UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
Commission File Number 000-19514
Gulfport Energy Corporation
-----------------------------------------------------
(Name of small business issuer in its charter)
Delaware 73-1521290
------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
14313 North May Avenue, Suite 100
Oklahoma City, Oklahoma 73134
(405) 848-8807
----------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
Common Stock, $0.01 par value None
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of May 14, 2004, 10,146,566 shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
GULFPORT ENERGY CORPORATION
TABLE OF CONTENTS
FORM 10-QSB QUARTERLY REPORT
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheet at March 31, 2004 (unaudited) 4
Statements of Income for the Three Month Periods Ended
March 31, 2004 and 2003 (unaudited) 5
Statements of Common Stockholders' Equity for the Three
Months Ended March 31, 2004 and 2003 (unaudited) 6
Statements of Cash Flows for the Three Months Ended
March 31, 2004 and 2003 (unaudited) 7
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Controls and Procedures 24
PART II OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities and Small Business Issuer
Purchases of Equity Securities 25
Item 3 Defaults upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
Signatures 27
2
GULFPORT ENERGY CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
March 31, 2004 and 2003
Forming a part of Form 10-QSB Quarterly Report to the
Securities and Exchange Commission
This quarterly report on Form 10-QSB should be read in conjunction with Gulfport
Energy Corporation's Annual Report on Form 10-KSB for the year ended December
31, 2003.
3
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.
4
GULFPORT ENERGY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
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.
5
GULFPORT ENERGY CORPORATION
Statements of Common Stockholders' Equity
-----------------------------------------
(Unaudited)
-----------
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.
6
GULFPORT ENERGY CORPORATION
Statements of Cash Flows
(Unaudited)
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.
7
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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
============
8
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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
9
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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".
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.
10
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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.
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
11
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
$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
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
12
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-QSB includes "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All
statements, other than statements of historical facts, included in this Form
10-QSB that address activities, events or developments that Gulfport Energy
Corporation ("Gulfport" or the "Company"), a Delaware corporation, expects or
anticipates will or may occur in the future, including such things as estimated
future net revenues from oil and gas reserves and the present value thereof,
future capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's business and operations, plans, references
to future success, references to intentions as to future matters and other such
matters are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties; general economic, market or business conditions; the
opportunities (or lack thereof) that may be presented to and pursued by the
Company; competitive actions by other oil and gas companies; changes in laws or
regulations; and other factors, many of which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in this Form
10-QSB are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by the Company
will be realized, or even if realized, that they will have the expected
consequences to or effects on the Company or its business or operations.
The following discussion is intended to assist in an understanding of the
Company's financial position as of March 31, 2004 and its results of operations
for the three-month periods ended March 31, 2004 and 2003. The Financial
Statements and Notes included in this report contain additional information and
should be referred to in conjunction with this discussion. It is presumed that
the readers have read or have access to Gulfport Energy Corporation's 2003
annual report on Form 10-KSB.
Overview
Gulfport is an independent oil and gas exploration and production company
with properties located along the Louisiana Gulf Coast. 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 million and
associated standardized measure of discounted future net cash flows of
approximately $194 million.
The Company's operations are concentrated in two fields: West Cote Blanche
Bay and the Hackberry Fields.
14
West Cote Blanche Bay
Background
West Cote Blanche Bay ("WCBB") Field lies approximately five miles off the
coast of Louisiana primarily in St. Mary's Parish in a shallow bay, with water
depths averaging eight to ten feet. Currently, Gulfport owns a 100% working
interest (79.443% average 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. WCBB overlies one of the largest salt dome
structures in the Gulf Coast. The field is characterized by a piercement salt
dome, which created traps from the Pleistocene through the Miocene. The
relative movements affected deposition and created a complex system of fault
traps. The compensating fault sets generally trend NW-SE and are intersected by
sets having a major radial component. Later-stage movement caused extension
over the dome and a large graben system (a downthrown area bounded by normal
faults) was formed. There are over 100 distinct sandstone reservoirs recognized
throughout most of the field and nearly 200 major and minor discrete intervals
have been tested. Within almost 900 wellbores that have been drilled to date in
the field, over 4,000 potential zones have been penetrated. The sands are
highly porous and permeable reservoirs primarily with a strong water drive.
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 are directionally drilled
using steering tools and downhole motors. The tolerance for error in getting
near the fault is low, so the complex faulting does introduce a risk factor of
crossing the fault before encountering the zone of interest, which could result
in part or all of the zone being absent in the borehole. This in turn can result
in lower than expected or zero reserves for that zone. The new wellbores
eliminate the mechanical risk associated with trying to produce the zone from an
old existing wellbore, while the wellbore locations are situated so as to more
efficiently drain each reservoir. The vast majority of the PUD targets are
up-dip offsets to wells which produced from a sub-optimum position within a
particular zone. Gulfport's 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.
As of March 31, 2004, there have been 880 wells drilled at WCBB, and of
these 48 are currently producing, 268 are shut-in and 5 are utilized as salt
water disposal wells. The balance of the wells (or 554) have been plugged and
abandoned.
For the three months ended March 31, 2004, Gulfport's net daily production
in this field averaged 1,467 barrels of oil.
15
Future Activity
Gulfport is planning a 12 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.
Hackberry Fields
Background
The Hackberry fields are located along the shore of Lake Calcasieu in
Cameron Parish, Louisiana. The Hackberry Field is a major salt intrusive
feature, elliptical in shape as opposed to a classic "dome," divided into East
and West field entities by a saddle. Structurally, Gulfport's East Hackberry
acreage is located on the eastern end of the Hackberry salt ridge. There are
over 30 pay zones at this field. The salt intrusion formed a series of
structurally complex and steeply dipping fault blocks in the Lower Miocene and
Oligocene age rocks. These fault blocks serve as traps for hydrocarbon
accumulation. Gulfport's wells currently produce from perforations found between
5,100' and 12,200'.
The East Hackberry field was discovered in 1926 by Gulf Oil Company (now
Chevron Corporation) by a gravitational anomaly survey. The massive shallow salt
stock presented an easily recognizable gravity anomaly indicating a productive
field. Initial production began in 1927 and has continued to the present. The
estimated cumulative oil and condensate production through 1999 was 111 million
barrels of oil with casinghead gas production being 60 billion cubic feet of
gas. There have been a total of 170 wells drilled on Gulfport's portion of the
field with 11 having current daily production; seven produce intermittently; 72
wells are shut-in and four wells have been converted to salt water disposal
wells. The remaining 76 wells have been plugged and abandoned.
At West Hackberry, the first discovery well was drilled in 1938 and was
developed by Superior Oil Company (now Exxon-Mobil Corporation) between 1938 and
1988. The estimated cumulative oil and condensate production through 2000 was
170 million barrels of oil with casinghead gas production of 120 billion cubic
feet of gas. There have been 36 wells drilled to date on Gulfport's portion of
West Hackberry and currently one is producing, 26 are shut-in and one well has
been converted to a saltwater disposal well. The remaining eight wells have
been plugged and abandoned.
Total net production per day for both Hackberry fields was 220 barrels of
oil for the three-month period ended March 31, 2004.
Future Activity
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.
16
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 year ended December 31,
2003 as "Other Income".
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.
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.
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
17
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.
RESULTS OF OPERATIONS
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 the 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 slight
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.
The following table summarizes the Company's oil and gas production and related
pricing for the three months ended March 31, 2004 and 2003:
Three Months Ended March 31,
2004 2003
---- ----
Oil production volumes (MBbls) 133 142
Gas production volumes (Mmcf) 15 26
Average oil price (per Bbl) $32.56 $28.91
Average gas price (per Mcf) $3.30 $ 4.23
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 only slightly to $686,000 for the three months ended March
31, 2004 from $572,000 for the same period in 2003. This slight increase was due
to slight increases in the Company's reserve report costs, salary and benefits,
legal expenses, 401(k) Company matching, and director's insurance which was
18
mostly 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, the Series A Preferred Stock had been classified on the
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.
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.
19
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 $.27 million as the cumulative effect of a change in
accounting principle. The non-cash transition adjustment increased oil and
natural gas properties and asset retirement obligations by $7.59 million and
$7.37 million, respectively, and decreased accumulated depreciation by $.05
million.
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 for 2003. This decrease 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 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 by financing activities for the three months ended March
31, 2004 and March 31, 2003 had only $6,000 and $5,000, respectively, of
activity related to principal payments on borrowings.
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.
20
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 or use a portion of the net proceeds from
the rights offering to repay in full the outstanding balance of this credit
facility.
In connection with our proposed 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 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 the Company's our common stock. 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 the
subscription price established for the rights offering. If the rights offering
proceeds and is not otherwise terminated by the Company, CD Holding has agreed
to 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 the
Company's $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
21
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 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 filing,
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 a rights offering to raise $12.0 million dollars. CD Holding, one of
our principal stockholders, has agreed subject to certain conditions, to
back-stop the rights offering for a commitment fee of 2% of the gross proceeds
from the 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
22
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 it's 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 intends to drill 12
wells at WCBB during 2004 at an estimated cost of $10.3 million and workover
seven existing wells at WCBB during 2004 at an estimated cost of $700,000.
During 2004, Gulfport intends to shoot 3-D seismic at East Hackberry Field
at an estimated total cost of approximately $4.5 million, of which $2.5 million
is expected to be expended in 2004.
Gulfport leases office space in Oklahoma City, Oklahoma under a lease
covering approximately 12,035 square feet. The monthly rent is approximately
$18,000. 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.
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.
23
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.
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.
ITEM 3. CONTROLS AND PROCEDURES
Gulfport Energy Corporation, under the direction of the Chief Executive
Officer and the Vice President and Chief Financial Officer, has established
disclosure controls and procedures that are designed to ensure that information
required to be disclosed by Gulfport in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. The
disclosure controls and procedures are also intended to ensure that such
information is accumulated and communicated to Gulfport's management, including
the Chief Executive Officer and the Vice President and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosures.
As of March 31, 2004, an evaluation was performed under the supervision and
with the participation of Gulfport management, including the Chief Executive
Officer and the Vice President and Chief Financial Officer, of the effectiveness
of the design and operation of Gulfport's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon
their evaluation, the Chairman and Chief Executive Officer and the Executive
Vice President and Chief Financial Officer have concluded that as of March 31,
2004, Gulfport's disclosure controls and procedures are effective. In compliance
with Rule 13a-14 promulgated under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, each of these
officers executed a Certification attached as an exhibit to this Form 10-QSB.
There have not been any significant changes in Gulfport's internal controls
over financial reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, internal
controls over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Gulfport has been named as a defendant in various lawsuits. The ultimate
resolution of these matters is not expected to have a material adverse effect on
the Company's financial condition or results of operations for the periods
presented in the financial statements.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
(a) In January 2004 Gulfport obtained the written consent of certain of
its stockholders approving two amendments to the Company's Certificate of
Incorporation, (i) increasing the authorized number of shares of the Company's
common stock, par value $0.01 per share ("Common Stock"), from 15,000,000 to
20,000,000 shares and (ii) increasing the authorized number of shares of the
Company's preferred stock, par value $0.01 per share from 1,000,000 to 5,000,000
shares. These amendments have been approved by the Company's Board of Directors
and the holders of more than a majority of shares of Common Stock outstanding.
These amendments became effective upon filings with the Secretary of State of
the State of Delaware on March 16, 2004.
The terms of the Series A preferred stock provide that for all quarters
after March 31, 2004, dividends must be paid 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. The Company's has filed an information statement with
the Securities and Exchange Commission with respect to the foregoing. The
amendment to the terms of the Series A preferred stock will become effective
upon filing of the amendment to the Certificate of Designations with the
Secretary of State of the State of Delaware, expected in June 2004.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Gulfport does not have a share repurchase program, and during the
three months ended March 31, 2004, Gulfport had not purchased any shares of its
common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Gulfport has obtained the written consent of certain of its stockholders of
record as of January 23, 2004 approving two amendments to the Company's
Certificate of Incorporation, (i) increasing the authorized number of shares of
the Company's common stock, par value $0.01 per share, from 15,000,000 to
20,000,000 shares and (ii) increasing the authorized number of shares of the
Company's preferred stock, par value $0.01 per share from 1,000,000 to 5,000,000
shares. These amendments have been approved by the Company's Board of Directors
and the holders of more than a majority of shares of Common Stock outstanding.
These amendments became effective upon filings with the Secretary of State of
the State of Delaware on March 16, 2004.
ITEM 5. OTHER INFORMATION
(a) None
(b) None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Form 10-Q filed December 1,
1997).
25
3.2 Amendment to Certificate of Incorporation changing name of
corporation to Gulfport Energy Corporation.
3.3 Amendment to Certificate of Incorporation to effect a 3 to 1
reverse stock split of the issued and outstanding Common
Stock.
3.4 Amendment to Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 50,000,000
to 250,000,000.
3.5 Amendment to Certificate of Incorporation to effect a 50 to 1
reverse stock split of the issued and outstanding Common
Stock.
3.6 Amendment to Certificate of Incorporation to reduce the number
of authorized shares of Common Stock from 250,000,000 to
15,000,000.
3.7 Amendment to Certificate of Incorporation (incorporated by
reference to Exhibit A to Information Statement filed on
February 20, 2004).
3.8 Bylaws (incorporated by reference to Exhibit 3.2 to the Form
10-Q filed December 1, 1997).
4.1 Form of Common Stock certificate.
10.1 Back-stop Letter Agreement between the Registrant and CD
Holding, LLC (incorporated by reference to Exhibit 10.1
of the Registrant's Registration Statement of Form SB-2,
File No. 333-115396, filed May 12, 2004).
10.2 Credit Agreement dated July 1, 2003 by and between the
Registrant and the Bank of Oklahoma LLC (incorporated by
reference to Exhibit 10.2 of the Registrant's Registration
Statement of Form SB-2, File No. 333-115396, filed May 12,
2004).
10.3 Stock Option Plan (incorporated by reference to Exhibit 10.2
to the Form 10-K filed March 30, 2001).
10.4 Form of Warrant Agreement.
10.6 Employment Agreement dated June 2003 between the Registrant
and Mike Liddell.
10.7 Credit Agreement dated April 30, 2004 by and between the
Registrant and CD Holding, L.L.C. LLC (incorporated by
reference to Exhibit 10.7 of the Registrant's Registration
Statement of Form SB-2, File No. 333-115396, filed May 12,
2004).
31.1* Certification of Chief Executive Officer of the Registrant
pursuant to Rule 13a-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
31.2* Certification of Chief Financial Officer of the Registrant
pursuant to Rule 13a-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
32.1* Certification of Chief Executive Officer of the Registrant
pursuant to Rule 13a-14(b) promulgated under the Securities
Exchange Act of 1934, as amended, and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
32.2* Certification of Chief Financial Officer of the Registrant
pursuant to Rule 13a-14(b) promulgated under the Securities
Exchange Act of 1934, as amended, and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
- ---------------------------
* Filed herewith
26
26
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULFPORT ENERGY CORPORATION
Date: May 18, 2004
/s/Mike Liddell
-----------------------------------------
Mike Liddell
Chief Executive Officer
/s/Mike Moore
-----------------------------------------
Mike Moore
Chief Financial Officer
27
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