluted net income (loss) per common share are illustrated in Note 16.
F-7
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
Income Taxes
Gulfport uses the asset and liability method of accounting for income
taxes, under which deferred tax assets and liabilities are recognized for the
future tax consequences of (1) temporary differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities
and (2) operating loss and tax credit carryforwards. Deferred income tax assets
and liabilities are based on enacted tax rates applicable to the future period
when those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income during the period the rate change is enacted. Deferred tax
assets are recognized as income in the year in which realization becomes
determinable.
Revenue Recognition
Gas revenues are recorded in the month produced using the entitlement
method, whereby any production volumes received in excess of the Company's
ownership percentage in the property are recorded as a liability. If less than
Gulfport's entitlement is received, the underproduction is recorded as a
receivable. There is no such liability or asset recorded at December 31, 2003.
Oil revenues are recognized when ownership transfers, which occurs in the month
produced.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
Significant estimates with regard to these financial statements include the
estimate of proved oil and gas reserve quantities and the related present value
of estimated future net cash flows there from and future net operating loss
carryforwards available as reductions of income tax expense.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a liability
has been incurred and the amount can be reasonably estimated.
Segment Information
The Company's only revenue generating activity is the production and sale
of oil and gas from properties located on the Louisiana Gulf Coast. Therefore,
no reporting of business segments has been included in these financial
statements or the notes thereto.
2. INSURANCE SETTLEMENT RECEIVABLE
Hurricane Lili hit the southern gulf coast of Louisiana on October 3, 2002
with estimated sustained winds over 120 miles per hour and a 9-1/2 foot tidal
surge. The eye of the hurricane came on shore directly East of Gulfport's WCBB
field. The storm caused significant damage to the Company's production
facilities and the WCBB field. The total cost to restore production to the
field was estimated by the Company's personnel and insurance carrier to be
$3,510,000. As of December 31, 2003, the Company had received the $3,510,000 in
insurance settlement proceeds. Hurricane related repairs for the years ended
December 31, 2003 and 2002, were $707,000 and $1,133,000 respectively.
3. ACCOUNTS RECEIVABLE - RELATED PARTY
Included in the accompanying December 31, 2003 balance sheet are amounts
receivable from entities that have similar controlling interests as those
F-8
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
controlling the Company. These receivables represent amounts billed by the
Company for general and administrative functions performed by Gulfport's
personnel on behalf of the related party companies. At the end of 2003, this
receivable amount totaled $379,000.
4. PROVISION FOR ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the activity in the allowance for doubtful accounts for the
year ended December 31, 2003 is as follows:
Balance, beginning of the year $ 239,000
Provision for bad debts -
Bad debts written off (239,000)
--------------
Balance, end of year $ -
==============
Charges to bad debt expense totaling $7,000 were made during the year ended
December 31, 2003. The Company wrote off a receivable of $246,000 during the
year resulting in bad debt expense of $7,000 after fully utilizing the provision
for allowance for doubtful accounts of $239,000. Charges to bad debt expense
for the year ended December 31, 2002 were $87,000.
5. PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated
depreciation, depletion and amortization as of December 31, 2003 are as follows:
Oil and gas properties $ 127,991,000
Office furniture and fixtures 1,435,000
Building 217,000
Land 260,000
----------------
Total property and equipment 129,903,000
Accumulated depreciation, depletion,
amortization and impairment reserve (77,423,000)
----------------
Property and equipment, net $ 52,480,000
================
Included in oil and gas properties at December 31, 2003 are $2,113,000 in
general and administrative costs incurred and capitalized to the full cost pool.
General and administrative costs capitalized to the full cost pool represent
management's estimate of costs incurred directly related to exploration and
development activities such as geological costs and other administrative costs
associated with overseeing the exploration and development activities. All
general and administrative costs not directly associated with exploration and
development activities were charged to expense as they were incurred.
6. OTHER ASSETS
Other assets as of December 31, 2003 consist of the following:
Plugging and abandonment escrow account
on the WCBB properties (Note 8) $ 2,749,000
CD's securing letter of credit 200,000
Deposits 111,000
----------------
$ 3,060,000
================
F-9
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
7. ACCRUED PAYABLE - ROYALTY AUDIT
During the third quarter of 2002, the Company underwent a royalty audit
which was conducted by the State of Louisiana. The audit covered the period
from January 1, 1999 through December 31, 2001. The Company was notified during
the fourth quarter of 2002 that the total amount to be paid as a result of the
audit was $492,000, including $146,000 in penalties and interest. As of
December 31, 2003, the liability was $333,000. Amounts to be paid in the next
twelve months total $212,000 and have been classified as "Accrued payable -
royalty audit" in the current liability section of the accompanying balance
sheet. The portion of the liability that will be due in periods beginning after
the next twelve months total $121,000 and have been classified as "Accrued
payable - royalty audit" in the non-current liability section of the
accompanying balance sheet.
8. LONG-TERM DEBT
Long-term debt as of December 31, 2003 is as follows:
Building loan $ 118,000
Amounts borrowed under line of credit (Note 10) 2,200,000
----------------
2,318,000
Less - current maturities of long term debt 2,318,000
----------------
Debt reflected as long term $ -
================
All debt outstanding as of December 31, 2003 will mature during 2004.
Building Loan
The building loan of $118,000 relates to a building in Lafayette,
Louisiana, purchased in 1996 to be used as the Company's Louisiana headquarters.
The building is 12,480 square feet with approximately 6,180 square feet of
finished office area and 6,300 square feet of warehouse space. This building
allows Gulfport to provide office space for Louisiana personnel, have access to
meeting space close to the fields and to maintain a corporate presence in
Louisiana.
9. NOTE PAYABLE - RELATED PARTY
On March 29, 2002, the outstanding balance of the Company's note payable to
Gulfport Funding, LLC ("Gulfport Funding"), along with all accumulated interest
due on the note, were retired through Gulfport Funding's participation in the
Company's Private Placement Offering as described in Note 11.
10. REVOLVING LINE OF CREDIT
The Company maintains a line of credit with Bank of Oklahoma, under which
the Company may borrow up to $2,300,000. Amounts borrowed under the line bear
interest at Chase Manhattan Prime plus 1%, with payments of interest on
outstanding balances due monthly. Any principal amounts borrowed under the line
will be due on July 1, 2004. As of December 31, 2003, $2,200,000 had been
borrowed under this line.
11. COMMON STOCK OPTIONS, WARRANTS AND CHANGES IN CAPITALIZATION
Options
The Company sponsors the 1999 Stock Option Plan (the "Plan"), which is
administered by the Compensation Committee (the "Committee") of the Board of
Directors of the Company. Under the terms of the Plan, the Committee may
determine: to which eligible participants options shall be granted, the number
of shares covered by such options, the purchase price or exercise price of such
F-10
options, the vesting period of such options and the exercisable period of such
options. Eligible participants are defined as (i) all directors of the Company;
(ii) all officers of the Company; and (iii) all key employees of the Company
with a customary work week of at least 40 hours in the employ of the Company.
The maximum number of shares for which options may be granted under the Plan, as
adjusted for changes in capitalization which have taken place since the Plan's
adoption, is 883,000.
The Company accounts for stock options under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure". Presented below is a summary of the status of stock
options and related activity for the years ended December 31, 2003 and 2002:
Weighted
Average
Exercise Price
Shares per Share
------- ---------------
Options outstanding at December 31, 2001 607,337 $ 2.00
Granted 20,000 2.00
Exercised - -
Forfeited/expired - -
------- ----------
Options outstanding at December 31, 2002 627,337 $ 2.00
Granted - -
Exercised - -
Forfeited/expired - -
------- ----------
Options outstanding at December 31, 2003 627,337 $ 2.00
======= ==========
All options granted, exercised and outstanding have an exercise price of
$2.00.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model and an expected life of 5 years. No
options were granted during the year ended December 31, 2003.
Options outstanding at December 31, 2003 totaled 627,337. Of this total,
612,520 options were exercisable at December 31, 2003, with the remaining
options vesting in future periods.
Warrants
In accordance with the origination of the note payable to Gulfport Funding
(retired during 2002 as discussed in Note 9), the Company issued 108,625
warrants to CD Holdings, LLC. The exercise price of these warrants is $5.25 and
was estimated as the average closing price of the Company's common stock for the
five days following the issuance of the warrants. The warrant agreement
provides for pro rata adjustments to the number of warrants granted if the
Company at any time increases the number of outstanding shares or otherwise
adjusts its capitalization.
Also, on July 11, 2002, 1,163,195 previously exercisable warrants expired.
The issuance of these warrants had stemmed from a reorganization which took
place in 1997.
Private Placement Offering
In March 2002, the Company commenced a private placement offering of 10,000
units. Each unit consisted of (i) one share of Cumulative Preferred Stock,
Series A, of the Company (Preferred) and (ii) a warrant to purchase up to 250
shares of common stock, par value $0.01 per share, of the Company. Holders of
the Preferred are entitled to receive dividends at the rate of 12% of the
liquidation preference per annum payable quarterly in cash or, at the option of
the Company for all quarters ending on or prior to March 31, 2004, payable in
F-11
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
whole or in part in additional shares of Preferred at the rate of 15% of the
liquidation preference per annum. To the extent funds are legally available,
the Company is obligated to declare and pay the dividends on the Preferred. The
Preferred may be redeemed at any time for an amount per share equal to $1,000
and all accrued and unpaid dividends thereon, whether or not declared or
payable, and must be redeemed on March 29, 2007 for an amount per share equal to
$1,000 and all accrued and unpaid dividends thereon, whether or not declared or
payable. Accordingly, the Preferred issued in connection with this Offering is
treated as redeemable stock on the Company's balance sheet. The affirmative
vote of at least two thirds of the votes entitled to be cast by holders of the
Preferred is necessary for any amendment to the certificate of incorporation
which (1) adversely affects the rights and privileges of the Preferred or (2)
creates or authorizes an increase in any shares ranking senior to the Preferred
or securities convertible into the foregoing. The Preferred cannot be sold or
transferred by its holders, subject to certain exceptions.
The Warrants have a term of ten years and an exercise price of $4.00 per
share of common stock. The Company granted to holders of the Warrants certain
demand and piggyback registration rights with respect to shares of common stock
issuable upon exercise of the warrants.
The Preferred offering was made available to stockholders (some of whom
were affiliates) of the Company as of December 31, 2001 and who were accredited
investors. Purchasers were able to participate up to their pro rata share of
ownership in the Company as of December 31, 2001. As of April 15, 2002, the
Company had closed on subscriptions totaling $9,292,000 for 9,291.85 units,
which included the conversion by Gulfport Funding, LLC of its $3,000,000 loan
along with the accumulated interest due from the Company for 3,262.98 units.
Additionally, multiple entities controlled by the Company's majority stockholder
participated in the offering by subscribing for 2,738 units at a cost of
$2,738,000.
12. DIVIDENDS ON SERIES A PREFERRED STOCK
As discussed in Note 11, the Company may, at its option, accrue additional
shares of Preferred for the payment of dividends at a rate of 15% per annum
during the initial two years following the closing date of its Offering. The
Company has chosen to do so for the quarterly periods ending March 31, June 30,
September 30, and December 31, 2003 and has therefore accrued additional shares
payable totaling 838,000 at December 31, 2003 related to the Preferred Stock
Series A shares issued and outstanding during those time periods. Subsequent to
the adoption of SFAS 150 in the third quarter (see Note 21), the dividends were
recognized as interest expense. The $875,000 shown as "Interest expense -
preferred stock" in the accompanying statement of operations represents the
dividends accrued on the Preferred Stock Series A for the quarterly periods
ended September 30 and December 31, 2003. These dividends payable were
calculated based upon the Preferred's $1,000 per share redemptive value and are
reflected as "Series A preferred stock" in the accompanying balance sheet.
Beginning with the period ended June 30, 2004, the Company will be required to
pay cash dividends at a rate of 12% per annum on the Series A Preferred Stock.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments carried as assets and liabilities on the
accompanying balance sheet at December 31, 2003 are carried at cost, which
approximates market value. The outstanding shares of Series A preferred stock
have been stated on the accompanying balance sheet at their redemptive value of
$1,000 per share.
14. CASTEX BACK-IN
Gulfport sold its interest in the Bayou Penchant, Bayou Pigeon, Deer Island
and Golden Meadow fields to Castex Energy 1996 Limited Partnership (Castex)
effective April 1, 1998 subject to a 25% reversionary interest in the
partnership after Castex had received 100% of the initial investment. Castex
informed Gulfport that the investment had paid out effective September 1, 2001.
In lieu of a 25% interest in the partnership, Gulfport elected to take a
proportionately reduced 25% working interest in the properties. During March
2002, the Company received approximately $220,000 from Castex which the Company
F-12
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
believes consists of sales income for the period after payout net of operating
expenses, although the Company has not received confirmation of such. As a
result, this amount received has been included in the accompanying statements of
operations for the year ended December 31, 2002 as "Other income". The Company
received an additional $66,000 from Castex in March of 2003, which is also
included in the accompanying statement of income for the year ended December 31,
2003 as "Other Income".
15. INCOME TAXES
A reconciliation of the statutory federal income tax amount to the recorded
expense follows:
2003 2002
--------------- ---------------
Income before federal income taxes $ 349,000 $ 441,000
--------------- ---------------
Expected income tax at statutory rate 140,000 176,000
Increase in tax resulting from interest
expense not tax deductible 350,000 -
Provision for income taxes 490,000 176,000
Net operating loss carryforward
utilized (490,000) (176,000)
Other deferred tax assets utilized - -
--------------- ---------------
Income tax expense recorded $ - $ -
=============== ===============
Subsequent to the adoption of SFAS 150, the Company recognized interest
expense of $875,000 for the year ended December 31, 2003. This interest is not
deductible for tax purposes. This resulted in a taxable difference of $350,000
when the interest expense is applied to the statutory rate of 40%. The
difference in taxable income is fully nullified by the Company's net operating
loss carryforward.
The tax effects of temporary differences and net operating loss carryforwards,
which give rise to deferred tax assets at December 31, 2003 are estimated as
follows:
2003 2002
--------------- ---------------
Net operating loss carryforward $ 39,349,000 $ 36,356,000
Oil and gas property basis difference 5,564,000 12,540,000
--------------- ---------------
Total deferred tax asset 44,913,000 48,896,000
Valuation allowance (44,913,000) (48,896,000)
--------------- ---------------
Net deferred tax asset (liability) $ - $ -
=============== ===============
The Company has an available tax net operating loss carry forward estimated
at approximately $98,372,000 as of December 31, 2003. This carryforward will
begin to expire in the year 2013.
F-13
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
16. NET INCOME (LOSS) PER COMMON SHARE
A reconciliation of the components of basic and diluted net income (loss)
per common share is presented in the table below:
2003 2002
---------------------------------- ----------------------------------
Per Per
Income (loss) Shares Share Income (loss) Shares Share
-------------------------------------------------------------------------
Basic:
Income before effect of change
in accounting principle $ 349,000 $ 441,000
Less: preferred stock
dividends (838,000) (1,066,000)
---------- -----------
$ (489,000) 10,146,566 $(0.05) $ (625,000) 10,146,566 $(0.06)
====== ======
Effect of change in
accounting principle 270,000 10,146,566 0.03 - 10,146,566 -
---------- ----- ----------- ------
$ (219,000) $(0.02) $ (625,000) $(0.06)
========== ====== =========== ======
Effect of dilutive securities:
Stock options 0 0
========== ==========
The Company recorded a net loss from continuing operations after preferred
stock dividends for the years ended December 31, 2003 and 2002. Due to this, no
potentially dilutive shares were used in the computation of dilutive earnings
per share as the use of such shares would be anti-dilutive.
17. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company conducts business
activities with a substantial number of its shareholders.
18. COMMITMENTS
Office Lease
On August 8, 2002, the Company executed a 60-month lease on 12,035 square
feet of office space which commenced on November 15, 2002. Payments due under
the lease during its term are as follows:
For the year ended December 31,
2004 $ 217,000
2005 217,000
2006 217,000
2007 162,000
----------------
$ 813,000
================
Payments made under this lease during the year ended December 31, 2003
totaled $217,000. Rental expense for all operating leases for the years ended
December 31, 2003 and 2002 totaled $233,000 and $165,000, respectively.
F-14
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Company assumed the seller's obligation to contribute
approximately $18,000 per month through March 2004, to a plugging and
abandonment trust and the obligation to plug a minimum of 20 wells per year for
20 years commencing March 11, 1997. ChevronTexaco retained a security interest
in production from these properties until abandonment obligations to
ChevronTexaco have been fulfilled. Beginning in 2007, the Company can access the
trust for use in plugging and abandonment charges associated with the property.
As of December 31, 2003, the plugging and abandonment trust totaled
approximately $2,749,000, including interest received during 2003 of
approximately $14,000. The Company has plugged 132 wells at WCBB since it began
its plugging program in 1997 and is current in its funding and plugging
obligations.
Texaco Global Settlement
Pursuant to the terms of a global settlement between Texaco and the State
of Louisiana which includes the State Lease No. 50 portion of Gulfport's East
Hackberry Field, Gulfport was obligated to commence drilling a well or other
qualifying development operation on certain non-producing acreage in the field
prior to March 1998. Because of prevailing market conditions during 1998, the
Company believed it was commercially impractical to shoot seismic or commence
drilling operations on the subject property. As a result, Gulfport has agreed to
surrender approximately 440 non-producing acres in this field to the State of
Louisiana. At December 31, 2003, Gulfport was in the process of releasing such
acreage to the State of Louisiana.
Contributions to 401(k) Plan
Gulfport sponsors a 401(k) and Profit Sharing plan under which eligible
employees may contribute up to 15% of their total compensation through salary
deferrals. Also under these plans, the Company will make a contribution each
calendar year on behalf of each employee equal to at least 3% of his or her
salary, regardless of the employee's participation in salary deferrals. During
the years ended December 31, 2003 and 2002, Gulfport incurred $71,000 and
$56,000, respectively, in contribution expense related to this plan.
Employment Agreement
At December 31, 2003, Gulfport had an employment agreement with its Chief
Executive Officer. This agreement expires June 1, 2009, and calls for an annual
salary of $200,000, which may be adjusted for cost of living increases.
19. CONTINGENCIES
Litigation
The Company has been named as a defendant on various litigation matters.
The ultimate resolution of these matters is not expected to have a material
adverse effect on the Company's financial condition or results of operations for
the periods presented in the financial statements.
Concentration of Credit Risk
Gulfport operates in the oil and gas industry in the state of Louisiana
with sales to refineries, re-sellers such as pipeline companies, and local
distribution companies. While certain of these customers are affected by
periodic downturns in the economy in general or in their specific segment of the
oil and gas industry, Gulfport believes that its level of credit-related losses
due to such economic fluctuations has been immaterial and will continue to be
immaterial to the Company's results of operations in the long term. During 2003,
Gulfport wrote off bad debts of $7,000. Bad debt expense of $87,000 was incurred
during 2002.
F-15
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 2003 Gulfport held cash in excess of insured limits in
these banks totaling $1,442,000.
During 2003, Gulfport sold all of its oil production to Shell Trading
Company and all of its gas production to ChevronTexaco. During 2002,
approximately 87% of Gulfport's revenues from oil and gas sales were
attributable to Shell Trading Company.
20. LITIGATION TRUST ENTITY
Pursuant to Old WRT's 1997 plan of reorganization, all of Old WRT'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 Oil and Gas Company (Tri-Deck)), existing as of the effective
date of that plan, were transferred into a "Litigation Trust" controlled by an
independent party for the benefit of most of Old WRT's existing unsecured
creditors. The litigation related to recovery of marine and rig equipment and
the Tri-Deck claims were subsequently transferred to the Litigation Trust as
described below.
The Litigation Trust was funded by a $3,000,000 cash payment, which was
made on the effective date of reorganization. Gulfport owns a 12% interest in
the Litigation Trust with the other 88% being owned by the former general
unsecured creditors of Old WRT. For financial statement reporting purposes,
Gulfport has not recognized the potential value of recoveries which may
ultimately be obtained, if any, as a result of the actions of the Litigation
Trust, treating the entire $3,000,000 payment as a reorganization cost at the
time of the reorganization.
On January 20, 1998, Gulfport and the Litigation Trust entered into a
Clarification Agreement whereby the rights to pursue various claims reserved by
Gulfport under the plan of reorganization were assigned to the Litigation Trust.
In connection with this agreement, the Litigation Trust agreed to reimburse the
Company $100,000 for legal fees Gulfport had incurred in connection these
claims. As additional consideration for the contribution of this claim to the
Litigation Trust, Gulfport is entitled to 20% to 80% of the net proceeds from
these claims.
During 2002, Gulfport received $160,000 in proceeds from the Litigation
Trust. No proceeds were received from the Litigation Trust in 2003.
21. ACCOUNTING PRONOUNCEMENTS
SFAS No. 143
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which requires the Company to record a liability equal to the fair value
of the estimated cost to retire an asset. The asset retirement liability is
recorded in the period in which the obligation meets the definition of a
liability, which is generally when the asset is placed into service. When the
liability is initially recorded, the Company will increase the carrying amount
of the related long-lived asset by an amount equal to the original liability.
The liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related long-lived asset. The
accretion of the asset retirement obligation resulted in an expense of $393,000
for the year ended December 31, 2003, as shown in the accompanying statement of
operations. Any difference between costs incurred upon settlement of an asset
retirement obligation and the recorded liability will be recognized as a gain or
loss in the Company's earnings. The asset retirement obligation is based on a
number of assumptions requiring professional judgment. The Company cannot
predict the type of revisions to these assumptions that will be required in
future periods due to the availability of additional information, including
prices for oil field services, technological changes, governmental requirements
and other factors. Upon adoption of SFAS No. 143, the Company recorded a net
benefit of $270,000 as the cumulative effect of a change in accounting
principle. The non-cash transition adjustment increased oil and natural gas
properties and asset retirement obligations by $7.59 million and $7.37 million,
respectively, and decreased accumulated depreciation by $50,000.
F-16
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
The asset retirement obligation recognized by the Company at December 31,
2003, relates to the estimated costs to dismantle and abandon its investment in
producing oil and gas properties and the related facilities. Of the total asset
retirement liability, $480,000 that has been classified as short-term is the
estimated portion of the total liability to be settled during the next year as
the Company meets its plugging and abandonment requirements as discussed in Note
18.
..
The pro forma asset retirement obligation as of December 31, 2002, was
$7.37 million. Pro forma net income for the period December 31, 2002, assuming
SFAS No. 143 had been applied retroactively, is shown in the following table:
December 31, 2002
-----------------
Net income available to common stockholders -
As reported $ (625,000)
Pro forma (340,000)
Net income per common share -
As reported, basic $ (0.06)
Pro forma, basic (0.03)
As reported, diluted (0.06)
Pro forma, diluted (0.03)
SFAS No. 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or as an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
generally effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company has recorded a liability
related to the Preferred of $12,071,000. Previously, the Preferred had been
classified on the balance sheet between total liabilities and equity. This
amount represents the 12,071 shares of Preferred issued and outstanding as of
December 31, 2003, at the redemption and liquidation value of $1,000 per share.
In the opinion of management, the $1,000 per share redemption and liquidation
value approximates fair value. The shares are mandatorily redeemable on the
fifth anniversary of the first issuance of Preferred.
22. SUBSEQUENT EVENTS
The Board of Directors has determined that if a sale of WCBB is not
consummated that it is in the best interests of the Company to conduct an equity
offering. The Board has approved a registered rights offering in the amount of
$12.0 million. The rights offering will be backstopped by one of the Company's
principal stockholders. As a result, the Company is guaranteed proceeds of
$12.0 million if the rights offering is commenced for a commitment fee of 2% of
the gross proceeds from the rights offering. Therefore, the Company shall have
required liquidity either through the sale of the property or the proceeds from
the rights offering.
In connection with the rights offering, on April 30, 2004, the Company
entered into a $3.0 million revolving credit facility with CD Holding, L.L.C., a
principal stockholder of the Company. Borrowings under the credit facility are
due on the earlier of the closing of the rights offering and August 1, 2005 and
bear interest at the rate of 10.0% per annum. Under the credit facility, CD
Holding may, if it elects to do so, apply the outstanding principal amount and
any accrued but unpaid interest either (1) to the subscription price payable
F-17
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
upon exercise of the rights issued to CD Holding in the rights offering, or (2)
to the purchase price for the Common Stock. The credit facility provides that if
the rights offering is not completed, CD Holding has the right to convert any
borrowings plus any accrued but unpaid interest under the facility into shares
of Common Stock at a conversion price $1.20 per share of Common Stock.
In April 2004, the Board of Directors of the Company approved and the
Company received the consent of holders of the requisite number of shares of
Preferred to amend the Company's Certificate of Designation with respect to the
Series A preferred stock to give the Company the ability to pay dividends on the
Series A preferred stock with additional shares of Series A preferred stock
after March 31, 2004 for so long as such shares remain outstanding and prior to
the mandatory redemption date.
23. SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION
ACTIVITIES (UNAUDITED)
The following is historical revenue and cost information relating to the
Company's oil and gas operations located entirely in the State of Louisiana:
Capitalized Costs Related to Oil and Gas Producing Activities
2003
--------------
Proven Properties $ 127,991,000
Accumulated depreciation, depletion
amortization and impairment reserve (76,158,000)
--------------
Proven properties, net $ 51,833,000
==============
Costs Incurred in Oil and Gas Property Acquisition and Development Activities
2003 2002
------------ ------------
Acquisition $ - $ 63,000
Development of Proved
Undeveloped Properties 6,320,000 5,270,000
Exploratory - 126,000
Recompletions/Workovers 3,825,000 3,054,000
------------ ------------
Total $ 10,145,000 $ 8,513,000
============ ============
Results of Operations for Producing Activities
The following schedule sets forth the revenues and expenses related to the
production and sale of oil and gas. The income tax expense is calculated by
applying the current statutory tax rates to the revenues after deducting costs,
which include depreciation, depletion and amortization allowances, after giving
effect to the permanent differences. The results of operations exclude general
office overhead and interest expense attributable to oil and gas production.
2003 2002
----------- -----------
Revenues $15,809,000 $11,829,000
Production costs (7,768,000) (6,474,000)
Depletion (4,421,000) (3,106,000)
----------- -----------
3,620,000 2,249,000
----------- -----------
Income tax expense
Current 1,448,000 900,000
Deferred (1,448,000) (900,000)
----------- -----------
- -
----------- -----------
Results of operations
from producing activities $ 3,620,000 $ 2,249,000
=========== ===========
F-18
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
Oil and Gas Reserves
The following table presents estimated volumes of proven and proven
undeveloped oil and gas reserves as of December 31, 2003 and 2002 and changes in
proven reserves during the last two years, assuming continuation of economic
conditions prevailing at the end of each year. Volumes for oil are stated in
thousands of barrels (MBbls) and volumes for gas are stated in millions of cubic
feet (MMCF). The weighted average prices at December 31, 2003 used for reserve
report purposes are $32.52 and $6.19, adjusted by lease for transportation fees
and regional price differentials, fixed price contracts, and for oil and gas
reserves, respectively.
Gulfport emphasizes that the volumes of reserves shown below are estimates
which, by their nature, are subject to revision. The estimates are made using
all available geological and reservoir data, as well as production performance
data. These estimates are reviewed annually and revised, either upward or
downward, as warranted by additional performance data.
2003 2002
---------------- ----------------
Oil Gas Oil Gas
------ ------ ------ ------
Proven Reserves
Beginning of the period 23,005 18,510 24,823 24,725
Purchases in oil and gas
reserves in place 377 555 - -
Extensions, discoveries and
other additions - - - -
Revisions of prior reserve
estimates (2,928) (5,417) (1,354) (6,112)
Current production (571) (123) (464) (103)
Sales of oil and gas
reserves in place - - - -
------ ------ ------ ------
End of period 19,883 13,525 23,005 18,510
====== ====== ====== ======
Proven developed reserves 1,790 1,258 3,232 3,773
====== ====== ====== ======
Discounted Future Net Cash Flows
Estimates of future net cash flows from proven oil and gas reserves were
made in accordance with SFAS No. 69, "Disclosures about Oil and Gas Producing
activities." The following tables present the estimated future cash flows, and
changes therein, from Gulfport's proven oil and gas reserves as of December 31,
2003 and 2002, assuming continuation of economic conditions prevailing at the
end of each year.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proven Oil
and Gas Reserves
Year ended December 31,
---------------------------
2003 2002
------------ ------------
Future cash flows $ 715,751,000 $ 768,573,000
Future development costs (128,487,000) (130,762,000)
Future production costs (104,677,000) (87,370,000)
Future production taxes (81,866,000) (87,692,000)
------------- -------------
Future net cash flows before income taxes 400,721,000 462,749,000
10% discount to reflect timing of cash flows (191,182,000) (217,417,000)
------------- -------------
Discounted future net cash flows 209,539,000 245,332,000
Future income taxes, net of 10% discount (15,530,000) (34,294,000)
------------- -------------
Standardized measure of discounted future
net cash flows $194,009,000 $211,038,000
============ ============
In order to develop its proved undeveloped reserves according to the
drilling schedule used by the engineers in Gulfport's reserve report, the
Company will need to spend $6,605,900, $13,266,000 and $16,058,000 during years
2004, 2005 and 2006 respectively.
F-19
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
CONTINUED
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proven Oil and Gas Reserves
Year ended December 31,
2003 2002
------------- -------------
Sales and transfers of oil and gas produced,
net of production costs $ (8,041,000) $ (5,355,000)
Net changes in prices and production costs 11,592,000 265,326,000
Acquisition of oil and gas reserves in place,
less related production costs 15,340,000 -
Extensions, discoveries and improven
recovery, less related costs - -
Revisions of previous quantity estimates, less
related production costs (80,919,000) (45,538,000)
Sales of reserves in place - -
Accretion of discount 26,235,000 (99,498,000)
Net changes in income taxes 18,764,000 (32,819,000)
Other - -
------------- -------------
Total change in standardized measure of
discounted future net cash flows $ (17,029,000) $ 82,116,000
============= =============
The standardized measure includes a deduction of $138,200 from the value,
at a discount rate of 10%, of the reserves to reflect the cumulative effect of
hedges in place at year-end for future periods as calculated at the time of the
reserve report using year-end SEC pricing.
Comparison of Standardized Measure of Discounted Future Net Cash Flows to
the Net Carrying Value of Proven Oil and Gas Properties at December 31, 2003 is
as follows:
2003 2002
------------ ------------
Standardized measure of discounted future
and net cash flows $194,009,000 $211,038,000
Proven oil and gas properties 127,991,000 109,480,000
Less accumulated depreciation, depletion,
amortization and impairment reserve (76,158,000) (71,791,000)
------------ ------------
Net carrying value of proven oil
and gas properties 51,833,000 37,689,000
------------ ------------
Standardized measure of discounted
future net cash flows in excess of
net carrying value of proven oil and
gas properties $142,176,000 $173,349,000
============ ============
F-20
GULFPORT ENERGY CORPORATION
BALANCE SHEET
March 31,
2004
--------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,027,000
Accounts receivable 2,319,000
Accounts receivable - related party 542,000
Prepaid expenses and other current assets 71,000
-------------
Total current assets 3,959,000
-------------
Property and equipment:
Oil and natural gas properties 128,980,000
Other property and equipment 1,927,000
Accumulated depletion, depreciation, amortization (78,556,000)
-------------
Property and equipment, net 52,351,000
-------------
Other assets 3,118,000
-------------
Total assets $ 59,428,000
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 3,199,000
Accrued payable - royalty audit 159,000
Asset retirement obligation - current 480,000
Current maturities of long-term debt 2,311,000
-------------
Total current liabilities 6,149,000
-------------
Asset retirement obligation - long-term 7,436,000
Accrued payable - royalty audit 121,000
Redeemable 12% cumulative preferred stock,
Series A, $.01 par value, with a redemption
and liquidation value of $1,000 per share;
30,000 authorized, 12,534 issued and
outstanding at March 31, 2004 12,534,000
-------------
Total liabilities 26,240,000
-------------
Commitments and contingencies
Preferred stock, $.01 par value; 5,000,000 authorized
at March 31, 2004, 30,000 issued as redeemable 12%
cumulative preferred stock, Series A -
Common stockholders' equity:
Common stock - $.01 par value, 20,000,000 authorized,
10,146,566 issued and outstanding at March 31, 2004 101,000
Paid-in capital 84,192,000
Accumulated deficit (51,105,000)
-------------
Total stockholders' equity 33,188,000
-------------
Total liabilities and stockholders' equity $ 59,428,000
=============
See accompanying notes to financial statements.
F-21
GULFPORT ENERGY CORPORATION
STATEMENTS OF INCOME
Three Months Ended March 31,
----------------------------
2004 2003
------------- ------------
Revenues:
Gas sales $ 48,000 $ 108,000
Oil and condensate sales 4,347,000 4,110,000
Other income 1,000 74,000
----------- -----------
4,396,000 4,292,000
----------- -----------
Costs and expenses:
Operating expenses 1,448,000 1,251,000
Production taxes 515,000 474,000
Depreciation, depletion, and amortization 1,133,000 1,000,000
General and administrative 686,000 572,000
----------- -----------
3,782,000 3,297,000
----------- -----------
INCOME FROM OPERATIONS: 614,000 995,000
----------- -----------
OTHER (INCOME) EXPENSE:
Accretion expense 73,000 75,000
Interest expense 42,000 3,000
Interest expense - preferred stock 463,000 -
Interest income (4,000) (11,000)
----------- -----------
574,000 67,000
----------- -----------
INCOME BEFORE INCOME TAXES 40,000 928,000
INCOME TAX EXPENSE (BENEFIT):
Current 201,000 401,000
Deferred (201,000) (401,000)
----------- -----------
- -
----------- -----------
NET INCOME BEFORE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 40,000 928,000
Cumulative effect of change in accounting
principle, net of tax effect - 270,000
----------- -----------
NET INCOME 40,000 1,198,000
Less: preferred stock dividends - (348,000)
----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 40,000 $ 850,000
=========== ===========
NET INCOME PER COMMON SHARE - BASIC:
Per common share before effect of change
in accounting principle $ 0.00 $ 0.05
Effect per common share of change in
accounting principle - 0.03
----------- -----------
$ 0.00 $ 0.08
=========== ===========
NET INCOME PER COMMON SHARE - DILUTED:
Per common share before effect of change
in accounting principle $ 0.00 $ 0.05
Effect per common share of change in
accounting principle - 0.03
----------- -----------
$ 0.00 $ 0.08
=========== ===========
See accompanying notes to financial statements.
F-22
GULFPORT ENERGY CORPORATION
Statements of Common Stockholders' Equity
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
---------- -------- ----------- -------------
Balance at December 31, 2002 10,146,566 $101,000 $84,192,000 $(50,926,000)
Net income - - - 1,198,000
Preferred stock dividends - - - (348,000)
---------- -------- ----------- ------------
Balance at March 31, 2003 10,146,566 $101,000 $84,192,000 $(50,076,000)
========== ======== =========== ============
Balance at December 31, 2003 10,146,566 $101,000 $84,192,000 $(51,145,000)
Net income - - - 40,000
Preferred stock dividends - - - -
---------- -------- ----------- ------------
Balance at March 31, 2004 10,146,566 $101,000 $84,192,000 $(51,105,000)
========== ======== =========== ============
See accompanying notes to financial statements.
F-23
GULFPORT ENERGY CORPORATION
Statements of Cash Flows
For the Three Months
Ended March 31,
---------------------------
2004 2003
------------ -----------
Cash flows from operating activities:
Net income $ 40,000 $ 1,198,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of change in accounting
principle - (270,000)
Accretion of discount 73,000 75,000
Interest expense - preferred stock 463,000
Depletion, depreciation and amortization 1,133,000 997,000
Amortization of debt issuance costs - 3,000
Changes in operating assets and liabilities:
Decrease in insurance settlement receivable - 2,510,000
(Increase) decrease in accounts receivable (979,000) 181,000
(Increase) in accounts receivable -
related party (163,000) (112,000)
Decrease in prepaid expenses 108,000 61,000
(Decrease) increase in accounts payable
and accrued liabilities (122,000) 1,882,000
------------ -----------
Net cash provided by operating activities 553,000 6,525,000
------------ -----------
Cash flows from investing activities:
(Additions) to cash held in escrow (58,000) (61,000)
(Additions) to other property, plant
and equipment (15,000) (14,000)
(Additions) to oil and gas properties (987,000) (3,778,000)
Expenditures related to oil and gas
properties due to hurricane (2,000) (536,000)
------------ -----------
Net cash used in investing activities (1,062,000) (4,389,000)
------------ -----------
Cash flows from financing activities:
Principal payments on borrowings (6,000) (5,000)
------------ -----------
Net cash used in financing activities (6,000) (5,000)
------------ -----------
Net increase (decrease) in cash and
cash equivalents (515,000) 2,131,000
Cash and cash equivalents at beginning.
of period 1,542,000 1,109,000
------------ -----------
Cash and cash equivalents at end of period $ 1,027,000 $ 3,240,000
============ ===========
Supplemental disclosure of cash
flow information:
Interest payments $ 42,000 $ 3,000
============ ===========
Supplemental disclosure of non-cash transactions:
Payment of Series A Preferred
Stock dividends through issuance of
Series A Preferred Stock $ - $ 348,000
============ ===========
See accompanying notes to financial statements.
F-24
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 and 2003
These condensed financial statements have been prepared by Gulfport Energy
Corporation (the "Company" or "Gulfport") 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-KSB.
1. ACCOUNTS RECEIVABLE - RELATED PARTY
Included in the accompanying March 31, 2004 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 2004. As of March 31,
2004, this receivable amount totaled $542,000.
2. PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated
depreciation, depletion and amortization are as follows:
March 31, 2004
--------------
Oil and gas properties $128,980,000
Office furniture and fixtures 1,450,000
Building 217,000
Land 260,000
------------
Total property and equipment 130,907,000
Accumulated depreciation, depletion,
amortization and impairment reserve (78,556,000)
------------
Property and equipment, net $ 52,351,000
============
F-25
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 and 2003
CONTINUED
3. OTHER ASSETS
Other assets consist of the following:
March 31, 2004
--------------
Plugging and abandonment escrow account
on the WCBB properties (Note 8) $ 2,807,000
CD's securing letter of credit 200,000
Deposits 111,000
-----------
$ 3,118,000
===========
4. LONG-TERM DEBT
A break down of long-term debt is as follows:
March 31, 2004
--------------
Building loan $ 111,000
Amounts borrowed under line of credit (Note 5) 2,200,000
------------
2,311,000
Less - current maturities of long term debt 2,311,000
------------
Debt reflected as long term $ -
============
The building loan of $111,000 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.
All debts outstanding at March 31, 2004 will mature during 2004.
5. REVOLVING LINE OF CREDIT
The Company maintains a line of credit with Bank of Oklahoma, under which
the Company may borrow up to $2,300,000. Amounts borrowed under the line bear
interest at Chase Manhattan Prime plus 1%, with payments of interest on
outstanding balances due monthly. Any principal amounts borrowed under the line
will be due on July 1, 2004. As of March 31, 2004, $2,200,000 had been borrowed
under this line. The Company intends to extend the maturity date of this credit
facility or use a portion of the net proceeds from the rights offering to repay
in full the outstanding balance of this credit facility.
6. 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. The
Company received an additional $66,000 from Castex in March of 2003, which is
included in the accompanying statement of income for the period ended March 31,
2003 as "Other Income".
F-26
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 and 2003
CONTINUED
7. EARNINGS PER SHARE
A reconciliation of the components of basic and diluted net income (loss)
per common share is presented in the table below:
For the Three Months Ended March 31,
2004 2003
---------------------------------------- ---------------
Per Per
Income Shares Share Income Shares Share
------- ---------- ----- -------- ---------- -----
Income before effect of change in
accounting principle $40,000 $ 928,000
Less: preferred stock dividends - (348,000)
------- ---------
40,000 10,146,566 0.00 580,000 10,146,566 0.05
Effect of change in accounting
principle - 10,146,566 - 270,000 10,146,566 0.03
-------- ----- --------- -----
$40,000 $0.00 $ 850,000 $0.08
Effect of dilutive securities:
Stock options 216,089 178,513
Diluted:
Income before effect of change in
accounting principle $40,000 $ 928,000
Less: preferred stock dividends - (348,000)
------- ---------
40,000 10,362,655 0.00 580,000 10,325,079 0.05
Effect of change in accounting
principle - 10,362,655 - 270,000 10,325,079 0.03
-------- ----- --------- -----
$40,000 $0.00 $ 850,000 $0.08
======= ===== ========= =====
Common stock equivalents not included in the calculation of 2004 and 2003
diluted earnings per share above consists of 2,322,893 warrants issued in
connection with the Company's Private Placement Offering which took place during
March 2002 as discussed in Note 9. Also not included in the calculation of 2004
and 2003 diluted earnings per share are 108,625 warrants issued in connection
with the Company's revolving line of credit with Gulfport Funding, which was
retired during March 2002. These potential common shares were not considered in
the calculation due to their anti-dilutive effect during the periods presented.
8. COMMITMENTS
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Company assumed the seller's obligation to contribute
approximately $18,000 per month through March 2004, to a plugging and
abandonment trust and the obligation to plug a minimum of 20 wells per year for
20 years commencing March 11, 1997. ChevronTexaco retained a security interest
in production from these properties until abandonment obligations to
ChevronTexaco have been fulfilled. Beginning in 2007, the Company can access the
trust for use in plugging and abandonment charges associated with the property.
As of March 31, 2004, the plugging and abandonment trust totaled approximately
$2,807,000, including interest received during 2004 of approximately $3,000.
The Company has plugged 132 wells at WCBB since it began its plugging program in
1997 and is current in its funding and plugging obligations.
F-27
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 and 2003
CONTINUED
Office Lease
The Company leases 12,035 square feet of office space in Oklahoma City.
This lease commenced in November of 2002 and has a 60 month term. Payments due
under the lease during its term are as follows:
For the year ended March 31,
----------------------------
2005 $ 217,000
2006 217,000
2007 216,000
2008 108,000
----------------
$ 758,000
================
The Company recently entered into an agreement to purchase the office
building it occupies. The building contains approximately 24,823 total rentable
square feet. Assuming the purchase is consummated, immediately upon the closing
the Company will have access to an additional 3,000 square feet with the
remaining space to be leased for approximately 12 months by the existing
tenant/owner. At the end of the twelve-month period, the Company will either
occupy or sub-lease any unused space. The Company is in the process of securing
possible financing related to the building purchase. The effect on the Company's
liquidity is expected to be minimal, as debt service costs are projected to be
covered by the rental income generated.
9. PRIVATE PLACEMENT OFFERING
In March 2002, the Company commenced a private placement offering of 10,000
units. Each unit consisted of (i) one share of Cumulative Preferred Stock,
Series A, of the Company (Preferred) and (ii) a warrant to purchase up to 250
shares of common stock, par value $0.01 per share, of the Company. Holders of
the Preferred are entitled to receive dividends at the rate of 12% of the
liquidation preference per annum payable quarterly in cash or, at the option of
the Company for all quarters ending on or prior to March 31, 2004, payable in
whole or in part in additional shares of Preferred at the rate of 15% of the
liquidation preference per annum. To the extent funds are legally available,
the Company is obligated to declare and pay the dividends on the Preferred. The
Preferred may be redeemed at any time for an amount per share equal to $1,000
and all accrued and unpaid dividends thereon, whether or not declared or
payable, and must be redeemed on March 29, 2007 for an amount per share equal to
$1,000 and all accrued and unpaid dividends thereon, whether or not declared or
payable. Accordingly, the Preferred issued in connection with this Offering is
treated as redeemable stock and a liability on the Company's balance sheet. The
affirmative vote of at least two thirds of the votes entitled to be cast by
holders of the Preferred is necessary for any amendment to the certificate of
incorporation which (1) adversely affects the rights and privileges of the
Preferred or (2) creates or authorizes an increase in any shares ranking senior
to the Preferred or securities convertible into the foregoing. The Preferred
cannot be sold or transferred by its holders, subject to certain exceptions.
The Warrants have a term of ten years and an exercise price of $4.00 per
share of common stock. The Company granted to holders of the Warrants certain
demand and piggyback registration rights with respect to shares of common stock
issuable upon exercise of the warrants.
The Preferred offering was made available to stockholders (some of whom
were affiliates) of the Company as of December 31, 2001 and who were accredited
investors. Purchasers were able to participate up to their pro rata share of
ownership in the Company as of December 31, 2001. As of April 15, 2002, the
Company had closed on subscriptions totaling $9,292,000 for 9,291.85 units,
which included the conversion by Gulfport Funding, LLC of its $3,000,000 loan
along with the accumulated interest due from the Company for 3,262.98 units.
Additionally, multiple entities controlled by the Company's majority stockholder
participated in the offering by subscribing for 2,738 units at a cost of
$2,738,000.
10. DIVIDENDS ON SERIES A PREFERRED STOCK
As discussed in Note 9, the Company may, at its option, accrue additional
shares of Preferred for the payment of dividends at a rate of 15% per annum
during the initial two years following the closing date of its Offering. The
F-28
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 and 2003
CONTINUED
Company has chosen to do so for the three month period ended March 31, 2004 and
has therefore accrued additional shares totaling $463,000 at March 31, 2004
related to the Preferred Stock Series A shares issued and outstanding during
that time period. These dividends were calculated based upon the Preferred's
$1,000 per share redemptive value and are reflected as "Series A preferred
stock" in the accompanying balance sheet. As a result of the adoption of SFAS
150, the dividends issued as additional shares for the three month period ended
March 31, 2004 are shown as "Interest expense - preferred stock" in the
accompanying statement of income. Beginning with the period ended June 30, 2004,
the Company will be required to pay cash dividends at a rate of 12% per annum on
the Series A Preferred Stock.
In April 2004, the Board of Directors of the Company approved and the
Company received the consent of holders of the requisite number of shares of
Preferred to amend the Company's Certificate of Designation with respect to the
Series A preferred stock to give the Company the ability to pay dividends on the
Series A preferred stock with additional shares of Series A preferred stock
after March 31, 2004, for so long as such shares remain outstanding and prior to
the mandatory redemption date.
11. SUBSEQUENT EVENTS
During 2003, the Company hired Petrie Parkman & Co. to assist in a possible
sale of WCBB. The Board of Directors has determined that if a sale of WCBB is
not consummated that it is in the best interests of the Company to conduct an
equity offering. The Board has approved a registered rights offering in the
amount of $12.0 million. The rights offering will be backstopped by one of the
Company's principal stockholders for a commitment fee of 2% of the gross
proceeds from the rights offering. As a result, the Company is guaranteed
proceeds of $12.0 million if the rights offering is commenced. Therefore, the
Company shall have required liquidity either through the sale of the property or
the proceeds from the rights offering.
In connection with the rights offering, on April 30, 2004, the Company
entered into a $3.0 million revolving credit facility with CD Holding, L.L.C., a
principal stockholder of the Company. Borrowings under the credit facility are
due on the earlier of the closing of the rights offering and August 1, 2005 and
bear interest at the rate of 10.0% per annum. Under the credit facility, CD
Holding may, if it elects to do so, apply the outstanding principal amount and
any accrued but unpaid interest (1) to the subscription price payable upon
exercise of the rights issued to CD Holding in the rights offering, or (2) to
the purchase price for the Common Stock. The credit facility provides that if
the rights offering is not completed, CD Holding has the right to convert any
borrowings plus any accrued but unpaid interest under the facility into shares
of our common stock at a conversion price equal to $1.20 per share.
F-29
Gulfport Energy Corporation
10,000,000 Shares of Common Stock
Common Stock Subscription Rights
____________________
PROSPECTUS
____________________
July 22, 2004