10-Q 1 0001.txt QUARTERLY REPORT FOR PERIOD ENDED SEPT 30,2000 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission file number 1-12108 GULFWEST OIL COMPANY (Exact name of Registrant as specified in its charter) Texas 87-0444770 (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 397 North Sam Houston Parkway East Suite 375 Houston, Texas 77060 (Address of principal executive offices) (zip code) (281) 820-1919 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(D) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date, November 8, 2000, was 18,445,041 shares of Class A Common Stock, $.001 par value. GULFWEST OIL COMPANY FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 Page of Form 10-Q Part I: Financial Information Item 1. Financial Statements Consolidated Balance Sheets, September 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and 1999 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II: Other Information Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on 8-K 12 Signatures 12 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ------- --------------------- GULFWEST OIL COMPANY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 (UNAUDITED) ASSETS
September 30, December 31, 2000 1999 ---------------------- ---------------------- CURRENT ASSETS: Cash and cash equivalents $ 30,740 $ 287,300 Accounts Receivable - trade, net of allowance for doubtful accounts of -0- in 2000 and 1999 1,981,487 990,402 Prepaid expenses 132,272 79,763 ---------------------- ---------------------- Total current assets 2,144,499 1,357,465 ---------------------- ---------------------- PROPERTY AND EQUIPMENT: Oil and gas properties, using the successful efforts method of accounting 25,856,257 20,083,696 Other property and equipment 1,924,063 1,358,400 Accumulated depreciation, depletion and amortization (3,542,051) (2,940,191) ---------------------- ---------------------- Total property and equipment 24,238,269 18,501,905 ---------------------- ---------------------- OTHER ASSETS: Deposits 27,638 27,638 Investments 122,785 122,785 Debt issue cost 453,739 ---------------------- ---------------------- Total other assets 604,162 150,423 ---------------------- ---------------------- TOTAL ASSETS $ 26,986,930 $ 20,009,793 ====================== ======================
The Notes to Consolidated Financial Statements are an integral part of these statements. 3 GULFWEST OIL COMPANY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 2000 1999 --------------------- --------------------- CURRENT LIABILITIES Notes payable $ 105,182 $ 250,000 Notes payable - related parties 200,000 750,000 Current portion of long-term debt 4,204,235 2,114,251 Current portion of long-term debt - related parties 196,398 234,355 Accounts payable - trade 1,614,085 839,129 Accrued expenses 477,544 462,956 --------------------- --------------------- Total current liabilities 6,797,444 4,650,691 --------------------- --------------------- LONG-TERM DEBT, net of current portion 13,422,315 11,040,744 --------------------- --------------------- LONG-TERM DEBT, RELATED PARTIES 243,701 263,574 --------------------- --------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock 80 88 Common stock 18,445 15,697 Additional paid-in capital 23,600,400 21,321,909 Retained deficit (17,055,207) (17,130,436) Long-term accounts and notes receivable - related parties, net of allowance for doubtful accounts of $700,230 in 2000 and 1999 (40,248) (152,474) --------------------- --------------------- --------------------- --------------------- Total stockholders' equity 6,523,470 4,054,784 --------------------- --------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,986,930 $ 20,009,793 ===================== =====================
The Notes to Consolidated Financial Statements are an integral part of these statements. 4 GULFWEST OIL COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ----------------- ------------- ----------------- ------------ OPERATING REVENUES Oil and gas sales $ 2,173,680 $ 792,190 5,604,244 $ 1,365,860 Well servicing revenues 18,318 32,621 189,579 76,112 Operating overhead and other income 99,850 24,676 240,558 88,144 ----------------- ------------- ----------------- ------------- Total Operating Revenues 2,291,848 849,487 6,034,381 1,530,116 ----------------- ------------- ----------------- ------------- OPERATING EXPENSES Lease operating expenses 809,390 411,443 2,229,957 894,241 Cost of well servicing operations 23,307 55,393 206,637 139,650 Depreciation, depletion and amortization 320,390 162,772 801,829 386,280 General and administrative 393,964 406,933 1,138,642 1,450,869 ----------------- ------------- ----------------- ------------- Total Operating Expenses 1,547,051 1,036,541 4,377,065 2,871,040 ----------------- ------------- ----------------- ------------- INCOME (LOSS) FROM OPERATIONS 744,797 (187,054) 1,657,316 (1,340,924) ----------------- ------------- ----------------- ------------- OTHER INCOME AND EXPENSE Interest Income 19 15,247 192 Interest expense (605,250) (231,354) (1,527,485) (650,979) Gain on sale of assets 816 44,349 7,143 49,431 ----------------- ------------- ----------------- ------------- Total Other Income and Expense (604,434) (186,986) (1,505,095) (601,356) ----------------- ------------- ----------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 140,363 (374,040) 152,221 (1,942,280) INCOME TAXES ----------------- ------------- ----------------- ------------- NET INCOME (LOSS) 140,363 (374,040) 152,221 (1,942,280) DIVIDENDS ON PREFERRED STOCK (PAID 2000 - $76,992; 1999 - $0) (89,114) (418,655) ----------------- ------------- ----------------- ------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 140,363 $ (463,154) $ 152,221 $ (2,360,935) ================= ============= ================= ============= INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ .01 $ (.04) $ .01 $ (.42) ================= ============= ================= =============
The Notes to Consolidated Financial Statements are an integral part of these statements. 5 GULFWEST OIL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
2000 1999 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 152,221 $ (1,942,280) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation, depletion, and amortization 801,829 386,280 Common stock and warrants issued and charged to operations 15,660 224,650 (Gain) on sale of assets (7,143) (49,431) Other non-operating (income) (5,780) (Increase) decrease in accounts receivable - trade, net (1,137,833) (416,030) (Increase) decrease in prepaid expenses (52,509) (29,869) Increase (decrease) in accounts payable and accrued expenses 1,257,128 36,708 (Increase) decrease in deposits (10,338) ----------------- ----------------- Net cash provided by (used in) operating activities 1,023,573 (1,800,310) ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale and disposition of property and equipment 14,665 150,370 Purchase of property and equipment (3,157,485) (1,050,888) ----------------- ----------------- Net cash used in investing activities (3,142,820) (900,518) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale or subscription of common stock 857,878 2,000,000 Payments on debt (937,294) (512,118) Proceeds from debt issuance 2,264,510 1,451,200 Debt issue cost (322,407) ----------------- ----------------- Net cash provided by financing activities 1,862,687 2,939,082 ----------------- ----------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (256,560) 238,254 CASH AND CASH EQUIVALENTS, beginning of period 287,300 204,307 ----------------- ----------------- CASH AND CASH EQUIVALENTS, end of period $ 30,740 $ 442,561 ================= ================= CASH PAID FOR INTEREST $ 353,220 $ 376,896 ================= =================
The Notes to Consolidated Financial Statements are an integral part of these statements. 6 GULFWEST OIL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 AND 1999 UNAUDITED) 1. During interim periods, GulfWest Oil Company ("the Company") follows the accounting policies set forth in its Annual Report on Form 10-K filed with the Securities and Exchange Commission. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the Annual Report when reviewing interim financial results. 2. The accompanying financial statements include the Company and its wholly-owned subsidiaries: RigWest Well Service, Inc., formerly VanCo Well Service, Inc., formed September 5, 1996; GulfWest Texas Company formed September 23, 1996; DutchWest Oil Company formed July 28, 1997; Southeast Texas Oil and Gas Company, L.L.C. acquired September 1, 1998; SETEX Oil and Gas Company formed August 11, 1998; GulfWest Oil & Gas Company formed February 8, 1999; and LTW Pipeline Co. formed April 19, 1999. All material intercompany transactions and balances are eliminated upon consolidation. 3. In management's opinion, the accompanying interim financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, the results of operations, and the statements of cash flows of the Company for the interim periods. 4. Non-cash Investing and Financing During the nine month period ended September 30, 2000, the Company acquired $3,327,561 in property and equipment through notes payable to financial institutions and related parties of $2,851,563, in exchange of accounts receivable of $169,798 and by issuing 200,000 shares of common stock valued at $306,200. In addition, accounts payable and accrued expenses decreased $312,791, debt issue costs increased $192,000 through notes payable to financial institutions. During the period, 815 shares of preferred stock, along with unpaid dividends of $76,992, were converted to 538,322 shares of common stock, notes payable of $975,000 (including $750,000 to a director) were converted to 800,000 shares of common stock and accounts payable of $49,352 were converted to 66,000 shares of common stock. Also, related party receivables of $112,226 and accounts receivable of $26,950 were exchanged for related party notes payable of $75,000 and for accounts payable of $64,176. 5. On April 5, 2000, the Company entered into an agreement with an energy lender (the "April 2000 Financing") to provide $19,302,000 in financing, of which $12,900,000 was funded at closing. An additional $6,000,000 in development capital will be funded for development projects on the Company's existing properties, as identified by the Company and approved by the lender. 6. As a result of the April 2000 Financing, the Company entered into an agreement with the energy lender, commencing in May 2000, to hedge a portion of its oil and gas sales for the period of May 2000 through April 2004. The agreement calls for initial volumes of 7,900 barrels of oil and 52,400 Mcf of gas per month, declining monthly thereafter. As a result of this agreement, the Company realized a reduction in revenues of $427,538 for the three-month period ended September 30, 2000 ($611,197 for the nine months ended September 30, 2000), which is included in oil and gas sales. 7 7. Other Stock Based Compensation Disclosures During the three months and nine months ended September 30, 2000 and 1999, the Company issued exercisable options and warrants to employees as compensation. The Company uses the intrinsic value based method of APB 25 to measure stock based compensation. If the Company had used the fair value method required by SFAS 123, the Company's net income (loss) and per share information would approximate the following amounts:
2000 Three Months Nine Months ---- ------------ ----------- As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- Options and warrants issued 106,000 256,000 SFAS 123 compensation $ 109,180 $ 194,680 APB 25 compensation Net income (loss) $ 140,363 $ 31,183 $ 152,221 $ (42,459) Income (loss) per common share - basic and diluted $ 0.01 $ 0.00 $ 0.01 $ (0.00
1999 Three Months Nine Months ---- ------------ ----------- As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- Options and warrants issued 606,754 606,754 SFAS 123 compensation $ 155,667 $ 155,667 APB 25 compensation Net income (loss) $ (374,040) $(529,707) $(1,942,280) $(2,097,947) Income (loss) per common share - basic and diluted $ (0.04) $ (0.06) $ (0.42) $ (0.45)
The Company utilized the Black-Sholes option pricing model to estimate the fair value of the options and warrants. The effects of applying SFAS 123 as disclosed above are not indicative of future amounts. The Company anticipates making additional stock based employee compensation awards in the future. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview GulfWest Oil Company ("GulfWest" or the "Company") is primarily engaged in the acquisition, development, exploitation, exploration and production of crude oil and natural gas. The Company owns an average 90% working interest in oil and gas properties located in Texas and Colorado, and currently operates 249 producing oil and gas wells. The Company estimates its proved reserves (net to the Company's interest) to be approximately 3.3 million barrels of crude oil and 22 billion cubic feet of natural gas. At September 30, 2000, the estimated present value of those reserves, discounted 10%, was approximately $50 million. The Company is focused on increasing production from its existing oil and gas properties through further exploitation, exploration and development, and on acquiring additional interests in oil and gas properties. The Company's gross revenues are derived from the following sources: 1. Oil and gas sales that are proceeds from the sale of crude oil and natural gas production to midstream purchasers; 2. Operating overhead consisting of fees earned from other working interest owners for operating oil and gas properties; and, 3. Well servicing revenues that are earnings from the operation of well servicing equipment under contract to third party operators. Results of Operations The factors which most significantly affect the Company's results of operations are (1) the sales price of crude oil and natural gas, (2) the level of total sales volumes of crude oil and natural gas, (3) the level of and interest rates on borrowings and, (4) the level and success of new acquisitions and development of existing properties. Comparative results of operations for the periods indicated are discussed below. Three Month Period Ended September 30, 2000 compared to Three Month Period Ended September 30, 1999. Revenues Oil and Gas Sales. Revenues from the sale of crude oil and natural gas for the third quarter increased 174% from $792,200 in 1999 to $2,173,700 in 2000. This was due to increased oil and gas production from development projects, higher oil and gas prices, and acquisitions of additional properties. The average prices received for production during the period increased 35% for oil from $19.07 per Bbl in 1999 to $25.79 per Bbl in 2000 and 53% for natural gas from an average of $2.55 per Mcf in 1999 to $3.90 per Mcf in 2000. Well Servicing Revenues. Revenues from well servicing operations for third parties decreased 44% from $32,600 for the period in 1999 to $18,300 for 2000. This decrease was due to higher rig utilization on properties where the Company owns 100% working interest, as part of its development program, resulting in less work for third parties. 9 Operating Overhead and Other Income. Revenues from the operating of properties increased 304% from $24,700 in 1999 to $99,900 in 2000. This increase was due to a larger operation of wells for other working interest owners and a settlement on damages to properties by third party vendors. Costs and Expenses Lease Operating Expenses. Lease operating expenses increased 97% from $411,400 in 1999 to $809,400 in 2000, due to the acquisitions of additional properties, expanded oil and gas production, and the costs related to such production. Cost of Well Servicing Operations. Well servicing expenses decreased 58% from $55,400 in 1999 to $23,300 in 2000. This decrease was due to higher rig utilization on properties where the Company owns 100% working interest, as part of its development program, resulting in less work for third parties. Depreciation, Depletion and Amortization (DD&A). DD&A increased 97% from $162,800 in 1999 to $320,400 in 2000, due to significantly higher production resulting from successful field development activities and acquisitions. Interest Expense. Interest expense increased 162% from $231,400 in 1999 to $605,300 in 2000, due to interest on debt associated with additional acquisitions and higher borrowing rates. Nine-Month Period Ended September 30, 2000 compared to Nine Month Period Ended September 30, 1999. Revenues Oil and Gas Sales. Revenues from the sale of crude oil and natural gas increased 310% from $1,365,900 in 1999 to $5,604,200 in 2000. This was due to increased oil and gas production from development projects, higher oil and gas prices, and acquisitions of additional properties. The average prices received for production during the period increased 64% for oil from $15.60 per Bbl in 1999 to $25.64 per Bbl in 2000 and 48% for natural gas from an average of $2.25 per Mcf in 1999 to $3.34 per Mcf in 2000. Well Servicing Revenues. Revenues from well servicing operations for third parties increased 149% from $76,100 for the period in 1999 to $189,600 in 2000. This increase was due to higher rig utilization on operated properties where the Company has working interest partners and increased work for third parties. Operating Overhead and Other Income. Revenues from the operation of properties increased 173% from $88,100 in 1999 to $240,600 in 2000. This increase was due to a larger operation of wells for other working interest owners and a settlement on damages to properties by third party vendors. Costs and Expenses Lease Operating Expenses. Lease operating expenses increased 149% from $894,200 in 1999 to $2,230,000 in 2000, due to the acquisitions of additional properties, expanded oil and gas production, and the costs related to such production. Cost of Well Servicing Operations. Well servicing expenses increased 48% from $139,600 in 1999 to $206,600 in 2000. This was due to higher rig utilization on operated properties where the Company has working interest partners and increased work for third parties. 10 Depreciation, Depletion and Amortization (DD&A). DD&A increased 108% from $386,300 in 1999 to $801,800 in 2000, due to significantly higher production resulting from successful field development activities and acquisitions. General and Administrative (G&A) Expenses. G&A expenses decreased 22% for the period from $1,450,900 in 1999 to $1,138,600 in 2000. The Company had non-recurring expenses consisting of costs associated with the consolidation of its offices to Houston and non-cash charges of $224,700 related to the issuance of stocks and warrants in 1999 compared to $15,700 in 2000. Interest Expense. Interest expense increased 135% from $651,000 in 1999 to $1,527,500 in 2000, due to interest on debt associated with additional acquisitions and higher borrowing rates. Financial Condition and Capital Resources Management has defined a tactical and strategic business plan to (1) use its existing assets to achieve and sustain positive cash flow, and (2) identify and evaluate additional development and acquisition opportunities to further grow the Company. Following are steps management has taken and is proceeding with as part of its business plan: The April 2000 Financing provided the Company $19,302,000 in financing, of which $12,900,000 was funded at closing. An additional $6,000,000 in development capital was committed for development projects on the Company's existing properties, as identified by the Company and approved by the lender. The proceeds funded at closing were used to retire existing debt, including accrued interest, of $10,234,977; acquire oil and gas properties in Zavala County, Texas for $2,300,000, including $3,266 in cash paid by the Company and 200,000 shares of the Company's common stock; and, acquire additional interests in the Madisonville Field, Texas, including the release of a 15% net profits interest by a former lender, for $368,289. The remaining $402,000 was used for costs associated with closing the loan. The loan is secured by substantially all of the Company's interests in oil and gas properties, bears interest at prime plus 3.5% and matures May 29, 2004. Monthly payments as to principal and interest are from an 85% net revenue interest in the secured properties. The lender retains a 7% overriding royalty interest with payments commencing after the loan is paid in full. The Company is proceeding with its development plan to be funded by the April 2000 Financing. As of November 8, 2000, the lender had approved approximately $3 million of the $6 million committed for development of the Company's properties. This plan should significantly increase production and allow the Company to meet its debt obligations and attain additional growth. However, adverse changes in prices of oil and gas and/or the inability of the Company to continue to raise the money necessary to further develop existing reserves or acquire new reserves could have a severe impact on the Company. During the third quarter, the Company completed a private offering of its common stock, which commenced during the second quarter of 2000. The Company issued a total of 1,509,837 shares for which it received $857,878 in cash and converted notes payable and accounts payable for $274,500. Of the converted debt, $150,000 had been received in 2000. The proceeds were used for working capital and development capital. On September 29, 2000, the Company entered into a Purchase and Sale Agreement for the acquisition of additional oil and gas properties located in Texas, Oklahoma and Mississippi for a purchase price of $2.9 million. A deposit of $150,000 was made that will be applied to the purchase price upon closing. 11 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ------- ---------------------------------------------------- None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. ------- --------------------------------- (a) Exhibits - Number Description *3.1 Articles of Incorporation of the Registrant and Amendments thereto. *3.2 Bylaws of the Registrant. #10.1 GulfWest Oil Company 1994 Stock Option and Compensation Plan, amended and restated as of April 15, 1998 and approved by the shareholders on May 28, 1998. --------------- * Previously filed with the Company's Registration Statement (on Form S-1, Reg. No. 33-53526), filed with the Commission on October 21, 1992. # Previously filed with the Company's Definitive Proxy Statement dated April 24, 1998, filed with the Commission on April 24, 1998. (b) Form 8-K - None SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GULFWEST OIL COMPANY (Registrant) Date: November 9, 2000 By: /s/ Thomas R. Kaetzer -------------------------------- Thomas R. Kaetzer President Date: November 9, 2000 By: /s/ Jim C. Bigham ----------------------------------------- Jim C. Bigham Executive Vice President and Secretary Date: November 9, 2000 By: /s/ Richard L. Creel ----------------------------------------- Richard L. Creel Vice President of Finance 12