As filed with the Securities and Exchange Commission on July 27, 2005.
Registration No. 333-116048
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 2
To
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Crimson Exploration Inc.
(Exact name of registrant as specified in its charter)
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Delaware 1311 87-0444770
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Identification No.)
Number)
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Jim C. Bigham
Vice President and Secretary
Crimson Exploration Inc. 480 N. Sam Houston Parkway, Suite 300
480 N. Sam Houston Parkway, Suite 300 Houston, Texas 77060
Houston, Texas 77060 Telephone: (281) 820-1919
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(Address, including zip code, and (Name, address, including zip code, and
telephone number, including area telephone number, including area code,
code, of registrant's principal of agent for service)
executive offices)
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Copies To:
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Julien Smythe
Akin Gump Strauss Hauer & Feld LLP
1111 Louisiana Street, 44th Floor
Houston, Texas 77002
Telephone: (713) 220-5800
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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement as selling
shareholders may decide.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. : |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: |_|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
EXPLANATORY NOTE
This Post-Effective Amendment No. 2 is being filed by Crimson Exploration
Inc., a Delaware corporation (the "Registrant"), the successor registrant to
GulfWest Energy Inc., a Texas corporation (the "Texas Corporation"). This
Post-Effective Amendment No. 2 is being filed with the Securities and Exchange
Commission (the "Commission") as the result of the reincorporation merger (the
"Reincorporation") that became effective on June 29, 2005. The Reincorporation
was effected by a merger of the Texas Corporation with and into the Registrant,
which, prior to effecting the Reincorporation, was a wholly-owned subsidiary of
the Texas Corporation.
Pursuant to the terms of the Agreement and Plan of Merger between the
Registrant and the Texas Corporation, each outstanding share of Class A common
stock was automatically converted into one share of the Registrant's common
stock, and each share of each series of preferred stock of the Texas Corporation
was automatically converted into one share of the corresponding series of the
Registrant's preferred stock, in each case at the time the Reincorporation
became effective. Each stock certificate representing issued and outstanding
shares of capital stock of the Texas Corporation continues to represent the same
number and kind of shares of capital stock of the Registrant. The Registrant
assumed all unexercised and unexpired options and warrants of the Texas
corporation outstanding at the effective time of the Reincorporation, which now
represent the right to receive shares of the Registrant's common stock upon
exercise. The Texas Corporation's Class A common stock was quoted on the
Over-the-Counter Bulletin Board, and the Registrant's common stock continues to
be quoted on the Over-the-Counter Bulletin Board under the symbol "CXPI".
The Reincorporation was approved by the shareholders of the Texas
Corporation at the annual meeting of shareholders of the Texas Corporation held
on June 1, 2005 for which proxies were solicited pursuant to Section 14(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
In accordance with paragraph (d) of Rule 414 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), the Registrant, as
the successor registrant to the Texas Corporation, hereby expressly adopts the
Registration Statement of the Texas Corporation on Form S-1, Registration
Statement No. 333-116048, as its own Registration Statement for all purposes of
the Securities Act and the Exchange Act, which adoption is effective as of and
at the effective time of the Reincorporation.
Subject to Completion, Dated July 25, 2005
P R O S P E C T U S
CRIMSON EXPLORATION INC.
18,861,799 Shares of Crimson Exploration Inc. Common Stock
(the "Shares")
This prospectus relates to the resale of up to 18,861,799 Shares
issuable to certain selling shareholders assuming the exercise of warrants
or conversion of certain preferred stock by those shareholders. This
offering is not being underwritten. The selling shareholders have advised
us that they will sell the shares from time to time in the open market, in
privately negotiated transactions or a combination of these methods at
market prices prevailing at the time of sale, at prices related to the
prevailing market prices, at negotiated prices, or otherwise as described
under "Plan of Distribution." We will pay all expenses of registration
incurred in connection with this offering, but the selling shareholders
will pay all of their selling commission, brokerage fees and related
expenses.
Our common stock is traded over-the-counter under the symbol "CXPI".
On July 25, 2005, the average of the high and low bid and asked prices of
our common stock as traded over-the-counter was $0.99 per share.
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Investing in our stock involves a high degree of risk. Please see
"Risk Factors" beginning on page 10 for a discussion of certain factors
that you should consider before investing.
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
passed upon the accuracy or adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed.
The selling shareholders may not sell or offer these securities until this
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it
is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
The date of this prospectus is , 2005
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
WHERE YOU CAN FIND ADDITIONAL INFORMATION......................................7
RISK FACTORS...................................................................9
CAPITALIZATION................................................................15
DIVIDEND POLICY...............................................................15
FORWARD-LOOKING STATEMENTS....................................................16
MARKET PRICE OF COMMON STOCK..................................................17
SELLING SHAREHOLDERS..........................................................18
PLAN OF DISTRIBUTION..........................................................22
SELECTED HISTORICAL FINANCIAL DATA............................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................25
BUSINESS AND PROPERTIES.......................................................35
MANAGEMENT....................................................................44
EXECUTIVE COMPENSATION........................................................47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................55
DESCRIPTION OF SECURITIES.....................................................57
GLOSSARY OF INDUSTRY TERMS AND ABBREVIATIONS..................................64
LEGAL MATTERS.................................................................66
EXPERTS.......................................................................66
-i-
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. The following summary does not contain all of the information that
may be important. You should read the detailed information appearing elsewhere
in this prospectus before making an investment decision. Certain terms that we
use in our industry are italicized and defined in the "Glossary of Industry
Terms and Abbreviations". Unless otherwise indicated, all references to "Crimson
Exploration", the "Company", "we", "us" and "our" refer to Crimson Exploration
Inc., its predecessor GulfWest Energy Inc. and our subsidiaries.
Our Business
We are primarily engaged in the acquisition, development, exploitation and
production of crude oil and natural gas, primarily in the onshore producing
regions of the United States. Our focus is on increasing production from our
existing properties through further exploitation, development and exploration,
and on acquiring additional interests in undeveloped and underdeveloped crude
oil and natural gas properties.
Since we made our first significant acquisition in 1993, we have
substantially increased our ownership in producing properties and our crude oil
and natural gas reserves through a combination of acquisitions and the further
exploitation and development of our properties. At December 31, 2004, our part
of the estimated proved reserves these properties contained was approximately
3.0 million barrels (MBbl) of oil and 29.1 billion cubic feet (Bcf) of natural
gas with an estimated Net Present Value discounted at 10% (PV-10) of $114.1
million. At present, all of our properties are located on land in Texas,
Colorado, Louisiana and Mississippi, except for the property in the shallow
inland boundaries of Grand Lake, Louisiana. In the future, we plan to expand by
acquiring additional properties in those areas, and in similar properties
located in other producing regions of the United States, including the shallow
waters of the Gulf of Mexico.
Our operations are considered to fall within a single industry segment,
which is the acquisition, development, production and servicing of crude oil and
natural gas properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Our Company
We were formed as a corporation under the laws of the State of Utah in 1987
as Gallup Acquisitions, Inc., and subsequently changed our name to First
Preference Fund, Inc. in 1992. We became a Texas corporation by a merger
effected in July 1992, in which our name became GulfWest Oil Company. On May 21,
2001, we changed our name to GulfWest Energy Inc. On June 29, 2005 we became a
Delaware corporation by merger in which our name became Crimson Exploration Inc.
Our common stock is traded over-the-counter (OTC) under the symbol "CXPI".
Our principal office is located at 480 North Sam Houston Parkway East,
Suite 300, Houston, Texas 77060 and our telephone number is (281) 820-1919.
Recent Transactions
April 2004 Financing
On April 27, 2004, we completed an $18,000,000 financing package with new
energy lenders. We used $15,700,000 to retire existing debt of $27,584,145,
resulting in forgiveness of debt of $12,475,612, the elimination of a hedging
liability and the return to the Company of Series F Preferred Stock with an
aggregate liquidation preference of $1,000,000. (This preferred stock, at the
request of the Company, was transferred to a financial advisor to the Company
and to two companies affiliated with two directors of the Company. See "Certain
Relationships and Related Transactions.") This taxable gain resulting from these
transactions will be completely offset by available net operating loss
carryforwards. The term of the note was eighteen months and it bore interest at
the prime rate plus 11%. This rate would increase by .75% per month beginning in
month ten. We paid the new lenders $1,180,000 in cash fees and also issued them
warrants to purchase 2,035,621 shares of our common stock at an exercise price
of $.01 per share, expiring in five years. The warrants were subject to
anti-dilution provisions. In connection with the February 2005 transactions
described below, the anti-dilution provisions were amended such that additional
issuances of stock (other than issuances to all holders) would not trigger an
adjustment to the number of shares issuable upon exercise of the warrants. We
are required by the terms of the warrants to register the resale of the common
stock underlying the warrants, and those shares are offered by this prospectus.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." All of the lenders have exercised their warrants for all 2,035,621
shares of common stock underlying their warrants by "cashless" exercise
resulting in the receipt of 2,018,224 shares of common stock.
1
Simultaneously, our wholly-owned subsidiary, GulfWest Oil & Gas Company,
completed the initial phase of a private offering of its Series A Preferred
Stock for $4,000,000. The Series A Preferred Stock was exchangeable into our
common stock based on a liquidation value of $500 per share of Series A
Preferred Stock divided by $.35 per share of our common stock, or 11,428,571
shares. As part of an advisory fee, we issued $500,000 of the Series A Preferred
Stock to a financial advisor. One of our former directors acquired $1,500,000 of
the Series A Preferred Stock. The resale of the shares of common stock received
upon exchange of the Series A Preferred Stock for common stock or upon
conversion of the Series H Preferred Stock into which certain of the shares of
Series A Preferred Stock converted into on or prior to March 15, 2005 is offered
by this prospectus.
Pursuant to an agreement with the financial advisor, who provided access to
the lenders and raised $1,900,000 of the Series A Preferred Stock, we paid the
following: a cash fee of $400,000, at closing of the transaction; $250,000 in
cash, payable $10,000 per month for 25 months; and $500,000 issued in Series A
Preferred Stock (as mentioned above). In addition, the financial advisor
received 400 shares of our Series F Preferred Stock from a former lender.
Of the $21,500,000 total cash raised, we used $15,700,000 to pay existing
debt and $1,580,000 to pay fees and commissions, leaving $4,220,000 available
for capital expenditures and working capital.
On January 7, 2005 we amended our April 2004 credit agreement to extend the
target date for repayment to February 28, 2005. We exercised this option on
January 26, 2005. We issued 29,100 shares of our common stock in connection with
this amendment.
February 2005 Preferred Stock Offering
On February 28, 2005 we closed two offerings of preferred stock exempt from
registration under Section 4(2) of the Securities Act of 1933. OCM GW Holdings,
LLC, an affiliate of Oaktree Capital Management, LLC, its ultimate parent (see
"Security Ownership of Certain Beneficial Owners and Management"), purchased
81,000 shares of Series G Convertible Preferred Stock, par value $0.01 per
share, for a purchase price of $40,500,000. OCM GW Holdings also purchased 2,000
shares of GulfWest Oil & Gas Company's Series A Preferred Stock, par value $0.01
per share, for a purchase price of $1,500,000.
Net proceeds of the offerings of approximately $38 million after expenses
were used for the repayment of debt and other liabilities and for general
corporate purposes. Approximately $20.8 million of proceeds went towards paying
off the April 2004 credit agreement. Approximately $8.7 million went towards
payment in full of two promissory notes, a credit agreement and revolving loan
agreement with two banks. In addition, we used the proceeds from the offerings
to pay $675,203 in accrued and unpaid dividends on our preferred stock.
Approximately $1.5 million of the proceeds went towards investment banking and
related fees.
2
We and OCM GW Holdings entered into a Shareholders Rights Agreement on
February 28, 2005 providing OCM GW Holdings with up to four demand registrations
with respect to shares of Series G Preferred Stock and common stock upon the
request of holders holding 50% or more of the registrable securities on an as
converted basis, and unlimited piggyback registration rights. OCM GW Holdings is
entitled to receive monthly financial reports, an annual business plan and
operating budget, periodic filings and other information about us and, in
addition, the agreement provides OCM GW Holdings with board observation rights.
The Shareholders Rights Agreement subjects us to various restrictive covenants
affecting the operation of our business. Further, OCM GW Holdings has a right of
first refusal to purchase any additional securities proposed to be purchased by
a third party from us.
We also entered into an Omnibus and Release Agreement with OCM GW Holdings
and certain other shareholders on February 28, 2005, which prohibits those
shareholders from, directly or indirectly, entering into any swap, option,
future, forward or other similar agreement that transfers, in whole or in part,
any of the economic consequences of ownership of any of our newly authorized
Series H Preferred Stock issuable upon exchange of our Series A Preferred Stock
or common stock, although such holders may sell our common stock or, after
February 28, 2007, the Series H Preferred Stock. After February 28, 2007, OCM GW
Holdings and its affiliates have a right of first refusal to acquire any Series
H Preferred Stock if a third party offers to acquire that stock, and the
signatories to the Omnibus and Release Agreement have piggyback registration
rights with respect to certain of the common stock held by them or issuable as a
dividend. The restrictions imposed upon the shareholders that have executed the
Omnibus and Release Agreement do not apply to shares of common stock owned by
these shareholders, whether received upon conversion of the Series H Preferred
Stock or otherwise, except as disclosed above.
As part of the transactions described above, we authorized two new series
of preferred stock and amended the terms of certain of our preferred stock. The
newly authorized Series G Preferred Stock purchased by Holdings ranks senior to
all other classes of capital stock. The Series G Preferred Stock provides for an
8% cumulative cash dividend, expressed as a percentage of the stock's $500
liquidation value plus accrued and unpaid dividends, which will accrue but not
be paid until the dividend owing April 1, 2009 is required to be paid, at which
time we will commence quarterly dividend payments. Deferred dividends may be
paid to the extent the board of directors elects to do so. Accrued dividends on
the Series G Preferred Stock may be converted to common stock at a conversion
price of $0.90. Accrued and unpaid deferred dividends are to be paid on
liquidation or, at our option, with the consent of the holders affected, at any
time. The Series G Preferred Stock is convertible at any time into our common
stock at a conversion price of $0.90 per share, subject to adjustments for stock
splits, combinations and the like, as well as subject to an adjustment for
damages of $3 million or less arising from our breaches of covenants,
representations or warranties under the Series G Preferred Stock subscription
agreement or Shareholders Rights Agreement as if the holders of our common stock
had received a special cash dividend of the amount of such damages. The Series G
Preferred Stock may be redeemed by us after the fourth anniversary of issuance
if a share of the underlying common stock trades at a price greater than the
$.90 (as adjusted) conversion price for 30 consecutive trading days, at a price
per share of Series G Preferred Stock equal to $500 plus accrued and unpaid
dividends. In addition, we may be required to redeem the Series G Preferred
Stock upon a change of control or if requested by a majority of holders if we
breach the document governing the Series G Preferred Stock or if OCM GW Holdings
and its affiliates suffer more than $3 million in damages arising from our
breaches of covenants, representations or warranties under the Series G
Preferred Stock subscription agreement or Shareholders Rights Agreement,
provided that prior to the redemption date the holders may convert their shares
to common stock. On a fully converted basis, the 81,000 outstanding shares of
Series G Preferred Stock would convert into 45 million shares of common stock,
or approximately 46.2 million shares including dividends accrued to the nearest
dividend payment date.
3
As part of the February 2005 transactions the Statement of Resolution
governing GulfWest Oil & Gas Company's Series A Preferred Stock was amended to
require the holders of the Series A Preferred Stock to exchange all their shares
for either approximately 1,429 shares of common stock per share of Series A
Preferred Stock or for one share of our newly authorized Series H Convertible
Preferred Stock per share of Series A Preferred Stock. If no election was made
by a holder of Series A Preferred Stock by March 15, 2005, such holder's shares
of Series A Preferred Stock would automatically be exchanged for common stock.
Prior to the February 2005 transactions, 50 shares of the Series A Preferred
Stock had been exchanged for 71,428 shares of our common stock. By March 15,
2005, five holders holding 6,700 shares of Series A Preferred Stock had elected
to exchange their shares of Series A Preferred Stock for Series H Preferred
Stock. One such holder affiliated with a director immediately elected to convert
its 200 Series H shares to 285,715 shares of common stock, and as of the date of
this prospectus an additional 1,250 shares of Series H Preferred Stock have
converted into common stock. As of the date of this prospectus there are no
issued and outstanding shares of Series A Preferred Stock.
The Series H Preferred Stock is convertible into common stock at a
conversion price of $0.35 a share and ranks junior to the Series G Preferred
Stock as to dividends and liquidation but senior to all other outstanding
classes of preferred stock of the Company. Holders of the newly authorized
Series H Preferred Stock are entitled to quarterly dividends of 10 shares of
common stock per share of Series H Preferred Stock, or 40 shares of common stock
annually per shares of Series H Preferred Stock. The Series H Preferred Stock
may be redeemed by us if we elect to redeem the Series G Preferred Stock, at a
price per share of $500. The resale of shares of common stock issued or issuable
upon conversion of the Series H Preferred Stock (held by persons other than OCM
GW Holdings) and exchange of the Series A Preferred Stock are offered by this
prospectus. On a fully converted basis, the 5,250 outstanding shares of Series H
Preferred Stock would convert into 7,500,001 shares of common stock.
Holders of both the Series G Preferred Stock and Series H Preferred Stock
vote on an as-converted basis with the holders of the common stock. The Series G
Preferred Stock, voting as a class, has the right to elect a majority of our
board.
The Series D Preferred Stock, which does not pay dividends, will remain of
equal priority with the Series E Preferred Stock as to liquidation. On a fully
converted basis, the 8,000 outstanding shares of Series D Preferred Stock would
convert into 500,000 shares of common stock.
The terms of the Series E Preferred Stock were amended to provide for a 6%,
rather than $30, annual dividend, expressed as a percentage of the stock's $500
liquidation value plus accrued and unpaid dividends, payable quarterly. As
amended, dividends on the Series E Preferred Stock will accrue but not be paid
until March 31, 2009, at which time we will commence quarterly dividend
payments. Deferred dividends on the Series E Preferred Stock may be paid to the
extent the board of directors elects to do so or dividends on the Series G
Preferred Stock are paid for a quarter. Accrued dividends on the Series E
Preferred Stock may be converted to common stock at a conversion price of $0.90.
Accrued and unpaid deferred dividends are to be paid on liquidation or, at our
option, with the consent of the holders affected, at any time. Further, the
Series E Preferred stock was amended so that the February 2005 transactions
would not trigger the change in control redemption right, although we may be
required to redeem the Series E Preferred Stock upon a future change of control,
at a price per share of $500 plus accrued and unpaid dividends. On a fully
converted basis, the 9,000 outstanding shares of Series E Preferred Stock would
convert into 2,250,000 shares of common stock, or approximately 2.4 million
shares including dividends accrued to the nearest dividend payment date.
4
As required by the terms of the Series F Preferred Stock, we offered to
redeem the outstanding shares of Series F Preferred Stock following the February
2005 offerings. However, the remaining 340 shares of Series F Preferred Stock
outstanding elected to convert into 170,000 shares of common stock in March
2005, and are offered by this prospectus in addition to the 830,000 shares of
common stock that had previously been issued upon conversion of the Series F
Preferred Stock.
On February 28, 2005 effective at the closing of the February 2005
preferred stock transactions, Scott Manolis, Marshall Smith and Thomas Kaetzer
resigned as members of our board of directors. Mr. Waggoner and John Loehr
remained as directors and B. James Ford, Skardon F. Baker and Allan D. Keel were
elected to fill the vacancies resulting from the resignation of such three
directors. In addition, Allan D. Keel was appointed Chief Executive Officer and
President and E. Joseph Grady was appointed Senior Vice President and Chief
Financial Officer.
June 2005 Reincorporation
On June 29, 2005, our predecessor, GulfWest Energy Inc., a Texas
corporation, merged with and into Crimson Exploration Inc., a Delaware
corporation, for the purpose of changing our state of incorporation from Texas
to Delaware (the "Reincorporation"). The Reincorporation was accomplished
pursuant to an Agreement and Plan of Merger, dated June 28, 2005, which was
approved by GulfWest's shareholders at the 2005 Annual Shareholders' Meeting
held June 1, 2005. As a result of the Reincorporation, each share of GulfWest
common stock was converted into one corresponding and substantially identical
share of our common stock, and each share of each series of GulfWest preferred
stock was converted into one corresponding and substantially identical share of
such series of our preferred stock. All outstanding options, warrants and other
rights outstanding at the time of the Reincorporation entitled to receive upon
exercise or conversion shares of GulfWest common stock now represent the right
to receive an identical number of shares of our common stock. Each certificate
representing shares of capital stock of GulfWest now represents the same number
and kind of shares of our capital stock. Our common stock initially traded on
the Over-the-Counter Bulletin Board under GulfWest's symbol, "GULF," but began
trading under the symbol "CXPI" on July 1, 2005.
July 2005 Credit Agreement
On July 15, 2005, we entered into a $100 million senior secured revolving
credit facility with Wells Fargo Bank, National Association. Borrowings under
the new credit facility will be subject to a borrowing base limitation based on
our current proved oil and gas reserves. The initial borrowing base is set at
$20 million and will be subject to semi-annual redeterminations, with the first
redetermination to be December 1, 2005. The facility will be secured by a lien
on all our assets, and the assets of our subsidiaries, as well as a security
interest in the stock of all our subsidiaries. The credit facility has a term of
three years, and all principal amounts, together with all accrued and unpaid
interest, will be due and payable in full on June 30, 2008. Proceeds from
extensions of credit under the facility will be for acquisitions of oil and gas
properties and for general corporate purposes. The facility also provides for
the issuance of letters-of-credit up to a $3 million sub-limit. On July 19,
2005, the outstanding balance under our facility was $1.5 million.
Advances under the facility will be in the form of either base rate loans
or Eurodollar loans. The interest rate on the base rate loans fluctuates based
upon the higher of (1) the lender's "prime rate" and (2) the Federal Funds rate,
plus a margin of 0.50%, plus a margin of between 0.0% and 0.5% depending on the
percent of the borrowing base utilized at the time of the credit extension. The
interest rate on the Eurodollar loans fluctuates based upon the rate at which
Eurodollar deposits in the London Interbank market ("Libor") are quoted for the
maturity selected, plus a margin of 1.25% to 2.00% depending on the percent of
the borrowing base utilized at the time of the credit extension. Eurodollar
loans of one, three and six months may be selected by us. A commitment fee of
0.375% on the unused portion of the borrowing base will accrue, and be payable
quarterly in arrears.
5
The credit agreement includes usual and customary affirmative covenants for
credit facilities of this type and size, as well as customary negative
covenants, including, among others, limitation on liens, hedging, mergers, asset
sales or dispositions, payments of dividends, incurrence of additional
indebtedness, certain leases and investments outside of the ordinary course of
business. The credit agreement also requires us to maintain a ratio of current
assets to current liabilities of at least 1.0 to 1.0, an interest coverage ratio
of EBITDAX (earnings before interest, taxes, depreciation and amortization and
exploration expense) to cash interest expense of 3.0 to 1.0 and a tangible net
worth of at least $45 million, subject to adjustment based on future results of
operations and any sales of equity securities. EBITDAX and tangible net worth
are calculated without consideration of unrealized gains and losses related to
stock derivatives accounted for under variable accounting rules or to commodity
hedges.
Securities Being Offered
This prospectus covers the resale of our common stock acquired or to be
acquired upon conversion or exchange of our Series D, E, F and H Preferred Stock
or the Series A Preferred Stock and upon exercise of certain warrants we have
issued:
o 500,000 shares of common stock issuable upon conversion of the Series
D Preferred Stock
o 2,250,000 shares of common stock issuable upon conversion of the
Series E Preferred Stock
o 1,000,000 shares of common stock previously issued upon conversion of
the Series F Preferred Stock
o 4,642,859 shares of common stock issuable upon conversion of the
Series H Preferred Stock
o 2,071,429 shares of common stock previously issued upon conversion of
the Series H Preferred Stock
o 4,714,287 shares of common stock previously issued upon exchange of
the Series A Preferred Stock
o 1,665,000 shares of common stock issuable upon exercise of warrants
o 2,018,224 shares of common stock previously issued upon exercise of
warrants.
As of July 25, 2005, there were 103,250 shares of preferred stock issued
and outstanding in four series, including 8,000 shares of Series D Preferred
Stock, 9,000 shares of Series E Preferred Stock, 81,000 shares of Series G
Preferred Stock and 5,250 shares of Series H Preferred Stock (collectively,
"Preferred Stock"). All the shares of our predecessor's Series F Preferred Stock
have elected to convert into 1,000,000 shares of common stock offered by this
prospectus. Shares issuable upon conversion of the Series G Preferred Stock are
not covered by this prospectus. The 8,000 shares of Series D Preferred Stock are
held by a former director, as are the 9,000 shares of Series E Preferred Stock.
See "Certain Relationships and Related Transactions." The 81,000 shares of
Series G Preferred Stock are held by OCM GW Holdings and a limited number of
transferees, including an officer, and the 5,250 shares of Series H Preferred
Stock are held by OCM GW Holdings, a former director and nine other investors.
The shares of common stock issuable upon conversion of the Series H Preferred
Stock held by OCM GW Holdings are not covered by this prospectus. On a fully
converted basis, the 8,000 shares of Series D Preferred Stock would convert to
500,000 shares of common stock. On a fully converted basis, the 9,000 shares of
Series E Preferred Stock would convert to 2,250,000 shares of common stock, or
approximately 2.4 million shares of common stock including accrued dividends on
the Series E Preferred Stock to the nearest dividend payment date. On a fully
converted basis, the 5,250 shares of Series H Preferred Stock outstanding would
convert to 7,500,001 shares of common stock. Currently, approximately 7.8
million shares of common stock to be offered by this prospectus have been issued
upon conversion or exchange of preferred stock.
6
Since 1996 we have occasionally issued warrants to employees, consultants
and directors as additional compensation. The warrants currently outstanding and
included in this prospectus have an exercise price of $0.75 per share and
entitle the warrant holders to purchase up to 840,000 shares of common stock.
The warrants exercisable for common stock offered by this prospectus contain
certain anti-dilution provisions and have expiration dates from August 16, 2006
to December 1, 2006.
Additionally, warrants have occasionally been issued to lenders or
guarantors on loans to us as additional consideration for entering into the
loans or guaranties. These warrants have an exercise price of $.75 per warrant
and entitle the warrant holders to purchase up to 825,000 shares of common stock
and are in addition to the warrants exercised for 2,018,224 shares of common
stock issued to our former lenders. A former director of the Company has 625,000
of these warrants. The warrants contain certain anti-dilution provisions and
have expiration dates ranging from October 15, 2005 to August 16, 2006.
As of July 25, 2005, warrants exercisable for 300,000 shares of common
stock initially covered by this prospectus have expired. This prospectus does
not cover shares of common stock underlying warrants issued after July 15, 2004.
Summary of the Offering
This prospectus relates to the resale of an aggregate of up to 18,861,799
shares of our common stock (the "Shares") issuable or issued to certain selling
shareholders, assuming the conversion and exchange of the preferred stock
described above, to the extent not already converted or exchanged, and the
exercise of the warrants described above. The selling shareholders may offer to
sell the Shares at fixed prices, at prevailing market prices at the time of
sale, or at varying negotiated prices. We will not receive any proceeds from the
resale of Shares by the holders thereof.
As of July 25, 2005 the total number of shares of our common stock
outstanding was 28,835,699, inclusive of shares of common stock underlying
shares of preferred stock that have converted or whose holders have elected to
convert to common stock, or whose shares were automatically exchanged into
common stock, prior to the date of this prospectus, but otherwise not including
the shares reserved for issuance upon the conversion and exchange of the
preferred stock and the exercise of the warrants described above.
On July 25, 2005 , the average of the high and low bid and asked prices of
our common stock as traded over-the-counter was $0.99 per share.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1, as amended, to register
the shares of common stock being offered by this prospectus. In addition, we
file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Prospective purchasers
may read and copy any reports, statements or other information we file at the
Securities and Exchange Commission's public reference facilities in Washington,
D.C. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference facilities. Our Securities and
Exchange Commission filings are also available to the public from commercial
7
document retrieval services, and at the web site maintained by the Securities
and Exchange Commission at http://www.sec.gov. As allowed by Securities and
Exchange Commission rules, this prospectus does not contain all the information
contained in the registration statement or in exhibits to the registration
statement.
8
RISK FACTORS
Investing in our stock involves a high degree of risk. You should carefully
consider the following risk factors in addition to the other information in this
prospectus before making an investment in our stock. Any of the following risks
could cause the trading price of the Shares to decline.
Our success depends heavily upon our ability to market our crude oil and
natural gas production at favorable prices.
In recent decades, there have been both periods of worldwide overproduction
and underproduction of crude oil and natural gas, and periods of increased and
relaxed energy conservation efforts. Such conditions have resulted in excess
supply of, and reduced demand for, crude oil on a worldwide basis and for
natural gas on a domestic basis. At other times, there has been short supply of,
and increased demand for, crude oil and, to a lesser extent, natural gas. These
changes have resulted in dramatic price fluctuations.
We may borrow funds to finance capital expenditures and for other purposes
which could possibly have important consequences to our shareholders, including
the following:
(i) Our indebtedness, acquisitions, working capital, capital
expenditures or other purposes may be impaired;
(ii) Funds available for our operations and general corporate purposes
or for capital expenditures will be reduced as a result of the dedication
of a portion of our consolidated cash flow from operations to the payment
of the principal and interest on our indebtedness;
(iii) We may be more highly leveraged than certain of our competitors,
which may place us at a competitive disadvantage;
(iv) The agreements governing our long-term indebtedness and bank
loans may contain restrictive financial and operating covenants;
(v) An event of default (not cured or waived) under financial and
operating covenants contained in our debt instruments could occur and have
a material adverse effect;
(vi) Certain of the borrowings under our debt agreements could have
floating rates of interest, which would cause us to be vulnerable to
increases in interest rates; and
(vii) Our degree of leverage could make us more vulnerable to a
downturn in general economic conditions.
Failure to comply with the covenants in our senior secured revolving credit
facility could be an event of default and could accelerate our payment
obligations.
We have incurred net losses in the past and there can be no assurance that
we will be profitable in the future.
We have incurred net losses in three of the last five fiscal years. We
cannot assure you that our current level of operating results will continue or
improve. Our activities could require additional debt or equity financing on our
part. Since the terms and availability of this financing depend to a large
degree upon general economic conditions and third parties over which we have no
control, we can give no assurance that we will obtain the needed financing or
that we will obtain such financing on attractive terms. In addition, our ability
to obtain financing depends on a number of other factors, many of which are also
beyond our control, such as interest rates and national and local business
conditions. If the cost of obtaining needed financing is too high or the terms
of such financing are otherwise unacceptable in relation to the opportunity we
are presented with, we may decide to forego that opportunity. Additional
indebtedness could increase our leverage and make us more vulnerable to economic
downturns and may limit our ability to withstand competitive pressures.
Additional equity financing could result in dilution to our shareholders.
9
Our future operating results may fluctuate significantly depending upon a
number of factors, including industry conditions, prices of crude oil and
natural gas, rates of production, timing of capital expenditures and drilling
success. These variables could have a material adverse effect on our business,
financial condition, results of operations and the market price of our common
stock.
Estimates of crude oil and natural gas reserves depend on many assumptions
that may turn out to be inaccurate.
Estimates of our proved reserves for crude oil and natural gas and the
estimated future net revenues from the production of such reserves rely upon
various assumptions, including assumptions as to crude oil and natural gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. The process of estimating crude oil and natural gas
reserves is complex and imprecise.
Actual future production, crude oil and natural gas prices, revenues,
taxes, development expenditures, operating expenses and quantities of
recoverable crude oil and natural gas reserves may vary substantially from the
estimates we obtain from reserve engineers. Any significant variance in these
assumptions could materially affect the estimated quantities and present value
of reserves we have set forth. In addition, our proved reserves may be subject
to downward or upward revision due to factors that are beyond our control, such
as production history, results of future exploration and development, prevailing
crude oil and natural gas prices and other factors.
Approximately 22% of our total estimated proved reserves at December 31,
2004 were proved undeveloped reserves, which are by their nature less certain.
Recovery of such reserves requires significant capital expenditures and
successful drilling operations. The reserve data set forth in the reserve
engineer reports assumes that substantial capital expenditures are required to
develop such reserves. Although cost and reserve estimates attributable to our
crude oil and natural gas reserves have been prepared in accordance with
industry standards, we cannot be sure that the estimated costs are accurate,
that development will occur as scheduled or that the results of such development
will be as estimated.
You should not interpret the present value referred to in this prospectus
as the current market value of our estimated crude oil and natural gas reserves.
In accordance with Securities and Exchange Commission requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the date of the estimate. Actual future prices
and costs may be materially higher or lower.
The estimates of our proved reserves and the future net revenues from which
the present value of our properties is derived were calculated based on the
actual prices of our various properties on a property-by-property basis at
December 31, 2004. The average sales prices of all properties were $40.41 per
barrel of oil and $5.89 per thousand cubic feet (Mcf) of natural gas at that
date.
10
Actual future net cash flows will also be affected by increases or
decreases in consumption by crude oil and natural gas purchasers and changes in
governmental regulations or taxation. The timing of both the production and the
incurring of expenses in connection with the development and production of crude
oil and natural gas properties affect the timing of actual future net cash flows
from proved reserves. In addition, the 10% discount factor, which is required by
the Securities and Exchange Commission to be used in calculating discounted
future net cash flows for reporting purposes, is not necessarily the most
appropriate discount factor. The effective interest rate at various times and
the risks associated with our business or the oil and gas industry in general
will affect the accuracy of the 10% discount factor.
Except to the extent that we acquire properties containing proved reserves
or conduct successful development or exploitation activities, our proved
reserves will decline as they are produced.
In general, the volume of production from crude oil and natural gas
properties declines as reserves are depleted. Our future crude oil and natural
gas production is highly dependent upon our success in finding or acquiring
additional reserves.
The business of acquiring, enhancing or developing reserves requires
considerable capital.
Our ability to make the necessary capital investment to maintain or expand
our asset base of crude oil and natural gas reserves could be impaired to the
extent that cash flow from operations is reduced and external sources of capital
become limited or unavailable. In addition, we cannot be sure that our future
acquisition and development activities will result in additional proved reserves
or that we will be able to drill productive wells at acceptable costs.
Crude oil and natural gas drilling and production activities are subject to
numerous risks, many of which are beyond our control.
These risks include (i) the possibility that no commercially productive oil
or gas reservoirs will be encountered; and, (ii) that operations may be
curtailed, delayed or canceled due to title problems, weather conditions,
governmental requirements, mechanical difficulties, or delays in the delivery of
drilling rigs and other equipment that may limit our ability to develop, produce
and market our reserves. We cannot assure you that new wells we drill will be
productive or that we will recover all or any portion of our investment in such
new wells.
Drilling for crude oil and natural gas may not be profitable.
Any wells that we drill may be dry wells or wells that are not sufficiently
productive to be profitable after drilling. Such wells will have a negative
impact on our profitability. In addition, our properties may be susceptible to
drainage from production by other operators on adjacent properties.
Our industry experiences numerous operating risks that could cause us to
suffer substantial losses.
Such risks include fire, explosions, blowouts, pipe failure and
environmental hazards, such as oil spills, natural gas leaks, ruptures or
discharges of toxic gases. We could also suffer losses due to personnel injury
or loss of life; severe damage to or destruction of property; or environmental
damage that could result in clean-up responsibilities, regulatory investigation,
penalties or suspension of our operations. In accordance with customary industry
practice, we maintain insurance policies against some, but not all, of the risks
described above. Our insurance policies may not adequately protect us against
loss or liability. There is no guarantee that insurance policies that protect us
against the many risks we face will continue to be available at justifiable
premium levels.
11
As owners and operators of crude oil and natural gas properties, we may be
liable under federal, state and local environmental regulations for activities
involving water pollution, hazardous waste transport, storage, disposal or other
activities.
Our past growth has been attributable to acquisitions of producing crude
oil and natural gas properties with proved reserves. There are risks involved
with such acquisitions.
The successful acquisition of properties requires an assessment of
recoverable reserves, future crude oil and natural gas prices, operating costs,
potential environmental and other liabilities, and other factors beyond our
control. Such assessments are necessarily inexact and their accuracy uncertain.
In connection with such an assessment, we perform a review of the subject
properties that we believe to be generally consistent with industry practices.
Such a review, however, will not reveal all existing or potential problems, nor
will it permit us, as the buyer, to become sufficiently familiar with the
properties to fully assess their capabilities or deficiencies. We may not
inspect every well and, even when an inspection is undertaken, structural and
environmental problems may not necessarily be observable.
When we acquire properties, in most cases, we are not entitled to
contractual indemnification for pre-closing liabilities, including environmental
liabilities.
We generally acquire interests in properties on an "as is" basis with
limited remedies for breaches of representations and warranties, and in these
situations we cannot assure you that we will identify all areas of existing or
potential exposure. In those circumstances in which we have contractual
indemnification rights for pre-closing liabilities, we cannot assure you that
the seller will be able to fulfill its contractual obligations. In addition, the
competition to acquire producing crude oil and natural gas properties is intense
and many of our larger competitors have financial and other resources
substantially greater than ours. We cannot assure you that we will be able to
acquire producing crude oil and natural gas properties that have economically
recoverable reserves for acceptable prices.
We may acquire royalty, overriding royalty or working interests in
properties that are less than the controlling interest.
In such cases, it is likely that we will not operate, nor control the
decisions affecting the operations, of such properties. We intend to limit such
acquisitions to properties operated by competent parties with whom we have
discussed their plans for operation of the properties.
We will need additional financing in the future to continue to fund our
development and exploitation activities.
We have made and will continue to make substantial capital expenditures in
our exploitation and development projects. We intend to finance these capital
expenditures with cash flow from operations, existing financing arrangements or
new financing. We cannot assure you that such additional financing will be
available. If it is not available, our development and exploitation activities
may have to be curtailed, which could adversely affect our business, financial
condition and results of operations, as was the case in 2004 and 2003.
The marketing of our natural gas production depends, in part, upon the
availability, proximity and capacity of natural gas gathering systems, pipelines
and processing facilities.
We could be adversely affected by changes in existing arrangements with
transporters of our natural gas since we do not own most of the gathering
systems and pipelines through which our natural gas is delivered to purchasers.
Our ability to produce and market our natural gas could also be adversely
affected by federal, state and local regulation of production and
transportation.
12
The crude oil and natural gas industry is highly competitive in all of its
phases.
Competition is particularly intense with respect to the acquisition of
desirable producing properties, the acquisition of crude oil and natural gas
prospects suitable for enhanced production efforts, the obtaining of goods and
services from industry providers, and the hiring of experienced personnel. Our
competitors in crude oil and natural gas acquisition, development, and
production include the major oil companies, in addition to numerous independent
crude oil and natural gas companies, individual proprietors and drilling
programs.
Many of these competitors possess and employ financial and personnel
resources substantially in excess of those which are available to us and may,
therefore, be able to pay more for desirable producing properties and prospects
and to define, evaluate, bid for, and purchase a greater number of producing
properties and prospects than our financial or personnel resources will permit.
Our ability to generate reserves in the future will be dependent on our ability
to select and acquire suitable producing properties and prospects while
competing with these companies.
The domestic oil industry is extensively regulated at both the federal and
state levels. Although we believe we are presently in compliance with all laws,
rules and regulations, we cannot assure you that changes in such laws, rules or
regulations, or the interpretation thereof, will not have a material adverse
effect on our financial condition or the results of our operations.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion, frequently increasing the regulatory burden on the
industry. There are numerous federal and state agencies authorized to issue
rules and regulations affecting the oil and gas industry. These rules and
regulations are often difficult and costly to comply with and carry substantial
penalties for noncompliance.
State statutes and regulations require permits for drilling operations,
drilling bonds, and reports concerning operations. Most states also have
statutes and regulations governing conservation matters, including the
unitization or pooling of properties, and the establishment of maximum rates of
production from wells. Some states have also enacted statutes prescribing price
ceilings for natural gas sold within their states.
Our industry is also subject to numerous laws and regulations governing
plugging and abandonment of wells, discharge of materials into the environment
and other matters relating to environmental protection. The heavy regulatory
burden on the oil and gas industry increases the costs of our doing business as
an oil and gas company, consequently affecting our profitability.
We have "blank check" preferred stock.
Our Certificate of Incorporation authorizes the Board of Directors to issue
preferred stock without further shareholder action in one or more series and to
designate the dividend rate, voting rights and other rights preferences and
restrictions. The issuance of preferred stock could have an adverse impact on
holders of common stock. Preferred stock is senior to common stock.
Additionally, preferred stock could be issued with dividend rights senior to the
rights of holders of common stock. Finally, preferred stock could be issued as
part of a "poison pill", which could have the effect of deterring offers to
acquire us. See "Description of Securities".
We do not pay dividends on our common stock.
Our board of directors presently intends to retain all of our earnings for
the expansion of our business; therefore we do not anticipate distributing cash
dividends on our common stock in the foreseeable future. Any decision of our
board of directors to pay cash dividends will depend upon our earnings,
financial position, cash requirements and other factors including our senior
secured revolving credit facility, which restricts payment of dividends.
13
One investor controls us.
As a result of the February 2005 preferred stock offerings, OCM GW Holdings
acquired a controlling interest in us. In addition to the common stock owned by
it, OCM GW Holdings has the right to acquire approximately 46.6 million shares
of common stock pursuant to conversion of Series G Preferred Stock (and accrued
dividends thereon) and Series H Preferred Stock owned by it, which together
represent approximately 62% of the outstanding common stock, assuming the
conversion of preferred stock (including accrued dividends on the Series G
Preferred Stock) held by it. See "Security Ownership of Certain Beneficial
Owners and Management." Pursuant to the terms of Series G Preferred Stock, the
holders of the Series G Preferred Stock, voting as a class, have the right to
elect a majority of our board of directors. Holdings currently owns
approximately 95% of the Series G Preferred Stock.
Mr. J. Virgil Waggoner, a former member of the Board and one of the selling
shareholders, owns 9,585,229 shares of our common stock, which represents
approximately 33% of the currently outstanding common stock. Additionally, Mr.
Waggoner has the right to acquire an additional 7,280,989 shares pursuant to
conversion of preferred stock (including accrued dividends on the Series E
Preferred Stock) and exercise of currently exercisable warrants and options. See
"Security Ownership of Certain Beneficial Owners and Management." Mr. Waggoner
has entered into a Share Transfer Restriction Agreement, dated February 28,
2005, with OCM GW Holdings, currently restricting his transfer of shares of
Series H Preferred Stock, and an Irrevocable Proxy with respect to his Series H
Preferred Stock thereby allowing OCM GW Holdings to vote such shares at any time
in class votes of the Series H Preferred Stock.
Additionally, OCM GW Holdings and all current directors and officers as a
group represent approximately 63% of the outstanding voting power (assuming the
exercise of all currently exercisable warrants and options held by them), which
includes the Series G Preferred Stock and Series H Preferred Stock, which vote
on an as converted basis. For as long as Holdings and the directors and officers
continue to own over a majority of the outstanding voting power, they will be
able to control matters submitted to shareholders and OCM GW Holdings will be
able to elect a majority of directors. The percentage ownership of OCM GW
Holdings, directors and officers could be reduced by the issuance of common
stock on conversion of preferred stock and the exercise of warrants, although it
is impossible to say how many shares will be actually issued.
The holders of our common stock do not have cumulative voting rights,
preemptive rights or rights to convert their common stock to other securities.
We are authorized to issue 200,000,000 shares of common stock, $.001 par
value per share. As of July 25, 2005 there were 28,835,699 shares of common
stock issued and outstanding. The holders of our common stock do not have
cumulative voting rights, and the holders of our common stock and Series H
Preferred Stock (on an as converted basis) present, in person or by proxy, will
be able to elect all of the remaining members of our board of directors (by
plurality vote) that the holders of the Series G Preferred Stock are not
entitled to elect as a class. The holders of shares of our common stock do not
have preemptive rights or rights to convert their common stock into other
securities.
The number of shares of outstanding common stock could increase
significantly as a result of our recent transactions
On an "as converted" basis, if all of the common stock underlying our
various convertible and derivative securities, including warrants and granted
employee stock options, outstanding at July 25, 2005, is issued by us, the
number of our outstanding shares of common stock will increase to approximately
111.4 million shares. It is impossible to say how many shares, if any, we will
issue and how many shares, in turn, will be resold. However, it is possible that
our stock price could decline significantly as a result of an increased number
of shares being offered into the market.
14
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2005 and
as adjusted to give effect to the issuance of the shares offered by this
prospectus listed under "Summary - Securities Being Offered", assuming
conversion of all the preferred stock described in this prospectus and exercise
of all of the outstanding warrants. You should read this table in conjunction
with our financial statements, "Selected Financial Data" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
included elsewhere in this prospectus.
Capitalization Schedule
-----------------------
Proforma
Actual Adjustments Post Balance Proforma
March 31, Assuming Sheet March 31,
2005 Conversion(1) Adjustments(2) 2005
Cash $ 2,274,825 $ - $ $ 2,046,417
============== ============= ============== =============
Working capital, including cash $ 1,867.656 $ $ - $ 1,867.656
Total long-term debt, net of current portion 92,245 - - 92,245
-------------- ------------- -------------- -------------
Total working capital and long-term debt $ 1,959,901 $ - $ $ 1,959,901
============== ============= ============== =============
Shareholders' equity
Series D Preferred Stock, $.01 par value, $500 $ $ $ $
liquidation value, 8,000 shares outstanding 80 (80) - -
Series E Preferred Stock, $.01 par value, $500
liquidation value, 9,000 shares outstanding 90 (90) - -
Series G Preferred Stock, $.01 par value, $500
liquidation value, 81,000 shares outstanding 810 (810) - -
Series H Preferred Stock, $.01 par value, $500
liquidation value, 6,500 shares outstanding 65 (65) - -
Series A Preferred Stock, $.01 par value,
24,922,893 shares outstanding actual -
87,101,669 as adjusted 24,923 62,123 56 87,102
Additional paid-in equity 72,767,869 (61,078) 48,453 72,755,244
Accumulated deficit (19,186,474) - (48,509) (19,234,983)
-------------- ------------- -------------- -------------
Total shareholders' equity $ 53,607,363 $ - $ - $ 53,607,363
============== ============= ============== =============
------------------
(1) Adjustments to March 31, 2005 balance sheet assuming that all convertible
securities registered under this S-1 Registration Statement were converted
to common stock on March 31, 2005.
(2) Adjustments to the March 31, 2005 balance sheet reflecting the issuance of
common stock after the March 31, 2005 balance sheet date.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. Our
senior secured revolving credit facility restricts the payment of dividends. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and to fund future growth. We do not anticipate
paying any cash dividends in the foreseeable future.
15
FORWARD-LOOKING STATEMENTS
We make forward-looking statements throughout this prospectus. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur, and other
similar statements), you must remember that our expectations may not be correct,
even though we believe they are reasonable. We do not guarantee that the
transactions and events described in this prospectus will happen as described
(or that they will happen at all). The forward-looking information contained in
this prospectus is generally located in the material set forth under the
headings "Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" but may be found
in other locations as well. These forward-looking statements generally relate to
our plans and objectives for future operations and are based upon our
management's reasonable estimates of future results and trends.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF WHEN THIS PROSPECTUS IS DELIVERED OR THE DATE OF ANY
SALE OF OUR COMMON STOCK.
16
MARKET PRICE OF COMMON STOCK
Our common stock, par value $0.001 per share, is traded over-the-counter
(OTC) under the symbol "CXPI". Fidelity Transfer Company, 1800 South West
Temple, Suite 301, Box 53, Salt Lake City, Utah 84115, (801) 484-7222 is the
transfer agent for the common stock. The high and low trading prices for the
common stock for each quarter in 2005, 2004 and 2003 are set forth below. The
trading prices represent prices between dealers, without retail mark-ups,
mark-downs, or commissions, and may not necessarily represent actual
transactions.
High Low
------- -------
2005
----
First Quarter $1.49 $ .79
Second Quarter 1.21 .84
Third Quarter (to July 25, 2005) 1.04 .85
2004
----
First Quarter $ .56 $ .32
Second Quarter .56 .33
Third Quarter .85 .45
Fourth Quarter .94 .66
2003
----
First Quarter $ .45 $ .42
Second Quarter .47 .35
Third Quarter .47 .43
Fourth Quarter .47 .32
The common stock is held by approximately 700 beneficial owners.
17
SELLING SHAREHOLDERS
The selling shareholders may offer and sell, from time to time, any or all
of the Shares. Because the selling shareholders may offer all or only some
portion of the 18,861,799 Shares, no estimate can be given as to the amount or
percentage of these Shares that will be held by the selling shareholders upon
termination of the offering. There will be no proceeds to us from the sale of
shares of common stock in this offering. However, we will receive proceeds from
the sale of shares of common stock upon the exercise of any warrants. Any
proceeds received upon exercise of warrants will be used for general working
capital purposes.
The following table sets forth the name and relationship with us, if any,
of certain of the selling shareholders and (i) the maximum number of shares of
common stock which may be offered for the account of the selling shareholders
under this prospectus, (ii) the amount and percentage of common stock that would
be owned by the selling shareholders after completion of the offering, assuming
a sale of all of the common stock which may be offered hereunder and (iii) the
number of shares of common stock beneficially owned by the selling shareholders
as of the date of this prospectus. Except as otherwise noted below, the selling
shareholders have not, within the past three years, had any position, office or
other material relationship with us.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission. The number of shares beneficially owned by a person
includes shares of common stock subject to options, warrants and preferred stock
held by that person that are currently convertible or exercisable or convertible
or exercisable within 60 days of the date of this prospectus. The shares
issuable under these securities are treated as if outstanding for computing the
percentage ownership of the person holding these securities but are not treated
as if outstanding for the purposes of computing the percentage ownership of any
other person.
------------------------------------------------------------------------------------------
Amount and
Name and Address of Total Shares % of Total Shares
Selling Security Holder Registered Ownership Owned(1)
------------------------------------------------------------------------------------------
Drawbridge Special Opportunities Fund, L.P(2) 1,009,112 14,550 1,023,662
1251 Avenue of the Americas
16th Floor
New York, NY 10020
------------------------------------------------------------------------------------------
D.B. Zwirn Special Opportunities Fund, L.P.(2) 1,009,112 14,550 1,023,662
745 5th Avenue
18th Floor *
New York, NY 10151
------------------------------------------------------------------------------------------
Petro Capital Advisors(3) 1,558,572 75,000 1,633,572
3838 Oak Lawn Ave., Suite 1775
Dallas, TX 75201 *
------------------------------------------------------------------------------------------
Virgil Waggoner(4) 7,160,715 9,705,503 16,866,218
6605 Cypresswood Drive, Suite 250
Spring, TX 77379 25.5%
------------------------------------------------------------------------------------------
18
------------------------------------------------------------------------------------------
Patrick Parker 857,143 45,000 902,143
Scarbrough Building, 6th and Congress,
101 W. 6th St. Suite 610 *
Austin, TX 78701
------------------------------------------------------------------------------------------
Douglas Moreland 1,428,572 78,333 1,506,905
1655 East Layton Drive
Englewood, CO 80100 *
------------------------------------------------------------------------------------------
Stanley Chason 71,428 0 71,428
6711 North Ocean Blvd.
Ocean Ridge, FL 33435 *
------------------------------------------------------------------------------------------
XMen, LLC 1,714,286 90,000 1,804,286
520 Lake Cook Road, Suite105
Deerfield, IL 60015 *
------------------------------------------------------------------------------------------
Bruce Goldstein 77,143 3,000 80,143
1934 Deercrest Lane
Northbrook, IL 60062 *
------------------------------------------------------------------------------------------
Barry S. Cohn Revocable Trust 214,286 11,250 225,536
2505 Astor Court
Glenview, IL 60025 *
------------------------------------------------------------------------------------------
Bargus Partnership 142,862 7,500 150,362
(Gus Schultes)
664 South Evergreen Ave *
Woodbury Heights, NJ 08097
------------------------------------------------------------------------------------------
Schultes Family Partnership LP 142,858 7,500 150,358
(Ed Schultes)
664 South Evergreen Ave *
Woodbury Heights, NJ 08097
------------------------------------------------------------------------------------------
Richard Schultes 142,858 7,500 150,358
664 South Evergreen Ave
Woodbury Heights, NJ 08097 *
------------------------------------------------------------------------------------------
4-Sibs, LLC 142,858 7,500 150,358
664 South Evergreen Ave
Woodbury Heights, NJ 08097 *
------------------------------------------------------------------------------------------
William Jefferys 28,570 1,500 30,070
664 South Evergreen Ave
Woodbury Heights, NJ 08097 *
------------------------------------------------------------------------------------------
John T. O'Brien and Linda O'Brian 28,570 1,500 30,070
(JTWROS)
664 South Evergreen Ave *
Woodbury Heights, NJ 08097
------------------------------------------------------------------------------------------
19
------------------------------------------------------------------------------------------
Robert Collison 28,570 1,500 30,070
664 South Evergreen Ave
Woodbury Heights, NJ 08097 *
------------------------------------------------------------------------------------------
David Hartman 28,570 1,500 30,070
664 South Evergreen Ave
Woodbury Heights, NJ 08097 *
------------------------------------------------------------------------------------------
Jeffrey DeMatte 28,570 1,500 30,070
664 South Evergreen Ave
Woodbury Heights, NJ 08097 *
------------------------------------------------------------------------------------------
Edwin J. Hagerty 371,429 19,500 390,929
13355 Noel Road, Suite 1400
Dallas, TX 75248 *
------------------------------------------------------------------------------------------
Star-Tex Trading Company 285,715 84,667 370,382
16300 Addison Rd., Suite 300
Addison, TX 75001 *
------------------------------------------------------------------------------------------
ST Advisory Corp./John E. Loehr(5) 470,000 147,491 617,491
16300 Addison Rd., Suite 300
Addison, TX 75001 *
------------------------------------------------------------------------------------------
Thomas R, Kaetzer(6) 200,000 408,852 608,852
480 N. Sam Houston Parkway, Suite 300
Houston, TX 77060 1.1%
------------------------------------------------------------------------------------------
Jim C. Bigham(7) 100,000 160,985 260,985
480 N. Sam Houston Parkway, Suite 300
Houston, TX 77060 *
------------------------------------------------------------------------------------------
Marshall A. Smith III(8) 270,000 619,005 889,005
480 N. Sam Houston Parkway, Suite 300
Houston, TX 77060 1.6%
------------------------------------------------------------------------------------------
Intermarket Management LLC(9) 500,000 0 500,000
271 Grove Ave., Suite C-3
Verona, NJ 07044 *
------------------------------------------------------------------------------------------
Star Investments , LTD 50,000 39,500 89,500
3421 Causeway Blvd., Suite 103
Metairie, LA 70002 *
------------------------------------------------------------------------------------------
Ray B. Nesbitt 150,000 243,333 393,333
1 Winston Woods
Houston, TX 77024 *
------------------------------------------------------------------------------------------
J. T. Thompson 40,000 10,000 50,000
1212 Woodhollow Drive, No. 15101
Houston, TX 77057 *
------------------------------------------------------------------------------------------
20
------------------------------------------------------------------------------------------
Ron Zimmerman 60,000 0 60,000
1212 Woodhollow Drive, No. 15101
Houston, TX 77057 *
------------------------------------------------------------------------------------------
Steven M. Morris 500,000 0 500,000
P.O. Box 941828
Houston, TX 77094 *
------------------------------------------------------------------------------------------
John Kruljac 20,000 0 20,000
8873 E. Bayou Gulch Road
Parker, CO 80134 *
------------------------------------------------------------------------------------------
USGT Investors 30,000 0 30,000
1845 Woodall Rodgers, Suite 1700
Dallas, TX 75201 *
------------------------------------------------------------------------------------------
------------------
* Less than 1%
1 Includes shares registered hereunder.
2 The selling shareholder is a former lender.
3 The selling shareholder is a former investment advisor.
4 Mr. Waggoner is a former director of the Company.
5 Mr. Loehr is a former director and officer of the Company. Reflects 270,000
shares issuable to Mr. Loehr pursuant to immediately exercisable warrants
and 200,000 shares issued upon exchange of preferred stock held by ST
Advisory Corp. ST Advisory Corp. is owned by John E. Loehr.
6 Mr. Kaetzer is Senior Vice President of Operations of the Company. See
"Management."
7 Mr. Bigham is Vice President and Secretary of the Company. See
"Management."
8 Mr. Smith was a director of the Company.
9 Mr. M. Scott Manolis was one of our directors. Mr. Manolis is an owner of
Intermarket Management LLC.
21
PLAN OF DISTRIBUTION
The selling shareholders may, from time to time, sell all or a portion of
the shares of common stock on any market upon which the common stock may be
quoted (currently the OTC Bulletin Board), in privately negotiated transactions
or otherwise. Such sales may be at fixed prices prevailing at the time of sale,
at prices related to the market prices or at negotiated prices. The shares of
common stock being offered by this prospectus may be sold by the selling
shareholders using one or more of the following methods, without limitation:
(a) Block trades in which the broker or dealer so engaged will attempt to
sell the shares of common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by the broker
or dealer for its account pursuant to this prospectus;
(c) an exchange distribution in accordance with the rules of the
applicable exchange;
(d) ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
(e) privately negotiated transactions;
(f) market sales (both long and short to the extent permitted under the
federal securities laws);
(g) at the market to or through market makers or into an existing market
for the shares;
(h) through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); and
(i) a combination of any aforementioned methods of sale.
In the event of the transfer by the selling shareholder of its shares to
any pledgee, donee or other transferee, we will, if required, amend this
prospectus and the registration statement of which this prospectus forms a part
by the filing of a post-effective amendment in order to have the pledgee, donee
or other transferee in place of the selling shareholder who has transferred his
or her shares.
In effecting sales, brokers and dealers engaged by a selling shareholder
may arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from the selling shareholder or, if any of the
broker-dealers act as an agent for the purchaser of such shares, from the
purchaser in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with a
selling shareholder to sell a specified number of the shares of common stock at
a stipulated price per share. Such an agreement may also require the
broker-dealer to purchase as principal any unsold shares of common stock at the
price required to fulfill the broker-dealer commitment to the selling
shareholder if such broker-dealer is unable to sell the shares on behalf of the
selling shareholder. Broker-dealers who acquire shares of common stock as
principal may thereafter resell the shares of common stock from time to time in
transactions which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above. Such sales
by a broker-dealer could be at prices and on terms then prevailing at the time
of sale, at prices related to the then-current market price or in negotiated
transactions. In connection with such resales, the broker-dealer may pay to or
receive from the purchasers of the shares commissions as described above.
22
A selling shareholder and any broker-dealers or agents that participate
with that selling shareholder in the sale of the shares of common stock may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with these sales. In that event, any commissions received
by the broker-dealers or agents and any profit on the resale of the shares of
common stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act of 1933, as amended.
From time to time, a selling shareholder may pledge its shares of common
stock pursuant to the margin provisions of its customer agreements with its
brokers. Upon a default by a selling shareholder, the broker may offer and sell
the pledged shares of common stock from time to time. Upon a sale of the shares
of common stock, the selling shareholders intend to comply with the prospectus
delivery requirements under the Securities Act of 1933 by delivering a
prospectus to each purchaser in the transaction. We intend to file any
amendments or other necessary documents in compliance with the Securities Act of
1933 which may be required in the event a selling shareholder defaults under any
customer agreement with brokers.
To the extent required under the Securities Act of 1933, a post effective
amendment to this registration statement will be filed, disclosing the name of
any broker-dealers, the number of shares of common stock involved, the price at
which the common stock is to be sold, the commissions paid or discounts or
concessions allowed to such broker-dealers, where applicable, that such
broker-dealers did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and other facts material to
the transaction.
We and the selling shareholders will be subject to applicable provisions of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
under it, including, without limitation, Rule 10b-5 and, insofar as a selling
shareholder is a distribution participant and we, under certain circumstances,
may be a distribution participant, under Regulation M. All of the foregoing may
affect the marketability of the common stock.
All expenses of the registration statement including, but not limited to,
legal, accounting, printing and mailing fees are and will be borne by us. Any
commissions, discounts or other fees payable to brokers or dealers in connection
with any sale of the shares of common stock will be borne by the selling
shareholder, the purchasers participating in such transaction, or both.
Any shares of common stock covered by this prospectus that qualify for sale
pursuant to Rule 144 under the Securities Act of 1933, as amended, may be sold
under Rule 144 rather than pursuant to this prospectus.
23
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of our
company for the three month period ended March 31, 2005 and 2004, and as of
December 31, 2004, 2003, 2002, 2001 and 2000, and for each of the periods then
ended. See "Business and Properties" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The income statement data for
the years ended December 31, 2004, 2003 and 2002 and the balance sheet data at
December 31, 2004 and 2003 are derived from our audited financial statements
contained elsewhere herein. The income statement data for the years ended
December 31, 2001 and 2000 and the balance sheet data at December 31, 2002, 2001
and 2000 are derived from our Annual Report on Form 10-K for those periods. You
should read this data in conjunction with our consolidated financial statements
and the notes thereto included elsewhere herein.
Three Month Period
Ended March 31,
(unaudited) Year Ended December 31,
-------------------------- --------------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income Statement Data
---------------------
Operating Revenues $ 3,664,333 $ 2,538,729 $11,207,673 $11,010,723 $10,839,797 $12,990,581 $ 8,984,175
Net income (loss) from
operations 968,147 363,693 1,557,815 558,774 310,290 3,451,875 2,464,017
Net income (loss) (2,774,325) (268,628) 8,072,221 (3,024,426) (4,502,313) 1,044,291 352,774
Dividends on preferred stock (773,120) (34,375) (455,612) (127,083) (112,500) (56,250) -
Net income (loss) available to
common shareholders (3,547,445) (303,003) 7,761,863 (3,151,509) (4,614,813) 988,401 352,774
Net income (loss), per share
of Common Stock $ (.17) $ (.02) $ .41 $ (.17) $ (.25) $ .05 $ .02
Weighted average number
of shares of common
stock outstanding 20,706,819 18,492,541 18,535,022 18,492,541 18,492,541 18,464,343 17,293,848
Balance Sheet Data
------------------
Current assets $ 5,212,530 $ 2,003,513 $ 2,214,542 $ 1,742,689 $ 2,353,046 $ 2,205,862 $ 2,934,804
Total assets 61,727,506 52,334,478 57,700,891 52,428,774 53,088,941 51,379,209 32,374,128
Current liabilities 3,344,874 45,069,515 35,568,417 44,619,652 43,998,566 12,492,365 7,594,986
Long-term obligations 1,256,260 1,405,323 1,950,300 1,393,607 137,808 26,541,957 18,077,371
Other liabilities 3,519,009 303,620 1,505,527 591,467 1,128,993 - -
Stockholders' Equity $61,727,506 $52,334,478 $18,676,643 $ 5,824,648 $ 7,823,574 $12,344,887 $ 6,701,771
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements and the notes thereto included elsewhere in this prospectus. This
discussion and analysis contains forward-looking statements within the meaning
of the federal securities laws. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from historical results or our predictions. Please see "Risk Factors" and
"Forward-Looking Statements" for a discussion of the uncertainties, risks and
assumptions associated with these statements.
Overview.
We are primarily engaged in the acquisition, development, exploitation and
production of crude oil and natural gas, primarily in the onshore producing
regions of the United States. Our focus is on increasing production from our
existing properties through further exploitation, development and exploration,
and on acquiring additional interests in undeveloped crude oil and natural gas
properties. Our 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. This represents over 98% of our
gross revenues.
2. Operating overhead and other income that consists of administrative fees
received for operating crude oil and natural gas properties for other working
interest owners, and for marketing and transporting natural gas for those
owners. This also includes earnings from other miscellaneous activities.
The following is a discussion of our consolidated results of operations,
financial condition and capital resources. You should read this discussion in
conjunction with our Consolidated Financial Statements and the Notes thereto
contained elsewhere herein.
Results of Operations.
The factors which most significantly affect our 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 cost and efficiency of operating
our own properties, (4) depletion and depreciation of oil and gas property costs
and related equipment, (5) the level of and interest rates on borrowings, (6)
the level and success of acquiring or finding new reserves, and the acquisition,
finding and development costs incurred in adding these reserves, and (7) the
adoption of changes in accounting rules.
We consider depletion and depreciation of oil and gas properties and
related support equipment to be critical accounting estimates, based upon
estimates of total recoverable oil and gas reserves.
The estimates of oil and gas reserves utilized in the calculation of
depletion and depreciation are estimated in accordance with guidelines
established by the Securities and Exchange Commission and the Financial
Accounting Standards Board, which require that reserve estimates be prepared
under existing economic and operating conditions with no provision for price and
cost escalations over prices and costs existing at year end, except by
contractual arrangements.
We emphasize that reserve estimates are inherently imprecise. Accordingly,
the estimates are expected to change as more current information becomes
available. Our policy is to amortize capitalized oil and gas costs on the unit
of production method, based upon these reserve estimates. It is reasonably
possible that the estimates of future cash inflows, future gross revenues, the
amount of oil and gas reserves, the remaining estimated lives of the oil and gas
properties, or any combination of the above may be increased or reduced in the
near term. If reduced, the carrying amount of capitalized oil and gas properties
may be reduced materially in the near term.
25
Comparative results of operations for the periods indicated are discussed
below.
Three-Month Period Ended March 31, 2005 compared to Three Month Period
Ended March 31, 2004.
Revenues
Oil and Gas Sales. During the first quarter of 2005, our sales volumes were
44,708 barrels of crude oil and 344,015 Mcf of natural gas, or 102,044 barrels
of oil equivalent compared to 45,184 barrels of crude oil and 253,756 Mcf of
natural gas, or 87,477 barrels of oil equivalent in the first quarter of 2004.
On a daily basis we produced an average of 1,134 barrels of oil equivalent in
the first quarter of 2005 compared to a daily average of 972 barrels of oil
equivalent in the 2004 quarter.
Oil and gas prices are reported net of the realized effect of our hedging
agreements. Prices realized were $35.84 per Bbl and $5.91 per Mcf in the first
quarter of 2005 compared to $27.97 per Bbl and $4.87 per Mcf in the first
quarter of 2004. Prices before the effects of the hedging agreements were $47.82
per Bbl and $6.26 per Mcf in the first quarter of 2005 compared to $32.60 per
Bbl and $5.53 per Mcf in the first quarter of 2004.
Revenues from the sale of crude oil and natural gas for the first quarter,
and net of realized losses from our hedging instruments, increased 45% from
$2,500,600 in 2004 to $3,634,200 in 2005. Losses realized on our hedges during
the 2005 quarter were $535,300 for oil and $121,200 for gas, compared to
$209,100 for oil and 167,100 for gas in the 2004 quarter. This was due to an
increase in natural gas sales volumes and an increase in both crude oil and
natural gas sales prices. Higher natural gas sales volumes were a result of the
completion of two new wells in our Iola Field in east Texas and increased
production from our Grand Lake Field in southwest Louisiana following workovers
completed in the fourth quarter of 2004. The Grand Lake Field also had an
increase in oil production, which offset the loss of production from the sale of
properties in 2004.
Operating Overhead and Other Income. Revenues from these activities
decreased from $38,100 in 2004 to 30,200 in 2005, due primarily to lower
overhead recoveries on company-operated properties.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses increased 7% from
$1,314,300 in 2004 to $1,400,900 in 2005 due to higher vendor prices. On a per
unit basis, expenses decreased from $15.02 per barrel of oil equivalent in 2004
to $13.73 per barrel of oil equivalent in 2005 due to increased production on
existing properties.
Depreciation, Depletion and Amortization (DD&A). DD&A increased 49% from
$439,200 in 2004 to $655,800 in 2005 due to higher production volumes, and from
an increase in the DD&A rate per unit from $5.02 per barrel of oil equivalent in
2004 to $6.43 per barrel of oil equivalent in 2005.
General and Administrative (G&A) Expenses. Our G&A expenses increased 54%
from $401,200 in 2004 to $618,200 in 2005 due to the recent additions to our
management team and to the accrual of $70,200 in non-cash stock option expense.
On a per unit basis, expenses increased from $4.59 per barrel of oil equivalent
in 2004 to $6.06 per barrel of oil equivalent in 2005.
Interest Expense. Interest expense increased 30% from $920,200 in 2004 to
$1,198,500 in 2005, primarily due to the amortization of the remaining note
discount associated with debt retired.
26
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues
Oil and Gas Sales. Our operating revenues from the sale of crude oil and
natural gas increased by 2% from $10,844,000 in 2003 to $11,101,000 in 2004.
Revenue increases due to higher oil and natural gas sales prices were
substantially offset by a 17% decrease in sales volumes, 12% of which was due to
normal oil and gas production declines and 5% due to property sales.
Operating Overhead and Other Income. Revenues from these activities
decreased 36% from $166,000 in 2003 to $107,000 in 2004, primarily due to (1) a
one time $58,000 contract settlement received in 2003, and (2) lower pipeline
volumes resulting in less transportation revenue.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses decreased 12% from
$5,528,000 in 2003 to $4,880,000 in 2004, 5% was due to lower variable costs on
lower production volumes and 7% due to property sales. On a per BOE basis, costs
increased from $13.16 in 2003 to $14.10 per BOE in 2004 because of lower volume
and higher vendor prices.
Depreciation, Depletion and Amortization (DD & A). DD & A decreased 2% from
$2,226,000 in 2003 to $2,185,000 in 2004, due to lower production volumes. On a
per BOE basis, the DD & A rate increased from $5.30 in 2003 to $6.31 per BOE in
2004 due to higher than anticipated development costs.
The cost of Dry Holes, Abandoned Property and Impaired Assets expense in
2004 was $453,000 (abandoned- $391,000; impaired- $62,000), compared to $359,000
(dry holes- $70,000; abandoned- $289,000) in 2003. The abandoned property was
due to a lack of capital to complete projects resulting in the loss of leases.
General and Administrative (G & A) Expenses. G & A expenses decreased 11%
from $2,262,000 in 2003 to $2,019,000 in 2004 due to expenses incurred in 2003
associated with financing efforts that were not culminated.
Interest Income and Expense. Interest expense increased 24% from $3,363,000
in 2003 to $4,154,000 in 2004. In April 2004 we retired debt of approximately
$27.6 million carrying an interest rate of prime plus 3.5% and replaced it with
debt of approximately $18.0 million that carries an interest rate of prime plus
11.0%. Also, included in 2004 is non cash interest expense of approximately $.4
million resulting from the discounting on a note payable issued in 2004.
Other Financing Costs. Other financing costs increased 47% from $1,000,000
in 2003 to $1,472,000 in 2004. In 2003, we recorded an expense of $1,000,000 to
account for the issuance of 2,000 shares of our preferred stock in conjunction
with the financial agreement on the retired debt referred to above. The expense
in 2004 represents the amortized portion of loan fees associated with the
refinancing of debt referred to above.
Unrealized Gain (Loss) on Derivative Instruments. The estimated future fair
value of derivative instruments at December 31, 2004 resulted in an estimated
unrealized loss of $1,506,000 in 2004 compared to an unrealized gain of $537,000
in 2003. Estimated unrealized gain/loss on oil and gas price hedges in place on
a particular balance sheet date is based on a "mark to market" calculation based
on a market price forecast on the balance sheet date compared to the prices
provided for in the derivative instruments.
27
Loss on Sale of Property and Equipment. We recorded a loss on sale of
property and equipment of $2,034,000 in 2004 as compared to $20,000 in 2003. See
Note 3 to the Financial Statements.
Accretion Expense. Accretion expense decreased 6% from $77,000 in 2003 to
$72,000 in 2004 due to sales of oil and gas properties.
Forgiveness of Debt. In 2004 we had $12,476,000 in debt forgiven as the
result of debt refinancing in April, 2004.
Dividends on Preferred Stock. In 2004, a dividend on preferred stock due
was $456,000. In 2003 dividends on preferred stock due was $127,000. The board
of directors did not declare any dividends be paid.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues
Oil and Gas Sales. Our operating revenues from the sale of crude oil and
natural gas increased by 4% from $10,447,000 in 2002 to $10,844,000 in 2003.
This increase was due to higher sales prices, offset by normal oil and gas
production declines and resulting in lower production volumes. We were unable to
offset those declines and maintain or increase production through development
efforts because of limited development capital.
Well Servicing Revenues. There were no revenues from our well servicing
operations in 2003 compared to $39,000 in 2002 since we ceased performing work
for other operators and concentrated on our own properties.
Operating Overhead and Other Income. Revenues from these activities
decreased 53% from $354,000 in 2002 to $166,000 in 2003, primarily due to (1)
the loss of an oil and gas marketing contract and (2) lower pipeline volumes
resulting in less transportation revenue.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses increased 2% from
$5,430,000 in 2002 to $5,528,000 in 2003 due to increased vendor prices.
Cost of Well Servicing Operations. There were no well servicing expenses in
2003 compared to $56,000 in 2002 since we did not work for other operators.
Depreciation, Depletion and Amortization (DD & A). DD & A decreased 17%
from $2,698,000 in 2002 to $2,226,000 in 2003, due to lower production volumes.
We also recorded in other income $262,000 related to the cumulative effect of
adopting SFAS 143 "Asset Retirement Obligations".
Dry Holes, Abandoned Property and Impaired Assets. The cost of abandoned
property in 2003 was $359,000 because the lack of capital to complete projects
resulted in the loss of leases. This compared to combined costs of dry holes,
abandoned property and impaired assets of $617,000 in 2002.
General and Administrative (G and A) Expenses. G and A expenses increased
31% from $1,728,000 in 2002 to $2,262,000 in 2003 due to expenses associated
with financing efforts that were not culminated.
Interest Income and Expense. Interest expense increased 6% from $3,159,000
in 2002 to $3,363,000 in 2003 due to penalty interest paid to our largest lender
under a provision in the loan agreement.
28
Other Financing Costs. In 2003, we recorded an expense of $1,000,000 to
account for the failed issuance of 2,000 shares of our preferred stock to our
largest lender under a financial agreement.
Unrealized Gain (Loss) on Derivative Instruments. The estimated future fair
value of derivative instruments at December 31, 2003 resulted in an unrealized
gain of $537,000 in 2003 compared to an unrealized loss of $1,597,000 in 2002.
Loss on Sale of Property and Equipment. We recorded a loss on sale of
property and equipment of $20,000 in 2003 as compared to $57,000 in 2002. See
Note 3 to the Financial Statements.
Accretion Expense. We recorded accretion expenses of $77,000 as a result of
adapting SPAS 143 "Asset Retirement Obligations", effective January 1, 2003.
Dividends on Preferred Stock. In 2003, dividends due on preferred stock due
was $127,000, however the board of directors did not declare any dividends to be
paid. In 2002, dividends on preferred stock due was $112,000, and paid was
$112,000.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues
Oil and Gas Sales. Our operating revenues from the sale of crude oil and
natural gas decreased by 16% from $12,426,000 in 2001 to $10,447,000 in 2002.
This decrease resulted from normal oil and gas production declines and the
inability to offset those declines through development efforts because of
limited development capital.
Well Servicing Revenues. Revenues from our well servicing operations
decreased by 77% from $169,000 in 2001 to $39,000 in 2002. This decrease was due
to performing less work for third parties and the sale of one of our workover
rigs.
Operating Overhead and Other Income. Revenues from these activities
decreased 10% from $395,000 in 2001 to $354,000 in 2002, primarily as a result
of the termination of a gas transportation sales contract with a local utility.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses increased 5% from
$5,155,000 in 2001 to $5,430,000 in 2002 due to increased vendor prices.
Cost of Well Servicing Operations. Well servicing expenses decreased 69%
from $182,000 in 2001 to $56,000 in 2002 due to less work under contract to
third parties and the sale of one workover rig.
Depreciation, Depletion and Amortization (DD & A). DD & A increased 8% from
$2,491,000 in 2001 to $2,698,000 in 2002, due to our proved reserves being
calculated slightly lower at the end of 2001.
Dry Holes, Abandoned Property, Impaired Assets. The costs of a dry hole in
Louisiana of $339,000, abandoned property in Oklahoma of $222,000 and impaired
assets in Mississippi of $55,000 totaled $617,000 in 2002 compared to none in
2001.
General and Administrative (G & A) Expenses. G & A expenses increased only
slightly from $1,710,000 in 2001 to $1,728,000 in 2002.
29
Interest Income and Expense. Interest expense increased 15% from $2,757,000
in 2001 to $3,159,000 in 2002 due to increased debt associated with the funding
of acquisitions in August, 2001, capital used in our development program and
issuance of warrants associated with working capital loans.
Unrealized Gain (Loss) on Derivative Instruments. The estimated future fair
value of derivative instruments at December 31, 2002 resulted in an unrealized
loss of $1,597,000 in 2002 compared to an unrealized gain of $4,215,000 in 2001.
Also in 2001, an unrealized loss of $3,747,000, resulting from the cumulative
effect of adopting SFAS No. 133 "Accounting for Derivative Instruments and Other
Hedging Activities," was recorded.
Loss on Sale of Property and Equipment. We recorded a loss on sale of
property and equipment of $57,000 in 2002 as compared to $118,000 in 2001. See
Note 3 to the Audited Financial Statements.
Dividends on preferred stock due was $112,000 and paid was $112,000 in
2002. Dividends on preferred stock due was $56,000 and paid was $28,000 in 2001.
Contractual Obligations
Our obligations as of December 31, 2004, under contractual obligations with
maturities exceeding one year, were as follows:
Total 2005 2006 2007 2008 2009 5 years
------------- ------------- ---------- ---------- --------- -------- ------------
Long-term debt obligations $ 23,603,897 $ 22,798,447 $ 506,565 $ 286,673 $ 12,212 $ - $ -
Operating lease obligations 302,279 132,979 135,323 33,977 - - -
Asset retirement obligations 1,144,854 - - 49,034 20,989 - 1,074,831
------------- ------------- ---------- ---------- --------- -------- ------------
$ 25,051,030 $ 22,931,426 $ 641,888 $ 369,684 $ 33,201 $ - $ 1,074,831
============= ============= ========== ========== ========= ======== ============
Financial Condition and Capital Resources.
At March 31, 2005, our current assets exceeded our current liabilities by
$1,867,656, while at December 31, 2004 our current liabilities exceeded our
current assets by $33,353,875. The improvement was attributable to repayment of
debt with proceeds from the sale of the Series G Preferred Stock. For the first
quarter of 2005 we had a loss of $3,547,445 compared to a loss of $303,003 for
the same period in 2004. The loss for 2005 included, however, a non-cash loss of
approximately $2.1 million ($1.3 million after tax) associated with the change
in our estimate of the fair value of our hedges, compared to a gain of
approximately $.3 in the 2004 quarter, and approximately $2.4 million ($1.2
million after tax) in charges related to the non cash writeoff of unamortized
issuance cost associated with the debt retired on February 28, 2005.
At December 31, 2004, our current liabilities exceeded our current assets
by $33,353,875, primarily because of the classification of approximately $29.6
million of Company debt as current. Substantially all of that debt was paid off
in conjunction with the February 28, 2005 investment by Oaktree Capital
Management (see below). We had income available to common shareholders of
$7,616,609 compared to a loss available to common shareholders of $3,151,509 at
December 31, 2003.
On April 27, 2004, we completed an $18,000,000 financing package with new
energy lenders. We used $15,700,000 in net proceeds from the financing to retire
existing debt of $27,584,145, resulting in forgiveness of debt of $12,475,612,
the elimination of a hedging liability and the return to the Company of Series F
Preferred Stock with an aggregate liquidation preference of $1,000,000 (this
preferred stock, at the request of the Company, was transferred by the previous
lender to a financial advisor to the Company and to two companies affiliated
with two directors of the Company in satisfaction of Company obligations to
them). (See "Certain Relationships and Related Transactions.") This taxable gain
resulting from these transactions will be completely offset by available net
operating loss carryforwards. The term of the note was eighteen months and it
bore interest at the prime rate plus 11%. This rate would increase by .75% per
month beginning in month ten. We paid the new lenders $1,180,000 in cash fees
and also issued them warrants to purchase 2,035,621 shares of our Common Stock
at an exercise price of $.01 per share, expiring in five years. The warrants are
subject to anti-dilution provisions. In connection with the February 2005
transactions described below, the anti-dilution provisions were amended such
that additional issuances of stock (other than issuances to all holders) would
not trigger an adjustment to the number of shares issuable upon exercise of the
warrants.
30
On January 7, 2005, we amended our April 2004 credit agreement to extend
the target date for repayment to February 28, 2005. We exercised this option on
January 26, 2005. We issued 29,100 shares of our common stock in connection with
this amendment.
In a subsequent event, on February 28, 2005, we sold in a private
placement, 81,000 shares of our Series G Preferred Stock to OCM GW Holdings for
an aggregate offering price of $40.5 million. GOGC issued, in a private
placement, 2,000 shares of our Series A Preferred Stock, having a liquidation
preference of $1.0 million, to OCM GW Holdings for $1.5 million. Net proceeds of
the offerings of approximately $38 million after expenses are being used for the
repayment of substantially all of our outstanding debt and other past due
liabilities and for general corporate purposes.
The Series G Preferred Stock bears a coupon of 8% per year, has an
aggregate liquidation preference of $40.5 million (excluding accrued dividends),
is convertible in the Common Stock at $0.90 per share and is senior to all of
our outstanding capital stock. For the first four years after issuance, we may
defer the payment of dividends on the Series G Preferred Stock and these
deferred dividends will also be convertible into our Common Stock at $0.90 per
share. In addition, the Series G Preferred Stock is entitled to nominate and
elect a majority of the members of the Board of Directors.
In connection with these transactions, the terms of the Series A Preferred
Stock have been amended such that by March 15, 2005, all such stock would either
convert into a newly created Series H Preferred Stock on a one for one basis or
into Common Stock at a conversion price of $0.35 per share. The Series H
Preferred Stock is required to be paid a dividend of 40 shares of Common Stock
per share of Series H Preferred Stock per year. In addition, the Series H
Preferred Stock is convertible into Common Stock at a conversion price of $0.35
per share. At March 15, 2005, holders of 6,700 shares of Series A Preferred
Stock converted to Series H Preferred Stock and holders of 3,250 shares of
Series A Preferred Stock converted to an aggregate 4,642,859 shares of Common
Stock. One Series H Preferred Stock holder immediately converted its shares of
Series H Preferred Stock to 285,715 shares of Common Stock and 1,250 shares have
subsequently converted. The outstanding Series H Preferred Stock has an
aggregate liquidation preference of $2.625 million. The Series H Preferred Stock
is senior to all of our outstanding capital stock other than Series G Preferred
Stock.
In addition, we amended the terms of our 9,000 shares of Series E Preferred
Stock such that the coupon of 6% per year they bear may be deferred for the next
four years and these deferred dividends will be convertible into Common Stock at
conversion price of $0.90 per share. The initial liquidation preference of the
Series E Preferred Stock of $500 per share remains convertible into Common Stock
at $2.00 per share. The Series E Preferred Stock has an aggregate liquidation
preference of $4.5 million (excluding accrued dividends), and is senior to all
of our Common Stock, of equal preference with our Series D Preferred Stock as to
liquidation and junior to our Series G Preferred Stock and H.
31
Inflation and Changes in Prices.
While the general level of inflation affects certain costs associated with
the petroleum industry, factors unique to the industry result in independent
price fluctuations. Such price changes have had, and will continue to have a
material effect on our operations; however, we cannot predict these
fluctuations.
The following table indicates the average crude oil and natural gas prices
received over the last three years by quarter. Average prices per barrel of oil
equivalent, computed by converting natural gas production to crude oil
equivalents at the rate of 6 Mcf per barrel, indicate the composite impact of
changes in crude oil and natural gas prices.
Average Prices(1)
------------------------------
Crude Oil Per
And Natural Equivalent
Liquids Gas Barrel
-------- ------- ----------
(per Bbl) (per Mcf)
2004
----
First $ 27.97 $ 4.87 $ 28.59
Second 30.41 5.34 31.18
Third 32.72 5.44 33.36
Fourth 35.32 5.97 35.58
2003
----
First $ 24.53 $ 5.36 $ 28.08
Second 23.53 4.47 25.04
Third 23.85 4.32 24.86
Fourth 24.99 4.56 25.02
2002
----
First $ 19.40 $ 2.81 $ 18.31
Second 20.75 3.16 19.83
Third 22.04 2.87 19.67
Fourth 22.38 3.56 22.11
----------------------
(1) Average sales price are shown net of the settled amounts of our oil and gas
hedge contracts.
Qualitative and Quantitative Disclosures About Market Risk.
The following market rate disclosures should be read in conjunction with
our financial statements and notes thereto beginning on Page F-1 of this
prospectus. All of our financial instruments are for purposes other than
trading. We only enter into derivative financial instruments in conjunction with
our oil and gas sales price hedging activities. Hypothetical changes in interest
rates and prices chosen for the following stimulated sensitivity effects are
considered to be reasonably possible near-term changes generally based on
consideration of past fluctuations for each risk category. It is not possible to
accurately predict future changes in interest rates and product prices.
Accordingly, these hypothetical changes may not be an indicator of probable
future fluctuations.
32
Interest Rate Risk
At December 31, 2004, we were exposed to interest rate risk on debt with
variable interest rates. At December 31, 2004, we carried variable rate debt of
$30,189,455. Assuming a one percentage point change at December 31, 2004 on our
variable rate debt, the annual pretax net income or loss would change by
$301,895. At March 31, 2005, we had no variable rate debt.
Commodity Price Risk
We hedge a portion of price risk associated with our oil and natural gas
sales through contractual arrangements which are classified as derivative
instruments. During 2004, 2003 and 2002 we entered into derivative arrangements
with financial institutions. We believe that these derivative arrangements,
although not free of risk, allow us to achieve a more predictable cash flow and
to reduce exposure to price fluctuations. However, derivative arrangements limit
the benefit to us of increases in the prices of crude oil and natural gas sales.
Moreover, our derivative arrangements apply only to a portion of our production
and provide only partial price protection against declines in price. Such
arrangements may expose us to risk of financial loss in certain circumstances.
We expect that the monthly volume of derivative arrangements will vary from time
to time. We continuously reevaluate our price hedging program in light of market
conditions, commodity price forecasts, capital spending and debt service
requirements.
As of March 31, 2005, these derivative instruments had an estimated fair
value liability of $3,519,009. A hypothetical change in oil and gas prices could
have an effect on oil and gas futures prices, which are used to estimate the
fair value of our derivative instruments. However, it is not practicable to
estimate the resultant change, if any, in the fair value of our derivative
instruments. The following hedges were in place at March 31, 2005 or were added
subsequent to that date and are effective for the periods shown.
Crude Oil Volume/ Month Average Price/ Unit
--------- ------------- -------------------
May 2004 thru October 2005 Swap 10,000 Bbls $32.00
April 2005 thru June 2005 Swap 2,000 Bbls $56.50
July 2005 thru October 2005 Swap 1,000 Bbls $56.50
November & December 2005 Swap 11,000 Bbls $56.50
January 2006 thru March 2006 Collar 10,000 Bbls Floor $50.00-$59.00 Ceiling
April 2006 thru December 2006 Collar 9,000 Bbls Floor $50.00-$59.00 Ceiling
January 2007 thru December 2007 Collar 3,000 Bbls Floor $45.00-$59.45 Ceiling
Natural Gas Volume/ Month Average Price/ Unit
----------- ------------- -------------------
June 2004 thru October 2005 Swap 60,000 MMBTU $5.15
April 2005 thru June 2005 Swap 20,000 MMBTU $7.45
July 2005 thru October 2005 Swap 10,000 MMBTU $7.45
November & December 2005 Swap 70,000 MMBTU $7.45
January 2006 thru December 2006 Collar 70,000 MMBTU Floor $6.00-$8.25 Ceiling
January 2007 thru December 2007 Collar 20,000 MMBTU Floor $6.00-$6.95 Ceiling
These volumes represent approximately 75% of the estimated production (for
both oil and natural gas) on currently producing properties for the remainder of
2005 and for 2006 and approximately 30% of estimated production for 2007.
We also had the following put options in place during the first quarter of
2005, for the months reflected. These contracts were terminated in conjunction
with the new swap and costless collars added in March 2005.
33
Crude Oil Monthly Volume Price per Bbl
--------- -------------- -------------
November 1, 2005 to April 30, 2006 7,000 Bbls $25.75 put
May 1, 2006 to October 31, 2006 6,000 Bbls $25.75 put
November 1, 2006 to April 30, 2007 5,000 Bbls $25.75 put
Natural Gas Monthly Volume Price per MMBTU
----------- -------------- ---------------
November 1, 2005 to April 30, 2006 50,000 MMBTU $4.50 put
May 1, 2006 to October 31, 2006 40,000 MMBTU $4.50 put
November 1, 2006 to April 30, 2007 30,000 MMBTU $4.50 put
At the end of each reporting period we are required by SFAS 133 to record
on our balance sheet the marked to market valuation of our derivative
instruments. These valuations are based on the NYMEX strip prices for those
future periods, as of the balance sheet date. As a result of these agreements,
we recorded a non-cash charge to earnings of $2,013,481 for the three month
period ended March 31, 2005 and a benefit of $287,847 for the three month period
ended March 31, 2004. The estimated change in fair value of the derivatives is
reported in Other Income and Expense as unrealized (gain) loss on derivative
instruments. The estimated fair value of the derivatives is reported in Other
Liabilities as derivative instruments.
Oil and gas sales are adjusted for gains or losses related to the effective
portion of hedging transactions as the underlying hedged production is sold.
Changes in fair value of the ineffective portion of designated hedges or for
derivative arrangements that do not qualify as hedges are recognized in the
consolidated statement of income as derivative gain or loss. Adjustments to oil
and gas sales realized from our hedging activities resulted in a reduction in
revenues of $1,841,209, $1,496,303 and $368,776 in 2004, 2003 and 2002,
respectively. In addition, we accrued an unrealized gain/(loss) on derivatives
of ($1,505,527), $537,526 and ($1,596,575) in 2004, 2003 and 2002, respectively,
for the fair value of the hedges at each balance sheet date. See Note 1 to our
audited Consolidated Financial Statements included in this prospectus for
additional discussion on derivative instruments.
All hedges which were in existence at March 31, 2004 were canceled as part
of our debt restructuring on April 27, 2004. As of December 31, 2004, new
derivative instruments in place had an estimated liability fair value of
$1,505.527.
More generally, dramatic price volatility in the natural gas and oil
markets has existed the past several years. In fact, the average quoted prices
for natural gas hovered around the low levels of $2.10 per Mcf in January 2002,
with the expectation of further decreases. However, the market prices
dramatically reversed in the summer months of 2002 and have continued to
increase.
Financial Statements and Supplementary Data
Information with respect to this our financial statements and supplementary
data is contained in our financial statements beginning on Page F-1 of the
financial section of this prospectus.
34
BUSINESS AND PROPERTIES
This summary highlights selected information contained elsewhere in this
prospectus. The following summary does not contain all of the information that
may be important. You should read the detailed information appearing elsewhere
in this prospectus before making an investment decision. Certain terms that we
use in our industry are italicized and defined in the "Glossary of Industry
Terms and Abbreviations". Unless otherwise indicated, all references to "Crimson
Exploration", the "Company", "we", "us" and "our" refer to Crimson Exploration
Inc. or our predecessor, GulfWest Energy Inc., and our subsidiaries.
Our Business.
We are primarily engaged in the acquisition, development, exploitation and
production of crude oil and natural gas, primarily in the onshore producing
regions of the United States. Our focus is on increasing production from our
existing properties through further exploitation, development and exploration,
and on acquiring additional interests in undeveloped crude oil and natural gas
properties. Our 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. This represents over 98% of our
gross revenues.
2. Operating overhead and other income that consists of administrative fees
received for operating crude oil and natural gas properties for other working
interest owners, and for marketing and transporting natural gas for those
owners. This also includes earnings from other miscellaneous activities. Our
operations are considered to fall within a single industry segment, which is the
acquisition, development, production and servicing of crude oil and natural gas
properties. See " Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Our Common Stock is traded over-the-counter (OTC) under the symbol "CXPI".
Our Company.
We were formed as a corporation under the laws of the State of Utah in 1987
as Gallup Acquisitions, Inc., and subsequently changed our name to First
Preference Fund, Inc. in 1992. We became a Texas corporation by a merger
effected in July 1992, through which our name became GulfWest Oil Company. On
May 21, 2001, we changed our name to GulfWest Energy Inc. We became a Delaware
corporation by merger effected on June 29, 2005 in which our name became Crimson
Exploration Inc.
Our principal office is located at 480 North Sam Houston Parkway East,
Suite 300, Houston, Texas 77060 and our telephone number is (281) 820-1919.
Crimson Exploration Inc. has six active and four inactive, direct or
indirect, wholly owned subsidiaries. The active subsidiaries are:
1. GulfWest Oil & Gas Company, a Texas corporation, was organized February
18, 1999 and is the owner of record of interests in certain crude oil and
natural gas properties located in Colorado and Texas. It has one wholly owned
subsidiary, GulfWest Oil & Gas Company (Louisiana) LLC.
2. GulfWest Oil & Gas Company (Louisiana) LLC, a Louisiana company, was
formed July 31, 2001 and is the owner of record of interests in certain crude
oil and natural gas properties in Louisiana.
35
3. SETEX Oil and Gas Company, a Texas corporation, was organized August 11,
1998 and is the operator of crude oil and natural gas properties in which we own
a majority working interest.
4. RigWest Well Service, Inc., a Texas corporation, was organized September
5, 1996 and operates well servicing equipment for our own account and for others
when not being utilized for our own account.
5. DutchWest Oil Company, a Texas corporation, was organized July 28, 1997
and is the owner of record of interests in certain crude oil and natural gas
properties located along the Gulf Coast of Texas.
6. GulfWest Development Company, a Texas corporation, was organized
November 9, 2000 and is the owner of record of interests in certain crude oil
and natural gas properties located in Texas and Mississippi.
Balance. At December 31, 2004, our proved reserves were comprised of 38%
crude oil and 62% natural gas. We will continue to expand our role in the
domestic natural energy industry by (i) acquiring additional interests in crude
oil and natural gas properties, (ii) increasing the production and reserve base
of our existing producing properties, and (iii) acquiring ownership of more
natural gas gathering systems and pipelines. Our goal is to have greater control
of our natural gas transportation and marketing, and an expanded role in the
transportation of natural gas produced by other parties in our area of
operations. We are presently focusing our workover and development efforts on
both crude oil and natural gas reserves to take advantage of the higher prices
of both commodities.
Financial Recapitalization
On April 27, 2004, we completed an $18,000,000 financing package with new
energy lenders. We used $15,700,000 in net proceeds from the financing to retire
existing debt of $27,584,145, resulting in forgiveness of debt of $12,475,612,
the elimination of a hedging liability and the return to the Company of Series F
Preferred Stock, par value $.01 per share and liquidation value $500 per share
(the "Series F Preferred Stock"), with an aggregate liquidation preference of
$1,000,000. This preferred stock, at our request was transferred by the previous
lender to a financial advisor of ours and to two companies affiliated with two
of our directors in satisfaction of our obligation to them. (See "Certain
Relationships and Related Transactions.") The taxable gain resulting from these
transactions will be completely offset by available net operating loss
carryforwards. The term of the note was eighteen months and it bore interest at
the prime rate plus 11%. This rate increased by .75% per month beginning in
month ten. We paid the new lenders $1,180,000 in cash fees and also issued them
warrants to purchase 2,035,621 shares of our Common Stock at an exercise price
of $.01 per share, expiring in five years. The warrants are subject to
anti-dilution provisions. In connection with the February 2005 transactions
described below, the anti-dilution provisions were amended such that additional
issuances of stock (other than issuances to all holders) would not trigger an
adjustment to the number of shares issuable upon exercise of the warrants.
Simultaneously, our wholly-owned subsidiary, GulfWest Oil & Gas Company
("GOGC"), completed the initial phase of a private offering of its Series A
Preferred Stock, par value $.01 and liquidation value $500 per share (the
"Series A Preferred Stock") for $4,000,000. The Series A Preferred Stock is
exchangeable into our Common Stock based on a liquidation value of $500 per
share of Series A Preferred Stock divided by $.35 per share of our Common Stock,
or 11,428,571 shares. As part of an advisory fee, we issued $500,000 of the
Series A Preferred Stock to a financial advisor. One of our former directors
purchased $1,500,000 of the Series A Preferred Stock.
On January 7, 2005, we amended our April 2004 credit agreement to extend
the target date for repayment to February 28, 2005. We exercised this option on
January 26, 2005. We issued 29,100 shares of our common stock in connection with
this amendment.
36
In a subsequent event, on February 28, 2005, we sold in a private
placement, 81,000 shares of our Series G Preferred Stock, par value $0.01 per
share and liquidation value $500 per share (the "Series G Preferred Stock"), to
OCM GW Holdings, LLC, an affiliate of Oaktree Capital Management, LLC for an
aggregate offering price of $40.5 million. In addition, GOGC issued, in a
private placement, 2,000 shares of its Series A Preferred Stock, having an
aggregate liquidation preference of $1.0 million, to OCM GW for $1.5 million.
Net proceeds of the offerings of approximately $38 million after expenses are
being used for the repayment of substantially all of our debt, other past due
liabilities and for general corporate purposes.
The Series G Preferred Stock bears a coupon of 8% per year, has an
aggregate liquidation preference of $40.5 million (excluding accrued dividends),
is convertible to the Common Stock at $0.90 per share of Common Stock and is
senior to all of our outstanding capital stock. For the first four years after
issuance, we may defer the payment of dividends on the Series G Preferred Stock
and these deferred dividends will also be convertible into our Common Stock at
$0.90 per share. In addition, the Series G Preferred Stock is entitled to
nominate and elect a majority of the members of our Board of Directors.
In connection with these transactions, the terms of the Series A Preferred
Stock have been amended such that by March 15, 2005, all such stock would either
convert into a newly created Series H Preferred Stock, par value $.01 and
liquidation value $500 per share (the "Series H Preferred Stock") on a one for
one basis or into Common Stock at a conversion price of $0.35 per share of
Common Stock. The Series H Preferred Stock is required to be paid a dividend of
40 shares of Common Stock per share of Series H Preferred Stock per year. In
addition, the Series H Preferred Stock is convertible into Common Stock at a
conversion price of $0.35 per share. At March 15, 2005, holders of 6,700 shares
of Series A Preferred Stock converted to Series H Preferred Stock and holders of
3,250 shares of Series A Preferred Stock converted to an aggregate 4,642,859
shares of Common Stock. One holder of the Series H Preferred Stock also
immediately converted its shares to 285,715 shares of Common Stock and 1,250
shares subsequently converted. The outstanding Series H Preferred Stock has an
aggregate liquidation preference of $2.625 million. The Series H Preferred Stock
is senior to all of our outstanding capital stock except Series G Preferred
Stock.
In addition, we amended the terms of our 9,000 shares of Series E Preferred
Stock, par value $.01 and liquidation value $500 per share (the "Series E
Preferred Stock"), such that the coupon of 6% per year they bear may be deferred
for the next four years and these deferred dividends will be convertible into
Common Stock at conversion price of $0.90 per share. The initial liquidation
preference of the Series E Preferred Stock of $500 per share remains convertible
into Common Stock at $2.00 per share. The Series E Preferred Stock has an
aggregate liquidation preference of $4.5 million (excluding accrued dividends),
is senior to our Common Stock, of equal preference with respect to liquidation
with our Series D Preferred Stock, par value $.01 and liquidation value $500 per
share (the "Series D Preferred Stock") and junior to our Series G Preferred
Stock and Series H Preferred Stock.
Our Business Strategy
We have pursued a business strategy of acquiring interests in crude oil and
natural gas producing properties where production and reserves can be increased
through exploitation activities. Such activities include workovers, development
drilling, recompletions, replacement or addition of equipment and waterflood or
other secondary recovery techniques. Key elements of our business strategy
include:
Development and Exploitation of Existing Properties. Our strategy is to
increase crude oil and natural gas production and reserves of our existing
assets through relatively low-risk development activities, such as performing
workovers, recompletions and horizontal drilling from existing wellbores,
infield drilling and more efficiently using production facilities.
37
Continued Acquisition Program. We acquired properties in four crude oil and
natural gas fields in Texas and Louisiana in the year 2001. Though capital
constrained since 2001, to the extent financial resources are available, we
intend to continue to pursue the acquisition of interests in crude oil and
natural gas properties (i) held by small, under-capitalized operators and (ii)
being divested by larger independent and major oil and gas companies.
Significant Operating Control. Currently, we are the operator of all but
two of the wells in which we own working interests. This operating control
enables us to better manage the nature, timing and costs of developing and
servicing such wells, and the timing and marketing of the resulting production.
Ownership of Workover Rigs. We currently own two workover service rigs and
one swabbing unit that we operate for our own account. By owning and operating
this equipment, we are better able to control costs, quality of operations and
availability of equipment and services.
Expanded Exploration and Exploitation Role. Historically, we have not
drilled exploratory wells due to the cost and risk associated with drilling
prospective locations. However, since the end of 1998, we have acquired
producing properties that have included significant acreage for prospective oil
and gas exploration. These include producing wells and acreage in Grimes,
Hardin, Jim Wells, Madison, Palo Pinto, Refugio, Wharton and Zavala, Counties,
Texas; Adams, Arapaho, Elbert and Weld Counties, Colorado; Cameron Parish,
Louisiana; and Jones County, Mississippi. These acquisitions have added existing
natural gas and crude oil production to our asset base and, as importantly, have
provided us with immediate geological databases for development drilling
opportunities as well as the potential for generating exploratory opportunities
on the acquired acreage. We have expanded our evaluation efforts in these fields
and intend to increase our development of reserves through workovers of existing
wells and by drilling additional wells. As we develop exploration opportunities
on these properties or see high-quality prospects generated by others, as
capital resources are available, we will complement our development activities
with capital for exploratory or exploitation projects.
Our Employees.
At March 31, 2005, we had 30 full time employees, of whom 14 were field
personnel. None of our employees are covered by collective bargaining
agreements.
Our Properties.
At December 31, 2004, we owned a total of 250 gross wells, of which 137
were producing, 95 were shut-in or temporarily abandoned and 18 were injection
or saltwater wells. We owned an average 89% working interest in the 137 gross
(120 net) producing wells. Gross wells are the total wells in which we own a
working interest. Net wells are the sum of the fractional working interests we
own in gross wells. Our part of the estimated proved reserves these properties
contain was approximately 3 million barrels (MMBL) of oil and 29.1 billion cubic
feet (Bcf) of natural gas at December 31, 2004. Substantially all of our
properties are located onshore or shallow inland waters in Texas, Colorado and
Louisiana.
38
Proved Reserves.
The following table reflects our estimated proved reserves at December 31
for each of the preceding three years.
2004 2003 2002
-------- -------- --------
Crude Oil (MBbl)
Developed 2,575 3,773 4,026
Undeveloped 388 1,265 1,496
-------- -------- --------
Total 2,963 5,038 5,552
======== ======== ========
Natural Gas (MMcf)
Developed 20,966 24,642 25,374
Undeveloped 8,125 8,018 8,785
-------- -------- --------
Total 29,091 32,660 34,159
======== ======== ========
Total (MBOE) 7,812 10,481 11,215
======== ======== ========
(a) Approximately 78% of our total proved reserves were classified as
proved developed at December 31, 2004.
(b) Barrel of Oil Equivalent (BOE) is based on a ratio of 6,000 cubic feet
of natural gas for each barrel of oil.
Standardized Measure of Discounted Future Net Cash Flows.
The following table sets forth as of December 31 for each of the preceding
three years, the estimated future net cash flow from and standardized measure of
discounted future net cash flows of our proved reserves, which were prepared in
accordance with the rules and regulations of the SEC and the Financial
Accounting Standard Board. Future net cash flow represents future gross cash
flow from the production and sale of proved reserves, net of crude oil and
natural gas production costs (including production taxes, ad valorem taxes and
operating expenses) and future development costs. The calculations used to
produce the figures in this table are based on current cost and price factors at
December 31 for each year. We cannot assure you that the proved reserves will
all be developed within the periods used in the calculations or that prices and
costs will remain constant.
2004 2003 2002
-------------- -------------- --------------
Future cash inflows $ 290,998,312 $ 336,795,385 $ 308,381,837
Future production and development costs-
Production 80,880,330 109,468,727 105,629,872
Development 24,141,982 21,460,459 23,350,811
Future net cash flows before income taxes 185,976,000 205,866,199 179,401,154
Future income taxes (49,871,272) (46,885,360) (38,611,577)
Future net cash flows after income taxes 136,104,728 158,980,839 140,789,577
10% annual discount for estimated timing
of cash flows (52,602,351) (70,653,419) (63,165,742)
Standardized measure of discounted
future net cash flows(1) $ 83,502,377 $ 88,327,420 $ 77,623,835
============== ============== ==============
39
-------------------
(1) The average sales prices utilized in the estimation of our proved reserves
were $40.41 per Bbl and $5.89 per Mcf, $29.51 per Bbl and $5.82 per Mcf,
and $28.72 per Bbl and $4.43 per Mcf at December 31, 2004, 2003 and 2002,
respectively.
Significant Properties.
Summary information on our properties with proved reserves is set forth
below as of December 31, 2004.
Present
Productive Wells Proved Reserves Value(1)
---------------------- --------------------------- ----------
Gross Net
Productive Productive Crude Natural
Wells Wells Oil Gas Total Amount
---------- ---------- -------- --------- -------- ----------
(MBbl) (MMcf) (MBOE) ($M)
Texas 80 75.91 1,295 15,663 3,906 $ 57,706
Colorado 37 24.81 278 5,550 1,203 13,676
Louisiana 19 18.88 1,383 7,878 2,696 42,549
Mississippi 1 0.37 7 - 7 126
Total 137 119.97 2,963 29,091 7,812 $ 114,057
-------------------
(1) The average sales prices used in the estimation of our proved reserves were
$40.41per Bbl and $5.89 per Mcf at December 31, 2004.
All information set forth herein relating to our proved reserves, estimated
future net cash flows and present values is taken from reports prepared by
Pressler Petroleum Consultants, independent petroleum engineers. The estimates
of these engineers were based upon their review of production histories and
other geological, economic, ownership and engineering data provided by and
relating to us. No reports on our reserves have been filed with any federal
agency. In accordance with the SEC's guidelines, our estimates of proved
reserves and the future net revenues from which present values are derived are
made using year end crude oil and natural gas sales prices held constant
throughout the life of the properties (except to the extent a contract
specifically provides otherwise). Operating costs, development costs and certain
production-related taxes were deducted in arriving at estimated future net
revenues, but such costs do not include debt service, general and administrative
expenses and income taxes.
There are numerous uncertainties inherent in estimating crude oil and
natural gas reserves and their values, including many factors beyond our
control. The reserve data set forth in this prospectus are based upon estimates.
Reservoir engineering is a subjective process, which involves estimating the
sizes of underground accumulations of crude oil and natural gas that cannot be
measured in an exact manner. The accuracy of any reserve estimate is a function
of the quality of available data, engineering and geological interpretation of
that data, and judgment. As a result, estimates of different engineers,
including those used by us, may vary. In addition, estimates of reserves are
subject to revision based upon actual production, results of future development,
exploitation and exploration activities, prevailing crude oil and natural gas
prices, operating costs and other factors. Such revisions may be material.
Accordingly, reserve estimates are often different from the quantities of crude
oil and natural gas that are ultimately recovered and are highly dependent upon
the accuracy of the assumptions upon which they are based. We cannot assure you
that the estimates contained in this prospectus are accurate predictions of our
crude oil and natural gas reserves or their values. Estimates with respect to
proved reserves that may be developed and produced in the future are often based
upon volumetric calculations and upon analogy to similar types of reserves
rather than upon actual production history. Estimates based on these methods are
generally less reliable than those based on actual production history.
Subsequent evaluation of the same reserves based upon production history will
result in potentially substantial variations in the estimated reserves.
40
Production, Revenue and Price History.
The following table sets forth information (associated with our proved
reserves) regarding production volumes of crude oil and natural gas, revenues
and expenses attributable to such production (all net to our interests) and
certain price and cost information for the years ended December 31, 2004, 2003
and 2002.
2004 2003 2002
------------- ------------- -------------
Production
Oil (Bbl) 173,865 221,433 278,374
Natural gas (Mcf) 1,033,433 1,191,350 1,487,048
------------- ------------- -------------
Total (BOE) 346,104 419,991 526,215
Revenue
Oil production $ 5,498,598 $ 5,362,657 $ 5,859,568
Natural gas production 5,602,516 5,481,803 4,587,601
------------- ------------- -------------
Total $ 11,101,114 $ 10,844,460 $ 10,447,169
Operating Expenses $ 4,879,754 $ 5,527,841 $ 5,430,205
Production Data
Average sales price (1)
Per barrel of oil $ 31.63 $ 24.22 $ 21.05
Per Mcf of natural gas $ 5.42 $ 4.60 3.09
Per BOE $ 32.07 $ 25.82 19.85
Average expenses per BOE
Lease operating $ 14.10 $ 13.16 $ 10.32
Depreciation, depletion and
Amortization $ 6.31 $ 5.30 $ 5.13
General and administrative $ 5.83 $ 5.39 $ 3.28
------------------
(1) Average sales prices are shown net of the settled amounts of our oil and
gas hedge contracts. Average sales prices per BOE, before adjustments for
the hedge contracts, were $37.39, $29.38 and $20.55 in 2004, 2003 and 2002,
respectively.
Productive Wells at December 31, 2004:
The following table shows the number of productive wells we own by
location:
Gross Net Gross Net
Oil Wells Oil Wells Gas Wells Gas Wells
--------- --------- --------- ---------
Texas 31 29.99 49 45.92
Colorado 21 13.45 16 11.36
Louisiana 14 13.88 5 5.00
Mississippi 1 0.37 - -
--------- --------- --------- ---------
Total 67 57.69 70 62.28
========= ========= ========= =========
41
Developed Acreage at December 31, 2004.
The following table shows the developed acreage that we own, by location,
which is acreage spaced or assigned to productive wells. Gross acres are the
total acres in which we own a working interest. Net acres are the sum of the
fractional working interests we own in gross acres.
Gross Acres Net Acres
------------- ---------
Texas 9,055 8,439
Colorado 6,000 4,020
Louisiana 1,320 1,315
------------- ---------
Total 16,375 13,774
============= =========
Undeveloped Acreage at December 31, 2004.
The following table shows the undeveloped acreage that we own, by location.
Undeveloped acreage is acreage on which wells have not been drilled or completed
to a point that would form the basis to determine whether the property is
capable of production of commercial quantities of crude oil and natural gas.
Gross Acres Net Acres
------------- ---------
Texas 20,420 17,920
Colorado 11,000 8,250
Louisiana 375 375
------------- ---------
Total 31,795 26,545
============= =========
Drilling Results.
In 2004, we drilled one well that was completed as a successful gas well.
The well was located in Grimes County, Texas and was drilled during the fourth
quarter of 2004. The well was completed, brought on-line in mid-January 2005 and
has produced at any average rate of 600 Mcf per day (net to our interest) for
the first 60 days. We did not drill any wells in 2003. In 2002, we drilled one
exploratory well, in which we own an 18% working interest, that resulted in a
dry hole and one development well, in which we own 100% working interest, that
is currently productive.
Costs Incurred
The following table shows the costs incurred in our oil and gas producing
activities for the past three years:
2004 2003 2002
------------ ------------ ------------
Property Acquisitions
Proved $ 6,742 - $ 562,760
Unproved 17,347 110,119 14,401
Development Costs 6,117,899 2,024,663 5,141,075
------------ ------------ ------------
$ 6,141,988 $ 2,134,782 $ 5,718,236
============ ============ ============
42
Property Dispositions
The following table shows oil and gas property dispositions:
2004 2003 2002
------------ ------------ ------------
Oil and gas properties $ 5,425,040 $ 31,979 $ 464,806
Accumulated DD&A (1,659,001) (11,569) (21,375)
------------ ------------ ------------
Net oil and gas properties $ 3,766,039 20,410 $ 443,431
============ ============ ============
As a result of these sales we recorded a loss of $2,029,932 in 2004 and
$20,409 in 2003 and a gain of $21,569 in 2002.
Marketing
We sell substantially all of our crude oil and natural gas production to
purchasers pursuant to sales contracts that typically have a thirty-day primary
term, although occasionally we enter into longer term contracts when it is
advantageous to do so. The sales prices for crude oil and condensate are tied to
industry standard posted prices plus negotiated premiums. The sales prices for
natural gas are based upon published index prices, subject to negotiated price
deductions.
Legal Proceedings
From time to time, we are involved in litigation relating to claims arising
out of our operations or from disputes with vendors in the normal course of
business. As of July 25, 2005, we were not engaged in any legal proceedings that
are expected, individually or in the aggregate, to have a material adverse
effect on us.
43
MANAGEMENT
The following table sets forth information on our directors and executive
officers at July 25, 2005:
Year First Elected
Name Age Position Director or Officer
Allan D. Keel 45 President, Chief Executive 2005
Officer and Director
E. Joseph Grady 52 Senior Vice President and Chief 2005
Financial Officer
B. James Ford 36 Director 2005
Skardon F. Baker 35 Director 2005
Lee B. Backsen 64 Director 2005
Lon McCain 57 Director 2005
Thomas R. Kaetzer 45 Senior Vice President of 1998
Operations
Tracy Price 46 Senior Vice President - 2005
Land/Business Development
Tommy Atkins 46 Senior Vice President - 2005
Exploration
Jay S. Mengle 51 Senior Vice President - 2005
Engineering
Richard L. Creel 55 Vice President of Finance and 1998
Controller
Jim C. Bigham 68 Vice President and Secretary 1991
Allan D. Keel was appointed Chief Executive Officer and President and
joined the Company's board of directors on February 28, 2005. Prior to joining
us, Mr. Keel was Vice President/General Manager of Westport Resources, Houston
office during 2004 . In this role he was responsible for WRC's Gulf of Mexico
operations including acquisitions, development and exploration. In 2003, Mr.
Keel served as a consultant to both domestic and international companies in
building their presence in the Gulf of Mexico. From mid 2000 until mid 2001, Mr.
Keel served as a Vice President at Enron Energy Finance where he worked on
private equity transactions and volumetric production payments. From 2001
through 2002, Mr. Keel served as President and CEO of Mariner Energy Company, a
majority owned affiliate of Enron. Subsequent to Enron's bankruptcy and its
decision to sell Mariner, Mr. Keel partnered with Oaktree Capital Management,
LLC in an effort to acquire the company. From 1996 until mid-2000, Mr. Keel was
Vice President/General Manager for Westport Resources, where he built the Gulf
of Mexico division from a grassroots effort. From 1984 to 1996, Mr. Keel was
with Energen Resources where he directed the company's exploration, joint
venture and acquisition activities. He received BS and MS degrees in geology
from the University of Alabama and an MBA from the Owen School of Management at
Vanderbilt University. Mr. Keel was appointed pursuant to the terms of the
Series G Preferred Stock.
44
E. Joseph Grady was appointed Vice President and Chief Financial Officer on
February 28, 2005. E. Joseph Grady is managing director of Vision Fund Advisors,
Inc., a financial advisory firm he co-founded in 2001. Mr. Grady has over
twenty-five years of financial, operational and administrative experience. He
was formerly Senior Vice President - Finance and Chief Financial Officer of
Texas Petrochemicals Holdings, Inc. from April 2003 to July 2004 and Vice
President - Chief Financial Officer and Treasurer of Forcenergy Inc. from 1995
to 2001.
B. James Ford became a member of the Company's board of directors on
February 28, 2005. Mr. Ford is a Managing Director of Oaktree Capital
Management, LLC. Prior to joining Oaktree in June 1996, Mr. Ford was a
consultant with McKinsey & Co., and a financial analyst in the Investment
Banking Department of PaineWebber Incorporated. Mr. Ford earned a Bachelor of
Arts in Economics from the University of California at Los Angeles and an M.B.A.
from the Stanford University Graduate School of Business. He currently serves as
a director of Cebridge Connections, LLC and National Mobile Television. Mr. Ford
was appointed pursuant to the terms of the Series G Preferred Stock.
Skardon F. Baker became a member of the Company's board of Directors on
February 28, 2005. Mr. Baker is a Vice President of Oaktree Capital Management,
LLC. Prior to joining Oaktree in 2004, Mr. Baker spent four years at J.P. Morgan
Chase & Co. and its predecessor organizations, serving most recently as a Vice
President in the Mergers and Acquisitions group responsible for identifying and
executing leveraged transactions for the firm's financial sponsor client base.
Mr. Baker also served as Executive Aide to Geoff Boisi and Don Layton, co-CEOs
of JP Morgan's investment bank. Prior thereto, Mr. Baker was a Director and
Associate at The Beacon Group, LLC, a merger advisory and private investment
firm. Prior to Beacon, Mr. Baker received an M.B.A. from Harvard Business School
and a J.D. from the University of Texas School of Law, where he was Associate
Editor of The Texas Law Review. During his time in graduate school, Mr. Baker
worked at McKinsey & Co. and Vinson & Elkins, LLP. Prior to graduate school, Mr.
Baker served as Chief Speechwriter and Special Assistant for the Office of
Governor George W. Bush. Before that, he was a Lieutenant in the United States
Army. Mr. Baker received a B.A. degree in Government magna cum laude from
Harvard University. Mr. Baker was appointed pursuant to the terms of the Series
G Preferred Stock.
Lee B. Backsen was elected as a new director at our June 1, 2005 annual
shareholders' meeting. He is Vice President - Exploration for Andex Resources,
LLC, a private oil and gas producing company, with responsibility for sourcing
exploration joint ventures. From 2000 until joining Andex in 2004, Mr. Backsen
was a consulting geologist for Continental Land & Fur Co., Inc. and Grant
Geophysical, Inc., for whom he screened exploratory prospects in the Texas and
Louisiana Gulf Coast Basins. Prior to establishing his consulting practice in
2000, Mr. Backsen spent over 35 years in the industry in senior exploration
management positions with Burlington Resources Inc., UMC Petroleum Corporation,
General Atlantic Gulf Coast Inc., Kerr McGee Corporation, Pelto Oil Company,
Spectrum Oil and Gas Company and Shell Oil Company. Mr. Backsen earned Bachelor
of Science degree and Masters of Science degree in Geology from Iowa State
University.
Lon McCain was elected as a new director at our June 1, 2005 annual
shareholders' meeting. He was Vice President, Treasurer and Chief Financial
Officer of Westport Resources Corporation, a large, publicly traded exploration
and production company, from 2001 until the sale of that company to Kerr McGee
Corporation in 2004. From 1992 until joining Westport, Mr. McCain was Senior
Vice President and Principal of Petrie Parkman & Co., an investment banking firm
specializing in the oil and gas industry. From 1978 until joining Petrie
Parkman, Mr. McCain held senior financial management positions with Presidio Oil
Company and Petro-Lewis Corporation and Ceres Capital. Mr. McCain received a
B.S. of Business Administration and a Masters of Business Administration/Finance
from the University of Denver. Mr. McCain has also been an Adjunct Professor of
Finance at the University of Denver since 1982.
45
Thomas R. Kaetzer was appointed senior vice president and chief operating
officer of the Company on September 15, 1998. From December 21, 1998 to February
28, 2005 he served as president and a director. Effective April 1, 2005, he was
appointed as Senior Vice President of Operations. He was Chief Executive Officer
from March 20, 2001 until May 12, 2004. Prior to joining us, Mr. Kaetzer had 17
years experience in the oil and gas industry, including 14 years with Texaco
Inc., which involved the evaluation, exploitation and management of oil and gas
assets. He has both onshore and offshore experience in operations and production
management, asset acquisition, development, drilling and workovers in the
continental U.S., Gulf of Mexico, North Sea, Colombia, Saudi Arabia, China and
West Africa. Mr. Kaetzer has a Masters Degree in Petroleum Engineering from
Tulane University and a Bachelor of Science Degree in Civil Engineering from the
University of Illinois.
Tracy Price was appointed Senior Vice President - Land/Business Development
on April 1, 2005. Mr. Price joined the Company after serving as the Senior Vice
President - Land/Business Development for The Houston Exploration Company from
2001 until joining the Company. Prior to his tenure at The Houston Exploration
Company, Mr. Price served as Manager of Land and Business Development for
Newfield Exploration Company between 1990 and 2001. From 1986 to 1990 Mr. Price
was Land Manager for Apache Corporation. Prior to Apache, Mr. Price has also
served in similar land management capacities at Challenger Minerals Inc. and
Phillips Petroleum Company. Mr. Price received his BBA in Petroleum Land
Management from the University of Texas.
Tommy Atkins was appointed Senior Vice President - Exploration on April 1,
2005. Mr. Atkins joined the Company after serving as the General Manager - Gulf
of Mexico for Newfield Exploration Company where he was employed from 1998 until
joining the Company. Prior to his tenure at Newfield, Mr. Atkins served in
various exploration capacities with EOG Resources and its predecessor companies
from 1984 to 1998, including prospect generator, development geologist and
finally as Exploration Manager. Mr. Atkins also worked at the Superior Oil
Company from 1981 through 1984. Mr. Atkins received a BS in Geology from the
University of Oklahoma.
Jay S. Mengle was appointed Senior Vice President - Engineering on April 1,
2005 after serving as the Shelf Asset Manager - Gulf of Mexico for Kerr McGee
Corporation subsequent to the 2004 merger with Westport Resources. Mr. Mengle
was with Westport Resources from 1998 to 2004, where he started Westport's Gulf
Coast/Gulf of Mexico drilling and production operations. Prior to joining
Westport, Mr. Mengle also served in various drilling, production and marketing
management capacities at Norcen Energy Resources, Kirby Exploration and Mobil
Oil Corp. Mr. Mengle received his BS in Petroleum Engineering from the
University of Texas.
Richard L. Creel has served as controller of the Company since May 1, 1997
and was elected vice president of finance on May 28, 1998. Prior to joining the
Company, Mr. Creel served as Branch Manager of the Nashville, Tennessee office
of Management Reports and Services, Inc. He has also served as controller of TLO
Energy Corp. He has extensive experience in general accounting, petroleum
accounting and financial consulting and income tax preparation.
Jim Bigham has served as secretary since 1991 and as executive vice
president of the Company since 1996 until February 2005, and thereafter as vice
president. Prior to joining the Company, he held management and sales positions
in the real estate and printing industries. Mr. Bigham is also a retired United
States Air Force Major. During his military career, he served in both command
and staff officer positions in the operational, intelligence and planning areas.
46
Directors are elected annually and hold office until the next annual
meeting or until their successors are duly elected and qualified.
Board Meetings and Committees
Our board of directors has established an audit committee and a
compensation committee.
The audit committee was established to review and appraise the audit
efforts of our independent auditors, and monitor our accounts, procedures and
internal controls. On June 1, 2005, Skardon F. Baker and Lon McCain were
appointed to the audit committee.
The function of the compensation committee is to fix the annual salaries
and other compensation for our officers and key employees. On June 1, 2005, B.
James Ford and Lee B. Backsen were appointed to the compensation committee.
Compensation of Directors
The shareholders approved an amended and restated Employee Stock Option
Plan on May 28, 1998, which included a provision for the payment of reasonable
fees in cash or stock to directors. Effective July 15, 2004 the board of
directors established a 2004 Stock Option and Compensation Plan in which
directors were eligible to participate. The board of directors approved a 2005
Stock Incentive Plan effective February 28, 2005, which includes directors as
eligible participants under the plan. Due to limited capital resources, no fees
were paid to directors in 2004. On June 1, 2005, our board approved a
compensation plan for non-employee directors providing for a $10,000 annual
retainer, with a $2,000 ($1,000 if by telephone) meeting attendance fee, for a
maximum of $8,000 per director per year, with an additional fee payable for
attendance of committee meetings held on days other than those on which the
board meets. The chairman of the audit and compensation committee is entitled to
receive an annual retainer of $5,000 and $2,500, respectively. Under the plan,
effective June 1, 2005, each non-employee director was entitled to receive
$15,000 of restricted stock, with a two year vesting schedule, and upon
re-election is entitled to receive $10,000 in restricted stock, with a one year
vesting schedule. The number of shares are determined based on the fair market
value of our common stock on the date of grant. In addition, the plan provides
for reimbursement of expenses for all directors in the performance of their
duties, including reasonable travel expenses incurred attending meetings.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation paid to
our chief executive officers and another executive officer (and an individual
for whom disclosure would be provided but for the fact that he was not serving
as an executive officer) whose total annual compensation is $100,000 or more
during the last fiscal year ended December 31, 2004.
47
Annual Compensation Long Term Compensation Awards
-------------------------------------------- -----------------------------------
Other
Annual Restricted All Other
Name and Principal Compen- Stock Compen-
Position Year End Salary($) Bonus($) sation($)(5) Awards($) Options(#) sation($)
----------------------- -------- ---------- -------- ------------ ----------- ----------- -----------
John E. Loehr(1)
Chief Executive Officer 2004 - - - - - -
2003 - - - - - -
2002 - - - - - -
Thomas R. Kaetzer(2)
President 2004 $ 150,000 - $ 25,000 - 210,000(2) -
2003 $ 150,000 - $ 25,000 - - -
2002 $ 144,167 - $ 25,000 - 100,000(2) (3)
Marshall A. Smith(4) 2004 $ 150,000 - $ 25,000 - - -
2003 $ 150,000 - $ 25,000 - - -
2002 $ 150,000 - $ 25,000 - - -
------------------
(1) During 2004 Mr. Loehr, a director, served as Chief Executive Officer from
May 12, 2004. He received no compensation for his services as Chief
Executive Officer.
(2) Mr. Kaetzer joined us as chief operating officer in September, 1998, was
elected president in December, 1998 and was elected chief executive officer
on March 20, 2001. He served as chief executive officer until May 12, 2004.
He received a base annual salary of $150,000, plus a $25,000 annual
contribution to a life insurance savings account paid monthly. In his
employment agreement, Mr. Kaetzer was entitled to receive 5-year warrants
to purchase 300,000 shares of common stock to be issued 100,000 each year
over a three year period, beginning in 2002. After receiving warrants to
purchase 100,000 shares of common stock in 2002, Mr. Kaetzer elected to
receive options rather than warrants. In 2003, Mr. Kaetzer elected to defer
receipt of options to purchase 100,000 shares of common stock until 2004.
(3) During 2002, pursuant to his employment agreement, Mr. Kaetzer received
warrants to purchase 100,000 shares of common stock exercisable at $0.75 a
share. At March 31, 2005, the closing price for a share of our common stock
was $1.16 and on April 30, 2002, the date on which the warrants were
received, the closing price was $.56 a share.
(4) Mr. Smith served as chief executive officer until March 20, 2001 and as
chairman of the board until his resignation on May 11, 2002. As chairman of
the board, Mr. Smith devoted full time to the business. Effective June 1,
2002, he resigned as an executive officer and became a paid consultant at
an annual fee of $150,000, plus a $25,000 annual contribution to a life
insurance savings account to be paid monthly. His consulting agreement
expired September 30, 2004.
(5) Perquisites that are less than 10% of the individual's bonus and salary in
the aggregate for any named executive officer are not disclosed in the
table in accordance with SEC rules.
48
Option Grants During 2004
The following table sets forth certain information concerning stock options
granted to the named executive officers during the year ended December 31, 2004.
Percent of
Total
Number of Options
Securities Granted to Grant Date
Underlying Employees Exercise or Present
Options in Fiscal Base Price Expiration Value($)
Name Granted(#) Year ($/share) Date (1)
----------------- ----------- ---------- ------------- ------------ -----------
John E. Loehr - - - - -
Thomas R. Kaetzer 100,000 7% $ 0.75 7/15/2009 $ 22,000
110,000 7% 0.45 9/1/2008 29,700
Marshall A. Smith - - - - -
------------------
(1) Present value for this option was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: (1) risk
free interest rate 2004- 3.0%, 2003 - 3.0%; 2002 - 3.0%; (2) weighted
average expected life 2004- 3.0, 2003 - 3.4; 2002 - 3.6; (3) expected
volatility of 2004- 94.32%, 2003 - 147.43%; 2002 - 101.73%; and (4) no
expected dividends. The present value of stock options granted is based on
a theoretical option-pricing model. In actuality, because the company's
employee stock options are not traded on an exchange, optionees can receive
no value nor derive any benefit from holding stock options under these
plans without an increase in the market price of the company's stock. Such
an increase in stock price would benefit all shareholders commensurately.
Option Exercises During 2004 and
Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at FY End(1) Options at FY End(2)
Exercisable/ ($) Exercisable/
Name Unexercisable Unexercisable
----------------------- ----------------------- ---------------------
John E. Loehr(3) 20,000/0 $ 2,600
Thomas R. Kaetzer(3)(4) 210,000/0 60,300
Marshall A. Smith 20,000/0 2,600
------------------
(1) No shares were acquired or value realized upon the exercise of options
since no options were exercised by the named executive officers in 2004.
(2) A market price of $0.88 a share was used based on the closing price of our
common stock at December 30, 2004, the last day of the fiscal year on which
a closing price for our common stock was reported.
(3) Does not include 100,000 and 125,000 warrants exercisable by Mr. Kaetzer at
December 31, 2004 for $.75 and $.875 a share, respectively, or 270,000
warrants held by Mr. Loehr at December 31, 2004 exercisable for $.75 a
share. Mr. Kaetzer's warrants for 100,000 shares of common stock
exercisable at $.875 a share expired in January 2005.
(4) Includes options for 100,000 and 110,000 shares exercisable for $.75 and
$.45 a share, respectively.
Employment Agreements
Effective October 1, 2001, we entered into an Employment Agreement with Mr.
Thomas R. Kaetzer, former president and chief executive officer for a period of
three years. Under the Employment Agreement, Mr. Kaetzer received a base annual
salary of $150,000, plus a $25,000 annual contribution to a life insurance
savings account to be paid monthly. Under his Employment Agreement, Mr. Kaetzer
was entitled to receive 5-year warrants to purchase 300,000 shares of common
stock to be issued 100,000 each year over a three year period, beginning in
2002. Except for the warrants for 100,000 shares of common stock issued in April
2002, Mr. Kaetzer elected to receive options to purchase common stock. In the
event of a change of control, Mr. Kaetzer would have had the option to continue
as an employee under the terms of the Employment Agreement or receive a lump-sum
cash severance payment equal to 200% of his annual base salary for the year
following the change of control. The Employment Agreement terminated by its
terms on September 30, 2004.
49
Effective June 1, 2002, we entered into a Consulting Agreement with Mr.
Marshall A. Smith III, which expires September 30, 2004. Under the Consulting
Agreement, Mr. Smith received an annual consulting fee of $150,000, plus a
$25,000 annual contribution to a life insurance savings account to be paid
monthly. In the event of a change of control, Mr. Smith would have had the
option to continue as a consultant under the terms of the Consulting Agreement
or receive a lump-sum cash severance payment equal to 200% of his annual
consulting fee for the year following the change of control. The Consulting
Agreement terminated by its terms on September 30, 2004.
Effective February 28, 2005, we entered into employment agreements with two
officers, Allan D. Keel (President and Chief Executive Officer) and E. Joseph
Grady (Senior Vice President and Chief Financial Officer). Each agreement has a
term of three years with automatic yearly extensions unless we or the officer
elects not to extend the agreement. Each agreement provides for a base salary
and, starting in calendar year 2006 and thereafter, an annual discretionary
bonus of 0% to 100% of each officer's base salary to be established by our Board
of Directors or a duly authorized committee. Mr. Keel will receive a base salary
of $240,000 per year and a first year bonus of $120,000 for the year ending
December 31, 2005, payable on or before February 26, 2006. Mr. Grady will
receive a base salary of $220,000 per year and a first year bonus of $110,000
for the year ending December 31, 2005, payable on or before February 25, 2006.
Effective April 1, 2005, we entered into employment agreements with three
newly appointed officers: Tracy Price (Senior Vice President - Land/Business
Development); Tommy Atkins (Senior Vice President - Exploration); and Steven
Mengle (Senior Vice President - Engineering). In addition, on April 1, 2005 the
Company entered into a new Employment Agreement with Thomas R. Kaetzer as Senior
Vice President of Operations; previously Mr. Kaetzer had served as our President
and Chief Operating Officer. Each agreement has a term of two years with
automatic yearly extensions unless we or the officer elects not to extend the
agreement. Each agreement provides for a base salary and, starting in calendar
year 2006 and thereafter, an annual discretionary bonus of 0% to 70% of each
officer's base salary to be established by our Board of Directors or a duly
authorized committee. Mr. Price will receive a base salary of $185,000 per year,
Mr. Kaetzer, Mr. Atkins and Mr. Mengle will each receive a base salary of
$180,000 per year.
Each of these agreements provides for severance and change-in-control
payments in the event we terminate an officer's employment "without Cause" or if
the officer terminates for "Good Reason." "Cause" and "Good Reason" are narrowly
defined. "Change of Control" is deemed to occur when less than 10% of our common
stock is beneficially owned by Oaktree Capital Management, LLC and its
affiliates. If an officer is terminated by us "without Cause" or the officer
resigns for "Good Reason" then that officer will receive (A) a cash amount equal
to the greater of (i) two times the sum of the calendar year's base salary and
the prior year's discretionary bonus and (ii) $600,000 (or $500,000, in the case
of Mr. Price, Mr. Mengle, Mr. Atkins and Mr. Kaetzer) and (B) health insurance
benefits for two years from the termination date. If an officer is terminated by
us "without Cause" or the officer resigns for "Good Reason" within 90 days
before or 12 months after a Change of Control, payment of the entire cash
severance amount will be made in a lump sum on the earlier of the date on which
the Change of Control occurs and the officer's effective date of termination.
Upon termination by us "without Cause" or by the officer for "Good Reason", the
officer will receive half of the cash severance amount in a lump sum within 15
days of termination. The remainder of the cash severance payment will be made
when the officer gives 30 days' notice to us prior to the conclusion of the 12
month period following the termination date agreeing to comply with non-compete
and non-solicitation provisions for an additional 12 months.
50
On February 28, 2005, the Company entered into Stock Option Agreements with
Mr. Keel and Mr. Grady. Mr. Grady received 900,000 options to purchase the
Company's Common Stock at an exercise price of $0.97 per share, 1,350,000
options to purchase the Company's Common Stock at an exercise price of $1.25 per
share, and 1,800,000 options to purchase the Company's Common Stock at an
exercise price of $1.70 per share. Mr. Keel received 2,700,000 options to
purchase the Company's Common Stock at an exercise price of $0.97 per share,
4,050,000 options to purchase the Company's Common Stock at an exercise price of
$1.25 per share, and 5,400,000 options to purchase the Company's Common Stock at
an exercise price of $1.70 per share.
On April 1, 2005, the Company entered into Stock Option Agreements with Mr.
Price, Mr. Mengle, Mr. Atkins and Mr. Kaetzer. Mr. Price received 900,000
options to purchase the Company's Common Stock at an exercise price of $1.16 per
share and 1,800,000 options to purchase the Company's Common Stock at an
exercise price of $1.70 per share. Mr. Mengle received 450,000 options to
purchase the Company's Common Stock at an exercise price of $1.16 per share and
900,000 options to purchase the Company's Common Stock at an exercise price of
$1.70 per share. Mr. Atkins received 383,000 options to purchase the Company's
Common Stock at an exercise price of $1.16 per share and 767,000 options to
purchase the Company's Common Stock at an exercise price of $1.70 per share. Mr.
Kaetzer received 333,333 options to purchase the Company's Common Stock at an
exercise price of $1.16 per share and 666,667 options to purchase the Company's
Common Stock at an exercise price of $1.70 per share.
Each set of options granted will become vested and exercisable with respect
to 15% of the shares on the first anniversary of the date granted and thereafter
at the end of each full succeeding year from the date granted according to the
following: 25% on the second anniversary, an additional 25% on the third
anniversary and 35% on the fourth anniversary at which time each set of granted
options will be vested and exercisable.
Stock Incentive Plans
Effective July 15, 2004, The Board of Directors approved the 2004 Stock
Option and Compensation Plan in which employees, directors and advisors could
receive nonqualified stock options. There are options to purchase 1,500,000
shares of Common Stock outstanding under the 2004 Plan. The Board of Directors
has approved a 2005 Stock Incentive Plan effective February 28, 2005. The Plan
allows us to grant (a) Incentive Stock Options, (b) Nonstatutory Stock Options,
(c) Restricted Awards, (d) Unrestricted Awards, (e) Performance Awards, (f)
Stock Appreciation Rights and (g) Dividend Equivalent Rights ("Awards").
Employees, Consultants and Directors of the Company and its Affiliates are
eligible to receive Awards. The maximum number of shares of common stock
issuable under the Plan may not exceed 27 million, unless and to the extent
awards under the 2004 Stock Option and Compensation Plan are forfeited, expire
or terminate. Options were issued to Mr. Keel, Mr. Grady, Mr. Price, Mr. Mengle,
Mr. Atkins and Mr. Kaetzer, and restricted stock awards granted to our
non-employee directors, pursuant to this Plan, as described above.
See "Description of Our Securities--Outstanding Options and Warrants" for
the terms of our outstanding options and warrants.
Compensation Committee Interlocks and Insider Participation
During fiscal year 2004, Messrs. Waggoner, Loehr (until May 12 of that
year) and Manolis served on the Compensation Committee. During fiscal year 2004,
no interlocking relationship existed between any member of the Board or
Compensation Committee and any member of the Board or Compensation Committee of
any other company.
51
During April 2004, entities controlled by Mr. Loehr and Mr. Manolis
received 400 and 1,000 shares, respectively, of a series of our preferred stock,
in consideration for services performed for the Company. Another entity which
Mr. Loehr managed purchased 200 shares of another series of our preferred stock
in April 2004 for $500 per share. In addition, an entity co-owned by Mr. Loehr
and another former director received approximately $1.3 million at the closing
of our February 2005 preferred stock offering in consideration for that entity's
interest in certain properties which it had acquired from a third party in 2004,
in consideration for satisfaction of monetary obligations owed by us to that
party under an agreement. See "Certain Relationships and Related Transactions"
below.
52
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of July 25, 2005 regarding
the beneficial ownership by each person known to us to own beneficially 5% or
more of the outstanding common stock or 5% of any other class of our voting
securities, and ownership of each class of our equity securities by each
director, certain named executive officers, and the directors and executive
officers as a group. The persons named in the table have sole voting and
investment power with respect to all shares of common stock owned by them,
unless otherwise noted.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For the purpose of calculating the number of
shares beneficially owned by a shareholder and the percentage ownership of that
shareholder, shares of common stock subject to options and similar rights that
are currently exercisable or convertible or exercisable or convertible within 60
days of the date of this prospectus by that shareholder are deemed outstanding.
Unless otherwise specified, the title of the class of securities reported in the
table below is of our common stock.
Name and Address of Title of Amount and Nature of
Beneficial Owner Class Beneficial Ownership Percent %
---------------------------------- ---------- ---------------------- -----------
Allan D. Keel(1,2) Common 363,333 1.24
Series G 600 0.74
E. Joseph Grady(2)
Tracy Price(2)
Tommy Atkins(2)
Jay S. Mengle(2)
Thomas R. Kaetzer(2,3) 608,852 2.09
Jim C. Bigham(2,4) 260,985 0.90
Richard L. Creel(2,5) 200,000 0.69
B. James Ford(6,7)
Skardon F. Baker(6,7)
Lee B. Backsen(2)
Lon McCain(2)
All current directors and officers Common 1,433,170 4.79
as a group (12 persons)(8) Series G 600 0.74
Oaktree Capital Management, Common 46,634,332 61.81
LLC(7,9) Series G 76,700 94.69
Series H 2,000 38.09
J. Virgil Waggoner(10, (11)) Common 16,866,218 46.70
Series H 3,000 57.14
------------------
1. Includes 333,333 shares underlying convertible preferred stock and 30,000
shares underlying warrants to purchase common stock.
2. Shareholder's address is 480 N. Sam Houston Parkway East, Suite 300,
Houston, Texas 77060. 3. Includes 296,226 shares owned directly, 2,626
shares owned by his wife and 310,000 shares subject to
currently exercisable warrants.
4. Includes 210,000 shares subject to currently exercisable warrants and
options. 5. Includes 180,000 subject to currently exercisable options. 6.
Excludes shares held by OCM GW Holdings, LLC, of which they disclaim
beneficial ownership. 7. c/o Oaktree Capital Management, LLC, 333 South
Grand Avenue, Los Angeles, California 90071.
8. Includes 730,000 shares subject to currently exercisable warrants and
options and 333,333 shares underlying convertible preferred stock.
9. Reported common stock includes 46,607,665 shares underlying Series G and
Series H convertible preferred stock (including accrued dividends on the
Series G Preferred Stock) held directly by OCM GW Holdings, LLC. The
reported shares are owned directly by OCM GW Holdings, LLC. OCM Principal
Opportunities Fund III, L.P. ("Fund") and OCM Principal Opportunities Fund
IIIA, L.P. ("Fund IIIA") are the direct beneficial owners of Holdings. Fund
is the managing member of Holdings and Oaktree Capital Management LLC
("Oaktree") is the managing member of OCM Principal Opportunities Fund III
GP, LLC ("Fund GP"), the general partner of the Fund and Fund IIIA.
Although each of Fund, Fund IIIA, Fund GP and Oaktree may be deemed an
indirect beneficial owner of the securities, each of them disclaims
beneficial ownership of those shares except to the extent of its pecuniary
interest in them.
53
10. Reported common stock includes 4,285,715 shares underlying Series H
convertible preferred stock, 2,350,274 shares underlying Series E
convertible preferred stock (including accrued dividends thereon), 625,000
shares subject to currently exercisable warrants, and 20,000 shares subject
to currently exercisable options. Shareholder granted OCM GW Holdings, LLC
an irrevocable proxy and entered into Share Restriction Agreement on
February 28, 2005, which currently applies only to class votes of the
Series H Preferred Stock. See "Description of Securities."
11. Shareholder's address is 6605 Cypresswood Drive, Suite 250 Spring, Texas
77379.
54
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Transactions With Management and Others
As described in "Business and Properties - Financial Recapitalization" OCM
GW Holdings purchased 81,000 shares of Series G Preferred Stock and 2,000 shares
of Series A Preferred Stock for $42 million. In addition, on May 17, 2005, we
executed a promissory note for the benefit of OCM GW Holdings, in the principal
amount of $1 million, payable on the earlier of July 17, 2005 and the day on
which we are able to make draws under a credit facility under which greater than
$1 million may be borrowed. Interest on the unpaid principal accrued at 4.59%
per annum. We repaid the note in full on July 19, 2005 from borrowings under our
new $100 million senior secured revolving credit facility. Skardon F. Baker, a
director, is a vice president of and B. James Ford, also a director, is a
managing director of Oaktree Capital Management, LLC, the ultimate parent of OCM
GW Holdings. See "Security Ownership of Certain Beneficial Owners and
Management."
In connection with our April 2004 financing, J. Virgil Waggoner, a former
director, and Star-Tex Trading Co., an entity managed by John E. Loehr, an
officer and a director at the time, purchased 3,000 shares and 200 shares,
respectively, of Series A Preferred Stock at a price of $500 per share. The
shares of common stock underlying such Series A and Series H Preferred Stock
(which the Series A Preferred Stock was exchanged for) are included in this
prospectus. On November 6, 2002, Mr. J. Virgil Waggoner, a director, provided us
a loan in the initial amount of $1,200,000, which was subsequently increased to
a total of $1,500,000, which was outstanding at February 28, 2005. We issued Mr.
Waggoner a promissory note with interest at the prime rate (prime rate 4.0% at
May 26, 2004), secured by common stock of our of wholly-owned subsidiary,
DutchWest Oil Company. Mr. Waggoner also received warrants to purchase 625,000
shares of our common stock at an exercise price of $.75 per share. Those
underlying shares are included in this prospectus. The note with accrued
interest was paid off in connection with the February 2005 offering, for a total
payment amount of $1,727,655. In addition, in December 2002, Mr. Waggoner
purchased 9,000 shares of our Series E Preferred Stock for $800,000. The shares
of common stock issuable upon conversion of the Series E Preferred Stock are
included in this prospectus.
In December 2001, the Company and Summit Investment Group Texas L.L.C.,
entered into an agreement (the "Summit Agreement") relating to the development
of oil and gas properties in several counties in Texas. On March 5, 2004, we
entered into an Option Agreement for the Purchase of Oil and Gas Leases (the
"Addison Agreement") with W. L. Addison Investments L.L.C., a private company
owned by Mr. J. Virgil Waggoner and Mr. John E. Loehr, two of our former
directors ("Addison"). Under the Addison Agreement, Addison agreed to pay
Summit, on our behalf, the non-recouped and outstanding advanced funds under the
agreement amounting to $1,200,000, thereby retiring the Summit Agreement except
for certain surviving obligations with respect to areas of mutual interest and
lease bank agreements expiring in 2008 and Summit retained the right to
participate up to a 25% working interest in the drilling of any wells on the
leases acquired by Addison. For consideration of such payment, Addison acquired
certain oil and gas leases and wellbores from Summit but agreed to grant us a
180-day redemption option (which was extended by mutual consent on July 15,
2004) to purchase the same for $1,200,000, plus interest at the prime rate plus
2%. In substitution for an account payable to Summit, we granted Addison a
promissory note for $600,000, with interest at the prime rate plus 2%. The
Addison promissory note would be considered paid in full if we exercised the
redemption option by paying the $1,200,000, plus interest. We exercised the
redemption option and Addison received $1,275,353 at the closing of the February
2005 offering and waived its rights under the agreement to retain up to a 25%
working interest under the leases.
55
As part of the April 2004 refinancing, a former lender agreed to return all
2,000 shares of our Series F Preferred Stock held by it. Rather than receive the
shares as treasury shares (which would have meant cancellation of the series) at
our request the former lender transferred 400 of the shares to ST Advisory
Corp., an entity owned by John E. Loehr, our former Chief Executive Officer and
also a former director, 400 of the shares to a financial advisor to the Company,
and 200 of the shares to Thomas R. Kaetzer, our President and a director at that
time and 1,000 shares to Intermarket Management LLC, an entity partially owned
by M. Scott Manolis, one of our directors at that time. These transfers were to
compensate Mr. Kaetzer, the financial advisor and the entities controlled by Mr.
Loehr and Mr. Manolis for service to the Company. The shares of common stock
underlying such shares of Series F Preferred Stock are included in this
prospectus.
As part of the closing of the February 2005 offering, the investor and the
Company agreed to pay certain legal, accounting and other due diligence costs
and, also certain closing fees which totaled approximately $3.75 million. Of
this certain related parties received the following fees: OCM GW Holdings, LLC
$1,000,000; Intermarket Management LLC $500,000 (Mr. Manolis, one of our
directors at the time, is an owner of Intermarket Management); Mr. Allan D. Keel
$300,000 (which was used to invest in the subject offering).
56
DESCRIPTION OF SECURITIES
General
The following descriptions are summaries of material terms of our common
stock, preferred stock, certificate of incorporation and bylaws. This summary is
qualified by reference to our certificate of incorporation, bylaws and the
designations of our preferred stock, which have been previously filed as
exhibits to our public filings with the Securities and Exchange Commission, and
by the provisions of applicable law.
We are authorized to issue 200 million shares of common stock, par value
$.001 per share. As of July 25, 2005, there were 28,835,699 shares of our sole
class of common stock issued and outstanding, and held by approximately 700
beneficial owners. On an "as converted" basis, if all of the common stock
underlying our various convertible and derivative securities, including warrants
and granted employee stock options, outstanding at July 25, 2005 is issued by
us, the number of our outstanding shares of common stock will increase to
approximately 111.4 million shares.
Our common stock is traded over-the-counter (OTC) under the symbol "CXPI".
Fidelity Transfer Company, 1800 South West Temple, Suite 301, Box 53, Salt Lake
City, Utah 84115, (801) 484-7222 is the transfer agent for the common stock.
Our Common Stock
The holders of our common stock are entitled, among other things, to one
vote per share on each matter submitted to a vote of shareholders and, in the
event of liquidation, to share ratably in the distribution of assets remaining
after payment of liabilities (including preferential distribution and dividend
rights of holders of preferred stock). The common stock does not have cumulative
voting rights. The holders of the outstanding shares of the common stock, voting
with the holders of the Series H Preferred Stock on an as converted basis,
elect, by plurality vote, all of the directors not entitled to be elected by
holders of the Series G Preferred Stock voting as a class, who are entitled to
elect a majority of our Board of Directors.
Holders of common stock have no preemptive or other rights to subscribe for
shares. Holders of common stock are entitled to such dividends as may be
declared by the Board out of funds legally available therefor. We have never
paid cash dividends on the common stock and do not anticipate paying any cash
dividends in the foreseeable future. As described below, the terms of our
preferred stock may limit our ability to declare and pay dividends on the common
stock.
Our Preferred Stock
Our board of directors is authorized, without further shareholder action,
to issue preferred stock in one or more series and to designate the dividend
rate, voting rights and other rights, preferences and restrictions of each such
series.
As of July 25, 2005, there were 103,250 shares of preferred stock, par
value $0.01 per share, issued and outstanding in four series, including 8,000
shares of Series D Preferred Stock (the "Series D Preferred Stock"), 9,000
shares of Cumulative Convertible Preferred Stock, Series E (the "Series E
Preferred Stock"), 81,000 shares of Series G Convertible Preferred Stock (the
"Series G Preferred Stock") and 5,250 shares of Series H Preferred Stock (the
"Series H Preferred Stock"; collectively, "Preferred Stock"). The 8,000 shares
of Series D Preferred Stock are held by a former director, as are the 9,000
shares of Series E Preferred Stock. The 81,000 shares of Series G Preferred
Stock are held by OCM GW Holdings, an officer, and 10 other investors. The 5,250
shares of Series H Preferred Stock are held by 11 parties including 3,000 shares
by a former director and 2,000 shares by OCM GW Holdings. Our preferred stock is
senior to our common stock regarding liquidation. All of our Series F Preferred
Stock and GulfWest Oil & Gas Company's Series A Preferred Stock has either
converted to or been exchanged for common stock or, in the case of the Series A
Preferred Stock, Series H Preferred Stock.
57
The Series D Preferred Stock does not have voting rights except as required
by law, is not entitled to dividends, nor is it redeemable. However it is
convertible to common stock at any time. None of the 8,000 outstanding shares of
Series D Preferred Stock has been converted. On a fully converted basis, the
8,000 shares of Series D Preferred Stock would convert to 500,000 shares of
common stock. The Series D Preferred Stock is of equal priority with the Series
E Preferred Stock as to liquidation, and has a $500 per share liquidation value.
The Series E Preferred Stock is entitled to receive cumulative dividends at
the rate of 6% per year, expressed as a percentage of the stock's $500
liquidation value plus accrued and unpaid dividends, payable quarterly. Except
as permitted in the certificate of designation for the Series E Preferred Stock,
dividends may not be paid on the common stock or other junior stock unless
dividends on the Series E Preferred Stock have been paid. Dividends on the
Series E Preferred Stock will accrue but not be paid until March 31, 2009, at
which time we will commence quarterly dividend payments. Deferred dividends on
the Series E Preferred Stock may be paid to the extent the board of directors
elects to do so or dividends on the Series G Preferred Stock are paid for a
quarter. Accrued dividends on the Series E Preferred Stock may be converted to
common stock at a conversion price of $0.90. Accrued and unpaid deferred
dividends are to be paid on liquidation or, at our option, with the consent of
the holders affected, at any time. The Series E Preferred Stock is redeemable in
whole or in part at any time, at our option, at a price of $500 per share, plus
all accrued and undeclared or unpaid dividends; except that, prior to our
redemption, the holders of record shall be given a 60-day written notice of our
intent to redeem and the opportunity to convert the Series E Preferred Stock to
common stock. The conversion price for the Series E Preferred Stock is based on
$2.00 per share of common stock. Upon a change of control, the Series E
Preferred Stock is redeemable at the holder's election at the same redemption
price, provided that holders may convert their shares to common stock prior to
the redemption date. The Series E Preferred Stock automatically converts to
common stock to the extent OCM GW Holdings and its affiliates convert their
shares of Series G Preferred Stock. The consent of a majority of the Series E
Preferred Stock is required to amend, alter, waive or repeal our charter or
bylaws, if the result would adversely affect the Series E Preferred Stock, or to
increase the number of directors above nine. None of the 9,000 outstanding
shares of Series E Preferred Stock has been redeemed or converted. On a fully
converted basis, the 9,000 shares of Series E Preferred Stock would convert to
2,250,000 shares of common stock, or approximately 2.4 million shares, including
dividends accrued to the last dividend payment date.
The Series G Preferred Stock ranks senior to all outstanding classes of
capital stock. The Series G Preferred Stock provides for an 8% cumulative cash
dividend, expressed as a percentage of the stock's $500 liquidation value plus
accrued and unpaid dividends, which will accrue but not be paid until the
dividend owing April 1, 2009 is required to be paid, at which time we will
commence quarterly dividend payments. Deferred dividends may be paid to the
extent the board of directors elects to do so. Accrued dividends on the Series G
Preferred Stock may be converted to common stock at a conversion price of $0.90.
Accrued and unpaid deferred dividends are to be paid on liquidation or, at our
option, with the consent of the holders affected, at any time. The Series G
Preferred Stock may be redeemed by us after February 28, 2009 if a share of the
underlying common stock trades at a price greater than the $.90 (as adjusted)
conversion price for 30 consecutive trading days, at a price per share of Series
G Preferred Stock equal to $500 plus accrued and unpaid dividends. In addition,
we may be required to redeem the Series G Preferred Stock upon a change of
control or if requested by a majority of holders if we breach the document
governing the Series G Preferred Stock or if OCM GW Holdings and it affiliates
suffer more than $3 million in damages arising from our breaches of covenants,
representations or warranties under the Series G Preferred Stock subscription
agreement or Shareholders Rights Agreement between us and OCM GW Holdings,
provided that holders may convert their shares to common stock prior to the
redemption date. If a dividend, other than a common stock dividend, is declared
on our common stock we will be required to declare a similar distribution with
respect to shares of Series G Preferred Stock on an as-converted basis. The
consent of a majority of the Series G Preferred Stock is required to pay a
dividend or make a distribution on or make any other payment with respect to the
capital stock of the company, except as permitted in the certificate of
designation for the Series G Preferred Stock, or to effect a change in control.
In addition, the consent of the majority of the Series G preferred Stock is
required to issue senior stock or parity stock or to amend, modify or repeal the
Series G certificate of designation or any other preferred stock certificate of
designation, or the charter or bylaws if the result could reasonably be expected
to adversely affect the Series G Preferred Stock. On a fully converted basis,
the 81,000 shares of Series G Preferred Stock would convert to approximately 45
million shares of common stock, or approximately 46.2 million shares, including
dividends accrued up to the last dividend payment date.
58
The Series H Preferred Stock is convertible into common stock at a
conversion price of $0.35 a share and ranks junior to the Series G Preferred
Stock as to dividends and liquidation but senior to all other outstanding
classes of preferred stock of the Company. Holders of the Series H Preferred
Stock are entitled to cumulative quarterly dividends of 10 shares of common
stock per share of Series H Preferred Stock, or 40 shares of common stock
annually per share of Series H Preferred Stock. The Series H Preferred Stock may
be redeemed by us if we elect to redeem the Series G Preferred Stock, at a price
per share of $500, the amount each share is entitled to upon liquidation,
provided that holders may convert their shares to common stock prior to the
redemption date. The Series H Preferred Stock automatically converts to common
stock to the extent OCM GW Holdings and its affiliates convert their Series G
Preferred Stock. The consent of a majority of the Series H Preferred Stock is
required to amend, modify or repeal the certificate of designation for the
Series H Preferred Stock, or the charter if the result could reasonably be
expected to adversely affect the Series H Preferred Stock. In addition, the
consent of a majority of the Series H Preferred Stock is required to pay a
dividend or make a distribution on or make any other payment with respect to our
capital stock, except as permitted in the certificate of designation for the
Series H Preferred Stock. On a fully converted basis, the 5,250 shares of Series
H Preferred Stock would convert into approximately 7.5 million shares of common
stock.
Holders of both the Series G Preferred Stock and Series H Preferred Stock
vote on an as-converted basis with the holders of the common stock. The Series G
Preferred Stock, voting as a class, has the right to elect a majority of our
board. The Series E Preferred Stock has the right to appoint one director in the
event of two or more dividend defaults or our insolvency or similar events. The
conversion rights of each series of preferred stock are subject to anti-dilution
adjustments set forth in the certificate of designation for each series.
Outstanding Options and Warrants
At July 25, 2005, we had outstanding warrants and options for the purchase
of 26,019,000 shares of common stock at prices ranging from $.01 to $1.81 per
share, including employee stock options to purchase 24,324,000 shares at prices
ranging from $.45 to $1.81 per share. If we issue additional shares, the
existing shareholders' percentage ownership of the Company may be further
diluted.
Agreements with Shareholders
We and OCM GW Holdings entered into a Shareholders Rights Agreement on
February 28, 2005 providing OCM GW Holdings with up to four demand registrations
with respect to shares of Series G Preferred Stock and common stock upon the
request of holders holding 50% or more of the registrable securities on an as
converted basis, and unlimited piggyback registration rights. OCM GW Holdings is
entitled to receive monthly financial reports, an annual business plan and
operating budget, periodic filings and other information about us and, in
addition, the agreement provides OCM GW Holdings with board observation rights.
The Shareholders Rights Agreement subjects us to various restrictive covenants
affecting the operation of our business. Further, OCM GW Holdings has a right of
first refusal to purchase any additional securities proposed to be purchased by
a third party from us.
59
We also entered into an Omnibus and Release Agreement with OCM GW Holdings
and certain other shareholders on February 28, 2005, which prohibits those
shareholders from, directly or indirectly, entering into any swap, option,
future, forward or other similar agreement that transfers, in whole or in part,
any of the economic consequences of ownership of any of our newly authorized
Series H Preferred Stock issuable upon exchange of our Series A Preferred Stock
or common stock, although such holders may sell our common stock or, after
February 28, 2007, the Series H Preferred Stock. After February 28, 2007, OCM GW
Holdings and its affiliates have a right of first refusal to acquire any Series
H Preferred Stock if a third party offers to acquire that stock, and the
signatories to the Omnibus and Release Agreement have piggyback registration
rights with respect to certain of the common stock held by them or issuable as a
dividend. The restrictions imposed upon the shareholders that have executed the
Omnibus and Release Agreement do not apply to shares of common stock owned by
these shareholders, whether received upon conversion of the Series H Preferred
Stock or otherwise, except as disclosed above.
Pursuant to a Subscription Agreement dated February 28, 2005, Allan D.
Keel, Chief Executive Officer and President, is subject to restrictions on
transfers of his shares of Series G Preferred Stock for a period of 2 years.
Allan D. Keel and the other purchasers of Series G Preferred Stock are subject
to a right of first offer in favor of OCM GW Holdings, but not with respect to
shares of common stock received upon conversion, and are required to convert
their shares to common stock when Holdings and its affiliates convert their
shares into common stock in the same proportion as OCM GW Holdings and its
affiliates.
J. Virgil Waggoner, a former director, entered into a Share Transfer
Restriction Agreement, dated February 28, 2005, with OCM GW Holdings, and
delivered an Irrevocable Proxy which currently grants OCM GW Holdings a proxy to
vote his Series H Preferred Stock in matters on which the Series H Preferred
Stock may vote as a class until such time as all of Mr. Waggoner's Series H
Preferred Stock has converted into common stock. Mr. Waggoner is subject to
restrictions on the disposition or transfer of the economic or voting rights of
the Series H Preferred Stock owned by him, including prohibitions on transfers
of shares of Series H Preferred Stock or entering into any swap, option, future,
forward or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of any such capital stock, without the
consent of OCM GW Holdings.
In addition, Mr. Waggoner is required to convert any shares of Series H
Preferred Stock he owns into common stock in the same proportion as that
converted by OCM GW Holdings or its affiliates.
Pursuant to the terms of a letter agreement between us and certain equity
investors dated April 22, 2004, on June 1, 2004, we filed a Shelf Registration
Statement on Form S-1 of which this prospectus is a part, which was declared
effective on July 14, 2004, in connection with our April 2004 financing, in
which we initially registered for resale 19,179,192 shares of common stock,
which included shares of common stock exchangeable for the preferred stock
issued in that financing, as well as shares of common stock issuable upon
conversion of preferred stock and exercise of warrants with piggyback
registration rights that we had issued to employees, consultants and lenders. In
connection with our April 2004 financing, we also issued warrants to purchase
2,035,621 shares of common stock and entered into a related warrant agreement
dated April 27, 2004, which provides the holders of common stock issuable upon
exercise of the warrants the right to two demand registrations for two years
from the date of exercise and unlimited piggyback registration rights. The
warrant holders have since exercised their warrants for common stock, and those
shares are included on the S-1 Shelf Registration Statement and are being
offered by this prospectus. We have committed to keep this Registration
Statement effective and current until December 8, 2006.
60
Anti-Takeover Effects of Delaware Laws and Our Charter and Bylaws Provisions
Certificate of Incorporation and Bylaws. Certain provisions in our
Certificate of Incorporation and Bylaws summarized below may be deemed to have
an anti-takeover effect and may delay, deter or prevent a tender offer or
takeover attempt that a shareholder might consider to be in its best interests,
including attempts that might result in a premium being paid over the market
price for the shares held by shareholders.
Our Certificate of Incorporation and Bylaws contain provisions that
(unless, as a general matter, a preferred stock designation provides otherwise
for that series of preferred stock):
o permit us to issue, without any further vote or action by the
shareholders, additional shares of preferred stock in one or more
series and, with respect to each such series, to fix the number of
shares constituting the series and the designation of the series, the
voting powers (if any) of the shares of the series, and the
preferences and relative, participating, optional and other special
rights, if any, and any qualification, limitations or restrictions, of
the shares of such series;
o require special meetings of the shareholders to be called by the
Chairman of the Board, the Chief Executive Officer, the President or
by resolution of a majority of the Board;
o require business at special meetings to be limited to the stated
purpose or purposes of that meeting;
o require that shareholder action to be taken at a meeting rather than
by written consent, unless approved by our board of directors;
o require that shareholders follow certain procedures, including advance
notice procedures, to bring certain matters before an annual meeting
or to nominate a director for election; and
o permit directors to fill vacancies in our Board of Directors.
The foregoing provisions of our Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the board of directors and in the
policies formulated by the board of directors and to discourage certain types of
transactions that may involve an actual or threatened change of control. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal. The provisions also are intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, they also may inhibit fluctuations in the market price of our
common stock that could result form actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in our management.
Delaware Takeover Statute. Section 203 (the "Delaware Business Combinations
Statute") of the Delaware General Corporation Law prohibits certain transactions
between a Delaware corporation and an "interested stockholder," which is broadly
defined as a person (including the affiliates and associates of such person)
that is directly or indirectly a beneficial owner of 15% or more of the voting
power of the outstanding voting stock of a Delaware corporation. This provision
prohibits certain business combinations (including mergers, consolidations,
sales or other dispositions of assets having an aggregate market value of 10% or
more of either the consolidated assets of a company or its outstanding stock,
and certain transactions that would increase the interested stockholder's
proportionate share of ownership in a company or grant the interested
stockholder disproportionate financial benefits) between an interested
stockholder and a company for a period of three years after the date the
interested stockholder acquired its stock, unless: (i) the business combination
or the transaction in which the stockholder became an interested stockholder is
approved by such company's board of directors prior to the date the interested
stockholder becomes an interested stockholder; (ii) the interested stockholder
acquired at least 85% of the voting stock of such company in the transaction in
which it became an interested stockholder; or (iii) the business combination is
approved by a majority of the board of directors and the affirmative vote of
two-thirds of the votes entitled to be cast by disinterested stockholders at an
annual or special meeting.
61
Limitation on Liability of Directors
Section 145 of the Delaware General Corporation Law permits us to indemnify
directors, officers, employees or agents, or persons serving in such capacity at
our request at another entity, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred, other than an action by or in the right of the company, to which such
director, officer, employee or agent may be a party, provided such person shall
have acted in good faith and shall have reasonably believed that his conduct was
in or not opposed to our best interests and, in the case of a criminal
proceeding, that he had no reasonable cause to believe his conduct was unlawful.
In connection with an action by or in the right of the company against a
director, officer, employee or agent, we have the power to indemnify such
director, officer, employee or agent for actual and reasonable expenses
(including attorneys' fees) incurred in connection with the defense or
settlement of such suit (a) if such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to our best interest, and (b) if
found liable to us only if ordered by a court of law. Section 145 provides that
such section is not exclusive of any other indemnification rights granted by us
to directors, officers, employees or agents. The Delaware General Corporation
Law provides for mandatory indemnification of directors and officers where such
director or officer is successful on the merits in the types of proceedings
discussed above.
Our Certificate of Incorporation and Bylaws provide for mandatory
indemnification of directors to the fullest extent authorized or permitted by
applicable law. The right to indemnification is a contract right and includes
the right to be paid by us the expenses incurred in defending any such
proceeding in advance of its final disposition. Our Bylaws provide that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by a director in his capacity as a director or officer may be made only upon
delivery to us of an undertaking to repay all advanced amounts if it is
ultimately determined by final nonappealable judicial decision that such person
is not entitled to be indemnified for those expenses. Such provisions may have
the effect of preventing changes in our management.
Our Certificate of Incorporation also contains a provision eliminating the
liability of a director to us or our shareholders for monetary damages for
breach of fiduciary duty as a director, except to the extent such exemption from
liability or limitation thereof is not permitted by the Delaware General
Corporation Law. The inclusion of these provisions in our Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter shareholders or
management from bringing lawsuits against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
us and our shareholders.
Additionally, we have entered into director indemnification agreements with
all of our directors and our executive officers named in this prospectus
providing for indemnification and advancement of expenses in connection with
legal proceedings. We also maintain directors and officers liability insurance
for our officers and directors.
62
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, we have been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
63
GLOSSARY OF INDUSTRY TERMS AND ABBREVIATIONS
The following are definitions of certain industry terms and abbreviations
used in this prospectus:
Bbl. Barrel.
BOE. Barrel of oil equivalent, based on a ratio of 6,000 cubic feet of natural
gas for each barrel of oil.
Gross Acres or Gross Wells. The total acres or wells, as the case may be, in
which a working interests is owned.
Horizontal Drilling. High angle directional drilling with lateral penetration of
one or more productive reservoirs.
Mcf. One thousand cubic feet.
Net Acres or Net Wells. The sum of the fractional working interests owned in
gross acres or gross wells.
Overriding Royalty Interest. The right to receive a share of the proceeds of
production from a well, free of all costs and expenses, except transportation.
Present Value. The pre-tax present value, discounted at 10%, of future net cash
flows from estimated proved reserves, calculated holding prices and costs
constant at amounts in effect on the date of the report (unless such prices or
costs are subject to change pursuant to contractual provisions) and otherwise in
accordance with the Commission's rules for inclusion of oil and gas reserve
information in financial statements filed with the Commission.
Proceeds of Production. Money received (usually monthly) from the sale of oil
and gas produced from producing properties.
Producing Properties. Properties that contain one or more wells that produce oil
and/or gas in paying quantities (i.e., a well for which proceeds from production
exceed operating expenses).
Productive Well. A well that is producing oil or gas or that is capable of
production.
Prospect. A lease or group of leases containing possible reserves, capable of
producing crude oil, natural gas, or natural gas liquids in commercial
quantities, either at the time of acquisition, or after vertical or horizontal
drilling, completion of workovers, recompletions, or operational modifications.
Proved Reserves. Estimated quantities of crude oil, natural gas, and natural gas
liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic conditions; i.e., prices and costs as of the date the estimate is made.
Reservoirs are considered proved if either actual production or a conclusive
formation test supports economic production.
The area of a reservoir considered proved includes:
a. That portion delineated by drilling and defining by gas-oil or
oil-water contacts, if any; and
b. The immediately adjoining portions not yet drilled but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
64
Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the "proved"
classification when successful testing by a pilot project, or the operation of
an installed program in the reservoir, provides support for the engineering
analysis on which the project or program was based.
Proved Reserves do not include:
a. Oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
b. Crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors;
c. Crude oil, natural gas, and natural gas liquids that may occur in
undrilled prospects; and
d. Crude oil, natural gas, and natural gas liquids that may be
recovered from oil sales and other sources.
Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. Additional oil and
gas expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery should be included as proved developed only after testing by
a pilot project or after operation of an installed program has confirmed through
production response that increased recovery will be achieved.
Proved Undeveloped Reserves. Reserves that are expected to be recovered from new
wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion. Reserves on undrilled acreage shall be
limited to those drilling units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for other units that have
not been drilled can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proven effective by actual tests in the area and in the same reservoir.
Recompletion. The completion for production of an existing wellbore in another
formation from that in which the well has previously been completed.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible oil or gas that is confined by impermeable rock or
water barriers and is individual and separate from other reservoirs.
Royalty. The right to a share of production from a well, free of all costs and
expenses, except transportation.
Royalty Interest. An interest in an oil and gas property entitling the owner to
a share of oil and natural gas production free of costs of production.
65
Standardized Measure. The present value, discounted at 10%, of future net cash
flows from estimated proved reserves, after income taxes, calculated holding
prices and costs constant at amounts in effect on the date of the report (unless
such prices or costs are subject to change pursuant to contractual provisions)
and otherwise in accordance with the Commission's rules for inclusion of oil and
gas reserve information in financial statements filed with the Commission.
Waterflood. An engineered, planned effort to inject water into an existing oil
reservoir with the intent of increasing oil reserve recovery and production
rates.
Working Interest. The operating interest under a lease, the owner of which has
the right to explore for and produce oil and gas covered by such lease. The full
working interest bears 100 percent of the costs of exploration, development,
production, and operation, and is entitled to the portion of gross revenue from
the proceeds of production which remains after proceeds allocable to royalty and
overriding royalty interests or other lease burdens have been deducted.
Workover. Rig work performed to restore an existing well to production or
improve its production from the current existing reservoir.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for us by Akin Gump Strauss Hauer & Feld LLP, Houston, Texas.
EXPERTS
The consolidated financial statements of Crimson Exploration, Inc.
(formerly GulfWest Energy Inc.) and subsidiaries have been included herein and
in the registration statement filed in connection with this offering in reliance
upon the report of Weaver and Tidwell, L.L.P., independent registered public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
Our oil and gas reserves have been reviewed by our independent reserve
engineers, Pressler Petroleum Consultants. Our disclosures of our oil and gas
reserves included in this prospectus have been presented in reliance upon the
authority of such firm as experts in petroleum engineering.
66
FINANCIAL REPORT
MARCH 31, 2005
DECEMBER 31, 2004
C O N T E N T S
Page
----
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets March 31, 2005 and December 31, 2004.............F-3
Consolidated Balance Sheets March 31, 2005 and December 31, 2004.............F-4
Consolidated Statements of Operations for the three months ended
March 31, 2005 And 2004.....................................................F-5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 And 2004.....................................................F-6
Notes to the Consolidated Financial Statements...............................F-7
F-2
GULFWEST ENERGY INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
ASSETS
March 31, December 31,
2005 2004
(Unaudited) (Audited)
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 2,274,825 $ 411,377
Accounts receivable - trade, net of allowance
for doubtful accounts of $-0- in 2005 and 2004 2,634,920 1,674,448
Prepaid expenses 302,785 128,717
------------- -------------
Total current assets 5,212,530 2,214,542
------------- -------------
PROPERTY AND EQUIPMENT
Oil and gas properties, using the successful
efforts method of accounting 60,541,372 58,557,072
Other property and equipment 1,482,930 1,437,206
Less: accumulated depreciation, depletion and
amortization (10,526,740) (9,870,962)
------------- -------------
Net property and equipment 51,497,562 50,123,316
------------- -------------
OTHER ASSETS
Deposits 9,804 9,804
Investments 297,368 274,362
Debt issue cost, net - 1,756,316
Deferred tax asset 4,710,242 3,322,551
------------- -------------
Total other assets 5,017,414 5,363,033
------------- -------------
TOTAL ASSETS $ 61,727,506 $ 57,700,891
============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-3
GULFWEST ENERGY INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2005 2004
(Unaudited) (Audited)
------------- -------------
CURRENT LIABILITIES
Notes payable $ 40,300 $ 4,916,568
Notes payable - related parties - 2,140,000
Current portion of long-term debt 92,544 22,686,254
Current portion of long-term debt - related parties - 112,192
Accounts payable - trade 2,800,703 4,654,561
Accrued expenses 293,072 940,587
Income taxes payable 118,255 118,255
------------- -------------
Total current liabilities 3,344,874 35,568,417
------------- -------------
NONCURRENT LIABILITIES
Long-term debt, net of current portion 92,245 805,450
Asset retirement obligations 1,164,015 1,144,854
------------- -------------
Total noncurrent liabilities 1,256,260 1,950,304
------------- -------------
OTHER LIABILITIES
Derivative instruments 3,519,009 1,505,527
------------- -------------
Total Liabilities 8,120,143 39,024,248
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock 1,045 253
Common stock 24,923 19,394
Additional paid-in capital 72,767,869 34,062,502
Retained deficit (19,186,474) (15,405,506)
------------- -------------
Total stockholders' equity 53,607,363 18,676,643
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,727,506 $ 57,700,891
============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
GULFWEST ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2005 2004
------------- -------------
OPERATING REVENUES
Oil and gas sales $ 3,634,160 $ 2,500,640
Operating overhead and other income 30,173 38,089
------------- -------------
Total Operating Revenues 3,664,333 2,538,729
------------- -------------
OPERATING EXPENSES
Lease operating expenses 1,400,864 1,314,284
Depreciation, depletion and amortization 655,778 439,202
Dry holes, abandoned property and impaired assets 2,156 -
Accretion expense 19,161 20,358
General administrative 618,227 401,192
------------- -------------
Total Operating Expenses 2,696,186 2,175,036
------------- -------------
INCOME FROM OPERATIONS 968,147 363,693
------------- -------------
OTHER INCOME AND EXPENSE
Interest expense (1,198,501) (920,168)
Other financing costs (1,905,159) -
Loss on sale of property and equipment (13,022) -
Unrealized gain (loss) on derivative instruments (2,013,481) 287,847
------------- -------------
Total Other Income and (Expense) (5,130,163) (632,321)
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (4,162,016) (268,628)
INCOME TAX BENEFIT 1,387,691 -
------------- -------------
NET INCOME (LOSS) (2,774,325) (268,628)
DIVIDENDS ON PREFERRED STOCK (Paid 2005 -
$1,006,643; Paid 2004 - 0) (773,120) (34,375)
------------- -------------
============= =============
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (3,547,445) $ (303,003)
============= =============
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED $ (.17) $ (.02)
============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
GULFWEST ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months Ended March 31,
-------------------------------------------
2005 2004
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,774,325) $ (268,628)
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation, depletion and amortization 655,778 439,202
Accretion expense 19,161 20,358
Stock option expense 70,250 --
Debt issue cost expense 1,779,596 --
Discount on note payable 502,120 --
Deferred tax asset (1,387,691) --
Note payable issued and charged to interest -- 61,046
Loss on sale of property and equipment 13,022 --
Unrealized (gain) loss on derivative instruments 2,013,482 (287,847)
(Increase) in accounts receivable - trade, net (949,222) (269,388)
(Increase) in prepaid expenses (174,068) (236,952)
Increase (decrease) in accounts payable and
accrued expenses (2,571,623) 373,384
------------ ------------
Net cash provided by (used in) operating activities (2,803,520) (168,825)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 41,175 --
Capital expenditures (2,061,503) (84,082)
------------ ------------
Net cash used in investing activities (2,020,328) (84,082)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 38,345,646 --
Proceeds from common stock warrants exercised 200 --
Payments on debt (31,803,219) (122,867)
Proceeds from debt issuance 820,000 130,258
Dividends paid
(675,331) --
------------ ------------
Net cash provided by financing activities 6,687,296 7,391
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,863,448 (245,516)
CASH AND CASH EQUIVALENTS,
Beginning of period 411,377 483,618
------------ ------------
CASH AND CASH EQUIVALENTS,
End of period $ 2,274,825 $ 238,102
============ ============
CASH PAID FOR INTEREST $ 1,906,616 $ 778,889
============ ============
The Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
During interim periods, we follow the accounting policies set forth in
our 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.
The accompanying financial statements include the Company and its
wholly-owned subsidiaries: RigWest 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;
LTW Pipeline Co. formed April 19, 1999; GulfWest Development Company
formed November 9, 2000; and, GulfWest Oil & Gas Company (Louisiana)
LLC formed July 31, 2001. All material intercompany transactions and
balances are eliminated upon consolidation.
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 cash flows of GulfWest Energy Inc. for
the interim periods.
2. NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three month period ended March 31, 2005 we paid $331,313 in
dividends by issuing 356,250 shares of common stock and we issued
29,100 shares of common stock to satisfy and record a $23,280 fee for a
loan extension. Also, on March 30, 2005 one of our employees exercised
25,000 common stock options for $11,250 which is recorded as an account
receivable. Under our cashless exercise procedures, the stock has been
posted for sale by a broker and the receivable will be settled when the
stock is sold. During the period we invested $23,006 in an oil and gas
partnership by contributing our cost basis in undrilled oil and gas
leases. In addition, we financed new field trucks for the $45,724 cost.
During the three month period ended March 31, 2004, we issued a note
payable for $600,000 in exchange for an account payable for $538,954
and $61,046 in interest expense was recorded.
3. DERIVATIVE INSTRUMENTS
In the past we have entered into, and may in the future enter into,
certain derivative arrangements with respect to portions of our oil and
natural gas production to reduce our sensitivity to volatile commodity
prices. During 2005 and 2004, we entered into price swaps and put
agreements with financial institutions. We believe that these
derivative arrangements, although not free of risk, allow us to achieve
a more predictable cash flow and to reduce exposure to price
fluctuations. However, derivative arrangements limit the benefit to us
of increases in the prices of crude oil and natural gas sales.
Moreover, our derivative arrangements apply only to a portion of our
production and provide only partial price protection against declines
in price. Such arrangements may expose us to risk of financial loss in
certain circumstances. We expect that the monthly volume of derivative
arrangements will vary from time to time. We continuously reevaluate
our price hedging program in light of market conditions, commodity
price forecasts, capital spending and debt service requirements. The
following hedges were in place at March 31, 2005 or were added
subsequent to that date and are effective for the periods shown.
F-7
Crude Oil Volume/ Month Average Price/ Unit
--------- ------------- -------------------
May 2004 thru October 2005 Swap 10,000 Bbls $32.00
April 2005 thru June 2005 Swap 2,000 Bbls $56.50
July 2005 thru October 2005 Swap 1,000 Bbls $56.50
November & December 2005 Swap 11,000 Bbls $56.50
January 2006 thru March 2006 Collar 10,000 Bbls Floor $50.00-$59.00 Ceiling
April 2006 thru December 2006 Collar 9,000 Bbls Floor $50.00-$59.00 Ceiling
January 2007 thru December 2007 Collar 3,000 Bbls Floor $45.00-$59.45 Ceiling
Natural Gas Volume/ Month Average Price/ Unit
----------- ------------- -------------------
June 2004 thru October 2005 Swap 60,000 MMBTU $5.15
April 2005 thru June 2005 Swap 20,000 MMBTU $7.45
July 2005 thru October 2005 Swap 10,000 MMBTU $7.45
November & December 2005 Swap 70,000 MMBTU $7.45
January 2006 thru December 2006 Collar 70,000 MMBTU Floor $6.00-$8.25 Ceiling
January 2007 thru December 2007 Collar 20,000 MMBTU Floor $6.00-$6.95 Ceiling
These volumes represent approximately 75% of the estimated production
(for both oil and natural gas) on currently producing properties for
the remainder of 2005 and for 2006 and approximately 30% of estimated
production for 2007.
We also had the following put options in place during the first quarter
of 2005, for the months reflected. These contracts were terminated in
conjunction with the new swap and cost-less collars added effective
April 1, 2005.
Crude Oil Monthly Volume Price per Bbl
--------- -------------- -------------
November 1, 2005 to April 30, 2006 7,000 Bbls $25.75 put
May 1, 2006 to October 31, 2006 6,000 Bbls $25.75 put
November 1, 2006 to April 30, 2007 5,000 Bbls $25.75 put
Natural Gas Monthly Volume Price per MMBTU
----------- -------------- ---------------
November 1, 2005 to April 30, 2006 50,000 MMBTU $4.50 put
May 1, 2006 to October 31, 2006 40,000 MMBTU $4.50 put
November 1, 2006 to April 30, 2007 30,000 MMBTU $4.50 put
At the end of each reporting period we are required by SFAS 133 to
record on our balance sheet the marked to market valuation of our
derivative instruments. These valuations are based on the NYMEX strip
prices for those future periods, as of the balance sheet date. As a
result of these agreements, we recorded a non-cash charge to earnings
of $2,013,481 for the three month period ended March 31, 2005 and a
benefit of $287,847 for the three month period ended March 31, 2004.
The estimated change in fair value of the derivatives is reported in
Other Income and Expense as unrealized (gain) loss on derivative
instruments. The estimated fair value of the derivatives is reported in
Other Liabilities as derivative instruments.
F-8
4. STOCK BASED COMPENSATION
In October 1995, SFAS No. 123, "Stock Based Compensation," (SFAS 123)
was issued. This statement requires that we choose between two
different methods of accounting for stock options and warrants. The
statement defines a fair-value-based method of accounting for stock
options and warrants but allows an entity to continue to measure
compensation cost for stock options and warrants using the accounting
prescribed by APB Opinion No. 25 (APB 25), "Accounting for Stock Issued
to Employees." Use of the APB 25 accounting method results in no
compensation cost being recognized if options are granted at an
exercise price at the current market value of the stock on the date of
grant or higher. We will continue to use the intrinsic value method
under APB 25 but are required by SFAS 123 to make pro forma disclosures
of net income (loss) and earnings (loss) per share as if the fair value
method had been applied in our 2005 and 2004 financial statements.
We use the Black Sholes option pricing model to estimate the fair value
of the options. If we had used the fair value method required by SFAS
123, our net loss and per share information would approximate the
following amounts:
2005 2004
---------------------------------------------------------------------------------
As Reported Proforma As Reported Proforma
SFAS 123
compensation cost $ $(11,322,000) $ $
APB 25
compensation cost $ $ $ $
Net income (loss) $(3,547,445) $(14,869,445) $(303,003) $(303,000)
Income (loss) per
common share,
Basic and diluted $ $ $ $
(.21) (.72) (.02) (.02)
---------------------------------------------------------------------------------
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), Share-Based Payments
which is a revision of FASB No. 123, Accounting for Stock-Based
Compensation. Statement 123 (R) supercedes APB opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No.
95, Statement of Cash Flows. Generally, the approach in Statement 123
(R) is similar to the approach described in Statement 123. However,
Statement 123 (R) requires all share- based payments to employees,
including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure will
no longer be an alternative. The effective date of this statement will
be our first quarter of 2006. Management has not yet determined the
impact that this statement will have on our consolidated financial
statements.
5. FINANCING ACTIVITY
On April 27, 2004, we completed an $18,000,000 financing package with
new energy lenders. We used $15,700,000 in net proceeds from the
financing to retire existing debt of $27,584,145, resulting in
forgiveness of debt of $12,475,612, the elimination of a hedging
liability and the return to the Company of Series F Preferred Stock
with an aggregate liquidation preference of $1,000,000 (this preferred
stock, at the request of the Company, was transferred by the previous
lender to a financial advisor to the Company and to two companies
affiliated with two transactions. The taxable gain resulting from these
transactions will be completely offset by available net operating loss
carryforwards. The term of the note was eighteen months and it bore
interest at the prime rate plus 11%. The rate increased by .75% per
month beginning in month ten.
F-9
We paid the new lenders $1,180,000 in cash fees and also issued them
warrants to purchase 2,035,621 shares of our Common Stock at an
exercise price of $.01 per share, expiring in five years. The warrants
were subject to anti-dilution provisions. In connection with the
February 2005 transactions described below, the anti-dilution
provisions were amended such that additional issuances of stock (other
than issuances to all holders) would not trigger an adjustment to the
number of shares issuable upon exercise of the warrants.
On January 7, 2005, we amended our April 2004 credit agreement to
extend the target date for repayment to February 28, 2005. We exercised
this option on January 26, 2005 and issued 29,100 shares of our common
stock in connection with this amendment.
On February 28, 2005, we sold in a private placement, 81,000 shares of
our Series G Preferred Stock to OCM GW Holdings, LLC ("OCMGW") for an
aggregate offering price of $40.5 million. GulfWest Oil and Gas
Company, ("GWOG") a subsidiary of the Company, issued, in a private
placement, 2,000 shares of our Series A Preferred Stock, having a
liquidation preference of $1.0 million, to OCMGW for $1.5 million. Net
proceeds of the offerings of approximately $38 million after expenses
are being used for the repayment of substantially all of our
outstanding debt and other past due liabilities and for general
corporate purposes.
The Series G Preferred Stock bears a coupon of 8% per year, has an
aggregate liquidation preference of $40.5 million, is convertible in to
Common Stock at $0.90 per share and is senior to all of our capital
stock. For the first four years after issuance, we may defer the
payment of dividends on the Series G Preferred Stock and these deferred
dividends will also be convertible into our Common Stock at $0.90 per
share. In addition, the Series G Preferred Stock is entitled to
nominate and elect a majority of the members of the Board of Directors
of GulfWest.
In connection with these transactions, the terms of the Series A
Preferred Stock were amended such that by March 15, 2005, all such
stock would either convert into a newly created Series H Preferred
Stock on a one for one basis or into Common Stock at a conversion price
of $0.35 per share. The Series H Preferred Stock is required to be paid
a dividend of 40 shares of Common Stock per share of Series H Preferred
Stock per year. In addition, the Series H Preferred Stock is
convertible into Common Stock at a conversion price of $0.35 per share.
At March 15, 2005, holders of 6,700 shares of Series A Preferred Stock
converted to Series H Preferred Stock and holders of 3,250 shares of
Series A Preferred Stock converted to an aggregate 4,642,859 shares of
Common Stock. One Series H Preferred Stock holder converted its shares
of Series H Preferred Stock in to 285,715 shares of Common Stock. The
outstanding Series H Preferred Stock has an aggregate liquidation
preference of $3.25 million. The Series H Preferred Stock is senior to
all of our capital stock other than Series G Preferred Stock.
In addition, we amended the terms of our 9,000 shares of Series E
Preferred Stock such that the coupon of 6% per year may be deferred for
the next four years and these deferred dividends will be convertible
into Common Stock at conversion price of $0.90 per share. The original
liquidation preference of the Series E Preferred Stock of $500 per
share remains convertible into Common Stock at $2.00 per share. The
Series E Preferred Stock has an aggregate liquidation preference of
$4.5 million, and is senior to all of our Common Stock, of equal
preference with our Series D Preferred Stock as to liquidation and
junior to our Series G and Series H Preferred Stock.
F-10
6. NOTES PAYABLE
March 31, 2005 December 31, 2004
----------------- -------------------
Non-interest bearing note payable to an unrelated party;
payable out of50% of the net transportation revenues
from a certain natural gas pipeline that is not yet in
service; no due date. $ 40,300 $ 40,300
Promissory note payable to a former director at 8%; due
May, 2001; unsecured. Retired March, 2005 40,000
Promissory note payable to an unrelated party at 10%; payable
on demand; unsecured. Retired March, 2005 5,000
Promissory note payable to an unrelated party; payable on
demand; interestat 8%; interest increased to 12% on
January 1, 2003; secured by certain oil and gas
properties. Retired March, 2005. 180,000
Note payable to a bank; due July, 2004; secured by guaranty
of a director; interest at prime rate (prime rate 5.25% at
December 31, 2004 with a floor of 4.75% and a
ceiling of 8.0%. Retired February, 2005 948,291
Promissory note payable to unrelated party; interest at 6%;
due June, 2003. Retired January, 2005. 55,300
Promissory note payable to one of our directors; interest at
8%; due on demand; unsecured. Retired March, 2005 50,000
Promissory note payable to one of our directors; interest at prime rate
(prime rate 5.25% at December 31, 2004); due
May, 2003; secured by Common Stock of DutchWest Oil
Company, our wholly owned subsidiary. Retired March 1,450,000
2005
Promissory note payable to an unrelated party at 8%; due
June 2003; secured by 4% in the last draft of the
Common Stock of DutchWest Oil Company, our wholly
owned subsidiary. Retired March, 2005 100,000
Promissory note payable to an unrelated party at 8%; due
May 2003; secured by 8% of the Common Stock of
DutchWest Oil Company, our wholly
owned subsidiary. Retired March, 2005. 140,000
Note payable to an entity owned by two directors of the
company, due September 2004; interest at prime plus
2% (prime rate 5.25% at December 31, 2004). Secured
by oil and gas leases. Retired March, 2005. 600,000
F-11
March 31, 2005 December 31, 2004
----------------- -------------------
Line of credit (up to $3,500,000) to a bank; due June 2004;
secured by the guaranty of a director; interest at prime
rate (prime rate 5.25% at December 31, 2004) with a
floor of 4.75% and a ceiling of 8.0%. Retired February,
2005. 3,447,677
----------------- -------------------
$ 40,300 $ 7,056,568
================= ===================
Long-term debt is as follows:
March 31, 2005 December 31
2004
---------------- ------------------
Line of credit (up to $3,000,000) to a bank; due July,
2005; secured by the guaranty of a director; interest greater
prime rates less .25% or 5.25% (prime note 5.25%
at December 31, 2004); retired February 2005. $ $ 2,995,488
Subordinated promissory notes to various individuals at 9.5%
interest per annum; amounts include $50,000 due to related
parties. Retired $100,000 March, 2005. 50,000 150,000
Notes payable to finance vehicles, payable in aggregate monthly
installments of approximately $4,000, including interest of.9%
to 13% per annum; secured by the related equipment; due
various dates through 2010. 134,789 99,900
Promissory note to a director; interest at 8.5%; due December 31,
2003. Retired March, 2005. 62,192
Note payable to lender; interest at prime plus 11% (prime
rate 5.25% at December 31, 2004) interest only;
due October,2006; secured by related oil and gas properties.
Retired February, 2005. 19,021,880
Note payable to a bank with monthly principal payments of
$36,000; interest at prime plus 1% (prime rate 5.25%
at December 31, 2004 with a minimum prime rate of
5.5%; final payment due November, 2003; secured by
related oil and gas properties; extended to July, 2007.
Retired February, 2005 1,224,000
Note payable to unrelated party to finance saltwater
disposal well with monthly installments of $4,540,
including interest at 10% per annum; final payment
due January, 2005; secured by related well.
Retired March, 2005. 50,436
---------------- ------------------
23,603,896
Less current portion 92,544 (22,798,446)
---------------- ------------------
Total long-term debt $ 92,245 $ 805,450
================ ==================
F-12
7. TAXES
We incurred a taxable loss of approximately $1.5 million and temporary
tax differences of approximately $2.1 million in the first quarter of
2005 which resulted in an increase of approximately $1.4 in our
deferred tax asset. We expect to fully utilize theses changes in the
future.
8. STOCKHOLDERS EQUITY
The following table sets forth the changes in the stockholder's equity
during the period ended March 31, 2005.
NUMBER OF SHARES
---------------------------
ADDITIONAL
PREFERRED COMMON COMMON PREFERRED PAID-IN RETAINED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT
-------------- ------------ ------------ --------------- ---------------- ---------------
BALANCE DECEMBER 31, 2004 25,290 19,393,969 $ 19,394 $ 253 $ 34,062,502 $(15,405,506)
Common stock issued 29,100 29 23,251
Preferred stock issued
Series A 2,000 20 1,499,980
Series G 81,000 810 36,844,836
Preferred stock conversions
Series A to common stock (3,250) 4,642,859 4,643 (33) (4,610)
Series F to common stock (340) 170,000 170 (3) (167)
Series H to common stock (200) 285,715 286 (2) (284)
Common stock dividends paid
Series A Preferred 356,250 356 330,956
Options and warrants exercised 45,000 45 11,405
Current year loss
(2,774,325)
Dividends paid on preferred stock (1,006,643)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE MARCH 31, 2005 104,500 24,922,893 $ 24,923 $ 1,045 $ 72,767,869 $(19,186,474)
============ ============ ============ ============ ============ ============
Also during the period the holders of the remaining 6,700 shares of the
Series A Preferred Stock, of our wholly owned subsidiary GulfWest Oil and
Gas Company, converted to our Series H Preferred Stock.
Dividends on all classes of our preferred stock are cumulative until
declared as payable by our Board of Directors. Our Series E Preferred Stock
accumulates at 6% per annum payable in cash, Series G Preferred Stock
accumulates at 8% per annum payable in cash and Series H Preferred Stock
accumulates at 40 shares of our common stock per share of the Series H
Preferred Stock per annum.
The following table sets forth the accumulated value of undeclared
dividends of our preferred stock at March 31, 2005.
------------------------------ -- ------- ------------ ---- ---------------
Series E Preferred Stock $23,671
------------------------------ -- ------- ------------ ---- ---------------
Series G Preferred Stock 284,055
------------------------------ -- ------- ------------ ---- ---------------
Series H Preferred Stock 25,784
------------------------------ -- ------- ------------ ---- ---------------
$333,510
------------------------------ -- ------- ------------ ---- ---------------
F-13
Subsequent to the end of the quarter holders of 1,250 shares of our Series
H Preferred Stock converted to 1,785,714 shares of our common stock and
2,018,224 common stock warrants were exercised.
F-14
C O N T E N T S
AUDITED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.....................F-16
Consolidated Balance Sheets........................................F-17
Consolidated Statements of Operations..............................F-19
Consolidated Statements of Stockholders' Equity....................F-20
Consolidated Statements of Cash Flows..............................F-22
Notes To Consolidated Financial Statements.........................F-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.....................F-48
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS....................F-49
All other Financial Statement Schedules have been omitted because they are
either inapplicable or the information required is included in the financial
statements or the notes thereto.
F-15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and
Board of Directors
GULFWEST ENERGY INC.
We have audited the accompanying consolidated balance sheets of GulfWest Energy
Inc. (a Texas Corporation) and Subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of The Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
GulfWest Energy Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
\s\WEAVER AND TIDWELL, L.L.P
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
March 29, 2005
F-16
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 411,377 $ 483,618
Accounts receivable - trade, net of allowance
for doubtful accounts of $-0- in 2004 and 2003 1,674,448 1,099,802
Prepaid expenses 128,717 159,269
------------ ------------
Total current assets 2,214,542 1,742,689
------------ ------------
OIL AND GAS PROPERTIES,
using the successful efforts method of accounting 58,557,072 58,472,886
OTHER PROPERTY AND EQUIPMENT 1,437,206 2,132,220
Less accumulated depreciation, depletion and amortization (9,870,962) (10,017,931)
------------ ------------
Net oil and gas properties and other property and equipment 50,123,316 50,587,175
------------ ------------
OTHER ASSETS
Deposits 9,804 20,142
Investments 274,362 -
Debt issuance cost, net 1,756,316 78,768
Deferred tax asset 3,322,551
------------ ------------
Total other assets 5,363,033 98,910
------------ ------------
TOTAL ASSETS $ 57,700,891 $ 52,428,774
============ ============
F-17
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
------------ ------------
CURRENT LIABILITIES
Notes payable $ 4,916,568 $ 8,182,165
Notes payable - related parties 2,140,000 1,465,000
Current portion of long-term debt 22,686,254 29,396,092
Current portion of long-term debt - related parties 112,192 130,152
Accounts payable - trade 4,654,561 5,002,675
Accrued expenses 940,587 443,568
------------ ------------
Income taxes payable 118,255
------------ ------------
Total current liabilities 35,568,417 44,619,652
------------ ------------
NONCURRENT LIABILITIES
Long-term debt, net of current portion 805,450 35,801
Asset retirement obligations 1,144,854 1,357,206
------------ ------------
Total noncurrent liabilities 1,950,304 1,393,007
------------ ------------
OTHER LIABILITIES
Derivative instruments 1,505,527 591,467
------------ ------------
Total Liabilities 39,024,248 46,604,126
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock 253 190
Common Stock 19,394 18,493
Additional paid-in capital 34,062,502 29,283,692
Retained deficit (15,405,506) (23,477,727)
------------ ------------
Total stockholders' equity 18,676,643 5,824,648
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,700,891 $ 52,428,774
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-18
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
OPERATING REVENUES
Oil and gas sales $ 11,101,114 $ 10,844,460 $ 10,447,169
Well servicing revenues 39,116
Operating overhead and other income 106,559 166,263 353,512
------------ ------------ ------------
Total Operating Revenues 11,207,673 11,010,723 10,839,797
------------ ------------ ------------
OPERATING EXPENSES
Lease operating expenses 4,879,754 5,527,841 5,430,205
Cost of well servicing operations 56,295
Depreciation, depletion and amortization 2,184,815 2,226,123 2,697,784
Dry holes, abandoned property and impaired assets 452,516 358,737 617,365
Accretion on asset retirement obligations 72,247 76,823
Settlement of asset retirement obligations 41,780
General administrative 2,018,746 2,262,425 1,727,858
------------ ------------ ------------
Total Operating Expenses 9,649,858 10,451,949 10,529,507
------------ ------------ ------------
INCOME FROM OPERATIONS 1,557,815 558,774 310,290
------------ ------------ ------------
OTHER INCOME AND EXPENSE
Interest expense (4,153,578) (3,363,330) (3,159,381)
Other financing costs (1,472,318) (1,000,000)
Loss on sale of property and equipment (2,034,079) (19,848) (56,647)
Unrealized gain (loss) on derivative instruments (1,505,527) 537,526 (1,596,575)
Forgiveness of debt 12,475,612
------------ ------------ ------------
Total Other Income and (Expense) 3,310,110 (3,845,652) (4,812,603)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES 4,867,925 (3,286,878) (4,502,313)
INCOME TAX BENEFIT 3,204,296
------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLES 8,072,221 (3,286,878) (4,502,313)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES, NET OF INCOME
TAXES 262,452
------------ ------------ ------------
NET INCOME (LOSS) 8,072,221 (3,024,426) (4,502,313)
DIVIDENDS ON PREFERRED STOCK
(PAID 2004-$-0-; 2003-$112,500; 2002-$28,125) (455,612) (127,083) (112,500)
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 7,616,609 $ (3,151,509) $ (4,614,813)
============ ============ ============
NET INCOME (LOSS) PER SHARE, BASIC
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLES $ .41 $ (.18) $ (.25)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES .01
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE BASIC $ .41 $ (.17) $ (.25)
============ ============ ============
NET INCOME (LOSS) PER SHARE, DILUTED BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES $ .26 $ (.18) $ (.25)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES .01
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE, DILUTED $ .26 $ (.17) $ (.25)
============ ============ ============
F-19
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Number of Shares
Preferred Common
Stock Stock
-------------- -------------
BALANCE, December 31, 2001 17,000 18,492,541
Issuance of warrants for additional financing
Net loss
Dividends paid on preferred stock
-------------- -------------
BALANCE, December 31, 2002 17,000 18,492,541
============== =============
Issuance of warrants for additional financing
Issuance of preferred stock related to current financing 2,000
Net loss
-------------- -------------
BALANCE, December 31, 2003 19,000 18,492,541
============== =============
Issuance of warrants for additional financing
Issuance of preferred stock related to current refinancing 8,000
Conversion of preferred stock to Common Stock. (1,710) 901,428
Net income
-------------- -------------
BALANCE, December 31, 2004 25,290 19,393,969
============== =============
The Notes to Consolidated Financials are an integral part of
these statements.
F-20
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Preferred Common Additional Paid-In Retained
Stock Stock Capital Deficit
-------------------------- ------------------------ ------------------------ ---------------------------
$ 170 $ 18,493 $ 28,164,712 $ (15,838,488)
93,500
(4,502,313)
(112,500)
-------------------------- ------------------------ ------------------------ ---------------------------
$ 170 $ 18,493 $ 28,258,212 $ (20,453,301)
========================== ======================== ======================== ===========================
25,500
20 999,980
(3,024,426)
-------------------------- ------------------------ ------------------------ ---------------------------
190 $ 18,493 $ 29,283,692 $ (23,477,727)
========================== ======================== ======================== ===========================
916,029
80 3,863,665
(17) 901 (884)
8,072,221
-------------------------- ------------------------ ------------------------ ---------------------------
$ 253 $ 19,394 $ 34,062,502 $ (15,405,506)
========================== ======================== ======================== ===========================
The Notes to Consolidated Financials are an integral part of
these statements.
F-21
GULFWEST ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
--------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,072,221 $ (3,024,426) $ (4,502,313)
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation, depletion and amortization 2,184,815 2,226,123 2,697,784
Accretion expense 72,247 76,823
Settlement of asset retirement obligations (25,769)
Amortization of debt issuance cost 1,379,818
Discount expense on note payable 413,910
Forgiveness of debt (12,475,612)
Common Stock and warrants issued and
charged to operations 25,500 93,500
Other financing costs 1,000,000
Deferred tax asset (3,322,551)
Income tax payable 118,255
Notes payable issued for interest expense 61,046
Loss on sale of property and equipment 2,034,079 19,848 56,647
Dry holes, abandoned property, impaired assets 452,516 358,737 617,365
Unrealized (gain) loss on derivative instruments 1,505,527 (537,526) 1,596,575
Cumulative effect of accounting change (262,452)
Provision for bad debts 29,201
(Increase) decrease in accounts receivable -
trade, net (267,271) 232,443 (109,437)
(Increase) decrease in prepaid expenses 30,552 144,637 (179,825)
Increase (decrease) in accounts payable and
accrued expenses 279,859 1,235,503 1,043,994
--------------- ---------------- ---------------
Net cash provided by operating activities 513,642 1,524,411 1,314,290
--------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits returned 10,338
Proceeds from sale of property and equipment 1,250,675 38,561 675,440
Capital expenditures (6,141,988) (1,067,924) (5,861,969)
--------------- ---------------- ---------------
Net cash used in investing activities (4,880,975) (1,029,363) (5,186,529)
--------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 3,363,745
Payments on debt (18,144,776) (1,672,288) (3,410,778)
Proceeds from debt issuance 21,304,258 973,164 7,394,181
Debt issuance cost (2,228,135)
Dividends paid (112,500)
--------------- ---------------- ---------------
Net cash provided by (used in) financing
activities 4,295,092 (699,124) 3,870,903
--------------- ---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (72,241) (204,076) (1,336)
CASH AND CASH EQUIVALENTS,
Beginning of year 483,618 687,694 689,030
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS,
End of year $ 411,377 $ 483,618 $ 687,694
=============== ================ ===============
CASH PAID FOR INTEREST $ 3,718,940 $ 3,216,034 $ 3,004,015
=============== ================ ===============
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-22
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies
consistently applied by management in the preparation of the
accompanying consolidated financial statements.
Organization
GulfWest Energy Inc. and our subsidiaries intend to
pursue the acquisition of quality oil and gas prospects, which
have proved developed and undeveloped reserves, and the
development of prospects with third party industry partners.
The accompanying consolidated financial statements
include our company and its wholly-owned subsidiaries: RigWest
Well Service, Inc. ("RigWest"), GulfWest Texas Company
("GWT"), both formed in 1996; DutchWest Oil Company formed in
1997; SETEX Oil and Gas Company ("SETEX") formed August 11,
1998; Southeast Texas Oil and Gas Company, L.L.C. ("Setex
LLC") acquired September 1, 1998; GulfWest Oil and Gas Company
formed February 18, 1999; LTW Pipeline Co. formed April 19,
1999; GulfWest Development Company ("GWD") formed November 9,
2000 and GulfWest Oil and Gas Company (Louisiana) LLC, formed
July 31, 2001. All material intercompany transactions and
balances have been eliminated in consolidation.
Statement of Cash Flows
We consider all highly liquid investment instruments
purchased with remaining maturities of three months or less to
be cash equivalents for purposes of the consolidated
statements of cash flows.
Non-Cash Investing and Financing Activities:
During the twelve month period ended December 31,
2004, in settlement of a contract we issued a note payable for
$600,000 in replacement of an account payable for $538,954 and
the recognition of an additional $61,046 of interest expense.
Also, as a result of refinancing debt in which we recorded a
$12,475,612 forgiveness of debt, we issued Common Stock
warrants valued at $916,029 which were recorded as a discount
to the face value of the new note issued, we issued $500,000
of preferred stock of a wholly owned subsidiary as a
commission to our financial advisor, and recorded a $360,000
payable for a loan termination fee. The termination fee was
subsequently increased by $48,000 as a result of increasing
the principal amount of the new note. We also financed field
trucks for $78,036. In addition, we invested $274,362 in a
partnership by contributing our cost basis of $76,732 in a
natural gas pipeline and $197,630 in undeveloped oil and gas
leases to the partnership.
During the twelve month period ended December 31,
2003, we adopted Statement of Financial Accounting Standard
No. 143 "Asset Retirement Obligations" (SFAS 143). As a result
of adopting SFAS 143, effective January 1, 2003, we recorded
an asset retirement obligation liability of $1,280,383, an
increase in the carrying value of our oil and gas properties
of $1,058,445, a reduction in accumulated depletion of
$484,390 a change of $262,452 to income as a cumulative effect
of a change in accounting principal. This retirement liability
was increased during 2004 and 2003 by recognizing$72,247 and
$76,823 respectfully, in accretion expense. Also, we decreased
the current portion of long term debt-related parties by
applying $17,300 in deposits and reclassified $176,320 from
accrued expenses to current portion of long term debt.
F-23
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. in Summary of Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Oil and Gas Properties
We use the successful efforts method of accounting
for oil and gas producing activities. Costs to acquire mineral
interests in oil and gas properties, to drill and equip
exploratory wells that find proved reserves, and to drill and
equip development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves, and
geological and geophysical costs are expensed.
As we acquire significant oil and gas properties, any
unproved property that is considered individually significant
is periodically assessed for impairment of value, and a loss
is recognized at the time of impairment by providing an
impairment allowance. Capitalized costs of producing oil and
gas properties and support equipment, after considering
estimated dismantlement and abandonment costs and estimated
salvage values, are depreciated and depleted by the
unit-of-production method.
On the sale of an entire interest in an unproved
property, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the
property has been assessed individually. If a partial interest
in an unproved property is sold, the amount received is
treated as a reduction of the cost of the interest retained.
On the sale of an entire or partial interest in a proved
property, gain or loss is recognized, based upon the fair
values of the interests sold and retained.
Other Property and Equipment
The following tables set forth certain information
with respect to our other property and equipment. We provide
for depreciation and amortization using the straight-line
method over the following estimated useful lives of the
respective assets:
Assets Years
--------------------------------- -------------
Automobiles 3-5
Office equipment 7
Gathering system 10
Well servicing equipment 10
F-24
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Other Property and Equipment - continued
Capitalized costs relating to other properties and equipment:
2004 2003
-------------------- ---------------------
Automobiles $ 285,384 $ 420,776
Office equipment 148,173 148,172
Gathering system 271,651 529,486
Well servicing equipment 731,998 1,033,786
-------------------- ---------------------
1,437,206 2,132,220
Less accumulated depreciation (872,364) (1,268,330)
-------------------- ---------------------
Net capitalized cost $ 564,842 $ 863,890
==================== =====================
Impairments
We have adopted SFAS 144 "Accounting for the
Impairment or Disposal of Long- Lived Assets". Accordingly,
impairments, measured using fair market value, are recognized
whenever events or changes in circumstances indicate that the
carrying amount of long-lived assets (other than unproved oil
and gas properties discussed above) may not be recoverable and
the future undiscounted cash flows attributable to the asset
are less than its carrying value.
Revenue Recognition
We recognize oil and gas revenues on the sales method
as oil and gas production is sold. Differences between sales
and production volumes during the years ended December 31,
2004, 2003, and 2002 were not significant. Well servicing
revenues are recognized as the related services are performed.
Operating overhead income is recognized based upon monthly
contractual amounts for lease operations and other income is
recognized as earned.
Trade Accounts Receivable
We grant credit to creditworthy independent and major
oil and gas companies for the sale of crude oil and natural
gas. In addition, we grant credit to joint owners of oil and
gas properties, which we, through our subsidiary, SETEX,
operate. Such amounts are secured by the underlying ownership
interests in the properties. We also grant credit to various
third parties through RigWest for well servicing operations.
Trade accounts receivable are reported in the
consolidated balance sheet at the outstanding principal
adjusted for any chargeoffs. An allocation for doubtful
accounts is recognized by management based upon a review of
specific customer balances, historical losses and general
economic conditions.
We maintain cash on deposit in non-interest bearing
accounts, which, at times, exceed federally insured limits. We
have not experienced any losses on such accounts and believe
we are not exposed to any significant credit risk on cash and
equivalents.
Fair Value of Financial Instruments
At December 31, 2004 and 2003, our financial
instruments consist of notes payable and long-term debt.
Interest rates currently available to us for notes payable and
long-term debt with similar terms and remaining maturities are
used to estimate fair value of such financial instruments.
F-25
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, since interest rates on substantially all of our
debt are variable, market based rates, the carrying amounts
are a reasonable estimate of fair value.
Debt Issuance Costs
Debt issue costs incurred are capitalized and
subsequently amortized over the term of the related debt on a
straight-line basis.
F-26
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Earnings (Loss) Per Share
We have adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share", which requires
that both basic earnings (loss) per share and diluted earnings
(loss) per share be presented on the face of the statement of
operations. Basic earnings (loss) per share are based on the
weighted-average number of outstanding common shares. Diluted
earnings (loss) per-share are based on the weighted-average
number of outstanding common shares and the effect of all
potentially diluted common shares.
Stock Based Compensation
In October 1995, SFAS No. 123, "Stock Based
Compensation," (SFAS 123) was issued. This statement requires
that we choose between two different methods of accounting for
stock options and warrants. The statement defines a
fair-value-based method of accounting for stock options and
warrants but allows an entity to continue to measure
compensation cost for stock options and warrants using the
accounting prescribed by APB Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." Use of the APB 25
accounting method results in no compensation cost being
recognized if options are granted at an exercise price at the
current market value of the stock or higher. We are required
by SFAS 123 to make pro forma disclosures of net income (loss)
and earnings (loss) per share as if the fair value method had
been applied in its 2004, 2003 and 2002 financial statements.
All options were issued with an exercise price at or above
fair market value on the date of grant with the exception of
one grant of 281,000 options, for which we have accrued
$129,260 in compensation expense in 2004. Also see Recent
Accounting Pronouncements.
During 2004, 2003 and 2002, we issued options and
warrants totaling: 1,610,000 shares in 2004 (exercisable
1,085,000); 35,000 in 2003 (all exercisable); 405,000 shares
in 2002 (all exercisable), respectively, to employees and
directors as compensation. If we had used the fair value
method required by SFAS 123, our net income (loss) and per
share information would approximate the following amounts:
2004 2003 2002
-------------------------- ---------------------------- ---------------------------
As ProForma As Reported ProForma As ProForma
Reported Reported
----------- ----------- ------------ ------------ ----------- ------------
SFAS 123
compensation cost $ $ 425,500 $ $ 7,350 $ $ 38,300
APB 25
compensation cost $ 129,260 $ (129,260) $ $ $ $
Net income (loss) $ 7,616,609 $ 7,320,369 $ (3,151,509) $ (3,158,859) $(4,614,813) $ (4,653,113)
Income (loss) per
common share-basic $ .41 $ .39 $ (.17) $ (.17) $ (.25) $ (.25)
Income (loss) per
common share-
diluted $ .26 $ .23 $ (.17) $ (.17) $ (.25) $ (.25)
F-27
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Stock Based Compensation - continued
The effects of applying SFAS 123 as disclosed above
are not indicative of future amounts. We anticipate making
additional stock based employee compensation awards in the
future.
We use the Black-Sholes option-pricing model to
estimate the fair value of the options and warrants (to
employee and non-employees) on the grant date. Significant
assumptions include (1) risk free interest rate 2004- 3.0%,
2003 - 3.0%; 2002 - 3.0%; (2) weighted average expected life
2004- 3.0, 2003 - 3.4; 2002 - 3.6; (3) expected volatility of
2004- 94.32%, 2003 - 147.43%; 2002 - 101.73%; and (4) no
expected dividends.
Implementation of New Financial Accounting Standards
Effective January 1, 2001, we adopted SFAS No. 133
"Accounting for Derivative Instruments and other Hedging
Activities", as amended by SFAS No. 137 and No. 138. It has
been determined that our oil and gas hedging agreements meet
the definition of SFAS 133 "Accounting for Derivative
Instruments and other Hedging Activities" and are accounted
for as a derivative instruments.
Effective January 1, 2002, we adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement requires the following three-step
approach for assessing and recognizing the impairment of
long-lived assets: (1) consider whether indicators of
impairment of long-lived assets are present; (2) if indicators
of impairment are present, determine whether the sum of the
estimated undiscounted future cash flows attributable to the
assets in question is less than their carrying amount; and (3)
if less, recognize an impairment loss based on the excess of
the carrying amount of the assets over their respective fair
values. In addition, SFAS No. 144 provides more guidance on
estimating cash flows when performing a recoverability test,
requires that a long-lived asset to be disposed of other than
by sale (such as abandoned) be classified as "held and used"
until it is disposed of, and establishes more restrictive
criteria to classify an asset as "held for sale". The adoption
of SFAS No. 144 did not have a material impact on our
financial statements since it retained the fundamental
provisions of SFAS No. 121, "Accounting for the Impairment or
Disposal of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," related to the recognition and measurement of
the impairment of long-lived assets to be "held and used".
F-28
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Implementation of New Financial Accounting Standards - continued
In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under
EITF Issue No. 94-3, a liability for an exit cost as defined
was recognized at the date of an entity's commitment to an
exit plan. SFAS No. 146 also establishes that the fair value
is the objective for the initial measurement of the liability.
SFAS No. 146 is effective for exit and disposal activities
that are initiated after December 31, 2002. This statement
will impact the timing of our recognition of liabilities for
costs associated with future exit or disposal activities.
Beginning in 2003, Statement of Financial Accounting
Standards No. 143, "Asset Retirement Obligations" ("SFAS 143")
requires us to recognize an estimated liability for the
plugging and abandonment of our oil and gas wells and
associated pipelines and equipment. Consistent with industry
practice, historically we had assumed the cost of plugging and
abandonment would be offset by salvage value received. This
statement requires us to record a liability in the period in
which our asset retirement obligation ("ARO") is incurred.
After initial recognition of the liability, we must capitalize
an additional asset cost equal to the amount of the liability.
In addition to any obligation that arises after the effective
date of SFAS 143, upon initial adoption we must recognize (1)
a liability for any existing ARO's, (2) capitalized cost
related to the liability, and (3) accumulated depreciation,
depletion and amortization on that capitalized cost adjusting
for the salvage value of related equipment.
The estimated liability is based on historical
experience in plugging and abandoning wells, estimated
remaining lives of those wells based on reserves estimates and
federal and state regulatory requirements. The liability is
discounted using an assumed credit-adjusted risk-free rate of
7.5%. Revisions to the liability could occur due to changes in
estimates of plugging and abandonment costs, changes in the
risk-free rate or remaining lives of the wells, or if federal
or state regulators enact new plugging and abandonment
requirements. At the time of abandonment, we will be required
to recognize a gain or loss on abandonment if the actual costs
do not equal the estimated costs.
The adoption of SFAS 143 resulted in a January 1,
2003 cumulative effect adjustment to record (i) a $1,058,445
increase in the carrying value of proved properties, (ii) a
$484,390 decrease in accumulated depreciation, depletion and
amortization, (iii) a $1,280,383 increase in noncurrent
liabilities, and (iv) a $262,452 gain, net of tax.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 123 (revised
2004), Share-Based Payments which is a revision of FASB No.
123, Accounting for Stock-Based Compensation. Statement 123
(R) supercedes APB opinion No. 25, Accounting for Stock Issued
to Employees, and amends FASB Statement No. 95, Statement of
Cash Flows. Generally, the approach in Statement 123 (R) is
similar to the approach described in Statement 123. However,
Statement 123 (R) requires all share- based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. The
provisions of this statement become effective for our third
quarter of 2005. Management has not yet determined the impact
that this statement will have on our consolidated financial
statements.
F-29
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Recapitalization
At December 31, 2004, despite certain refinancing during 2004 our
current liabilities exceeded our current assets by $33,353,875, which without
additional capital left doubt about our ability to survive; however this doubt
was eliminated pursuant to the 2005 recapitalization described below.
On April 27, 2004, we completed an $18,000,000 financing package with
new energy lenders. We used $15,700,000 to retire existing debt of $27,584,145,
resulting in forgiveness of debt of $12,475,612, the elimination of a hedging
liability and the return to us our Series F Convertible Preferred Stock with an
aggregate liquidation preference of $1,000,000. This preferred stock, at our
request, was transferred to our financial advisor and to two companies
affiliated with two of our directors. See "Certain Relationships and Related
Transactions." This taxable gain resulting from these transactions will be
completely offset by available net operating loss carryforwards. The term of the
note is eighteen months and it bears interest at the prime rate plus 11%. This
rate increases by .75% per month beginning in month ten. We paid the new lenders
$1,180,000 in cash fees and also issued them warrants to purchase 2,035,621
shares of our Common Stock at an exercise price of $.01 per share, expiring in
five years. The warrants are subject to anti-dilution provisions.
We continued to pursue new equity capital during 2005, culminating in
the sale of $42,000,000 in newly issued preferred stock. In a subsequent event,
on February 28, 2005, we sold in a private placement, 81,000 shares of our
Series G Preferred Stock to OCMGW for an aggregate offering price of $40.5
million. In addition, our subsidiary, GulfWest Oil & Gas Company (GOGC) issued,
in a private placement, 2,000 shares of its Series A Preferred Stock, having a
liquidation preference of $1.0 million, to OCMGW for $1.5 million. Net proceeds
of the offerings of approximately $38 million after expenses are being used for
the repayment of debt and other liabilities and for general corporate purposes.
See note 5.
The Series G Preferred Stock bears a coupon of 8% per year. The Series
G Preferred Stock has an aggregate liquidation preference of $40.5 million, and
is senior to all of our capital stock. For the first four years after issuance,
we may defer the payment of dividends on the Series G Preferred Stock and these
deferred dividends will also be convertible into our Common Stock at $0.90 per
share. In addition, the Series G Preferred Stock is entitled to vote on an
as-converted basis with the Common Stockholders and, as a class, to nominate and
elect a majority of the members of the Board of Directors of GulfWest. The
Series G Preferred Stock is senior in liquidation preference to all of our
capital stock.
In connection with these transactions, the terms of the Series A
Preferred Stock have been amended such that by March 15, 2005, all such stock
will either convert into a newly created Series H Preferred Stock on a one for
one basis or into Common Stock at a conversion price of $0.35 per share. The
Series H Convertible Preferred Stock has a liquidation preference of $500 per
share and is required to be paid a dividend of 40 shares of Common Stock per
share per year. In addition, the Series H Convertible Preferred Stock is
convertible into Common Stock at a conversion price of $0.35 per share. At March
15, 2005, holders of 6,700 shares of Series A Preferred Stock converted to
Series H Preferred Stock and holders of 3,250 shares of Series A Preferred Stock
converted to an aggregate 4,642,859 shares of Common Stock. The outstanding
Series H Preferred Stock has an aggregate liquidation preference of $3.350
million and is senior to all of our capital stock other than Series G Preferred
Stock.
In addition, we amended the terms of our 9,000 shares of Series E
Preferred Stock such that the coupon of 6% per year they bear may be deferred
for the next four years and these deferred dividends will be convertible into
Common Stock at conversion price of $0.90 per share. The initial liquidation
preference of the Series E Preferred Stock of $500 per share remains convertible
into Common Stock at $2.00 per share. The Series E Preferred Stock has an
aggregate liquidation preference of $4.5 million, and is senior to all of our
Common Stock, of equal preference with our Series D Preferred Stock and junior
to our Series G Preferred Stock and Series H Preferred Stock.
F-30
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties
The following tables set forth certain information with
respect to our oil and gas producing activities for the periods
presented:
Capitalized Costs Relating to Oil and Gas Producing Activities:
2004 2003
---------------- ----------------
Unproved oil and gas properties $ 81,366 $ 261,650
Proved oil and gas properties 54,947,396 54,669,482
Support equipment and facilities 3,528,310 3,541,754
---------------- ----------------
58,557,072 58,472,886
Less accumulated depreciation, depletion and
amortization (8,998,598) (8,749,601)
---------------- ----------------
Net capitalized costs $ 49,558,474 $ 49,723,285
================ ================
Results of Operations for Oil and Gas Producing Activities:
2004 2003 2002
---------------- ---------------- ---------------
Oil and gas sales $ 11,101,114 $ 10,844,466 $ 10,447,169
Production costs (4,879,754) (5,527,841) (5,430,205)
Depreciation, depletion and amortization (1,954,256) (1,527,727) (2,187,036)
Accretion expense (72,247) (76,823) -
Income tax expense - - -
---------------- ---------------- ---------------
Results of operations for oil and gas
producing activities - income $ 4,194,857 $ 3,712,075 $ 2,829,928
================ ================ ===============
Costs Incurred in Oil and Gas Producing Activities:
2004 2003 2002
---------------- ---------------- ---------------
Property Acquisitions
Proved $ 6,742 $ - $ 562,760
Unproved 17,347 110,119 14,401
Development Costs 6,117,899 2,024,663 5,141,075
---------------- ---------------- ---------------
$ 6,141,988 $ 2,134,782 $ 5,718,236
================ ================ ===============
The following table shows oil and gas property dispositions:
2004 2003 2002
---------------- ---------------- ---------------
Oil and gas properties $ 5,425,040 $ 31,979 $ 464,806
Accumulated DD&A (1,659,001) (11,569) $ (21,375)
---------------- ---------------- ---------------
Net oil and gas properties $ 3,766,039 $ 20,410 $ 443,431
================ ================ ===============
As a result of these sales we recorded a loss of $2,029,932 in 2004 and
$20,409 in 2003 and a gain of $21,569 in 2002.
F-31
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties - continued
A reconciliation of our asset retirement obligation liability is as
follows:
2004 2003
---------------- ----------------
Balance January 1 $ 1,357,206 $ -
Cumulative effect adjustment - 1,280,383
Accretion expense 72,247 76,823
Liability settled (25,769) -
Liability reduced from assets sold (331,173) -
Revisions 72,343
---------------- ----------------
Balance December 31 $ 1,144,854 $ 1,357,206
================ ================
Note 4. Accrued Expenses
Accrued expenses consisted of the following:
December31, December 31,
2004 2003
---------------- -----------------
Accrued compensation
expense on variable options $ 129,260 $ -
Payroll taxes - 5,833
Interest 769,327 395,735
Professional fees 42,000 42,000
---------------- -----------------
$ 940,587 $ 443,568
================ =================
F-32
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Notes payable is as follows:
2004 2003
------------- ---------------
Non-interest bearing note payable to an unrelated party; payable out of
50% of the net transportation revenues from a certain natural gas
pipeline that is not yet in service; no due date. $ 40,300 $ 40,300
Promissory note payable to a former director at 8%; due May, 2001;
unsecured. Retired March, 2005 40,000 40,000
Promissory note payable to an unrelated party at 10%; payable on
demand; unsecured. Retired March, 2005 5,000 45,000
Line of credit (up to $2,500,000) to a bank; due October, 2002; secured
by guaranty of a director; interest greater of prime rate less .25% or
5.25%, (prime rate 5.25% at December 31, 2004). Line of credit
increased to $3,000,000 and due date extended to April, 2004. Retired
and replaced April, 2004. 2,995,488
Promissory note payable to an unrelated party; payable on demand; interest
at 8%; interest increased to 12% on January 1, 2003; secured
by certain oil and gas properties. Retired March, 2005. 180,000 300,000
Note payable to a bank; due July, 2004; secured by guaranty of a director;
interest at prime rate (prime rate 5.25% at December
31, 2004 with a floor of 4.75% and a ceiling of 8.0%.
Retired February, 2005 948,291 948,400
Promissory note payable to unrelated party; interest at 6%; due June,
2003. Retired January, 2005. 55,300 55,300
Promissory note payable to one of our directors; interest at 8%;
due on demand; unsecured. Retired March, 2005. 50,000 50,000
Promissory note payable to one of our directors; interest at prime rate
(prime rate 5.25% at December 31, 2004); due May, 2003; secured by
Common Stock of DutchWest Oil Company, our wholly
owned subsidiary. Retired March, 2005 1,450,000 1,375,000
Promissory note payable to an unrelated party at 8%; due June 2003;
secured by 4% in the last draft of the Common Stock of DutchWest
Oil Company, our wholly owned subsidiary. Retired March, 2005. 100,000 100,000
Promissory note payable to an unrelated party at 8%; due May 2003; secured
by 8% of the Common Stock of DutchWest Oil Company,
our wholly owned subsidiary. Retired March, 2005. 140,000 200,000
Note payable to an entity owned by two directors of the company, due
September 2004; interest at prime plus 2% (prime rate 5.25% at
December 31, 2004). Secured by oil and gas leases. Retired March,
2005. 600,000
F-33
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Notes payable is as follows - continued:
2004 2003
-------------- ------------------
Line of credit (up to $3,500,000) to a bank; due June 2004; secured by
the guaranty of a director; interest at prime rate (prime rate
5.25% at December 31, 2004) with a floor of 4.75% and a ceiling
of 8.0% Retired February, 2005. 3,447,677 3,497,677
-------------- ------------------
$ 7,056,568 $ 9,647,165
============== ==================
The weighted average interest rate for notes payable at December 31,
2004 and 2003 was 5.79% and 5.0%, respectively.
Long-term debt is as follows:
2004 2003
-------------- -----------------
Line of credit (up to $3,000,000) to a bank; due July, 2005; secured by
the guaranty of a director; interest greater prime rates less
.25% or 5.25% (prime note 5.25% at December 31, 2004); retired
February 2005. $ 2,995,488 $ -
Subordinated promissory notes to various individuals at 9.5% interest
per annum; amounts include $50,000 due to related parties; past
due. Retired $100,000 March, 2005. 150,000 150,000
Notes payable to finance vehicles, payable in aggregate monthly
installments of approximately $4,000, including interest of.9%
to 13% per annum; secured by the related equipment; due various
dates through 2007. 99,900 69,500
Promissory note to a director; interest at 8.5%; due December 31, 2003.
Retired March, 2005. 62,192 78,941
Note payable to an energy lender; interest at prime plus 3.5% (prime rate
5.25% at December 31, 2004) payable monthly out of 90% net
profits from certain oil and gas properties; final payment due
May, 2004; secured by related oil and gas properties.
Refinanced March 2004 27,574,769
Note payable to lender; interest at prime plus 11% (prime rate 5.25% at
December 31, 2004) interest only; due October,2006; secured by
related oil and gas properties. Retired February, 2005. 19,021,880 -
F-34
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Long-term debt is as follows - continued:
2004 2003
-------------- -----------------
Note payable to a bank with monthly principal payments of $36,000;
interest at prime plus 1% (prime rate 5.25% at December 31, 2004
with a minimum prime rate of 5.5%; final payment due November, 2003;
secured by related oil and gas properties; extended to July, 2007.
Retired February, 2005 1,224,000 1,564,000
Note payable to unrelated party to finance saltwater disposal well with
monthly installments of $4,540, including interest at 10% per annum;
final payment due January, 2005; secured by related well. Retired
March, 2005. 50,436 123,624
Note payable to related party to finance equipment with monthly
installments of $608, including interest at 11% per annum; final
payment due February, 2004; secured by related equipment. Retired
February, 2004. 1,211
-------------- -----------------
23,603,896 29,562,045
Less current portion (22,798,446) (29,526,244)
-------------- -----------------
Total long-term debt $ 805,450 $ 35,801
============== =================
Estimated annual maturities for long-term debt are as follows:
2005 $ 22,798,447
2006 506,565
2007 286,673
2008 12,212
2009 -
--------------
$ 23,603,897
==============
Note Payable and long- term debt remaining after the retirement of debt
in February and March, 2005
Note payable $ 40,300
==============
Long- term debt $ 149,900
Less current portion (88,449)
--------------
Total long- term debt $ 61,451
==============
F-35
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity
Common Stock
2004 2003
----------------- --------------
Par value $.001; 80,000,000 shares authorized; 19,393,969 shares issued
and outstanding as of December 31, 2004 and
2003, respectively $ 19,394 $ 18,493
================= ==============
Preferred Stock
Series D, par value $.01; 12,000 shares authorized; 8,000 shares issued
and outstanding at December 31, 2004 and 2003. The Series D preferred
stock does not pay dividends and is not redeemable. The liquidation
value is $500 per share. After three years from the date of issue,
and thereafter, the shares are convertible to Common Stock based upon
a value of $500 per Series D share divided by $8 per share of Common
Stock. 80 80
Series E, par value $.01; 9,000 shares authorized; 9,000 shares
issued and outstanding at December 31, 2004 and 2003. The
Series E pays dividends, as declared, at a rate of 2.5% per
annum increasing to 6% per annum July 1, 2004, has a liquidation
value of $500 per share, may be redeemed at our option and, as
amended, is convertible to Common Stock based upon a value of
$500 per Series E share divided by $2 per share of Common Stock. 90 90
Series F, par value $.01; 2,000 shares authorized; 340 and 2,000 shares
issued and outstanding at December 31, 2004 and December 31, 2003
respectfully. The Series F preferred stock pays dividends, as
declared, at a rate of $2.5% per share annum, has a liquidation
value of $500 per share, may be redeemed at our option and is
convertible to Common Stock based upon a value of $500 per Series F
share divided by $1 per share of Common Stock 3 20
Series A, par value $.01; 10,000 shares authorized; 7,950 shares issued
and outstanding at December 31, 2004. The Series A preferred stock
pays dividends, as declared, at a rate of 9 % per annum, has a
liquidation value of $500 per share, may be redeemed at our option
and is exchangeable for Common Stock based upon a value of $500 per
Series A share divided by $.35 per share of Common Stock. 80
----------------- --------------
$ 253 190
================= ==============
All classes of preferred shareholders have liquidation preference over
common shareholders of $500 per preferred share, plus accrued dividends.
Dividends in arrears at December 31, 2004 were $608,087 (Series A $244,147;
Series E $347,409; Series F $16,531).
F-36
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
We maintain a 1994 Stock Option and Compensation Plan (the "1994
Plan"), which terminated on February 11, 2004. There are options to purchase
424,000 shares of Common Stock still outstanding and exercisable under the 1994
Plan. Effective July 15, 2004, we implemented our 2004 Stock Option and
Compensation Plan (the "2004 Plan"). There are options to purchase 1,525,000
shares of Common Stock outstanding under the 2004 Plan. Following is a schedule
by year of the activity related to stock options, including weighted-average
("WTD AVG") exercise prices of options in each category.
F-37
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
2004 2003 2002
------------------------------ -------------------------- -------------------------
Wtd Avg Wtd Avg Wtd Avg
Prices Number Prices Number Prices Number
--------- --------------- -------- -------------- --------- ------------
Balance, January 1 $ .90 1,102,000 $ .90 1,067,000 $ 1.03 1,097,000
Options issued $ .48 1,610,000 $ .75 35,000 .75 35,000
Options expired $ (.80) (763,000) $ - - $ 3.00 (65,000)
--------------- -------------- ------------
Balance, December 31 $ .60 1,949,000 $ .90 1,102,000 $ .90 1,067,000
=============== ============== ============
Options to purchase 1,474,000 shares of Common Stock were exercisable
at December 31, 2004. Following is a schedule by year and by exercise price of
the expiration of our stock options issued as of December 31, 2004:
2005 2006 2007 2008 Thereafter Total
----------- ---------- ---------- ------------- ------------ ------------
$ .45 950,000 475,000 1,425,000
$ .75 35,000 250,000 285,000
$ .83 65,000 65,000
$1.13 100,000 100,000
$1.20 14,000 14,000
$1.81 60,000 60,000
----------- ---------- ---------- ------------- ------------ ------------
114,000 65,000 35,000 1,260,000 475,000 1,949,000
=========== ========== ========== ============= ============ ============
281,000 of the options issued are subject to variable award accounting
treatment. As a result, we accrued $129,260 as compensation expense in 2004.
Stock Warrants
We have issued a significant number of stock warrants for a variety of
reasons, including compensation to employees, additional inducements to purchase
our common or preferred stock, inducements related to the issuance of debt and
for payment of goods and services. Following is a schedule by year of the
activity related to stock warrants, including weighted-average exercise prices
of warrants in each category:
2004 2003 2002
-------------------------- -------------------------- ---------------------------
Wtd Avg Wtd Avg Wtd Avg
Prices Number Prices Number Prices Number
--------- ------------- --------- ------------- --------- --------------
Balance, January 1 $ .76 1,965,000 $ 1.24 2,181,754 $ 2.15 1,306,754
Warrants issued $ .01 2,035,621 $ .75 150,000 $ .75 1,145,000
Warrants exercised - -
or expired - - $ 3.61 (366,754) $ 3.57 (270,000)
------------- ------------- --------------
Balance, December 31 $ .38 4,000,621 $ .76 1,965,000 $ 1.24 2,181,754
============= ============= ==============
Included in the "warrants issued" and "warrants exercised/expired"
columns in 2002 were 270,000 warrants whose price was reduced in 2002 to $.75.
F-38
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Following is a schedule by year and by exercise price of the expiration
of our stock warrants issued as of December 31, 2004:
2005 2006 2007 2008 2009 Total
---- ---- ---- ---- ---- -----
$ .01 2,035,621 2,035,621
.75 225,000 1,590,000 1,815,000
.875 150,000 150,000
----------- ------------ ------------- ----------- ----------- ------------
375,000 1,590,000 - - 2,035,621 4,000,621
=========== ============ ============= =========== =========== ============
Warrants outstanding to our officers, directors and employees at
December 31, 2004 and 2003 were approximately 1,515,000 and 1,515,000,
respectively. The exercise prices on these warrants range from $.75 to $.875 and
expire on various dates through 2006.
Note 7. Income (Loss) Per Common Share
The following is a reconciliation of the numerators and denominators
used in computing income (loss) per share:
2004 2003 2002
------------------ ----------------- ------------------
Net income (loss) $ 8,072,221 $ (3,024,426) $ (4,502,313)
Preferred stock dividends (455,612) (127,083) (112,500)
------------------ ----------------- ------------------
Income (loss) available to common
shareholders (numerator) $ 7,616,609 $ (3,151,509) $ 4,614,813
================== ================= ==================
Weighted-average number of shares
of Common Stock - basic 18,535,022 18,492,541 18,492,541
(denominator)
------------------ ----------------- ------------------
Income (loss) per share - basic $ .41 $ (.17) $ .25
================== ================= ==================
Weighted - average number of shares
of Common Stock - diluted
(denominator) 31,618,275 18,492,541 18,492,541
------------------ ----------------- ------------------
Income (loss) per share - diluted $ .26 $ (.17) $ (.25)
================== ================= ==================
Potential dilutive securities (stock options, stock warrants and
convertible preferred stock) in 2003 and 2002 have not been considered since we
reported a net loss and, accordingly, their effects would be antidilutive.
F-39
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Related Party Transactions
As described in "Our Company - Financial Recapitalization" OCM GW
Holdings purchased 81,000 shares of Series G Preferred Stock and 2,000 shares of
Series A Preferred Stock for $42 million. Skardon F. Baker, a director, is an
employee of and B. James Ford, also a director is a managing director of Oaktree
Capital Management, LLC, the ultimate parent of OCM GW Holdings.
In connection with our April 2004 financing, J. Virgil Waggoner, a
director, and Star-Tex Trading Co., an entity managed by John Loehr, an officer
at the time and currently a director, purchased 3,000 shares and 200 shares,
respectively, of Series A Preferred Stock at a price of $500 per share. Both Mr.
Waggoner and Star-Tex, in connection with the February 2005 offering, elected to
exchange those shares for an equal number of shares of Series H Preferred Stock.
On October 23, 1995, we sold $25,000 each of 9% promissory notes in a
private offering to two trusts, the trustee of whom is John E. Loehr, an officer
at the time of the transaction and currently a director. The balance of the
notes plus accrued interest thereon at February 28, 2005 was $87,855. The note
was paid off in connection with the February 2005 offering.
In June, 1999, we issued a promissory note with interest at 8.5% to Mr.
Marshall A. Smith III, an officer and director at the time, in the amount of
$124,083 for accrued compensation. At February 28, 2005, the note had a balance
and accrued and unpaid interest of $99,360 and was being paid in monthly
installments of approximately $1,500 per month. The note was paid off in
connection with the February 2005 offering.
On November 6, 2002, Mr. J. Virgil Waggoner, a director, provided us a
loan in the initial amount of $1,200,000, which was subsequently increased to a
total of $1,500,000, which was outstanding at February 28, 2005. We issued Mr.
Waggoner a promissory note with interest at the prime rate (prime rate 4.0% at
May 26, 2004), secured by common stock of our wholly-owned subsidiary, DutchWest
Oil Company. Mr. Waggoner also received warrants to purchase 625,000 shares of
our common stock at an exercise price of $.75 per share. The note with accrued
interest was paid off in connection with the February 2005 offering, for a total
payment amount of $1,727,655.
On April 26, 2001, we obtained a line of credit of up to $2,500,000
from a bank for which two directors, Mr. J. Virgil Waggoner and Mr. Marshall A.
Smith, were guarantors. On April 3, 2002, the balance of the line of credit was
retired and a new line of credit of up to $3,000,000 was obtained from the bank
for which Mr. Waggoner and Mr. Smith were guarantors. The line of credit was
paid off in connection with the February 2005 offering.
On March 5, 2004, we entered into an Option Agreement for the Purchase
of Oil and Gas Leases (the "Addison Agreement") with W. L. Addison Investments
L.L.C., a private company owned by Mr. J. Virgil Waggoner and Mr. John E. Loehr,
two of our directors ("Addison"). Under the Addison Agreement, Addison agreed to
pay Summit, on our behalf, the non-recouped and outstanding advanced funds
amounting to $1,200,000, thereby retiring the Summit Agreement except for
certain surviving obligations with respect to areas of mutual interest and lease
bank agreements. For consideration of such payment, Addison acquired certain oil
and gas leases and wellbores from Summit but agreed to grant us a 180-day
redemption option (which was extended by mutual consent) to purchase the same
for $1,200,000, plus interest at the prime rate plus 2%. We tendered Addison a
promissory note in the amount of $600,000, with interest at the prime rate plus
2%, to substitute for an account payable to Summit, pursuant to the Summit
Agreement, in the same amount. The note would be considered paid in full if we
exercised the redemption option and paid the $1,200,000, plus interest. Summit
retained the right to participate up to a 25% working interest in the drilling
of any wells on the leases acquired by Addison. In the event we exercised the
redemption option, Addison could have, at its sole option, retained up to a 25%
working interest in the leases. The Addison Agreement was extended on July 15,
2004. We exercised the redemption option and Addison received $1,275,353 at the
closing of the February 2005 offering and waived its rights under the agreement
to a working interest under the leases.
F-40
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the April 2004 refinancing, the former lender agreed to
return all 2,000 shares of our Series F Preferred Stock held by it. Rather than
receive the shares as treasury shares (which would have meant cancellation of
the series) at our request the former lender transferred 400 of the shares to ST
Advisory Corp., an entity owned by John Loehr, our former CEO and a current
director, 400 of the shares to a financial advisor to the Company, and 200 of
the shares to Thomas R. Kaetzer, our President and Director at that time and
1,000 shares to Intermarket Management LLC, an entity partially owned by M.
Scott Manolis, one of our directors at that time. These transfers were to
compensate the financial advisor and Mr. Loehr, Kaetzer and Manolis for service
to the Company. On September 29, 2004, the financial advisor with 400 shares
transferred 140 shares to three non-management transferees.
$675,203 of the proceeds from the February 2005 offering went towards
the payment of accrued and unpaid dividends of the preferred stock. J. Virgil
Waggoner received $469,603 as a result. On December 22, 2004, ST Advisory Corp,
Intermarket Management LLC and Mr. Kaetzer converted their Series F preferred
shares into common stock. At the closing of the February 2005 offering they were
paid their proportionate share of accrued dividends due on the 2000 shares,
which totaled $17,167.
As part of the closing of the February 2005 offering, the investor and
the Company agreed to pay certain legal, accounting and other due diligence
costs and, also certain closing fees which totaled approximately $3.75 million.
Of this certain related parties received the following fees: OCWGW $1,000,000;
Intermarket Management LLC $500,000; Mr. Allan D. Keel $300,000 (which was used
to invest in the subject offering).
In January 2005, Allan D. Keel, our current president and chief
executive officer, and another individual lent an aggregate of $200,000 to the
Company, which was repaid in full out of the proceeds of the February 2005
offering. $120,000 of that loan was attributable to Mr. Keel. In addition, Mr.
Keel received warrants to purchase 30,000 shares of Common Stock at $0.01 share
in connection with this transaction.
Note 9. Income Taxes
The components of the net deferred federal income tax assets
(liabilities) recognized in our consolidated balance sheets were as follows:
F-41
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes - continued
December 31, December 31,
2004 2003
---- ----
Deferred tax assets
Net operating loss carryforwards $ 4,873,859 $ 6,352,507
Income tax credits 118,255
Oil and gas properties 198,596 610,381
Derivative instruments 572,100 201,099
Accretion 56,647 26,120
----------------- -------------------
Net deferred tax assets before
valuation allowance 5,819,457 7,190,107
Valuation Allowance (2,496,906) (7,190,107)
----------------- -------------------
Net deferred tax assets (liabilities) $ 3,322,551 $ -
================= ===================
At December 31, 2003 we had recorded a valuation allowance for the
entire balance of our deferred tax asset, due the uncertainty of our ability to
ever realize that benefit. Due to a change in circumstances described below, we
made an adjustment to the valuation allowance in 2004 resulting from a change in
judgment about the realizability of the net operating loss carryforwards in
future years. On February 28, 2005 we sold $ 42,000,000 in newly issued
preferred stock. We realized approximately $38,000,000, net of offering expenses
(See Note 2). We used the proceeds to retire substantially all of our notes
payable, paid substantial amounts of accounts payable and accrued expenses and
retained approximately $2,000,000 for working capital. After these transactions
we had approximately $190,000 in notes payable remaining. Of the retired notes
$20,094,000 bore interest at the prime rate plus 11%. As a result of these
transactions we believe we will generate enough future taxable income to fully
realize all of our available net operating loss carryforwards other than those
limited by Internal Revenue Code Section 382.
We had no income tax provision in 2003 and 2002. The provision for 2004
consists of the following:
2004
-----------------
Current tax $ 118,255
Deferred tax 1,252,395
Re-evaluation of beginning valuation allowance (4,693,201)
-----------------
Current income tax provision $ (3,322,551)
=================
The following table summarizes the difference between the actual tax
provision and the amounts obtained by applying the statutory tax rate of 38% to
the income (loss) before income taxes for the year ended December 31, 2004 and
34% for the years ended December 31, 2003 and 2002.
2004 2003 2002
----------------- ----------------- -----------------
Tax (benefit) calculated at statutory rate $ 1,849,812 $ (1,028,305) $ (1,530,786)
Increase (reductions) in taxes due to:
Income tax credits (118,255)
Effect on non-deductible expenses 170,530 362,910 65,174
Change in valuation allowance (4,693,201) 934,422 1,586,988
Other (531,437) (269,027) (121,376)
----------------- ----------------- -----------------
Current income tax provision $ (3,322,551) $ - $ -
================= ================= =================
F-42
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004 we had net operating loss carryforwards of
approximately $12,800,000, which are available to reduce future taxable income
and the related income tax liability. We expect we will not be able to utilize
carryforwards of approximately $6,600,000 due to the limitations of Internal
Revenue Code Section 382. The net operating loss carryforward expires at various
dates through 2023.
F-43
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments and Contingencies
Oil and Gas Hedging Activities
We entered into an agreement with an energy lender commencing in May,
2000, to hedge a portion of our oil and gas sales for the period of May, 2000
through April, 2004. The agreement called for initial volumes of 7,900 barrels
of oil and 52,400 Mmbtu of gas per month, declining monthly thereafter. We
entered into an additional agreement with the energy lender, commencing
September, 2001, to hedge an additional portion of our oil and gas sales for the
periods of September, 2001 through July, 2004 and September, 2001 through
December 2003, respectively. The agreement called for initial volumes of 15,000
barrels of oil and 50,000 Mmbtu of gas per month, declining monthly thereafter.
These agreements were terminated in April 2004 with the refinancing of the
related debt. We entered into a second agreement, as a result of refinancing the
debt, commencing May 2004, to hedge a portion of our oil and gas sales for the
period of May 2004 through October 2005. The agreement calls for 10,000 barrels
of oil and 60,000 Mmbtu of gas per month. As a result of these agreements, we
realized a reduction in revenues of $1,841,209 , $1,496,303 and $368,776 for the
twelve - month periods ended December 31, 2004, 2003 and 2002, respectively,
which is included in oil and gas sales.
Lease Obligations
We lease office space at one location under a sixty-four (64) month
lease, which commenced December 1, 2001 and was amended May 30, 2002 after
expansion. Annual commitments under the lease are: 2005 - $132,979, 2006 -
$135,323 and 2007 - $33,977. Total rent expense for the years ended December 31,
2004, 2003 and 2002 were approximately $142,500, $134,500 and $91,000,
respectively.
Litigation
From time to time, we are involved in litigation arising out of our
operations or from disputes with vendors in the normal course of business. As of
March 29, 2005, we were not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material effect on our consolidated
financial statements.
Note 11. Oil and Gas Reserves Information (Unaudited)
The estimates of proved oil and gas reserves utilized in the
preparation of the financial statements are estimated in accordance with
guidelines established by the Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve estimates be
prepared under existing economic and operating conditions with no provision for
price and cost escalations over prices and costs existing at year end except by
contractual arrangements.
We emphasize that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. Our policy is to amortize capitalized oil and gas costs on
the unit of production method, based upon these reserve estimates. It is
reasonably possible that, because of changes in market conditions or the
inherent imprecision of these reserve estimates, that the estimates of future
cash inflows, future gross revenues, the amount of oil and gas reserves, the
remaining estimated lives of the oil and gas properties, or any combination of
the above may be increased or reduced in the near term. If reduced, the carrying
amount of capitalized oil and gas properties may be reduced materially in the
near term.
F-44
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
The following unaudited table sets forth proved oil and gas reserves,
all within the United States, at December 31, 2004, 2003, and 2002, together
with the changes therein.
Crude Oil Natural Gas
(BBls) (Mcf)
---------------- ----------------
QUANTITIES OF PROVED RESERVES:
Balance December 31, 2001 5,871,837 39,257,907
Revisions (125,468) (4,959,229)
Extensions, discoveries and additions 22,129 1,090,024
Purchase 52,480 1,090,025
Sales (20,698) (837,856)
Production (278,374) (1,487,048)
---------------- ----------------
Balance December 31, 2002 5,521,906 34,158,823
Revisions (262,608) (308,080)
Extensions, discoveries and additions - -
Purchase - -
Sales - -
Production (221,335) (1,190,624)
---------------- ----------------
Balance December 31, 2003 5,037,963 32,660,119
Revisions (426,932) (2,857,240)
Extensions, discoveries and additions - 2,823,427
Purchase - -
Sales (1,474,115) (2,502,596)
Production (173,865) (1,033,433)
---------------- ----------------
Balance December 31, 2004 2,963,051 29,090,277
================ ================
PROVED DEVELOPED RESERVES:
December 31, 2002 4,025,552 25,374,113
================ ================
December 31, 2003 3,772,926 24,642,407
================ ================
December 31, 2004 2,575,403 20,965,574
================ ================
F-45
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
STANDARDIZED MEASURE:
Standardized measure of discounted future net cash flows relating to
proved reserves:
2004 2003 2002
------------------- ----------------- ----------------
Future cash inflows $ 290,998,312 $ 336,795,385 $ 308,381,837
Future production and development costs
Production 80,880,330 109,468,727 105,629,872
Development 24,141,982 21,460,459 23,350,811
------------------- ----------------- ----------------
Future cash flows before income taxes 185,976,000 205,866,199 179,401,154
Future income taxes (49,871,272) (46,885,360) (38,611,577)
------------------- ----------------- ----------------
Future net cash flows after income taxes 136,104,728 158,980,839 140,789,577
10% annual discount for estimated
timing of cash flows (52,602,351) (70,653,419) (63,165,742)
------------------- ----------------- ----------------
Standardized measure of discounted
future net cash flows $ 83,502,377 $ 88,327,420 $ 77,623,835
=================== ================= ================
The following reconciles the change in the standardized measure of
discounted future net cash flows:
Beginning of year $ 88,327,420 $ 77,623,835 $ 48,849,383
Changes from:
Purchases of proved reserves - - 3,054,793
Sales of producing properties (13,756,990) - (953,159)
Extensions, discoveries and improved
recovery, less related costs 10,280,787 - 2,002,176
Sales of oil and gas produced, net of
production costs (6,221,360) (5,316,619) (5,016,964)
Revision of quantity estimates (12,614,337) (3,751,921) (9,974,557)
Accretion of discount 11,439,568 9,889,881 5,649,945
Change in income taxes (4,552,701) (4,793,281) (13,624,917)
Changes in estimated future
development costs (8,040,393) 2,003,801 (5,254,561)
Development costs incurred that
reduced future development costs 6,117,899 2,024,663 5,569,881
Change in sales and transfer prices,
net of production costs 8,245,446 16,470,113 46,903,282
Changes in production rates (timing)
and other 4,277,038 (5,823,052) 418,533
------------------- ----------------- ----------------
End of year $ 83,502,377 $ 88,327,420 $ 77,623,835
=================== ================= ================
F-46
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Quarterly Results (Unaudited)
Summary data relating to the results of operations for each quarter for
the years ended December 31, 2004 and 2003 follows:
Three Months Ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------- --------------- ---------------- ----------------
2004
Net sales $ 2,538,729 $ 2,535,266 $ 2,802,946 $ 3,330,732
Gross profit 363,693 320,452 542,172 784,014
Net income (loss) (303,003) 9,323,281 (4,905,958) 3,502,289
Income (loss) per common
share
Basic $ (.02) $ .50 $ (.27) $ .19
Diluted $ (.02) $ .29 $ (.27) $ .10
2003
Net sales $ 3,250,603 $ 2,790,124 $ 2,436,063 $ 2,533,933
Gross profit 862,683 406,576 81,573 (433,321)
Net income (loss) 120,659 (1,231,883) (399,457) (1,640,828)
Income (loss) per common
share - Basic and Diluted $ .01 $ (.07) $ (.02) $ (.09)
F-47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
GULFWEST ENERGY INC.
Our report on the consolidated financial statements of GulfWest Energy Inc. and
Subsidiaries as of December 31, 2004 and 2003 and for each of the three years in
the period ended December 31, 2004, is included on page F-1. In connection with
our audit of such consolidated financial statements, we have also audited the
related financial statement schedule for the years ended December 31, 2004, 2003
and 2002 on page F-34.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
\s\ WEAVER AND TIDWELL, L.L.P.
------------------------------
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
March 29, 2005
F-48
GULFWEST ENERGY INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
BALANCE BALANCE
AT AT
BEGINNING PROVISIONS/ RECOVERIES/ END
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
-------------------------------------- ---------------- ----------------- ----------------- --------------
For the year ended
December 31, 2002
Accounts and notes
receivable related
parties $ 740,478 $ $ (740,478) $
================ ================= ================= ==============
Valuation allowance for
deferred tax assets $ 4,668,697 $ 1,586,988 $ $ 6,255,685
================ ================= ================= ==============
For the year ended
December 31, 2003
Valuation allowance for
deferred tax assets $ 6,255,685 $ 934,422 $ 7,190,107
================ ================= ================= ==============
For the year ended
December 31, 2004
Valuation allowance for
deferred tax assets $ 7,190,107 $ (4,693,201) $ 2,496,906
================ ================= ================= ==============
F-49
CRIMSON EXPLORATION INC.
18,861,799 Shares
Common Stock
, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be paid by the Company in
connection with the offering described in this Registration Statement. All
amounts are estimates, except the Securities and Exchange Commission
Registration Fee.
SEC Registration Fee*................................... $924
Legal Fees and Expenses................................. 40,000
Accounting Fees and Expenses............................ 20,000
Miscellaneous........................................... 4,076
------------
Total.............................................. $65,000
============
* The registration fee was paid in connection with the
initial filing of the registration statement. No additional
fee is required in connection with this post-effective
amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits the
Registrant to indemnify directors, officers, employees or agents, or persons
serving in such capacity at the Registrant's request at another entity, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred, other than an action by or in the
right of the Registrant, to which such director, officer, employee or agent may
be a party, provided such person shall have acted in good faith and shall have
reasonably believed that his conduct was in or not opposed to the best interests
of the Registrant and, in the case of a criminal proceeding, that he had no
reasonable cause to believe his conduct was unlawful. In connection with an
action by or in the right of the Registrant against a director, officer,
employee or agent, the Registrant has the power to indemnify such director,
officer, employee or agent for actual and reasonable expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
suit (a) if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the Registrant, and (b)
if found liable to the Registrant, only if ordered by a court of law. Section
145 provides that such section is not exclusive of any other indemnification
rights granted by the Registrant to directors, officers, employees or agents.
The Delaware General Corporation law provides for mandatory indemnification of
directors and officers where such director or officer is successful on the
merits in the types of proceedings discussed above.
The Certificate of Incorporation and Bylaws of the Registrant provides
for mandatory indemnification of directors to the fullest extent authorized or
permitted by applicable law. The right to indemnification is a contract right
and includes the right to be paid by the Registrant the expenses incurred in
defending any such proceeding in advance of its final disposition. Our Bylaws
provide that, if the Delaware General Corporation Law requires, an advancement
of expenses incurred by a director in his capacity as a director or officer of
the Registrant may be made only upon delivery to the Registrant of an
undertaking to repay all advanced amounts if it is ultimately determined by
final nonappealable judicial decision that such person is not entitled to be
indemnified for those expenses.
The Certificate of Incorporation of the Registrant also contains a
provision eliminating the liability of a director to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted by the Delaware General Corporation Law.
II-1
The Registrant has obtained insurance on behalf of the Registrant and
its directors and officers individually against certain liabilities. In
addition, all of the Registrant's directors and executive officers have entered
into director indemnification agreements with our predecessor providing for
indemnification and advancement of expenses in connection with legal
proceedings, and, furthermore, the terms of the agreements providing for the
filing of this registration statement or inclusion of shares thereon by certain
of the selling shareholders provide for cross-indemnification of the selling
shareholders, on the one hand, and the Registrant, its directors and officers,
on the other hand, for liabilities arising under the Securities Act of 1933
relating to this registration statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM
REGISTERED SECURITIES.
As shown in the table that follows, during 2003, 2004 and to July 25,
2005, we sold preferred stock convertible to Common Stock, and also issued
shares of Common Stock, not registered under the Securities Act of 1933, as
amended, and exempt under Section 4(2) of the Act. Unless otherwise noted in
this Item, we believe that other issuances described in this Item would be
private placements exempt under Section 4(2) of the Act due to the nature of
each transaction and the relationship of such investors with us and their
knowledge of the company. No underwriters were used, and no underwriting
discounts or commissions were paid in connection with the sales.
Shares/ Exercise/
Underlying Conversion
Date Security Holder(s) Shares Price Consideration
---- -------- --------- ------ ----- -------------
06/12/03 Preferred
Stock Lender 1,000,000 $ 1.00 Loan Penalty
04/27/04 Preferred Accredited
Stock Investors 11,428,571 $ .35 $4,000,000
01/10/05 Warrants Lenders 50,000 $ 0.01 $200,000 Loan
01/21/05 Common
Stock Lender 29,100 N/A Loan Extension
01/21/05 Common Preferred
Stock Holders 356,250 N/A Settlement
02/28/05 Preferred Accredited
Stock Investor 45,050,000 $ .90 $40,500,000
2/28/05 Preferred Accredited
Stock Investor 2,857,143 $ .35 $ 1,500,000
From July 15, 2002 to February 12, 2003, we issued promissory notes to
two accredited investors in the total amount of $300,000, with interest at 8%
per annum and warrants to purchase a total of 100,000 shares of our Common Stock
at $.75 per share; a promissory note to one accredited investor in the total
amount of $300,000 with an original interest rate of 8% that increased to 12% on
January 1, 2003 and warrants to purchase 150,000 shares of our Common Stock at
an exercise price of $.75 per share; and a promissory note to a director in the
amount of $1,200,000, with interest at the prime rate and warrants to purchase
625,000 shares of our Common Stock at $.75 per share. In December 2002 we sold
9,000 shares of Series E Preferred Stock to a director for $800,000, the terms
of which were amended on February 28, 2005 to provide for, among other things, a
6% rather than $30 annual dividend, which may be deferred until 2009 by us.
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On April 27, 2004, we completed an $18,000,000 financing package with
new energy lenders, resulting in the return to the Company of 2,000 shares of
Series F Preferred Stock with an aggregate liquidation preference of $1,000,000.
This preferred stock, at the request of the Company, was transferred by the
previous lender to a financial advisor to the Company and to two companies
affiliated with two directors of the Company in satisfaction of Company
obligations to them, and 140 of the 400 shares of Series F Preferred Stock held
by the financial advisor were transferred to three investors. In October 2004,
60 shares of Series F Preferred Stock had converted into 30,000 shares of Common
Stock. On December 22, 2004, 1,600 shares of Series F Preferred Stock held by
three investors converted to 800,000 shares of Common Stock, and on March 11 and
March 15, 2005, the remaining 340 shares of Series F Preferred Stock converted
to 170,000 shares of Common Stock. We issued the new lenders warrants to
purchase 2,035,621 shares of our Common Stock at an exercise price of $.01 per
share, expiring in five years, and on April 1 and April 4, 2005, the warrants
were exercised for an aggregate of 2,018,224 shares of Common Stock by
"cashless" exercise.
Simultaneously, GulfWest Oil & Gas Company completed the initial phase
of a private offering of its Series A Preferred Stock for $4,000,000. As part of
an advisory fee, we issued $500,000 of the Series A Preferred Stock to a
financial advisor. One of our former directors acquired $1,500,000 of the Series
A Preferred Stock. In October 2004, 50 shares of the Series A Preferred Stock
had been exchanged by one investor for 71,428 shares of our Common Stock. By
March 15, 2005, pursuant to a charter amendment, five holders holding 6,700
shares of Series A Preferred Stock had elected to exchange their shares of
Series A Preferred Stock for Series H Preferred Stock, convertible into common
stock on the same basis as the Series A Preferred Stock, and the remainder not
previously exchanged had converted into 4,642,859 shares of Common Stock. One
such holder affiliated with a director immediately elected, upon exchange of the
Series A Preferred Stock for Series H Preferred Stock on February 28, 2005, to
convert its 200 Series H shares to 285,715 shares of Common Stock, and on April
22, 2005 an additional 1,250 shares of Series H Preferred Stock converted into
approximately 1.8 million shares of Common Stock.
On January 7, 2005, we amended our April 2004 credit agreement to
extend the target date for repayment to February 28, 2005. We exercised this
option on January 26, 2005. We issued 29,100 shares of our common stock to our
lender on February 15, 2005 in an exempt private placement in connection with
this amendment.
On January 21, 2005 we issued 356,250 shares of common stock to certain
holders of the Series A Preferred Stock in settlement of a dispute regarding the
terms of the Series A Preferred Stock.
In January 2005, a current officer and another individual lent an
aggregate of $200,000 to us, which was repaid in full on February 28, 2005. In
connection with that loan we issued warrants to purchase 50,000 shares of our
common stock; on March 22, 2005 one of the individuals exercised his warrants
and received 20,000 shares of our Common Stock.
On February 28, 2005, we sold in a private placement, 81,000 shares of
our Series G Preferred Stock to OCM GW Holdings, LLC for an aggregate offering
price of $40.5 million. In addition, GulfWest Oil & Gas Company issued, in a
private placement, 2,000 shares of our Series A Preferred Stock, having a
liquidation preference of $1.0 million, to OCM GW Holdings, LLC for $1.5
million, which by March 15, 2005 had been exchanged for 2,000 shares of Series H
Preferred Stock pursuant to a charter amendment.
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ITEM 16 Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Registration
Statement:
Number Description
------ -----------
3.1 Certificate of Incorporation of the Registrant. (Previously
filed on our current report on Form 8-K filed July 5, 2005.)
3.2 Certificate of Designation, Preferences and Rights of Series
D Preferred Stock. (Previously filed on our current report
on Form 8-K filed July 5, 2005.)
3.3 Certificate of Designation, Preferences and Rights of
Cumulative Convertible Preferred Stock, Series E.
(Previously filed on our current report on Form 8-K filed
July 5, 2005.)
3.4 Certificate of Designation, Preferences and Rights of Series
G Convertible Preferred Stock. (Previously filed on our
current report on Form 8-K filed July 5, 2005.)
3.5 Certificate of Designation, Preferences and Rights of Series
H Convertible Preferred Stock. (Previously filed on our
current report on Form 8-K filed July 5, 2005.)
3.6 Bylaws of the Registrant. (Previously filed on our current
report on Form 8-K filed July 5, 2005.)
3.7 Agreement and Plan of Merger, dated June 28, 2005, between
GulfWest Energy Inc. and Crimson Exploration Inc.
(Previously filed on our current report on Form 8-K filed
July 5, 2005.)
4.1 Letter Agreement by and among GulfWest Energy Inc., a Texas
corporation, GulfWest Oil & Gas Company and the investors
listed on the signature page thereof, dated April 22, 2004.
(Previously filed with our Current Report on Form 8-K, dated
April 29, 2004 and filed with the Commission on May 10,
2004.)
4.2 Warrant Agreement made by and between GulfWest Energy Inc.,
and Highbridge/Zwirn Special Opportunities FUND, L.P., and
Drawbridge Special Opportunities Fund LP, Grantees, dated
and effective April 29, 2004. (Previously filed with our
Current Report on Form 8-K dated April 29, 2004 and filed
with the Commission on May 10, 2004.)
4.3 Shareholders Rights Agreement between GulfWest Energy Inc.
and OCM GW Holdings, LLC dated February 28, 2005.
(Previously filed with the Form 13D, Reg. No. 005-54301,
filed with the Commission on March 10, 2005.)
4.4 Omnibus and Release Agreement among GulfWest Energy Inc.,
OCM GW Holdings, LLC and those signatories set forth on the
signature page thereto, dated as of February 28, 2004.
(Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
4.5 Share Transfer Restriction Agreement between J. Virgil
Waggoner and OCM GW Holdings, LLC, dated February 28, 2005.
(Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
4.6 Irrevocable Proxy executed by J. Virgil Waggoner dated
February 28, 2005. (Previously filed with our Form 10-K,
Reg. No. 001-12108, filed with the Commission on March 31,
2005.)
4.7 Exchange Agreement between GulfWest Energy Inc. and GulfWest
Oil & Gas Company, dated February 28, 2005. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
4.8 Letter Agreement among OCM GW Holdings, LLC, OCM Principal
Opportunities Fund III, L.P., OCM Principal Opportunities
Fund III GP, LLC, Oaktree Capital Management, LLC, GulfWest
Energy Inc., GulfWest Oil & Gas Company and J. Virgil
Waggoner dated February 28, 2005. (Previously filed with our
Form 10-K, Reg. No. 001-12108, filed with the Commission on
March 31, 2005.)
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4.9 Subscription Agreement among OCM GW Holdings, LLC, Allan D.
Keel and those individuals listed on the signature page
thereto, dated February 28, 2005. (Previously filed with the
Form 13D, Reg. No. 005-54301, filed with the Commission on
March 10, 2005.)
5.1* Opinion of Akin Gump Strauss Hauer & Feld LLP
10.1 Employment Agreement between Allan D. Keel and GulfWest
Energy, Inc., dated February 28, 2005. (Previously filed
with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
10.2 Employment Agreement between E. Joseph Grady and GulfWest
Energy, Inc., dated February 28, 2005. (Previously filed
with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
10.3 GulfWest Oil Company 1994 Stock Option and Compensation
Plan, amended and restated as of April 1, 2001 and approved
by the shareholders on May 18, 2001. (Previously filed with
our Proxy Statement on Form DEF 14A, filed with the
Commission on April 16, 2001.)
10.4 GulfWest Energy Inc. 2004 Stock Option and Compensation
Plan. (Previously filed with our Form 10-K, Reg. No.
001-12108, filed with the Commission on March 31, 2005.)
10.5 GulfWest Energy Inc. 2005 Stock Option Incentive Plan.
(Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
10.6 Form of GulfWest Energy Inc. 2005 Stock Incentive Plan Stock
Option Agreement. (Previously filed with our Form 10-K, Reg.
No. 001-12108, filed with the Commission on March 31, 2005.)
10.7 Form of Warrant Agreement. (Previously filed with our Form
10-K, Reg. No. 001-12108, filed with the Commission on March
31, 2005.)
10.8 Form of Indemnification Agreement for directors and
officers. (Previously filed with our Form 8-K, Reg. No.
001-12108, filed with the Commission on July 21, 2005.)
10.9 Letter Agreement among D.B. Zwirn Special Opportunities
Fund, LP, GulfWest Oil & Gas, and Drawbridge Special
Opportunities Fund, LP, dated January 7, 2005. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
10.10 Series G Subscription Agreement between GulfWest Energy
Inc. and OCM GW Holdings, LLC dated February 28, 2005.
(Previously filed with the Form 13D, Reg. No. 005-54301,
filed with the Commission on March 10, 2005.)
10.11 Series A Subscription Agreement between GulfWest Oil & Gas
Company and OCW GW Holdings, LLC dated February 28, 2005.
(Previously filed with the Form 13D, Reg. No. 005-54301,
filed with the Commission on March 10, 2005.)
10.12 Letter Agreement between W.L. Addison Investment, L.L.C.,
GulfWest Energy Inc., and Setex Oil and Gas Company dated
February 24, 2005 extending Option Agreement for the
Purchase of Oil and Gas Leases dated March 5, 2004.
(Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
10.13 Letter Agreement between W.L. Addison Investment, L.L.C.,
GulfWest Energy Inc., and Setex Oil and Gas Company dated
July 15, 2004 extending Option Agreement for the Purchase of
Oil and Gas Leases dated March 5, 2004. (Previously filed
with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
10.14 Option Agreement for the Purchase of Oil and Gas Leases
with W.L. Addison Investments L.L.C. dated March 5, 2004
(Previously filed.)
10.15 Employment Agreement with Thomas R. Kaetzer. (Previously
filed.)
10.16 Consulting Agreement with Marshall A. Smith. (Previously
filed.)
10.17 Oil and Gas Property Acquisition, Exploration and
Development Agreement with Summit Investment Group-Texas,
L.L.C. effective December 1, 2001. (Previously filed.)
II-5
10.18 Employment Agreement between Tracy Price and GulfWest
Energy Inc., dated April 1, 2005. (Previously filed.)
10.19 Employment Agreement between Tommy Atkins and GulfWest
Energy Inc., dated April 1, 2005. (Previously filed.)
10.20 Employment Agreement between Jay S. Mengle and GulfWest
Energy Inc., dated April 1, 2005. (Previously filed.)
10.21 Employment Agreement between Thomas R. Kaetzer and GulfWest
Energy Inc., dated April 1, 2005. (Previously filed.)
10.22* Summary terms of June 2005 Director Compensation Plan.
(Included on page 47 of the Prospectus.)
10.23 Credit Agreement, dated July 15, 2005, among Crimson
Exploration Inc., Wells Fargo, N.A., as agent and a lender,
and each lender from time to time a party thereto.
(Previously filed with our Form 8-K, Reg. No. 001-12108,
filed with the Commission on July 21, 2005.)
10.24 Form of director restricted stock grant. (Previously filed
with our Form 8-K, Reg. No. 001-12108, filed with the
Commission on July 21, 2005.)
10.25* Limited Waiver of Shareholders Rights Agreement, dated
July 14, 2005, by OCM GW Holdings, LLC.
22.1* Subsidiaries of the Registrant (included on pages 35-36 of
the Prospectus.)
23.1 Consent of Akin Gump Strauss Hauer & Feld LLP. (included in
Exhibit 5.1).
23.2 Consent of Weaver and Tidwell, L.L.P. (Previously filed with
our Form 10-K, Reg. No. 001-12108, filed with the Commission
on March 31, 2005.)
23.3 Consent of Independent Petroleum Engineers. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
25* Power of Attorney (included on signature page of this
Amendment). *Filed Herewith
(b) The Financial Statement Schedules are incorporated by reference starting on
Page F-1 of this Amendment.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended.
II-6
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) of the
Securities Act, if, in the aggregate, the changes in volume and
price represent not more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
2. That for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-7
S I G N A T U R E S
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post Effective Amendment No. 2 to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on the 27th day of
July, 2005.
CRIMSON EXPLORATION INC.
By: /s/ Allan D. Keel
---------------------------------------------------------
Allan D. Keel, President and Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Allan D. Keel and E. Joseph Grady as his
true and lawful attorney-in-fact and agent, with full power of substitution, for
him and in his name, place, and stead, in any and all capacities to sign any and
all amendments or supplements to this Registration Statement on Form S-1, and to
file the same, and with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment No. 2 to the Registration Statement has been signed below by
the following persons and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Allan D. Keel President, Chief Executive
--------------------------------- Officer and Director July 27, 2005
Allan D. Keel
/s/ E. Joseph Grady Senior Vice President and Chief
--------------------------------- Financial Officer July 27, 2005
E. Joseph Grady
/s/ Richard L. Creel Vice President of Finance and
--------------------------------- Controller July 27, 2005
Richard L. Creel
/s/ B. James Ford Director
--------------------------------- July 27, 2005
B. James Ford
/s/ Skardon F. Baker Director
---------------------------------
Skardon F. Baker July 27, 2005
II-8
/s/ Lee B. Backsen Director
---------------------------------
Lee B. Backsen July 27, 2005
/s/ Lon McCain Director
---------------------------------
Lon McCain July 27, 2005
II-9
Index to Exhibits
The following documents are filed as part of this Registration Statement:
Number Description
------ -----------
3.1 Certificate of Incorporation of the Registrant. (Previously
filed on our current report on Form 8-K filed July 5, 2005.)
3.2 Certificate of Designation, Preferences and Rights of Series
D Preferred Stock. (Previously filed on our current report
on Form 8-K filed July 5, 2005.)
3.3 Certificate of Designation, Preferences and Rights of
Cumulative Convertible Preferred Stock, Series E.
(Previously filed on our current report on Form 8-K filed
July 5, 2005.)
3.4 Certificate of Designation, Preferences and Rights of Series
G Convertible Preferred Stock. (Previously filed on our
current report on Form 8-K filed July 5, 2005.)
3.5 Certificate of Designation, Preferences and Rights of Series
H Convertible Preferred Stock. (Previously filed on our
current report on Form 8-K filed July 5, 2005.)
3.6 Bylaws of the Registrant. (Previously filed on our current
report on Form 8-K filed July 5, 2005.)
3.7 Agreement and Plan of Merger, dated June 28, 2005, between
GulfWest Energy Inc. and Crimson Exploration Inc.
(Previously filed on our current report on Form 8-K filed
July 5, 2005.)
4.1 Letter Agreement by and among GulfWest Energy Inc., a Texas
corporation, GulfWest Oil & Gas Company and the investors
listed on the signature page thereof, dated April 22, 2004.
(Previously filed with our Current Report on Form 8-K, dated
April 29, 2004 and filed with the Commission on May 10,
2004.)
4.2 Warrant Agreement made by and between GulfWest Energy Inc.,
and Highbridge/Zwirn Special Opportunities FUND, L.P., and
Drawbridge Special Opportunities Fund LP, Grantees, dated
and effective April 29, 2004. (Previously filed with our
Current Report on Form 8-K dated April 29, 2004 and filed
with the Commission on May 10, 2004.)
4.3 Shareholders Rights Agreement between GulfWest Energy Inc.
and OCM GW Holdings, LLC dated February 28, 2005.
(Previously filed with the Form 13D, Reg. No. 005-54301,
filed with the Commission on March 10, 2005.)
4.4 Omnibus and Release Agreement among GulfWest Energy Inc.,
OCM GW Holdings, LLC and those signatories set forth on the
signature page thereto, dated as of February 28, 2004.
(Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
4.5 Share Transfer Restriction Agreement between J. Virgil
Waggoner and OCM GW Holdings, LLC, dated February 28, 2005.
(Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
4.6 Irrevocable Proxy executed by J. Virgil Waggoner dated
February 28, 2005. (Previously filed with our Form 10-K,
Reg. No. 001-12108, filed with the Commission on March 31,
2005.)
4.7 Exchange Agreement between GulfWest Energy Inc. and GulfWest
Oil & Gas Company, dated February 28, 2005. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
4.8 Letter Agreement among OCM GW Holdings, LLC, OCM Principal
Opportunities Fund III, L.P., OCM Principal Opportunities
Fund III GP, LLC, Oaktree Capital Management, LLC, GulfWest
Energy Inc., GulfWest Oil & Gas Company and J. Virgil
Waggoner dated February 28, 2005. (Previously filed with our
Form 10-K, Reg. No. 001-12108, filed with the Commission on
March 31, 2005.)
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4.9 Subscription Agreement among OCM GW Holdings, LLC, Allan D.
Keel and those individuals listed on the signature page
thereto, dated February 28, 2005. (Previously filed with the
Form 13D, Reg. No. 005-54301, filed with the Commission on
March 10, 2005.)
5.1* Opinion of Akin Gump Strauss Hauer & Feld LLP
10.1 Employment Agreement between Allan D. Keel and GulfWest
Energy, Inc., dated February 28, 2005. (Previously filed
with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
10.2 Employment Agreement between E. Joseph Grady and GulfWest
Energy, Inc., dated February 28, 2005. (Previously filed
with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
10.3 GulfWest Oil Company 1994 Stock Option and Compensation
Plan, amended and restated as of April 1, 2001 and approved
by the shareholders on May 18, 2001. (Previously filed with
our Proxy Statement on Form DEF 14A, filed with the
Commission on April 16, 2001.)
10.4 GulfWest Energy Inc. 2004 Stock Option and Compensation
Plan. (Previously filed with our Form 10-K, Reg. No.
001-12108, filed with the Commission on March 31, 2005.)
10.5 GulfWest Energy Inc. 2005 Stock Option Incentive Plan.
(Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
10.6 Form of GulfWest Energy Inc. 2005 Stock Incentive Plan Stock
Option Agreement. (Previously filed with our Form 10-K, Reg.
No. 001-12108, filed with the Commission on March 31, 2005.)
10.7 Form of Warrant Agreement. (Previously filed with our Form
10-K, Reg. No. 001-12108, filed with the Commission on March
31, 2005.)
10.8 Form of Indemnification Agreement for directors and
officers. (Previously filed with our Form 8-K, Reg. No.
001-12108, filed with the Commission on July 21, 2005.)
10.9 Letter Agreement among D.B. Zwirn Special Opportunities
Fund, LP, GulfWest Oil & Gas, and Drawbridge Special
Opportunities Fund, LP, dated January 7, 2005. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
10.10 Series G Subscription Agreement between GulfWest Energy
Inc. and OCM GW Holdings, LLC dated February 28, 2005.
(Previously filed with the Form 13D, Reg. No. 005-54301,
filed with the Commission on March 10, 2005.)
10.11 Series A Subscription Agreement between GulfWest Oil & Gas
Company and OCW GW Holdings, LLC dated February 28, 2005.
(Previously filed with the Form 13D, Reg. No. 005-54301,
filed with the Commission on March 10, 2005.)
10.12 Letter Agreement between W.L. Addison Investment, L.L.C.,
GulfWest Energy Inc., and Setex Oil and Gas Company dated
February 24, 2005 extending Option Agreement for the
Purchase of Oil and Gas Leases dated March 5, 2004.
(Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
10.13 Letter Agreement between W.L. Addison Investment, L.L.C.,
GulfWest Energy Inc., and Setex Oil and Gas Company dated
July 15, 2004 extending Option Agreement for the Purchase of
Oil and Gas Leases dated March 5, 2004. (Previously filed
with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
10.14 Option Agreement for the Purchase of Oil and Gas Leases
with W.L. Addison Investments L.L.C. dated March 5, 2004
(Previously filed.)
10.15 Employment Agreement with Thomas R. Kaetzer. (Previously
filed.)
10.16 Consulting Agreement with Marshall A. Smith. (Previously
filed.)
10.17 Oil and Gas Property Acquisition, Exploration and
Development Agreement with Summit Investment Group-Texas,
L.L.C. effective December 1, 2001. (Previously filed.)
II-11
10.18 Employment Agreement between Tracy Price and GulfWest
Energy Inc., dated April 1, 2005. (Previously filed.)
10.19 Employment Agreement between Tommy Atkins and GulfWest
Energy Inc., dated April 1, 2005. (Previously filed.)
10.20 Employment Agreement between Jay S. Mengle and GulfWest
Energy Inc., dated April 1, 2005. (Previously filed.)
10.21 Employment Agreement between Thomas R. Kaetzer and GulfWest
Energy Inc., dated April 1, 2005. (Previously filed.)
10.22* Summary terms of June 2005 Director Compensation Plan.
(Included on page 47 of the Prospectus.)
10.23 Credit Agreement, dated July 15, 2005, among Crimson
Exploration Inc., Wells Fargo, N.A., as agent and a lender,
and each lender from time to time a party thereto.
(Previously filed with our Form 8-K, Reg. No. 001-12108,
filed with the Commission on July 21, 2005.)
10.24 Form of director restricted stock grant. (Previously filed
with our Form 8-K, Reg. No. 001-12108, filed with the
Commission on July 21, 2005.)
10.25* Limited Waiver of Shareholders Rights Agreement, dated
July 14, 2005, by OCM GW Holdings, LLC.
22.1* Subsidiaries of the Registrant (included on pages 35-36 of
the Prospectus.)
23.1 Consent of Akin Gump Strauss Hauer & Feld LLP. (included in
Exhibit 5.1).
23.2 Consent of Weaver and Tidwell, L.L.P. (Previously filed with
our Form 10-K, Reg. No. 001-12108, filed with the Commission
on March 31, 2005.)
23.3 Consent of Independent Petroleum Engineers. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the
Commission on March 31, 2005.)
25* Power of Attorney (included on signature page of this
Amendment). *Filed Herewith
II-12