<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1996
REGISTRATION NO. 333-12007
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
to
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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PATINA OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 1311 75-2629477
(State of other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number) incorporation or organization)
1625 BROADWAY DAVID J. KORNDER
SUITE 2000 1625 BROADWAY
DENVER, COLORADO 80202 SUITE 2000
(303) 389-3600 DENVER, COLORADO 80202
(303) 389-3600
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of telephone number, including area
registrant's principal executive offices) code, of agent for service)
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Copies to:
RONALD T. ASTIN OR
J. MARK METTS
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
1001 FANNIN
HOUSTON, TEXAS 77002-6760
(713) 758-2222
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable following the effectiveness of this
Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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7 1/8% Convertible
Preferred Stock . . . . . . . . 388,850 $ 25.125 $ 9,769,856.25 $ 3,370.60(3)
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(1) Consists of the following numbers of shares of 7 1/8%
Convertible Preferred Stock of Patina Oil & Gas Corporation
("Patina") that may be issued in connection with the
redemption, reclassification and exchange of each Depositary
Share representing an interest in one-eighth of a share of
$12.00 Convertible Preferred Stock of Gerrity Oil & Gas
Corporation ("Gerrity") into .5270 shares of Patina 7 1/8%
Convertible Preferred Stock.
(2) Estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(f)(1) and Rule 457(c),
based on the average of the low and high sales prices of Patina
7 1/8% Convertible Preferred Stock on the New York Stock
Exchange on September 9, 1996 of $25.125 and the exchange ratio
of .5270 shares of Patina 7 1/8% Convertible Preferred Stock
for each share of Gerrity $12.00 Convertible Preferred Stock.
(3) Previously paid.
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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 DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
GERRITY OIL & GAS CORPORATION
1625 Broadway, Suite 2000
Denver, Colorado 80202
October 2, 1996
You are cordially invited to attend a Special Meeting of Stockholders
of Gerrity Oil & Gas Corporation ("Gerrity"), to be held at 9:00 a.m., Eastern
Time, on Thursday, October 31, 1996, at the offices of the Chairman and Chief
Executive Officer of Patina Oil & Gas Corporation ("Patina"), 595 Madison
Avenue, 27th Floor, New York, New York (the "Special Meeting").
The purpose of the Special Meeting is to consider and vote upon (i) a
proposal to approve and adopt an amendment to the Certificate of Incorporation
of Gerrity (the "Certificate of Amendment") to redeem, reclassify and exchange
each Depositary Share (the "Depositary Shares") representing an interest in
one-eighth of a share of the $12.00 Convertible Preferred Stock of Gerrity (the
"Gerrity Preferred Stock") into .5270 shares of 7 1/8% Convertible Preferred
Stock of Patina (the "Patina Preferred Stock") together with the amount of any
dividends or other distributions (without interest) which may have become
payable in respect of Patina Preferred Stock during the period commencing on the
date of the initial issuance of the Patina Preferred Stock (May 2, 1996) and
ending on the date of surrender by the holders of the certificates formerly
representing Depositary Shares (the "Transaction"), and (ii) such other matters
as may properly come before the Special Meeting.
The Patina Preferred Stock pays quarterly dividends at a rate of 7
1/8% per annum (based upon its liquidation preference, or approximately $1.78
per share per annum), has a liquidation preference of $25.00 per share and, at
the option of the holder, is convertible into Common Stock of Patina ("Patina
Common Stock") at a conversion price per share of $8.61. The Patina Preferred
Stock will be redeemable by Patina after three years from the date of initial
issuance and subject to certain conditions, after two years from the date
of such issuance. The Patina Preferred Stock was initially issued upon
the consummation, on May 2, 1996, of an exchange offer by Patina for
Depositary Shares (the "Exchange Offer"). Pursuant to the Exchange Offer,
Patina offered to exchange .5270 shares of Patina Preferred Stock for each
outstanding Depositary Share, the same ratio to be employed in the Transaction.
Depositary Shares representing approximately 75.7% of the outstanding Gerrity
Preferred Stock were tendered to Patina and exchanged in the Exchange Offer or
were acquired after the Exchange Offer and are now owned by Patina. On the
date the Exchange Offer was completed, Gerrity was merged with a transitory
subsidiary of Patina, with Gerrity as the surviving corporation (the "Merger")
which resulted in Patina becoming the holder of all of the outstanding common
stock of Gerrity.
The Board of Directors of Gerrity has been advised by the investment
banking firm of A. G. Edwards & Sons, Inc. that, as of the date of this
Information Statement/Prospectus, in its opinion, the terms of the Transaction
contemplated by the Certificate of Amendment are fair from a financial point of
view to the holders (other than Patina) of Depositary Shares representing
Gerrity Preferred Stock. A copy of the opinion of A. G. Edwards & Sons, Inc.,
which sets forth the assumptions made, matters considered and limits of such
opinion, is included in the enclosed Information Statement/Prospectus as Annex
B.
FOR THE REASONS SET FORTH IN THE ACCOMPANYING INFORMATION
STATEMENT/PROSPECTUS, THE BOARDS OF DIRECTORS OF BOTH GERRITY AND PATINA BELIEVE
THAT THE CERTIFICATE OF AMENDMENT AND THE TRANSACTION ARE FAIR TO, AND IN THE
BEST INTERESTS OF, HOLDERS (OTHER THAN PATINA) OF DEPOSITARY SHARES REPRESENTING
GERRITY PREFERRED STOCK, AND THE BOARD OF DIRECTORS OF GERRITY HAS UNANIMOUSLY
VOTED TO RECOMMEND THAT HOLDERS OF COMMON STOCK OF GERRITY ("GERRITY COMMON
STOCK") AND DEPOSITARY SHARES REPRESENTING GERRITY PREFERRED STOCK VOTE FOR
APPROVAL OF THE TRANSACTION AND ADOPTION OF THE CERTIFICATE OF AMENDMENT
RELATED THERETO.
In order to effect the Transaction, the Certificate of Amendment must
be adopted and approved, which, in the circumstances of the Transaction,
requires the affirmative votes of a majority of the outstanding shares of
Gerrity Common Stock and of 66 2/3% of the outstanding shares of Gerrity
Preferred Stock, voting separately as a class. Since Patina owns all of the
outstanding Gerrity Common Stock and Depositary Shares representing more than
66 2/3% of the Gerrity Preferred Stock and has advised Gerrity that it will
vote all shares owned by it for approval and adoption of the Certificate of
Amendment, approval of the Transaction at the Special Meeting is assured.
Accordingly, WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
The Certificate of Amendment and financial and other information
concerning the businesses of Patina and Gerrity are included in the enclosed
Information Statement/Prospectus. You are encouraged to review carefully the
enclosed Information Statement/Prospectus.
Sincerely,
Thomas J. Edelman
Chairman and Chief Executive Officer
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GERRITY OIL & GAS CORPORATION
1625 Broadway, Suite 2000
Denver, Colorado 80202
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on October 31, 1996
To the Stockholders of Gerrity Oil & Gas Corporation:
A Special Meeting of Stockholders of Gerrity Oil & Gas Corporation, a
Delaware corporation ("Gerrity"), will be held on Thursday, October 31, 1996 at
9:00 a.m., Eastern Time, at the offices of the Chairman and Chief Executive
Officer of Patina Oil & Gas Corporation ("Patina"), 595 Madison Avenue, 27th
Floor, New York, New York (the "Special Meeting"), for the following purposes:
1. To consider the approval and adoption of an amendment to the
Certificate of Incorporation of Gerrity (the "Certificate of
Amendment") to redeem, reclassify and exchange (the "Transaction"),
upon the effectiveness of the Certificate of Amendment, each
outstanding share of the $12.00 Convertible Preferred Stock of Gerrity
(the "Gerrity Preferred Stock") into 4.216 shares of 7 1/8% Convertible
Preferred Stock of Patina (the "Patina Preferred Stock") (or .5270
shares of Patina Preferred Stock for each Depositary Share (the
"Depositary Shares") representing an interest in one-eighth of a share
of Gerrity Preferred Stock) together with the amount of any dividends
or other distributions (without interest) which may have become payable
in respect of Patina Preferred Stock during the period commencing on
the date of initial issuance of the Patina Preferred Stock and ending
on the date of surrender of the Depositary Share certificates by the
holders (other than Patina) thereof.
2. To transact such other business as may properly come before
the Special Meeting or any adjournment or postponement thereof.
Further information concerning the Certificate of Amendment and the
Transaction contemplated thereby is set forth in the accompanying Information
Statement/Prospectus and in the Certificate of Amendment, a copy of which is
included as Annex A thereto.
Only holders of record of shares of common stock of Gerrity ("Gerrity
Common Stock") and Gerrity Preferred Stock at the close of business on September
30, 1996 are entitled to notice of, and to vote at, the Special Meeting or any
adjournment or postponement thereof. A complete list of such stockholders will
be available for examination at the offices of Gerrity in Denver, Colorado
during normal business hours by any Gerrity stockholder, for any purpose germane
to the Special Meeting, for a period of 10 days prior to the meeting.
FOR THE REASONS SET FORTH IN THE ACCOMPANYING INFORMATION
STATEMENT/PROSPECTUS, THE BOARDS OF DIRECTORS OF BOTH GERRITY AND PATINA BELIEVE
THAT THE CERTIFICATE OF AMENDMENT AND THE TRANSACTION ARE FAIR TO, AND IN THE
BEST INTERESTS OF, THE HOLDERS (OTHER THAN PATINA) OF DEPOSITARY SHARES
REPRESENTING GERRITY PREFERRED STOCK, AND THE BOARD OF DIRECTORS OF GERRITY HAS
UNANIMOUSLY VOTED TO RECOMMEND THAT HOLDERS OF GERRITY COMMON STOCK AND
DEPOSITARY SHARES REPRESENTING GERRITY PREFERRED STOCK VOTE FOR APPROVAL OF THE
TRANSACTION AND ADOPTION OF THE CERTIFICATE OF AMENDMENT RELATED THERETO.
In order to effect the Transaction, the Certificate of Amendment must
be adopted and approved, which, in the circumstances of the Transaction,
requires the affirmative votes of a majority of the outstanding shares of
Gerrity Common Stock and of 66 2/3% of the outstanding shares of Gerrity
Preferred Stock, voting separately as a class. Since Patina owns all of the
outstanding Gerrity Common Stock and Depositary Shares representing
approximately 75.7% of the Gerrity Preferred Stock and has indicated that it
intends to vote all of such shares FOR the approval and adoption of the
Certificate of Amendment, approval of the Transaction at the Special Meeting is
assured. Accordingly, WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
By Order of the Board of Directors,
Rodney L. Waller
Secretary
Denver, Colorado
October 2, 1996
<PAGE> 4
PATINA OIL & GAS CORPORATION
GERRITY OIL & GAS CORPORATION
INFORMATION STATEMENT/PROSPECTUS
This Information Statement/Prospectus relates to the proposed amendment
to the Certificate of Incorporation (the "Certificate of Amendment") of Gerrity
Oil & Gas Corporation, a Delaware corporation ("Gerrity"), to redeem, reclassify
and exchange (the "Transaction") each outstanding share of $12.00 Convertible
Preferred Stock of Gerrity ("Gerrity Preferred Stock") into shares of 7 1/8%
Convertible Preferred Stock, $.01 par value per share ("Patina Preferred
Stock"), of Patina Oil & Gas Corporation, a Delaware corporation ("Patina" ), at
a ratio of .5270 shares of Patina Preferred Stock for each Depositary Share
("Depositary Share") representing an interest in one-eighth of a share of
Gerrity Preferred Stock together with the amount of any dividends or other
distributions (without interest) which may have become payable in respect of
Patina Preferred Stock during the period commencing on the date of the initial
issuance of the Patina Preferred Stock and ending on the date of surrender of
the certificates formerly representing Depositary Shares by the holders (other
than Patina) thereof.
The Patina Preferred Stock to be issued pursuant to the Transaction
pays quarterly dividends at the rate of 7 1/8% per annum (by reference to its
liquidation preference, or approximately $1.78 per share per annum), has a
liquidation preference of $25.00 per share, and is convertible into common
stock, $.01 par value per share, of Patina (the "Patina Common Stock") at a
conversion price of $8.61. In addition, the Patina Preferred Stock will be
redeemable by Patina after three years from original issuance (May 2, 1996) or,
subject to certain conditions, after two years from original issuance, at
specified redemption prices.
This Information Statement/Prospectus is being furnished to holders of
Gerrity Common Stock (as defined below) and Gerrity Preferred Stock in
connection with the special meeting of stockholders of Gerrity to be held on
October 31, 1996 and any adjournments or postponements thereof (the "Special
Meeting"). At the Special Meeting, holders of common stock, $.01 par value per
share, of Gerrity (the "Gerrity Common Stock") and Gerrity Preferred Stock will
be asked to approve and adopt the Certificate of Amendment and the Transaction
contemplated thereby. The affirmative vote of the holders of each of (i) a
majority of the outstanding shares of Gerrity Common Stock and (ii) Depositary
Shares representing 66 2/3% of the outstanding shares of Gerrity Preferred
Stock, voting separately as a class, is required for approval and adoption of
the Certificate of Amendment. This Information Statement/Prospectus constitutes
a prospectus of Patina with respect to up to 388,764 shares of Patina Preferred
Stock that may be issued pursuant to the Transaction upon redemption,
reclassification and exchange of the Gerrity Preferred Stock.
All of the outstanding Gerrity Common Stock was acquired by Patina in
a merger (the "Merger") between Gerrity and a transitory subsidiary of Patina,
in which Gerrity was the surviving corporation. The Merger, which was
consummated on May 2, 1996, was the principal step in the consolidation (the
"Consolidation") of certain assets and operations of Gerrity and Snyder Oil
Corporation, a Delaware corporation ("SOCO") in the Wattenberg Field
("Wattenberg" or the "Field"). As a result of the Merger, the former owners of
Gerrity Common Stock received approximately 30% of the outstanding Patina
Common Stock, and the remaining approximate 70% is held by SOCO, which owned
all of the Patina Common Stock prior to the Merger. On the same date the
Merger was completed, Patina also completed an exchange offer (the "Exchange
Offer"), whereby Patina exchanged an aggregate of 1,204,847 shares of Patina
Preferred Stock and cash for 2,286,308 Depositary Shares, representing
approximately 75.3% of the outstanding Gerrity Preferred Stock, at an exchange
ratio of .5270 shares of Patina Preferred Stock for each Depositary Share, the
same ratio to be employed in the Transaction. Subsequent to the Exchange
Offer, Patina purchased an additional 12,000 Depositary Shares in open market
transactions, giving it ownership in the aggregate of 2,298,308 Depositary
Shares or 75.7% of the Depositary Shares outstanding.
The Gerrity Preferred Stock currently is listed and trades on the New
York Stock Exchange (the "NYSE"), although trading volumes have been modest
since the completion of the Exchange Offer due to the reduced number of
Depositary Shares outstanding in public hands and the consequent reduction in
the number of shares of Gerrity Preferred Stock available for public trading. On
September 23, 1996, the last day on which trading in the Gerrity Preferred Stock
occurred on the NYSE prior to the date of preparation of this Information
Statement/Prospectus, the closing price of the Gerrity Preferred Stock on the
NYSE was $14.00. The Patina Preferred Stock and the Patina Common Stock each
are listed and traded on the NYSE. On September 27, 1996, the last trading day
prior to the date of preparation of this Information Statement/Prospectus, the
closing price of the Patina Preferred Stock was $25.75, and the closing price of
the Patina Common Stock was $7.125.
Since Patina owns all of the outstanding Gerrity Common Stock and
Depositary Shares representing more than 66 2/3% of the Gerrity Preferred
Stock, and has advised Gerrity that it intends to vote all shares held by it
for the approval and adoption of the Certificate of Amendment, approval of the
Transaction at the Special Meeting is assured. Accordingly, GERRITY IS NOT
ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND A PROXY.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SECURITIES OFFERED HEREBY.
This Information Statement/Prospectus is first being mailed to Gerrity
stockholders on or about October 2, 1996.
NEITHER THE TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES
COMMISSION. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
SUCH STATE SECURITIES COMMISSION HAS PASSED UPON THE FAIRNESS OR
MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY
OF THE INFORMATION CONTAINED IN THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Information Statement/Prospectus is October 2, 1996
<PAGE> 5
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES MADE HEREBY
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY GERRITY OR PATINA. NEITHER THE DELIVERY OF
THIS INFORMATION STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES
OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF GERRITY OR PATINA SINCE THE DATE HEREOF OR
THAT THE INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS INFORMATION STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, ANY SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER.
AVAILABLE INFORMATION
Patina is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, and other information with the Securities and
Exchange Commission (the "Commission"). Gerrity is subject to the
informational requirements of the Exchange Act and, in accordance therewith,
files reports and other information with the Commission. Reports, proxy
statements and other information filed by Patina and Gerrity can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's Regional Offices at Seven World Trade Center, 13th Floor,
New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or from the
site maintained by the Commission on the Internet World Wide Web at
http://www.sec.gov. In addition, reports, proxy statements and other
information concerning Patina and Gerrity may be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.
Patina has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Patina Preferred Stock that
will be issued pursuant to the Transaction. In addition, Patina has filed with
the Commission a Schedule 13E-3 (together with all amendmendments, supplements
and exhibits thereto, the "Schedule 13E-3") relating to the Transaction pursuant
to the Exchange Act. The information contained herein with respect to Patina
and its affiliates, including SOCO, has been provided by Patina, and the
information contained herein with respect to Gerrity and its affiliates has been
provided by Gerrity. This Information Statement/Prospectus does not contain all
of the information set forth in the Registration Statement or the Schedule
13E-3, certain parts of which were omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement and the Schedule 13E-3, copies of which may
be obtained from the Commission as set forth above. Any statements contained
herein concerning the provisions of any document filed as an exhibit to the
Registration Statement or the Schedule 13E-3 or otherwise filed with the
Commission are not necessarily complete, and in each instance reference is made
to the copy of such document so filed. Each such statement is qualified in its
entirety by such reference.
Patina intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent accountants
following the end of each fiscal year, and quarterly reports containing
unaudited financial statements for the first three fiscal quarters of each
fiscal year, following the end of each such fiscal quarter.
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TABLE OF CONTENTS
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SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Patina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SOCO Wattenberg and SOCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Gerrity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Patina Summary Pro Forma Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Patina Summary Historical Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Gerrity Summary Historical Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Opinion of Gerrity Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Recommendation of the Board of Directors of Gerrity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Certain Relationships Between SOCO and Patina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Limitations on Control Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
No Appraisal or Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Market Price and Dividend Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
De-Listing of Depositary Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Termination of "Margin Securities" Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Termination of Exchange Act Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Uncertainty as to Trading Market and Liquidity for Patina Preferred Stock . . . . . . . . . . . . . . . . . 14
Shares Available for Future Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Recent Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Lack of History as an Independent Operating Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Potential Conflicts of Interest Between SOCO and Patina . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Volatility of Oil and Natural Gas Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Economic Risks of Oil and Natural Gas Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Geographic Concentration of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Replacement of Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Operating Risks of Oil and Natural Gas Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Uncertainty of Reserve Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Government Regulation and Litigation Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
No Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Concentration of Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Record Date and Outstanding Shares; Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Quorum; Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
No Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
General Description of the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
No Appraisal or Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Background of the Transaction; Special Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Reasons for the Transaction; Recommendation of the Board of Directors of Gerrity . . . . . . . . . . . . . . 23
Opinion of Gerrity Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Background of the Merger and the Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Governmental and Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Certain Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Restrictions on Resales by Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Certain Information Concerning Patina, SOCO and Gerrity . . . . . . . . . . . . . . . . . . . . . . . . . . 37
RELATIONSHIPS BETWEEN SOCO AND PATINA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Business Opportunity Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Corporate Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Cross-Indemnification Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
PATINA BUSINESS STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Competition and Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Oil and Gas Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Acreage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Patina Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Headquarters and Production Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF PATINA . . . . . . . . . . . . . . . . . . . . . 46
SELECTED HISTORICAL FINANCIAL DATA OF PATINA (FORMERLY SOCO WATTENBERG) . . . . . . . . . . . . . . . . . . . . . . 51
PATINA (FORMERLY SOCO WATTENBERG) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
-2-
<PAGE> 7
<TABLE>
<S> <C>
Development, Acquisition and Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Financial Condition and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Inflation and Changes in Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
INFORMATION CONCERNING SOCO WATTENBERG (PREDECESSOR OF PATINA). . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Gas Gathering and Processing and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Customers and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Production, Revenue and Price History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Drilling Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Proved Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Producing Wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Acreage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Litigation and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF GERRITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
GERRITY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 66
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
INFORMATION CONCERNING GERRITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Acreage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oil and Gas Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Drilling Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Competition and Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
MANAGEMENT OF PATINA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Compensation of Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Profit Sharing and Savings Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Indemnification of Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
MARKET PRICE AND DIVIDEND DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
PRINCIPAL HOLDERS OF GERRITY CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Gerrity Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Gerrity Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
DESCRIPTION OF PATINA CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Patina Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Patina Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Executive Warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
COMPARATIVE RIGHTS OF PATINA AND GERRITY STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Special Conversion Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Ability to Create Senior Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Patina Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Gerrity Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
SCHEDULE I: Information Concerning the Directors and Executive Officers of SOCO . . . . . . . . . . . . . . . . . . S-1
ANNEX A: Certificate of Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
ANNEX B: Opinion of A. G. Edwards & Sons, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
-3-
<PAGE> 8
SUMMARY
The following summarizes certain information contained in this
Information Statement/Prospectus. The summary is qualified in its entirety by
the more detailed information contained in or incorporated by reference in this
Information Statement/Prospectus, including the Certificate of Amendment and
other documents included as Annexes. Stockholders are urged to carefully read
this Information Statement/Prospectus and the Annexes in their entirety.
Stockholders should especially consider the information set forth below under
the heading "Risk Factors." As used in this Information Statement/Prospectus,
unless otherwise required by the context, the term "Patina" means Patina Oil &
Gas Corporation, the term "Gerrity" means Gerrity Oil & Gas Corporation, and the
term "SOCO" means Snyder Oil Corporation. Historical information of Patina for
periods prior to the Merger are the results of SOCO Wattenberg Corporation,
referred to herein as SOCO Wattenberg, whose assets and operations were
contributed to Patina by SOCO in connection with the Merger.
PATINA
Patina is an independent energy company formed to consolidate (the
"Consolidation") certain assets and operations of SOCO in the Wattenberg
Field and Gerrity. Wattenberg lies within the Denver-Julesburg Basin ("D-J
Basin") of north central Colorado. A principal purpose of the Consolidation
was to eliminate overhead costs and to provide the opportunity to combine the
strengths of SOCO and Gerrity. This should permit enhanced operating and
financial performance and economies of scale beyond those previously achieved
by SOCO and Gerrity. These economies of scale are particularly significant
given the adverse impact of the current depressed market for Rocky Mountain
natural gas. See "Patina Business Strategy."
One of the most attractive features of Wattenberg is that it contains
several productive formations. Three of the formations, the Codell, Niobrara
and J-sand, are "blanket" zones in the area of Patina's Wattenberg holdings,
while others, such as the Sussex are more localized. In recent years, the
Codell and Niobrara formations have been the primary drilling objective in
Wattenberg, although Patina also has successfully recompleted shallower
formations such as the Sussex. Drilling in Wattenberg is low risk from the
perspective of encountering hydrocarbons, with better than 95% of the wells
being completed as producers. Consequently, Wattenberg's economic
attractiveness is primarily dependent on energy prices, the reservoir
characteristics of the specific area of the Field being drilled and the
operator's ability to minimize capital and operating costs.
As of June 30, 1996 Patina held interests in over 3,600 wells in
Wattenberg with net proved reserves on a pro forma basis at December 31, 1995
of approximately 82 million barrels of oil equivalent ("MMBOE"), over 70% of
which were attributable to natural gas. Based on unescalated year-end 1995 oil
and gas prices, these reserves had a pre-tax present value of $380 million. As
of June 30, 1996, Patina's production exceeded 20,000 barrels of oil equivalent
("BOE") per day. Over the past five years, SOCO and Gerrity have drilled over
2,000 wells in Wattenberg. Given Patina's experience in drilling and
completing wells of this type, combined with an operating base encompassing
approximately 3,300 active wells, Patina believes it can drill and operate its
oil and gas properties in the Field at a lower cost than its competitors.
Furthermore, because virtually all of the wells in which it holds an interest
lie within a 40 mile radius, Patina believes it has the potential to become one
of the most efficient oil and gas producers in the United States.
As of June 30 1996, Patina had identified in excess of 1,500
undeveloped locations on its Wattenberg acreage, including 600 locations
classified as proven at December 31, 1995. In addition, Patina had an
inventory of approximately 850 recompletion opportunities that were also
classified as proven at December 31, 1995. Should drilling and completion
technologies improve or Rocky Mountain natural gas prices recover, a
substantial number of these unproven locations could become economically
attractive to drill. This inventory of undeveloped locations and recompletion
opportunities provides the ability to substantially expand development
activities if conditions warrant. In the interim, Patina expects to limit its
capital expenditures on existing properties to less than $15 million per year.
As a result, management believes that funds generated
-4-
<PAGE> 9
from operations will permit a rapid paydown of debt or the aggressive pursuit
of further consolidation opportunities. Given Patina's expected low cost
structure and extensive experience in drilling and efficiently operating large
numbers of wells, management believes Patina is well positioned to pursue
further consolidation in Wattenberg, to take advantage of similar opportunities
in other basins (subject to the terms of the Business Opportunity Agreement
between SOCO and Patina) and to continue to develop its existing properties.
See "Relationships Between SOCO and Patina - Business Opportunity Agreement."
At June 30, 1996 a total of 19,866,012 shares of Patina Common Stock,
together with warrants to purchase 3,500,000 shares of Patina Common Stock,
were outstanding. The Patina Common Stock consists of 17,866,012 shares having
one vote per share and 2,000,000 shares of Series A Common Stock having three
votes per share ("Patina Series A Common Stock"). SOCO owns shares
representing approximately 70% of the outstanding Patina Common Stock and 75%
of the voting power thereof. Long-term debt of Patina at June 30, 1996 was
approximately $221 million, with stockholders' equity exceeding $191 million.
Patina, a Delaware corporation, maintains its principal executive
offices at 1625 Broadway, Suite 2000, Denver, Colorado 80202, and its telephone
number is (303) 389-3600.
SOCO WATTENBERG AND SOCO
SOCO Wattenberg became active in the Field in 1986 through the
acquisition of a small public company. Since that time, it has acquired oil
and gas interests in more than 20 separate transactions and drilled over 1,500
wells in the Field. As of December 31, 1995, SOCO Wattenberg held interests in
approximately 1,850 wells of which it operated approximately 1,530. SOCO
Wattenberg was contributed by SOCO to Patina in connection with the Merger.
SOCO Wattenberg is operated as a wholly owned subsidiary of Patina. See
"Information Concerning SOCO Wattenberg (Predecessor of Patina)."
SOCO is an independent oil company based in Fort Worth, Texas which is
active in a number of onshore basins in the United States, in the Gulf of
Mexico and internationally. SOCO, a Delaware corporation, maintains its
principal executive offices at 777 Main Street, Fort Worth, Texas 76102, and
its telephone number is (817) 338-4043.
GERRITY
Gerrity, a Delaware corporation, was formed in 1990 to consolidate the
oil and gas interests of several affiliated entities engaged in the drilling
and operation of wells in Wattenberg. Since its inception, Gerrity has pursued
a strategy of maintaining strict control over drilling and operating costs while
expanding its business through the acquisition and subsequent development of
producing properties and undeveloped acreage primarily within the D-J Basin.
As of December 31, 1995, Gerrity held interests in over 1,850 wells of which it
operated approximately 1,750. Since the Merger, all of the outstanding Gerrity
Common Stock has been owned by Patina. The principal executive offices of
Gerrity are located at 1625 Broadway, Suite 2000, Denver, Colorado 80202, and
its telephone number is (303) 389-3600. See "Information Concerning Gerrity."
-5-
<PAGE> 10
PATINA
SUMMARY PRO FORMA INFORMATION
(UNAUDITED)
The following table presents pro forma consolidated financial and
operating information for the year ended December 31, 1995 and for the six
month period ended June 30, 1996 after giving effect to the Merger, the
Exchange Offer and the Transaction. This information should be read in
conjunction with the Unaudited Pro Forma Condensed Consolidated Financial
Information of Patina and Notes thereto presented elsewhere in this Information
Statement/Prospectus. The summary pro forma consolidated financial and
operating information shown in this table is not necessarily indicative of the
results that would have actually occurred had the Merger, the Exchange Offer
and the Transaction been consummated on the dates or for the periods indicated
or which may occur in the future.
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996
----------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND PRODUCTION AND RESERVE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 103,962 $ 47,060
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,255 50,713
Depletion, depreciation and amortization . . . . . . . . . . . 60,338 27,944
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . (4,293) (3,653)
Net income (loss) per share . . . . . . . . . . . . . . . . . . (.36) (.25)
Weighted average shares outstanding . . . . . . . . . . . . . . 20,000 20,000
BALANCE SHEET DATA
Oil and gas properties and equipment, net . . . . . . . . . . . N/A $ 415,907
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . N/A 455,475
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . N/A 220,913
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . N/A 201,279
PRODUCTION DATA
Net Production
Crude oil and liquids (MBbl) . . . . . . . . . . . . . . . . . 2,960 1,123
Natural gas (MMcf) . . . . . . . . . . . . . . . . . . . . . . 38,820 15,363
Equivalent barrels (MBOE) . . . . . . . . . . . . . . . . . . . 9,430 3,684
Average net daily production
Crude oil and liquids (Bbl) . . . . . . . . . . . . . . . . . . 8,110 6,173
Natural gas (Mcf) . . . . . . . . . . . . . . . . . . . . . . . 106,356 84,413
Equivalent barrels (BOE) . . . . . . . . . . . . . . . . . . . 25,836 20,242
Average sales price
Crude oil and liquids (Bbl) . . . . . . . . . . . . . . . . . . $ 16.25 $ 19.42
Natural gas (Mcf) . . . . . . . . . . . . . . . . . . . . . . . 1.38 1.60
</TABLE>
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<PAGE> 11
RESERVE DATA
The following table summarizes the pro forma estimate of Patina's net
proved developed and undeveloped reserves as of December 31, 1995 prepared by
Netherland, Sewell & Associates, Inc. ("NSAI"), assuming the Merger, the
Exchange Offer and the Transaction occurred at such date. The quantities and
values are based on prices in effect at December 31, 1995, averaging $18.55 per
barrel of oil and $1.70 per Mcf of gas.
<TABLE>
<CAPTION>
PROVED RESERVES (1) (2)
----------------------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Crude oil and liquids (MMbl) . . . . . . . . . . . . 18,687 5,633 24,320
Natural gas (MMcf) . . . . . . . . . . . . . . . . . 297,856 49,550 347,406
Equivalent barrels (MBOE) . . . . . . . . . . . . . . 68,330 13,891 82,221
Future net cash flow before income taxes (in $615,059 $67,552 $682,611
thousands) . . . . . . . . . . . . . . . . . . . . .
Future net cash flow after income taxes (in thousands) -- -- $573,563
Pretax PW10% Value (in thousands) . . . . . . . . . . $362,120 $17,943 $380,063
After tax PW10% Value (in thousands) . . . . . . . . -- -- $331,886
</TABLE>
- ---------------
(1) The proved reserves include the following quantities and values
attributable to properties, located in the Uinta Basin of Utah, that were
sold following the Merger in July, 1996.
<TABLE>
<CAPTION>
PROVED RESERVES
-----------------------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Equivalent barrels (MBOE) . . . . . . . . . . . . . . 171 200 371
Pretax PW10% Value (in thousands) . . . . . . . . . . $715 $478 $1,193
</TABLE>
(2) Patina's net proved developed and undeveloped reserves as of December 31,
1995 prepared by NSAI are higher than the sum of SOCO Wattenberg and
Gerrity reserves as of the same date due to Patina's anticipated reduced
capital and operating costs resulting from economies of scale achieved
through the Merger. However, as of December 31, 1995, such increase in
estimated proved reserves was less than 1% of the sum of the reserves of
the combining companies on an equivalent barrel basis and represents an
increase in present value of approximately 2.5% as of such date.
-7-
<PAGE> 12
PATINA
SUMMARY HISTORICAL INFORMATION
The following table presents summary financial and operating
information for, and as of the end of, each of the years in the three year
period ended December 31, 1995 and the six months ended June 30, 1995 for SOCO
Wattenberg, and historical information for Patina for the six months ended June
30, 1996. This information should be read in conjunction with the Financial
Statements and Notes thereto of Patina (formerly SOCO Wattenberg) and Patina
(formerly SOCO Wattenberg) Management's Discussion and Analysis of Financial
Condition and Results of Operations presented elsewhere in this Information
Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ---------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PRODUCTION AND RESERVE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues . . . . . . . . . . . . . . . $ 64,865 $ 67,822 $ 50,102 $ 27,177 $ 30,110
Expenses . . . . . . . . . . . . . . . 44,034 63,283 53,324 28,167 32,365
Depletion, depreciation and amortization 25,190 43,036 32,591 16,951 18,723
Net income (loss) . . . . . . . . . . . 13,540 2,950 (2,094) (643) (1,861)
Net income (loss) applicable to common
stockholders . . . . . . . . . . . 13,540 2,950 (2,094) (643) (2,571)
Net income (loss) per share . . . . . . .97 .21 (.15) (.05) (.16)
Weighted average shares outstanding . . 14,000 14,000 14,000 14,000 15,959
BALANCE SHEET DATA
Oil and gas properties, net . . . . . . $181,170 $234,821 $214,910 $227,600 $414,612
Total assets . . . . . . . . . . . . . 195,895 246,686 224,521 237,860 455,475
Debt to parent . . . . . . . . . . . . 60,857 79,333 75,000 75,000 --
Long-term debt . . . . . . . . . . . . -- -- -- -- 220,913
Stockholders' equity . . . . . . . . . 92,865 115,846 113,663 125,518 191,550
PRODUCTION AND RESERVE DATA
Net production
Crude oil and liquids (MBbl) . . . . . 1,224 1,829 1,342 729 693
Natural gas (MMcf) . . . . . . . . . . 21,706 23,893 20,981 11,621 10,308
Equivalent barrels (MBOE) . . . . . . . 4,842 5,812 4,839 2,666 2,411
Average net daily production
Crude oil and liquids (Bbl) . . . . . . 3,353 5,012 3,677 4,028 3,808
Natural Gas (Mcf) . . . . . . . . . . . 59,468 65,459 57,481 64,204 56,637
Equivalent Barrels (BOE) . . . . . . . 13,265 15,922 13,257 14,729 13,247
Average sales price
Crude oil and liquids (Bbl) . . . . . . $ 15.87 $ 14.84 $ 16.43 $ 16.79 $ 19.55
Natural Gas (Mcf) . . . . . . . . . . . $ 2.08 $ 1.70 $ 1.34 $ 1.28 $ 1.58
Estimated proved reserves
Crude oil and liquids (MBbl) . . . . . 16,928 12,218 7,421 N/A N/A
Natural gas (MMcf) . . . . . . . . . . 229,862 178,703 138,857 N/A N/A
Equivalent barrels (MBOE) . . . . . . . 55,238 42,002 30,564 N/A N/A
</TABLE>
-8-
<PAGE> 13
GERRITY
SUMMARY HISTORICAL INFORMATION
The following table presents summary consolidated financial and operating
information for, and as of the end of, each of the years in the three year
period ended December 31, 1995 and for the six months ended June 30, 1995 and
1996. This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of Gerrity and Gerrity Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Information Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PRODUCTION AND RESERVE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues . . . . . . . . . . . . . . . . $ 67,313 $ 65,588 $ 53,860 $ 29,383 $ 25,053
Expenses . . . . . . . . . . . . . . . . 50,390 64,812 62,048 32,416 28,560
Depletion, depreciation and amortization 25,414 32,458 30,333 16,131 14,003
Net income (loss) . . . . . . . . . . . . 12,066 (1,674) (7,973) (2,881) (2,794)
Net income (loss) applicable to common
stockholders . . . . . . . . . . . . 9,106 (6,228) (12,527) (5,158) (5,071)
Per common share: (1) . . . . . . . . . .
Income (loss) before extraordinary item
and cumulative effect of accounting
change . . . . . . . . . . . . . . . .78 (.27) (.91) (.37) N/A
Net income (loss) . . . . . . . . . . . . .66 (.45) (.91) (.37) N/A
Weighted average shares outstanding . . . 13,697 13,781 13,781 13,781 N/A
BALANCE SHEET DATA
Oil and gas properties, net . . . . . . . $292,503 $300,188 $285,112 $296,683 $213,097
Total assets . . . . . . . . . . . . . . 327,808 337,690 319,549 331,203 241,780
Long-term debt, net . . . . . . . . . . . 92,312 129,000 116,875 137,000 139,117
Stockholders' equity . . . . . . . . . . 180,980 174,752 162,225 169,594 72,426
PRODUCTION AND RESERVE DATA
Net production
Crude oil and liquids (MBbl) . . . . . . 1,825 2,040 1,618 906 633
Natural gas (MMcf) . . . . . . . . . . . 17,978 19,587 17,839 9,443 7,573
Equivalent barrels (MBOE) . . . . . . . . 4,821 5,304 4,592 2,480 1,896
Average net daily production
Crude oil and liquids (Bbl) . . . . . . . 5,000 5,588 4,434 5,008 3,481
Natural Gas (Mcf) . . . . . . . . . . . . 49,255 53,662 48,873 52,170 41,610
Equivalent Barrels (BOE) . . . . . . . . 13,209 114,532 12,580 13,703 10,415
Average sales price
Crude oil and liquids (Bbl) . . . . . . . $ 16.28 $ 15.19 $ 16.09 $ 16.17 $ 19.41
Natural Gas (Mcf) . . . . . . . . . . . . 1.97 1.71 1.43 1.44 1.59
Estimated proved reserves
Crude oil and liquids (MBbl) . . . . . . 17,862 21,297 16,785 N/A N/A
Natural gas (MMcf) . . . . . . . . . . . 208,315 237,028 206,321 N/A N/A
Equivalent barrels (MBOE) . . . . . . . . 52,581 60,802 51,172 N/A N/A
</TABLE>
- ---------------
(1) Since the Merger all outstanding shares of Gerrity Common Stock have
been held by Patina and thus per common share data is not applicable
for the six months ended June 30, 1996.
-9-
<PAGE> 14
The following table summarizes the estimate of Gerrity's net proved
developed and undeveloped reserves as of December 31, 1995 prepared by NSAI.
The quantities and values are based on prices in effect at December 31, 1995,
averaging $18.75 per barrel of oil and $1.77 per Mcf of gas.
<TABLE>
<CAPTION>
PROVED RESERVES (1)
--------------------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -------
<S> <C> <C> <C>
Crude oil and liquids (MBbl) 11,573 5,212 16,785
Natural gas (MMcf) 162,286 44,035 206,321
Equivalent barrels (MBOE) 38,621 12,551 51,172
Future net cash flow before income taxes (in thousands) $347,966 $62,450 $410,416
Future net cash flow after income taxes (in thousands) -- -- $347,045
Pretax PW10% Value (in thousands) $207,564 $16,301 $223,865
After tax PW10% Value (in thousands) -- -- $196,211
</TABLE>
------------------
(1) For purposes of estimating Gerrity's net proved developed and
undeveloped reserves as of December 31, 1995, NSAI prepared such
reserves on a basis consistent with Patina's methodology of
estimating reserves relating to final decline rates and the exclusion
of proved undeveloped reserves with positive future net revenue but
negative present value when discounted at 10 percent. This
methodology represents a change from Gerrity's estimated proved
reserves as of December 31, 1994 prepared by NSAI, resulting in an
estimated reduction in proved reserves of approximately five million
barrels of oil equivalent and no material change in present value
before income taxes.
THE TRANSACTION
In order to make Gerrity a wholly owned subsidiary of Patina, the Board of
Directors of Gerrity is submitting the Certificate of Amendment to the holders
of Gerrity Common Stock and Gerrity Preferred Stock for their approval and
adoption at the Special Meeting. Upon the effectiveness of the Certificate of
Amendment, which will occur upon filing the Certificate of Amendment with the
Secretary of State of the State of Delaware after the approval thereof by the
holders of a majority of the Gerrity Common Stock and at least 66 2/3% of the
Gerrity Preferred Stock, Patina will redeem, reclassify and exchange any and
all of the outstanding shares of Gerrity Preferred Stock represented by an
aggregate of 737,692 outstanding Depositary Shares held by persons other than
Patina into shares of Patina Preferred Stock at a ratio of .5270 shares of
Patina Preferred Stock per Depositary Share. An aggregate of 388,763
additional shares of Patina Preferred Stock are expected to be issued in the
Transaction.
Neither Patina nor Gerrity is aware of any additional federal or state
regulatory approval that is required to consummate the Transaction, except
compliance with federal and state securities laws.
The Patina Preferred Stock has a liquidation preference of $25.00 per
share, pays quarterly dividends at the rate of 7 1/8% per year (based upon its
liquidation preference or an aggregate of approximately $1.78 per share per
annum) and is convertible into Patina Common Stock at a conversion price per
share of $8.61 (or approximately 2.904 shares of Patina Common Stock for each
share of Patina Preferred Stock). In addition, the Patina Preferred Stock will
be redeemable by Patina after three years from initial issuance (May 2, 1996)
or, subject to certain conditions, after two years from initial issuance, at
specified redemption prices. See "Description of Patina Capital Stock - Patina
Preferred Stock."
Because of Gerrity's debt service requirements on subordinated debt and bank
borrowings outstanding following the Merger it is more likely than not that
in the foreseeable future no dividends will be paid on the Gerrity Preferred
Stock. Furthermore, the ability of Patina to achieve the cost reductions and
-10-
<PAGE> 15
economies of scale which were a principal purpose of the Consolidation is
reduced by the continuing requirements imposed upon Gerrity as a reporting
company under the Exchange Act resulting from the existence of the outstanding
Gerrity Preferred Stock. Accordingly, the Board of Directors of both Patina
and Gerrity have determined to effect the Transaction for the reasons described
in more detail under "The Transaction - Reasons for the Transaction;
Recommendation of the Board of Directors of Gerrity."
THE SPECIAL MEETING
The Special Meeting will be held on Thursday, October 31, 1996, at the
offices of the Chairman and Chief Executive Officer of Patina, 595 Madison
Avenue, 27th Floor, New York, New York at 9:00 a.m. Eastern Time. The purpose
of the Special Meeting is to consider and vote upon a proposal to approve and
adopt the Certificate of Amendment and such other matters as may properly come
before the Special Meeting. Only holders of record of Gerrity Common Stock and
holders of Depositary Shares representing an interest in Gerrity Preferred
Stock at the close of business on September 30, 1996 (the "Record Date") are
entitled to notice of, and to vote at, the Special Meeting. On the Record Date,
there were 379,500 shares of Gerrity Preferred Stock outstanding (represented
by an aggregate of 3,036,000 Depositary Shares), of which 287,288.5
(represented by an aggregate of 2,298,308 Depositary Shares) (or 75.7%) are
held by Patina. All of the outstanding Gerrity Common Stock is held by Patina.
No shares of Gerrity Preferred Stock are held by officers and directors of
Patina and their affiliates and no shares are held by officers and directors of
Gerrity and their affiliates. The presence, in person or by proxy, at the
Special Meeting of the holders of a majority of the Gerrity Common Stock
entitled to vote is necessary to constitute a quorum. The affirmative vote of
the holders of a majority of the Gerrity Common Stock and Depositary Shares
representing 66 2/3% of the Gerrity Preferred Stock is required to approve and
adopt the Certificate of Amendment and the Transaction contemplated thereby.
See "The Special Meeting."
OPINION OF GERRITY FINANCIAL ADVISOR
The Board of Directors of Gerrity received the oral opinion of A. G.
Edwards & Sons, Inc. ("A. G. Edwards") on August 26, 1996, which was confirmed
in a written opinion dated the date of this Information Statement/Prospectus,
that the terms of the Transaction contemplated by the Certificate of Amendment
are fair from a financial point of view to the holders (other than Patina) of
Depositary Shares representing Gerrity Preferred Stock. For information
regarding the opinion of A.G. Edwards, including the assumptions made, matters
considered and limits of such opinion, see "The Transaction - Opinion of
Gerrity Financial Advisor" and the actual opinion, which is included in
Annex B hereto. Holders of Depositary Shares representing Gerrity Preferred
Stock are urged to read carefully and in its entirety the opinion of
A. G. Edwards.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF GERRITY
THE BOARDS OF DIRECTORS OF BOTH GERRITY AND PATINA HAVE DETERMINED THAT
THE TRANSACTION CONTEMPLATED BY THE CERTIFICATE OF AMENDMENT IS FAIR TO, AND IN
THE BEST INTERESTS OF, THE HOLDERS (OTHER THAN PATINA) OF DEPOSITARY SHARES
REPRESENTING GERRITY PREFERRED STOCK AND THE BOARD OF DIRECTORS OF GERRITY HAS
UNANIMOUSLY VOTED TO RECOMMEND THAT THE HOLDERS OF DEPOSITARY SHARES
REPRESENTING GERRITY PREFERRED STOCK VOTE FOR APPROVAL OF THE TRANSACTION AND
ADOPTION OF THE CERTIFICATE OF AMENDMENT RELATED THERETO AT THE SPECIAL
MEETING. See "The Transaction - Background of the Transaction; Special
Factors" and "- Reasons for the Transaction; Recommendation of the Board
of Directors of Gerrity."
CERTAIN RELATIONSHIPS BETWEEN SOCO AND PATINA
As a result of the Merger, SOCO owns shares of Patina Common Stock
including Series A Common Stock representing 70% of the outstanding Patina
Common Stock and 75% of the aggregate voting power thereof. As such, SOCO is
effectively able to control the Board of Directors of Patina and to determine
the outcome of matters submitted to a vote of Patina's stockholders. In
addition, SOCO and Patina have entered into certain agreements, including a
Business Opportunity Agreement, Corporate Services Agreement,
Cross-Indemnification Agreement and Registration Rights Agreement, that govern
the relationship between SOCO and Patina following the Merger. Furthermore,
any contracts or transactions involving Patina or any of its
-11-
<PAGE> 16
subsidiaries in which SOCO or any of its subsidiaries has a direct or indirect
interest (other than an interest solely as a stockholder of Patina) are
required to be approved by either (a) a majority of the disinterested directors
of Patina or (b) by a majority of any committee established by the Patina Board
of Directors that consists solely of directors that are disinterested. See
"Relationships Between SOCO and Patina."
LIMITATIONS ON CONTROL SALES
The agreement relating to the Merger (the "Merger Agreement") provides that
SOCO may not effect certain sales of a controlling interest in Patina prior to
the second anniversary of the effective date of the Merger (May 2, 1998),
subject to earlier termination, unless all holders of Patina Common Stock are
given an opportunity to participate in such sale on a basis that would result
in such holders receiving a per share consideration with a fair market value at
least equal to the average per share consideration to be received by SOCO. See
"Risk Factors - Concentration of Ownership."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Transaction contemplated by the Certificate of Amendment will be
taxable for federal income tax purposes, and holders of Depositary Shares
generally will recognize a capital gain or loss upon the disposition of
Depositary Shares which will be deemed to occur in the Transaction. For a
discussion of these and other federal income tax considerations in connection
with the Transaction, see "The Transaction - Certain Federal Income Tax
Consequences."
NO APPRAISAL OR DISSENTERS' RIGHTS
Under Delaware law, holders of Depositary Shares, each representing an
interest in one-eighth of a share of Gerrity Preferred Stock, who oppose the
Transaction are not entitled to any appraisal or dissenters' rights in
connection with the Transaction. Furthermore, no appraisal or dissenters'
rights are available to such holders pursuant to the Certificate of
Incorporation or Bylaws of Gerrity. See "The Transaction - No Appraisal or
Dissenters' Rights."
MARKET PRICE AND DIVIDEND DATA
Patina Preferred Stock and Patina Common Stock are listed for trading
on the NYSE under the trading symbols "POGPr" and "POG," respectively. The
Depositary Shares representing shares of Gerrity Preferred Stock are listed on
the NYSE under the trading symbol "GOGPr". The following table sets forth the
closing sales prices per share of Patina Preferred Stock and per Depositary
Share representing Gerrity Preferred Stock as reported on the NYSE on July 16,
1996, the last trading day for which prices were available prior to the
announcement of the Transaction, and on September 27, 1996 (or September 23,
1996 (as indicated)), the last trading days for which prices were available
prior to the date of preparation of this Information Statement/Prospectus, and
on an equivalent pro forma basis for Gerrity. The Gerrity pro forma equivalent
information was calculated by multiplying the exchange ratio (.5270) by the
Patina information.
<TABLE>
<CAPTION>
CLOSING PRICE PER SHARE
-----------------------
PRO FORMA
EQUIVALENT PER
GERRITY GERRITY
DEPOSITARY DEPOSITARY
DATE PATINA PREFERRED SHARES SHARE
-------- ---------------- ---------- -----------
<S> <C> <C> <C>
July 16, 1996 . . . . . . . . . . . . . . . . . . $ 23.50 $ 12.50 $ 12.38
September 27, 1996 . . . . . . . . . . . . . . . . $ 25.75 $ 14.00* $ 13.57
</TABLE>
* (as of September 23, 1996)
-12-
<PAGE> 17
RISK FACTORS
Holders are urged to consider the factors set forth under the heading "Risk
Factors" in deciding whether or not to vote to approve and adopt the
Certificate of Amendment and the Transaction contemplated thereby. However,
since Patina owns all of the outstanding Gerrity Common Stock and in excess of
66 2/3% of the Gerrity Preferred Stock and has advised Gerrity that Patina
intends to vote all shares held by it for the approval and adoption of the
Certificate of Amendment, approval of the Transaction at the Special Meeting is
assured.
-13-
<PAGE> 18
RISK FACTORS
In addition to the other information contained in this Information
Statement/Prospectus, holders of Gerrity Depositary Shares representing Gerrity
Preferred Stock should consider carefully the following factors in deciding
whether to vote to approve and adopt the Certificate of Amendment.
The risk factors set forth below are grouped by subject matter, and do not
necessarily appear in the order of materiality.
DE-LISTING OF DEPOSITARY SHARES
The redemption, reclassification and exchange of Gerrity Preferred Stock
into Patina Preferred Stock pursuant to the Transaction will eliminate the
public market for Depositary Shares since no shares of Gerrity Preferred Stock
would remain outstanding, and Patina has advised Gerrity that Patina will
undertake the actions necessary to terminate existing arrangements for
Depositary Shares. As a result, the Depositary Shares and the Gerrity Preferred
Stock would no longer be eligible for listing on the NYSE, and Gerrity will
request that the listing thereof be terminated by the NYSE. Holders of
certificates representing Depositary Shares would be entitled to receive only
the Patina Preferred Stock into which the Gerrity Preferred Stock represented by
such Depositary Shares have been reclassified and exchanged, together with the
amount of any dividends or other distributions (without interest) which may have
become payable in respect of the Patina Preferred Stock during the period
commencing on the date of the initial issuance of the Patina Preferred Stock
(May 2, 1996) and ending on the date of surrender by such holders of
certificates formerly representing Depositary Shares. Following the completion
of the Transaction, holders of Depositary Shares will be provided with a letter
of transmittal and other instructions for exchanging their certificates
representing Depositary Shares for Patina Preferred Stock certificates. See
"The Transaction - General Description of the Transaction."
TERMINATION OF "MARGIN SECURITIES" STATUS
The Depositary Shares are currently "margin securities," as such term is
defined under the rules of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"), which has the effect, among other things, of
allowing brokers to extend credit on the collateral of such securities.
Following the Transaction, the Depositary Shares will no longer constitute
"margin securities" for purposes of the margin regulations of the Federal
Reserve Board. As a result, such Depositary Shares could no longer be used as
collateral for loans made by brokers. However, the Patina Preferred Stock to
be received by holders of Depositary Shares is a "margin security" under the
rules of the Federal Reserve Board and is expected to continue to be a margin
security following the Transaction.
TERMINATION OF EXCHANGE ACT REGISTRATION
The Depositary Shares are currently registered under the Exchange Act.
Such registration may be terminated upon application of Gerrity to the
Commission if the Depositary Shares are not listed on a national securities
exchange and there are fewer than 300 record holders of the Depositary Shares.
Gerrity intends to apply for termination of such registration following the
completion of the Transaction. The termination of registration of the
Depositary Shares under the Exchange Act will substantially reduce the
information required to be furnished by Gerrity to its shareholders and to the
Commission and would make certain provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b), the requirement of
furnishing a proxy statement in connection with stockholders' meetings pursuant
to Section 14(a), and the requirements of Rule 13e-3 under the Exchange Act
with respect to "going private" transactions, no longer applicable to the
Depositary Shares. However, Patina Preferred Stock is registered under the
Exchange Act and will remain so registered following the Transaction.
UNCERTAINTY AS TO TRADING MARKET AND LIQUIDITY FOR PATINA PREFERRED STOCK
Prior to the Merger, there was no public market for the shares of the
Patina Common Stock or the Patina Preferred Stock. Patina Common Stock and
Patina Preferred Stock are listed on the NYSE, and the
-14-
<PAGE> 19
Transaction will increase the number of shares of Patina Preferred Stock
available for public trading. However, since the Merger trading of Patina
Preferred Stock and Patina Common Stock has been limited, and there can be no
assurance that an active trading market for Patina Preferred Stock and Patina
Common Stock will develop or be sustained. Accordingly, the market for Patina
Preferred Stock may be relatively illiquid, which could adversely affect the
market price from time to time of the Patina Preferred Stock or cause prices to
fluctuate significantly based on relatively small trading volume. The number
of shares of Patina Preferred Stock into which each Depositary Share
representing Gerrity Preferred Stock will be redeemed, reclassified and
exchanged in the Transaction is identical to the number of such shares (.5270
shares of Patina Preferred Stock for each Depositary Share) issuable in the
Exchange Offer, and was determined by negotiations between Gerrity and SOCO in
connection with the Merger and not by any independent party representing solely
the holders of Depositary Shares representing Gerrity Preferred Stock.
SHARES AVAILABLE FOR FUTURE SALE
Future sales, or the availability for future sale, of substantial amounts
of Patina Common Stock, Patina Warrants or Patina Preferred Stock in the public
market following the Merger could adversely affect the market price of such
securities. For a description of the Patina Common Stock eligible for resale
after the Merger, see "Description of Patina Capital Stock - Shares Eligible
for Future Sale." In addition, pursuant to the Merger Agreement, Patina
granted SOCO certain "demand" and "piggyback" registration rights, which SOCO
could exercise in order to sell shares of Patina Common Stock held by it prior
to the expiration of applicable holding periods under the federal securities
laws. See "Relationships between SOCO and Patina - Registration Rights
Agreement."
RECENT LOSSES
Each of Gerrity and Patina incurred net losses for the six months ended
June 30, 1996. In addition, SOCO Wattenberg had a net loss for the year ended
December 31, 1995, and Gerrity had net losses for the years ended December 31,
1994 and December 31, 1995. Accordingly, there can be no assurance that Patina
will be profitable on a consolidated basis in the future. See "Patina
(formerly SOCO Wattenberg), Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Gerrity Managements's Discussion and
Analysis of Financial Condition and Results of Operations."
LACK OF HISTORY AS AN INDEPENDENT OPERATING COMPANY
While both SOCO and Gerrity have been active operators within Wattenberg,
Patina has had only limited experience since the completion of the Merger with
respect to the new strategy and overall cost structure of the combined entity.
Patina's strategy, including its plans to reduce costs through the
Consolidation, remains largely untested. Accordingly, there can be no
assurances that Patina will achieve or be able to maintain the overall
operating cost structure it anticipates or that its strategy will be
successful.
POTENTIAL CONFLICTS OF INTEREST BETWEEN SOCO AND PATINA
Conflicts of interest may arise between SOCO and Patina due primarily to
the control position that SOCO has with respect to Patina and the nature of the
respective businesses of SOCO and Patina. Such conflicts of interest may arise
in a number of areas relating to their past and ongoing relationships,
including acquisitions of oil and gas properties, the negotiation and
performance of intercompany services, insurance matters, marketing, financial
commitments, registration rights, sales of Patina securities, the election of
directors and payment of dividends by Patina. SOCO and its affiliates have in
the past entered into significant intercompany transactions and agreements
incident to their respective businesses, and Patina and SOCO and its affiliates
may be expected to enter into material transactions and agreements from time to
time in the future. Such transactions and agreements have related and may
relate to, among other things, the purchase, sale and marketing of oil and gas,
the provision of certain corporate services, including financial accounting and
reserve engineering services, insurance and the purchase and sale of assets,
including inventory and
-15-
<PAGE> 20
oil and gas property interests. Patina and SOCO intend that the terms of any
future agreements and transactions will be substantially as favorable to Patina
as could be obtained from third parties and are subject to a Business
Opportunity Agreement and a Corporate Services Agreement which address many
of these issues. SOCO has agreed that contracts or transactions between Patina
and SOCO or SOCO's subsidiaries will be approved by disinterested directors of
Patina. These conflicts of interest will continue to exist. See
"Relationships Between SOCO and Patina."
In addition, two officers of Patina, Thomas J. Edelman, Chairman of the
Board, President and Chief Executive Officer, and Rodney L. Waller, Vice
President - Acquisitions, are also officers of SOCO. See "Management of
Patina."
VOLATILITY OF OIL AND NATURAL GAS PRICES
Historically, the markets for oil and natural gas have been volatile and
are likely to continue to be volatile in the future. Prices for oil and
natural gas are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for oil and natural gas, market uncertainty
and a variety of additional factors that are beyond the control of Patina.
These factors include the level of consumer product demand, weather conditions,
proximity and capacity of natural gas pipelines and other transportation
facilities, domestic and foreign governmental regulations, the price and
availability of alternative fuels, political conditions in the Middle East, the
foreign supply of oil and natural gas, the price of foreign imports and overall
economic conditions. It is impossible to predict future oil and natural gas
price movements with any certainty. Declines in oil and natural gas prices may
adversely affect Patina's financial condition, liquidity and results of
operations. Lower oil and natural gas prices also may reduce the amount of
Patina's oil and natural gas reserves that can be produced economically.
ECONOMIC RISKS OF OIL AND NATURAL GAS OPERATIONS
Patina's oil and natural gas operations are subject to the economic risks
typically associated with development, production and exploration activities,
including the necessity of significant expenditures to locate and acquire
producing properties and to drill wells. In conducting development and
exploration activities, Patina may drill unsuccessful wells and experience
losses. In the event that oil or natural gas is discovered, there is no
assurance that such oil or natural gas can be economically produced or
satisfactorily marketed. The presence of unanticipated pressure or
irregularities in formations, miscalculations or accidents could potentially
cause Patina's development, production and exploration activities to be
unsuccessful, or potentially result in material uninsured losses.
Consequently, Patina's actual future production may be substantially affected
by factors beyond Patina's control.
GEOGRAPHIC CONCENTRATION OF OPERATIONS
Substantially all of Patina's operations are located in Wattenberg.
Pursuant to the terms of the Business Opportunity Agreement, Patina is
restricted for three years from the date of the Merger in its ability to expand
into a number of productive areas in Colorado, Wyoming and Utah, including
portions of the Washakie, Greater Green River, Big Horn, Wind River, Uinta and
Piceance Basins. These restrictions may limit Patina's ability to diversify its
operating base. Because of Patina's geographic concentration, any regional
events that increase costs, reduce availability of equipment or supplies,
reduce demand or limit production, including weather and natural disasters, may
impact Patina more than if its operations were more geographically diversified.
Patina's production will be transported on local pipeline systems for
processing at several local processing plants. While Patina expects to have
flexibility to mitigate the effects of pipeline curtailments or plant
shut-downs, curtailment of a significant portion of a pipeline or a prolonged
shut-down at a major plant could adversely affect Patina's operations, perhaps
materially. Prices for Rocky Mountain gas production have traditionally been
more volatile than prices in other markets and have been depressed since early
1995. In large part, this is the result of increased production in the region
and limited transportation capacity to other
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regions of the country. As a result, prices are particularly sensitive to
local demand, which has been depressed in large part due to unusually mild
weather in the region in 1995 and the first portion of 1996.
REPLACEMENT OF RESERVES
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. A typical Wattenberg Codell/Niobrara well
produces most prolifically in the first six to twelve months, during which
production declines significantly from initial rates. More than half of a
typical well's reserves are recovered in the first three years of production.
Production from Patina's properties declined in 1995 and in the first six
months of 1996 and, in view of the limited drilling activity in the first six
months of 1996 due to depressed prices for Rocky Mountain gas, is expected to
decline further throughout the remainder of 1996. Management believes that
production will continue to decline thereafter unless capital expenditures are
increased above current projected levels. Except to the extent Patina acquires
properties containing proved reserves or conducts successful drilling or
recompletion activities, the proved reserves of Patina will decline as reserves
are produced. Patina's future oil and natural gas production is, therefore,
highly dependent upon its level of success in finding or acquiring additional
reserves. The business of developing or acquiring reserves is capital
intensive. To the extent cash flow from operations is reduced and external
sources of capital become limited or unavailable, Patina's ability to make the
necessary capital investment to maintain or expand its asset base of oil and
natural gas reserves would be impaired. In addition, there can be no assurance
that Patina's future development, acquisition and exploration activities will
result in additional proved reserves or that Patina will be able to drill
productive wells at acceptable costs.
OPERATING RISKS OF OIL AND NATURAL GAS OPERATIONS
The oil and natural gas business involves certain operating hazards such as
well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pollution, releases
of toxic gas and other environmental hazards and risks, any of which could
result in substantial losses to Patina. In addition, Patina may be liable for
environmental damages caused by previous owners of property held by Patina. As
a result, substantial liabilities to third parties or governmental entities may
be incurred, the payment of which could reduce or eliminate the funds available
for development, acquisitions or exploration, or result in the loss of Patina's
properties. In accordance with customary industry practices, Patina will
maintain insurance against some, but not all, of such risks and losses. The
occurrence of such an event not fully covered by insurance could have a
material adverse effect on the financial condition and results of operations of
Patina.
UNCERTAINTY OF RESERVE ESTIMATES
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in this Information
Statement/Prospectus represents only estimates. Reserve engineering is a
subjective process of estimating underground accumulations of 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 and of engineering and
geological interpretation and judgment. As a result, estimates of different
engineers may vary.
In addition, estimates of reserves and of Patina's future net revenues from
such reserves and the present value thereof are based on assumptions regarding
production levels, future oil and natural gas prices, operating costs and other
factors that may not prove to be correct over time. Any significant variance
in these assumptions could materially affect the estimated quantity and value
of reserves set forth in this Information Statement/Prospectus.
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COMPETITION
The oil and gas industry is highly competitive. Patina competes for the
acquisition of oil and natural gas properties with numerous entities, including
major oil companies, other independent oil and gas concerns and individual
producers and operators. Many of these competitors have financial and other
resources substantially greater than those of Patina.
GOVERNMENT REGULATION AND LITIGATION PROCEEDINGS
Patina's business is regulated by certain local, state and federal laws and
regulations relating to the exploration for, and the development, production,
marketing, transportation and storage of, oil and natural gas. Colorado's
statute concerning oil and gas development was amended in 1994 to provide the
State's Oil and Gas Conservation Commission (the "COGCC") with additional
authority to regulate oil and gas activities to protect public health, safety
and welfare, as well as the environment. Several rulemaking proceedings have
been or will be undertaken pursuant to these statutory changes, including
consideration of regulations to protect soil and groundwater, expand and
clarify reclamation requirements, regulate locations of new wells in
residential areas and provide financial assurance for industry obligations in
these areas. These rules, which have been adopted by the COGCC after
consideration by the oil and gas industry as well as groups representing
agricultural, residential, environmental and local governmental interests, are
not expected to have a material adverse effect on Patina, and management does
not expect that the rules currently being considered will have a material
adverse effect. There can be no assurance, however, even though the Colorado
statute currently requires that any regulations adopted by the COGCC be cost
effective and technologically feasible, that regulatory developments will not
increase Patina's costs of operations or limit its ability to develop its
properties fully. Local efforts to regulate oil and gas activities, although
limited by state law which prohibits local regulations from preventing the
drilling of wells or conflicting with COGCC regulations, are expected,
particularly if drilling levels increase significantly, to continue since the
use of surface land for drilling and operations competes directly with the use
of such land by agricultural and residential interests, which own the great
majority of surface land in Wattenberg. Patina's business will also be subject
to extensive and changing environmental and safety laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. In addition, Patina is subject to changing and
extensive tax laws, the effects of which cannot be predicted with certainty.
There can be no assurance that present or future regulation will not adversely
affect the operations of Patina. In addition, SOCO Wattenberg and Gerrity are
subject to certain litigation proceedings with respect to their operations, as
described in "Information Concerning SOCO Wattenberg (Predecessor of Patina -
Litigation and Contingencies" and "Information Concerning Gerrity - Legal
Proceedings."
NO DIVIDENDS
Patina has not paid, and does not intend to pay in the forseeable future,
cash dividends on its Common Stock. Instead, Patina currently intends to
retain its cash for the continued expansion of its business, including
development and acquisition activities, and to reduce debt levels. No cash
dividends may be paid unless all accrued and unpaid dividends on the Patina
Preferred Stock, and certain other preferred stock that may be issued in the
future, have been paid. In addition, Patina's bank credit facilities contain
limitations on the payment of dividends.
CONCENTRATION OF OWNERSHIP
SOCO owns an aggregate of 14,000,000 shares of Patina Common Stock
including all 2,000,000 shares of Series A Common Stock, a special series of
Patina Common Stock having three votes per share (which shares would convert
automatically to ordinary Patina Common Stock upon transfer thereof by SOCO or
if Patina ceases to be included in the consolidated financial statements of
SOCO). As such, SOCO owns shares representing 70% of the outstanding shares of
the common stock of Patina and 75% of the aggregate voting power thereof and
retains control over matters submitted to a vote of Patina's stockholders,
including
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the election of the board of directors, amendments to Patina's Certificate of
Incorporation or other extraordinary corporate transactions, such as a merger
or consolidation. The Merger Agreement adopted in connection with the Merger
provides that SOCO may not effect certain sales of a controlling interest in
Patina prior to the second anniversary of the date of the Merger (subject to
earlier termination) unless all holders of Patina Common Stock are given an
opportunity to participate in such sale on a basis that would result in such
holders receiving a per share consideration with a fair market value at least
equal to the average per share consideration to be received by SOCO. The
Merger Agreement does not require that such holders receive the same
consideration, but does require that it have at least the same average fair
market value per share. After the two year period (or earlier termination),
these rights will expire, and SOCO would not be contractually obligated to
afford such holders any such opportunities.
THE SPECIAL MEETING
GENERAL
The Special Meeting will be held on Thursday, October 31, 1996, at the
offices of the Chairman and Chief Executive Officer of Patina, 595 Madison
Avenue, 27th Floor, New York, New York, commencing at 9:00 a.m. Eastern Time.
The purpose of the Special Meeting is to consider and vote upon (i) a proposal
to approve and adopt the Certificate of Amendment and the Transaction
contemplated thereby and (ii) such other matters as may properly be brought
before the Special Meeting.
FOR THE REASONS SET FORTH HEREIN, THE BOARDS OF DIRECTORS OF BOTH GERRITY
AND PATINA HAVE DETERMINED THAT THE TRANSACTION IS FAIR TO, AND IN THE BEST
INTERESTS OF, THE HOLDERS (OTHER THAN PATINA) OF DEPOSITARY SHARES REPRESENTING
GERRITY PREFERRED STOCK AND THE BOARD OF DIRECTORS OF GERRITY HAS UNANIMOUSLY
VOTED TO RECOMMEND THAT THE HOLDERS OF DEPOSITARY SHARES REPRESENTING GERRITY
PREFERRED STOCK AND GERRITY COMMON STOCK VOTE FOR APPROVAL OF THE TRANSACTION
AND ADOPTION OF THE CERTIFICATE OF AMENDMENT RELATED THERETO.
RECORD DATE AND OUTSTANDING SHARES; VOTING RIGHTS
Only holders of record of Gerrity Common Stock and Depositary Shares
representing Gerrity Preferred Stock on the Record Date are entitled to notice
of, and to vote at, the Special Meeting. On the Record Date, there was one
holder of Gerrity Common Stock (Patina) with 100 shares of Gerrity Common Stock
issued and outstanding and approximately ten beneficial holders of an aggregate
of 3,036,000 Depositary Shares representing 379,500 shares of Gerrity Preferred
Stock outstanding. Each share of Gerrity Common Stock entitles the holder
thereof to one vote on each matter submitted for stockholder approval. On
certain matters affecting the Gerrity Preferred Stock (such as the proposed
Transaction) the shares of Gerrity Preferred Stock are entitled to one vote per
share.
QUORUM; VOTE REQUIRED
The presence at the Special Meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of Gerrity Common Stock entitled to
vote at the Special Meeting will constitute a quorum for the transaction of
business. Approval and adoption of the Certificate of Amendment requires the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Gerrity Common Stock entitled to vote thereon and the vote of at
least 66 2/3% of the issued and outstanding shares of Gerrity Preferred Stock
entitled to vote thereon. In determining whether the proposal to adopt the
Certificate of Amendment has received the requisite number of affirmative
votes, abstentions and broker non-votes will have the same effect as a vote
against the proposal.
The Transaction is not structured to require the approval of at least a
majority of the holders of Depositary Shares not affiliated with Patina, SOCO
or Gerrity before it may be consummated.
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<PAGE> 24
ALL OF THE OUTSTANDING SHARES OF GERRITY COMMON STOCK AND DEPOSITARY SHARES
REPRESENTING APPROXIMATELY 75.7% OF THE OUTSTANDING SHARES OF GERRITY PREFERRED
STOCK ARE BENEFICIALLY OWNED BY PATINA, WHICH HAS ADVISED GERRITY THAT IT
INTENDS TO VOTE SUCH SHARES OF GERRITY COMMON STOCK AND DEPOSITARY SHARES
REPRESENTING GERRITY PREFERRED STOCK FOR THE APPROVAL AND ADOPTION OF THE
CERTIFICATE OF AMENDMENT AND THE TRANSACTION CONTEMPLATED THEREBY. ACCORDINGLY,
APPROVAL OF THE CERTIFICATE OF AMENDMENT AND THE TRANSACTION AT THE SPECIAL
MEETING IS ASSURED.
No shares of Gerrity Preferred Stock are held by officers and directors of
Patina and their affiliates, and no shares are held by officers and directors
of Gerrity and their affiliates.
NO SOLICITATION OF PROXIES
Proxies are not being solicited hereby on behalf of the Board of Directors
of Gerrity, which since the date of the Merger has been composed of Mr. Thomas
J. Edelman, Mr. Brian J. Cree and Mr. Rodney L. Waller, all of whom are
employees of SOCO and/or Patina (the "Gerrity Board"). For additional
information regarding the individuals comprising the Gerrity Board, see
"Management of Patina." Accordingly, GERRITY IS NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND A PROXY.
OTHER MATTERS
At the date of this Information Statement/Prospectus, the Gerrity Board
does not know of any business to be presented at the Special Meeting other than
as set forth in the notice accompanying this Information Statement/Prospectus.
THE TRANSACTION
GENERAL DESCRIPTION OF THE TRANSACTION
The Transaction would be effected by amending Gerrity's Certificate of
Incorporation to provide that effective upon the filing of the Certificate of
Amendment with the Secretary of State of the State of Delaware, each outstanding
share of Gerrity Preferred Stock will be redeemed, reclassified into and
exchanged for shares of Patina Preferred Stock (at an exchange ratio of .5270
shares of Patina Preferred Stock for each Depositary Share) together with the
amount of any dividends or other distributions (without interest) which may have
become payable in respect of Patina Preferred Stock during the period commencing
on the date of the initial issuance of the Patina Preferred Stock (May 2, 1996)
and ending on the date of surrender of the certificates formerly representing
Depositary Shares by the holders (other than Patina) thereof. An aggregate of
approximately 388,763 additional shares of Patina Preferred Stock are expected
to be issued in the Transaction. In addition, Patina has advised Gerrity that
Patina will take whatever actions are necessary to terminate the depositary
arrangements with respect to Depositary Shares. Fractional shares will not be
issued, and holders of certificates theretofore representing Depositary Shares
will be paid an amount in cash for their fractional interests determined by
multiplying (i) the fraction of a share of Patina Preferred Stock to which such
holder would otherwise have been entitled by (ii) the closing price of a share
of Patina Preferred Stock on the NYSE on the first full trading day on or after
the date the Transaction becomes effective and on which such Patina Preferred
Stock is traded. The text of the Certificate of Amendment is attached hereto as
Annex A and is incorporated herein by reference. The description of the
Certificate of Amendment contained in this Information Statement/Prospectus is
qualified in all respects by reference to the text of the Certificate of
Amendment.
It is expected that the Certificate of Amendment to the Certificate of
Incorporation of Gerrity providing for the Transaction will be filed with the
Secretary of State of the State of Delaware as soon as practicable after the
conclusion of the Special Meeting, probably upon the date thereof.
Accordingly, it is expected that the Transaction will be completed on the date
of the Special Meeting or shortly thereafter.
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Each share of Patina Preferred Stock is entitled to the payment of
quarterly dividends at the rate of 7 1/8% per annum (based upon its liquidation
preference, or approximately $1.78 per share per annum), has a liquidation
preference of $25 per share and is convertible into Patina Common Stock at a
conversion price of $8.61 per share. In addition, such shares of Patina
Preferred Stock are redeemable by Patina after three years from original
issuance (May 2, 1996), or, subject to certain conditions, after two years from
original issuance at specified redemption prices. See "Description of Patina
Capital Stock - Patina Preferred Stock." Depositary Shares are presently
convertible into the consideration received by holders of Gerrity Common Stock
in the Merger (on the basis of the exchange ratio employed in the Merger and
the conversion price applicable prior to the Merger of $19.25 per share of
Gerrity Common Stock), which is .5655 shares of Patina Common Stock and .2827
Patina Warrants per Depositary Share. In addition, because of the current debt
service requirements on outstanding subordinated debt and bank borrowings of
Gerrity, it is more likely than not that in the foreseeable future no dividends
will be paid on the Gerrity Preferred Stock. However, pursuant to the terms of
the Gerrity Preferred Stock, no dividends may be paid on the Gerrity Common
Stock held by Patina until and unless accrued but unpaid dividends have been
paid in full on the Gerrity Preferred Stock.
By comparison, each share of Patina Preferred Stock is presently
convertible into 2.904 shares of Patina Common Stock based on the conversion
price of $8.61 per share. Furthermore, the covenants and other terms of
Patina's existing credit lines and other borrowings do not currently restrict
Patina from making dividend payments on the Patina Preferred Stock in
accordance with its terms. See "Patina Business Strategy - Patina Financing."
After the effective date of the Transaction, Gerrity will furnish record
holders of Depositary Shares with instructions as to the surrender or exchange
for payment of their certificates theretofore representing Depositary Shares
presently held by them, and will advise holders of certificates theretofore
representing Depositary Shares as to the procedure for issuance of certificates
representing Patina Preferred Stock or payment of cash in lieu of fractional
shares. If any certificates representing shares of Patina Preferred Stock are
to be registered in the name of a person other than that of the registered
holder of the Depositary Shares surrendered, the amount of any stock transfer
or similar taxes (whether imposed on the registered holder or such person)
payable on account of such transfer must be paid to Gerrity (or to an exchange
agent appointed by Gerrity), unless satisfactory evidence of the payment of
such taxes, or exemption therefrom, is submitted.
AFTER THE EFFECTIVE DATE OF THE TRANSACTION, HOLDERS OF CERTIFICATES
THERETOFORE REPRESENTING DEPOSITARY SHARES WILL NOT BE ENTITLED TO RECEIVE ANY
DIVIDENDS OR OTHER DISTRIBUTIONS PAYABLE TO HOLDERS OF PATINA PREFERRED STOCK
UNTIL SURRENDER OF THEIR DEPOSITARY SHARE CERTIFICATES. UPON SURRENDER OF
THEIR DEPOSITARY SHARE CERTIFICATES, THE HOLDERS WILL RECEIVE THE AMOUNT OF ANY
DIVIDENDS OR OTHER DISTRIBUTIONS (WITHOUT INTEREST) WHICH MAY HAVE BECOME
PAYABLE IN RESPECT OF PATINA PREFERRED STOCK PRIOR TO SURRENDER, SUBJECT TO
APPLICABLE ESCHEAT LAWS.
NO APPRAISAL OR DISSENTERS' RIGHTS
No right of appraisal or dissent is available to any holder of Depositary
Shares representing Gerrity Preferred Stock who opposes the Transaction under
the laws of the State of Delaware. Furthermore, no such right is available to
any such holder under the Certificate of Incorporation or bylaws of Gerrity, by
agreement or otherwise.
BACKGROUND OF THE TRANSACTION; SPECIAL FACTORS
The Transaction will result in Gerrity becoming a wholly owned subsidiary
of Patina. The Transaction is the culmination of a series of events which began
with the Merger and the Exchange Offer, which themselves resulted from a lengthy
negotiation process described under "- Background of the Merger and the
Exchange Offer" below. The following discussion sets forth the background of
the considerations leading to the reasons the Gerrity Board and the Board of
Directors of Patina (the "Patina Board") have unanimously determined that the
Transaction is fair to and in the best interests of the
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holders of Depositary Shares representing Gerrity Preferred Stock.
Since the completion of the Merger, members of the Gerrity Board and
management of Patina have continued to discuss the impact of the acquisition of
Gerrity as structured in the Merger and Exchange Offer upon Patina's ability to
effect its intended business strategy. Although it was initially contemplated
that the Gerrity Preferred Stock not exchanged in the Exchange Offer could
remain outstanding following the Exchange Offer without an unduly adverse
effect on Patina's effectuation of its business strategy, Patina's senior
management and the Gerrity Board now believe the limitations on the cost
reduction efforts of the combined enterprise imposed by the expense associated
with Gerrity's status as a reporting company under the Exchange Act, the
dividend requirements of the Gerrity Preferred Stock and the diversion of
management time and limited operating flexibility of the combined enterprise
resulting from the existence of a publicly held equity security at the Gerrity
level constitute a significant constraint on Patina's ability to successfully
implement the strategies contemplated in the Consolidation. Patina's senior
management and the Gerrity Board believe that the continuing expenses involved
in Gerrity remaining a public company are not providing a material benefit to
Gerrity and, in light of Gerrity's status as a subsidiary of another public
company, to the holders of the Depositary Shares.
Senior management of Gerrity and Patina have discussed and analyzed various
alternatives to the proposed Transaction to achieve the objectives of the
Consolidation, including an extension of the Exchange Offer, open market or
negotiated purchases of Depositary Shares and a reverse split of the Gerrity
Preferred Stock in which cash would be paid to holders of publicly held
Depositary Shares. The first two alternatives were rejected because they
afforded no assurance that the goal of making Gerrity a wholly owned subsidiary
of Patina would be achieved, although Patina has purchased 12,000 additional
Depositary Shares since the expiration of the Exchange Offer at prevailing
market prices. The third alternative was rejected because it would divert a
significant amount of cash needed by Patina for use in its business. The
proposed Transaction, on the other hand, would provide holders of Depositary
Shares with an ongoing interest in Gerrity through ownership of an interest in
Patina and with a current income stream in the form of dividends on the Patina
Preferred Stock, which was unlikely to exist in the foreseeable future with
respect to the Gerrity Preferred Stock. The decision to recommend that the
Gerrity Board adopt the same exchange ratio employed in the Exchange Offer and
to pay the amount of any dividend or other distributions payable upon the Patina
Preferred Stock from the date of its initial issuance was made to assure equal
treatment of all holders of Depositary Shares (in light of the relatively small
amount of time that has elapsed since the completion of the Exchange Offer) and
because such exchange ratio and dividend rate were the result of arm's length
bargaining between Gerrity and SOCO and had been approved by the Gerrity Board
as constituted prior to the Merger. Because the exchange ratio and dividend
rate were the result of such arm's length bargaining, senior management of
Gerrity did not recommend to the Gerrity Board that an unaffiliated
representative of holders of Depositary Shares be appointed to negotiate with
respect to the proposed Transaction on behalf of such holders or that a
committee of directors unaffiliated with Gerrity, Patina or SOCO be created to
negotiate the terms of the Transaction.
Accordingly, senior management determined to recommend to the Gerrity Board
and to the Patina Board that the Transaction be undertaken and recommended to
stockholders for their approval and adoption. On July 30, 1996 the Board of
Directors of Patina authorized the issuance of additional Patina Preferred Stock
in the Transaction and the filing of a registration statement under the
Securities Act in respect of the Transaction. On August 12, 1996, the Gerrity
Board retained A.G. Edwards to deliver a written opinion to the Gerrity Board
regarding the fairness from a financial point of view of the terms of the
proposed Transaction to the holders (other than Patina) of Depositary Shares
representing Gerrity Preferred Stock. At a meeting of the Gerrity Board held on
August 26, 1996 at which the issues described above and below were discussed in
detail, the Gerrity Board was briefed by senior management regarding its
conclusions and recommendations described in the preceding paragraphs and
received a presentation by A.G. Edwards of its financial analysis of the
proposed Transaction. At the meeting A.G. Edwards delivered its oral opinion as
to the fairness, from a financial point of view, of the terms of the Transaction
to the holders (other than Patina) of the Depositary Shares representing Gerrity
Preferred Stock. The Gerrity Board then unanimously approved the Transaction
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and determined to recommend to Gerrity stockholders the approval and adoption of
the Certificate of Amendment and the Transaction contemplated thereby.
A.G. Edwards confirmed its opinion to the Gerrity Board in a writing dated the
date of this Information Statement/Prospectus, a copy of which is attached
hereto as Annex B.
An analysis similar to that employed by the Gerrity Board was employed by
the Patina Board at a meeting held on September 30, 1996 (except that although
A.G. Edwards described to the Patina Board the analysis it employed in rendering
its opinion to the Gerrity Board, A.G. Edwards did not make a presentation,
deliver an opinion nor render financial advice to the Patina Board), at which
time the Patina Board adopted the analyses of the Gerrity Board and A.G. Edwards
and determined that the Certificate of Amendment and the Transaction
contemplated thereby are fair to, and in the best interests of, holders (other
than Patina) of Depositary Shares representing Gerrity Preferred Stock.
REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE BOARD OF DIRECTORS OF GERRITY
At a meeting held on August 26, 1996, the Board of Directors of Gerrity, by
unanimous vote, determined that the terms of the Transaction are fair to and in
the best interests of the holders (other than Patina) of the Depositary Shares
representing Gerrity Preferred Stock and recommended approval and adoption of
the Certificate of Amendment and the Transaction contemplated thereby by the
stockholders of Gerrity. In reaching these determinations, the Gerrity Board
consulted with senior management of Gerrity and Patina, as well as its financial
and legal advisors and considered, among other things, the following factors:
(i) The continuing significant costs to the combined entities associated
with Gerrity remaining a reporting company under the Exchange Act, including
expenses, the dividend requirements of the Gerrity Preferred Stock and the
time required of management. One of the principal purposes of the
Consolidation was to eliminate overhead costs and provide the opportunity to
combine the strengths of the two predecessor entities in order to permit
enhanced operating and financial performance and economies of scale beyond
those achieved by the predecessor companies. Such economies of scale are
particularly significant in light of the adverse impact on both SOCO
Wattenberg and Gerrity resulting from the depressed market for Rocky
Mountain natural gas. The continuation of Gerrity as a public company,
which results from the continued existence of the outstanding Gerrity
Preferred Stock, lessens the ability of the combined entities to achieve
this principal goal of the Consolidation, through diversion of both
management time and corporate financial resources into activities which are
inconsistent with the business strategy adopted in connection with the
Merger.
(ii) The unlikelihood of payment of dividends on the Gerrity Preferred
Stock. Because of the current debt service requirements on outstanding
subordinated debt and bank borrowings of Gerrity, it is more likely than
not that in the foreseeable future no dividends could be paid on the
Gerrity Preferred Stock.
(iii) Restrictions on the ability of Gerrity to pay dividends to Patina.
Pursuant to the terms of the Gerrity Preferred Stock, no dividends may be
paid on the Gerrity Common Stock held by Patina until and unless accrued
but unpaid dividends have been paid in full on the Gerrity Preferred Stock.
(iv) The relative illiquidity of the Gerrity Preferred Stock. Since the
Merger, a large portion of the Depositary Shares has been held by a small
number of holders (approximately two holders other than Patina accounted
for 75% of the Depositary Shares remaining in public hands on the date of
the August 26, 1996 Gerrity Board meeting) and relatively few shares are
thus available for trading in public markets. Although the Depositary
Shares are listed for trading on the NYSE, volume of trading is so slight
that, in the opinion of the Gerrity Board, the holders of Depositary Shares
have not derived the benefit of an established trading market that normally
accompany the public ownership of shares. Since the Merger, the Gerrity
Preferred Stock has been relatively illiquid, with average weekly trading
volume from the Merger to the date of the Gerrity Board meeting amounting
to less than 7,500 Depositary Shares.
(v) The fact that Patina Preferred Stock pays a current dividend and is
also listed for trading on the NYSE. Although trading on the NYSE of the
Patina Preferred Stock has been limited since the Merger, the increase in
the number of shares resulting from reclassifying and exchanging Gerrity
Preferred Stock into Patina Preferred Stock would increase the number of
shares of Patina Preferred Stock available for public trading and could
result in greater liquidity.
(vi) The conclusions and analysis of senior management of Gerrity regarding
the Transaction as described under "- Background of the Transaction -
Special Factors."
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(vii) The potential conflicts of interest faced by the Gerrity Board
between its obligations to Patina, as holder of all of the Gerrity Common
Stock and approximately 75.7% of the Depositary Shares representing Gerrity
Preferred Stock, and to public holders of Depositary Shares in respect of
future business decisions involving Gerrity.
(viii) The financial condition, results of operations, business and
prospects of Gerrity, if it were to remain publicly owned, including the
need for additional capital to facilitate the growth of its business and
the uncertain prospects of obtaining such additional capital.
(ix) The financial condition, results of operations, business and
prospects of Patina since the Merger, including the benefits obtained (and
limitations thereon) as a result of the cost reductions expected to be
realized by, and the reduced leverage of, the combined company.
(x) The oral presentation by A.G. Edwards at the August 26, 1996 meeting
of the Gerrity Board and the oral opinion of A.G. Edwards, which was later
confirmed in a written opinion dated the date of this Information
Statement/Prospectus, to the effect that, as of the dates of such opinions,
the terms of the Transaction contemplated by the Certificate of Amendment,
are fair from a financial point of view to the holders (other than Patina)
of Depositary Shares representing Gerrity Preferred Stock. The full text
of A.G. Edwards' opinion dated the date of this Information
Statement/Prospectus, which sets forth the assumptions made, matters
considered and limitations of the review undertaken by A.G. Edwards is
attached as Annex B hereto and is incorporated herein by reference.
HOLDERS OF GERRITY PREFERRED STOCK ARE URGED TO READ CAREFULLY AND IN ITS
ENTIRETY THE OPINION OF A.G. EDWARDS.
(xi) The fact that redeeming, reclassifying and exchanging the Gerrity
Preferred Stock into Patina Preferred Stock would complete the
Consolidation by making Gerrity a wholly owned subsidiary of Patina.
(xii) The fact that the redemption, reclassification and exchange of
Gerrity Preferred Stock pursuant to the Transaction is likely to result,
among other things, in the Depositary Shares and Gerrity Preferred Stock
being delisted by the NYSE, no longer constituting margin securities and/or
no longer being registered under the Exchange Act.
(xiii) The expected future trading values of the Depositary Shares, in the
absence of the Transaction, in light of, among other matters, the
historical trading multiples of other oil and gas companies and the current
industry, economic and market conditions.
The Gerrity Board did not assign relative weights to the foregoing factors
and did not determine that any factor was more important than any other factor.
Rather, the Gerrity Board viewed its position and recommendations as being
based on the totality of the information presented to and considered by it.
The Gerrity Board recognized that, although there can be no assurance as to
the level of growth or profits to be attained by Patina in the future, the
Transaction contemplated by the Certificate of Amendment gives the holders of
Depositary Shares the opportunity to receive Patina Preferred Stock. In doing
so, this would enable such holders to participate (i) in the synergies that
were expected to be created through the Merger by having an expanded, more
stable and less restricted revenue base to support the dividend payments on the
Patina Preferred Stock and (ii) in the future growth and profits of the
combined company through the possibility of ownership of Patina Common Stock
upon conversion of the Patina Preferred Stock.
An analysis similar to that set forth above in respect of the Gerrity Board
was employed by the Patina Board at a meeting held on September 30, 1996
(except that although A.G. Edwards described to the Patina Board the analysis it
employed in rendering its opinion to the Gerrity Board, A.G. Edwards did not
make a presentation, deliver an opinion nor render financial advice to the
Patina Board). In particular, the Patina Board considered the factors identified
in (i) through (xiii) above, as well as the text of the opinion of A.G. Edwards
rendered to the Gerrity Board in the form attached hereto as Annex B, and
adopted the analyses of the Gerrity Board and A.G. Edwards as its own. As a
result of such analysis, the Patina Board considering the totality of the
available information, without giving particular weight to any one of the
foregoing factors, determined that the Certificate of Amendment and the
Transaction contemplated thereby are fair to, and in the best interests of,
holders (other than Patina) of Depositary Shares representing Gerrity Preferred
Stock.
It is expected that, if for any reason the Certificate of Amendment is not
approved and adopted, or the Transaction is not consummated, the current
management of Gerrity will continue to manage Gerrity as an ongoing business in
accordance with Patina's current long-term strategic plan adopted in connection
with the Merger.
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<PAGE> 29
OPINION OF GERRITY FINANCIAL ADVISOR
In considering whether to approve the Certificate of Amendment and the
Transaction, the Gerrity Board received the opinion of A.G. Edwards.
Gerrity retained A.G. Edwards to act as Gerrity's financial advisor in
connection with the Transaction and related matters based upon A.G. Edwards'
qualifications, expertise and reputation, as well as A.G. Edwards' prior
investment banking relationship and familiarity with Gerrity. At the August
26, 1996 meeting of the Gerrity Board, A.G. Edwards rendered an oral opinion
to the Gerrity Board that, as of such date, and subject to the considerations
set forth in such opinion, the terms of the Transaction contemplated by the
Certificate of Amendment are fair from a financial point of view to the holders
(other than Patina) of Depositary Shares representing Gerrity Preferred Stock.
A.G. Edwards subsequently confirmed its oral opinion by delivery of a written
opinion dated the date of this Information Statement/Prospectus.
The full text of A.G. Edwards' written opinion dated the date of this
Information Statement/Prospectus which sets forth the assumptions made, matters
considered and limitations of the review undertaken, is attached as Annex B to
this Information Statement/Prospectus (the "A.G. Edwards Opinion") and is
incorporated herein by reference. Holders of the Depositary Shares
representing Gerrity Preferred Stock are urged to, and should, read the A.G.
Edwards Opinion carefully and in its entirety. The A.G. Edwards Opinion is
directed to the Gerrity Board and the fairness of the terms of the Transaction
contemplated by the Certificate of Amendment, and it does not constitute a
recommendation to any holder of Depositary Shares representing Gerrity
Preferred Stock as to whether or not to vote for the adoption and approval of
the Certificate of Amendment. The summary of the A.G. Edwards Opinion set
forth in this Information Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
In arriving at its opinion, A.G. Edwards (i) analyzed certain public and
non-public operating and financial data of Gerrity, Patina and SOCO Wattenberg
prepared by the respective managements, technical staff, land personnel and
reserve engineers, which data has been made available to it in its role as
financial advisor to Gerrity, (ii) reviewed the reported prices and trading
activity of Gerrity's and Patina's publicly traded debt and equity securities,
(iii) discussed with the management of Gerrity and Patina the historical
operating results, financial condition and the future prospects of the business
of Gerrity and Patina, (iv) analyzed published information regarding the
financial and market performance of a limited group of companies which A.G.
Edwards believes is comparable to Gerrity and Patina, (v) reviewed the
financial terms, to the extent publicly available, of certain acquisition
transactions, (vi) analyzed certain financial projections of Gerrity and Patina
and considered the value of certain tangible and intangible costs and benefits
that have and may in the future accrue to Gerrity and Patina as a result of the
Merger, (vii) reviewed the terms of the Merger, the Exchange Offer, the
proposed Transaction and certain related documents, (viii) took into account
its general experience in the industry, dealings with similar transactions and
knowledge derived from its role as financial advisor to Gerrity; and (ix)
undertook such additional reviews, analyses and inquiries as it deemed relevant
under the circumstances.
In rendering its opinion, A.G. Edwards relied without independent
verification upon the accuracy and completeness of all financial and other
information that was provided to it by Gerrity or that it otherwise reviewed
for the purposes of the opinion, and the opinion is conditioned upon such
information being complete and accurate in all material respects. It has not
made or obtained any independent evaluation or appraisals of the assets of
Gerrity and Patina, nor has it been furnished with any such appraisals. A.G.
Edwards also assumed that financial projections of the future performance of
Gerrity, SOCO Wattenberg and Patina provided to it by management were prepared
on a basis reflecting management's best currently available estimates and
judgment. Its opinion is necessarily based on economic, monetary, political,
market and other conditions existing and which can be evaluated as of the date
of the opinion; however, such conditions are subject to rapid and unpredictable
change. A.G. Edwards also assumed, without independent investigation, that
the form of the Transaction complies with applicable law including, without
limitation, that the holders
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<PAGE> 30
(other than Patina) of Depositary Shares representing Gerrity Preferred Stock
are not being asked to submit a proxy in respect of the Transaction.
The following is a brief summary of certain analyses performed by and
reviewed with the Gerrity Board on August 26, 1996 in connection with the
preparation of the A.G. Edwards Opinion and with its oral presentation to the
Gerrity Board on that date. A.G. Edwards updated its analysis to reflect
public market information through September 27, 1996.
Gerrity Preferred Stock Performance. A.G. Edwards' analysis of Gerrity
Preferred Stock performance consisted of a historical analysis of closing prices
and trading volumes from June 21, 1994 to September 27, 1996; Gerrity's indexed
weekly price performance from June 21, 1994 to September 27, 1996 relative to a
non-investment grade Convertible Preferred Index (the "Convertible Preferred
Index") and a Comparable Public Companies Index (the "Public Companies Index"),
which was comprised of five energy companies with publicly traded convertible
preferred stock outstanding including American Exploration Corporation, Callon
Petroleum, Chieftain International, Forest Oil Corporation and Howell
Corporation (the "Comparable Public Companies"). The Gerrity Preferred Stock
generally under-performed the Public Companies Index and the Convertible
Preferred Index during the above mentioned time frame. From January 1, 1996
through September 27, 1996, the Gerrity Preferred Stock closed at a high of
$15.25 per share and a low of $10.50 per share. On September 23, 1996 the
Gerrity Preferred Stock closed at $14.00 per share.
Patina Preferred Stock Performance. A.G. Edwards' analysis of Patina
Preferred Stock performance consisted of a historical analysis of closing prices
and trading volumes from May 3, 1996 to September 27, 1996 and Patina's indexed
daily price performance from May 3, 1996 to September 27, 1996 relative to the
Comparable Public Companies Index. The 1996 high of $26.00 for the Patina
Preferred Stock occurred on September 26, 1996, representing a 10.9% premium to
the year-to-date average Gerrity Preferred Stock share price of $12.35, assuming
the exchange ratio of 0.527 shares of Patina Preferred Stock in exchange for
each Depositary Share. The 1996 low of $22.25 for the Patina Preferred Stock
occurred on June 12, 1996, representing a 5.0% discount to the year-to-date
average Gerrity Preferred Stock share price. The 1996 year-to-date mean share
price of the Patina Preferred Stock is $23.99, representing a 2.4% premium to
the year-to-date average Gerrity Preferred Stock share price. On September 27,
1996, the Patina Preferred Stock closed at $25.75. The above premiums/discounts
do not reflect any amounts of dividends or distributions with respect to Patina
Preferred Stock which may become payable to holders of Depositary Shares during
the period commencing on the date of the initial issuance of the Patina
Preferred Stock and ending on the date of the surrender by such holders of their
certificates formerly representing Depositary Shares.
Theoretical Black-Scholes Analysis. A.G. Edwards performed a theoretical
analysis of the Gerrity Preferred Stock. The Gerrity Preferred Stock was
analyzed as two separate securities, a straight bond yielding 6% on a $75.9
million face amount and a call option with an initial strike price of $19.25 per
share of Gerrity Common Stock. The bond valuation was performed using
discounted cash flow analysis and a discount rate of 17%. A.G. Edwards applied
a discount rate of 17% per annum based upon various factors, including the
position of the Gerrity Preferred Stock in the capital structure and the
creditworthiness of Gerrity and the spread to U.S. Treasuries for similar
publicly-traded debt instruments. The Black-Scholes model was used to calculate
the call option assuming a 40% annual volatility, a ten year life and the
implied Gerrity Common Stock price on September 27, 1996 of $3.10 per share
based on the September 27, 1996 Patina Common Stock closing price of $6.88 per
share. A.G. Edwards calculated an aggregate theoretical Gerrity Preferred Stock
value based on continuing operations as a going concern (the "Gerrity Preferred
Stock Going Concern Valuation") of $9.84 per share.
Discounted Cash Flow Analysis. A.G. Edwards performed a discounted cash
flow analysis of Gerrity and Patina based on financial projections prepared by
the respective management of each company. Using discount rates ranging from
9.0% to 11.0% per annum, A.G. Edwards calculated the present value of the
Unlevered Free Cash Flows (as defined below) of Gerrity and Patina for fiscal
years 1996 through 2011. Unlevered Free Cash Flows were calculated as net
income available to common stockholders before the aggregate of preferred stock
dividends, depletion, depreciation and amortization, deferred taxes, other
non-cash expenses and before-tax net interest expense, less general and
administrative expenses, the sum of
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capital expenditures and net investment in working capital. A.G. Edwards
applied discount rates ranging from 9.0% to 11.0% per annum based upon various
factors, including the weighted average cost of capital to Gerrity and Patina
and the likely cost of capital relevant to investors in assets similar to SOCO
Wattenberg. Unlevered Free Cash Flows were projected to the end of the reserve
life. To calculate the net present value based on continuing operations as a
going concern of the aggregate preferred and common equity of Gerrity (the
"Gerrity Equity Going Concern Valuation"), A.G. Edwards deducted Net Debt
(defined as aggregate debt less cash), excluding the Gerrity Preferred Stock,
as of June 30, 1996. A.G. Edwards calculated the Gerrity Equity Going Concern
Valuation based on a risk-weighted oil and gas reserve case which was risked as
follows: proved developed producing, 100%, proved not producing, 80%, and
proved undeveloped, 50%. The commodity price deck was based approximately on
the New York Mercantile Exchange futures curve for West Texas Intermediate
("WTI") and Henry Hub ("HHUB") for the forthcoming twelve months (adjusted for
price differentials due to the geographic location and the quality of
production), with prices and costs held flat through the projection period.
A.G. Edwards calculated a Gerrity Equity Going Concern Valuation range of
$9.1 million to $11.0 million, which implies a Gerrity Preferred Stock Going
Concern Valuation of no more than $11.0 million.
Precedent Transaction Analysis. Using certain publicly available
information, A.G. Edwards refined the data set to include only nine precedent
Rocky Mountain transactions involving oil and gas reserves/companies/securities
that A.G. Edwards deemed comparable to Gerrity and Patina in order to
calculate a Gerrity Equity Going Concern Valuation. A.G. Edwards compared the
total transaction consideration of precedent transactions to (i) the total
estimated acquired reserves on an mcf equivalent basis and (ii) the SEC PV10
value of acquired reserves. An analysis of the multiples yielded (i) a $ per
mcfe range of $0.55 - $0.65 and (ii) a percentage to SEC PV10 range of 95% -
105%, resulting in a Gerrity Equity Going Concern Valuation range of $26.7
million to $49.3 million, which implies a Gerrity Preferred Stock Going Concern
Valuation of no more than $49.3 million.
No precedent transaction used in the Precedent Transaction Analysis is
identical to the Transaction. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
financial and operating characteristics of the Gerrity reserve base and other
factors that could affect the acquisition value of the companies to which it is
being compared. Mathematical analysis (such as determining the mean or median)
is not itself a meaningful method of analyzing comparable transaction data.
Comparable Public Company Analysis. As apart of its analysis, A.G. Edwards
compared certain financial information of Gerrity with corresponding publicly
available information of the Comparable Public Companies, which are publicly
traded oil and gas companies that A.G. Edwards considered comparable in certain
respects to Gerrity. Historical financial and reserve information used in
connection with this analysis is as of the most recent financial statements
publicly available for each company as of September 27, 1996. In performing its
analysis, A.G. Edwards compared (i) the primary common and preferred stock
market capitalization as a multiple of cash flow estimates (before preferred
dividend) for 1996 and 1997 (the "Price to Cash Flow Multiple"), (ii) the total
firm value (defined as the common stock market capitalization plus preferred
stock market capitalization plus total long-term debt less cash and cash
equivalents) as a multiple of EBITDA (defined as earnings before interest,
income taxes and depletion, depreciation and amortization) for 1996 and 1997
(the "Total Firm Value of EBITDA Multiple"). An analysis of the multiples for
the Comparable Public Companies, yielded (i) a Price to Cash Flow Multiple
range for 1996 of 5.0x to 6.0x, and a Price to Cash Flow Multiple range for
1997 of 5.0x to 6.0x, and (ii) a Total Firm Value to EBITDA Multiple range for
1996 of 6.3x to 7.3x, and a Total Firm Value to EBITDA Multiple range for 1997
of 4.7x to 5.7x. Using (i) the Price to Cash Flow Multiples for 1996 and 1997
and (ii) Total Firm Value to EBITDA Multiples for 1996 and 1997, A.G. Edwards
calculated a Gerrity Equity Going Concern Valuation range of $66.3 million to
$90.6 million which implies a Gerrity Preferred Stock Going Concern Valuation
range of no more than $66.3 million to $75.9 million.
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No company utilized in the comparable public company analysis as a
comparison is identical to Gerrity. Accordingly, an analysis of the results of
the foregoing necessarily involves complex considerations and judgments
concerning financial and operating characteristics of Gerrity and other factors
that could affect the public trading value of the Comparable Public Companies
or company to which it is being compared. Mathematical analysis (such as
determining the mean or median) is not itself a meaningful method of using
comparable public company data.
Pro Forma Analysis of the Merger. In valuing the Gerrity Preferred Stock,
A.G. Edwards also analyzed the impact of the Merger on Gerrity both pro forma
and with respect to actual operating data since the completion of the Merger.
In conducting its analysis, A.G. Edwards relied upon certain assumptions and
financial forecasts provided by Gerrity's, Patina's and SOCO's management and
upon estimates as to certain cost savings and economies of scale provided by
Gerrity's, Patina's and SOCO's management.
The analysis of the pro forma impact of the Merger included a pro forma
theoretical Black-Scholes analysis, discounted cash flows analysis, precedent
transaction analysis and comparable public company analysis of Patina using the
same assumptions as the analysis of Gerrity described above. In the pro forma
theoretical Black-Scholes analysis, A.G. Edwards calculated a value based on
continuing operations as a going concern of the Patina Preferred Stock (the
"Patina Preferred Stock Going Concern Valuation") of $18.41 per share. In the
pro forma discounted cash flow analysis, A.G. Edwards calculated a Patina
Equity Going Concern Valuation of $41.2 million to $45.3 million which implies
a Patina Preferred Stock Going Concern Valuation of at least $40.0 million. In
the pro forma precedent transaction analysis, A.G. Edwards calculated a Patina
Equity Going Concern Valuation range of $66.6 million to $105.0 million which
implies a Patina Preferred Stock Going Concern Valuation of at least $40.0
million. In the pro forma comparable public company analysis, A.G. Edwards
calculated a Patina Equity Going Concern Valuation range of $136.7 million to
$182.7 million which implies a Patina Preferred Stock Going Concern Valuation
of at least $40.0 million.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. A.G.
Edwards believes that its analyses must be considered as a whole and that
selecting one method of analysis or portions of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinion. In addition, A.G. Edwards may have given various
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting for any particular analysis described above should not be
taken to be A.G. Edwards' view of the actual value of Gerrity and Patina.
In performing its analyses, A.G. Edwards made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Gerrity and Patina. The
analyses performed by A.G. Edwards are not necessarily indicative of actual
value, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of A.G. Edwards'
analysis of whether the terms of the Transaction are fair from a financial point
of view to the holders (other than Patina) of the Depositary Shares representing
Gerrity Preferred Stock and were conducted in connection with the delivery of
the A.G. Edwards Opinion. The analyses do not purport to be appraisals or to
reflect the prices at which Gerrity and Patina might actually be sold. Because
such estimates are inherently subject to uncertainty, none of Gerrity, A.G.
Edwards, or any other person can assert, nor can there be any assurance, that
such estimates will represent Gerrity's or Patina's actual results. In
addition, as described above, the A.G. Edwards Opinion and the information
provided by it to the Gerrity Board were two of many factors taken into
consideration by the Gerrity Board in making its determination to approve the
Certificate of Amendment and the transactions contemplated thereby.
Consequently, the A.G. Edwards analyses described above should not be viewed as
determinative of the opinion of the Gerrity Board or the view of the Gerrity
management with respect to the value of Gerrity or of whether the Gerrity Board
or the management of Gerrity would have been willing to agree to different
considerations.
The consideration to be received by the holders of Gerrity Preferred Stock
pursuant to the Transaction was determined by the Gerrity Board, and the ratio
in respect of which Depositary Shares representing Gerrity
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Preferred Stock are to be reclassified and exchanged is the same as that
offered in the Exchange Offer. A.G. Edwards did not make a recommendation with
respect to the amount of the consideration.
The Gerrity Board retained A.G. Edwards based upon its experience and
expertise. A.G. Edwards is a nationally recognized investment banking and
advisory firm. As part of its investment banking business, A.G. Edwards is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive bidding,
secondary distributions of listed and unlisted securities, private placements
and valuation for estate, corporate and other purposes. In the ordinary course
of its business, A.G. Edwards and its affiliates may actively trade the debt
and equity securities of Gerrity and SOCO for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. In the past, A.G. Edwards has provided financial
advisory and investment banking services to Gerrity for which services A.G.
Edwards has received customary fees.
Pursuant to a letter agreement dated August 12, 1996 between Gerrity and
A.G. Edwards, A.G. Edwards is entitled to an advisory fee of $100,000, which
was paid when A.G. Edwards rendered its opinion. In addition, Gerrity has
agreed to reimburse A.G. Edwards for its expenses, including the reasonable
fees and expenses of its counsel (subject to a limit of $10,000), and to
indemnify A.G. Edwards and its affiliates against certain liabilities and
expenses, including liabilities under federal securities laws.
Certain Financial Projections Financial projections relating to Gerrity
and Patina were provided to A.G. Edwards for the fiscal years ending December
31, 1996, 1997, 1998 and 1999. Such projections were prepared by management of
Gerrity. The most recent projections relating to Gerrity reflected revenues of
$47.0 million in 1996 and $38.6 million in 1997, and net losses of $10.2 in
1996 and $7.7 million in 1997. The most recent projections relating to Patina
reflected combined revenues of $71.2 million in 1996 and $75.0 million in 1997,
and net losses of $10.2 million in 1996 and $8.7 million in 1997. Such
projections did not take into account actions that management of Gerrity and
Patina would take, respectively, such as acquisitions, divestitures, financial
restructuring or other alternatives to, in the case of Gerrity, reduce or
eliminate such losses, and, in the case of Patina, expand revenue and
profitability. The data included in the projections for Gerrity and Patina
described above were not prepared with a view to public disclosure or
compliance with published guidelines of the Commission or the guidelines
established by the American Institute of Certified Public Accountants regarding
prospective financial information, and are included in this Information
Statement/Prospectus only because they were provided to A.G. Edwards. Neither
Gerrity's nor Patina's independent public accountants have examined, compiled
or applied any procedures with respect to this data and express no opinion of
any kind or assurance thereon. None of Gerrity, Patina, or A.G. Edwards, or
any of their respective advisors can assert, nor can there be any assurance,
that such projected financial data will represent Gerrity's or Patina's actual
results.
BACKGROUND OF THE MERGER AND THE EXCHANGE OFFER
The following is a discussion of the negotiation process that led to the
completion of the Merger and the Exchange Offer and is included herein for
completeness and to conform to the disclosure requirements of the Commission
relating to "going private transactions," such as the Transaction.
In October 1993, the Gerrity Board engaged the investment banking firms of
Goldman Sachs & Co. ("Goldman Sachs") and Indosuez Capital ("Indosuez") to act
as Gerrity's financial advisors in connection with a review of strategic
alternatives available to Gerrity to maximize stockholder value. The Gerrity
Board directed senior management to commence such a review in part because the
acquisition market in the oil and gas industry, commodity prices and market
values based on multiples of anticipated cash flow and price-to-earnings ratios
were believed by senior management to be favorable at that time, resulting in a
potentially higher valuation for Gerrity. Shortly thereafter, representatives
of Goldman Sachs and Indosuez met with members of senior management to develop
an understanding of Gerrity's strategic objectives and to develop a preliminary
analysis of Gerrity's options for maximizing stockholder value, including a
sale or merger of Gerrity.
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Goldman Sachs and Indosuez contacted a number of companies regarding a
potential business combination transaction with Gerrity. Gerrity subsequently
entered into confidentiality agreements with approximately ten such companies,
including SOCO, pursuant to which Gerrity agreed to make available to such
companies certain information regarding Gerrity for purposes of evaluating a
potential sale of Gerrity. At such time, Gerrity issued a press release
indicating that it had begun discussions with various companies regarding a
possible sale of Gerrity. During November and December 1993, Gerrity provided
information to six of the companies with which it had entered into
confidentiality agreements.
In late November 1993, the price of oil dropped significantly creating an
immediate reduction in the stock prices of potential acquirors, thereby making
acquisitions more difficult or costly to finance. On January 6, 1994 Gerrity
issued a press release announcing that it was no longer pursuing discussions
regarding a sale of Gerrity as no indications of interest had been received at
prices deemed attractive by senior management.
Senior management of Gerrity decided to attempt to expand the operations of
Gerrity beyond Wattenberg, increased its management team and issued $100
million of public subordinated debt in part in furtherance of this objective.
Accordingly, senior management developed a strategy of expansion through
strategic acquisitions; however, due to a continuing decline in commodity
prices and the inability to identify sellers willing to sell at values deemed
reasonable by senior management, Gerrity was unable to successfully implement
its expansion strategy. Gerrity used the proceeds of the subordinated debt
offering to reduce bank debt and for working capital purposes.
In the fall of 1994, an oil and gas company approached senior management of
Gerrity to inquire whether Gerrity would have an interest in a business
combination. In response to such inquiry, the Gerrity Board retained Morgan
Stanley & Co. Incorporated ("Morgan Stanley") in November 1994 to act as
Gerrity's financial advisor in connection with a review of strategic
alternatives available to Gerrity to maximize stockholder value, including the
sale or merger of Gerrity to or with the oil and gas company that had expressed
interest or to others, the acquisition of or consolidation with another
company, or a significant reduction in general and administrative expenses. In
January 1995, while pursuing these strategies, Gerrity announced a plan to
reduce significantly general and administrative expenses through reductions in
staff, office space and overall costs in general.
Through early 1995, Morgan Stanley contacted, on behalf of Gerrity,
approximately 15 companies regarding a possible transaction involving Gerrity.
Gerrity entered into confidentiality agreements with approximately four such
companies and provided information to such companies and certain other
companies with which it had previously entered into confidentiality agreements,
including SOCO. Gerrity engaged in preliminary discussions with Patina that
had initially expressed interest and other companies, including SOCO. None of
these discussions advanced beyond the preliminary stage, except the discussions
with Patina that had initially expressed interest. Those discussions
terminated in February 1995 after such company determined not to make a formal
proposal. While Gerrity and its senior management continued to explore
possible opportunities for a potential business combination, sale transaction
or strategic acquisition, no proposals were made or received at that time.
In early 1995, through a meeting and a series of phone calls,
representatives of Morgan Stanley contacted Thomas J. Edelman, President of
SOCO, regarding a possible transaction involving a combination of SOCO's
Wattenberg operations with Gerrity through the formation of a new entity.
Discussions with SOCO prior to that time had focused on the sale of Gerrity to
SOCO for cash or for SOCO stock. SOCO and Gerrity executed a joint
confidentiality agreement on March 1, 1995 with respect to sharing information
for the purpose of determining whether either party would have an interest in a
business combination of SOCO's Wattenberg operations with Gerrity in a stock
transaction. Thereafter, the parties engaged in preliminary discussions
regarding such a business combination to determine whether any mutually
acceptable basis existed upon which the parties would entertain further
discussions.
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On March 9, 1995, Mr. Edelman met with Robert W. Gerrity, then Chief
Executive Officer of Gerrity, to discuss the possibility of a business
combination. At such meeting, Mr. Edelman indicated that he would not be
interested in pursuing any transaction in which Mr. Gerrity would serve as
chief executive officer of the combined company. At that meeting, Mr. Gerrity
indicated his belief that he was the best qualified candidate to be the chief
executive officer of the combined company, but also indicated that he would not
stand in the way of a transaction that was in the best interests of Gerrity
stockholders.
On March 16, 1995, Brian J. Cree, Senior Vice President and Chief Operating
Officer of Gerrity, David Kornder, Vice President - Finance of Gerrity, Steven
Burr, Vice President of SOCO, and James H. Shonsey, Vice President - Finance of
SOCO, met for the purpose of providing Gerrity with an initial understanding of
SOCO's Wattenberg operations and to determine whether SOCO and Gerrity would
have any interest in further discussions regarding a possible transaction.
In April 1995, representatives of Morgan Stanley met with Mr. Edelman to
discuss further a possible transaction. Mr. Edelman reiterated that a firm
condition for proceeding with a combination of SOCO's Wattenberg operations
with Gerrity was that a chief executive other than Mr. Gerrity be selected to
act as chief executive officer in any combined company.
On May 3, 1995, Mr. Gerrity met with two outside directors of Gerrity, Karl
Van Horn and Thomas Kane, and later spoke with Douglas Waggaman, the third
outside director, to review the possibility of a transaction with SOCO. While
the outside directors indicated their strong reservations about Gerrity's
ability to retain operating efficiencies and expertise in any stock transaction
in which a chief executive other than Mr. Gerrity would run the combined
operations, Mr. Gerrity and the outside directors decided to explore other
alternative transactions while at the same time continuing discussions with
SOCO to determine if a possible transaction could be structured with SOCO that
nevertheless would be in the best interests of Gerrity's stockholders.
On May 10, 1995, Mr. Gerrity and a representative of Morgan Stanley met
with Mr. Edelman to discuss a possible transaction. At such meeting, Mr.
Edelman indicated that he would not be interested in pursuing a transaction
involving a combination of SOCO's Wattenberg operations with Gerrity unless
certain conditions were met. Among other things, they discussed the need to
reach agreement on the valuation methodology that would be utilized in
determining the relative values of SOCO's Wattenberg operations and Gerrity.
In addition, Mr. Edelman indicated that while SOCO was interested in retaining
much of Gerrity's senior management in a business combination, he reiterated
that SOCO would not be interested in pursuing a transaction in which Mr.
Gerrity would be chief executive officer of the combined company.
During the late spring and early summer of 1995, Gerrity and SOCO exchanged
additional information regarding their respective Wattenberg operations,
including oil and gas reserves, cost structure and other operational and
financial data. Concurrently, senior management of Gerrity engaged in
preliminary discussions with other potential parties to a business combination
transaction, but no proposals were made or received by Gerrity.
In June and early-July 1995, Mr. Gerrity and Mr. Edelman met in an effort
to determine whether there was any continuing interest in a transaction. After
such meetings and consultation with Messrs. Van Horn, Kane and Waggaman,
because of the significant issues that continued to exist in the SOCO
discussions and in order to determine whether other alternatives were available
to maximize stockholder value, Gerrity engaged Jefferies & Company, Inc.
("Jefferies") to explore strategic alternatives other than a possible
transaction with SOCO as well as to advise it on any SOCO transaction if one
were to materialize. Jefferies made preliminary contact with several
companies, and Gerrity initiated discussions with one such company and
continued discussions with others that had previously expressed interest. No
proposal was made or received by Gerrity with respect to any of such contacts.
While Gerrity and Jefferies were exploring other alternatives, Morgan
Stanley continued to assist Gerrity in discussions with SOCO. On August 7,
1995, SOCO retained CS First Boston Corporation ("First Boston")
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to advise SOCO in connection with the proposed transaction being discussed with
Gerrity and its advisors. In August 1995, senior management of Gerrity and
SOCO began discussing ranges of values and the percentage of equity that
Gerrity's stockholders would receive in a combined company. In mid-August, Mr.
Edelman informally outlined to Mr. Gerrity a possible combination whereby SOCO
would contribute all of its Wattenberg operations together with $75 million of
debt to a new company that would merge with Gerrity, and Gerrity's stockholders
would receive 25% of the combined entity based on various assumptions. Mr.
Gerrity responded with a counter-proposal that Gerrity's stockholders receive
approximately 40% of the equity of the combined company. In light of the large
disparity in valuations, the parties discontinued active discussions at that
time.
At a meeting of the Gerrity Board held on September 22, 1995, Morgan
Stanley reported to the Gerrity Board on the status of discussions with SOCO,
including the fact that there was still a substantial variation in the relative
values that managements of Gerrity and SOCO were placing on their businesses in
any proposed combination. Mr. Gerrity also reported to the Gerrity Board that
there had been some preliminary discussions with certain other companies, and
that other alternatives were under consideration with Jefferies' assistance,
including restructuring of Gerrity's balance sheet by undertaking to sell
certain properties in a tax-efficient transaction, exchanging Gerrity's
preferred stock for common stock or a less costly preferred security, and
repurchasing a portion of Gerrity's subordinated debt. After considering all
such alternatives, the Gerrity Board authorized senior management to continue
discussions with SOCO, the other companies with whom preliminary discussions
had taken place, and any other appropriate merger candidates that could be
identified.
In meetings on October 10 and 19, 1995, Messrs. Gerrity and Cree and Mr.
Edelman reached a working understanding as to how they would value, on a
relative basis, the two businesses if they determined to proceed with a
mutually acceptable transaction. Such understanding was based on information
received to date and subject to agreement on all other significant elements of
any such transaction. Pursuant to such understanding, if the parties
determined to proceed with a transaction, Gerrity's common stockholders would
receive 6,000,000 of a pro forma 20,000,000 outstanding shares after the
proposed combination, or 30% of the common equity, plus warrants to purchase
3,000,000 shares of common stock of the proposed combined entity, and Gerrity's
preferred stock would be exchanged for a new issue of convertible preferred
stock of the combined company with the liquidation preference reduced from
$75.9 million to $40 million, partially offset by an increased dividend rate
and with an improved conversion price over the existing preferred stock. The
parties understood that any agreement reflecting such understanding could not
be reached without exchange of significant additional information to verify the
assumptions on which such understanding was based, a detailed analysis and
verification of the relative costs of such transaction, satisfactory
arrangements on the employment related issues discussed below, and resolution
of numerous other substantive issues, including details of the structure of the
proposed transaction. In such discussions, Mr. Edelman reiterated SOCO's
requirement that Mr. Gerrity not assume a senior management position with the
combined company and related matters.
In November and December 1995, Gerrity and SOCO and their respective
financial and legal advisors continued negotiations regarding these issues. On
November 11, 1995, Mr. Kane, a non-employee director of Gerrity, died. In Mid-
November, 1995, Mr. Edelman indicated that, as a condition to any transaction,
all existing employment and change of control agreements with Mr. Gerrity and
ten other officers be settled in advance of the combination on terms
satisfactory to SOCO, which would be no more favorable terms than those set
forth in such agreements.
On November 9, 1995, SOCO's management and legal advisors described the
status of the discussions with Gerrity during a telephonic meeting of the SOCO
Board of Directors. Although no formal action was taken, it was the consensus
of the SOCO Board to continue the discussions and to keep the Board advised of
any progress. On November 16, 1995, the SOCO Board met with management and
SOCO's financial and legal advisors to discuss more fully the proposed
transaction and its effect on SOCO and its stockholders.
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In December 1995, Mr. Gerrity met with John Snyder, Chairman of SOCO, and
William Johnson, an outside director of SOCO, two proposed directors of Patina,
to discuss in general terms the possible combination of the two businesses,
including SOCO's future plans for, and management philosophy with respect to,
the combined business.
On January 2, 1996, the Gerrity Board held a telephonic meeting to discuss
the status of the negotiations with SOCO, and was briefed by senior management
and Gerrity's financial and legal advisors. The Gerrity Board instructed
senior management to continue discussions with SOCO, and, accordingly, during
the week of January 2, 1996, senior management of Gerrity and its financial and
legal advisors met with senior management of SOCO and its financial and legal
advisors in an effort to resolve remaining issues.
A meeting of the Gerrity Board was held on January 6, 1996. At that
meeting, senior management and outside legal counsel provided the Gerrity Board
with current drafts of the agreements being negotiated and briefed the Gerrity
Board on the content of the agreements and the status of the negotiations and
the significant issues that remained to be resolved. Senior management, Morgan
Stanley and Jefferies made a presentation of their preliminary financial
analyses performed to date, based upon the information then available, and the
Gerrity Board also discussed other alternatives to the proposed transaction
with SOCO. At that meeting, in view of the potential conflict of interest of
officers who are directors with respect to the employment matters being
discussed as part of the transaction, the Gerrity Board appointed a committee
consisting of all of the non-employee members of the Gerrity Board. Messrs.
Van Horn and Waggaman (the "Special Committee"), to review settlement of the
employment and change of control arrangements, as required by SOCO as part of
the transaction.
Immediately following the meeting of the Gerrity Board on January 6, 1996,
the Special Committee met with outside legal counsel to review the status of
negotiations with respect to the terms of the settlement of Mr. Gerrity's
employment agreement and the employment and/or change of control agreements
with ten other officers of Gerrity, as well as the non-competition covenant and
consulting agreement proposed to be entered into between Mr. Gerrity and
Patina. In addition, the Special Committee determined to retain a valuation
consultant to advise it on the valuation of the non- competition covenant
proposed to be entered into between Mr. Gerrity and Patina.
The parties continued negotiations with respect to the transaction the
following week with their respective outside legal advisors, together with
separate counsel with respect to Mr. Gerrity's severance, non-competition and
consulting agreements. Drafts of the agreements documenting the transaction
were circulated to directors for their review at the end of such week.
On January 15, 1996, the Special Committee held a telephonic meeting during
which it reviewed with outside legal counsel in detail the terms of the
proposed settlements with Mr. Gerrity and other officers, as well as the terms
of Mr. Gerrity's proposed non-competition covenant and consulting agreement
with Patina. At such meeting, the valuation consultant made a preliminary
report of the analysis of the value of Mr. Gerrity's non-competition covenant
with Patina.
On the morning of January 16, 1996, the Special Committee held a telephonic
meeting and reviewed the written report of the valuation consultant and the
current terms and status of the settlement agreements along with the
non-competition covenant and the consulting agreement between Mr. Gerrity and
Patina. Immediately following the Special Committee Meeting, the Gerrity Board
held a telephonic meeting to consider the material open issues in the proposed
merger agreement. At the meeting, outside legal counsel reviewed in detail the
terms of the proposed merger agreement and the open issues that remained to be
resolved. In addition, Morgan Stanley presented its updated financial analysis
of the transaction. The meeting was adjourned until the evening of January 16
to permit time to negotiate the remaining provisions. Thereafter, senior
management and outside legal counsel continued to negotiate to resolve the
remaining open issues and completed documentation of the transaction.
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On the evening of January 16, the Special Committee held a telephonic
meeting with outside legal counsel and resolved to recommend to the Gerrity
Board approval of the officer settlement agreements and the terms of the non-
competition covenant and consulting agreement between Mr. Gerrity and Patina.
Immediately thereafter, the Gerrity Board held a telephonic meeting and was
briefed by senior management and outside legal counsel on the resolution of the
remaining open issues. The Gerrity Board then received the recommendation of
the Special Committee with respect to the employment matters included as part
of the transaction, and the oral opinion of Morgan Stanley, which opinion was
later confirmed in writing, dated January 16, 1996, as to the fairness, from a
financial point of view, of the merger consideration to be received by the
holders of Gerrity Common Stock, and unanimously approved the Merger Agreement
and the transactions contemplated thereby and the amendment.
At a special meeting of the SOCO Board held on January 11, 1996, Mr.
Edelman described for the SOCO Board the status of the transaction and the
agreements that were being negotiated with Gerrity in connection with the
transaction. The SOCO Board unanimously approved the Merger Agreement, the
Merger and the other transactions contemplated by the Merger Agreement, and
authorized Mr. Edelman to finalize the necessary documentation, subject to
approval of final documentation by a committee composed of Mr. Edelman and John
C. Snyder, SOCO's Chairman. This committee approved the original Merger
Agreement and the transactions contemplated thereby on January 16, 1996.
On January 24, 1996, Patina filed with the Commission a registration
statement containing a preliminary proxy statement/prospectus relating to the
proposed Merger. After such filing, representatives of Patina and Gerrity
approached certain holders of the Gerrity Preferred Stock to discuss the
proposed Merger. Based on these discussions, certain holders of Gerrity
Preferred Stock indicated they would not vote in favor of the Merger.
Because of a concern that holders of Gerrity Preferred Stock having in the
aggregate sufficient voting power to block approval of the Merger would not vote
in favor of the Merger, in late February 1996, the parties proposed that the
structure of the proposed Merger be amended to provide for the Exchange Offer,
under which the preferred stockholders would not be entitled to vote on the
Merger, but would be entitled to retain ownership of their Depositary Shares or
exchange their shares for shares of Patina Preferred stock pursuant to the
Exchange Offer. To encourage holders of Gerrity Preferred Stock to tender their
shares pursuant to the Exchange Offer, it was proposed that the terms of the
Patina Preferred Stock be amended to provide that the initial conversion price
$12.30 would be subject to adjustment following the Effective Time to 123% of
the average closing price of the Patina Common Stock as reported on the New York
Stock Exchange Composite Tape for the ten trading days immediately following the
60th day after the effective date of the Merger, subject to a minimum conversion
price of $8.61. The discussions described above with the holders of the Gerrity
Preferred Stock were general in nature, and the specific modification to the
conversion price on the Patina Preferred Stock was not negotiated with any
holder of Gerrity Preferred Stock.
In addition, contemporaneously with the meeting of the Gerrity Board
described below, because of declines in the trading prices of the Gerrity
Common Stock and the implied value of the Patina Common Stock since January 16,
1996, it was agreed that the exercise price of the Patina Warrants would be
reduced from $14.00 to $12.50.
On March 18, 1996, the Gerrity Board held a telephonic meeting and was
briefed by senior management and outside legal counsel on the proposed
revisions to the transactions contemplated by the Merger Agreement, including
the terms and conditions of the Exchange Offer. Jefferies made a presentation
of its financial analysis of the transaction, and the Gerrity Board received
the oral opinion of Jefferies, which opinion was later confirmed in writing,
dated March 18, 1996, as to the fairness, from a financial point of view, of
the transactions contemplated by the Merger Agreement, including the Exchange
Offer, to the holders of Gerrity Preferred Stock. Morgan Stanley then advised
the Gerrity Board that, based upon the information available as of March 18,
1996, Morgan Stanley would be in a position to update its written opinion dated
January 16,
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1996 at the time of mailing the Proxy Statement/Prospectus. The Gerrity Board
then unanimously approved the amended Merger Agreement and the transactions
contemplated thereby.
On May 2, 1996 the Merger was consummated, and the Exchange Offer was
closed. As a result of the Merger, Patina beneficially owns all of the
outstanding Gerrity Common Stock. As a result of the Exchange Offer and
subsequent purchases of Depositary Shares in market transactions, Patina
beneficially owns approximately 75.7% of the outstanding Gerrity Preferred
Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the federal income tax consequences
of the Transaction. This discussion is based upon current provisions of the
Code, the Treasury regulations promulgated thereunder, current administrative
rulings, and court decisions, all of which are subject to change, possibly
retroactively. No attempt has been made to comment on all federal income tax
consequences of the Transaction nor on any state, local or foreign tax
consequences that may be relevant to particular holders, including holders that
are subject to special tax rules such as dealers in securities, foreign
persons, mutual funds, insurance companies and tax-exempt entities. The
following discussion assumes that shares of Gerrity Preferred Stock have been
held, and Patina Common Stock and Patina Preferred Stock will be held, as
capital assets (generally, assets held for investment). Gerrity stockholders
are advised and expected to consult their own tax advisers regarding the
federal income tax consequences of the Transaction in light of their personal
circumstances and the consequences under state, local and foreign tax laws.
Exchange of Gerrity Preferred Stock for Patina Preferred Stock in the
Transaction. Upon the redemption, exchange and reclassification of Gerrity
Preferred Stock represented by Depositary Shares in the Transaction, the holder
will recognize capital gain or loss in an amount equal to the difference
between the fair market value of the Patina Preferred Stock received in the
redemption, reclassification and exchange and the holder's tax basis in the
Gerrity Preferred Stock represented by the Depositary Shares exchanged. Such
gain or loss will be long-term capital gain or loss if the Gerrity Preferred
Stock has been held for more than one year.
Dividends on Patina Preferred Stock or Patina Common Stock. Dividends
received on the Patina Preferred Stock or Patina Common Stock into which the
Patina Preferred Stock is converted will be taxable as ordinary income to the
extent of Patina's current and accumulated earnings and profits and the excess,
if any, as a return of capital, which will not be subject to tax, to the extent
of the holder's tax basis in such stock, and thereafter as gain from the sale
of a capital asset. Dividends received by corporate holders of Patina
Preferred Stock or Patina Common Stock out of such earnings and profits
generally will qualify, subject to certain limitations, for the dividends
received deduction allowable to corporations under section 243 of the Code.
Redemption of Patina Preferred Stock. A redemption of Patina Preferred
Stock for cash will be a taxable event. Such redemption will be treated, under
section 302 of the Code, as a distribution that is treated as a taxable
dividend, nontaxable recovery of basis or an amount received in exchange for
the Patina Preferred Stock pursuant to the rules summarized above, unless the
redemption (a) results in a "complete termination" of the stockholder's
interest in Patina under section 302(b)(3) of the Code; (b) is "substantially
disproportionate" with respect to the stockholder under section 302(b)(2) of
the Code; or (c) is "not essentially equivalent to a dividend" under section
302(b)(1) of the Code. In determining whether any of these tests have been
met, shares considered to be owned by the stockholder by reason of certain
constructive ownership rules in sections 302(c) and 318 of the Code, as well as
shares actually owned, must be taken into account. If any of these tests are
met, the redemption of the Patina Preferred Stock for cash would be treated as
a sale or exchange for tax purposes on which the holder would recognize gain or
loss equal to the difference between the amount of cash received and the
holder's tax basis in the Patina Preferred Stock redeemed.
Conversion of Patina Preferred Stock. In general, no gain or loss will be
recognized for federal income tax purposes on the conversion of Patina
Preferred Stock solely into shares of Patina Common Stock, except
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with respect to any cash received in lieu of any fractional share of Patina
Common Stock. The tax basis for Patina Common Stock received on conversion
will be equal to the tax basis of the Patina Preferred Stock converted, reduced
by the portion of basis allocable to any fractional share exchanged for cash,
and the holding period of such shares of Patina Common Stock will include the
holding period of such Patina Preferred Stock.
Adjustment of Conversion Price. Section 305 of the Code treats as a
distribution (taxable as a dividend to the extent of the issuing corporation's
current or accumulated earnings and profits) certain actual or constructive
distributions of stock with respect to stock, stock rights or convertible
securities. Certain adjustments in the conversion ratio of stock, stock rights
or convertible securities are considered distributions of stock. For example,
Treasury regulations treat holders of preferred stock or stock rights as having
received such a constructive distribution where the conversion price of such
preferred stock or stock rights is adjusted to reflect certain taxable
distributions with respect to the stock into which such preferred stock or
stock rights is convertible or exercisable. Adjustment of the conversion rates
at which the Patina Preferred Stock can be converted could cause the holders
thereof to be viewed under section 305 of the Code as having received a deemed
distribution taxable as a dividend whether or not such holders exercise their
conversion rights.
Sale or Exchange of Patina Common Stock or Patina Preferred Stock. Upon a
sale, exchange or other disposition of Patina Common Stock or Patina Preferred
Stock (other than a conversion), the holder will recognize capital gain or loss
in an amount equal to the difference between the amount realized on the
disposition and the holder's tax basis in the Patina Common Stock or Patina
Preferred Stock sold or exchanged. Such gain or loss will be long-term capital
gain or loss if the securities sold or exchanged have been held for more than
one year.
GOVERNMENTAL AND REGULATORY APPROVALS
Patina and Gerrity are not aware of any governmental or regulatory
approvals required for consummation of the Transaction, other than compliance
with applicable securities laws including the "going private" rules of the
Commission.
CERTAIN LITIGATION
On or about March 8, 1996, a complaint was filed in the Court of Chancery
for the State of Delaware against Gerrity and each of the directors of Gerrity
(Brickell Partners v. Gerrity Oil & Gas Corporation, C.A. No. 14888 (Del.
Ch.)). The complaint alleges that the "action is brought (a) to restrain the
defendants from consummating a merger which will benefit the holders of
Gerrity's common stock at the expense of the holders of the preferred, and (b)
to obtain a declaration that the terms of the proposed merger constitute a
breach of the contractual rights of the preferred." The complaint seeks, among
other things, certification as a class action on behalf of all holders of
Gerrity Preferred Stock, a declaration that the defendants have committed an
abuse of trust and have breached their fiduciary and contractual duties, an
injunction enjoining the Merger and money damages. Defendants believe that the
complaint is without merit and intend to vigorously defend against the action.
At this time, Gerrity is unable to estimate the range of potential loss, if
any, from this uncertainty. However, Gerrity believes the resolution of this
uncertainty should not have a material adverse effect upon Gerrity's financial
position, although an unfavorable outcome in any reporting period could have a
material impact upon Gerrity's results of operations for that period.
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Patina Preferred Stock to be received by Gerrity stockholders
in connection with the Transaction have been registered under the Securities
Act and, except as set forth in this paragraph, may be traded without
restriction. The Patina Preferred Stock to be issued in connection with the
Transaction and received by persons who are deemed to be "affiliates" (as that
term is defined in Rule 144 under the Securities Act) of Gerrity prior to the
Transaction may be resold by them only in transactions permitted by the resale
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provisions of Rule 145 under the Securities Act (or, in the case of such
persons who become affiliates of Patina, Rule 144 under the Securities Act) or
as otherwise permitted under the Securities Act.
CERTAIN INFORMATION CONCERNING PATINA, SOCO AND GERRITY
The name, citizenship, business address, principal occupation or employment
and five-year employment history for each of the directors and executive
officers of Patina and SOCO are set forth under the heading "Management of
Patina" and in Schedule I hereto, respectively.
Except as set forth herein, none of Patina, SOCO or, to the best knowledge
of Patina or SOCO, any of their respective directors and executive officers, or
any associate of majority-owned subsidiary of such persons, beneficially owns
any equity security of Gerrity, and none of Patina, SOCO, or, to the best
knowledge of Patina or SOCO, any officers or subsidiaries of any of the
foregoing, has effected any transaction in any equity security of Gerrity
during the past 60 days.
Except as otherwise set forth in this Information Statement/Prospectus,
neither Patina, SOCO or, to the best knowledge of Patina or SOCO, any of their
respective directors and executive officers has any contract, arrangement,
understanding or relationship with any other person with respect to any
securities of Gerrity, including, without limitation, any contract,
arrangement, understanding, or relationship concerning the transfer or the
voting of any securities of Gerrity, joint ventures, loans or option
arrangements, puts or calls, guaranties of loans, guaranties against loss or
the giving or withholding or proxies. Except as set forth in this Information
Statement/Prospectus, none of Patina, SOCO or, to the best knowledge of Patina
or SOCO, any of their respective directors and executive officers has had any
transactions with Gerrity, or any of its executive officers, directors or
affiliates that would require reporting under the rules of the Commission.
Except as set forth in this Information Statement/Prospectus, there have
been no contacts, negotiations or transactions between Patina, SOCO, or, to the
best knowledge of Patina or SOCO, any of their respective directors and
executive officers, on the one hand, and Gerrity or its executive officers,
directors or affiliates, on the other hand, concerning a reorganization,
liquidation, consolidation or merger, tender offer or other acquisition of
securities, election of directors or change in the management of Patina or
Gerrity, a sale or other transfer of a material amount of assets of any
thereof, any change in dividend rate or policy or indebtedness or
capitalization of Patina or Gerrity, any other material change in the corporate
structure of Patina or Gerrity, any class of equity securities of Patina or
Gerrity becoming eligible for termination of registration pursuant to Section
12(g)(4) of the Exchange Act, or the suspension of Patina's or Gerrity's
obligations to file reports under Section 15(d) of the Act.
RELATIONSHIPS BETWEEN SOCO AND PATINA
As a result of the Merger, SOCO owns shares of Patina Common Stock and
Series A Common Stock representing approximately 70% of the outstanding number
of shares of common stock of Patina and 75% of the aggregate voting power
thereof. As such, SOCO is effectively able to control the Patina Board and to
determine the outcome of matters submitted to a vote of the stockholders of
Patina. A provision of the Merger Agreement requires that any contracts or
transactions involving Patina or any of its Subsidiaries in which SOCO or any of
its Subsidiaries has a direct or indirect interest (other than an interest
solely as a stockholder of Patina) shall be approved by either (a) a majority of
the disinterested directors of Patina or (b) a majority of any committee
established by the Patina Board that consists solely of disinterested directors.
BUSINESS OPPORTUNITY AGREEMENT
Both Patina and SOCO engage in oil and gas exploration, development and
production activities. In addition, the operations of Patina and many of the
operations of SOCO are located in the same general geographic region. As a
result, and because certain individuals are executive officers of both Patina
and
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SOCO, Patina and SOCO have entered into a Business Opportunity Agreement
intended to delineate the manner in which new opportunities to pursue business
will be addressed by SOCO and Patina. Generally, for a three year period
following the date of the Merger, each of Patina and SOCO have designated
"areas of interest." The area of interest for Patina is Wattenberg, and during
the three year period, Patina has a right of first refusal with respect to any
business opportunity identified by SOCO or Patina in Wattenberg. Conversely,
during the three year period, SOCO has a right of first refusal with respect to
any business opportunity identified by Patina or SOCO in certain areas
designated by SOCO as its area of interest. Because of the Business
Opportunity Agreement, Patina is limited in its ability to expand into certain
areas outside Wattenberg for the first three years following the Merger,
thereby increasing its geographic dependence on the Field. See "Risk Factors
- -- Geographic Concentration of Operations."
Under the Business Opportunity Agreement, Patina has a right of first
refusal with respect to any business opportunity identified by SOCO in
Wattenberg. Accordingly, SOCO must notify Patina of and furnish all
information relevant to any business opportunity in the Patina area of interest
that SOCO or a person controlled by SOCO wishes to pursue. Thereafter, Patina
will have 10 days to exercise its right of first refusal and, upon notification
by Patina to SOCO of Patina's intent to exercise its right, Patina or any
person controlled thereby may pursue such business opportunity to the exclusion
of SOCO. SOCO may, however, pursue any opportunity that Patina fails to pursue
despite Patina's notification of an intent to pursue such opportunity. The
term "business opportunity" means any actual or potential opportunity to enter
into an Energy Business Transaction. The term "Energy Business Transaction"
means any transaction pursuant to which any person would participate, in any
way, in any transaction involving any energy-related business, including all
phases of energy exploration, development, production and transportation.
SOCO will have reciprocal rights with respect to business opportunities in
SOCO's designated area of interest, which includes a number of productive areas
in Colorado, Wyoming and Utah, including portions of the Washakie, Greater
Green River, Big Horn, Wind River, Uinta and Piceance Basins.
The Business Opportunity Agreement provides that the first of the
parties (or persons controlled thereby) to receive a business opportunity
outside of the designated areas of interest may pursue that opportunity without
offering the opportunity to the other parties. Business opportunities received
by individual officers or directors of SOCO or Patina will be characterized
depending solely upon the capacity in which such officer or director was
serving in connection with receiving the business opportunity. If the
capacity is not specified, then the business opportunity may be pursued by SOCO
or a person controlled by SOCO without any participation by Patina. For
example, if a business opportunity outside Wattenberg is presented to Thomas J.
Edelman, who is a director and executive officer of both Patina and SOCO, in a
manner that does not specify that it is intended to be a business opportunity
for Patina, then the opportunity may be pursued by SOCO without offering it to
Patina.
CORPORATE SERVICES AGREEMENT
As described under "Patina Business Strategy," it is an important part of
Patina's ongoing business strategy that the combining companies reduce
duplicative general and administrative costs. Accordingly, Patina and SOCO have
entered into a Corporate Services Agreement pursuant to which SOCO will provide
certain administrative services to Patina so that Patina will not need to have
these tasks performed by Patina employees. Because of the Corporate Services
Agreement, it is anticipated that Patina will be able to conduct its operations
with fewer employees. However, as more fully described below, SOCO's agreement
to provide certain scheduled services is scheduled to terminate on May 2, 1997
and its obligation to provide certain transitional services expires on November
2, 1996 (unless extended by Patina). Furthermore, SOCO is able to terminate its
obligation to provide services under the Corporate Services Agreement under
certain circumstances. To the extent that SOCO ceases to provide services under
the Corporate Services Agreement, then Patina will be required to obtain these
services from other sources or by hiring additional employees.
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<PAGE> 43
Pursuant to the Corporate Services Agreement, for one year from the date of
the Merger (May 2, 1996), SOCO will provide Patina the following corporate
services: gas marketing services, payroll processing and investor relations.
Patina reimburses SOCO for SOCO's reasonable expenses in connection with
providing the services; provided that the aggregate cost to Patina for each
service shall not exceed $150,000 for gas marketing services, $40,000 for
payroll processing and $100,000 for investor relations. In addition to these
services, within six months of the date of the Merger, SOCO will make a
detailed proposal to Patina's disinterested directors to provide Patina with
any general or administrative service and the charges associated with each
proposed service. In this regard, SOCO currently intends to include in this
proposal an offer to provide accounting services to Patina. SOCO's proposal
will be considered by Patina's disinterested directors in good faith based upon
a consideration of a variety of factors specified in the Corporate Services
Agreement.
During this same period, SOCO will review the general and administrative
operations of Patina, including, without limitation, Patina's securities law
reporting systems, management information systems, tax systems, and employee
benefit administration and reserve reporting systems, with the goal of
determining a cost-effective method for Patina to conduct such functions, and
shall be reimbursed for reasonable expenses in connection with performing
related services up to $350,000 for the first six months following the date of
the Merger. Patina and SOCO have agreed to indemnify and hold each other
harmless from any and all liability, loss, damage or expense, including without
limitation attorneys' fees, that any such indemnified party may suffer as a
result of any claims, demands, costs or judgments arising out of the provision
of services under the Corporate Services Agreement, in each case to the extent
that any such losses are not the result of gross negligence, willful misconduct
or bad faith on the part of such indemnified person or any breach by such
indemnified person of an obligation under the Corporate Services Agreement.
In addition, the Merger Agreement provides that (a) the compensation of
Thomas J. Edelman for all services to Patina and its subsidiaries for the first
year following the date of the Merger shall be $250,000, and Patina agrees to
pay such amount (subject to withholding for applicable federal, state and local
taxes) directly to Mr. Edelman; provided that Mr. Edelman is also entitled to
participate in other employee benefit plans in which Patina's executive
officers are entitled to participate other than health, medical or insurance
plans, (b) the compensation (other than compensation pursuant to health,
medical or insurance plans) of Rodney L. Waller for all services to Patina and
its subsidiaries for the first year following the date of the Merger shall be
$75,000 and Patina agrees to pay such amount (subject to withholding for
applicable federal, state and local taxes) directly to Mr. Waller; provided
that Mr. Waller is also entitled to participate in other employee benefit plans
in which Patina's executive officers are entitled to participate other than
health, medical or insurance plans, and (c) Patina will pay SOCO $250,000 in
consideration for support services provided by SOCO to Mr. Edelman and $25,000
in consideration for support services provided by SOCO to Mr. Waller in
furtherance of their performance of services for Patina for the first year
following the date of the Merger. Such support amounts are paid by Patina to
SOCO in equal monthly installments.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the terms of the Merger Agreement, Patina and SOCO entered into
a registration rights agreement (the "Registration Rights Agreement").
Pursuant to the Registration Rights Agreement, Patina granted SOCO certain
rights to register under the Securities Act the offer and sale of its shares of
Patina Common Stock owned at the date of the Merger (including any shares of
Patina Common Stock issued or to be issued in exchange for Series A Common
Stock owned at the date of the Merger) (the "Restricted Stock"). SOCO and any
permitted assignee of SOCO's rights and duties under the Registration Rights
Agreement (collectively "Holders") can demand registration of their Restricted
Stock if Holders make a request for registration; provided that the number of
shares proposed to be sold shall be at least 5% of the aggregate number of
shares of Restricted Stock then outstanding, but in no event less than 500,000
shares of Restricted Stock. Such sale of Restricted Stock will be an
underwritten offering if the Holders of a majority in number of shares of
Restricted Stock to be registered so elect, subject to the exclusion from the
offering of a portion of the shares of Restricted Stock if such exclusion is
determined by the underwriters to affect the success of such offering. If a
portion of the shares of Restricted Stock of a Holder is excluded from such
offering, then
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<PAGE> 44
a Holder shall have the right to one additional "demand" registration with
respect to such Restricted Stock. Except for an additional "demand"
registration in response to the exclusion of a portion of shares of Restricted
Stock from an offering, Patina shall not be required to file more than two
"demand" registrations. In addition, the Holders are entitled, subject to
certain limitations, to include their shares of Restricted Stock in any
registration under the Securities Act with respect to an offering for its own
account of any class of its equity securities. Whenever Patina undertakes to
register the Restricted Stock pursuant to the Registration Rights Agreement,
Patina will use its reasonable best efforts to effect the registration and sale
of such Restricted Stock in accordance with the intended method of disposition
thereof as promptly as practicable. Such registration will be subject to
certain conditions and limitations as set forth in the Registration Rights
Agreement, and certain conditions and limitations as set forth in the
Registration rights Agreement and certain expenses incurred in connection with
a "demand" or "piggyback" registration will borne by Patina. The Registration
Rights Agreement contains certain indemnification provisions whereby Patina and
the selling Holders of Restricted Stock agree to indemnify each other from
certain Securities Act liabilities.
CROSS-INDEMNIFICATION AGREEMENT
Pursuant to the cross-indemnification agreement (the "Cross-Indemnification
Agreement"), Patina has agreed to indemnify SOCO for all Patina Liabilities and
SOCO has agreed to indemnify Patina for all SOCO Liabilities. The term "SOCO
Liabilities" means all liabilities of SOCO or any of its subsidiaries that are
not Patina Liabilities. The term "Patina Liabilities" means all liabilities
directly related to assets or operations conveyed to Patina by SOCO in
connection with the transactions contemplated by the Consolidation, directly
related to assets, operations or businesses of Gerrity, or otherwise reflected
or reserved in the Patina balance sheet, regardless of their existence in
relation to the date of the Merger; provided, however, that the term "Patina
Liabilities" does not include (i) liabilities for income taxes of Patina or SOCO
relating to periods prior to the date of the Merger, (ii) liabilities retained
by SOCO listed on a disclosure schedule of SOCO, or (iii) liabilities disclosed
or required by GAAP to be disclosed on the balance sheet of Patina as of the
date of the Merger that are not disclosed in the balance sheet of Patina of
September 30, 1995. Notwithstanding the foregoing, Patina Liabilities includes
any liability included in the calculation of working capital pursuant to the
Merger Agreement or constituting an expense or obligation for which Patina is
liable under the terms of the Merger Agreement.
PATINA BUSINESS STRATEGY
The following discussion should be read in conjunction with the information
relating to SOCO Wattenberg and Gerrity (both of which are now subsidiaries of
Patina) appearing elsewhere in this Information Statement/Prospectus.
GENERAL
Patina is engaged in the development and production of natural gas and
crude oil primarily in the Wattenberg Field of Colorado's D-J Basin. At June
30, 1996, Patina held interests in over 3,600 wells in Wattenberg with net
proved reserves on a pro forma basis at December 31, 1995 of approximately 82
MMBOE, over 70% of which were attributable to natural gas. Based on
unescalated year-end oil and gas prices, these reserves had a pre-tax present
value of $380 million.
Wattenberg, discovered in 1970, is located approximately 35 miles north of
Denver in the D-J Basin and stretches over Adams, Boulder and Weld counties in
Colorado. One of the most attractive features of Wattenberg is that there are
several productive formations. In a section only 4,500 feet thick, there are
at least eight major potentially productive formations. Three of the
formations, the Codell, Niobrara and J-Sand, are "blanket" zones in the area of
Patina's Wattenberg holdings, while others, such as the D-Sand, Dakota and the
shallower Shannon, Sussex and Parkman, are more localized. Although referred
to as a "formation" or "sand," many of such formations actually are comprised of
more than one rock strata. For example, the
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<PAGE> 45
Niobrara has three separate and distinct bodies or "benches" with potential
hydrocarbon development. The presence of several prospective zones tends to
reduce the risk of a dry hole. The following chart illustrates the multi-pay
nature of Patina's core area of operations:
PRODUCING FORMATIONS IN THE D-J BASIN
<TABLE>
<CAPTION>
APPROXIMATE
DEPTH
FORMATION (FEET)
- --------- ------
<S> <C>
Parkman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600
Sussex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Shannon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Niobrara . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Codell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,300
D-Sand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
J-Sand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800
Dakota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
</TABLE>
Drilling in Wattenberg is low risk from the perspective of encountering
hydrocarbons, with better than 95% of the wells drilled being completed as
producing properties. Consequently, the Field's economic attractiveness is
primarily dependent on energy prices, the reservoir characteristics of the
specific area of the Field being drilled and the operator's ability to minimize
capital and operating costs.
BUSINESS STRATEGY
General. A principal purpose of the Consolidation was to eliminate
overhead costs and to provide the opportunity to combine the strengths of the
two predecessor entities. This should permit enhanced operating and financial
performance and economies of scale beyond those already achieved by the
predecessor companies. These economies of scale are particularly significant
given the adverse impact of the current depressed market for Rocky Mountain
natural gas.
Management Expertise and Exploitation of Core Focus Area. Over the
past five years, the predecessor companies have drilled more than 2,000 wells in
Wattenberg. Given Patina's experience in drilling and completing wells of this
type combined with an operating base encompassing approximately 3,300 active
wells, management believes it can continue to successfully exploit its oil and
gas properties. At June 30, 1996, Patina had identified in excess of 1,500
undeveloped locations on its Wattenberg acreage, including 600 locations
classified as proven at December 31, 1995. In addition, Patina had an
inventory of approximately 850 recompletion opportunities that were also
classified as proven at December 31, 1995. Should drilling and completion
technologies improve or Rocky Mountain natural gas prices recover, a
substantial number of the unproven locations could become economically
attractive to drill. This inventory of undeveloped locations and recompletion
opportunities would provide the ability to substantially expand development
activities if conditions warrant.
Focus on Low Cost Operations. The predecessor companies have taken
actions to significantly reduce their operating costs. Because Patina operates
nearly 3,300 wells within a 40 mile radius, it has the potential to be one of
the most cost efficient oil and gas producers in the United States. Patina
believes that its expertise in Wattenberg drilling and production, the
economies of scale and managerial focus associated with such a concentrated
asset base, and its stringent cost controls will enable Patina to exploit its
properties at a lower cost than many of its competitors.
Pursue Additional Opportunities. Given Patina's low cost operating
structure and extensive experience in drilling and efficiently operating large
numbers of wells, management believes that Patina is well positioned to pursue
further consolidation in Wattenberg and to take advantage of similar
acquisition
-41-
<PAGE> 46
opportunities in other basins. SOCO intends to hold its interest in Patina for
investment. It is possible, however, that Patina and/or SOCO will be presented
with opportunities to sell all or a portion of the capital stock or assets of
Patina or otherwise engage in a transaction involving a change of control of
Patina. These opportunities could arise in connection with pursuing the
consolidation or acquisition opportunities described above, or could arise
independently of any such activities. Pursuant to the Merger Agreement, SOCO
has agreed that, in connection with certain sales of control, all of the
holders of Patina Common Stock will be given an opportunity to participate in
the sale of control transaction for consideration having a fair market value
per share at least equal to the fair market value per share of the
consideration to be received by SOCO in the transaction. This control sales
provision expires on the second anniversary of the effective date of the Merger
(May 2, 1996) or, if earlier, the date SOCO and its subsidiaries cease to
beneficially own in the aggregate at least 49.9% of the outstanding number of
shares of common stock of Patina. See "Risk Factors - Concentration of
Ownership."
COMPETITION AND MARKETS
Competition in the oil and gas industry is intense in the Rocky
Mountain region. Patina's predecessors actively competed for reserve
acquisitions and exploration leases and licenses, oftentimes against companies
with greater financial and other resources. To the extent that Patina's
development and exploration budget is lower than that of certain of its
competitors, Patina may be disadvantaged in effectively competing for certain
reserves, leases and licenses. However, Patina believes that the concentrated
location of its properties, its drilling and production capabilities and the
experience of its management will enable it to compete effectively.
During 1995, the predecessor companies' oil and gas production was
principally sold to end users, marketers and other purchasers having access to
pipeline facilities in Wattenberg. Patina anticipates marketing (and since the
Merger, Patina has marketed) its oil and gas production under the following
terms.
Oil. Oil production will be principally sold to refiners and
marketers who truck oil to storage facilities or pipelines. Such production is
generally sold under arrangements that provide a bonus to the local market
posting for crude oil.
Natural Gas. Gas production will be processed in order to recover
liquids from the natural gas produced. The liquid products are then sold
separately from the residue gas. Substantially all of Patina's gas production
is dedicated for gathering to Associated Natural Gas Corporation ("ANGC") and
KN Front Range Gathering Company, and processed at plants owned by ANGC and
Amoco Production Company. Although management does not believe that the loss
of one or more of these arrangements would have a material adverse effect on
Patina in the long term, it could adversely affect cash flows until other
marketing arrangements were made.
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<PAGE> 47
OIL AND GAS RESERVES
The following table summarizes the pro forma estimates of Patina's net
proved developed and undeveloped reserves as of December 31, 1995 prepared by
NSAI, assuming the Merger occurred at such date. The quantities and values in
the table are based on prices in effect at December 31, 1995, averaging $18.55
per barrel of oil and $1.70 per Mcf of gas. Average oil and gas prices being
received by Patina for the first six months of 1996 were $19.55 per barrel and
$1.58 per Mcf, respectively.
<TABLE>
<CAPTION>
PROVED RESERVES(1)(2)
---------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -----
<S> <C> <C> <C>
Crude oil and liquids (MBbl) 18,687 5,633 24,320
Natural gas (MMcf) 297,856 49,550 347,406
Equivalent barrels (MBOE) 68,330 13,891 82,221
Future net cash flow before income taxes
(in thousands) $615,059 $67,552 $682,611
Future net cash flow after income taxes
(in thousands) -- -- $573,563
Pretax PW10% Value (in thousands) $362,120 $17,943 $380,063
After tax PW10% Value (in thousands) -- -- $331,886
</TABLE>
(1) The proved reserves include the following quantities and values
attributable to properties located in the Uinta Basin of Utah that
were sold in July 1996:
<TABLE>
<CAPTION>
PROVED RESERVES
---------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -----
<S> <C> <C> <C>
Equivalent barrels (MBOE) 171 200 371
Pretax PW10% Value (in thousands) $715 $478 $1,193
</TABLE>
(2) Patina's net proved developed and undeveloped reserves as of December
31, 1995 prepared by NSAI are higher than the sum of SOCO Wattenberg
and Gerrity reserves as of the same date due to Patina's anticipated
reduced capital and operating costs resulting from economies of scale
achieved through the Merger. However, as of December 31, 1995, such
increase in estimated proved reserves was less than 1% of the sum of
the reserves of the combining companies on an equivalent barrel basis,
and represents an increase in present value of approximately 2.5% as
of such date.
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<PAGE> 48
PRODUCTION
The following table sets forth the aggregate pro forma oil and gas
production data for the year ended December 31, 1995, assuming the Merger had
occurred at the beginning of the period presented.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----
<S> <C>
Net production
Crude oil and liquids (MBbl) 2,960
Natural gas (MMcf) 38,820
Equivalent barrels (MBOE) 9,430
Average net daily production
Crude oil and liquids (Bbl) 8,110
Natural gas (Mcf) 106,356
Equivalent barrels (BOE) 25,836
Average sales price
Crude oil and liquids ($/Bbl) $16.25
Natural gas ($/Mcf) $ 1.38
</TABLE>
ACREAGE
The following table sets forth the aggregate pro forma developed and
undeveloped acreage as of December 31, 1995, assuming the Merger had occurred
at such date:
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------------- -------------------
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
Colorado 177,950 137,851 102,958 89,873
Utah 1,600 1,000 62,929 57,905
------- ------- ------- -------
Total 179,550 138,851 165,887 147,778
======= ======= ======= =======
</TABLE>
PATINA FINANCING
Patina and its subsidiaries have entered into a $240 million credit
facility (collectively, the "Credit Facilities") with Texas Commerce Bank
National Association ("TCB"), which serves as Administrative Agent for the
Credit Facilities, NationsBank of Texas, N.A., which serves as Documentation
Agent, and CIBC, Inc., Credit Lyonnais New York Branch and Wells Fargo Bank,
N.A., as co-agents. The Credit Facilities consist of (a) a credit facility to
be provided to Patina and SOCO Wattenberg (the "Patina Facility") and (b) a
credit facility to be provided to Gerrity (the "Gerrity Facility").
The Patina Facility consists of a term loan facility (the "Patina Term
Facility") in an amount up to $87 million and a revolving credit facility (the
"Patina Revolving Facility") in an aggregate amount up to $102 million. The
Patina Term Facility will be available to finance purchases of the Gerrity 11
3/4% Senior Subordinated Notes until the first anniversary of the effective
date of the Merger. At June 30, 1996, Patina had not utilized the term loan
facility. The amount available for borrowing under the Patina revolving credit
facility, which may be used for working capital purposes is limited to a
semiannually adjusted borrowing base that equaled $102 million at June 30,
1996.
The Gerrity Facility is a revolving credit facility in an aggregate
amount up to $138 million. The amount available for borrowing under the
Gerrity Facility will be limited to a fluctuating borrowing base, which equaled
$51 million at June 30, 1996. At June 30, 1996 $34.5 million was outstanding
under the Gerrity
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<PAGE> 49
Facility. The Gerrity Facility was used primarily to refinance Gerrity's
previous bank credit facility and pay costs associated with the Merger.
The borrowers may elect all or a portion of the Credit Facilities bear
interest at a rate per annum equal to : (i) the higher of (a) TCB's prime rate
plus a margin equal to .25% with respect to the Gerrity Facility and the Patina
Revolving Facility and .75% increasing by 1% on the first anniversary of the
effective date of the Merger (May 2, 1996) and by .5% every six months
thereafter with respect to the Patina Term Facility (the "Applicable Margin")
and (b) the Federal Funds Effective Rate plus .5% plus the Applicable Margin,
or (ii) the rate at which Eurodollar deposits for one, two, three or six months
(as selected by the applicable borrower) are offered to TCB in the interbank
Eurodollar market in the approximate amount of the requested borrowing plus
1.25%, with respect to the Gerrity Facility and the Patina Revolving Facility,
and 1.5% increasing by 1% on the first anniversary of the date of the Merger
and by .5% every six months thereafter with respect to the Patina Term
Facility.
The Gerrity Facility is secured by first and prior mortgages
encumbering substantially all of Gerrity's oil and gas properties and is
jointly and severally guaranteed by Patina and SOCO Wattenberg. In the event
the Patina Term Facility is not paid in full by the first anniversary date of
the date of the Merger, Patina and SOCO Wattenberg will, upon demand by the
lenders, grant first and prior mortgages on at least 80% of their respective
proved oil and gas properties to secure the Credit Facilities. The Credit
Facilities are secured by first and prior liens encumbering 100% of the issued
and outstanding capital stock of every class of SOCO Wattenberg and Gerrity
(excluding Gerrity Preferred Stock held by parties other than Patina and its
affiliates), and certain other assets.
The credit agreement contains certain financial covenants relating to
the borrowers, including but not limited to a maximum total debt to
capitalization ratio, a maximum total debt to EBITDA ratio and a minimum
current ratio. The credit agreement also contains certain negative covenants,
including but not limited to restrictions on indebtedness; certain liens;
guaranties, speculative derivatives and other similar obligations; asset
dispositions; dividends, loans and advances; creation of subsidiaries;
investments; leases; acquisitions; mergers; changes in fiscal year;
transactions with affiliates; changes in business conducted; sale and leaseback
and operating lease transactions; sale of receivables; prepayment of other
indebtedness; amendments to principal documents; negative pledge clauses;
issuance of securities; and non-speculative commodity hedging.
EMPLOYEES
As of June 30, 1996 Patina employed 160 people in its Denver,
Platteville and Brighton, Colorado offices. Patina considers its employee
relations to be good.
HEADQUARTERS AND PRODUCTION OFFICE
Patina leases approximately 26,500 square feet of office space in
Glendale, Colorado for a term expiring in 2000. The monthly rent is
approximately $29,000. Patina recently subleased approximately 28,628 square
feet from SOCO at 1625 Broadway, Denver, Colorado at monthly rental rates
ranging from approximately $13,400 to approximately $18,600 for a portion of
the space and a flat monthly rate of approximately $12,400 for the remainder of
the subleased space. This sublease expires on November 30, 2001. Gerrity also
owns field offices in Platteville and Evans, Colorado and an office and shop in
Brighton, Colorado. Patina expects to sell the Evans, Colorado field office.
Patina believes its facilities will be adequate for the foreseeable future.
INSURANCE
Patina maintains an oil and gas lease operator policy that insures
Patina against certain risks associated with drilling and completing its wells,
as well as producing wells. There can be no assurance that
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<PAGE> 50
this insurance will be adequate to cover any losses or exposure to liability.
Patina also carries comprehensive general liability, officers and directors
liability, key man life, property, pollution liability, automobile, workers'
compensation policies, and an umbrella policy.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION OF PATINA
The pro forma condensed consolidated balance sheet is the balance
sheet of Patina as of June 30, 1996 which reflects the actual recording of the
Merger and the Exchange Offer and gives effect to the Transaction. The pro
forma condensed consolidated statement of operations for the six months then
ended and the year ended December 31, 1995, give effect to the Merger, the
Exchange Offer and the Transaction. The transactions associated with the
Merger Agreement were accounted for as a purchase of Gerrity. The pro forma
consolidated statements of operations are based upon the assumptions set forth
in the accompanying notes to such statements. The pro forma adjustments are
based upon available information and assumptions that management believes are
reasonable under the circumstances.
The pro forma consolidated financial statements comprise historical
financial data that have been retroactively adjusted or combined to reflect the
effect of the Merger, the Exchange Offer and the Transaction on the historical
financial statements included elsewhere in this Prospectus. The pro forma
condensed consolidated balance sheet at June 30, 1996, and the related pro
forma condensed consolidated statements of operations for the six months then
ended and the year ended December 31, 1995 were prepared as if the Merger, the
Exchange Offer and the Transaction were consummated on June 30, 1996, January
1, 1996 and 1995, respectively. The pro forma condensed consolidated financial
statements should be read in conjunction with the related historical financial
statements and are not necessarily indicative of the results that would have
actually occurred had the Merger, the Exchange Offer and the Transaction been
consummated on the dates or for the periods indicated or which may occur in the
future.
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<PAGE> 51
PATINA OIL & GAS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
PATINA PRO FORMA UNAUDITED
(HISTORICAL) ADJUSTMENTS PRO FORMA
-------------- ---------------- -------------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . . . $ 35,078 $ $ 35,078
Oil and gas properties and equipment, net . . . . . . 415,907 415,907
Other noncurrent assets, net . . . . . . . . . . . . 4,490 4,490
-------------- -------------
$ 455,475 $ 455,475
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities . . . . . . . . . . . . . . . . . $ 29,756 $ $ 29,756
Other noncurrent liabilities . . . . . . . . . . . . 3,527 3,527
Long-term debt . . . . . . . . . . . . . . . . . . . 220,913 220,913
Preferred stock of subsidiary . . . . . . . . . . . . 9,729 (9,729) (a) -
Stockholders' equity
Preferred stock, $.01 par . . . . . . . . . . . . 12 4 (a) 16
Common stock, $.01 par . . . . . . . . . . . . . 199 199
Capital in excess of par value . . . . . . . . . 193,378 9,725 (a) 203,103
Retained earnings . . . . . . . . . . . . . . . . (2,039) (2,039)
-------------- -------------
191,550 201,279
-------------- -------------
$ 455,475 $ 455,475
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 52
PATINA OIL & GAS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOUR
MONTHS ENDED
APRIL 30, 1996
PATINA GERRITY PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Oil and gas sales . . . . . . . . . . . . . $ 29,816 $ 16,540 $ 46,356
Other . . . . . . . . . . . . . . . . . . . 294 410 704
------------- -------------- -----------
30,110 16,950 47,060
------------- -------------- -----------
Expenses
Direct operating . . . . . . . . . . . . . 5,401 2,841 525 (b) 8,600
(167) (c)
Exploration . . . . . . . . . . . . . . . . 149 331 480
General and administrative . . . . . . . . 3,113 2,275 (1,150) (c) 3,713
(525) (b)
Interest and other . . . . . . . . . . . . 4,979 4,636 361 (d) 9,976
Depletion, depreciation and amortization . 18,723 8,968 (1,029) (e) 27,944
1,282 (f)
------------- -------------- -----------
32,365 19,051 50,713
------------- -------------- -----------
Income (loss) before taxes . . . . . . . . . . (2,255) (2,101) (3,653)
Provision (benefit) for income taxes . . . . . (394) (714) 1,108 (g) -
------------- -------------- -----------
Net income (loss) . . . . . . . . . . . . . . . (1,861) (1,387) (3,653)
Dividends on preferred stock . . . . . . . . . 710 1,518 (808) (h) 1,420
------------- -------------- -----------
Net income (loss) applicable to common stock . $ (2,571) $ (2,905) $ (5,073)
============= ============== ===========
Net income (loss) per share . . . . . . . . . . $ (0.16) $ (0.25)
============= ===========
Weighted average shares outstanding . . . . . . 15,959 20,000
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 53
PATINA OIL & GAS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PATINA GERRITY PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Oil and gas sales . . . . . . . . . . . . . $ 50,073 $ 51,513 $ 101,586
Other . . . . . . . . . . . . . . . . . . . 29 2,347 2,376
-------------- -------------- -----------
50,102 53,860 103,962
-------------- -------------- -----------
Expenses
Direct operating . . . . . . . . . . . . . 8,867 8,366 1,575 (b) 18,308
(500) (c)
Exploration . . . . . . . . . . . . . . . . 416 285 701
General and administrative . . . . . . . . 5,974 7,731 (4,705) (c) 7,425
(1,575) (b)
Interest and other . . . . . . . . . . . . 5,476 14,505 674 (d) 20,655
Depletion, depreciation and amortization . 32,591 30,333 (5,151) (e) 60,338
2,565 (f)
Restructuring expenses . . . . . . . . . . . . - 828 828
-------------- -------------- -----------
53,324 62,048 108,255
-------------- -------------- -----------
Income (loss) before taxes . . . . . . . . . . (3,222) (8,188) (4,293)
Provision (benefit) for income taxes . . . . . (1,128) (215) 1,343 (g) -
-------------- -------------- -----------
Net income (loss) . . . . . . . . . . . . . . . $ (2,094) (7,373) (4,293)
--------------
Dividends on preferred stock . . . . . . . . . 4,554 (1,714) (h) 2,840
-------------- -----------
Net income (loss) applicable to common stock . $ (12,527) $ (7,133)
============== ===========
Net income (loss) per share . . . . . . . . . . $ (0.36)
===========
Weighted average shares outstanding . . . . . . 20,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 54
PATINA OIL & GAS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements
reflect the adjustments described below:
BALANCE SHEET
(a) To reflect the reclassification and exchange of the remaining
737,692 Outstanding Depository Shares (representing an aggregate of 92,211.5
shares of Gerrity Preferred Stock) into 388,763 shares of Patina Preferred
Stock.
STATEMENTS OF OPERATIONS
(b) To conform the financial statement presentation by Gerrity of
various overhead charges and recoveries to a basis consistent with that of
Patina.
(c) To reflect the reduction in direct operating and general and
administrative expenses that result from the elimination of redundant
personnel, lease space and other corporate services. Under the Merger
Agreement, Patina and SOCO have entered into a Corporate Services Agreement
under which SOCO will provide certain services to Patina so that Patina will
not need to have these tasks performed by Patina employees. Administrative
efficiencies from combining headquarters and field operations and eliminating
duplicate executive, professional and administrative personnel are expected to
total approximately $4.7 million per year. Based upon a detailed analysis of
the expenses and personnel that will be required to provide such services
following the Merger, management has estimated that future annual recurring
general and administrative expenses will approximate $5.0 million, net of
reimbursements.
(d) To adjust interest expense to reflect the refinancing or payment
of (i) $1.2 million (or 1.2%) of Gerrity's 11 3/4% Senior Subordinated Notes,
(ii) Gerrity's bank borrowings under the terms of Patina's credit facility,
(iii) the payable to parent and (iv) transaction costs. The interest expense
reflects the Eurodollar Margin set forth in the credit facilities, which margin
was applied to the current Eurodollar Rate resulting in an average borrowing
rate of approximately 6.75%. See "Patina Financing." Under the terms of
Gerrity's Senior Subordinated Notes, Gerrity is obligated to purchase any Notes
put to Gerrity at a price of 101% of the principal amount thereof upon certain
asset sales or dispositions.
(e) To adjust depletion, depreciation and amortization of oil and gas
properties based on the purchase price allocated to Gerrity oil and gas
properties and the use of a combined depletion, depreciation and amortization
rate. The combined rate utilized was $6.13 per BOE reflecting a rate of $6.10
per BOE for the first nine months (based on reserve quantities as of December
31, 1994) and $6.24 per BOE for the last three months (based on reserve
quantities as of December 31, 1995). The rate utilized for the six months
ended June 30, 1996 was $6.32 per BOE based on reserve quantities as of
December 31, 1995.
(f) To adjust depletion, depreciation and amortization to reflect the
amortization of the value assigned to a noncompete agreement entered into as
part of the Merger. The value is being amortized over five years at a rate
intended to approximate the decline in the value of the agreement.
(g) To eliminate the benefit from income taxes to reflect the impact
of the pro forma losses exceding the net deferred tax liabilities.
(h) To reduce dividends paid on Gerrity Preferred Stock (reflecting
the estimated exchange of the remaining Gerrity Preferred Stock pursuant to the
Exchange Offer and the Transaction).
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<PAGE> 55
SELECTED HISTORICAL FINANCIAL DATA OF PATINA (FORMERLY SOCO WATTENBERG)
The following table presents selected historical financial data as of
or for each of the years in the five year period ended December 31, 1995 and
the six month period ending June 30, 1995 for SOCO Wattenberg, and historical
financial data as of the six month period ended June 30, 1996 for Patina.
Future results may differ substantially from historical results because of
changes in oil and natural gas prices, normal production declines and other
factors. This information should be read in conjunction with the financial
statements and notes thereto of Patina Oil & Gas Corporation (formerly SOCO
Wattenberg) and the Patina Management's Discussion and Analysis of Financial
Condition and Results of Operations, presented elsewhere in this Information
Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues . . . . . . . . . . . . $ 22,047 $ 38,698 $ 64,865 $ 67,822 $ 50,102 $ 27,177 $ 30,110
Expenses:
Direct operating . . . . . . . 2,306 8,272 8,927 8,110 8,867 4,766 5,401
Exploration . . . . . . . . . . 19 17 573 784 416 139 149
General and administrative . . 7,710 6,115 6,982 7,484 5,974 3,542 3,113
Interest and other . . . . . . 1,558 1,771 2,362 3,869 5,476 2,769 4,979
Depletion, depreciation and
amortization . . . . . . . 5,763 11,949 25,190 43,036 32,591 16,951 18,723
-------- -------- -------- --------- -------- --------- --------
Total expenses . . . . 17,356 28,124 44,034 63,283 53,324 28,167 32,365
-------- -------- -------- --------- -------- --------- --------
Income (loss) before taxes . . 4,691 10,574 20,831 4,539 (3,222) (990) (2,255)
Provision (benefit) for
income taxes . . . . . . . 1,642 3,701 7,291 1,589 (1,128) (347) (394)
-------- -------- -------- --------- -------- --------- --------
Net income (loss) . . . . . . . $ 3,049 $ 6,873 $ 13,540 $ 2,950 $ (2,094) $ (643) $ (1,861)
======== ======== ======== ========= ======== ========= ========
Balance Sheet Data
Current assets . . . . . . . . $ 7,135 $ 5,343 $ 14,725 $ 11,083 $ 9,611 $ 9,478 $ 35,078
Oil and gas properties, net . . 69,139 106,251 181,170 234,821 214,910 227,600 414,612
Total assets . . . . . . . . . 77,012 113,064 195,895 246,686 224,521 237,860 455,475
Current liabilities . . . . . . 9,961 16,740 23,735 23,838 9,611 9,478 29,756
Long-term debt . . . . . . . . -- -- -- -- -- -- 220,913
Debt to parent . . . . . . . . 23,194 35,537 60,857 79,333 75,000 75,000 --
Stockholders' equity . . . . . 38,981 51,278 92,865 115,846 113,663 125,518 191,550
Cash Flow Data
Net cash provided by operations $ 8,628 $ 27,710 $ 38,882 $ 47,690 $ 18,407 $ 5,555 $ 14,968
Net cash used by investing . . (27,761) (47,189) (97,573) (96,378) (21,060) (18,613) (2,415)
Net cash realized (used) by
financing . . . . . . . . . 19,133 19,479 58,691 48,688 2,653 13,058 (340)
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends . . . . . . . . 4.01 6.97 9.82 2.17 0.40 0.63 0.47
</TABLE>
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<PAGE> 56
PATINA (FORMERLY SOCO WATTENBERG) MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Six Months ended June 30, 1996 and 1995. On May 2,
1996, Gerrity was merged into a wholly owned subsidiary of Patina (the
"Merger"). This transaction was accounted for as a purchase of Gerrity.
Accordingly, the results of operations since the Merger reflect the impact of
the acquisition.
Total revenues for the three month and six month periods ended June
30, 1996 increased to $19.5 million and $30.1 million. The amounts represented
increases of 51% and 11% as compared to the respective prior year periods. The
revenue increases are due to the effect of the Merger and improved product
prices in 1996. The net loss for the second quarter 1996 was $1.1 million
compared to a net loss of $428,000 for the same period in 1995. The increase
in net loss is primarily attributed to a significant increase in interest
expense related to higher average debt balances outstanding and higher average
interest rates due to the 11.75% Senior Subordinated Notes.
Oil and gas sales less direct operating expenses were $15.7 million, a
52% increase from the prior year quarter. Average daily production in the
second quarter of 1996 was 4,908 barrels and 69.8 MMcf (16,538 barrels of oil
equivalent), increases of 28% and 10%, respectively. The production increases
resulted solely from the Merger. Exclusive of the Merger, production continued
to decline due to Patina's reduced development schedule and expected initial
declines on the large number of wells drilled and completed in 1994 and 1995.
There were 64 wells placed on production in the first six months of 1995
compared to 1 well in the first six months of 1996. Total production volumes
are expected to increase in the third quarter due to the full quarter effect of
the Merger and a modest drilling and recompletion program initiated in the
third quarter. However, from that point, while production is not expected to
continue to decline at the current rate, a decrease is expected unless
development drilling activity is substantially increased or additional
acquisitions are consummated. The decision to increase development drilling is
heavily dependent on the current prices being received for production. Unless
prices increase significantly, development drilling is expected to be limited.
Average oil prices increased to $20.24 per barrel compared to $17.24
received in the second quarter of 1995. Natural gas prices increased from
$1.19 per Mcf in the first quarter of 1995 to $1.60 in 1996. The increase was
primarily the result of prior year production being marketed under term
arrangements which were based on Rocky Mountain region pricing (which remains
depressed) whereas the 1996 production benefitted from a portion of these
agreements expiring. This allowed the production to be sold at local spot
prices which had increased as a result of higher demand and overall declining
production in the DJ Basin. Direct operating expenses increased to $2.29 per
BOE compared to $1.91 in the prior year quarter. The increase is primarily
attributed to focusing more attention on enhancing production through
performing workovers on existing properties rather than through development
drilling. As a result of the Merger, Patina expects to realize efficiencies
which will help hold direct operating expenses per BOE constant even if
production continues to decline.
General and administrative expenses, net of reimbursements, for second
quarter 1996 were $1.6 million, a 19% increase from the same period in 1995 but
only a 2% increase over first quarter 1996. The increases are the result of
the Merger partially offset by reductions in allocated costs by SOCO. Prior to
the Merger, Patina did not have its own employees. Employees and certain
office space and furniture, fixtures and equipment were provided by SOCO. SOCO
allocated general and administrative expenses based on estimates of
expenditures incurred on behalf of Patina. The general and administrative
expenses in 1996 through the Merger were lower than the expenses for the
comparable period in 1995, reflecting the lower overhead associated with the
reduced drilling activity and Patina's overall reduction in personnel.
Interest and other expense was $3.7 million compared to $1.4 million
in the second quarter of 1995. The increase is the result of an increase in
the average outstanding debt levels due to additional debt recorded as a result
of the Merger as well as debt incurred to finance certain costs related to the
Merger.
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<PAGE> 57
Patina's average interest rate climbed to 9.1% compared to 7.0% in the second
quarter 1995. This increase is due primarily to the 11.75% Senior Subordinated
Notes.
Depletion, depreciation and amortization expense for the second
quarter totaled $11.8 million, an increase of $3.4 million or 41% from the same
period in 1995. The increase resulted from the increase in production and an
increased depletion, depreciation and amortization rate of $7.81 per BOE
compared to $6.36 in 1995. The primary cause for the increased rate was a
downward revision in reserve quantities due to proved undeveloped reserves
being classified as uneconomic at year end 1995 prices and the inclusion of the
amortization of a noncompete agreement entered into in conjunction with the
Merger.
Comparison of 1995 results to 1994. Total revenues in 1995 were $50.1
million as compared to $67.8 million in 1994. The 26% decrease was due to both
a drop in production (17%) and in average prices received (11%). The net loss
for 1995 was $2.1 million compared to net income of $3.0 million in 1994. The
decrease was primarily due to the drop in production and average prices
received, higher direct operating expenses and increased interest expense due
to increased average debt payable to parent offset somewhat by a lower
depletion rate.
Average daily production during 1995 was 3,677 barrels and 57,481 Mcf
(13,257 barrels of oil equivalent), a decrease of 27% for oil and 12% for gas,
as compared to 1994. The production declines resulted primarily from SOCO
Wattenberg's decision to reduce drilling plans for 1995 due to the continued
decline in gas prices subsequent to year end 1994. During 1995, SOCO
Wattenberg placed an additional 88 wells on production compared to 360 wells
during 1994. SOCO Wattenberg expects these production declines to continue due
to normal well production declines unless natural gas prices recover to a level
at which SOCO Wattenberg could economically increase its development program.
Revenues exceeded direct operating costs by $41.2 million, a 31% decrease from
1994. Average oil prices increased 11% to $16.43 per barrel. However, that
modest increase was more than offset by the continued drastic reduction in gas
prices. The average gas price for 1995 was only $1.34 per Mcf, a 21% decrease
from 1994. Direct operating expenses per equivalent barrel also increased to
$1.83 from $1.40 in 1994 due to decreasing total production with a higher
number of wells and higher well servicing costs in 1995.
General and administrative expenses, net of reimbursements, were $6.0
million in 1995 as compared to $7.5 million in 1994. Prior to the Merger, SOCO
Wattenberg did not have its own employees. Employees and certain office space
and furniture, fixtures and equipment were provided by SOCO. SOCO allocated
general and administrative expenses based on estimates of actual expenditures
incurred on behalf of SOCO Wattenberg. The general and administrative expenses
in 1995 were $1.5 million lower than 1994, reflecting the lower overhead
associated with the reduced drilling activity.
Interest paid to parent and other expense was $5.5 million in 1995 as
compared to $3.9 million in 1994. Interest expense represents interest on debt
payable to SOCO. Prior to the Merger, SOCO financed all of SOCO Wattenberg's
activities. A portion of such financing was considered to be an investment by
SOCO in SOCO Wattenberg and, accordingly, no interest was charged by SOCO to
SOCO Wattenberg for this capital. The remaining portion of such financing was
considered to be debt payable to SOCO with interest charged to SOCO Wattenberg
at a rate which approximated the average interest rate being paid by SOCO under
its revolving credit facility. The increase in interest expense is primarily
due to an increase in interest rates from 5.5% to 7%.
Depletion, depreciation and amortization expense for 1995 decreased
24% from 1994. The decrease was primarily attributable to the decreases in
production and a $2.1 million greater impairment in 1994.
Comparison of 1994 results to 1993. Total revenues in 1994 rose 5% to
$67.8 million. The revenue increase was the result of a 20% growth in oil and
gas production calculated in equivalent barrels. The revenue rise was limited
by a 13% decline in the average price per BOE which reduced current year
revenues by $9.7 million. Net income for 1994 was $3.0 million, compared to
$13.5 million in 1993. In addition to the price decline, the decrease resulted
from increased expenses for interest and depletion, depreciation and
amortization.
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<PAGE> 58
Revenues less direct operating costs in 1994 increased 7% to $59.6
million, due to the rise in oil and gas production. The average price received
for gas production decreased 18% in 1994 to $1.70 per Mcf while oil prices
dropped 6% to $14.84 per barrel. Direct operating expenses decreased 9% during
1994, and on a per BOE basis decreased to $1.40 from $1.84 in 1993 reflecting
cost efficiencies gained from a higher number of operated wells in a
concentrated area and ongoing cost reduction efforts.
Average daily production during 1994 was 15,922 BOE, up 20% from 1993.
The production increase resulted primarily from continued development
activities and secondarily from acquisitions. In 1994, SOCO Wattenberg placed
360 wells on production. An additional 90 wells were recompleted to enhance
production. The significant decline in natural gas prices since mid 1994
resulted in SOCO Wattenberg significantly curtailing its gas development plans
in late 1994 and continuing into 1995.
General and administrative expenses, net of reimbursements, were $7.5
million in 1994, an increase of 7% over 1993, reflecting the higher drilling
activity in 1994. Interest and other expense was $3.9 million in 1994 compared
to $2.4 million in 1993. The increase was the result of a rise in the average
outstanding debt to parent due to capital project expenditures, as well as an
increase in average interest rates to 5.5% from 4.9%.
Depletion, depreciation and amortization expense for 1994 increased
$17.8 million or 71% from the prior year. Of the increase, $4.9 million was
related to the 20% rise in oil and gas production, $3.1 million to an increase
in unevaluated property impairments and field and office equipment depreciation
increases and $9.8 million due to an increase in the production depletion,
depreciation and amortization rate to $6.74 per equivalent barrel from $5.05 in
1993. The primary cause for the increased rate was a downward revision in
reserve quantities due to reserves being classified as uneconomic at then
current price levels.
DEVELOPMENT, ACQUISITION AND EXPLORATION
During the six months ended June 30, 1996, Patina incurred $219.2
million in capital expenditures. Of this amount, $218.3 million related to the
acquisition of Gerrity by the issuance of stock of Patina. Capital
expenditures, exclusive of acquisitions, totaled only $932,000 as Patina has
continued to limit its development activity based on current Rocky Mountain
natural gas prices.
During 1994 and 1995 SOCO Wattenberg incurred $97.5 million and $13.2
million in capital expenditures of which $88.2 million and $12.1 million was
for oil and gas development. A total of 360 wells were placed on production in
1994 with 42 in progress at year end. Ten wells spudded during the year were
plugged and abandoned. A total of 88 wells were placed on production in 1995
with one in progress at year end and no dry holes drilled. With the continued
decline of gas prices in 1995, SOCO Wattenberg significantly reduced its
drilling during 1995.
SOCO Wattenberg also expended $7.6 million and $650,000 during 1994
and 1995 for acquisition activities primarily related to the purchase of
incremental interests in various properties and additional acreage. During
1994 and 1995, SOCO Wattenberg expended $784,000 and $416,000, for exploration
activities primarily for delay rentals and geological and geophysical expenses.
In addition, SOCO Wattenberg expended $909,000 and $13,000 during 1994 and 1995
for field and office equipment.
FINANCIAL CONDITION AND CAPITAL RESOURCES
At June 30, 1996, Patina had total assets of $455.5 million. Total
capitalization was $412.5 million, of which 46% was represented by
stockholder's equity, 28% by senior debt and 26% by subordinated debt. During
the six months ended June 30, 1996, net cash provided by operations was $15.0
million, as compared to $5.6 million for the same period in 1995. As of June
30, 1996, there were no commitments for capital expenditures. At December 31,
1995, SOCO Wattenberg had total assets of $224.5 million. Total capitalization
was $214.9 million, of which 53% was represented by stockholder's equity, 35%
by debt to parent and the remainder by other noncurrent liabilities. During
1995, net cash provided by operations was $18.4 million, a decrease of 61%
compared to 1994. Patina anticipates that 1996 expenditures for
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<PAGE> 59
development drilling, giving effect to the Merger, will be less than $10
million, which will allow for a reduction of indebtedness or provide funds to
pursue additional acquisitions. The level of these and other future
expenditures is largely discretionary, and the amount of funds devoted to any
particular activity may increase or decrease significantly, depending on
available opportunities and market conditions. Patina plans to finance its
ongoing development, acquisition and exploration expenditures using internal
cash flow, proceeds from asset sales and its bank credit facilities. In
addition, joint ventures or future public and private offerings of debt or
equity securities may be utilized. Due to restrictions outlined in Gerrity's
various credit agreements, cash generated by Gerrity will be retained by
Gerrity and will not be available to fund Patina's other operations.
Prior to the Merger, SOCO financed all of Patina's activities. A
portion of such financing was considered to be an investment by parent in
Patina with the remaining portion being considered debt payable to SOCO. In
conjunction with the Merger, the $75 million debt payable to SOCO was paid in
full and Patina does not expect SOCO to provide any additional funding.
Simultaneously with the Merger, Patina and its subsidiaries entered
into a bank credit agreement. The agreement consists of (i) a facility
provided to Patina and SOCO Wattenberg (the "Patina Facility") and (ii) a
facility provided to Gerrity (the "Gerrity Facility").
The Patina Facility consists of a term loan facility in an amount up
to $87 million and a revolving credit facility in an aggregate amount up to
$102 million. The term loan facility will be available to finance purchases of
the Gerrity 11.75% Senior Subordinated Notes until the first anniversary of the
Merger. At June 30, 1996, Patina had not utilized the term loan facility. The
amount available for borrowing under the revolving credit facility will be
limited to a semiannually adjusted borrowing base that equaled $102 million at
June 30, 1996. At June 30, 1996, $81.8 million was outstanding under the
revolving credit facility.
The Gerrity Facility is a revolving credit facility in an aggregate
amount up to $51 million. The amount available for borrowing under the Gerrity
Facility will be limited to a fluctuating borrowing base that equaled $51
million at June 30, 1996. At June 30, 1996, $34.5 million was outstanding
under the Gerrity Facility. The Gerrity Facility was used primarily to
refinance Gerrity's previous bank credit facility and pay costs associated with
the Merger.
The bank credit agreement contains certain financial covenants,
including but not limited to a maximum total debt to capitalization ratio, a
maximum total debt to EBITDA ratio and a minimum current ratio. The bank
credit agreement also contains certain negative covenants, including but not
limited to restrictions on indebtedness; certain liens; guaranties, speculative
derivatives and other similar obligations; asset dispositions; dividends, loans
and advances; creation of subsidiaries; investments; leases; acquisitions;
mergers; changes in fiscal year; transactions with affiliates; changes in
business conducted; sale and lease back and operating lease transactions; sale
of receivables; prepayment of other indebtedness; amendments to principal
documents; negative pledge clauses; issuance of securities; and non-speculative
commodity hedging.
INFLATION AND CHANGES IN PRICES
While certain of its costs are affected by the general level of
inflation, factors unique to the petroleum industry result in independent price
fluctuations. Over the past five years, significant fluctuations have occurred
in oil and gas prices. Although it is particularly difficult to estimate
future prices of oil and gas, price fluctuations have had, and will continue to
have, a material effect on Patina.
INFORMATION CONCERNING SOCO WATTENBERG (PREDECESSOR OF PATINA)
GENERAL
During the last five years, SOCO Wattenberg has drilled over 1,100
wells in the Wattenberg Field of the D-J Basin, including 25 wells drilled in
1995. At December 31, 1995, SOCO Wattenberg had interests in
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<PAGE> 60
more than 1,850 producing wells, of which it operated approximately 1,530.
Owing primarily to depressed gas prices, drilling activity decreased
significantly in late 1994 and 1995. If gas prices increase, SOCO Wattenberg
would expect to materially increase its drilling in Wattenberg.
At year-end 1995, the net proved reserves attributed to SOCO
Wattenberg's properties were 7.4 million barrels of oil and 138.9 Bcf of gas.
Proved reserve quantities were significantly reduced by low year-end gas prices
(approximately $1.60 per Mcf) prevailing in Wattenberg. Year-end 1995 reserves
were attributable to 1,797 producing wells, 45 proved undeveloped locations and
approximately 90 proved behind pipe zones. The number of proved undeveloped
locations is sensitive to the prevailing level of gas prices, and could
increase if prices return to historical levels. Also, future drilling activity
should result in the assignment of proved reserves to additional locations
offsetting new productive wells.
The Codell formation has traditionally been the primary objective for
development drilling. This formation is a blanket siltstone formation that
exists under much of the Wattenberg acreage at depths of 6,700 to 7,500 feet.
Codell reserves generally have a high degree of predictability due to uniform
deposition and gradual transition from high to low gas/oil ratio areas. SOCO
Wattenberg frequently dually completes the Niobrara chalk formation, which lies
immediately above the Codell, to enhance drilling economics. The
Codell/Niobrara wells produce most prolifically in the first six to twelve
months, during which production declines significantly from initial rates.
More than half of a typical well's reserves are recovered in the first three
years of production. As a result, each well contributes significantly more
production in its first year than in subsequent years.
During the last several years, SOCO Wattenberg expanded its drilling
targets to include both deeper and shallower formations. The J-sand lies
approximately 500 feet below the Codell. It is a low permeability sandstone
generally found to be productive throughout the D-J Basin. Production
performance varies with porosity and thickness and is more variable in those
areas outside the heart of Wattenberg. The Dakota formation lies approximately
200 feet below the J-sand. It is a low permeability sand occasionally
naturally fractured with less predictable commercial accumulations and varied
performance results. A number of wells have been completed in the Sussex
formation at average depths of 4,500 feet. The Sussex sands were deposited in
bars and exhibit variable reservoir quality with a moderate degree of
predictability. Sussex sands are primarily behind pipe reserves in existing
and future wells drilled to the Codell and J-sands.
Because the Codell, Niobrara and J-sand formations are continuous
reservoirs over a large portion of the Wattenberg, SOCO Wattenberg believes
that drilling, at least in the heart of Wattenberg, is relatively low risk,
with well economics depending primarily on prices paid for oil and gas
production and control of drilling, completion and operating costs. Of the
1,105 wells drilled between 1991 and December 31, 1995, only 15 were classified
as dry holes, and most of these were in outlying areas of the D-J Basin. Dry
holes in the D-J Basin cost an average of $75,000 per well. The average cost
of a completed well approximated $202,000 in 1995.
GAS GATHERING AND PROCESSING AND MARKETING
Gas production from Wattenberg is processed in order to recover
natural gas liquids, primarily propane and a butane/gasoline mix, from the
natural gas provided by producers. The liquid products are then sold
separately from the residue gas. Production from substantially all SOCO
Wattenberg's acreage is dedicated for gathering to Associated Natural Gas
Corporation ("ANGC") and for processing at plants owned by ANGC and Amoco
Production Company ("Amoco"). ANGC currently processes approximately 55% of
the production from SOCO Wattenberg wells, with the remainder being processed
by Amoco. Under each of these arrangements Amoco and ANGC receive their fees
predominantly in the form of percentages of the liquid products and residue gas
so that gathering and processing fees effectively fluctuate with market prices.
In June 1995, SOCO sold its recently constructed West Plant processing
plant on the western end of the Wattenberg area along with certain related
assets. On September 30, 1995, SOCO sold its remaining Wattenberg
transportation and processing facilities to ANGC for approximately $60.9
million. In connection with the sale to ANGC, SOCO Wattenberg agreed that all
its uncommitted production, which had been
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<PAGE> 61
transported and processed by SOCO's Gas Management Unit, would be transported
and processed by ANGC. SOCO Wattenberg does not expect the sale to ANGC to
materially effect the net price realized by SOCO Wattenberg from its Wattenberg
production at current price levels.
If either Amoco or ANGC were unable to process SOCO Wattenberg's
production at their plants for any reason, including a plant shut-down, or if a
significant portion of ANGC's pipeline system were to be curtailed, it would
have a short-term adverse impact on SOCO Wattenberg's operations. In addition,
the purchaser of the West Plant has ceased operation of that plant, and SOCO
Wattenberg believes the plant may be decommissioned. This has resulted in an
increase in line pressures on ANGC's gathering system in the western end of the
Wattenberg and has suppressed SOCO Wattenberg's production in the area since
September 30, 1995. SOCO Wattenberg believes, however, that the flexibility
afforded by ANGC's and other gathering systems in the area, the number of
processing plants in the Field and SOCO Wattenberg's contractual arrangements
with ANGC, Amoco and pipeline companies serving the area, will enable SOCO
Wattenberg to mitigate the effects of these developments shortly.
CUSTOMERS AND MARKETING
SOCO Wattenberg's oil and gas production is principally sold to end
users, marketers and other purchasers having access to pipeline facilities near
its properties. In 1993, 1994 and 1995, Amoco accounted for approximately 29%,
25% and 22% of revenues, and subsidiaries of SOCO accounted for 48%, 59% and
46%, respectively. In 1994 and 1995, Total Petroleum accounted for 15% and 20%
of revenues. The marketing of oil and gas by SOCO Wattenberg can be affected
by a number of factors that are beyond its control and whose future effect
cannot be accurately predicted. SOCO Wattenberg does not believe, however,
that the loss of any of its customers would have a material adverse effect on
its operations.
Natural Gas. SOCO Wattenberg markets its residue gas to utilities,
independent marketers and end users through both intrastate and interstate
pipelines. SOCO Wattenberg has historically marketed its liquid products to
local and regional distributors, and has access to liquids lines which permit
the direct sale of liquids products to the major interchange at Conway, Kansas
or to the Phillips Powder River liquids pipeline. Through September 1997, SOCO
Wattenberg's share of liquid products produced at ANGC plants will be purchased
by ANGC at prices approximating market values. Thereafter, ANGC has, for an
additional one-year period, the right to match sales of such products by SOCO
Wattenberg.
Oil. Oil production is principally sold to refiners and marketers who
truck oil to storage facilities or pipelines. The price is generally based on
one or more posted prices, adjusted for transportation costs and quality.
Amoco has the right to purchase oil produced from properties previously
purchased from Amoco at an average of certain local posted prices.
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<PAGE> 62
PRODUCTION, REVENUE AND PRICE HISTORY
The following table sets forth information regarding net production of
crude oil and liquids and natural gas, revenues and expenses attributable to
such production and certain price and cost information for each of the years in
the three year period ended December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
-----------------------------------
<S> <C> <C> <C>
Production
Crude oil and liquids (Mbbl) . . . . . . . . . . . . . . . . . 1,224 1,829 1,342
Natural gas (MMcf) . . . . . . . . . . . . . . . . . . . . . . . 21,706 23,893 20,981
MBOE(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,842 5,812 4,839
Average sales price(c)
Crude oil and liquids (Bbl) . . . . . . . . . . . . . . . . . . . $ 15.87 $ 14.84 $ 16.43
Natural gas (Mcf)(b) . . . . . . . . . . . . . . . . . . . . . 2.08 1.70 1.34
BOE(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.33 11.66 10.35
Average direct operating expense/BOE . . . . . . . . . . . . . . $ 1.84 $ 1.40 $ 1.83
</TABLE>
(a) Gas production is converted to oil equivalents at the rate of 6 Mcf
per barrel.
(b) Sales of natural gas liquids are included in gas revenues.
(c) SOCO Wattenberg estimates that its composite net wellhead prices at
December 31, 1995 were approximately $1.50 per Mcf of gas and $16.93
per barrel of oil, respectively.
DRILLING RESULTS
The following table sets forth information with respect to wells
drilled by SOCO Wattenberg during the past three years. All the wells were
development wells. The information should not be considered indicative of
future performance, nor should it be assumed that there is necessarily any
correlation between the number of productive wells drilled, quantities of
reserves found or economic value. Productive wells are those that produce
commercial quantities of hydrocarbons whether or not they produce a reasonable
rate of return.
<TABLE>
<CAPTION>
1993 1994 1995
------------------------------------
<S> <C> <C> <C>
Productive
Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311.0 350.0 25.0
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281.8 305.6 24.1
Dry
Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 8.0 0.0
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 7.9 0.0
</TABLE>
At December 31, 1995, one gross (one net) development well was in
progress.
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<PAGE> 63
PROVED RESERVES
The following table sets forth estimated year end proved reserves
attributable to SOCO Wattenberg's properties for the three years ended December
31, 1995.
<TABLE>
<CAPTION>
1993 1994 1995
------------------------------------
<S> <C> <C> <C>
Crude oil and liquids (MBbl)
Developed . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,365 8,832 6,955
Undeveloped . . . . . . . . . . . . . . . . . . . . . . . . . . 9,563 3,386 466
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 16,928 12,218 7,421
======== ======== ========
Natural gas (MMcf)
Developed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,765 147,869 133,088
Undeveloped . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,097 30,834 5,769
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,862 178,703 138,857
======== ======== ========
Total MBOE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,238 42,002 30,564
======== ======== ========
</TABLE>
The following table sets forth pretax future net revenues from the
production of proved reserves and the Pretax PW 10% Value of such revenues.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
DEVELOPED UNDEVELOPED(A) TOTAL
--------- -------------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,819 $ (919) $ 32,900
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,723 (667) 27,056
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,382 197 23,579
Remainder . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,487 8,269 158,756
-------- ------ --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $235,411 $6,880 $242,291
======== ====== ========
Pretax PW 10% Value . . . . . . . . . . . . . . . . . . . . . . . $144,830 $2,025 $146,855(b)
======== ====== ========
</TABLE>
- ------------
(a) Net of estimated capital costs, including estimated costs of $1.6
during 1996.
(b) The after tax PW 10% value of proved reserves totaled approximately
$127.5 million at year end 1995.
The quantities and values in the preceding tables are based on prices
in effect at December 31, 1995, averaging $18.11 per barrel of oil and $1.60
per Mcf of gas. Price reductions decrease reserve values by lowering the
future net revenues attributable to the reserves and also by reducing the
quantities of reserves that are recoverable on an economic basis. Price
increases have the opposite effect. Any significant decline in prices of oil
or gas could have a material adverse effect on SOCO Wattenberg's financial
condition and results of operations.
Proved developed reserves are proved reserves that are expected to be
recovered from existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserves that are expected to be
recovered from new wells drilled to known reservoirs on undrilled acreage for
which the existence and recoverability of such reserves can be estimated with
reasonable certainty, or from existing wells where a relatively major
expenditure is required to establish production.
Future prices received for production and future production costs may
vary, perhaps significantly, from the prices and costs assumed for purposes of
these estimates. There can be no assurance that the proved reserves will be
developed within the periods indicated or that prices and costs will remain
constant. There can be no assurance that actual production will equal the
estimated amounts used in the preparation of reserve projections.
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<PAGE> 64
The present values shown should not be construed as the current market
value of the reserves. The 10% discount factor used to calculate present
value, which is specified by the Commission, is not necessarily the most
appropriate discount rate, and present value, no matter what discount rate is
used, is materially affected by assumptions as to timing of future production,
which may prove to be inaccurate. For properties operated by SOCO Wattenberg,
expenses exclude SOCO Wattenberg's share of overhead charges. In addition, the
calculation of estimated future net revenues does not take into account the
effect of various cash outlays, including, among other things, general and
administrative costs and interest expense.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. The data in the above tables represent estimates
only. Oil and gas reserve engineering must be recognized as a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact way, and estimates of other engineers might differ
materially from those shown above. The accuracy of any reserve estimate is a
function of the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing and production after
the date of the estimate may justify revisions. Accordingly, reserve estimates
are often materially different from the quantities of oil and gas that are
ultimately recovered.
All of the proved reserves at year-end were estimated by NSAI. No
estimates of SOCO Wattenberg's reserves comparable to those included herein
have been included in reports to any federal agency other than the Commission.
PRODUCING WELLS
The following table sets forth certain information at December 31,
1995 relating to the producing wells in which SOCO Wattenberg owned a working
interest. SOCO Wattenberg also held royalty interests in 163 producing wells.
Wells are classified as oil or gas wells according to their predominant
production stream.
<TABLE>
<CAPTION>
AVERAGE
PRINCIPAL GROSS NET WORKING
PRODUCTION STREAM WELLS WELLS INTEREST
----------------- ----- ----- --------
<S> <C> <C> <C>
Crude oil and liquids . . . . . . . . . . . . . . . . . . . . . . . 1,240 1,073 87%
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 375 83%
----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,694 1,448 85%
===== =====
</TABLE>
ACREAGE
The following table sets forth certain information at December 31,
1995 relating to acreage held by SOCO Wattenberg. Undeveloped acreage is
acreage held under lease, permit, contract, or option that is not in a spacing
unit for a producing well, including leasehold interests identified for
development or exploratory drilling. Developed acreage is acreage assigned to
producing wells.
<TABLE>
<CAPTION>
GROSS NET
----- ---
<S> <C> <C>
Developed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,839 72,359
====== ======
Undeveloped . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,134 53,199
====== ======
</TABLE>
COMPETITION
The oil and gas industry is highly competitive in all its phases.
Competition is particularly intense with respect to the acquisition of
producing properties. There is also competition for the acquisition of oil and
gas leases, in the hiring of experienced personnel and from other industries in
supplying alternative sources of energy.
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<PAGE> 65
Competitors in acquisitions, exploration, development and production
include the major oil companies in addition to numerous independent oil
companies, individual proprietors, drilling and acquisition programs and
others. Many of these competitors possess financial and personnel resources
substantially in excess of those available to SOCO Wattenberg and, since the
Merger, to Patina. Such competitors may be able to pay more for desirable
leases and to evaluate, bid for and purchase a greater number of properties
than the financial or personnel resources of SOCO Wattenberg permit. The
ability of SOCO Wattenberg to increase reserves in the future will be dependent
on its ability to select and acquire suitable producing properties and
prospects for future exploration and development.
REGULATION
SOCO Wattenberg's operations are affected by political developments
and federal and state laws and regulations. Oil and gas industry legislation
and administrative regulations are periodically changed for a variety of
political, economic and other reasons. Numerous departments and agencies,
federal, state, local and Indian, issue rules and regulations binding on the
oil and gas industry, some of which carry substantial penalties for failure to
comply. The regulatory burden on the oil and gas industry increases SOCO
Wattenberg's and Patina's cost of doing business, decreases flexibility in the
timing of operations and may adversely affect the economics of capital
projects.
In the past, the federal government has regulated the prices at which
oil and gas could be sold. Prices of oil and gas sold by SOCO Wattenberg are
not currently regulated. There can be no assurance, however, that sales of
such production will not be subject to federal regulation in the future.
The following discussion of various statutes, rules, regulations or
governmental orders to which SOCO Wattenberg's operations may be subject is
necessarily brief and is not intended to be a complete discussion thereof.
Federal Regulation of Natural Gas. Historically, the sale and
transportation of natural gas in interstate commerce have been regulated under
various federal and state laws including, but not limited to, the Natural Gas
Act of 1938, as amended ("NGA") and the Natural Gas Policy Act of 1978
("NGPA"), both of which are administered by the Federal Energy Regulatory
Commission ("FERC"). However, regulation of first sales, including the
certificate and abandonment requirements and price regulation, was phased out
during the late 1980's and all remaining wellhead price ceilings terminated on
January 1, 1993.
FERC continues to have jurisdiction over transportation and sales
other than first sales. Commencing in the mid-1980's, FERC promulgated several
orders designed to correct perceived market distortions resulting from the
traditional role of major interstate pipeline companies as wholesalers of gas
and to make gas markets more competitive by removing transportation and other
barriers to market access. These orders have had and will continue to have a
significant influence on natural gas markets in the United States and have,
among other things, allowed non-pipeline companies, including SOCO Wattenberg,
to market gas and fostered the development of a large spot market for gas.
These orders have gone through various permutations, due in significant part to
FERC's response to court review of these orders. Parts of these orders remain
subject to judicial review, and SOCO Wattenberg is unable to predict the impact
on its natural gas production and marketing operations of judicial review of
these orders.
In April 1992, FERC issued Order 636, a rule designed to restructure
the interstate natural gas transportation and marketing system to remove
various barriers and practices that have historically limited non-pipeline gas
sellers, including producers, from effectively competing with pipelines. The
restructuring process required the "unbundling" of pipeline services (e.g.,
transportation, sales and storage) so that producers, marketers and end users
of natural gas contract only for those services which they need and may obtain
each service from the most economical source. The 1993-1994 winter heating
season was the first period during which FERC Order 636 procedures were
operative. To date, management of SOCO Wattenberg believes the Order 636
procedures have not had any significant effect on SOCO Wattenberg.
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<PAGE> 66
State Regulation of Drilling and Production. State regulatory
authorities have established rules and regulations requiring permits for
drilling, reclamation and plugging bonds and reports concerning operations,
among other matters. Colorado also has statutes and regulations governing a
number of environmental and conservation matters.
Colorado's statute concerning oil and gas development was amended in
1994 to provide the State's Oil and Gas Conservation Commission (the "COGCC")
with additional authority to regulate oil and gas activities to protect public
health, safety and welfare, as well as the environment. Several rulemaking
proceedings have been or will be undertaken pursuant to these statutory
changes, including consideration of regulations to protect soil and
groundwater, expand and clarify reclamation requirements, regulate locations of
new wells in residential areas and provide financial assurance for industry
obligations in these areas. These rules, which have been adopted by the COGCC
after consideration by the oil and gas industry as well as groups representing
agricultural, residential, environmental and local governmental interests, are
not expected to have a material adverse effect on SOCO Wattenberg, and
management does not expect that the rules currently being considered will have
a material adverse effect. There can be no assurance, however, even though
Colorado statute currently requires that any regulations adopted by the COGCC
be cost effective and technologically feasible, that regulatory developments
will not increase SOCO Wattenberg's costs of operations or limit its ability to
develop its properties fully. Local efforts to regulate oil and gas
activities, although limited by state law which prohibits local regulations
from preventing the drilling of wells or conflicting with COGCC regulations,
are expected, particularly if drilling levels increase significantly, to
continue since the use of surface land for drilling and operations competes
directly with the use of such land by agricultural and residential interests,
which own the great majority of surface land in Wattenberg.
Environmental Regulations. Operations of SOCO Wattenberg are subject
to numerous laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. These laws and
regulations may require the acquisition of a permit before drilling commences,
prohibit drilling activities on certain lands lying within wilderness and other
protected areas and impose substantial liabilities for pollution resulting from
drilling operations. Such laws and regulations also restrict air or other
pollution and disposal of wastes resulting from the operation of gas processing
plants, pipeline systems and other facilities owned directly or indirectly by
SOCO Wattenberg.
SOCO Wattenberg currently owns or leases numerous properties that have
been used for many years for natural gas and crude oil production. Although
SOCO Wattenberg believes that it and other previous owners have utilized
operating and disposal practices that were standard in the industry at the
time, hydrocarbons or other wastes may have been disposed of or released on or
under the properties owned or leased by SOCO Wattenberg. In connection with
its most significant acquisitions, SOCO Wattenberg performed environmental
assessments and found no material environmental noncompliance or clean-up
liabilities requiring action in the near or intermediate future, although some
matters identified in the environmental assessments are subject to ongoing
review. SOCO Wattenberg has assumed responsibility for some of the matters
identified. Environmental assessments have not been performed on all of SOCO
Wattenberg's properties. To date, expenditures for environmental control
facilities and for remediation have not been significant to SOCO Wattenberg.
SOCO Wattenberg believes, however, that it is reasonably likely that the trend
toward stricter standards in environmental legislation and regulations will
continue. For instance, efforts have been made in Congress to amend the
Resource Conservation and Recovery Act to reclassify oil and gas production
wastes as "hazardous waste," the effect of which would be to further regulate
the handling, transportation and disposal of such waste. If such legislation
were to pass, it could have a significant adverse impact on SOCO Wattenberg's
operating costs, as well as the oil and gas industry in general.
New initiatives regulating the disposal of oil and gas waste are also
pending in certain states, including Colorado, the only state in which SOCO
Wattenberg conducts operations, and these various initiatives could have a
similar impact on SOCO Wattenberg. The COGCC has enacted rules regarding the
regulation of disposal of oil field waste. These rules establish significant
new permitting, record-keeping and compliance procedures relating to the
operation of pits, the disposal of produced water, and the disposal and/or
treatment of oil field waste, including waste currently exempt from federal
regulation. These rules may require the addition of technical personnel to
perform the necessary record-keeping and compliance and may require the
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<PAGE> 67
termination of production from some of SOCO Wattenberg's marginal wells, for
which the cost of compliance would exceed the value of remaining production.
In addition, as indicated above, the COGCC has enacted regulations imposing
specific reclamation requirements on operators upon the conclusion of their
operations. Management believes that compliance with current applicable laws
and regulations will not have a material adverse impact on SOCO Wattenberg.
During 1995, the COGCC held rulemaking proceedings to consider, among
other things, groundwater protection. COGCC rules were promulgated in June
1995 requiring that all production pits and certain buried or partially buried
vessels and pits be inventoried and that, by July 1997, the buried or partially
buried produced water vessels located in sensitive areas (which include most of
the Wattenberg Field) must be tested, and any leaking vessels replaced or
repaired. New pits may need to be permitted and/or lined and new unlined pits
in sensitive areas will not be allowed. SOCO Wattenberg estimates that it has
approximately 1000 buried tanks (concrete, steel or fiberglass) throughout the
Wattenberg Field. A testing program is in place and SOCO Wattenberg is
currently unable to predict the total number of facilities that will need
remediation and closure.
The COGCC recently concluded rule making proceedings regarding
Colorado Statewide Reclamation Rules. These proposed rules address all aspects
of reclamation of land and soil affected by oil and gas operations including
well permitting, surface owner notification and consultation, site preparation
and interim and final reclamation. In addition, flowline and gathering line
construction and annual pressure testing requirements are included. SOCO
Wattenberg is unable to predict the number of facilities that will be affected
or the procedures involved.
Colorado has also adopted regulations to implement the Federal Clean
Air Act. These new regulations are not expected to have a significant impact
on SOCO Wattenberg or its operation. In the longer term, regulations under the
Federal Clean Air Act may increase the number and type of SOCO Wattenberg's
facilities that require permits, which could increase SOCO Wattenberg's cost of
operations and restrict its activities in certain areas.
LITIGATION AND CONTINGENCIES
In August 1994, five landowners in Weld County, Colorado sued Union
Pacific Resources Company ("UPRC"), SOCO Wattenberg and other defendants in
Weld County District Court, State of Colorado, challenging UPRC's reservation
of minerals in deeds occurring in the first decade of this century. In
September 1994, the case was removed to the U.S. District Court for the
District of Colorado. The defendants have filed a motion for summary judgment
asking the District Court to rule as a matter of law that UPRC owns the oil and
gas that are part of the severed mineral estate. Similar claims were made
under identical reservations by Utah and Wyoming surface owners in cases
litigated in the federal courts of those states between 1979 and 1987. In
those cases, the Federal courts held as a matter of law that, under the laws of
Utah and Wyoming, these mineral reservations unambiguously severed the mineral
estate from the surface estate and reserved to Union Pacific Railroad Company
and its successors all subsurface substances, including oil and gas. These
holdings were affirmed by the United States Court of Appeals for the Tenth
Circuit. While SOCO Wattenberg believes that the rule of law applied by the
federal courts in Utah and Wyoming should also be applied under Colorado law,
there are Colorado court decisions that could provide a basis for an
alternative interpretation. The present value of the disputed reserves on SOCO
Wattenberg's properties leased from UPRC subject to the lawsuit is estimated to
be approximately $1.25 million as of year end 1994. SOCO Wattenberg holds
approximately 13,000 net acres of other lands in the Wattenberg Field that are
subject to substantially the same mineral reservations at issue in the present
suit. An adverse interpretation of the reservations at issue is likely to
implicate UPRC's, and thus SOCO Wattenberg's, title in these other lands as
well.
In August 1995, SOCO Wattenberg was sued in the United States District
Court of Colorado by seven plaintiffs purporting to represent all persons who,
at any time since January 1, 1960, have had agreements providing for royalties
from gas production in Colorado to be paid by SOCO Wattenberg under a number of
various lease provisions. The plaintiffs allege that SOCO Wattenberg
improperly deducted unspecified
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<PAGE> 68
"post-production" costs incurred by SOCO Wattenberg prior to calculating
royalty payments in breach of the relevant lease provisions and that SOCO
Wattenberg fraudulently concealed that fact from plaintiffs. The plaintiffs
have recently amended the complaint to allege that Patina has also underpaid
royalties on oil production. The plaintiffs seek unspecified compensatory and
punitive damages and a declaratory judgment that SOCO Wattenberg is not
permitted to deduct post-production costs prior to calculating royalties paid
to the class. SOCO Wattenberg believes that its calculation of royalties are
and have been proper under the relevant lease provisions, and intends to defend
this and any similar suits vigorously.
SOCO Wattenberg is a defendant in other lawsuits relating to its
Wattenberg properties and is involved in governmental proceedings arising in
the ordinary course of business in addition to those described above. While
SOCO Wattenberg cannot predict the outcome of such litigation and other
proceedings, it does not expect those matters to have a materially adverse
effect on the results of operations or financial condition of SOCO Wattenberg.
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<PAGE> 69
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF GERRITY
The following table presents selected historical consolidated
financial data as of or for each of the years in the five year period ended
December 31, 1995 and for the six months ended June 30, 1995 and 1996,
respectively. Future results may differ substantially from historical results
because of changes in oil and natural gas prices, normal production declines
and other factors. This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of Gerrity and the Gerrity
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Information Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ----------------------
1991 1992 1993 1994 1995 1995 1996
-------- --------- --------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues . . . . . . . . . . . . . $ 15,860 $ 26,567 $ 67,313 $ 65,588 $ 53,860 $ 29,383 $ 25,053
Expenses
Oil and gas production costs . . 2,586 3,635 8,764 10,724 8,366 4,504 4,380
Depletion, depreciation and
amortization . . . . . . . . 7,214 10,460 25,414 32,458 30,333 16,131 14,003
General and administrative, net . 2,067 4,237 8,574 10,799 7,731 3,691 2,790
Interest expense . . . . . . . . 1,075 1,652 7,470 10,161 14,505 7,229 6,934
Other . . . . . . . . . . . . . . 224 239 168 670 1,113 861 453
-------- --------- --------- -------- -------- -------- --------
Total expenses . . . . . . 13,166 20,223 50,390 64,812 62,048 32,416 28,560
--------- --------- --------- -------- -------- -------- --------
Income (loss) before income taxes . 2,694 6,344 16,923 776 (8,188) (3,033) (3,507)
Benefit (provision) for income
taxes . . . . . . . . . . . . . (727) (1,269) (3,328) (41) 215 152 713
-------- --------- --------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of
accounting change . . . . . . . 1,967 5,075 13,595 735 (7,973) (2,881) (2,794)
Extraordinary item-loss on early
extinguishment of debt, net
of tax benefit of $1,200
and $127 . . . . . . . . . . . -- -- (2,629) (2,409) -- -- --
Cumulative effect of adopting FAS
109 . . . . . . . . . . . . . . -- -- 1,100 -- -- -- --
-------- --------- --------- -------- --------- -------- --------
Net income (loss) . . . . . . . . . $ 1,967 $ 5,075 $ 12,066 $ (1,674) $ (7,973) $ (2,881) $ (2,794)
======== ========= ========= ======== ======== ======== ========
Net income (loss) applicable to
common shareholders . . . . . $ 1,967 $ 5,075 $ 9,106 $ (6,228) $(12,527) $ (5,158) $ (5,071)
======== ========= ========= ======== ======== ======== ========
Per common share: (1)
Income (loss) before
extraordinary item and
cumulative effect of
accounting change . . . . . . $ .30 $ .50 $ .78 $ (.27) $ (.91) $ ( .37) N/A
Extraordinary item-loss on early
extinguishment of debt . . . . -- -- (.20) (.18) -- -- N/A
Cumulative effect of adopting
FAS 109 . . . . . . . . . . . -- -- .08 -- -- -- N/A
-------- --------- --------- -------- -------- --------
Net income (loss) . . . . . . . . $ .30 $ .50 $ .66 $ (0.45) $ (.91) $ (.37) N/A
======== ========= ========= ======== ======== ========
Weighted average shares
outstanding . . . . . . . . . 6,635 10,180 13,697 13,781 13,781 13,781 N/A
======== ========= ========= ======== ======== ========
BALANCE SHEET DATA
Current assets . . . . . . . . . $ 13,552 $ 15,461 $ 18,058 $ 15,769 $ 15,115 $ 14,021 $ 22,824
Oil and gas properties, net . . . 42,969 209,597 292,503 300,188 285,112 296,683 213,097
Total assets . . . . . . . . . . 58,875 240,615 327,808 337,690 319,549 331,203 241,780
Current liabilities . . . . . . . 6,669 27,820 45,226 25,735 21,698 18,710 22,988
Long-term debt, net of current
maturities . . . . . . . . . . 8,281 107,275 92,312 129,000 116,875 137,000 139,117
Stockholders' equity . . . . . . . 41,470 97,350 180,980 174,752 162,225 169,594 72,426
CASH FLOW DATA
Net cash provided by operating
activities . . . . . . . . . . $ 9,142 $ 16,510 $ 33,635 $ 45,702 $ 25,484 12,151 6,632
Net cash used in investing
activities . . . . . . . . . . (19,298) (176,385) (102,395) (47,968) (8,566) (16,693) (13,172)
Net cash provided by (used in)
financing activities . . . . . 19,879 155,487 62,833 2,232 (15,595) 5,682 14,173
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends . . . . . . . 3.38 4.16 1.95 .68 .32 .42 .35
</TABLE>
- ----------------
(1) Since the Merger all outstanding shares of Gerrity Common Stock have
been held by Patina and thus per common share data is not applicable
for the six months ended June 30, 1996.
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<PAGE> 70
GERRITY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Gerrity's
Consolidated Financial Statements and the Notes thereto and the Selected
Financial and Operating Data included elsewhere herein.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO 1995
Revenue. Revenue for the three and six months ended June 30, 1996 was
$12,586,000 and $25,053,000, a decrease of $2,004,000, or 14% and $4,330,000,
or 15%, respectively, as compared to the same periods in 1995. These changes
were primarily attributable to decreased average daily production partially
offset by higher average selling prices as summarized in the tables below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1995 1996 PERCENT
------- ------- -------
<S> <C> <C> <C>
Barrels of oil production per day . . . . . . 5,008 3,481 (30)
Price per barrel ("BOE") . . . . . . . . . . $ 16.17 $ 19.41 20
Mcfs of gas production per day . . . . . . . 52,170 41,610 (20)
Price per Mcf . . . . . . . . . . . . . . . . $ 1.44 $ 1.59 10
Barrels of oil equivalent production
per day . . . . . . . . . . . . . . . . . 13,703 10,415 (24)
Price per barrel equivalent . . . . . . . . . $ 11.39 $ 12.86 13
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
----------------
<S> <C>
Decrease in oil and gas sales due to production volume . . $(7,104,000)
Increase in oil and gas sales due to selling price . . . . 3,228,000
-----------
Decrease in oil and gas sales . . . . . . . . . . . . . . . $(3,876,000)
===========
</TABLE>
Oil and gas production may vary from period to period due to several
factors, including changes in weather, timing of new well hookups, timing of
recompletions, and the purchase or sale of producing properties. In response
to low commodity prices experienced throughout 1995 and 1996, Gerrity reduced
the level of its drilling and recompletion activity. More than half of a
typical Codell wells reserves are recovered in the first three years of
production. As a result, each well contributes significantly more production
in the first year than in subsequent years. Gerrity drilled and completed 860
wells and performed 282 recompletions from January 1, 1992 to December 31,
1994. As of January 1, 1995 to the present time, Gerrity has drilled and
completed 81 wells and performed 85 recompletions. Production was lower during
the three and six months ended June 30, 1996 in comparison to 1995 as a result
of all of the aforementioned factors.
In March 1996, Gerrity entered into a crude oil swap agreement in
order to hedge against the volatility in crude oil prices during the summer
months. Although Gerrity entered into the agreement to minimize exposure to
price decreases, the agreement also limits Gerrity's ability to benefit from
any significant price increases on the contract volumes. The contract volume
is for 1,500 barrels of crude oil per day during the period from July 1, 1996
through September 30, 1996. The agreements involve the cash settlement of the
differential between the contract prices (an average of $18.34 per barrel) and
the
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<PAGE> 71
average closing NYMEX crude oil price during each month. Any gain or loss
realized on these agreements will be included as a component of oil and gas
sales in the month of production.
Direct Operating Expenses. Direct operating expenses consist of lease
operating expenses and production taxes. Gerrity's costs for the three and six
months ended June 30, 1996 were $2,350,000 and $4,380,000, and increase of
$95,000, or 4%, and a decrease of $124,000, or 3%, respectively, compared to
the same periods in 1995. The overall increase for the three months ended June
30, 1996 is attributable to a reclassification of certain expenses for May and
June 1996 to direct operating expenses to present these costs on a financial
reporting basis consistent with that of SOCO. The decrease for the six months
ended June 30, 1996 is due to a reduction in field personnel throughout 1995 as
well as lower production taxes in 1996, which reflects the decrease in oil and
gas sales.
General and Administrative Expenses. General and administrative
expenses, which are net of operator fees received by Gerrity, for the three and
six months ended June 30, 1996 were $1,112,000 and $2,790,000, a decrease of
$749,000, or 40% and $901,000, or 24%, respectively, compared to the same
periods in 1995. The decreases reflect Gerrity's cost reduction plan which was
implemented in January 1995 as well as additional cost savings realized as a
result of the Merger.
Interest and Other Expenses. Interest and other expenses for the
three and six months ended June 30, 1996 was $3,589,000 and $7,015,000, a
decrease of $127,000, or 3%, and $241,000, or 3%, respectively, as compared to
the same periods in 1995. These decreases are due primarily to a decrease in
the average outstanding borrowings between 1995 and 1996 as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1995 1996
------- -------
<S> <C> <C>
Average interest rate . . . . . . . . . . . . . . 10.7% 11.0%
Average borrowings outstanding (in thousands) . . $136,709 $123,283
</TABLE>
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the three and six months ended June 30, 1996 were $7,326,000
and $14,003,000, a decrease of $743,000, or 9%, and a decrease of $2,128,000,
or 13%, respectively, compared to the same periods in 1995. As depletion is
calculated using the units-of-production method, the decrease in the six months
ended June 30, 1996 was primarily attributable to the decrease in oil and gas
production. The decrease for the three months ended June 30, 1996 also
reflects the reduction in the valuation of oil and gas properties from
historical cost to fair value as of the Merger date. Depletion costs per BOE
increased from $6.24 for the first six months of 1995 to $6.79 for the first
six months of 1996.
Restructuring expenses. Restructuring expenses for the six months
ended June 30, 1995 were $828,000. These expenses were a result of Gerrity's
cost reduction plan implemented in January 1995 and were comprised primarily of
severance benefits and to a lesser extent, office lease renegotiation costs and
the related abandonment of leasehold improvements.
Income Taxes. The difference between the benefit from income taxes
for the three and six months ended June 30, 1995 and 1996, and the amount which
would be determined by applying statutory income tax rates to income before
income taxes is due primarily to a reduction of the effective tax rate as a
result of the anticipated realization of alternative minimum tax credits and
utilization of Section 29 tax credits, respectively.
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<PAGE> 72
1995 COMPARED TO 1994
Revenue. Revenue for the year ended December 31, 1995 was
$53,860,000, a decrease of $11,728,000, or 18%, as compared to 1994. This
change was primarily attributable to decreased average daily production and
lower average selling prices as summarized in the tables below, partially
offset by increases in oil marketing income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 PERCENT
---- ---- -------
<S> <C> <C> <C>
Barrels of oil production per day 5,588 4,434 (21)
Price per barrel $ 15.19 $ 16.09 6
Mcfs of gas production per day 53,662 48,873 (9)
Price per Mcf $ 1.71 $ 1.43 (16)
Barrels of oil equivalent production per day 14,532 12,580 (13)
Price per barrel equivalent ("BOE") $ 12.17 $ 11.22 (8)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Decrease in oil and gas sales due to production volume $ (9,392,000)
Decrease in oil and gas sales due to selling price (3,650,000)
------------
Decrease in oil and gas sales $(13,042,000)
============
</TABLE>
Oil and gas production may vary from period to period due to several
factors, including changes in weather, timing of new well hookups, timing of
recompletions, voluntary curtailment of certain gas production and the purchase
or sale of producing properties. In response to low commodity prices
experienced throughout 1995, Gerrity reduced the level of its drilling and
recompletion activity. Production was lower in the year ended December 31,
1995 in comparison to 1994 as a result of all of the aforementioned factors.
In April 1995, Gerrity entered into two crude oil swap agreements in
order to hedge against the volatility in crude oil prices during the spring and
summer months. Although Gerrity entered into the agreements to minimize
exposure to price decreases, the agreements also limited Gerrity's ability to
benefit from any significant price increases on the contract volumes. The
total contract volume was for 2,000 barrels of crude oil per day during the
period from May 1, 1995 through August 31, 1995 (or approximately 10% of
Gerrity's 1995 total oil production including trading activities). The
agreements involved the cash settlement of the differential between the
contract price (an average of $19.44) and the average closing NYMEX crude oil
price during each month. The $280,000 gain realized on these agreements has
been included as a component of oil and gas sales in the period of production.
Gerrity was not a party to any product swap or hedge agreements at December 31,
1995.
Oil and Gas Production Costs. Oil and gas production costs consist of
lease operating expenses and production taxes. Gerrity's oil and gas
production costs for the year ended December 31, 1995 were $8,366,000, a
decrease of $2,358,000, or 22%, compared to 1994. This decrease was partially
attributable to lower production taxes in 1995, which were the result of lower
oil and gas sales. Lease operating expenses were also lower, primarily as a
result of lower lease and road maintenance costs and a reduction in field
personnel throughout 1995.
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the year ended December 31, 1995 was $30,333,000, a decrease
of $2,125,000, or 7%, compared to 1994. As depletion is calculated using the
units-of-production method, the decrease in the year ended December 31, 1995
was attributable to the decrease in oil and gas production. Depletion costs
per BOE
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<PAGE> 73
increased from $5.86 for 1994 to $6.33 for 1995. A commodity price decrease
generally decreases total proved reserves, thereby increasing the depletion
rate.
General and Administrative Expenses, Net. General and administrative
expenses, which are net of operator fees received by Gerrity, for the year
ended December 31, 1995 were $7,731,000, a decrease of $3,068,000, or 28%,
compared to 1994. This decrease is primarily the result of Gerrity's cost
reduction plan implemented in January 1995 in response to continued low
commodity prices. The plan included staff reductions throughout the
organization, which resulted in lower expenses, including salaries, rent and
related expenses. The 28% decrease was slightly below the 30% reduction
targeted by management as a result of higher than anticipated legal expenses.
Interest Expense. Interest expense for the year ended December 31,
1995 was $14,505,000, an increase of $4,344,000, or 43%, as compared to 1994.
This increase is due primarily to an increase in the average interest rate of
Gerrity's outstanding borrowings between 1994 and 1995 and to an increase in
the average borrowings outstanding as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995
------- -------
<S> <C> <C>
Average interest rate 8.65% 10.9%
Average borrowings outstanding (in thousands) $122,400 $134,000
</TABLE>
Gerrity's weighted average interest rate increased commencing in July
1994 as a result of its issuance of $100,000,000 of 11 3/4% Senior Subordinated
Notes due July 15, 2004. Additionally, short term interest rates applicable to
Gerrity's revolving credit agreement have increased.
Restructuring Expenses. Restructuring expenses for the year ended
December 31, 1995 were $828,000. These expenses were a result of Gerrity's
cost reduction plan implemented in January 1995 and were comprised primarily of
severance benefits and to a lesser extent, office lease renegotiation costs and
the related abandonment of leasehold improvements.
Income Taxes. The difference between the benefit (provision) for
income taxes for the years ended December 31, 1994 and 1995, and the amount
which would be determined by applying statutory income tax rates to income
(loss) before income taxes is due primarily to a reduction in federal income
taxes payable or refundable as a result of Section 29 tax credits. The benefit
recorded for the 1995 net operating loss for federal income tax purposes is
less than the statutory rate as it will be carried back to years in which the
original tax was reduced by Section 29 credits. Due to the sale of the
property interests in October 1995, no significant Section 29 credits will be
available to Gerrity in the future.
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<PAGE> 74
1994 COMPARED TO 1993
Revenue. Revenue for the year ended December 31, 1994 was
$65,588,000, a decrease of $1,725,000, or 3%, as compared to 1993. This
decrease was primarily attributable to lower oil and gas prices, partially
offset by higher average daily production as summarized in the tables below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 PERCENT
---- ---- -------
<S> <C> <C> <C>
Barrels of oil production per day 5,000 5,588 12
Price per barrel $ 16.28 $ 15.19 (7)
Mcfs of gas production per day 49,255 53,662 9
Price per Mcf $ 1.97 $ 1.71 (13)
Barrels of oil equivalent production per day 13,209 14,532 10
Price per barrel equivalent ("BOE") $ 13.51 $ 12.17 (10)
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Increase in oil and gas sales due to production volume $ 6,667,000
Decrease in oil and gas sales due to selling price (7,225,000)
-----------
Net decrease in oil and gas sales $ (558,000)
===========
</TABLE>
Oil and gas production increased during the year ended December 31,
1994 as a result of a full year of production from Gerrity's 1993 drilling and
recompletion program and a partial year of production from Gerrity's 1994
program. Gerrity successfully completed 469 wells and performed 109
behind-the-pipe recompletions during 1993. In 1994, Gerrity successfully
completed 113 wells and performed 130 behind-the-pipe recompletions.
Oil and Gas Production Costs. Oil and gas production costs consist of
lease operating expenses and production taxes. Gerrity's oil and gas
production costs for the year ended December 31, 1994 were $10,724,000, an
increase of $1,960,000, or 22%, as compared to 1993. Lease operating expenses
were higher as a result of the increase in the number of wells operated for the
full year and Gerrity's increased focus on production subsequent to the 1993
drilling program, resulting in higher lease, well and road maintenance and
workover expenditures. Management believes that this increased focus on
production also contributed to the 10% increase in production volumes.
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the year ended December 31, 1994 was $32,458,000, an increase
of $7,044,000, or 28%, as compared to 1993. As depletion is calculated using
the units-of-production method, the increase for the year is partially
attributable to the increase in oil and gas production and partially
attributable to higher capitalized costs subsequent to the 1993 and 1994
drilling and recompletion programs and the lower commodity prices received by
Gerrity in 1994 in comparison to 1993. A price decrease generally decreases
total proved reserves, thereby increasing the depletion rate. Depletion costs
per BOE were $5.86 in 1994 as compared to $5.00 in 1993.
General and Administrative Expenses, Net. General and administrative
expenses, which are net of operator fees received by Gerrity, were $10,799,000
for the year ended December 31, 1994, an increase of $2,225,000, or 26%, as
compared to 1993. The increased expense resulted from an increase in staff to
accommodate the higher level of drilling and recompletion activity during 1993
and to accommodate plans for future growth, which resulted in increases in
salaries, rent and related expenses. Legal expenses incurred in the settlement
of several lawsuits also contributed to the 1994 increase in expenses.
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<PAGE> 75
Interest Expense. Interest expense for the year ended December 31,
1994 was $10,161,000, an increase of $2,691,000, or 36%, as compared to 1993.
The increase is due primarily to an increase in the average interest rate on
Gerrity's outstanding borrowings between 1993 and 1994 and to an increase in
the average borrowings outstanding as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994
------- -------
<S> <C> <C>
Average interest rate 7.08% 8.65%
Average borrowings outstanding (in thousands) $111,500 $122,400
</TABLE>
Gerrity's average interest rate increased in 1994 as a result of its
issuance of $100,000,000 of 11 3/4% Senior Subordinated Notes in June 1994 and
to the significant increase in short term prime and LIBOR borrowing rates
during 1994 applicable to Gerrity's revolving credit agreement.
Income Taxes. The difference between the provision for income taxes
and the amount which would be determined by applying statutory income tax rates
to income before income taxes is due primarily to a reduction in federal income
taxes as a result of the utilization of Section 29 credits. The effective tax
rate is higher in 1993 in comparison to 1994, as the amount of Section 29
credits which may be utilized by Gerrity in any year is effectively limited to
the current federal regular income taxes for that year. Net income for 1993
was further increased by a one time benefit of $1,100,000 recorded upon the
adoption of FAS 109, effective January 1, 1993.
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities. In conjunction with the Merger, Gerrity entered
into a new Bank Credit Agreement dated as of May 2, 1996 with Texas Commerce
Bank National Association, as administrative agent, NationsBank of Texas, N.A.,
a documentary agent, Wells Fargo Bank, N.A., CIBC, Inc. and Credit Lyonnais, as
co-agents. Gerrity's Credit Agreement currently includes commitments to lend up
to $51,000,000 to Gerrity. Borrowings under the Credit Agreement are secured by
a pledge of the stock of all of Gerrity's subsidiaries and a mortgage on
substantially all of Gerrity's oil and gas properties. As of June 30, 1996,
Gerrity had $34,500,000 of outstanding borrowings and $16,500,000 available for
borrowing under the Bank Credit Agreement ($14,000,000 of which is reserved for
acquisition of Gerrity's 11 3/4% Senior Subordinated Notes. The average
interest rate on outstanding borrowings under the Bank Credit Agreement at June
30, 1996 was 7.19%.
The amount available to be drawn by Gerrity under the Credit Agreement
is subject to a borrowing base (the "Borrowing Base"), which is based upon the
Lenders' determination of the amount of Indebtedness (as defined in the Credit
Agreement) for borrowed money that can be supported by Gerrity's proved oil and
gas reserves. The Borrowing Base is generally determined semi-annually, but
may be redetermined, at the option of either Gerrity or the Lenders, one
additional time each year, and will be redetermined on certain sales of assets
included in the Borrowing Base. Until the next scheduled redetermination, the
Borrowing Base has been set at $51,000,000.
The bank credit agreement contains certain financial covenants,
including but not limited to a maximum total debt to recapitalization ratio, a
maximum total debt to EBITDA ratio and a maximum current ratio. The bank
credit agreement also contains certain negative covenants, including but not
limited to restrictions on indebtedness; certain liens, guaranties, speculative
derivatives and other similar obligations; asset dispositions; dividends, loans
and advances; creation of subsidiaries; investments; leases; acquisitions;
mergers; changes in fiscal year; transactions with affiliates; changes in
business conducted; sale and leaseback and operating lease transactions; sale
of receivables; prepayment of other indebtedness; amendments to principal
documents; negative pledge clauses; issuance of securities; and non-speculative
commodity hedging.
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<PAGE> 76
Gerrity's 11 3/4% Senior Subordinated Notes due July 15, 2004 contain
covenants that, among other things, limit the ability of Gerrity to incur
additional indebtedness. Specifically, the Notes restrict Gerrity from
incurring indebtedness (exclusive of the Notes) in excess of approximately
$51,000,000, if after giving effect to the incurrence of such additional
indebtedness and the receipt and application of the proceeds therefrom,
Gerrity's interest coverage ratio is less than 2.5:1 or adjusted consolidated
net tangible assets is less than 150% of the aggregate indebtedness of Gerrity.
Gerrity is currently in compliance with the net tangible asset covenant.
Gerrity currently does not meet the interest coverage ratio necessary to incur
indebtedness in excess of approximately $51,000,000 primarily as a result of
lower than anticipated commodity prices. Gerrity is of the opinion that this
will have no materially adverse effect on its financial condition.
On May 6, 1993, Gerrity completed a private placement of 379,500
shares (represented by 3,036,000 Depositary Shares) of its $12 Convertible
Preferred Stock. Gerrity received net proceeds of $72,508,000 from the
offering, a portion of which was used in May 1993 to retire $25,000,000 of
debt. The remaining net proceeds from the offering were used to fund a portion
of Gerrity's accelerated development drilling and recompletion program. Each
share of Convertible Preferred Stock has a liquidation preference of $200 and
annual cumulative dividends of $12, when and if declared by the Board of
Directors of Gerrity. During 1993, 1994 and 1995, dividends of $2,390,850,
$4,554,000 and $4,554,000, respectively, were declared and paid to the holders
of record. In January 1996, the Board of Directors of Gerrity declared a
dividend of $1,138,500 ($3.00 per share) which was paid on February 15, 1996.
Each share of Convertible Preferred Stock is convertible at any time
at the option of the holder, unless previously redeemed, at a rate of 10.392
shares of Gerrity's Common Stock, subject to adjustments for certain dilutive
events. The Convertible Preferred Stock is not redeemable by Gerrity prior to
May 23, 1996. On or after such date it will be redeemable by Gerrity in whole
or in part at any time at $208.40 per share of Convertible Preferred Stock,
declining ratably to $200 per share of Convertible Preferred Stock on or after
May 23, 2003.
Investing Activities. Gerrity's drilling activities require
significant capital. During the six months ended June 30, 1996, Gerrity
performed 46 recompletions. Net cash used in investing activities was
$13,172,000. These capital expenditures were financed through cash provided by
operating activities of $6,632,000 and through net borrowings under the Credit
Agreement totaling $15,312,000. Net cash provided by financing activities was
$14,173,000. As a result of continued low Rocky Mountain natural gas prices,
Gerrity's capital expenditures for 1996, exclusive of acquisitions, are
currently estimated to be approximately $8,500,000 to $10,000,000. Gerrity
continually evaluates the drilling budget and may increase or decrease its
development program in response to market conditions.
During 1993, 1994 and 1995, Gerrity drilled 472, 114 and 76 oil and
gas development wells and performed 109, 130 and 39 recompletions,
respectively. Capital expenditures incurred for property acquisition,
exploration and development were approximately $106,000,000 in 1993,
$40,000,000 in 1994 and $18,000,000 in 1995. See Note 9 of Notes to
Consolidated Financial Statements. Net cash used in investing activities was
$102,395,000, $47,968,000 and $8,566,000 in 1993, 1994 and 1995 respectively.
These capital expenditures have been financed with the proceeds of the May 1993
Convertible Preferred Stock offering additional borrowings under the Credit
Agreement, and cash flow provided by operating activities. Net cash provided
by (used in) financing activities was $62,833,000, $2,232,000 and $(15,595,000)
in 1993, 1994 and 1995, respectively.
On October 13, 1995, Gerrity received $9,550,000 from an unaffiliated
third party from the sale of an interest in certain of its properties in the
D-J Basin. The sale will enable the purchaser to earn tax credits associated
with future natural gas production from the properties. Gerrity reserved a
variable production payment that generally will entitle Gerrity to 90% of the
net cash flow from the properties. Gerrity will continue to operate the
properties and market the related oil and gas production. Additionally,
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<PAGE> 77
Gerrity has the right to repurchase the property interest effective January 1,
2004. Gerrity has recorded the sale proceeds, net of transaction costs of
$154,000, as unearned revenue that will be amortized into revenue on a units of
production method. The proceeds were utilized to prepay principal outstanding
on Gerrity's revolving Credit Agreement.
Financial Condition and Strategy. Gerrity had working capital deficits
of $6,583,000 and $164,000 at December 31, 1995 and June 30, 1996, respectively.
Gerrity has historically maintained a working capital deficit as cash flows from
operations have been sufficient to meet its working capital needs. At June 30,
1996, Gerrity had an additional $16,500,000 of available borrowings pursuant to
the terms of its Credit Agreement.
Gerrity had working capital deficits of $27,168,000, $9,966,000 and
$6,583,000 as of December 31, 1993, 1994 and 1995, respectively. The increased
working capital deficit in 1993 was primarily attributable to an increase in
current maturities of long-term debt which were due under a previous credit
agreement. Gerrity has historically maintained a working capital deficit as
cash flows from operations have been sufficient to meet its working capital
needs, a strategy management expects to continue. At December 31, 1995,
Gerrity had an additional $14,000,000 of available borrowings under its Credit
Agreement, subject to the Borrowing Base determinations discussed above, should
amounts in excess of cash flows from operations be required.
Since its inception, Gerrity has pursued strategy of maintaining
strict control over drilling and operating costs while expanding its business
through the acquisition and subsequent development of producing properties and
undeveloped acreage in the D-J Basin. Gerrity exploits its oil and gas
properties through the implementation of operational improvements, workovers,
multi-zone recompletions and the drilling of new development or infill wells at
lower costs than most of its competition. Gerrity will continue to maintain
its focus on low cost operations and intends to increase its reserve base,
production and cash flow through (i) investing in basins where Gerrity can
utilize its experience as a low-cost operator, (ii) using available cash flows
to continue to exploit its existing properties in the D-J Basin and (iii)
reducing debt levels in a low commodity price environment. Gerrity believes
that the financial flexibility resulting from no scheduled maturities of debt
until December 31, 1996 provides enhanced opportunities in a low oil and gas
price environment. During 1995, Gerrity performed 115 well completions and was
in the process of completing an additional 9 wells at December 31, 1995.
Capital expenditures incurred for property acquisition, exploration and
development were approximately $18,000,000. As a result of the continued low
commodity prices, Gerrity's capital expenditures for 1996, exclusive of
acquisitions, are currently estimated to be approximately $10,000,000 to
$15,000,000. Gerrity continually evaluates the drilling budget and may
increase or decrease its development program in response to market conditions
as the year progresses.
Gerrity will continue to focus on generating the highest rates of
return on its capital in 1996 primarily through selective developmental
drilling and recompletion activity in proved nonproducing uphole formations in
existing wellbores. Gerrity plans to fund its planned capital expenditures
with cash flow from operating activities. During 1993, 1994 and 1995,
Gerrity's cash flow from operating activities was $33,635,000, $45,702,000 and
$25,484,000, respectively. The increase between 1993 and 1994 is primarily
attributable to increases in payables associated with operating activities.
Gerrity management anticipates that Gerrity's cash flows from operations and
available credit facilities will be sufficient to meet its working capital
needs for the next two years.
Gerrity routinely compares its liquidity requirements and alternative
uses of capital against estimated future cash flows and the estimated sales
value of properties. As a result of this process, Gerrity has in the past and
may in the future seek to raise additional capital, refinance or restructure
indebtedness, modify its preferred dividend policy, consider the sale of
interests in subsidiaries or other assets, or take a combination of such steps
or other steps, to increase liquidity, reduce indebtedness and fund future
activities. Gerrity routinely evaluates acquisitions of interests in, or
combinations with, companies perceived by management to be undervalued in the
marketplace. Gerrity intends to consider
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<PAGE> 78
such acquisition activities in the future and, in connection with this
activity, may consider issuing additional equity securities and increasing the
indebtedness of Gerrity or its subsidiaries.
INFLATION AND CHANGES IN PRICES
While certain of Gerrity's costs are affected by the general level of
inflation, factors unique to the petroleum industry result in independent price
fluctuations. Over the past five years, significant fluctuations have occurred
in oil and gas prices. Although it is particularly difficult to estimate
future prices of oil and gas, price fluctuations have had, and will continue to
have, a material effect on Gerrity.
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<PAGE> 79
SELECTED QUARTERLY FINANCIAL DATA FOR GERRITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM
<TABLE>
<CAPTION>
INCOME (LOSS) NET NET INCOME
BEFORE PER INCOME (LOSS) PER
REVENUE INCOME TAXES TOTAL SHARE(1) (LOSS) SHARE(1)
------- ------------ ----- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
1994
----
First Quarter $15,342 $ 2,260 $ 1,763 $ .05 $ 1,763 $ .05
Second Quarter 18,810 2,867 2,236 .08 2,236 .08
Third Quarter 15,968 (2,269) (1,339) (.18) (3,748)(2) (.36)
Fourth Quarter 15,468 (2,082) (1,925) (.22) (1,925)(3) (.22)
1995
----
First Quarter $14,793 $(1,719) $(1,633) $(.20) $(1,633)(4) $(.20)
Second Quarter 14,590 (1,314) (1,248) (.17) (1,248) (.17)
Third Quarter 12,022 (2,599) (2,536) (.27) (2,536) (.27)
Fourth Quarter 12,455 (2,556) (2,556) (.27) (2,556) (.27)
1996
----
First Quarter $12,467 $(1,385) $ (915) $ (.15) $ (915) $(.15)
Second Quarter $12,586 $(2,122) $(1,879) N/A $(1,879) N/A
</TABLE>
(1) Calculated after deduction of cumulative dividends on Gerrity
Preferred Stock.
(2) Includes loss on early extinguishment of debt of $2,409 (net of tax
benefit).
(3) Includes an approximate $300 adjustment to production taxes relating
to audit assessments.
(4) Includes $828 of restructuring expenses relating to Gerrity's cost
reduction plan implemented in January 1995.
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<PAGE> 80
INFORMATION CONCERNING GERRITY
GENERAL
Gerrity is an independent energy company primarily engaged in the
drilling of low risk oil and gas development wells. Gerrity was formed in June
1990 to consolidate the oil and gas interests and operations of several
entities in the D-J Basin.
Since its inception, Gerrity has pursued a strategy of maintaining
strict control over drilling and operating costs while expanding its business
through the acquisition and subsequent development of producing properties and
undeveloped acreage in the D-J Basin. Since early 1995, Gerrity has taken
advantage of low entry cost opportunities to accumulate approximately 100,000
undeveloped acres in the Uinta Basin in northeastern Utah. Gerrity exploits
its oil and gas properties through the implementation of operational
improvements, workovers, multi-zone recompletions and the drilling of new
development or infill wells. The following table illustrates Gerrity's proved
reserves and annual production from 1991 through 1995:
<TABLE>
<CAPTION>
PROVED RESERVES PRODUCTION
--------------- ----------
OIL GAS TOTAL TOTAL OIL GAS TOTAL TOTAL
YEAR (MMBBL) (BCF) (MMBOE) (BCFE) (MMBBL) (BCF) (MMBOE) (BCFE)
- ---- ------- ----- ------- ------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991 4.1 50.4 12.5 75.3 0.4 4.2 1.1 6.7
1992 16.4 185.2 47.3 283.3 0.7 7.1 1.9 11.5
1993 17.9 208.3 52.6 315.5 1.8 18.0 4.8 28.9
1994 21.3 237.0 60.8 364.8 2.0 19.6 5.3 31.6
1995 16.8 206.3 51.2 307.0 1.6 17.8 4.6 27.5
</TABLE>
In response to lower commodity prices throughout 1995, Gerrity reduced
the level of its drilling and recompletion activity. During 1995, Gerrity
drilled 76 development wells in 1995, all of which were commercially
successful, and performed 39 behind-the-pipe recompletions in various
formations on existing wells. In addition, Gerrity was in the process of
drilling five development wells in 1995, all of which are expected to be
successfully completed in 1996, drilling one exploratory well and recompleting
an additional three wells at year end. Over the past five years, Gerrity has
drilled 1,033 wells, 1,024 of which were commercially successful. In the first
six months of 1996, Gerrity drilled no additional wells. As of June 30, 1996,
Gerrity operated 1,750 wells, and owned interests in 73 wells it did not
operate, producing from the Parkman, Sussex, Shannon, Codell, Niobrara, J-sand
and Dakota formations in Wattenberg. Based on the estimates of NSAI, at
December 31, 1995, Gerrity had net proved reserves of 16,785 MBbls of oil and
206,321 MMcf of natural gas, with a pretax net present value of approximately
$223,865,000 (assuming oil and gas prices and production costs remain constant,
and the stream of net revenues is discounted at 10% per year). Gerrity's ratio
of reserves to production was 11.1 years.
As of June 30, 1996, Gerrity had identified over 1,000 drill sites on
its existing properties, including 561 with estimated net proved undeveloped
reserves of 12,551 MBOE at December 31, 1995. In addition, Gerrity has
identified approximately 715 recompletion opportunities. Gerrity has
historically completed its wells in the Codell formation while evaluating
shallower formations for possible recompletion.
Gerrity believes that its substantial experience in Wattenberg, the
economies of scale associated with drilling and operating large numbers of
similar wells and Gerrity's stringent cost controls enable it to exploit its
oil and gas properties at a lower cost than many of its competitors. From
January 1, 1991 through December 31, 1995, Gerrity's average finding and
development costs were $5.84 per BOE and its average lease operating expense
was $1.03 per BOE. As a result of these low costs, Gerrity believes that it is
able to successfully develop acreage that could not be drilled economically by
most of its competitors. These lower operating costs not only increase
Gerrity's gross profit on the sale of production, but also extend the economic
life of its wells.
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<PAGE> 81
PROPERTIES
Wattenberg. The Wattenberg Field, discovered in 1970, is located
approximately 35 miles north of Denver in the D-J Basin in Adams, Boulder and
Weld Counties, Colorado. Gerrity's Wattenberg production is from the Parkman,
Sussex, Shannon, Codell, Niobrara, J-sand and Dakota formations. As of
December 31, 1995, Gerrity's net proved developed and undeveloped reserves in
Wattenberg were estimated at 16,778 MBbls of oil and 204,137 MMcf of natural
gas. As of December 31, 1995, Gerrity owned 100% of the working interest in
each of 1,467 producing wells in Wattenberg, between 1.19% and 99.84% of the
working interest in an additional 357 wells, an average 95% working interest in
830 proved developed non-producing formations and an average 89% working
interest in 561 drillsites with proved undeveloped reserves. As of December
31, 1995, Gerrity operated 1,750 wells in which it owned an interest.
Uinta Basin. The Uinta Basin is located in the northeast portion of
Utah. The principal producing formations are the Green River, Wasatch and
Mesaverde. Gerrity operated five gas wells and one salt water disposal well in
the eastern portion of the Uinta Basin. At December 31, 1995, Gerrity had one
exploratory well in progress. As of December 31, 1995, Gerrity's net proved
developed and undeveloped reserves were estimated at 6.7 MBbls of oil and 2,185
MMcf of gas. In July of 1996, Gerrity sold certain undeveloped acreage and all
of its producing properties located in the Uinta Basin. Such properties
comprised approximately 46,035 gross and 40,411 net.
ACREAGE
The following table sets forth the gross and net acres of developed
and undeveloped oil and gas leases held by Gerrity as of December 31, 1995.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------------- -------------------
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
Colorado 80,111 65,492 46,824 36,674
Utah 1,600 1,000 62,929 57,905
------ ------ ------- ------
Total 81,711 66,492 109,753 94,579
====== ====== ======= ======
</TABLE>
Subsequent to December 31, 1995, and through June 30, 1996, Gerrity
has acquired an additional 41,871 gross (40,274 net) undeveloped acres in Utah.
OIL AND GAS RESERVES
The following table summarizes the estimate of Gerrity's net proved
developed and undeveloped reserves as of December 31, 1995 prepared by NSAI.
<TABLE>
<CAPTION>
PROVED RESERVES(1)
------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -----
<S> <C> <C> <C>
Crude oil and liquids (MBbl) 11,573 5,212 16,785
Natural gas (MMcf) 162,286 44,035 206,321
Equivalent barrels (MBOE) 38,621 12,551 51,172
Future net cash flow before
income taxes (in thousands) $347,966 $62,450 $410,416
Future net cash flow after income
taxes (in thousands) -- -- $347,045
Pretax PW10% Value (in thousands) $207,564 $16,301 $223,865
After tax PW 10% Value (in thousands) -- -- $196,211
</TABLE>
(1) For purposes of estimating Gerrity's net proved developed and
undeveloped reserves as of December 31, 1995, NSAI prepared such
reserves on a basis consistent with Patina's methodology of estimating
reserves relating to final decline rates and the exclusion of proved
undeveloped
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<PAGE> 82
reserves with positive future net revenue but negative present value
when discounted at 10 percent. This methodology represents a change
from Gerrity's estimated proved reserves as of December 31, 1994
prepared by NSAI, resulting in an estimated reduction in proved
reserves of approximately five million barrels of oil equivalent and
no material change in present value before income taxes.
The quantities and values in the preceding tables are based on prices
in effect at December 31, 1995, averaging $18.75 per barrel of oil and $1.77
per Mcf of gas. Price reductions decrease reserve values by lowering the
future net revenues attributable to the reserves and also by reducing the
quantities of reserves that are recoverable on an economic basis. Price
increases have the opposite effect. Any significant decline in prices of oil
or gas could have a material adverse effect on Gerrity's financial condition
and results of operations.
Proved developed reserves are proved reserves that are expected to be
recovered from existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserves that are expected to be
recovered from new wells drilled to known reservoirs on undrilled acreage for
which the existence and recoverability of such reserves can be estimated with
reasonable certainty, or from existing wells where a relatively major
expenditure is required to establish production.
Future prices received for production and future production costs may
vary, perhaps significantly, from the prices and costs assumed for purposes of
these estimates. There can be no assurance that the proved reserves will be
developed within the periods indicated or that prices and costs will remain
constant. There can be no assurance that actual production will equal the
estimated amounts used in the preparation of reserve projections.
The present value shown should not be construed as the current market
value of the reserves. The 10% discount factor used to calculate present
value, which is specified by the Commission, is not necessarily the most
appropriate discount rate, and present value, no matter what discount rate is
used, is materially affected by assumptions as to timing of future production,
which may prove to be inaccurate. In addition, the calculation of estimated
future net revenues does not take into account the effect of various cash
outlays, including, among other things, general and administrative costs and
interest expense.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. The data in the above tables represent estimates
only. Oil and gas reserve engineering must be recognized as a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact way, and estimates of other engineers might differ
materially from those shown above. The accuracy of any reserve estimate is a
function of the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing and production after
the date of the estimate may justify revisions. Accordingly, reserve estimates
are often materially different from the quantities of oil and gas that are
ultimately recovered.
For further information concerning the discounted future net cash
flows from these proved reserves, see Note 9 of Notes to Gerrity's Consolidated
Financial Statements.
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<PAGE> 83
PRODUCTION
The following table sets forth Gerrity's oil and gas production data
for each of the last three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net production
Crude oil and liquids (MBbl) 1,825 2,040 1,618
Natural gas (MMcf) 17,978 19,587 17,839
Equivalent oil (MBOE) 4,821 5,304 4,592
Average sales price
Crude oil and liquids (Bbl) $ 16.28 $ 15.19 $ 16.09
Natural gas (Mcf) $ 1.97 $ 1.71 $ 1.43
Average direct operating expense ($/BOE) $ 1.82 $ 2.02 $ 1.82
</TABLE>
DRILLING ACTIVITIES
During the three years ended December 31, 1995, capital expenditures,
including exploration costs, were approximately $163,471,000. See Note 9 of
Notes to Consolidated Financial Statements. The following table sets forth the
wells drilled and completed by Gerrity for each of the last three years.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Development:
Oil 427.0 423.9 107.0 105.6 73.0 72.9
Gas 42.0 41.4 6.0 6.0 2.0 2.0
Non-productive 3.0 2.8 1.0 1.0 -- --
----- ----- ----- ----- ---- ----
Total 472.0 468.1 114.0 112.6 75.0 74.9
===== ===== ===== ===== ==== ====
Exploratory:
Oil -- -- -- -- -- --
Gas -- -- -- -- 1.0 1.0
Non-productive -- -- -- -- -- --
----- ----- ----- ----- ---- ----
Total -- -- -- -- 1.0 1.0
===== ===== ===== ===== ==== ====
</TABLE>
Gerrity owned a working interest in 1,625 gross (1,560 net) producing
oil wells and 204 gross (178 net) producing gas wells as of December 31, 1995.
A well is categorized as an oil well or a gas well based upon the ratio of gas
to oil produced when it first commences production. However, substantially all
of Gerrity's wells produce both oil and gas. From January 1, 1996 to June 30,
1996, Gerrity had completed or was in the process of completing one additional
well.
COMPETITION AND MARKETS
The oil and gas industry is highly competitive. Gerrity competes in
the areas of oil and gas development, acquisitions, production, exploration and
marketing with major oil companies, other independent oil and gas concerns and
individual producers and operators. Many of these competitors have
substantially greater financial and other resources than Gerrity.
There are a variety of factors which affect the market for oil and
gas, including the extent of domestic production and imports of oil and gas,
the proximity and capacity of natural gas pipelines and other transportation
facilities, local, national and worldwide demand for oil and gas, the marketing
of competitive alternate fuels and the effects of state and federal regulation
of oil and gas production and sales. The oil and gas industry also competes
with other industries in supplying the energy and fuel requirements of
industrial, commercial and individual customers.
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<PAGE> 84
Approximately 50% of the gas produced from the wells Gerrity operates
in the Wattenberg Field is sold under several separate agreements with
Associated Natural Gas, Inc. ("ANGC"). Pursuant to these agreements, Gerrity
receives a fixed percentage of the proceeds of ANGC's sales of gas, which are
made primarily under long-term market sensitive contracts, as well as a fixed
percentage of the proceeds of ANGC's sales of gas liquids. Agreements relating
to over 90% of the gas produced and sold to ANGC remain in effect for the
economic life of ANGC's gas processing facilities, which Gerrity expects to
exceed the economic life of the wells. One agreement may be terminated by
either party after 1998. None of these contracts require Gerrity to deliver
any specified amount of gas.
A portion of the balance of the gas produced is gathered by KN Front
Range Gathering Company under competitive terms, and processed by Amoco at the
Wattenberg Processing Plant under a favorable contract that not only provides
payment for a percentage of the liquids stripped from the gas but also
redelivers the same amount of MMBtu as was produced under a "keepwhole"
arrangement. This agreement remains in effect until December 2012. The
residue gas is sold under seasonal spot market arrangements to markets on the
front range of Colorado or transported under favorable gas transportation
contracts to Midwest markets.
As a part of a settlement agreement entered into with Vessels Gas
Processing, Inc. ("Vessels"), Gerrity will deliver an average of 4,000 MMBtu
per day to the Vessels Ft. Lupton gas processing facility through November 30,
1997 to be processed under competitive processing terms. Upon execution of all
final agreements made part of this settlement, Gerrity agreed to deliver an
additional 1,000 MMBtu per day to the plant for three years to be processed at
below market terms. Gerrity has reserved the right to market all residue gas
processed by Vessels and receives a fixed percentage of the proceeds from the
sale of gas liquids by Vessels.
Gerrity markets its oil to GTT through short-term contracts. GTT
aggregates volumes of oil and is responsible for quality control. GTT resells
the oil to purchasers and also directly to a local refinery. The production is
sold at the wellhead to GTT under arrangements equal to the local market
posting for crude oil. During 1995, the majority of oil produced by Gerrity
was sold to Associated Transport & Trading Co. ("ATTCO", an affiliate of ANGC),
Amoco and EOTT Energy Partners L.P. None of these contracts require any
specified amount of oil. In addition to its activities marketing Gerrity's
oil, GTT batches volumes of oil suitable for trades at Cushing, Oklahoma where
quantities are traded on the open market.
ANGC/ATTCO and Amoco each purchased production from Gerrity in 1995
that exceeded 10% of Gerrity's consolidated revenues. See Note 9 of Notes to
Consolidated Financial Statements. None of these customers is related to
Gerrity other than as a purchaser of production. Although management does not
believe that the loss of one or more of these customers would have a material
adverse effect on Gerrity in the long term, it could adversely affect cash
flows until other marketing arrangements were made. To date, Gerrity has not
experienced any difficulty in marketing its oil or gas.
REGULATION
The production and sale of oil and gas are subject to various federal,
state and local governmental regulations, which may be changed from time to
time in response to economic or political conditions. Matters subject to
regulation include permits for drilling operations, drilling bonds, reports
concerning operations, the spacing of wells, unitization and pooling of
properties, taxation and environmental protection. Changes in state statutes,
rules and regulations affecting oil and gas companies may render drilling in
certain locations more expensive or uneconomical due to increased surface owner
compensation, bonding requirements or environmental regulatory constraints.
Colorado's statute concerning oil and gas development was amended in
1994 to provide the state's Oil and Gas Conservation Commission with additional
authority to regulate oil and gas activities to protect public health, safety
and welfare, as well as the environment. Several rulemakings pursuant to these
statutory changes have, or will be, undertaken by the Commission to revise the
regulation of groundwater protection, soil protection and site reclamation, and
financial assurance for industry obligations in these areas. To date,
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<PAGE> 85
these rule changes have not adversely affected oil and gas operations of
Gerrity, as the Commission is required to enact cost-effective and technically
feasible regulations. However, there can be no assurance that, in the
aggregate, these regulatory developments will not increase the costs of
conducting oil and gas activities in Colorado.
Additionally, various cities and counties in which Gerrity operates
have asserted additional regulatory authority over oil and gas operations. At
present, this additional local regulation has not adversely impacted Gerrity's
operations. In addition, Colorado case law prohibits such local regulation
from preventing the drilling of wells or conflicting with regulations
promulgated by the Oil and Gas Conservation Commission. However, Gerrity is
unable to predict if or to what degree stricter local regulation would impact
Gerrity's operations.
In order to promote competition, the FERC has issued a series of
orders which have restructured the interstate natural gas transportation and
marketing system. To date, Gerrity has not experienced any material adverse
effect as a result of these FERC orders. However, there can be no assurance
that Gerrity's production of natural gas will not be subject to federal
regulation in the future and it is not possible to predict what effect such
regulations may have on its future gas marketing.
LEGAL PROCEEDINGS
In January 1996, Gerrity and three other producers were served in a
suit brought in the state district court in the City and County of Denver,
Colorado by five plaintiffs purporting to represent all persons who, at any
time since January 1, 1960, have had agreements providing for royalties from
gas production in Colorado to be paid by Gerrity under a number of lease
provisions. The plaintiffs allege that Gerrity improperly deducted unspecified
"post-production" costs incurred prior to calculating royalty payments in
breach of the relevant lease provisions and that Gerrity fraudulently concealed
that fact from plaintiffs. The plaintiffs seek unspecified compensatory and
punitive damages and a declaratory judgment that Gerrity was not permitted to
deduct post-production costs prior to calculating royalties payable to the
class. Gerrity believes that costs deducted by it in calculating royalties are
and have been proper under the relevant lease and other applicable provisions,
and intends to defend this and any similar suits vigorously. At this time,
Gerrity is unable to estimate the range of potential loss, if any, from this
uncertainty. However, Gerrity believes the resolution of this uncertainty
should not have a material adverse effect upon Gerrity's financial position,
although an unfavorable outcome in any reporting period could have a material
impact on Gerrity's results of operations for that period.
See "The Transaction--Certain Litigation" for a description of certain
other litigation involving Gerrity relating to the Merger.
Gerrity may from time to time be involved in various claims, lawsuits,
disputes with third parties, investigations and actions involving allegations
of discrimination, tax deficiencies or breach of contract incidental to the
operations of its business. Gerrity is not currently involved in any such
incidental litigation which it believes could have a materially adverse effect
on its financial condition or results of operations.
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<PAGE> 86
MANAGEMENT OF PATINA
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the persons
who became the executive officers and directors of Patina following the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas J. Edelman 45 Chairman of the Board, President and Chief Executive
Officer
Brian J. Cree 33 Executive Vice President and Chief Operating Officer,
Director
Keith M. Crouch 49 Senior Vice President and General Counsel
Ronald E. Dashner 44 Senior Vice President, Operations
David J. Kornder 35 Vice President and Chief Financial Officer
David R. Macosko 35 Vice President
Terry L. Ruby 37 Vice President
David W. Siple 37 Vice President
Rodney L. Waller 46 Vice President
Kenneth A. Wonstolen 45 Vice President
Robert J. Clark 51 Director
Jay W. Decker 44 Director
William J. Johnson 61 Director
Alexander P. Lynch 43 Director
John C. Snyder 54 Director
</TABLE>
THOMAS J. EDELMAN co-founded SOCO and has been President and a
director of SOCO since 1981. Prior to 1981, he was a Vice President of The
First Boston Corporation. From 1975 through 1980, Mr. Edelman was with Lehman
Brothers Kuhn Loeb Incorporated. Mr. Edelman received his Bachelor of Arts
Degree from Princeton University and his Masters Degree in Finance from Harvard
University. Mr. Edelman serves as a director of Command Petroleum Limited and
as Chairman of Amerac Energy Corporation, affiliates of SOCO. In addition, Mr.
Edelman serves as a director of Petroleum Heat & Power Co., a Connecticut based
fuel oil distributor, and its affiliate Star Gas Corporation. Mr. Edelman
serves as Chairman of Lomak Petroleum, Inc.
BRIAN J. CREE has served as Senior Vice President and Chief Operating
Officer of Gerrity since March 1993 and as a Director of Gerrity since November
1992. From September 1992 to March 1993, Mr. Cree served as Senior Vice
President-Operations and Chief Accounting Officer of Gerrity. Prior to that,
Mr. Cree served as Vice President and Treasurer of Gerrity since its inception
in 1990. Mr. Cree served as Vice President and Treasurer of The Robert Gerrity
Company from 1989 to 1990 and served in various accounting capacities with that
company from 1987 to 1990. Prior to that, Mr. Cree was employed as an
accountant at the public accounting firm of Deloitte, Haskins & Sells.
KEITH M. CROUCH was appointed Vice President of Gerrity in October
1993 and Director in October 1994. From March 1992 to October 1993, Mr. Crouch
served as Corporate Counsel to Gerrity. Mr. Crouch has been responsible for
the legal aspects of Gerrity's oil and gas operations. Prior to joining
Gerrity, Mr. Crouch was in private practice with Pendleton & Sabian, P.C. since
1983.
RONALD E. DASHNER was promoted to Vice President--Rockies Group--Rocky
Mountain Division of SOCO in late 1995. Prior to that he was Operations
Manager of SOCO's D-J Basin/Greater Green River Unit. He joined SOCO in 1994.
From 1991 to 1994, Mr. Dashner was Onshore Gulf Coast Operations Manager for
Enron Oil & Gas Company. From 1980 through 1990, Mr. Dashner held various
positions with TXO Production Corp., including Drilling & Production
Manager--Rocky Mountain District and Assistant District Manager--East Texas
District. From 1978 to 1980, he was employed by Davis Oil Company in
Engineering
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<PAGE> 87
and Operations. From 1975 to 1978, he was employed by Chevron in
the Drilling, Production and Construction Department. Mr. Dashner received his
Bachelor of Science Degree in Civil Engineering from Colorado State University
in 1974.
DAVID J. KORNDER was appointed Vice President of Gerrity in October
1993. From January 1993 to October 1993 Mr. Kornder served as Executive
Advisor to the Chairman for Gerrity. Mr. Kornder is responsible for Gerrity's
financial planning and budgeting. Prior to joining Gerrity, Mr. Kornder was an
Assistant Vice President for Gillett Group Management, Inc. where he was
responsible for that firm's financial planning and budgeting from September
1989 to January 1993. Prior to that, Mr. Kornder was an accountant with the
independent accounting firm of Deloitte & Touche for five years.
DAVID R. MACOSKO was appointed Vice President of Gerrity in March
1994. From June 1992 to March 1994, Mr. Macosko served as Operations
Coordinator and Manager of Accounts Payable with Gerrity. Mr. Macosko is
responsible for Gerrity's daily business operations in the D-J Basin. Mr.
Macosko received a bachelor of science degree in accounting from West Virginia
University. Mr. Macosko has been with Gerrity and its predecessor entity for
six years serving in various operational, accounting and analyst positions.
Mr. Macosko has eleven years of experience in the oil and gas industry.
TERRY L. RUBY was appointed Vice President of Gerrity in March 1995,
and is in charge of land matters for Gerrity. His responsibilities include
management of land assets, acquisition and divestiture. Mr. Ruby has been with
Gerrity's land department since 1992. Previously, Mr. Ruby worked with Apache
Corporation from 1990 to 1992, and with Baker Exploration Company from 1982 to
1989. Mr. Ruby holds B.S. and M.B.A. degrees.
DAVID W. SIPLE has been a Land Manager with SOCO since 1995. He has
served in various capacities in the Land Department since joining SOCO in 1994.
From 1990 through 1994, Mr. Siple was the Land Manager of Gerrity. From 1981
through 1989, Mr. Siple was employed by PanCanadian Petroleum Company in the
Land Department. Mr. Siple received his Bachelor of Science Degree in Mineral
Land Management from the University of Colorado.
RODNEY L. WALLER serves as Vice President--Special Projects of SOCO.
He joined Patina in 1977. Previously, Mr. Waller was employed by Arthur
Andersen & Co. Mr. Waller received his Bachelor of Arts Degree from Harding
University.
KENNETH A. WONSTOLEN was appointed Vice President of Gerrity in March
1995 and is in charge of environmental and public affairs. His
responsibilities include environmental, health and safety matters, as well as
government, community, media and investor relations. Mr. Wonstolen joined
Gerrity in 1992 as Corporate Counsel after having been in the private practice
of law since 1990. Mr. Wonstolen was Executive Director and General Counsel of
the Independent Petroleum Association of Mountain States from 1985 to 1990.
Mr. Wonstolen holds B.A. and J.D. degrees, as well as a Master of Environmental
Policy and Management degree.
ROBERT J. CLARK is the President of Bear Paw Energy Corporation, which
was formed in March 1995. Previously, he was President of SOCO Gas Systems,
Inc. and Vice President--Gas Management of SOCO from 1988 to 1995. From 1985
to 1988, Mr. Clark was Vice President--Natural Gas for Ladd Petroleum
Corporation, a subsidiary of General Electric Company. From 1967 to 1985, Mr.
Clark served in various management capacities with North Illinois Gas Company,
NICOR Exploration Company and Reliance Pipeline Company, all of which were
subsidiaries of NICOR, Inc. Mr. Clark received his Bachelor of Science Degree
in Accounting from Bradley University and his Masters Degree in Business
Administration from Northern Illinois University.
JAY W. DECKER has been the Executive Vice President and a director of
Hugoton Energy Corporation, a public independent oil company, since September
1995. From 1989 until its merger into Hugoton Energy, Mr. Decker was the
President and Chief Executive Officer of Consolidated Oil & Gas, Inc., a
private independent oil company based in Denver, Colorado and President of a
predecessor company. Prior to 1989,
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Mr. Decker served as Vice President--Operations for General Atlantic Energy
Company and in various capacities for Peppermill Oil Company, Wainoco Oil & Gas
and Shell Oil Company. Mr. Decker received his Bachelor of Science Degree in
Petroleum Engineering from the University of Wyoming.
WILLIAM J. JOHNSON, a director of SOCO since 1994, is a private
consultant for the oil and gas industry and is President and a director of
JonLoc Inc., an oil and gas company of which he and his family are the sole
shareholders. From 1991 to 1994, Mr. Johnson was President, Chief Operating
Officer and a director of Apache Corporation. Previously, he was a director,
President and Chief Executive Officer of Tex/Con Oil and Gas, where he served
from 1989 to 1991. Prior thereto, Mr. Johnson served in various capacities
with major oil companies, including director and President USA of BP
Exploration Company, President of Standard Oil Production Company and Senior
Vice President of The Standard Oil Company. Mr. Johnson received a Bachelor of
Science degree in Petroleum Geology from Mississippi State University and
completed the Advanced Management Course at the University of Houston. Mr.
Johnson serves as a director of BJ Services Company, an oilfield service
company and Camco International, and oilfield manufacturing company. Mr.
Johnson also serves on the advisory board of Texas Commerce Bank, Houston.
ALEXANDER P. LYNCH has been Co-President and Co-Chief Executive
Officer of The Bridgeford Group, a financial advisory firm, since January 1995.
From April 1991 to December 1994, he served as Senior Managing Director of
Bridgeford. From 1985 until April 1991, Mr. Lynch was a Managing Director of
Lehman Brothers, a division of Shearson Lehman Brothers Inc. Mr. Lynch also
serves as a director of Lincoln Snacks Company and Illinois Central
Corporation.
JOHN C. SNYDER, Chairman of the Board of Directors of SOCO, founded
one of SOCO's predecessors in 1978. From 1973 to 1977, Mr. Snyder was an
independent oil operator in Texas and Oklahoma. Previously, he was a director
and the Executive Vice President of May Petroleum Inc. where he served from
1971 to 1973. Mr. Snyder was the first president of Canadian-American
Resources Fund, Inc., which he founded in 1969. From 1964 to 1966, Mr. Snyder
was employed by Humble Oil and Refining Company (currently Exxon Co., USA) as a
petroleum engineer. Mr. Snyder received his Bachelor of Science Degree in
Petroleum Engineering from the University of Oklahoma and his Masters Degree in
Business Administration from the Harvard University Graduate School of Business
Administration. Mr. Snyder is a director of the Community Enrichment Center,
Inc., Fort Worth, Texas.
Each of the foregoing persons is a United States citizen.
Directors of Patina will be elected annually and hold office until
their successors have been elected and qualified or their earlier resignation
or removal.
Messrs. Clark, Cree, Edelman, Johnson and Snyder were elected to the
Board of Directors of Patina pursuant to the Merger Agreement. The Merger
Agreement provides that until the 1998 Annual Meeting of stockholders of
Patina, Patina shall have no more than three directors affiliated with either
SOCO or any of its affiliates other than Patina. Until the 1998 Annual
Meeting, if a director who is not affiliated with SOCO or any of its affiliates
(other than Patina) ceases to be a director of Patina, SOCO has agreed to use
its reasonable best efforts to fill any vacancy caused thereby to be filled by
another person who is not affiliated with SOCO or any of its affiliates (other
than Patina). SOCO has agreed to vote all of the voting securities of Patina
held by SOCO or any of its subsidiaries in favor of the election of directors
consistent with the foregoing.
The Board of Directors of Patina has established an Executive
Committee, a Compensation Committee and an Audit Committee. The Executive
Committee is be empowered to take any action normally reserved to the full
Board of Directors of Patina, to the extent permitted by law. The Compensation
Committee acts on behalf of the Board of Directors of Patina with respect to
the compensation of directors and executive officers, and administers certain
of Patina's employee benefit plans. The Audit Committee will review the scope
and results of the audit and other services performed by Patina's independent
accountants and report to the Board of Directors of Patina with respect
thereto.
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COMPENSATION OF DIRECTORS
Directors of Patina who are not employees of Patina, SOCO or their
affiliates receive an annual retainer of $18,000, payable half in cash and half
in Patina Common Stock. In addition, such directors receive a fee for each
committee meeting they attend in person equal to $250 if the meeting is held on
the same day as a meeting of the Board of Directors or $1,000 if the meeting is
held separately. Non-employee directors also will be reimbursed for expenses
incurred in attending Board of Directors and committee meetings, including
those for travel, food and lodging. Directors and members of committees of the
Board of Directors of Patina who are employees of Patina, SOCO or their
affiliates are not compensated for their Board of Directors and committee
activities.
Non-employee directors of Patina receive one-half their annual
retainer in shares of Patina Common Stock under the Patina 1996 Stock Option
Plan for Non-Employee Directors (the "Directors Stock Plan"), subject to
certain conditions set forth in the Directors Stock Plan. On the 15th of
March, June, September and December of each year, commencing June 15, 1996,
non-employee directors will receive shares of Patina Common Stock having a fair
market value on such date equal to $2,250. Shares issued under the Directors
Stock Plan may be either authorized and unissued shares of Patina Common Stock
or previously issued shares held in Patina's treasury. The Directors Stock
Plan is administered by members of the Patina Board who are employees of Patina
or its affiliates.
The Directors Stock Plan also required that Patina automatically grant
to each non-employee director, on the date the Merger became effective and on
the date of the director's appointment, election, reappointment or reelection
as a member of the Board of Directors, a stock option (a "Director Option") for
5,000 shares of Patina Common Stock, subject to certain adjustments described
below. The exercise price for all Director Options will be the fair market
value on the date of grant. Payment for Patina Common Stock issued upon the
exercise of a Director Option may be made in cash or, with the consent of the
ineligible directors (i) in whole shares of Patina Common Stock owned by the
holder of the Director Option for at least six months prior to the date of
exercise or (ii) partly in cash and partly in such shares of Patina Common
Stock. Generally, the duration of each Director Option will be five years from
the date of award, and each Director Option may be exercised in whole or in
part at any time after the date of grant; provided, however, that 30% of the
shares of Patina Common Stock covered by any such Director Option vest one year
after date of grant, an additional 30% of such shares of Patina Common Stock
vest two years after the date of grant, and all remaining shares of Patina
Common Stock vest three years after the date of grant. The maximum number of
shares that may be issued to any director in any 12-month period beginning on
the date of Patina's annual meeting is 3,000.
In the event of any change in the number of outstanding shares of
Patina Common Stock effected without receipt of consideration therefor by
Patina by reason of a stock dividend or a split, combination, exchange of
shares or other recapitalization or merger in which Patina is the surviving
corporation, the aggregate number and class of reserved shares, the number and
class of shares subject to each outstanding Director Option and the exercise
price of each outstanding Director Option shall be automatically adjusted
accurately and equitably to reflect the effect thereon of such change. A
dissolution or liquidation of Patina, certain sales of all or substantially all
of the assets of Patina, certain mergers or consolidations or certain other
transactions will cause such holder's Director Options then outstanding to
terminate, but such holder shall have the right, immediately prior to such
transaction, to exercise such Director Options without regard to the
restrictions on exercisability otherwise applicable.
The Directors Stock Plan will terminate ten years from the date of
adoption, or on such earlier date as the Board of Directors of Patina may
determine. Any Director Option outstanding at the termination date will remain
outstanding until it has been exercised, has terminated or has expired. The
Directors Stock Plan may be amended, suspended or terminated by the Board of
Directors of Patina at any time without further stockholder approval, except
that stockholder approval as required for any amendment that (i) changes the
class of persons eligible to receive Director Options, (ii) materially
increases the benefits accruing to non-employee directors under the Directors
Stock Plan or (iii) increases the duration of the Directors Stock Plan.
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At the Effective Time, there were four non-employee directors of
Patina who were eligible to receive grants under the Directors Stock Plan.
Options were granted at the effective date of the Merger for an aggregate of
20,000 shares of Patina Common Stock at an exercise price of $7.75 per share.
COMPENSATION OF EXECUTIVE OFFICERS
Pursuant to the Merger Agreement, Patina has agreed that for at least
one year after the effective date of the Merger, Gerrity will provide to its
officers salaries at least equal to those paid prior to the Merger. In
addition, Patina has agreed to pay compensation of Thomas J. Edelman, President
and Chief Executive Officer of Patina, and Rodney L. Waller, Vice
President-Acquisitions of Patina, for all services of such persons to Patina
for the first year following the Effective Time, with amounts of $250,000 and
$75,000, respectively. Subject to the foregoing, compensation of executive
officers of Patina will be determined by the Compensation Committee of the
Board of Directors of Patina based on recommendations of senior management and
such factors as the Committee deems relevant.
STOCK OPTION PLAN
Patina has established its 1996 Stock Option Plan (the "Patina Option
Plan") both to retain executives and other key employees and to motivate them
to improve long-term stock market performance. The following summary of the
Patina Option Plan is qualified in its entirety by the full text of the Patina
Option Plan, a copy of which has been filed as an exhibit to the Registration
Statement of which the Information Statement/Prospectus is a part.
The Patina Option Plan provides for the granting of options to
purchase shares of Patina Common Stock to certain key employees of Patina,
including officers and directors who are also employees of Patina or its
affiliates, and certain other persons who are not employees or directors of
Patina or its affiliates but who from time to time provide substantial advice
or other assistance or services to Patina or its affiliates. Subject to
certain adjustments described below, the number of shares of Patina Common
Stock that may be acquired under options outstanding at the time of each grant
under the Patina Option Plan may not exceed the lesser of (i) 3,000,000 shares
and (ii) 10% of the number of shares of Patina Common Stock outstanding at the
time of such grant. Subject to such limitation, there is no limit on the
absolute number of awards that may be granted during the life of the Patina
Option Plan.
The Patina Option Plan will be administered by a committee (the
"Option Committee") of independent members of the Patina Board which has the
authority to award options and to determine the terms and conditions (which
need not be identical) of such options, including the persons to whom, and the
time or times at which, options will be awarded, the number of options to be
awarded to each such person, the exercise price of any such options and the
form, terms and provisions of any agreement pursuant to which such options are
awarded.
Any option may be either an incentive or non-incentive stock option
depending on the terms of such option. The exercise price of the shares of
Patina Common Stock covered by an incentive stock option may not be less than
the fair market value of Patina Common Stock on the date of award, and the
exercise price of the shares of Patina Common Stock covered by each option that
is not an incentive stock option may not be less than 50% of the fair market
value of the Patina Common Stock on the date of award. It is expected that the
exercise price of options granted will be equal to the fair market value on the
date of award. If an Optionee is terminated for Cause (as defined in the
Patina Option Plan) or voluntarily terminates his employment, such optionee's
options terminate and cease to be exercisable. If Patina or one of its
affiliates terminates the optionee's employment without cause, such optionee
has the right to exercise any exercisable option for thirty days following
termination. If an optionee ceases to be employed by reason of disability, the
optionee will have the right for ninety days after termination of employment to
exercise an option to the extent such option is exercisable on the date of his
termination of employment. If an optionee dies while employed, an option will
be exercisable by the optionee's legal representatives, legatees or
distributees for ninety days following the date of optionee's death.
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Payment for Patina Common Stock issued upon the exercise of an option
may be made in cash or, with the consent of the Option Committee, in whole
shares of Patina Common Stock owned by the holder of the option for at least
six months prior to the date of exercise or partly in cash and partly in such
shares of Patina Common Stock. If payment is made, in whole or in part, with
previously owned shares of Patina Common Stock, the Option Committee may issue
to such holder a new option for a number of shares equal to the number of
shares delivered by such holder to pay the exercise price of the previous
option having an exercise price equal to not less than 100% of the fair market
value of the Patina Common Stock on the date of such exercise. In the event of
any change in the number of outstanding shares of Patina Common Stock effected
without receipt of consideration therefor by Patina by reason of a stock
dividend or a split, combination, exchange of shares or other recapitalization
or merger in which Patina is the surviving corporation, the aggregate number
and class of reserved shares, the number and class of shares subject to each
outstanding option and the exercise price of each outstanding option shall be
automatically adjusted accurately and equitably to reflect the effect thereon
of such change. A dissolution or liquidation of Patina, certain sales of all
or substantially all of the assets of Patina, certain mergers or consolidations
or certain other transactions will cause such holder's options then outstanding
to terminate, but such holder shall have the right, immediately prior to such
transaction, to exercise such options without regard to the restrictions on
exercisability otherwise applicable.
No tax obligation will arise for the optionee or Patina upon the
granting of either incentive stock options or non-qualified stock options under
the Patina Option Plan. Upon exercise of a non-qualified stock option, an
optionee will recognize ordinary income in an amount equal to the excess, if
any, of the fair market value, on the date of exercise, of the stock acquired
over the exercise price of the option. Thereupon, Patina will be entitled to a
tax deduction in an amount equal to the ordinary income recognized by the
optionee. Any additional gain or loss realized by an optionee on disposition
of the shares generally will be capital gain or loss to the optionee and will
not result in any additional tax deduction to Patina.
Upon the exercise of an incentive stock option, an optionee will
recognize no immediate taxable income. The tax cost will be deferred until the
optionee ultimately sells the shares of Patina Common Stock. If the optionee
does not dispose of the option shares within two years from the date the option
was granted and within one year after the exercise of the option, and the
option is exercised no later than three months after the termination of the
optionee's employment, the gain or the sale will be treated as long-term
capital gain. Subject to the limitations in the Patina Option Plan, certain of
these holding periods and employment requirements are liberalized in the event
of the optionee's death or disability while employed by Patina. Patina is not
entitled to any tax deduction, except that if the Patina Common Stock is not
held for the full term of the holding period outlined above, the gain on the
sale of such stock, being the lesser of (i) the fair market value of the stock
on the date of exercise minus the option price, or (ii) the amount realized on
disposition minus the option price, will be taxed to the optionee as ordinary
income and Patina will be entitled to a deduction in the same amount. Any
additional gain or loss realized by an optionee upon disposition of shares
prior to the expiration of the full term of the holding period outlined above,
generally will be capital gain or loss to the optionee and will not result in
any additional tax deduction to Patina. The "spread" upon exercise of an
incentive stock option constitutes a tax preference item within the computation
of the "alternative minimum tax" under the Code. The tax benefits that might
otherwise accrue to an optionee may be affected by the imposition of such tax
if applicable to the optionee's individual circumstances.
To the extent that an optionee pays all or part of the option price by
tendering shares of Patina Common Stock owned by the optionee, the rules
described above apply, except that a number of shares received upon the
exercise equal to the number of shares surrendered as payment of the option
price will have the same basis and tax holding period as the shares of Patina
Common Stock tendered.
PROFIT SHARING AND SAVINGS PLAN
Patina has established a 401(k) profit sharing plan (the "Savings
Plan"). Under the Savings Plan, there is no fixed dollar amount of retirement
benefits. Employees of Patina will become eligible to enter the Savings Plan
after four months of service. Patina, in its discretion, will determine
annually the amount of its contribution, if any, to the Savings Plan.
Employees will become 40% vested with respect to Patina's
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contributions after two years of credited service, 80% after three years and
100% after four years. The Savings Plan also will include a "401(k)
arrangement" under which employees may designate a portion of their salary as a
tax-deferred contribution to the Savings Plan. Employees will always be 100%
vested with respect to such contributions. The Savings Plan's trustee will pay
an employee his accumulated Savings Plan interest upon his retirement at or
after age 55 or upon death. Further, Patina has adopted a supplemental
deferred compensation plan as a means of provide additional incentives for key
employees to remain in the employ of Patina.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Patina has entered into indemnification agreements with each of its
directors and officers. These agreements are intended to provide a contractual
right to indemnification, to the extent permitted by law, for costs, expenses
(including attorneys' fees and disbursements), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by the person to be
indemnified in connection with any proceeding (including, to the extent
permitted by law, any derivative action) to which they are, or are threatened
to be made, a party by reason of their status or decisions or actions in such
positions. These agreements do not change the basic legal standards for
indemnification set forth in DGCL or the Certificate of Incorporation of Patina
and are intended to be in furtherance, and not in limitation of, the general
right to indemnification provided in the Certificate of Incorporation and
Bylaws of Patina.
MARKET PRICE AND DIVIDEND DATA
The Patina Common Stock, the Patina Warrants (which are issuable upon
conversion of the Gerrity Preferred Stock as a result of the Merger) and the
Patina Preferred Stock are listed for trading on the NYSE under the symbols
"POG", "POGWT" and "POGPr", respectively. Such listings became effective on
May 2, 1996. The following table sets forth, for the period since such listing
became effective, the range of high and low sales prices for the Patina Common
Stock, Patina Warrants and Patina Preferred Stock, respectively as reported on
the NYSE Composite Tape.
<TABLE>
<CAPTION>
PATINA
PATINA PATINA PREFERRED
COMMON STOCK WARRANT STOCK
-------------- --------------- -------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Second Quarter (commencing May 3, 1996) $ 8 1/4 $ 6 1/8 $ 2 3/8 $ 1 1/4 $ 24 1/2 $ 22 1/4
Third Quarter (through September 27, 1996) 7 3/8 6 3/4 1 3/8 15/16 26 23 1/8
</TABLE>
Gerrity Common Stock and Depositary Shares representing Gerrity Preferred Stock
are listed on the NYSE under the symbols "Gerrity" and "GerrityPr,"
respectively. The following table sets forth, for the periods indicated, the
range of high and low sales prices for the Depositary Shares representing
Gerrity Preferred Stock as reported by the NYSE Composite Tape.
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<TABLE>
<CAPTION>
GERRITY
DEPOSITARY SHARES
----------------------
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
First Quarter . . . . . . . . . . . . . . . . . . --- ---
Second Quarter (commencing June 21, 1994 with
respect to the Depositary Shares) . . . . . . . $ 16 1/4 $ 13 3/4
Third Quarter . . . . . . . . . . . . . . . . . . 17 3/8 14 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . 14 1/4 12
YEAR ENDED DECEMBER 31, 1995
First Quarter . . . . . . . . . . . . . . . . . . $ 13 $ 10
Second Quarter . . . . . . . . . . . . . . . . . 13 1/2 11 1/8
Third Quarter . . . . . . . . . . . . . . . . . . 12 5/8 10 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . 11 1/4 10
YEAR ENDED DECEMBER 31, 1996
First Quarter . . . . . . . . . . . . . . . . . . $ 13 $ 10 1/2
Second Quarter . . . . . . . . . . . . . . . . . 13 12 7/8
Third Quarter (through September 27, 1996) . . . 15 1/4 12 5/8
</TABLE>
On July 16, 1996, the last trading day prior to the announcement of the
Transaction the closing sales prices per share of the Depositary Shares, as
reported on the NYSE was $12 1/2, and the closing sales prices per share of the
Patina Common Stock and the Patina Preferred Stock were $6 3/4 and $23 1/2,
respectively. On September 23, 1996, the last day prior to the date of
preparation of this Information Statement/Prospectus on which the Depositary
Shares were traded, the closing sales price per share of the Depositary Shares,
as reported on the NYSE was $14.00. On September 27, 1996, the last day prior
to the date of preparation of this Information Statement/Prospectus on which
the Patina Common Stock and the Patina Preferred Stock were traded, the closing
sales prices per share of the Patina Common Stock and the Patina Preferred
Stock, as reported on the NYSE, were $7 1/8 and $25 3/4, respectively.
For the foreseeable future, Patina does not intend to pay cash
dividends on its common stock. Patina currently intends to retain its cash for
the continued expansion of its business, including development and acquisition
activities and to reduce debt levels. No cash dividends may be paid unless all
accrued and unpaid dividends on the Patina Preferred Stock, and certain other
preferred stock that may be issued in the future, have been paid. In addition,
Patina's bank credit facilities contain limitations on the payment of
dividends. Because of the debt service requirements on subordinated debt and
bank borrowings outstanding at Gerrity following the Merger, as well as current
oil and gas prices in the D-J Basin, it is more likely than not that in the
foreseeable future no dividends will be paid on the Gerrity Preferred Stock if
the Transactions is not effected. However, no dividends may be paid to Patina
on the Gerrity common stock unless the dividends have been paid in full on the
Gerrity Preferred Stock.
PRINCIPAL HOLDERS OF GERRITY CAPITAL STOCK
GERRITY COMMON STOCK
As a result of the Merger, all of the issued and outstanding Gerrity
Common Stock is owned by Patina.
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<PAGE> 94
GERRITY PREFERRED STOCK
The following table sets forth information with respect to the
beneficial ownership of Gerrity Preferred Stock as of September 27, 1996, except
as set forth in the notes below, by all persons owning beneficially, to the
knowledge of Gerrity, 5% or more thereof. Unless otherwise specified, the
ownership reflects sole power to vote and dispose of the securities.
<TABLE>
<CAPTION>
NUMBER
OF
NAME SHARES (1) PERCENTAGE
---- ------------- -----------
<S> <C> <C>
Patina Oil & Gas Corporation
1625 Broadway, Suite 2000
Denver, Colorado 80202 . . . . . . . . . . . . . . . . . . . . 2,298,308 75.7%
Franklin Resources, Inc. (2)
777 Mariners Island Blvd.
San Mateo, CA 94404 . . . . . . . . . . . . . . . . . . . . . . 579,700 19.1%
FMR Corp (3)
82 Devonshire Street
Boston, MA 02109 . . . . . . . . . . . . . . . . . . . . . . . 442,200 14.6%
</TABLE>
- -------------
(1) Number of Depositary Shares (each representing one-eighth of one
share of Gerrity Preferred Stock).
(2) The information in the table and this note relating to Franklin
Resources, Inc. is based on a Schedule 13G filed by that entity dated
February 12, 1996. Based on such Schedule 13G, Franklin Resources,
Inc. is an investment company registered under Section 8 of the
Investment Company Act of 1940, as amended.
(3) The information in this table and this note relating to FMR Corp. is
based on a Schedule 13G filed by that entity dated February 14, 1996.
Based on such Schedule 13G, FMR Corp. is the parent company of
Fidelity Management & Research Company. Based upon conversations with
representatives of FMR Corp. in connection with the Exchange Offer,
Patina believes FMR exchanged a portion of these shares in the
Exchange Offer.
DESCRIPTION OF PATINA CAPITAL STOCK
GENERAL
Pursuant to the Certificate of Incorporation of Patina, the authorized
capital stock of Patina consists of 40,000,000 shares of common stock (of which
38,000,000 shares are Patina Common Stock and 2,000,000 shares have been
designated as Series A Common Stock) and 5,000,000 shares of Patina preferred
stock, par value $.01 per share (of which 1,600,000 shares have been designated
Patina Preferred Stock, as described below). As of the date hereof, there are
17,866,012 shares of Patina Common Stock outstanding, 2,000,000 shares of
Series A Common Stock and 1,204,847 shares of Patina preferred stock
outstanding. The following descriptions of the securities of Patina are
summaries, do not purport to be complete or to give effect to applicable
statutory or common law and are qualified in their entirety by reference to the
Certificate of Incorporation of Patina, which is included as an exhibit to the
Registration Statement of which this Information Statement/Prospectus is a
part.
COMMON STOCK
General. Patina is authorized to issue 40,000,000 shares of common
stock, par value $.01, of which 38,000,000 shares are Patina Common Stock and
2,000,000 shares have been designated as Series A Common Stock. The holders of
Patina Common Stock are entitled to one vote for each share on all matters
submitted to a vote of stockholders. The holders of Patina Common Stock do not
have cumulative voting rights in the election of directors of Patina. The
holders of Patina Common Stock are entitled to receive ratably such dividends,
if any, as may be declared by the Patina Board out of legally available funds.
In the event of liquidation, dissolution or winding up of Patina, the holders
of Patina Common Stock are entitled to share ratably in all assets of Patina
remaining after provision for payment of liabilities and satisfaction of the
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liquidation preference of any shares of preferred stock (as defined below) that
may be outstanding. The holders of Patina Common Stock have no preemptive,
subscription, redemption or conversion rights. The shares of Patina Common
Stock to be issued and outstanding upon consummation of the Merger will be
validly issued, fully paid and nonassessable. The rights, preferences and
privileges of holders of Patina Common Stock will be subject to those of
holders of the Patina Preferred Stock and any other series of preferred stock.
See "Patina Preferred Stock."
Series A Common Stock. Except as set forth below, each share of
Series A Common Stock is identical in all respects to the Patina Common Stock.
The holders of shares of Series A Common Stock are generally entitled to vote
upon all matters submitted to a vote of the shareholders of Patina, but in all
cases be entitled to three votes per share of Series A Common Stock held. All
of the 2,000,000 outstanding shares of Series A Common Stock are owned by SOCO.
The holders of Series A Common Stock have the right to participate
equally with holders of Patina Common Stock in any dividends (whether in cash,
stock or otherwise) declared with respect to the Patina Common Stock by the
Patina Board; provided, however, that dividends or distributions payable in
shares of, or in subscription or other rights to acquire shares of, Patina
Common Stock may be declared on and paid only to holders of Patina Common
Stock, and dividends or distributions payable in shares of, or in subscription
or other rights to acquire shares of, Series A Common Stock may be declared on
and paid only to holders of Series A Common Stock; and provided further that if
holders of Patina Common Stock shall receive a dividend or distribution payable
in shares of (or in subscription or other rights to acquire shares of) Patina
Common Stock, then the holders of Series A Common Stock shall receive a
dividend or distribution of an equal number of shares payable in shares of
Series A Common Stock (or, if applicable, in subscription or other rights to
acquire shares of Series A Common Stock), and if holders of Series A Common
Stock shall receive a dividend or distribution payable in shares of (or in
subscription or other rights to acquire shares of) Series A Common Stock, then
the holders of Patina Common Stock shall receive a dividend or distribution of
an equal number of shares payable in shares of Patina Common Stock (or, if
applicable, in subscription or other rights to acquire shares of Patina Common
Stock). The foregoing provisions are intended to maintain the three-to-one
ratio between the votes per share to which the Series A Common Stock and the
Patina Common Stock are entitled. In the event Patina wishes to effect a
dividend or distribution payable in shares of Patina Common Stock as described
above, the foregoing provisions would require that Patina first amend its
Certificate of Incorporation to increase the number of authorized shares of
Series A Common Stock. Such amendment would require the approval of a majority
of the voting power of the outstanding shares of Patina Common Stock.
Upon the earlier of (A) a share or shares of Series A Common Stock
becoming owned of record by a person or entity other than SOCO or a SOCO
Affiliate (as defined below), whether by transfer or otherwise, or (B) the
receipt by Patina of written notice from SOCO to the effect that Patina is no
longer eligible for inclusion in SOCO's consolidated financial statements for
financial accounting purposes, which determination shall be at the sole
discretion of SOCO (each, a "Conversion Event"), then, without any action on
the part of Patina or the holder of such share or shares of Series A Common
Stock, such share of shares of Series A Common Stock shall be automatically
converted, as of the date of such Conversion Event, into an equal number of
shares of Patina Common Stock, and the certificate representing such share or
shares of Series A Common Stock shall automatically be deemed to represent such
share or shares of Patina Common Stock. As used herein, "SOCO Affiliate" means
any person or entity directly or indirectly controlling or controlled by or
under direct or indirect common control with SOCO (or a successor thereto),
and, with respect to a given share or shares of Series A Common Stock on behalf
of SOCO (or a successor thereto) or a SOCO Affiliate in a fiduciary or nominee
capacity. For the purposes of the foregoing definition, "control" means the
power to direct the management and policies of such person or entity, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise.
As long as there are any shares of Series A Common Stock outstanding,
Patina's Certificate of Incorporation may not be amended in any manner that
would affect adversely the rights of the holders of Series A Common Stock in a
manner different than the rights of holders of Patina Common Stock generally,
without the approval of the holders of at least 80% of the outstanding shares
of Series A Common Stock
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voting separately as a class; provided, however, that any change in the voting
or conversion rights of the Series A Common Stock shall be deemed an adverse
change that would require such approval; and provided further that any
amendment to Patina's Certificate of Incorporation (including without
limitation an amendment to the terms of the Patina Common Stock) that would
alter the ratio of (X) the number of votes to which one share of Series A
Common Stock is entitled to (Y) the number of votes to which one share of
Patina Common Stock is entitled shall require such approval.
PREFERRED STOCK
Patina is authorized to issue 5,000,000 shares of preferred stock, par
value $.01 per share, of which 1,600,000 shares have been designated as the
Patina Preferred Stock. Of such 1,600,000 shares, 1,204,847 were issued in
connection with the Exchange Offer and the remaining 388,764 shares are expected
to be issued in the Transaction. The Patina Board has authority, without
stockholder approval, to issue shares of preferred stock in one or more series
and to determine the number of shares, designations, dividend rights, conversion
rights, voting power, redemption rights, liquidation preferences and other terms
of any such series. The issuance of preferred stock, while providing desired
flexibility in connection with possible acquisitions and other corporate
purposes, could adversely affect the voting power of holders of Patina Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of Patina. Patina has no present plans for any
issuance of preferred stock, other than the shares of Patina Preferred Stock
issued pursuant to the Exchange Offer and those issuable in the Transaction.
PATINA PREFERRED STOCK
Dividend. Holders of Patina Preferred Stock are entitled to receive
when, as and if declared by the Patina Board out of funds legally available
therefor, cumulative cash dividends at an annual rate of 7 1/8%, payable
quarterly in arrears on May 15, August 15, November 15 and February 15 of each
year, commencing May 15, 1996 (with respect to the period from February 15,
1996 to such date), except that if any such date is a Saturday, Sunday or legal
holiday then such dividend is payable on the next day that is not a Saturday,
Sunday or legal holiday. Dividends are payable to holders of record as they
appear on the stock transfer books on such record dates as are fixed by the
Patina Board (provided that no record date shall be the same as a date set for
redemption of any shares of Patina Preferred Stock nor later than the sixth
business day prior to the date fixed for any redemption of the Patina Preferred
Stock). Holders of Patina Preferred Stock that are redeemed on a redemption
date that falls between the record date and the payment date for a dividend are
not entitled to receive such dividend on the shares so redeemed, but the price
paid upon redemption will reflect accrued dividends thereon as described below.
The Patina Preferred Stock has priority as to dividends over the
Patina Common Stock and any other series or class of Patina's stock hereafter
issued that ranks junior as to dividends to the Patina Preferred Stock, when as
issued (collectively "Junior Dividend Stock"), and has priority as to
distributions of assets upon liquidation, dissolution or winding up of Patina,
whether voluntary or involuntary, over the Patina Common Stock and any other
series or class of Patina's stock hereafter issued that ranks junior as to such
distributions to the Patina Preferred Stock (collectively, "Junior Liquidation
Stock"). No dividend (other than dividends payable solely in stock that is
Junior Dividend Stock and Junior Liquidation Stock (the Patina Common Stock and
any other capital stock of Patina that is both Junior Dividend Stock and Junior
Liquidation Stock, "Junior Stock")), may be paid on any Junior Dividend Stock,
and no payment may be made on account of the purchase, redemption, retirement,
or other acquisition of Junior Dividend Stock or Junior Liquidation Stock,
unless all accrued and unpaid dividends on the Patina Preferred Stock for all
dividend payment periods ending on or before the date of payment of such
dividends on Junior Dividend Stock, or such payment for such Junior Dividend
Stock or Junior Liquidation Stock, as the case may be, have been paid or
declared and set apart for payment. Patina may not pay dividends on the Patina
Preferred Stock unless it has paid or declared and set apart for payment or
contemporaneously pays or declares and sets apart for payment all accrued and
unpaid dividends for all dividend payment periods on any class or series of
stock having a preference over the Patina Preferred Stock as to dividends. No
full dividends shall be declared, paid or set apart for payment on shares of
any class or series of Patina's capital stock which by its terms ranks, as to
dividends, on a parity with the
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Patina Preferred Stock (any such class or series of Patina's capital stock
being herein referred to as "Parity Dividend Stock") for any period unless full
cumulative dividends have been, or contemporaneously are, paid or declared and
set apart for payment on the Patina Preferred Stock for all dividend payment
periods ending on or before the payment date of such dividends on Parity
Dividend Stock. No dividends shall be paid on Parity Dividend Stock except on
dates on which dividends are paid on the Patina Preferred Stock. All dividends
paid or declared and set apart for payment on the Patina Preferred Stock and
any Parity Dividend Stock shall be paid or declared and set apart for payment
pro rata so that the amount of dividends paid or declared and set apart for
payment per share on the Patina Preferred Stock and the Parity Dividend Stock
on any date shall in all cases bear to each other the same ratio that accrued
and unpaid dividends to the date of payment on the Patina Preferred Stock and
the Parity Dividend Stock bear to each other.
No payment may be made on account of the purchase, redemption,
retirement or other acquisition of shares of Parity Dividend Stock or other
class or series of Patina's capital stock ranking on a parity with the Patina
Preferred Stock as to distributions of assets upon liquidation, dissolution or
winding up of Patina, whether voluntary or involuntary (such stock that has
parity with the Patina Preferred Stock as to liquidation rights, "Parity
Liquidation Stock"), and, other than dividends to the extent permitted in the
preceding sentence, no distributions shall be declared, paid or set aside for
payment on shares of Parity Dividend Stock or Parity Liquidation Stock, unless
all accrued and unpaid dividends on the Patina Preferred Stock for all dividend
payment periods ending on or before the date of payment on account of such
acquisition of such Parity Dividend Stock or Parity Liquidation Stock shall
have been paid or declared and set apart for payment.
The amount of dividends payable per share of Patina Preferred Stock
for each quarterly dividend period is computed by dividing the annual dividend
amount by four. The amount of dividends payable for the initial period and for
any period shorter than a full quarterly dividend period is computed on the
basis of a 360-day year of twelve 30-day months. No interest is payable in
respect of any dividend payment on the Patina Preferred Stock which may be in
arrears.
Under Delaware law, Patina may declare and pay dividends or make other
distributions on its capital stock only out of surplus, as defined in the DGCL
or, in cases there is no such surplus, out of its net profits for the fiscal
year in which the dividend or distribution is declared or the preceding fiscal
year. The payment of dividends and any future operating losses will reduce
such surplus and thus could adversely affect its ability to continue to pay
dividends on the Patina Preferred Stock. The DGCL also prohibits dividends or
distributions from being declared, paid or made if Patina is or would be
rendered insolvent by virtue of such dividend or distribution, or if such
declaration, payment or distribution would contravene the Certificate of
Incorporation.
Liquidation Rights. In the case of the voluntary or involuntary
liquidation, dissolution or winding up of Patina, holders of shares of Patina
Preferred Stock are entitled to receive the liquidation preference of $25.00
per share, plus an amount equal to any accrued and unpaid dividends to the
payment date, before any payment or distribution is made to the holders of any
Junior Liquidation Stock, but the holders of the shares of the Patina Preferred
Stock will not be entitled to receive the liquidation preference of such shares
until the liquidation preference of any other series or class of stock
hereafter issued that ranks senior as to liquidation rights to the Patina
Preferred Stock ("Senior Liquidation Stock") has been paid in full. The
holders of Patina Preferred Stock and all series of classes of stock hereafter
issued that rank on a parity as to distributions of assets upon such
liquidation, dissolution or winding up of Patina with the Patina Preferred
Stock are entitled to share ratably, in accordance with the respective
preferential amounts payable on such stock, in any distribution (after payment
of the liquidation preference of any Senior Liquidation Stock) which is not
sufficient to pay in full the aggregate of the amounts payable thereon. After
payment in full of the liquidation preference of the shares of the Patina
Preferred Stock, the holders of such shares are not entitled to any further
participation in any distribution of assets of Patina. The voluntary sale,
lease, exchange or transfer of all or substantially all of Patina's property or
assets to, or its consolidation or merger with, one or more corporations shall
not be deemed to be a voluntary or involuntary liquidation, dissolution or
winding up of Patina.
Voting Rights. The holders of Patina Preferred Stock have no voting
rights except as described below or as required by law. In connection with any
such vote, each outstanding share of Patina Preferred Stock
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is entitled to one vote, excluding shares held by any entity controlled by
Patina, which shares shall have no voting rights.
Whenever dividends on the Patina Preferred Stock or on any other class
or series of Patina's preferred stock have not been paid in an aggregate amount
equal to at least six quarterly dividends on such shares (whether or not
consecutive), the number of members of Patina's Board of Directors will be
increased by two and the holders of Patina Preferred Stock, voting separately
as a class with the holders of any other class or series of Patina's preferred
stock on which like voting rights have been conferred and are exercisable, will
be entitled to elect such two additional directors who shall continue to serve
as long as such dividends remain in arrears. Such voting rights will terminate
when all such dividends accrued and unpaid have been declared and paid or set
apart for payment. The term of office of all directors so elected will
terminate immediately upon the termination of such voting rights, and the
number of directors constituting the Board of Directors shall be reduced by
two.
In addition, so long as any shares of any class or series of Patina's
preferred stock are outstanding, Patina will not, without the affirmative vote
or consent of the holders of at least 66 2/3% of all outstanding shares of
preferred stock, voting or consenting (as the case may be) separately as a
class without regard to series, (A) create any class of stock ranking prior to
any outstanding Patina Preferred Stock as to dividends or upon liquidation or
increase the authorized number of shares of any such class, (B) alter or change
any of the provisions of Patina's Certificate of Incorporation so as adversely
to affect the relative rights and preferences of any outstanding preferred
stock of Patina; provided, however, that the creation of any class of
non-convertible stock, regardless of ranking, or any class of stock convertible
into Patina Common Stock that by its terms ranks pari passu or junior to any
outstanding Preferred Stock of Patina as to dividends or upon liquidation or an
increase in the authorized number of shares of any such class shall not give
rise to any such voting right, or (C) increase the authorized number of shares
of Patina's preferred stock. So long as any shares of Patina Preferred Stock
are outstanding, Patina will not, without the affirmative vote or consent of
the holders of at least 66 2/3% of the outstanding shares of Patina Preferred
Stock, voting or consenting (as the case may be) separately as a series, alter
or change any provision of the Certificate of Incorporation so as adversely to
affect the relative rights and preferences of the Patina Preferred Stock.
Redemption. The Patina Preferred Stock may not be redeemed by Patina
prior to the second anniversary of the Effective Time; provided, however, that
the Patina Preferred Stock is not redeemable prior to the third anniversary of
the Effective Time unless the Closing Price (as hereinafter defined) of Patina
Common Stock equals or exceeds 150% of the then effective conversion price on
at least 20 Trading Days (as hereinafter defined) out of any 30 consecutive
Trading Days ending within five business days prior to the notice of
redemption. Subject to the foregoing, Patina Preferred Stock may be redeemed
by Patina, at its option, on any date set by the Patina Board of Directors, in
whole or in part, at any time, subject to the limitations, if any, imposed by
applicable law, for an amount in cash equal to the following redemption prices
per share if redeemed during the 12-month period beginning on the anniversary
date of the Effective Time in any year indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.700%
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.988
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.275
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.563
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.850
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.138
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.425
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.713
2006 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000
</TABLE>
plus, in each case, an amount in cash equal to all per share dividends on the
Patina Preferred Stock accrued and unpaid thereon, whether or not declared, to
but excluding the date fixed for redemption. If fewer than all the outstanding
shares of Patina Preferred Stock are to be redeemed, Patina will select those
shares to be redeemed pro rata or by lot or in such other manner as the Patina
Board may determine to be fair. There is no mandatory redemption or sinking
fund obligation with respect to the Patina Preferred Stock. If at any time
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dividends on the Patina Preferred Stock are in arrears, Patina may not redeem
less than all of the then-outstanding shares of the Patina Preferred Stock
until all accrued dividends for all past dividend periods have been paid in
full.
Notice of redemption will be mailed at least 30 days but not more than
90 days before the date fixed for redemption to each holder of record of shares
of Patina Preferred Stock to be redeemed at the address shown on the stock
transfer books. No fractional shares of Patina Preferred Stock will be issued
upon a redemption of less than all of the Patina Preferred Stock, but in lieu
thereof, an appropriate amount will be paid in cash based on the value for the
shares of Patina Preferred Stock as determined in good faith by the Patina
Board. After the date fixed for redemption, dividends will cease to accrue on
the shares of Patina Preferred Stock called for redemption and other rights of
the holders of such shares will terminate, except the right to receive the
redemption price without interest, and all conversion rights privileges will
terminate at the close of business on the fifth business day prior to the date
fixed for redemption.
The term "Closing Price" means with respect to any common stock on any
day, the last reported sale price regular way on such day or, in case no such
sale takes place on such day, the average of the reported closing bid and
asking prices regular way of the common stock in each case on the principal
national securities exchange or quotation system on which the common stock is
listed or admitted to trading or quoted, or, if not listed or admitted to
trading or quoted on any national securities exchange or quotation system, the
average of the closing bid and asked prices of the common stock in the
over-the-counter market on the day in question as reported by the National
Quotation Bureau Incorporated, or a similarly generally accepted reporting
service, or, if not so available in such manner, as furnished by any New York
Stock Exchange member firm selected from time to time by the Board of Directors
of the Corporation for that purpose. The term "Trading Day" means a day on
which securities are traded on the national securities exchange or quotation
system or in the over-the-counter market used to determine the Closing Price.
Conversion Rights. The holder of any shares of Patina Preferred Stock
has the right, at the holder's option, to convert any or all of such shares
into Patina Common Stock at any time at a conversion price of $8.61.
Notwithstanding the foregoing, if the Patina Preferred Stock is called for
redemption, the conversion right will terminate at 5:00 p.m. Eastern time on
the fifth business day prior to the date fixed for such redemption. Except as
provided in the next paragraph, no payments or adjustments in respect of
dividends on shares of Patina Preferred Stock surrendered for conversion,
whether paid or unpaid and whether or not in arrears, or on account of any
dividend on the Patina Common Stock issued upon conversion shall be made by
Patina upon the conversion of any shares of Patina Preferred Stock. The holder
of record of shares of Patina Preferred Stock on a dividend record date who
surrenders such shares for conversion during the period between such dividend
record date and the corresponding dividend payment date will be entitled to
receive the dividend on such dividend payment date notwithstanding the
conversion of such shares; provided, however, that unless such shares, prior to
such surrender, had been called for redemption on a redemption date during the
period between such dividend record date and the date that is six business days
after such dividend payment date, such shares must be accompanied, upon
surrender for conversion, by payment from the holder to Patina of an amount
equal to the dividend payable on such shares on that dividend payment date. No
fractional shares of Patina Common Stock will be issued upon conversion but, in
lieu thereof, an appropriate amount will be paid in cash based on the reported
last sale price for the shares of Patina Common Stock on the NYSE on the day of
such conversion.
If Patina, by dividend or otherwise, declares or makes a distribution
on its Patina Common Stock referred to in clause (iv) or (v) below, the holders
of Patina Preferred Stock, upon the conversion thereof subsequent to the close
of business on the date fixed for the determination of stockholders entitled to
receive such distribution and prior to the effectiveness of the conversion
price adjustment in respect of such distribution, will be entitled to receive
for each share of Patina Common Stock into which Patina Preferred Stock is so
converted the portion of the evidences of indebtedness, shares of capital
stock, cash and assets so distributed applicable to one share of Patina Common
Stock; provided, however, that Patina may, with respect to all holders so
converting, in lieu of distributing any portion of such distribution not
consisting of cash or securities of Patina, pay such holder cash equal to the
fair market value thereof (as determined by the Patina Board).
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The conversion price will be subject to adjustment in certain events
including, without duplication, (i) dividends (and other distributions) payable
in Patina Common Stock on any class of capital stock of Patina; (ii) the
issuance to all holders of Patina Common Stock of rights or warrants, entitling
holders of such rights or warrants to subscribe for or purchase Patina Common
Stock at less than the current market price (as defined); (iii) subdivisions
and combinations of Patina Common Stock; (iv) distributions to all holders of
Patina Common Stock of evidences of indebtedness of Patina, shares of capital
stock, cash or assets (including securities, but excluding those rights,
warrants, dividends and distributions referred to above and dividends and
distributions paid exclusively in cash); and (v) distributions to all holders
of Patina Common Stock consisting of cash, excluding (A) cash that is part of a
distribution referred to in (iv) above, and (B) any quarterly cash dividend to
the extent it does not exceed the per share amount of the next preceding
quarterly cash dividend on the Patina Common Stock (as adjusted to reflect any
of the events referred to in clauses (i) through (iv) of this sentence), or all
of any such quarterly cash dividend if the amount thereof per share of Patina
Common Stock multiplied by four does not exceed 15% of the current market price
of the Patina Common Stock on the trading day next preceding the date of
declaration of such dividend.
Patina from time to time may reduce the conversion price by any amount
for any period of at least 20 days, in which case Patina shall give at least 15
days notice of such reduction, if the Patina Board has made a determination
that such reduction would be in the best interests of Patina, which
determination shall be conclusive.
PATINA WARRANTS
Pursuant to the Merger, Patina issued an aggregate of 3,000,000 Patina
Warrants, initially representing the right to purchase an aggregate of
3,000,000 shares of Patina Common Stock. Each Patina Warrant entitles the
holder thereof initially to purchase one share of Patina Common Stock for an
initial exercise price of $12.50 per share. The Patina Warrants are
exercisable at any time prior to the fifth anniversary of the date of issuance
thereof, at which time the Patina Warrants expire.
The number of shares subject to and the exercise price of the Patina
Warrants are subject to adjustment from time to time upon the occurrence of
certain events including (i) payment of a dividend or a distribution on Patina
Common Stock in shares of Patina Common Stock; (ii) payment of a dividend or a
distribution on any other class or series of Patina capital stock, which
distribution includes Patina Common Stock; (iii) subdivision of the outstanding
shares of Patina Common Stock; (iv) combination of the outstanding shares of
Patina Common Stock; (v) distributions on Patina Common Stock in shares of
Patina capital stock; (vi) issuances by reclassification of Patina Common Stock
of any shares of Patina capital stock; (vii) issuances of rights, warrants,
convertible securities or options entitling the holders thereof to subscribe
for or purchase shares of Patina Common Stock for a consideration per share
less than the market price; (viii) adjustments in the subscription or purchase
price to a price per share less than the market price; (ix) distribution on the
Patina Preferred Stock of an extraordinary cash dividend (as defined); (x)
issuances of Patina Common Stock for a consideration per share less than the
market price and (xi) acquisitions by Patina of Patina Common Stock pursuant to
a tender or exchange offer at a consideration per share in excess of the market
price on the day after the expiration of the tender or exchange offer.
Notwithstanding the foregoing, there will be no adjustment in the exercise
price for issuance of shares pursuant to any dividend reinvestment plan,
employee or director benefit plan, or any Patina Warrant or the Executive
Warrant. The foregoing summary does not purport to be complete and is subject
to and qualified in its entirety by reference to the Patina Warrant Agreement,
a copy of which has been filed as an exhibit to the Registration Statement of
which this Proxy Statement/Prospectus is a part.
Patina intends to file with the Commission a Registration Statement on
Form S-1 (the "Shelf Registration") relating to the shares of Patina Common
Stock issuable upon exercise of the Patina Warrants and the Executive Warrant
(as defined below).
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EXECUTIVE WARRANT
Pursuant to his Non-Competition Agreement, Patina issued to Robert W.
Gerrity a five-year warrant (the "Executive Warrant") initially to purchase an
aggregate of 500,000 shares at an initial exercise price equal to $8.04 (which
is the average of the closing prices of the Patina Common Stock for the 10-day
period following the date of the Merger), which warrant is identical to the
Patina Warrants except that it will not be exercisable until the later of (i)
the 30th day following the date of the Merger and (ii) the expiration of any
applicable waiting period under Section 16(b) of the Exchange Act. The
Executive Warrant may not be transferred except to the heirs and devisees of
Mr. Gerrity. The Shelf Registration will include the shares of Patina Common
Stock issuable upon exercise of the Executive Warrant. See "-Patina Warrants."
SHARES ELIGIBLE FOR FUTURE SALE
Following the Merger, there are issued and outstanding an aggregate of
20,000,000 shares of the common stock of Patina, of which 12,000,000 shares of
Patina Common Stock and 2,000,000 shares of Series A Common Stock are owned by
SOCO. In addition to the shares of Patina Common Stock that are outstanding,
there are outstanding an aggregate of 1,204,847 shares of Patina Preferred
Stock, 3,000,000 Patina Warrants and the Executive Warrant to purchase 500,000
shares of Patina Common Stock, and an additional 388,764 shares of Patina
Preferred Stock will be outstanding as a result of the Transaction. In
addition, it is expected that options to purchase shares of Patina Common Stock
will be granted from time to time pursuant to the Patina Option Plan and
Directors Stock Plan. Patina will have reserved a sufficient number of shares
of Patina Common Stock for issuance upon the conversion of the Patina Preferred
Stock and exercise of the Patina Warrants and the Executive Warrant. Following
the Merger, Patina will file and keep effective the Shelf Registration to
register under the Securities Act the issuance of Patina Common Stock pursuant
to the Patina Warrants and the Executive Warrant.
All of the shares of Patina Common Stock issued in the Merger (or
issued upon the conversion of the Patina Preferred Stock or Patina Warrants)
are freely tradeable by the holder thereof, except to the extent such shares
are held by persons who are affiliates of Patina or who were affiliates of
Gerrity. Shares held by such persons will be subject to certain restrictions
on transfer set forth in Rules 144 and 145 under the Securities Act, which
impose certain volume and manner of sale requirements on such shares. With
respect to the shares of Patina Common Stock held by SOCO, such shares are
"restricted securities" within the meaning of Rule 144 under the Securities
Act, and thus will be eligible for resale only in a transaction registered
under the Securities Act or pursuant to an applicable exemption therefrom.
However, SOCO is entitled to certain "demand" and "piggyback" registration
rights with respect to such shares, which would permit SOCO to sell large
amounts of the Patina Common Stock into the public market.
Patina has filed a registration statement to register under the
Securities Act the shares of Patina Common Stock which are issuable under the
Patina Option Plan and Directors Stock Plan. As a result, shares issued to
non- affiliates after the effective date of the registration statement covering
such shares generally may be sold freely in the open market.
No prediction can be made as to the effect, if any, that sales of
shares of Patina Common Stock or the availability of such shares for sale will
have on the market price of the Patina Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Patina Common Stock in the
public market could adversely affect prevailing market prices and make it less
likely that the Patina Preferred Stock can be converted into Patina Common
Stock at an advantageous price.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Patina Common Stock, Patina
Warrants and Patina Preferred Stock is Society National Bank, Dallas, Texas.
-97-
<PAGE> 102
COMPARATIVE RIGHTS OF PATINA AND GERRITY STOCKHOLDERS
If the Transaction is consummated, the holders of Depositary Shares
representing an interest in Gerrity Preferred Stock will become holders of
Patina Preferred Stock. The rights of the holders of both Patina and Gerrity
are governed by and subject to the provisions of the DGCL. The following is a
brief summary of certain differences between the rights of holders of Patina
Preferred Stock and the rights of holders of Gerrity Preferred Stock, and is
qualified in its entirety by reference to the relevant provisions of the DGCL,
the Certificate of Incorporation and Bylaws of Patina and the Certificate of
Incorporation and Bylaws of Gerrity. Except as set forth below, the rights of
holders of Patina Preferred Stock are substantially the same as the rights of
holders of Gerrity Preferred Stock Securities.
SPECIAL CONVERSION RIGHTS
Gerrity. The holders of Gerrity Preferred Stock are entitled to
convert all, but not less than all, of such holders' Gerrity Preferred Stock
into Gerrity Common Stock for a period of 30 days after Gerrity mails a notice
that a Change of Control (as defined in the Certificate of Incorporation) or a
Fundamental Change (as defined in the Certificate of Incorporation) has
occurred. The Merger did not constitute such a Change of Control or
Fundamental Change. Gerrity has the option in lieu of issuing Gerrity Common
Stock to pay to the holder cash in an amount equal to the Market Value (as
defined in the Certificate of Incorporation) of the shares of Gerrity Common
Stock into which such holders' Gerrity Preferred Stock is convertible.
Patina. The holders of Patina Preferred Stock are not entitled to
special conversion rights.
ABILITY TO CREATE SENIOR PREFERRED STOCK
Gerrity. The Certificate of Incorporation of Gerrity provides that
Gerrity will not create any class of Stock that, by its terms, ranks prior to
any outstanding preferred stock of Gerrity, including the Gerrity Preferred
Stock, as to dividends or upon liquidation, or increase the authorized number
of shares of any such class without the affirmative vote or consent of the
holders of at least two-thirds of all outstanding shares of preferred stock of
Gerrity, voting or consenting separately as a class. Gerrity may, however,
without such vote or consent, create any class of stock that by its terms ranks
pari passu or junior to any outstanding preferred stock of Gerrity or increase
the authorized number of shares of any such class.
Patina. The Certificate of Designation of the Patina Preferred Stock
provides that Patina will not create any class of stock that is convertible
into Patina Common Stock that, by its terms, ranks prior to the Patina
Preferred Stock as to dividends or upon liquidation, or increase the authorized
number of shares of any such class without the affirmative vote or consent of
66 2/3% of the outstanding shares of preferred stock of Patina, voting or
consenting separately as a class. Patina may, however, without such vote or
consent, create any class of non-convertible stock, regardless of ranking, or
any class of stock convertible into Patina Common Stock that by its terms ranks
pari passu or junior to any outstanding preferred stock of Patina or increase
the authorized number of shares of any such class.
INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of Arthur Andersen LLP will be
present at the Special Meeting to respond to appropriate questions of Gerrity
stockholders and to make a statement if they so desire.
LEGAL MATTERS
The validity of the Patina Preferred Stock to be issued in the
Transaction has been passed upon for Patina by Vinson & Elkins L.L.P., Houston,
Texas.
-98-
<PAGE> 103
EXPERTS
The financial statements of Patina at December 31, 1994 and 1995 and
for the three years then ended included in this Proxy Statement/Prospectus and
elsewhere in the Registration Statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The financial statements of Gerrity at December 31, 1994 and 1995 and
for the two years then ended included in this Proxy Statement/Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The consolidated financial statements of Gerrity for the year ended
December 31, 1993 included in this Proxy Statement/Prospectus have been audited
by Coopers & Lybrand L.L.P., independent accountants, as stated in their report
appearing herein. The consolidated financial statements audited by Coopers &
Lybrand L.L.P. have been included herein in reliance upon the reports of Coopers
& Lybrand L.L.P., independent accountants, upon the authority of such firm as
experts in accounting and auditing.
The information appearing in this Proxy Statement/Prospectus regarding
proved reserves and the related future net revenues and the present value
thereof is derived, as and to the extent described herein, from reserve reports
prepared by NSAI, independent oil and gas consultants, and, to such extent, are
included herein in reliance upon the authority of such firm as experts with
respect to such reports and audits.
-99-
<PAGE> 104
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PATINA OIL & GAS CORPORATION (FORMERLY SOCO WATTENBERG)
Introductory Note to Unaudited Consolidated Financial Statements F-2
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996 F-3
Consolidated Statements of Operations for the three months ended June 30, 1995
and 1996 and for the six months ended June 30, 1995 and 1996 F-4
Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 1994 and 1995 and for the six months ended June 30, 1996 F-5
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and 1996 F-6
Notes to Unaudited Financial Statements F-7
Report of Independent Public Accountants F-14
Balance Sheets as of December 31, 1994 and 1995 F-15
Statements of Operations for the years ended December 31, 1993,
1994 and 1995 F-16
Statements of Changes in Stockholder's Equity for the years ended
December 31, 1993, 1994 and 1995 F-17
Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 F-18
Notes to Audited Financial Statements F-19
GERRITY OIL & GAS CORPORATION
Introductory Note to Unaudited Consolidated Financial Statements F-25
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996 F-26
Consolidated Statements of Operations for the three months ended June 30, 1995
and 1996 and for the six months ended June 30, 1995 and 1996 F-27
Consolidated Statements of Stockholders Equity for the years ended
December 31, 1994 and 1995 and for the six months ended June 30, 1996 F-28
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and 1996 F-29
Notes to Unaudited Financial Statements F-30
Report of Independent Public Accountants F-36
Report of Independent Accountants F-37
Consolidated Balance Sheets as of December 31, 1994 and 1995 F-38
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 F-39
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995 F-40
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 F-41
Notes to Audited Consolidated Financial Statements F-42
</TABLE>
F-1
<PAGE> 105
INTRODUCTORY NOTE TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared in
conformity with generally accepted accounting principles. The statements are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary to fairly present Patina's financial position and results of
operations.
F-2
<PAGE> 106
PATINA OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 1,000 $ 13,213
Accounts receivable 6,611 18,907
Inventory and other 2,000 2,958
------------- --------------
9,611 35,078
------------- --------------
Oil and gas properties, successful efforts method 333,513 551,473
Accumulated depletion, depreciation and amortization (118,919) (136,861)
------------- --------------
214,594 414,612
------------- --------------
Gas facilities and other 4,775 5,922
Accumulated depreciation (4,459) (4,627)
------------- --------------
316 1,295
------------- --------------
Other assets, net - 4,490
------------- --------------
$ 224,521 $ 455,475
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,852 $ 15,065
Accrued liabilities 415 10,362
Payable to parent 5,344 4,329
------------- --------------
9,611 29,756
------------- --------------
Senior debt - 116,296
Senior subordinated notes - 104,617
Debt to parent 75,000 -
Other noncurrent liabilities 26,247 3,527
Preferred stock of subsidiary - 9,729
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par, 5,000,000 shares
authorized, -0- and 1,204,847 shares issued
and outstanding - 12
Common stock, $.01 par, 40,000,000 shares
authorized, 14,000,000 and 19,866,012 shares
issued and outstanding 140 199
Capital in excess of par value - 193,378
Investment by parent 113,523 -
Retained earnings (deficit) - (2,039)
------------- --------------
113,663 191,550
------------- --------------
$ 224,521 $ 455,475
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 107
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ---------------------
1995 1996 1995 1996
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales $ 12,887 $ 19,182 $ 27,148 $ 29,816
Other 3 274 29 294
-------- -------- -------- --------
12,890 19,456 27,177 30,110
-------- -------- -------- --------
Expenses
Direct operating 2,503 3,446 4,766 5,401
Exploration 41 81 139 149
General and administrative 1,323 1,570 3,542 3,113
Interest and other 1,351 3,732 2,769 4,979
Depletion, depreciation and amortization 8,331 11,756 16,951 18,723
-------- -------- -------- --------
Income (loss) before taxes (659) (1,129) (990) (2,255)
-------- -------- -------- --------
Provision (benefit) for income taxes
Current - - - -
Deferred (231) - (347) (394)
-------- -------- -------- --------
(231) - (347) (394)
-------- -------- -------- --------
Net income (loss) $ (428) $ (1,129) $ (643) $ (1,861)
======== ======== ======== ========
Net income (loss) per common share $ (.03) $ (.10) $ (.05) $ (.16)
======== ======== ======== ========
Weighted average shares outstanding 14,000 17,919 14,000 15,959
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 108
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CAPITAL IN RETAINED
------------------- ------------------- EXCESS OF INVESTMENT EARNINGS
SHARES AMOUNT SHARES AMOUNT PAR VALUE BY PARENT (DEFICIT)
-------- -------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 - $ - 14,000 $ 140 $ - $115,706 $ -
Credit in lieu of taxes - - - - - 1,107 -
Change in investment by parent - - - - - (1,196) -
Net loss - - - - - (2,094) -
-------- -------- ------- ------ -------- -------- -------
Balance, December 31, 1995 - - 14,000 140 - 113,523 -
Credit in lieu of taxes - - - - - 171 -
Change in investment by parent - - - - - (7,514) -
Net loss through the Merger date - - - - - (532) -
Merger 1,205 12 6,000 60 194,291 (105,648) -
Issuance of common - - 1 - 9 - -
Repurchase of common - - (135) (1) (922) - -
Preferred dividends - - - - - - (710)
Net loss subsequent to the
Merger date - - - - - - (1,329)
-------- -------- ------- ------ -------- -------- -------
Balance, June 30, 1996
(Unaudited) 1,205 $ 12 19,866 $ 199 $193,378 $ - $(2,039)
======== ======== ======= ====== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 109
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Operating activities
Net loss $ (643) $ (1,861)
Adjustments to reconcile net loss to net
cash provided by operations
Exploration expense 139 149
Depletion, depreciation and amortization 16,951 18,723
Deferred taxes (347) (394)
Amortization of deferred credits (860) (646)
Changes in current and other assets and liabilities
Decrease in
Accounts receivable 1,605 1,384
Inventory and other - 102
Increase (decrease) in
Accounts payable (11,647) (5,052)
Accrued liabilities 357 1,504
Other liabilities - 1,059
------------ -----------
Net cash provided by operations 5,555 14,968
------------ -----------
Investing activities
Acquisition, development and exploration (18,613) (1,375)
Merger expenditures, net of cash acquired - (1,040)
------------ -----------
Net cash used by investing (18,613) (2,415)
------------ -----------
Financing activities
Increase (decrease) in payable/debt to parent 4,331 (78,615)
Increase (decrease) in indebtedness (4,333) 96,108
Deferred credits 1,402 624
Change in investment by parent 11,658 (7,514)
Cost of common stock issuance - (9,310)
Repurchase of common stock - (923)
Preferred dividends - (710)
------------ -----------
Net cash realized (used) by financing 13,058 ( 340)
------------ -----------
Increase in cash - 12,213
Cash and equivalents, beginning of period 1,000 1,000
------------ -----------
Cash and equivalents, end of period $ 1,000 $ 13,213
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 110
PATINA OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
Patina Oil & Gas Corporation (the "Company"), a Delaware corporation, was
incorporated in January 1996 to hold all of the assets of Snyder Oil
Corporation ("SOCO") in the Wattenberg Field and to facilitate the acquisition
of Gerrity Oil & Gas Corporation ("GOG"). Previously, SOCO's Wattenberg
operations had been conducted through SOCO or its wholly owned subsidiary, SOCO
Wattenberg Corporation ("SWAT"). On May 2, 1996, SOCO contributed the balance
of its Wattenberg assets to SWAT and transferred all of the shares of SWAT to
the Company. Immediately thereafter, GOG merged into another wholly owned
subsidiary of the Company (the "Merger"). As a result of these transactions,
SWAT and GOG became wholly owned subsidiaries of the Company. The Company's
operations currently consist of the acquisition, development, production and
exploration of oil and gas properties in the Wattenberg Field.
SOCO owns approximately 70% of the common stock of the Company. In
conjunction with the Merger, the Company offered to exchange the Company's
preferred stock for GOG's preferred stock (the "Original Exchange Offer"). A
total of 1,204,847 shares were issued in exchange for approximately 75% of
GOG's preferred stock. Subsequent to quarter end, the Company announced that it
intended to amend GOG's certificate of incorporation to provide that all
remaining shares of GOG's preferred stock would be exchanged for the Company's
preferred stock based on the same terms as the Original Exchange Offer. The
expected dividend payments resulting from this exchange have been accrued at
June 30, 1996. Upon consummation of this second exchange, the Company expects
to have approximately 1.6 million preferred shares outstanding.
The above transactions were accounted for as a purchase of GOG. The
amounts and results of operations of the Company for periods prior to the
Merger reflected in these financial statements include the historical amounts
and results of operations of SOCO's Wattenberg operations. Certain amounts in
the accompanying financial statements have been allocated in a reasonable and
consistent manner in order to depict the historical financial position, results
of operations and cash flows of the Company on a stand-alone basis prior to the
Merger.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Risks and Uncertainties
Historically, the market for oil and gas has experienced significant
price fluctuations. Prices for natural gas in the Rocky Mountain region have
traditionally been particularly volatile and have been depressed since 1994.
In large part, the decreased prices are the result of mild weather, increased
production in the region and limited transportation capacity to other regions
of the country. Increases or decreases in prices received could have a
significant impact on the Company's future results of operations.
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Consequently, leasehold costs are capitalized when
incurred. Unproved properties are assessed periodically
F-7
<PAGE> 111
within specific geographic areas and impairments in value are charged to
expense. Exploratory expenses, including geological and geophysical expenses
and delay rentals, are charged to expense as incurred. Exploratory drilling
costs are initially capitalized, but charged to expense if and when the well is
determined to be unsuccessful. Costs of productive wells, unsuccessful
developmental wells and productive leases are capitalized and amortized on a
unit-of- production basis over the life of the remaining proved or proved
developed reserves, as applicable. Gas is converted to equivalent barrels at
the rate of 6 Mcf to 1 barrel. Amortization of capitalized costs has generally
been provided over the entire DJ Basin as the wells are located in the same
reservoir. The Company expects to review the appropriateness of this policy in
the second half of 1996. No accrual has been provided for estimated future
abandonment costs as management estimates that the salvage value will
approximate such costs.
During the fourth quarter of 1995, the Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 121 requires the Company to assess the need for an impairment of
capitalized costs of oil and gas properties on a field-by- field basis. During
the six months ended June 30, 1995 and 1996, the Company did not provide for
any impairments. Changes in the underlying assumptions or the amortization
units could, however, result in impairments in the future.
Other assets reflect the value assigned to a noncompete agreement entered
into as part of the Merger. The value is being amortized over five years at a
rate intended to approximate the decline in the value of the agreement.
Amortization expense for the two months ended June 30, 1996 was $640,000.
Scheduled amortization for the next five years is $1,924,000 for the remainder
of 1996, $1,540,000 in 1997, $513,000 in 1998, and $257,000 in each of 1999 and
2000.
Gas Imbalances
The Company uses the sales method to account for gas imbalances. Under
this method, revenue is recognized based on the cash received rather than the
Company's proportionate share of gas produced. Gas imbalances at December 31,
1995 and June 30, 1996 were insignificant.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $1.0
million and $13.2 million at December 31, 1995 and June 30, 1996. The book
value approximates fair value due to the short maturity of these instruments.
The book value and estimated fair value of the Company's debt to parent and
senior debt combined was $75.0 million and $116.3 million at December 31, 1995
and June 30, 1996. The fair value is presented at face value given its
floating rate structure. The book value of the senior subordinated notes was
$104.6 million at June 30, 1996. The estimated fair value was $104.1 million
at that date. The fair value is estimated based on their price on the New York
Stock Exchange.
Other
All liquid investments with an original maturity of three months or less
are considered to be cash equivalents.
All cash payments for income taxes were made by SOCO during the six
months ended June 30, 1995 and through May 2, 1996 at which point the Company
began paying its own taxes. The Company was charged interest by SOCO on its
debt to SOCO of $2.7 million and $1.6 million for the six months ended June 30,
1995 and 1996, which was reflected as an increase in debt to SOCO.
Certain amounts in prior periods consolidated financial statements have
been reclassified to conform with current classification.
In the opinion of management, those adjustments to the financial
statements (all of which are of a normal and recurring nature) necessary to
present fairly the financial position and results of operations have been made.
These interim financial statements should be read in conjunction with the
Company's Proxy Statement/Prospectus dated April 2, 1996 (SEC Registration No.
333-00572).
F-8
<PAGE> 112
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 1995 and June 30, 1996
includes no significant unevaluated leasehold. Acreage is generally held for
exploration, development or resale and its value, if any, is excluded from
amortization. The following table sets forth costs incurred related to oil and
gas properties.
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Acquisition $ 650 $ 218,297
Development 12,141 736
Exploration 416 149
Other 13 47
---------- ---------
$ 13,220 $ 219,229
========== =========
</TABLE>
On May 2, 1996, the Merger discussed in Note 1 was consummated. The
following table summarizes the unaudited pro forma effects on the Company's
financial statements assuming that the Merger and the Exchange Offer had been
consummated on January 1, 1995 and 1996. Future results may differ
substantially from pro forma results due to changes in these assumptions,
changes in oil and gas prices, production declines and other factors.
Therefore, pro forma statements cannot be considered indicative of future
operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1995 1996
-------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Total revenues $ 56,560 $ 47,060
Production direct operating margin $ 45,585 $ 37,756
Depletion, depreciation and amortization $ 32,443 $ 27,945
Net income (loss) $ (884) $ (3,653)
Net income (loss) per common share $ (.12) $ (.25)
Weighted average shares outstanding 20,000 20,000
Production volumes (MBOE) 5,146 3,684
</TABLE>
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Bank credit facilities $ - $ 116,296
Less current portion - -
---------- ---------
Senior debt, net $ - $ 116,296
========== =========
Senior subordinated notes $ = $ 104,617
========== =========
Debt to parent $ 75,000 $ =
========== =========
</TABLE>
Simultaneously with the Merger, the Company entered into a bank credit
agreement. The agreement consists of (a) a facility provided to the Company
and SOCO Wattenberg (the "Company Facility") and (b) a facility provided to GOG
(the "GOG Facility").
F-9
<PAGE> 113
The Company Facility consists of a term loan facility (the "Company Term
Facility") in an amount up to $87 million and a revolving credit facility (the
"Company Revolving Facility") in an aggregate amount up to $102 million. The
Company Term Facility will be available to fund loans from Patina and/or SOCO
Wattenberg to GOG (the "Intercompany Loan") to finance purchases of the GOG
11.75% Senior Subordinated Notes until the first anniversary of the Merger. At
June 30, 1996, the Company had not utilized the Company Term Facility. The
amount available for borrowing under the Company Revolving Facility will be
limited to a semiannually adjusted borrowing base that equaled $102 million at
June 30, 1996. At June 30, 1996, $81.8 million was outstanding under the
Company Revolving Facility.
The GOG Facility is a revolving credit facility in an aggregate amount up
to $51 million. The amount available for borrowing under the GOG Facility will
be limited to a fluctuating borrowing base that equaled $51 million at June 30,
1996. At June 30, 1996, $34.5 million was outstanding under the GOG Facility.
The GOG Facility was used primarily to refinance GOG's previous bank credit
facility and pay for costs associated with the Merger.
The borrowers may elect that all or a portion of the credit facilities
bear interest at a rate per annum equal to: (i) the higher of (a) prime rate
plus a margin equal to .25% with respect to the GOG Facility and the Company
Revolving Facility and .75% increasing by 1% on the first anniversary of the
Merger and by .5% every six months thereafter with respect to the Company Term
Facility (the "Applicable Margin") and (b) the Federal Funds Effective Rate
plus .5% plus the Applicable Margin, or (ii) the rate at which eurodollar
deposits for one, two, three or six months (as selected by the applicable
borrower) are offered in the interbank eurodollar market in the approximated
amount of the requested borrowing (the "Eurodollar Rate") plus 1.25%, with
respect to the GOG Facility and the Company Revolving Facility, and 1.5%
increasing by 1% on the first anniversary of the Merger and by .5% every six
months thereafter with respect to the Company Term Facility (the "Eurodollar
Margin"). During the period subsequent to the Merger through June 30, 1996,
the average interest rate under the facilities was 7.0%.
The bank credit agreement contains certain financial covenants, including
but not limited to a maximum total debt to capitalization ratio, a maximum
total debt to EBITDA ratio and a minimum current ratio. The bank credit
agreement also contains certain negative covenants, including but not limited
to restrictions on indebtedness; certain liens; guaranties, speculative
derivatives and other similar obligations; asset dispositions; dividends, loans
and advances; creation of subsidiaries; investments; leases; acquisitions;
mergers; changes in fiscal year; transactions with affiliates; changes in
business conducted; sale and leaseback and operating lease transactions; sale
of receivables; prepayment of other indebtedness; amendments to principal
documents; negative pledge clauses; issuance of securities; and non-speculative
commodity hedging.
Simultaneously with the Merger, the Company recorded $100 million of
Senior Subordinated Notes due July 15, 2004 issued by GOG on July 1, 1994. In
connection with the Merger, the Company repurchased $1.2 million of the notes.
As part of the purchase accounting, the remaining notes have been reflected in
the accompanying financial statements at a market value of $104.6 million or
105.875% of their principal amount. Interest is payable each January 15 and
July 15. The Notes are redeemable at the option of GOG, in whole or in part,
at any time on or after July 15, 1999, initially at 105.875% of their principal
amount, declining to 100% on or after July 15, 2001. Upon the occurrence of a
change of control, as defined in the Notes, GOG would be obligated to make an
offer to purchase all outstanding Notes at a price of 101% of the principal
amount thereof. In addition, GOG would be obligated, subject to certain
conditions, to make offers to purchase Notes with the net cash proceeds of
certain asset sales or other dispositions of assets at a price of 101% of the
principal amount thereof. The Notes are unsecured general obligations of GOG
and are subordinated to all senior indebtedness of GOG and to any existing and
future indebtedness of GOG's subsidiaries.
The Notes contain covenants that, among other things, limit the ability
of GOG to incur additional indebtedness, pay dividends, engage in transactions
with shareholders and affiliates, create liens, sell assets, engage in mergers
and consolidations and make investments in unrestricted subsidiaries.
Specifically, the Notes restrict GOG from incurring indebtedness (exclusive of
the Notes) in excess of approximately $51 million, if after giving effect to
the incurrence of such additional indebtedness and the receipt and application
F-10
<PAGE> 114
of the proceeds therefrom, GOG's interest coverage ratio is less than 2.5:1 or
adjusted consolidated net tangible assets is less than 150% of the aggregate
indebtedness of GOG. GOG currently does not meet the interest coverage ratio
necessary to incur indebtedness in excess of approximately $51 million
primarily as a result of lower than anticipated commodity prices.
Prior to the Merger, SOCO financed all of the Company's activities. A
portion of such financing was considered to be an investment by parent in the
Company with the remaining portion being considered Debt to parent. The
portion considered to be Debt to parent versus an investment by parent was a
discretionary percentage determined by SOCO after consideration of the
Company's internally generated cash flows and level of capital expenditures.
Subsequent to the Merger, the $75 million debt to parent was paid in full and
the Company does not expect SOCO to provide any additional funding.
On the portion of such financing which was considered to be Debt to
parent, interest was charged by SOCO to the Company. The Company was charged
interest on the debt payable to SOCO at a rate which approximated the average
interest rate being paid by SOCO under its revolving credit facility (7.0% and
6.4% for 1995 and the six months ended June 30, 1996).
Scheduled maturities of indebtedness for the next five years are zero for
the remainder of 1996, 1997 and 1998, $116.3 million in 1999 and zero in 2000.
The long-term portion of the credit facilities are scheduled to expire in 1999;
however, it is management's intent to review both the short-term and long-term
facilities and extend the maturities on a regular basis.
Cash payments for interest were zero and $649,000, respectively, for the
six months ended June 30, 1995 and 1996.
(5) STOCKHOLDERS' EQUITY
A total of 40 million common shares, $.01 par value, are authorized of
which 19.9 million were issued and outstanding at June 30, 1996. The Company
issued 6.0 million shares in exchange for all of the outstanding stock of GOG
upon consummation of the Merger. Of the 19.9 million shares outstanding, 2.0
million are designated as Series A Common Stock. The Series A Common Stock is
identical to the common shares except that the Series A Common Stock is
entitled to three votes per share rather than one vote per share. The Series A
Common Stock is owned by SOCO and reverts to regular common shares upon certain
conditions. During the second quarter 1996, the Company repurchased 135,000
shares of common stock for $923,000. No dividends have been paid on the
Company's common stock as of June 30, 1996.
A total of 5 million preferred shares, $.01 par value, are authorized of
which 1.2 million were issued and outstanding at June 30, 1996. In May 1996,
1.2 million shares of 7.125% preferred stock were issued to certain GOG
preferred shareholders electing to exchange their preferred shares in an
exchange offer related to the consummation of the Merger. Thus there were no
proceeds received related to this issuance. The stock is convertible into
common stock at any time at $8.61 per share. The 7.125% preferred stock is
redeemable at the option of the Company at any time after May 2, 1998 if the
average closing price of the Patina common stock for 20 of the 30 days prior to
not less than five days preceding the redemption date is greater than $12.92
per share or at any time after May 2, 1999. The liquidation preference is $25
per share, plus accrued and unpaid dividends. The Company paid $536,000 ($1.78
per 7.125% convertible share per annum) in preferred dividends during the six
months ended June 30, 1996 and has accrued an additional $528,000 at June 30,
1996 for dividends.
In 1996, the shareholders adopted a stock option plan for employees
providing for the issuance of options at prices not less than fair market
value. Options to acquire up to three million shares of common stock may be
outstanding at any given time. The specific terms of grant and exercise are
determinable by a committee of independent members of the Board of Directors.
A total of 512,000 options were issued in May 1996. The options vest over a
three-year period (30%, 60%, 100%) and expire five years from date of grant.
In 1996, the shareholders adopted a stock grant and option plan (the
"Directors' Plan") for non-employee Directors of the Company. The Directors'
Plan provides for each non-employee Director to receive
F-11
<PAGE> 115
common shares having a market value equal to $2,250 quarterly in payment of
one-half their retainer. A total of 1,412 shares were issued in June 1996. It
also provides for 5,000 options to be granted annually to each non-employee
Director. A total of 20,000 options were issued in May 1996. The options vest
over a three-year period (30%, 60%, 100%) and expire five years from date of
grant.
Earnings per share are computed by dividing net income (loss), less
dividends on preferred stock, by weighted average common shares outstanding.
Net income (loss) available to common for the six months ended June 30, 1995
and 1996, was $(643,000) and $(2.6) million, respectively. Differences between
primary and fully diluted earnings per share were insignificant for all periods
presented.
(6) FEDERAL INCOME TAXES
Prior to the Merger, the Company had been included in the tax return of
SOCO. Current and deferred income tax provisions allocated by SOCO were
determined as though the Company filed as an independent company, making the
same tax return elections used in SOCO's consolidated return. Subsequent to
the Merger, the Company will not be included in the tax return of SOCO.
A reconciliation of the statutory rate to the Company's effective rate as
they apply to the benefit for the six months ended June 30, 1995 and 1996
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1995 1996
------- ------
<S> <C> <C>
Federal statutory rate (35%) (35%)
Loss in excess of net deferred tax liability - 18%
------- ------
Effective income tax rate (35%) (17%)
======= ======
</TABLE>
For tax purposes, the Company had regular net operating loss
carryforwards of $44.9 million and alternative minimum tax loss carryforwards
of $3.2 million at December 31, 1995. These carryforwards expire between 2005
and 2009. No cash payments were made by the Company for federal taxes during
1994 and 1995. As discussed in Note 1, the accompanying financial statements
include certain Wattenberg operations previously owned directly by SOCO.
Accordingly, certain operating losses generated by these properties were
retained by SOCO. In addition, certain taxable income generated by SOCO did
not offset the Company's net operating loss carryforwards. The effect of such
items has been reflected as a charge or credit in lieu of taxes in the
Company's statement of changes in stockholder's equity.
(7) MAJOR CUSTOMERS
During the six months ended June 30, 1995 and 1996, Associated Natural
Gas, Inc. accounted for 54% and 59%, Amoco Production Company accounted for 22%
and 19%, and Total Petroleum accounted for 17% and 14% of revenues,
respectively. Management believes that the loss of any individual purchaser
would not have a long-term material adverse impact on the financial position or
results of operations of the Company.
(8) DEFERRED CREDITS
In 1992, the Company formed a partnership to monetize its Section 29
tax credits. Through May 1996, revenue increase of more than $.40 per Mcf was
realized on production volumes from qualified Section 29 properties in this
arrangement. The Company recognized $860,000 and $646,000 of this revenue
during the six months ended June 30, 1995 and 1996, respectively. In May 1996,
the Company terminated the partnership and simultaneously entered into a new
agreement to monetize Section 29 tax credits. The new agreement provides for
the Company to receive proceeds from Section 29 tax credits via a variable
production payment. As a result, this arrangement is expected to increase
revenue by more than $.40 per Mcf through 2002. Subsequent to June 30, 1996,
the Company negotiated an agreement whereby additional Section 29 tax credits
will be monetized under this same type of structure.
F-12
<PAGE> 116
(9) RELATED PARTY
Prior to the Merger, the Company did not have its own employees.
Employees, certain office space and furniture, fixtures and equipment were
provided by SOCO. SOCO allocated general and administrative expenses to the
Company based on its estimate of expenditures incurred on behalf of the
Company. Subsequent to the Merger, certain field, administrative and executive
employees of SOCO and GOG became employees of the Company. SOCO will continue
to provide certain services to Patina under a corporate services agreement.
(10) COMMITMENTS AND CONTINGENCIES
In August 1995, SOCO was sued in the United States District Court of
Colorado by seven plaintiffs purporting to represent all persons who, at any
time since January 1, 1960, have had agreements providing for royalties from
gas production in Colorado to be paid by SOCO under a number of various lease
provisions. Substantially all liability under this suit has been assumed by
Patina. In January 1996, GOG was also sued in a similar but separate action
filed in the District Court in and for the City and County of Denver. The
plaintiffs, in both suits, allege that the companies improperly deducted
unspecified "post-production" costs incurred by the companies prior to
calculating royalty payments in breach of the relevant lease provisions and
that the companies fraudulently concealed that fact from the plaintiffs. The
plaintiffs seek unspecified compensatory and punitive damages and a declaratory
judgment that the companies are not permitted to deduct post-production costs
prior to calculating royalties paid to the class. SOCO, Patina and GOG believe
that costs deducted in calculating royalties are and have been proper under the
relevant lease provisions, and they intend to defend these and any similar
suits vigorously. At this time, the Company is unable to estimate the range of
potential loss, if any, from this uncertainty. However, the Company believes
the resolution of this uncertainty should not have a material adverse effect
upon the Company's financial position, although an unfavorable outcome in any
reporting period could have a material impact on the Company's results of
operations for that period.
In March 1996, a complaint was filed in the Court of Chancery for the
State of Delaware against GOG and each of its directors, Brickell Partners v.
Gerrity Oil & Gas Corporation, C.A. No. 14888 (Del. Ch.). The complaint
alleges that the "action is brought (a) to restrain the defendants from
consummating a merger which will benefit the holders of the Company's common
stock at the expense of the holders of the Preferred and (b) to obtain a
declaration that the terms of the proposed merger constitute a breach of the
contractual rights of the Preferred." The complaint seeks, among other things,
certification as a class action on behalf of all holders of the Company's
preferred stock, a declaration that the defendants have committed an abuse of
trust and have breached their fiduciary and contractual duties, an injunction
enjoining the Merger and money damages. Defendants believe that the complaint
is without merit and intend to vigorously defend against the action. At this
time, the Company is unable to estimate the range of potential loss, if any,
from this uncertainty. However, the Company believes the resolution of this
uncertainty should not have a material adverse effect upon the Company's
financial position, although an unfavorable outcome in any reporting period
could have a material impact on the Company's results of operations for that
period.
The Company is a party to various other lawsuits incidental to its
business, none of which are anticipated to have a material adverse impact on
its financial position or results of operations.
F-13
<PAGE> 117
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder,
Patina Oil & Gas Corporation:
We have audited the accompanying balance sheets of Patina Oil & Gas
Corporation (a Delaware corporation and wholly owned subsidiary of Snyder Oil
Corporation, formerly SOCO Wattenberg) as of December 31, 1994 and 1995, and
the related statements of operations, changes in stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Patina Oil & Gas
Corporation as of December 31, 1994 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Fort Worth, Texas,
March 19, 1996
F-14
<PAGE> 118
PATINA OIL & GAS CORPORATION
(FORMERLY SOCO WATTENBERG)
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
---- ----
<S> <C> <C>
Current assets
Cash and equivalents $ 1,000 $ 1,000
Accounts receivable 8,083 6,611
Inventory 2,000 2,000
-------- ---------
11,083 9,611
-------- ---------
Notes receivable 782 --
-------- ---------
Oil and gas properties, successful efforts method 325,608 338,288
Accumulated depletion, depreciation and amortization (90,787) (123,378)
-------- ---------
234,821 214,910
-------- ---------
$246,686 $ 224,521
======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 14,754 $ 3,852
Accrued liabilities 9,084 415
Payable to parent -- 5,344
-------- ---------
23,838 9,611
-------- ---------
Deferred taxes and other 27,669 26,247
Debt to parent 79,333 75,000
Contingencies
Stockholder's equity
Preferred stock, $.01 par, 5,000,000 shares authorized,
-0- shares issued and outstanding -- --
Common stock, $.01 par, 40,000,000 shares authorized, 14,000,000
shares issued and outstanding 140 140
Investment by parent 115,706 113,523
-------- ---------
115,846 113,663
-------- ---------
$246,686 $ 224,521
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE> 119
PATINA OIL & GAS CORPORATION
(FORMERLY SOCO WATTENBERG)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Revenues
Oil and gas sales $64,554 $67,749 $50,073
Other 311 73 29
------- ------- -------
64,865 67,822 50,102
------- ------- -------
Expenses
Direct operating 8,927 8,110 8,867
Exploration 573 784 416
General and administrative 6,982 7,484 5,974
Interest paid to parent and other 2,362 3,869 5,476
Depletion, depreciation and amortization 25,190 43,036 32,591
------- ------- -------
Income (loss) before taxes 20,831 4,539 (3,222)
------- ------- -------
Provision (benefit) for income taxes
Current -- -- --
Deferred 7,291 1,589 (1,128)
------- ------- -------
Net income (loss) $13,540 $ 2,950 $(2,094)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE> 120
PATINA OIL & GAS CORPORATION
(FORMERLY SOCO WATTENBERG)
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------ INVESTMENT
SHARES AMOUNT BY PARENT
------ ------ ---------
<S> <C> <C> <C>
Balance, December 31, 1992 14,000 $ 140 $ 51,138
Net income -- -- 13,540
Charge in lieu of taxes -- -- (2,794)
Change in investment by parent -- -- 30,841
------ ------ --------
Balance, December 31, 1993 14,000 $ 140 92,725
Net income -- -- 2,950
Charge in lieu of taxes -- -- (8,190)
Change in investment by parent -- -- 28,221
------ ------ --------
Balance, December 31, 1994 14,000 $ 140 115,706
Net loss -- -- (2,094)
Credit in lieu of taxes -- -- 1,107
Change in investment by parent -- -- (1,196)
------ ------ --------
Balance, December 31, 1995 14,000 $ 140 $113,523
====== ====== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE> 121
PATINA OIL & GAS CORPORATION
(FORMERLY SOCO WATTENBERG)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 13,540 $ 2,950 $ (2,094)
Adjustments to reconcile net income (loss) to
net cash provided by operations
Exploration expense 573 784 416
Depletion, depreciation and amortization 25,190 43,036 32,591
Deferred taxes 7,291 1,589 (1,128)
Amortization of deferred credits (3,686) (2,539) (2,025)
Changes in operating assets and liabilities
Decrease (increase) in
Accounts receivable (7,556) 3,642 1,472
Inventory (1,826) -- --
Increase (decrease) in
Accounts payable 5,049 (1,552) (10,902)
Accrued liabilities 307 (220) 77
-------- -------- --------
Net cash provided by operations 38,882 47,690 18,407
-------- -------- --------
Investing activities
Acquisition, development and exploration (99,043) (95,596) (21,842)
Notes receivable 1,470 (782) 782
-------- -------- --------
Net cash used by investing (97,573) (96,378) (21,060)
-------- -------- --------
Financing activities
Increase in payable to parent -- -- 5,344
Increase (decrease) in debt to parent 25,320 18,476 (4,333)
Monetization of tax credits 2,530 1,991 2,838
Change in investment by parent 30,841 28,221 (1,196)
-------- -------- --------
Net cash realized by financing 58,691 48,688 2,653
-------- -------- --------
Increase in cash -- -- --
Cash and equivalents, beginning of year 1,000 1,000 1,000
-------- -------- --------
Cash and equivalents, end of year $ 1,000 $ 1,000 $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 122
PATINA OIL & GAS CORPORATION
(FORMERLY SOCO WATTENBERG)
NOTES TO AUDITED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
Patina Oil & Gas Corporation (the "Company" or "Patina"), a Delaware
corporation, is a wholly-owned subsidiary of Snyder Oil Corporation (along with
its remaining subsidiaries, collectively referred to as "SOCO"). The Company
was formed in January 1996 for the purpose of consolidating SOCO's operations
in the Wattenberg Field of the Denver-Julesburg Basin (the "DJ Basin") in
Colorado ("Wattenberg"). A portion of SOCO's Wattenberg operations have
historically been conducted through SOCO Wattenberg Corporation, a wholly-owned
subsidiary of SOCO. The Wattenberg operations consist of the acquisition,
exploration, development and production of oil and gas properties in the
Wattenberg field.
In January 1996, SOCO entered into an agreement whereby the Wattenberg
operations of SOCO will be merged with Gerrity Oil & Gas Corporation ("Gerrity
Merger"). As a result, SOCO will own 70% of the common stock and the former
Gerrity shareholders will own 30% of the common stock of the new public company
which will be known as Patina. Prior to the consummation of the Gerrity
Merger, SOCO's Wattenberg operations will be consolidated into Patina.
Accordingly, the amounts and results of operations of the Company included in
these financial statements include the historical amounts and results of
operations of the Wattenberg operations of SOCO to be consolidated into Patina.
The consummation of the Gerrity Merger is subject to certain conditions
including approval by Gerrity's shareholders. There is no assurance that the
Gerrity Merger will be consummated.
Historically, the market for oil and gas has had significant price
fluctuations. Prices for the DJ Basin gas production have traditionally been
more volatile than prices in other markets and have been depressed since early
1995. In large part, this is the result of increased production in the region
and limited transportation capacity to other regions of the country. As a
result, prices are particularly sensitive to local demand, which has been
depressed primarily due to unusually mild weather in the region in 1995.
Future increases or decreases in prices received could have a significant
impact on the Company's future results of operations.
Certain amounts in the accompanying financial statements have been
allocated in a reasonable and consistent manner in order to depict the
historical financial position, results of operations and cash flows of the
Company on a stand-alone basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company follows the "successful efforts" accounting method. All
oil and gas leasehold costs are capitalized when incurred. Unproved properties
are assessed periodically on a prospect-by-prospect basis and impairments in
value are charged to expense. Exploratory expenses, including geological and
geophysical expenses and delay rentals, are charged to expense as incurred.
Exploratory drilling costs, including stratigraphic test wells, are initially
capitalized, but charged to expense if and when the well is determined to be
unsuccessful. Costs of productive wells, developmental dry holes and
productive leases are capitalized and amortized on a unit-of-production basis
over the life of the remaining proved or proved developed reserves, as
applicable. Gas is converted to equivalent barrels at the rate of 6 Mcf to 1
barrel. Amortization of capitalized costs is generally provided over the
entire DJ Basin as the wells are located in the same reservoir. No accrual has
been provided for estimated dismantlement, restoration and abandonment
F-19
<PAGE> 123
costs as management estimates that the salvage value of lease and well
equipment will approximate the future liability for such costs.
Prior to 1995, the Company provided impairments for significant proved
and unproved oil and gas property groups to the extent that net capitalized
costs exceeded the undiscounted future cash flows. During 1994, the Company
provided impairments of $2.9 million. During 1995, the Company adopted
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". SFAS 121 requires the Company to assess the need for an
impairment of capitalized costs of oil and gas properties on a field-by-field
basis. If an impairment is indicated based on undiscounted expected future
cash flows, then an impairment is recognized to the extent that net capitalized
costs exceed discounted expected future cash flows. During 1995, the Company
provided impairments of $712,000. The expected cash flows used to assess the
need for impairment is highly dependent on the assumptions regarding future
prices to be received and costs to be incurred as well as estimated economic
reserves to be recovered. Changes in the underlying assumptions or the
amortization units could result in impairments in the future.
The Company uses the sales method to account for gas imbalances.
Under this method, revenue is recognized based on the cash received rather than
the Company's proportionate share of gas produced. The Company's imbalances at
December 31, 1994 and 1995 were not significant.
The carrying value and estimated fair value of cash and equivalents
was $1.0 million at December 31, 1994 and 1995. The carrying value
approximates fair value due to the short maturity of these financial
instruments. The carrying value and estimated fair value of the Company's debt
to parent was $79.3 million and $75.0 million at December 31, 1994 and 1995.
The fair value is estimated based on current rates offered to SOCO for similar
debt.
All cash payments for income taxes were made by SOCO in 1993, 1994 and
1995. The Company was charged interest by SOCO on its debt to parent of $2.4
million in 1993, $3.9 million in 1994 and $5.4 million in 1995 which was
reflected as an increase in Debt to parent. As provided by the Gerrity Merger
Agreement, SOCO will retain all ad valorem tax liabilities applicable to
production through 1995 and will contribute inventory of $2.0 million.
Additionally, the working capital to be contributed by SOCO to Patina will be
zero plus certain items provided for in the Gerrity Merger Agreement.
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 1994 and 1995
includes $714,000 and zero of unevaluated leasehold. Such properties are held
for exploration, development or resale and are excluded from amortization. The
following table sets forth costs incurred related to oil and gas properties.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Acquisition $ 24,593 $ 7,556 $ 650
Development 74,598 88,213 12,141
Exploration 573 784 416
Other 944 909 13
-------- ------- -------
$100,708 $97,462 $13,220
======== ======= =======
</TABLE>
(4) DEBT TO PARENT
Historically, SOCO has financed all of the Company's activities. A
portion of such financing is considered to be an investment by SOCO in the
Company with the remaining portion being considered debt to parent. The
portion considered to be debt to parent versus an investment by SOCO is a
discretionary percentage determined by SOCO after consideration of the
Company's internally generated cash flows and level of capital expenditures.
The classification of historical financings is not necessarily an indicator of
how
F-20
<PAGE> 124
future financings will be characterized. Also, it is contemplated that
subsequent to the Gerrity Merger, if consummated, SOCO will provide no
additional funding to the Company.
On the portion of such financing which is considered to be debt to
parent, interest is charged by SOCO to the Company. The Company is charged
interest on the net debt to SOCO at a rate which approximates the average
interest rate being paid by SOCO under its revolving credit facility (4.9%,
5.5% and 7.0% during the years ended December 31, 1993, 1994 and 1995). There
were no cash payments for interest expense in 1993, 1994 or 1995.
(5) FEDERAL INCOME TAXES
The Company has historically been included in the consolidated U.S.
federal income tax return of SOCO. Current and deferred income tax provisions
allocated by SOCO were determined as though the Company filed as an independent
company, making the same tax return elections used in SOCO's consolidated
return. Subsequent to the Gerrity Merger, Patina will not be included in the
consolidated U.S. federal income tax return of SOCO.
The Company adopted FASB Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," effective January 1, 1992. As such,
any deferred income taxes reflect the future tax consequences of temporary
differences between the tax bases of assets and liabilities and their financial
reporting amounts. No differences existed between the federal statutory rate
and the Company's effective rate.
For book purposes the components of the net deferred asset and
liability at December 31, 1994 and 1995, respectively, were:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Deferred tax assets
NOL carryforwards $16,611 $15,716
Reserves and other -- 128
------- -------
16,611 15,844
======= =======
Deferred tax liabilities
Depreciable and depletable property 44,100 41,169
Investments and other 71 --
------- -------
44,171 41,169
------- -------
Net deferred tax liability $27,560 $25,325
======= =======
</TABLE>
For tax purposes, the Company had regular net operating loss
carryforwards of $44.9 million and alternative minimum tax loss carryforwards
of $3.2 million at December 31, 1995. These carryforwards expire between 2005
and 2009. No cash payments were made by the Company for federal taxes during
1993, 1994 and 1995. As discussed in Note 1, the accompanying financial
statements include certain Wattenberg operations owned directly by SOCO.
Accordingly, certain operating losses generated by these properties were
retained by SOCO. In addition, certain taxable income generated by SOCO did not
offset the Company's net operating loss carryforwards. The effect of such
items has been reflected as charge or credit in lieu of taxes in the Company's
statement of changes in stockholder's equity.
(6) MAJOR CUSTOMERS
In 1993, 1994, and 1995, Amoco Production Company accounted for 29%,
25% and 22%, respectively, of revenues. In 1994 and 1995, Total Petroleum
accounted for 15% and 20%, respectively. In 1993, 1994, and 1995, subsidiaries
of SOCO accounted for 48%, 59% and 46%, respectively, of revenues. Management
believes that the loss of any individual purchaser would not have a material
adverse impact on the financial position or results of operations of the
Company.
F-21
<PAGE> 125
(7) DEFERRED CREDITS
The Company is involved in a partnership formed to monetize Section 29
tax credits generated by the Company's properties. In 1992, an institutional
investor agreed to contribute $6.4 million related to the Company's properties.
The initial $3.0 million was contributed in 1992, an additional $2.6 million
contributed during 1993 and $813,000 received in March 1994. In June 1994, the
arrangement was extended and an additional $1.4 million was received. In early
1995, a second investor was added and the limited partners committed to
contribute an additional $4.0 million. As a result, this transaction is
anticipated to increase cash flow and net income through early 1996. A revenue
increase of more than $.40 per Mcf is realized on production generated from
qualified Section 29 properties in this partnership. The amounts received by
SOCO applicable to the Company net of revenue recognized are included in
deferred taxes and other. Additionally, the Company recognized $3.7 million,
$2.5 million and $2.0 million of this revenue during 1993, 1994, and 1995,
respectively.
(8) RELATED PARTY
The Company has not historically had its own employees. Employees,
certain office space and furniture, fixtures and equipment have been provided
by SOCO. SOCO has allocated general and administrative expenses to the Company
based on its estimate of actual expenditures incurred on behalf of the Company.
Subsequent to the Gerrity Merger described in Note 1, certain field,
administrative and executive employees of SOCO and Gerrity will become
employees of the Company. Subsequent to the merger, SOCO will provide certain
services to Patina under a corporate services agreement.
(9) COMMITMENTS AND CONTINGENCIES
In August 1995, the Company was sued in the United States District
Court of Colorado by seven plaintiffs purporting to represent all persons who,
at any time since January 1, 1960, have had agreements providing for royalties
from gas production in Colorado to be paid by the Company under a number of
various lease provisions. The plaintiffs allege that the Company improperly
deducted unspecified "post-production" costs incurred by the Company prior to
calculating royalty payments in breach of the relevant lease provisions and
that the Company fraudulently concealed that fact from the plaintiffs. The
plaintiffs have recently amended the complaint to allege that the Company has
also underpaid royalties on oil production. The plaintiffs seek unspecified
compensatory and punitive damages and a declaratory judgment that the Company
is not permitted to deduct post-production costs prior to calculating royalties
paid to the class. The Company believes that its calculation of royalties are
and have been proper under the relevant lease provisions, and intends to defend
this and any similar suits vigorously. At this time, the Company is unable to
estimate the range of potential loss, if any, from this uncertainty. However,
the Company believes the resolution of this uncertainty should not have a
material adverse effect upon the Company's financial position, although an
unfavorable outcome in any reporting period could have a material impact on the
Company's results of operations for that period.
(10) UNAUDITED SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
Independent petroleum consultants directly evaluated 84%, 89%, and
100% of proved reserves at December 31, 1993, 1994 and 1995, respectively. All
reserve estimates are based on economic and operating conditions at that time.
Future net cash flows as of each year end were computed by applying then
current prices to estimated future production less estimated future
expenditures (based on current costs) to be incurred in producing and
developing the reserves. All reserves are located onshore in the United
States.
Future prices received for production and future production costs may
vary, perhaps significantly, from the prices and costs assumed for purposes of
these estimates. There can be no assurance that the proved reserves will be
developed within the periods indicated or that prices and costs will remain
constant. With respect to certain properties that historically have
experienced seasonal curtailment, the reserve estimates assume that the
seasonal pattern of such curtailment will continue in the future. There can be
no assurance that actual production will equal the estimated amounts used in
the preparation of reserve projections.
F-22
<PAGE> 126
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. The data in the tables below represent estimates
only. Oil and gas reserve engineering must be recognized as a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact way, and estimates of other engineers might differ
materially from those shown above. The accuracy of any reserve estimate is a
function of the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing and production after
the date of the estimate may justify revisions. Accordingly, reserve estimates
are often materially different from the quantities of oil and gas that are
ultimately recovered.
QUANTITIES OF PROVED RESERVES--
<TABLE>
<CAPTION>
CRUDE OIL NATURAL GAS
--------- -----------
(MBBL) (MMCF)
<S> <C> <C>
Balance, December 31, 1992 12,595 178,417
Revisions (145) 6,027
Extensions, discoveries and additions 2,491 36,016
Production (1,224) (21,706)
Purchases 3,239 32,043
Sales (28) (935)
------ -------
Balance, December 31, 1993 16,928 229,862
Revisions (4,450) (50,021)
Extensions, discoveries and additions 1,372 20,900
Production (1,829) (23,893)
Purchases 197 1,855
Sales -- --
------ -------
Balance, December 31, 1994 12,218 178,703
Revisions (3,609) (19,618)
Extensions, discoveries and additions 154 785
Production (1,342) (20,981)
Purchases -- --
Sales -- (32)
------ -------
Balance, December 31, 1995 7,421 138,857
====== =======
PROVED DEVELOPED RESERVES--
<CAPTION>
CRUDE OIL NATURAL GAS
--------- -----------
(MBBL) (MMCF)
<S> <C> <C>
December 31, 1992 5,151 99,926
===== =======
December 31, 1993 7,365 136,765
===== =======
December 31, 1994 8,832 147,869
===== =======
December 31, 1995 6,955 133,088
===== =======
STANDARDIZED MEASURE--
<CAPTION>
DECEMBER 31,
------------
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Future cash inflows $ 494,140 $ 356,224
Future costs:
Production (124,015) (100,505)
Development (57,587) (13,428)
--------- ---------
Future net cash flows 312,538 242,291
Undiscounted income taxes (47,627) (29,873)
--------- ---------
After tax net cash flows 264,911 212,418
10% discount factor (103,430) (84,902)
--------- ---------
Standardized measure $ 161,481 $ 127,516
========= =========
</TABLE>
F-23
<PAGE> 127
CHANGES IN STANDARDIZED MEASURE--
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of year $140,303 $191,011 $161,481
Revisions:
Prices and costs (29,553) (56,928) 2,240
Quantities 8,675 (29,498) (14,230)
Development costs 16,410 (8,044) (1,182)
Accretion of discount 14,030 19,101 16,148
Income taxes (5,345) 23,121 10,963
Production rates and other (18,250) (8,422) (21,265)
-------- -------- --------
Net revisions (14,033) (60,670) (7,326)
Extensions, discoveries and additions 32,022 19,583 2,064
Production (47,415) (58,099) (40,877)
Future development costs incurred 57,305 67,484 12,192
Purchases(a) 24,446 2,172 --
Sales(b) (1,617) -- (18)
-------- -------- --------
Standardized measure, end of year $191,011 $161,481 $127,516
======== ======== ========
</TABLE>
(a) "Purchases" includes the present value at the end of the period of
properties acquired during the year plus the cash flow received on
such properties during the period, rather than their estimated present
value at the time of the acquisition.
(b) "Sales" represents the present value at the beginning of the period of
properties sold, less the cash flow received on such properties during
the period.
F-24
<PAGE> 128
INTRODUCTORY NOTE TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared in
conformity with generally accepted accounting principles. The statements are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary to fairly present Gerrity's financial position and results of
operations.
F-25
<PAGE> 129
GERRITY OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
-------------- ----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and equivalents $ 1,433 $ 9,066
Accounts receivable 12,741 12,734
Inventory and other 941 1,024
-------- --------
15,115 22,824
-------- --------
Oil and gas properties, successful efforts method 390,135 217,461
Accumulated depletion, depreciation and amortization (105,023) (4,364)
-------- --------
285,112 213,097
-------- --------
Gas facilities and other 17,824 1,398
Accumulated depreciation (4,962) (29)
-------- -------
12,862 1,369
Note receivable from related party 1,000 -
Other assets, net 5,460 4,490
-------- --------
$319,549 $241,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 12,884 10,213
Accrued liabilities 7,689 10,227
Payable to parent - 2,548
Current maturities of long-term debt 1,125 -
-------- --------
21,698 22,988
-------- --------
Senior debt, net 16,875 34,500
Senior subordinated notes 100,000 104,617
Payable to affiliate - 4,621
Other long-term liabilities 18,751 2,628
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, par value $.01 per share;
500,000 shares authorized, 379,500 shares issued
and outstanding (liquidation preference of $75,900) 4 4
Common stock, par value $.01 per share; 40,000,000
shares authorized, 13,781,260 and 100 shares issued and
outstanding 138 -
Capital in excess of par value 160,524 73,829
Retained earnings (deficit) 1,559 (1,407)
-------- --------
162,225 72,426
-------- --------
$319,549 $241,780
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 130
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ------------------
1995 1996 1995 1996
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales $13,949 $12,215 $28,245 $24,369
Other 641 371 1,138 684
------- ------- ------- -------
14,590 12,586 29,383 25,053
------- ------- ------- -------
Expenses
Direct operating 2,255 2,350 4,504 4,380
Exploration 3 331 6 372
General and administrative 1,861 1,112 3,691 2,790
Interest and other 3,716 3,589 7,256 7,015
Depletion, depreciation and amortization 8,069 7,326 16,131 14,003
Restructuring expenses - - 828 -
------- ------- ------- -------
Income (loss) before taxes (1,314) (2,122) (3,033) (3,507)
Provision (benefit) for income taxes
Current - - - -
Deferred (66) (243) (152) (713)
------- ------- ------- -------
(66) (243) (152) (713)
------- ------- ------- -------
Net income (loss) $(1,248) $(1,879) $(2,881) $(2,794)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 131
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK CAPITAL IN
------------------ ----------------------- EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS TOTAL
------- ------ ----------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 379,500 $ 4 13,781,260 $ 138 $160,524 $14,086 $174,752
Net loss - - - - - (7,973) (7,973)
Preferred dividends - - - - - (4,554) (4,554)
------- ------ ----------- ------- -------- ------- --------
Balance, December 31, 1995 379,500 4 13,781,260 138 160,524 1,559 162,225
Net loss through the Merger date - - - - - (1,387) (1,387)
Preferred dividends - - - - - (1,139) (1,139)
Revaluation of assets and liabilities
in Merger to fair value - - (13,781,160) (138) (86,695) 967 (85,866)
Net loss subsequent to the
Merger - - - - - (1,407) (1,407)
------- ------ ----------- ------- -------- ------- --------
Balance, June 30, 1996
(unaudited) 379,500 $ 4 100 $ - $73,829 $(1,407) $ 72,426
======= ====== =========== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 132
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------
1995 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Operating activities
Net loss $(2,881) $(2,794)
Adjustments to reconcile net loss to net cash
provided by operations
Exploration expense 6 372
Depletion, depreciation and amortization 16,131 14,003
Restructuring expenses 194 -
Deferred taxes and other 177 (751)
Change in current and other assets and liabilities
Decrease (increase) in:
Accounts receivable 3,027 (58)
Inventory and other (379) (114)
Increase (decrease) in:
Accounts payable (839) (1,248)
Accrued liabilities (728) (329)
Ad valorem taxes payable (2,557) (2,449)
------- -------
Net cash provided by operations 12,151 6,632
------- -------
Investing activities
Acquisition, development and exploration (16,693) (4,613)
Merger expenses - (8,559)
------- -------
Net cash used in investing (16,693) (13,172)
-------- -------
Financing activities:
Repayment of long-term debt - (36,188)
Proceeds from long-term debt 8,000 51,500
Preferred dividends (2,277) (1,139)
Other (41) -
------- -------
Net cash provided by financing 5,682 14,173
------- -------
Net increase in cash and equivalents 1,140 7,633
Cash and equivalents, beginning of period 110 1,433
------- -------
Cash and equivalents, end of period $ 1,250 $ 9,066
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $7,637 $6,730
Cash paid for income taxes - -
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE> 133
GERRITY OIL & GAS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring items and a revaluation of assets and liabilities as a result of
accounting for the merger of the Company as a purchase by Patina) necessary
to present fairly the financial position of Gerrity Oil & Gas Corporation
and its wholly-owned subsidiaries (collectively, the "Company") as of June
30, 1996 and the results of operations and cash flows for the periods
presented. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. Management believes the
disclosures made are adequate to ensure that the information is not
misleading, and suggests that these financial statements be read in
conjunction with the Company's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1995 and the Company's Proxy
Statement/Prospectus dated April 2, 1996 (SEC Registration No. 333-00572).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recent Developments
On May 2, 1996, at a special meeting of the stockholders of the Company,
the Amended and Restated Agreement and Plan of Merger dated January 16,
1996 and amended and restated March 20, 1996 (the "Agreement") and the
transactions contemplated thereby, providing for the merger (the "Merger")
of a wholly owned subsidiary of Patina Oil & Gas Corporation ("Patina"),
which was a wholly owned subsidiary of Snyder Oil Corporation ("SOCO"),
with and into the Company, was approved by the Company's common
stockholders. In accordance with the Agreement, the shares of common
stock, par value $.01 per share, of the Company issued and outstanding
immediately prior to the effective time of the Merger were collectively
converted into an aggregate of 6,000,000 shares of common stock, par value
$.01 per share of Patina, and 3,000,000 five-year warrants initially to
purchase one share of Patina Common Stock at an exercise price of $12.50
per share. As a result, SOCO owns 70% of the common stock and the former
Gerrity common shareholders own 30% of the common stock of Patina and
warrants to purchase additional shares of Patina common stock.
In conjunction with the Merger, Patina offered to exchange Patina's
preferred stock for Gerrity's preferred stock (the "Original Exchange
Offer"). A total of 1,204,847 shares were issued in exchange for
approximately 75% of Gerrity's preferred stock. Subsequent to the quarter
end, Patina announced that it intended to amend Gerrity's certificate of
incorporation to provide that all remaining shares of Gerrity's preferred
stock would be exchanged for Patina's preferred stock on the same terms as
the Original Exchange Offer. Additionally, the Company repurchased $1.2
million of Senior Subordinated Notes put to the Company in accordance with
the change of control provision within the indenture.
During the second quarter of 1996, the Company used the purchase method to
record the acquisition of the Company by Patina. In a purchase method
combination, the purchase price is allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition.
As a result of applying pushdown accounting, the assets and liabilities of
the Company were revalued to reflect the purchase price (the estimated
value of the Patina common shares and Patina warrants distributed to the
Company's common shareholders plus all liabilities assumed by Patina) to
acquire the Company. The Company's assets and liabilities were assigned
carrying amounts based on their relative fair market values.
F-30
<PAGE> 134
The financial statements reflect the effects of Merger-related transactions
in the second quarter of 1996. The primary impact of applying pushdown
accounting was the revaluation of oil and gas properties and the associated
impact on depletion, depreciation and amortization. Periods presented
prior to the second quarter of 1996 are presented on a pre-Merger basis
and, therefore, are not comparable.
Risks and Uncertainties
Historically, the market for oil and gas has experienced significant price
fluctuations. Prices for natural gas in the Rocky Mountain region have
traditionally been particularly volatile and have been depressed since
1994. In large part, the decreased prices are the result of mild weather,
increased production in the region and limited transportation capacity to
other regions of the country. Increases or decreases in prices received
could have a significant impact on the Company's future results of
operations.
The preparation of 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
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Consequently, oil and gas leasehold costs are
capitalized when incurred. Unproved properties are assessed periodically
within specific geographic areas and impairments in value are charged to
expense. Exploratory expenses, including geological and geophysical
expenses and delay rentals, are charged to expense as incurred.
Exploratory drilling costs are initially capitalized, but charged to
expense if and when the well is determined to be unsuccessful. Costs of
productive wells, unsuccessful developmental wells and productive leases
are capitalized and amortized on a unit-of-production basis over the life
of the remaining proved or proved developed reserves, as applicable. Gas
is converted to equivalent barrels at the rate of 6 Mcf to one barrel.
Amortization of capitalized costs has generally been provided over the
entire DJ Basin as the wells are located in the same reservoir. The
Company expects to review the appropriateness of this policy in the second
half of 1996. No accrual has been provided for estimated future
abandonment costs as management estimates that the salvage value will
approximate such costs.
During the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS 121 requires the Company to assess the need for an impairment of
capitalized costs of oil and gas properties on a field- by-field basis.
During the six months ended June 30, 1995 and 1996, the Company did not
provide for any impairments. Changes in the underlying assumptions or the
amortization units could, however, result in impairments in the future.
Other assets reflect the value assigned to a noncompete agreement entered
into as part of the Merger. The value is being amortized over five years
at a rate intended to approximate the decline in the value of the
agreement. Amortization expense for the two months ended June 30, 1996 was
$640,000. Scheduled amortization for the next five years is $1,924,000 for
the remainder of 1996, $1,540,000 in 1997, $513,000 in 1998, and $257,000
in each of 1999 and 2000.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $1.4
million and $9.1 million at December 31, 1995 and June 30, 1996. The book
value approximates fair value due to the short maturity of these
instruments. The book value and estimated fair value of the Company's bank
debt and senior debt combined was $118 million and $139.1 million at
December 31, 1995 and June 30, 1996. The fair
F-31
<PAGE> 135
value of the bank debt is presented at face value given its floating rate
structure. The book value of the senior subordinated notes was $104.6
million at June 30, 1996. The estimated fair value was $104.1 million at
that date. The fair value is estimated based on the instruments price as
quoted on the New York Stock Exchange.
Other
All liquid investments with an original maturity of three months or less
are considered to be cash equivalents.
Certain amounts in prior periods consolidated financial statements have
been reclassified to conform with current classification.
3. INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
11 3/4% Senior Subordinated Notes due 2004 $100,000 $104,617
Note payable, banks 18,000 34,500
-------- --------
Total long-term debt 118,000 139,117
Less current maturities (1,125) -
-------- --------
Long-term debt, net $116,875 $139,117
======== ========
</TABLE>
The scheduled maturities of indebtedness for the next five years at June 30,
1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
(IN THOUSANDS)
<S> <C>
1996 $ -
1997 -
1998 -
1999 34,500
2000 -
-------
Total $34,500
=======
</TABLE>
Simultaneously with the Merger, the Company entered into a bank credit
agreement. The agreement consists of (a) a facility provided to
Patina and SOCO Wattenberg (the "Patina Facility") and (b) a facility
provided to the Company (the "Company Facility").
The Company Facility is a revolving credit facility in an aggregate
amount up to $51 million. The amount available for borrowing under
the Company Facility will be limited to a fluctuating borrowing base
that equaled $51 million at June 30, 1996. At June 30, 1996, $34.5
million was outstanding under the Company Facility. To date, the
Company Facility has been used primarily to refinance the previous
bank credit facility and pay costs associated with the Merger.
F-32
<PAGE> 136
The borrower may elect that all or a portion of the credit facilities
bear interest at a rate per annum equal to: (i) the higher of (a)
prime rate plus a margin equal to .25% and (b) the Federal Funds
Effective Rate plus .5% plus the Applicable Margin, or (ii) the rate
at which eurodollar deposits for one, two, three or six months (as
selected by the applicable borrower) are offered in the interbank
eurodollar market in the approximated amount of the requested
borrowing (the "Eurodollar Rate") plus 1.25%. From May 2, 1996
through June 30, 1996, the average interest rate under the facilities
approximated 7.0%.
The bank credit agreement contains certain financial covenants,
including but not limited to a maximum total debt to capitalization
ratio, a maximum total debt to EBITDA ratio and a minimum current
ratio. The bank credit agreement also contains certain negative
covenants, including but not limited to restrictions on indebtedness;
certain liens; guaranties, speculative derivatives and other similar
obligations; asset dispositions; dividends, loans and advances;
creation of subsidiaries; investments; leases; acquisitions; mergers;
changes in fiscal year; transactions with affiliates; changes in
business conducted; sale and leaseback and operating lease
transactions; sale of receivables; prepayment of other indebtedness;
amendments to principal documents; negative pledge clauses; issuance
of securities; and non-speculative commodity hedging.
On July 1, 1994, the Company received the net proceeds of
approximately $95,000,000 from its offering of $100,000,000 of 11 3/4%
Senior Subordinated Notes due July 15, 2004. In connection with the
Merger, the Company repurchased $1.2 million of the notes. As part of
the purchase method of accounting, the remaining notes have been
reflected in the accompanying financial statements at a market value
of $104.6 million or 105.875% of their principal amount. Interest is
payable each January 15 and July 15, commencing January 15, 1995. The
Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after July 15, 1999, initially at 105.875% of
their principal amount, declining to 100% on or after July 15, 2001.
Upon the occurrence of a change of control, as defined in the Notes,
the Company would be obligated to make an offer to purchase all
outstanding Notes at a price of 101% of the principal amount thereof.
In addition, the Company would be obligated, subject to certain
conditions, to make offers to purchase Notes with the net cash
proceeds of certain asset sales or other dispositions of assets at a
price of 101% of the principal amount thereof. The Notes are
unsecured general obligations of the Company and are subordinated to
all senior indebtedness of the Company and to any existing and future
indebtedness of the Company's subsidiaries. The Company utilized the
net proceeds from the Notes to pay down $85,000,000 of outstanding
debt under the Company's bank credit agreement and to prepay all
$10,000,000 of the then outstanding senior subordinated debt.
The Notes contain covenants that, among other things, limit the
ability of the Company to incur additional indebtedness, pay
dividends, engage in transactions with shareholders and affiliates,
create liens, sell assets, engage in mergers and consolidations and
make investments in unrestricted subsidiaries. Specifically, the
Notes restrict the Company from incurring indebtedness (exclusive of
the Notes) in excess of approximately $51,000,000, if after giving
effect to the incurrence of such additional indebtedness and the
receipt and application of the proceeds therefrom, the Company's
interest coverage ratio is less than 2.5:1 or adjusted consolidated
net tangible assets is less than 150% of the aggregate indebtedness of
the Company. The Company is currently in compliance with the net
tangible asset covenant. The Company currently does not meet the
interest coverage ratio necessary to incur indebtedness in excess of
approximately $51,000,000 primarily as a result of lower than
anticipated commodity prices.
F-33
<PAGE> 137
4. STOCKHOLDER'S EQUITY
In 1993, the Company privately placed 3,036,000 Depositary Shares,
each representing a one-eighth interest in a share of $12.00
Convertible Preferred Stock. The Company received $72,508,000 net
proceeds from the offering. Each share of the Convertible Preferred
Stock is convertible at any time at the option of the holder into
10.392 shares of Common Stock. Annual cumulative dividends of $12.00
per share of Convertible Preferred Stock ($1.50 per Depositary Share)
are payable each May 15, August 15, November 15, and February 15,
when, and if declared by the Board. Dividends at the rate of $12.00
per share, annually, were paid through February 15, 1996. Subsequent
to that date, no dividends have been declared or paid on the Company's
preferred shares.
In the case of the voluntary or involuntary liquidation, dissolution
or winding up of the Company, holders of Convertible Preferred Stock
are entitled to receive a liquidation preference of $200.00 per share
($75,900,000 or $25 per Depositary Share), plus accrued unpaid
dividends. The shares of Convertible Preferred Stock are redeemable
at the option of the Company, in whole or in part at any time at
$208.40 per share, declining ratably to $200 per share in May 2003.
In conjunction with the Merger, Patina offered to exchange Patina's
preferred stock for Gerrity's preferred stock (the "Original Exchange
Offer"). A total of 1,204,847 shares were issued in exchange for
approximately 75% of Gerrity's preferred stock. Subsequent to the
quarter end, Patina announced that it intended to amend Gerrity's
certificate of incorporation to provide that all remaining shares of
Gerrity's preferred stock would be exchanged for Patina's preferred
stock on the same terms as the Original Exchange Offer.
In accordance with the Merger Agreement, the shares of common stock,
par value $.01 per share, of the Company issued and outstanding
immediately prior to the effective time of the Merger (13,781,260
common shares) were collectively converted into an aggregate of
6,000,000 shares of common stock, par value $.01 per share of Patina,
and 3,000,000 five-year warrants initially to purchase one share of
Patina Common Stock at an exercise price of $12.50 per share.
Immediately subsequent to this conversion, the authorized common
shares of the Company were reduced from 40,000,000 to 1,000 of which
100 are issued and outstanding, all owned by Patina.
5. INCOME TAXES
The difference between the benefit from income taxes for the three and
six months ended June 30, 1995 and 1996, and the amount which would be
determined by applying statutory income tax rates to income before
income taxes is due primarily to a reduction of the effective tax rate
as a result of the anticipated realization of alternative minimum tax
credits and utilization of Section 29 tax credits, respectively.
6. COMMITMENTS AND CONTINGENCIES
In January 1996, Gerrity and three other producers were sued by five
plaintiffs purporting to represent all persons who, at any time since
January 1, 1960, have had agreements providing for royalties from gas
production in Colorado to be paid by the Company under a number of
various lease provisions. The plaintiffs allege that the Company
improperly deducted unspecified "post-production" costs incurred by
the Company prior to calculating royalty payments in breach of the
relevant lease provisions and that the Company fraudulently concealed
that fact from the plaintiffs. The plaintiffs seek unspecified
compensatory and punitive damages and a declaratory judgment that the
Company was not permitted to deduct post-production costs prior to
calculating royalties paid to the class. The Company believes that
costs deducted by it in calculating royalties are and have been proper
under the relevant lease provisions, and it intends to defend this and
any similar suits vigorously. At this
F-34
<PAGE> 138
time, the Company is unable to estimate the range of potential loss,
if any, from this uncertainty. However, the Company believes the
resolution of this uncertainty should not have a material adverse
effect upon the Company's financial position, although an unfavorable
outcome in any reporting period could have a material impact on the
Company's results of operations for that period.
In March 1996, a complaint was filed in the Court of Chancery for the
State of Delaware against the Company and each of the directors of the
Company, Brickell Partners v. Gerrity Oil & Gas Corporation, C.A. No.
14888 (Del. Ch.). The complaint alleges that the "action is brought
(a) to restrain the defendants from consummating a merger which will
benefit the holders of the Company's common stock at the expense of
the holders of the Preferred and (b) to obtain a declaration that the
terms of the proposed merger constitute a breach of the contractual
rights of the Preferred." The complaint seeks, among other things,
certification as a class action on behalf of all holders of the
Company's preferred stock, a declaration that the defendants have
committed an abuse of trust and have breached their fiduciary and
contractual duties, an injunction enjoining the Merger and money
damages. Defendants believe that the complaint is without merit and
intend to vigorously defend against the action. At this time, the
Company is unable to estimate the range of potential loss, if any,
from this uncertainty. However, the Company believes the resolution
of this uncertainty should not have a material adverse effect upon the
Company's financial position, although an unfavorable outcome in any
reporting period could have a material impact on the Company's results
of operations for that period.
The financial statements reflect favorable legal proceedings only upon
receipt of cash, final judicial determination or execution of a
settlement agreement. The Company is a party to various other
lawsuits incidental to its business, none of which are anticipated to
have a material adverse impact on its financial position or results of
operations.
F-35
<PAGE> 139
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gerrity Oil & Gas Corporation:
We have audited the accompanying consolidated balance sheets of
Gerrity Oil & Gas Corporation ("Gerrity") as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of Gerrity's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Gerrity Oil & Gas Corporation as of December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 19, 1996
F-36
<PAGE> 140
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Gerrity Oil & Gas Corporation:
We have audited the accompanying consolidated statements of
operations, stockholders' equity, and cash flows of Gerrity Oil & Gas
Corporation ("Gerrity") for the year ended December 31, 1993. These financial
statements are the responsibility of Gerrity's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Gerrity Oil & Gas Corporation for the year ended December 31,
1993, in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January
1, 1993, Gerrity changed its method of accounting for income taxes.
COOPERS & LYBRAND
Denver, Colorado
March 30, 1994
F-37
<PAGE> 141
GERRITY OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Current assets:
Cash and equivalents $ 110 $ 1,433
Accounts receivable:
Trade 12,486 9,110
Income and severance tax refunds 1,430 3,631
Inventories 1,541 789
Prepaid expenses and other 202 152
-------- --------
Total current assets 15,769 15,115
-------- --------
Oil and gas properties, at cost (successful efforts method) 389,377 390,135
Less accumulated depletion, depreciation and amortization (89,189) (105,023)
-------- --------
Net oil and gas properties 300,188 285,112
-------- --------
Property and equipment, at cost:
Gathering systems 10,658 11,218
Vehicles, furniture and equipment 7,863 6,606
-------- --------
18,521 17,824
Less accumulated depreciation and amortization (3,952) (4,962)
-------- --------
Net property and equipment 14,569 12,862
-------- --------
Note receivable from related party 1,000 1,000
Debt issuance costs and other, net 6,164 5,460
-------- --------
$337,690 $319,549
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,491 $ 5,986
Interest payable 6,356 5,665
Ad valorem taxes payable 5,703 5,253
Undistributed revenue payable 2,509 2,837
Current maturities of long-term debt -- 1,125
Income taxes payable 556 596
Other 120 236
-------- --------
Total current liabilities 25,735 21,698
-------- --------
Long-term liabilities:
Long-term debt, net of current maturities 129,000 116,875
Unearned revenue -- 9,139
Ad valorem taxes payable 5,048 4,479
Deferred income taxes -- 2,012
Other 3,155 3,121
-------- --------
Total long-term liabilities 137,203 135,626
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible preferred stock, par value $.01 per share;
500,000 shares authorized, 379,500 shares issued and
outstanding (Liquidation preference of $75,900) 4 4
Common stock, par value $.01 per share; 40,000,000
shares authorized, 13,781,260 shares issued and
outstanding 138 138
Additional paid-in capital 160,524 160,524
Retained earnings 14,086 1,559
-------- --------
Total stockholders' equity 174,752 162,225
-------- --------
$337,690 $319,549
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE> 142
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Revenue:
Oil and gas sales $65,113 $64,555 $ 51,513
Interest and other income 2,200 1,033 2,347
------- ------- --------
Total revenue 67,313 65,588 53,860
------- ------- --------
Costs and expenses:
Lease operating expenses 4,366 5,842 4,734
Production taxes 4,398 4,882 3,632
Depletion, depreciation and amortization 25,414 32,458 30,333
General and administrative, net 8,574 10,799 7,731
Interest expense 7,470 10,161 14,505
Restructuring expenses -- -- 828
Loss on disposition of Wyoming properties -- 442 --
Abandonments, exploration and other 168 228 285
------- ------- --------
Total costs and expenses 50,390 64,812 62,048
------- ------- --------
Income (loss) before income taxes 16,923 776 (8,188)
Benefit (provision) for income taxes (3,328) (41) 215
------- ------- --------
Income (loss) before extraordinary item and
cumulative effect of accounting change 13,595 735 (7,973)
Extraordinary item--loss on early
extinguishment of debt, net of tax benefit
of $1,200 and $127 (2,629) (2,409) --
Cumulative effect of adopting FAS 109 1,100 -- --
------- ------- --------
Net income (loss) 12,066 (1,674) (7,973)
Dividends on convertible preferred stock (2,960) (4,554) (4,554)
------- ------- --------
Net income (loss) applicable to common stock $ 9,106 $(6,228) $(12,527)
======= ======= ========
Per common share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $ .78 $ (.27) $ (.91)
Extraordinary item--loss on early
extinguishment of debt (.20) (.18) --
Cumulative effect of adopting FAS 109 .08 -- --
------- ------- --------
Net income (loss) $ .66 $ (.45) $ (.91)
======= ======= ========
Weighted average shares outstanding 13,697 13,781 13,781
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE> 143
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK ADDITIONAL
----- ------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 -- $-- 13,625,010 $136 $ 86,575 $10,639 $ 97,350
Net income -- -- -- -- -- 12,066 12,066
Proceeds from issuance of convertible
preferred stock net of offering costs
of $3,392 379,500 4 -- -- 72,504 -- 72,508
Dividends on convertible preferred stock
($6.30 per share) -- -- -- -- -- (2,391) (2,391)
Proceeds from exercise of stock options -- -- 156,250 2 1,445 -- 1,447
------- --- ---------- ---- -------- ------- --------
Balance at December 31, 1993 379,500 4 13,781,260 138 160,524 20,314 180,980
Net loss -- -- -- -- -- (1,674) (1,674)
Dividends on convertible preferred
stock ($12.00 per share) -- -- -- -- -- (4,554) (4,554)
------- --- ---------- ---- -------- ------- --------
Balance at December 31, 1994 379,500 4 13,781,260 138 160,524 14,086 174,752
Net loss -- -- -- -- -- (7,973) (7,973)
Dividends on convertible preferred stock
($12.00 per share) -- -- -- -- -- (4,554) (4,554)
------- --- ---------- ---- -------- ------- --------
Balance at December 31, 1995 379,500 $ 4 13,781,260 $138 $160,524 $ 1,559 $162,225
======= === ========== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 144
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 12,066 $ (1,674) $ (7,973)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization 25,414 32,458 30,333
Amortization of loan fees 878 950 643
(Gain) loss on asset dispositions, net (1,452) 18 370
Deferred income taxes 718 (356) 2,230
Amortization of unearned revenue -- -- (257)
Loss on early extinguishment of debt 3,829 2,536 --
Cumulative effect of adopting FAS 109 (1,100) -- --
--------- --------- ---------
40,353 33,932 25,346
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, trade (8,722) 1,627 3,811
Accounts receivable, tax refunds (822) (81) (2,201)
Other (1,146) (26) (19)
Increase (decrease) in:
Accounts payable and accrued expenses (682) 1,108 (193)
Interest payable 307 6,025 (691)
Ad valorem taxes payable 3,505 2,641 (1,019)
Undistributed revenue payable 2,052 276 328
Income taxes payable (1,227) 422 40
Other 17 (222) 82
--------- --------- ---------
Net cash provided by operating activities 33,635 45,702 25,484
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (102,595) (48,337) (22,281)
Proceeds from sale of assets -- 569 13,715
Notes receivable from related party 1,000 (1,000) --
Other (800) 800 --
--------- --------- ---------
Net cash used in investing activities (102,395) (47,968) (8,566)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 159,500 126,875 24,250
Principal payments under long-term borrowings (163,5480) (113,691) (35,250)
Proceeds from issuance of convertible
preferred stock, net 72,508 -- --
Proceeds from issuance of common stock 1,247 -- --
Dividends paid on convertible preferred stock (2,391) (4,554) (4,554)
Loan origination fees paid (4,483) (6,398) (41)
--------- --------- ---------
Net cash provided by (used in) financing
activities 62,833 2,232 (15,595)
--------- --------- ---------
Net increase (decrease) in cash and equivalents (5,927) (34) 1,323
Cash and equivalents, beginning of year 6,071 144 110
--------- --------- --------
Cash and equivalents, end of year $ 144 $ 110 $ 1,433
========= ========= ========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net of capitalized
amounts $ 6,284 $ 3,186 $ 14,553
Cash paid (refunded) for income taxes 2,714 (151) (8)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 145
GERRITY OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Gerrity Oil & Gas Corporation ("Gerrity") is an independent energy
company primarily engaged in the drilling of low risk oil and gas development
wells. Gerrity was formed in 1990 to consolidate the oil and gas interests and
operations of several entities in the Wattenberg Field of the Denver-Julesburg
Basin (the "D-J Basin") in Colorado. Gerrity, as operator of jointly owned oil
and gas properties, sells a significant amount of such production to certain
major customers (see Note 9), and pays vendors for oil and gas services. Joint
interest receivables are subject to collection under terms of operating
agreements which generally provide lien rights.
The consolidated financial statements include the accounts of Gerrity
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of
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 financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Recent Developments
In January 1996, Gerrity entered into an agreement whereby Gerrity
will be merged with (the "Merger") a wholly-owned subsidiary of Patina Oil &
Gas Corporation ("Patina"), which is a wholly-owned subsidiary of Snyder Oil
Corporation ("SOCO"). Immediately prior to the merger, SOCO will contribute
its assets in the Wattenberg Field of the D-J Basin and $75,000,000 of bank
debt to another wholly-owned subsidiary of Patina. As a result, SOCO will own
70% of the common stock and the former Gerrity common shareholders will own 30%
of the common stock of Patina and warrants to purchase additional shares of
Patina common stock. As amended in March 1996, holders of Gerrity's Depositary
Shares representing an interest in Gerrity's Convertible Preferred Stock will
be entitled to exchange their shares for shares of convertible preferred stock
of Patina pursuant to an exchange offer to be commenced by Patina in connection
with the Merger or retain their existing Gerrity Depositary Shares. The
consummation of the merger is subject to certain conditions including approval
by Gerrity's common stockholders. There can be no assurance that the merger
will be consummated.
If the Merger is consummated, the assets and liabilities of Gerrity
will be revalued in the consolidated financial statements of Patina based on
fair value. The assigned fair value of the Gerrity assets and liabilities may
be pushed down for the separate financial statements of Gerrity resulting in a
substantial decline in the book value of Gerrity's assets.
Cash Equivalents
Gerrity considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents. The total
carrying amount of cash and cash equivalents approximates the fair values of
such instruments.
F-42
<PAGE> 146
Oil and Gas Producing Activities
Gerrity follows the "successful efforts" method of accounting for its
oil and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are
capitalized when incurred, pending determination of whether the well has found
proved reserves. If an exploratory well has not found proved reserves, the
costs of drilling the well are charged to expense. The costs of development
wells are capitalized whether productive or nonproductive.
Geological and geophysical costs and the costs of carrying and
retaining undeveloped properties are expensed as incurred. Depletion,
depreciation and amortization of capitalized costs for producing oil and gas
properties is provided using the units-of-production method based upon proved
reserves. An accrual for estimated dismantlement, restoration, and abandonment
costs is being provided over the lives of the related producing wells. At
December 31, 1995, Gerrity has recorded a cumulative provision for such costs
of $3,121,000. Management estimates that the salvage value of lease and well
equipment will approximately offset the future liability for such costs.
The net capitalized costs of proved oil and gas properties are limited
to the aggregate undiscounted after-tax future net revenues (the "ceiling")
related to such properties. If the net capitalized costs exceed the ceiling,
the excess will be recorded as a charge to operations.
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." FAS 121 requires entities
to review long-lived assets to be held and used or held for disposal for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Gerrity is required to
adopt FAS 121 on January 1, 1996. Management believes that the adoption of
this pronouncement will have no significant impact on its results of operations
or financial position, if its oil and gas properties are held and used.
Inventories
Inventories consist primarily of tubular goods valued at the lower of
cost (specific identification or average cost) or market.
Property and Equipment
Property and equipment is recorded at cost. Renewals and betterments
which substantially extend the useful life of the assets are capitalized.
Maintenance and repairs are expensed when incurred. Depreciation and
amortization is provided using the straight-line method over the estimated
useful lives of the assets of three to 30 years. Gains and losses on
retirements are included in operations.
Debt Issue Costs
Costs associated with the issuance of debt are capitalized and
amortized using the effective interest method over the term of the related
debt.
Revenue Recognition
Revenue from oil and gas sales is recorded on an accrual basis as
sales are made and deliveries occur.
F-43
<PAGE> 147
Gas Balancing
Gerrity uses the entitlements method to account for gas imbalances.
Under this method, revenue is recorded on the basis of Gerrity's proportionate
share of total gas sold from the affected wells. Gerrity's gas imbalances at
December 31, 1994 and 1995 were not significant.
Income Taxes
Effective January 1, 1993, Gerrity adopted Statement of Financial
Accounting Standards No. 109 ("FAS 109") Accounting for Income Taxes. The
adoption of FAS 109 changed Gerrity's method of accounting for income taxes
from the deferred method ("APB 11") to an asset and liability approach.
Previously Gerrity deferred the past tax effects of timing differences between
financial reporting and taxable income. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of those assets and liabilities. FAS 109 also
requires the recording of a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
The adoption of FAS 109 resulted in a one time benefit of $1,100,000
($.08 per common share) during 1993.
Earnings Per Share
Earnings per share on income (loss) before extraordinary item and
cumulative effect of accounting change is calculated by dividing income before
these items, after deduction of cumulative dividends on convertible preferred
stock for the year, by the weighted average number of common shares outstanding
during the period. Earnings per share on the extraordinary item and cumulative
effect of adopting FAS 109 is calculated by dividing such items by the weighted
average number of common shares outstanding during the year. The effects of
convertible preferred stock and common stock options have not been included in
the computation as their effect is either not dilutive or antidilutive.
Reclassifications
Certain amounts in the 1993 and 1994 Consolidated Financial Statements
have been reclassified to correspond to the 1995 presentation.
2. EMPLOYEE BENEFIT PLANS
Stock Option Plan
Gerrity has 2,000,000 shares of common stock reserved for issuance
under its 1993 Stock Option Plan (the "1993 Plan"), which was adopted by the
Board of Directors on August 16, 1993. The 1993 Plan was adopted to replace
Gerrity's Second Amended and Restated Stock Option Plan (the "Second Amended
Plan"), which was terminated by Gerrity in August 1993 upon the voluntary
surrender and cancellation of all options under the plan.
The 1993 Plan was implemented on August 16, 1993 and like the Second
Amended Plan, the 1993 Plan authorizes the issuance of stock options for up to
2,000,000 shares of Gerrity's common stock. Options for 1,846,500 shares of
Gerrity's common stock were granted under the 1993 Plan on August 16, 1993.
All of such options were granted at an initial exercise price of $13.00 per
share compared to a weighted average exercise price of $9.55 per share under
the Second Amended Plan.
F-44
<PAGE> 148
On March 3, 1994, the Board of Directors voted to amend the 1993 Plan
and reprice existing options granted thereunder. The outstanding options were
repriced to an exercise price of $9.50 per share, to bring them in line with
the options granted and voluntarily surrendered under the Second Amended Plan.
The vesting provisions of the 1993 Plan were also amended to provide that 50%
of any outstanding unvested options will become exercisable upon Gerrity's
common stock price reaching $13.00, and the remaining 50% will become
exercisable upon the stock price reaching $16.00. In any event, all options
are exercisable during the last three months of their term. All of the options
granted under the 1993 Plan will expire in ten years if not exercised earlier.
In addition to options granted under the 1993 Plan, options for
150,000 shares and 50,000 shares with exercise prices of $13.00 and $6.00 per
share were granted in 1993 and 1994, respectively. The option granted in 1994
is subject to the same vesting requirements as those issued under the 1993
Plan, as amended. The 1993 option is currently exercisable for 100,000 shares
and the remaining 50,000 shares will become exercisable on July 31, 1997 or
earlier if Gerrity achieves certain income per share targets. If this option
is not exercised by August 31, 1997, it will expire. At December 31, 1994 and
1995 there was an option outstanding under a prior plan to purchase 20,000
shares at $8.00 per share which, if not exercised earlier, will expire in March
2002.
Presented below is a summary of options granted, expired, exercised,
surrendered and outstanding during 1993, 1994 and 1995:
<TABLE>
<CAPTION>
STOCK OPTION PLANS
------------------
SECOND OTHER
AMENDED 1993 PLAN OPTIONS TOTAL
------- --------- ------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1993 1,785,000 -- 112,500 1,897,500
Options granted 103,500 1,846,500 150,000 2,100,000
Options expired (193,750) (1,500) -- (195,250)
Options exercised (63,750)(1) (92,500)(2) (156,250)
Options surrendered (1,631,000) -- -- (1,631,000)
---------- ---------- ------- ----------
Balance, December 31, 1993 -- 1,845,000 170,000 2,015,000
Options granted -- 295,000 50,000 345,000
Options surrendered -- (397,250) -- (397,250)
---------- ---------- ------- ----------
Balance, December 31, 1994 -- 1,742,750 220,000 1,962,750
Options granted -- 310,000 -- 310,000
Options surrendered -- (333,750) -- (333,750)
---------- ---------- ------- ----------
Balance, December 31, 1995 -- 1,719,000 220,000 1,939,000
========== ========== ======= ==========
</TABLE>
(1) Consists of 63,750 shares at an exercise price of $8.00 per share.
(2) Consists of 2,500 shares at an exercise price of $6.625 per share and
90,000 shares at an exercise price of $8.00 per share.
Of the options for 1,939,000 shares outstanding at December 31, 1995,
options for 976,000 shares are currently exercisable. At December 31, 1995,
the exercise price was $13.00 for 150,000 shares, $9.50 for 1,361,500 shares,
$8.00 for 20,000 shares, $6.00 for 100,000 shares and $4.00 for 307,500 shares.
The exercise price of all outstanding options is at least equal to the fair
market value on the date of grant or repricing.
F-45
<PAGE> 149
Key Employee Participation Plan
In July 1991, Gerrity instituted a Key Employee Participation Plan
("KEPP" or the "Participation Plan") pursuant to which certain key employees of
Gerrity were given the opportunity to participate in Gerrity's drilling or
recompletion of development wells. Wells drilled pursuant to certain financing
arrangements were not subject to the Participation Plan. Each year, the
participants were able to elect to acquire a stated percentage of the working
interest in each of the wells Gerrity planned to drill or recomplete for such
year. The participants were required to acquire the same percentage working
interest in all such wells and to pay their proportionate share of all costs,
including acreage costs. If Gerrity drilled or recompleted more wells during
the course of the year than it had anticipated, the participants had the right,
but not the obligation, to participate in the drilling of the additional wells
on the same basis. Effective July 1, 1993, Gerrity's Board of Directors
terminated the Participation Plan.
Gerrity drilled or recompleted 93 wells subject to the Participation
Plan for 1993. The participants acquired a total of approximately 15% of the
working interests in such wells, at a total cost of approximately $2,179,000.
Nonofficer employees elected to acquire approximately 1% of the interests
available under the Participation Plan and officers and directors of Gerrity
acquired approximately 14%.
During the fourth quarter of 1993, Gerrity purchased the KEPP
interests of all current officers, directors and employees of Gerrity. The
purchase price as of December 1, 1993 for such KEPP interests of approximately
$8,466,000 was determined by the disinterested members of Gerrity's Board of
Directors. An independent investment banking firm provided an opinion, based
on a $9,000,000 valuation for the total KEPP interests outstanding, which
concluded that such purchase price was fair to Gerrity from a financial point
of view. During 1993 Gerrity paid approximately $8,184,000 and an additional
$282,000 of the purchase price was owed as of December 31, 1993.
In September 1993, Gerrity acquired the KEPP interests of a former
officer and director of Gerrity for a purchase price of approximately $280,000.
Bonus Plan
Gerrity's Board of Directors or its Compensation Committee approves
executive bonuses for each year. Bonuses were $412,500, $530,000 and $215,000
in 1993, 1994 and 1995, respectively.
3. RELATED PARTY TRANSACTIONS
In 1994, Gerrity's Board of Directors approved loans to an officer up
to $1,500,000. During November 1994, the officer borrowed $1,000,000 from
Gerrity. The promissory note bears interest at prime plus 3/4% (9.25% at
December 31, 1995), with interest payable on November 1 of each year.
Principal amortization is at the discretion of the Board of Directors, but in
any event, the principal amount with all accrued interest shall be due on
December 31, 2000.
In 1992, Gerrity's Board of Directors approved loans to an officer up
to $1,000,000. During April 1993, the maximum amount of loans authorized to be
outstanding to this officer was increased to $2,500,000. Outstanding loans
provided for interest at the prime rate plus 3/4%, and were repayable in
monthly installments of interest only through December 31, 1993, and fully
amortizing monthly installments of principal and interest for the ensuing four
years. These loans were collateralized by a pledge of shares of Gerrity's
common stock owned by the officer. In addition, in April 1993 Gerrity's Board
of Directors approved loans aggregating up to $350,000 to two other officers of
Gerrity. These loans provided for interest at the prime rate plus 2%, and were
due by December 31, 1993. All loans to officers were repaid during 1993.
F-46
<PAGE> 150
During 1993, Gerrity paid approximately $109,000 to a company owned by
an officer and director for charter jet service.
On April 2, 1993 Gerrity entered into a $95,000,000 Senior Secured
Revolving Credit Facility with a group of banks and financial institutions (the
"Lenders"). The lead bank and agent for the Lenders under the credit agreement
was Banque Indosuez and, during 1993 and 1994, Gerrity incurred agency fees of
$93,750 and $62,500, respectively. A principal with Indosuez Capital, an
affiliate of Banque Indosuez, served on Gerrity's Board of Directors from
August 1993 through September 1994.
In December 1993, Indosuez Capital entered into a twelve-month
exclusive agreement, as amended, with Gerrity whereby Indosuez Capital served
as financial advisor in connection with an offering of debt securities. In
connection with the offering of the 11 3/4% Senior Subordinated Notes in June
1994, Gerrity paid an advisory and placement fee of approximately $1,850,000.
4. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
11 3/4% Senior Subordinated Notes due July 15, 2004 $100,000 $100,000
Note payable, banks, collateralized by Gerrity's interest
in substantially all of its oil and gas properties 29,000 18,000
-------- --------
Total long-term debt 129,000 118,000
Less current maturities -- 1,125
-------- --------
Long-term debt, net of current maturities $129,000 $116,875
======== ========
</TABLE>
The aggregate maturities of long-term debt at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
(IN THOUSANDS)
<S> <C>
1996 $ 1,125
1997 4,500
1998 4,500
1999 4,500
2000 3,375
Thereafter 100,000
--------
Total $118,000
========
</TABLE>
On July 1, 1994, Gerrity received the net proceeds of approximately
$95,000,000 from its offering of $100,000,000 of 11 3/4% Senior Subordinated
Notes due July 15, 2004. Interest is payable each January 15 and July 15,
commencing January 15, 1995. The Notes are redeemable at the option of
Gerrity, in whole or in part, at any time on or after July 15, 1999, initially
at 105.875% of their principal amount, declining to 100% on or after July 15,
2001. Upon the occurrence of a change of control, as defined in the Notes,
Gerrity would be obligated to make an offer to purchase all outstanding Notes
at a price of 101% of the principal amount thereof. In addition, Gerrity would
be obligated, subject to certain conditions, to make offers to purchase Notes
with the net cash proceeds of certain asset sales or other dispositions of
assets at a price of 101% of the principal amount thereof. The Notes are
unsecured general obligations of Gerrity and are subordinated to all senior
indebtedness of Gerrity and to any existing and future indebtedness of
Gerrity's
F-47
<PAGE> 151
subsidiaries. Gerrity utilized the net proceeds from the Notes to pay down
$85,000,000 of outstanding debt under Gerrity's bank credit agreement and to
prepay all $10,000,000 of the then outstanding senior subordinated debt.
The Notes contain covenants that, among other things, limit the
ability of Gerrity to incur additional indebtedness, pay dividends, engage in
transactions with shareholders and affiliates, create liens, sell assets,
engage in mergers and consolidations and make investments in unrestricted
subsidiaries. Specifically, the Notes restrict Gerrity from incurring
indebtedness (exclusive of the Notes) in excess of approximately $51,000,000,
if after giving effect to the incurrence of such additional indebtedness and
the receipt and application of the proceeds therefrom, Gerrity's interest
coverage ratio is less than 2.5:1 or adjusted consolidated net tangible assets
is less than 150% of the aggregate indebtedness of Gerrity. Gerrity is
currently in compliance with the net tangible asset covenant. Gerrity
currently does not meet the interest coverage ratio necessary to incur
indebtedness in excess of approximately $51,000,000 primarily as a result of
lower than anticipated commodity prices. Gerrity is of the opinion that this
will have no materially adverse effect on its financial condition.
On December 21, 1994, Gerrity entered into an Amended and Restated
Credit Agreement with a group of commercial lending institutions including Bank
of Montreal, Den Norse Bank, Societe Generale, Credit Lyonnais and Christiania
Bank (the "Lenders"). The Credit Agreement currently includes commitments to
lend up to $60,000,000 to Gerrity. Borrowings under the Credit Agreement are
secured by a pledge of the stock of all of Gerrity's subsidiaries and a
mortgage on substantially all of Gerrity's oil and gas properties. As of
December 31, 1995, Gerrity had outstanding borrowings of $18,000,000.
The amount available to be drawn by Gerrity under the Credit Agreement
is subject to a borrowing base (the "Borrowing Base"), which is based upon the
Lenders' determination of the amount of Indebtedness (as defined in the Credit
Agreement) for borrowed money that can be supported by Gerrity's proved oil and
gas reserves. The Borrowing Base is generally determined semi-annually, but
may be redetermined, at the option of either Gerrity or the Lenders, one
additional time each year, and will be redetermined on certain sales of assets
included in the Borrowing Base. If the Borrowing Base is redetermined in such
a manner that the amount outstanding under the Credit Agreement exceeds the new
Borrowing Base, then Gerrity must either, at its election, deliver additional
security covering additional oil and gas assets or make a payment in an amount
necessary to cure the deficiency. If such deficiency has not been cured within
30 days, then it must be cured by repaying the Credit Agreement in an amount
equal to the deficiency. The Borrowing Base under the Credit Agreement was set
at $32,000,000 on December 15, 1995.
Borrowings under the Credit Agreement are currently revolving loans.
On October 31, 1996 (the "Conversion Date"), all borrowings then outstanding
will be converted into a term loan. The term loan will require quarterly
principal and interest payments on the last day of each March, June, September
and December. Principal payments will be equal to the borrowings outstanding
on the Conversion Date.
Borrowings under the Credit Agreement prior to the Conversion Date
bear interest, at Gerrity's option, at a rate equal to (i) LIBOR plus a margin
of 1.75% or (ii) the Alternate Base Rate, plus a margin of 0.75%. The
Alternate Base Rate equals the higher of the federal funds rate plus 1/2% and
the prime rate of interest. The weighted average interest rate on outstanding
borrowings under the Credit Agreement was 7.56% at December 31, 1995. From the
Conversion Date to the maturity date, borrowings will bear interest at a rate
of 1/2 of 1% greater than the rates prior to the Conversion Date.
The Credit Agreement, as amended, includes various covenants which
prohibit or limit Gerrity's ability (a) to incur or cause to exist additional
Indebtedness (as defined in the Credit Agreement), (b) make certain investments
other than for capital expenditures, (c) incur certain additional liens, (d)
repurchase or redeem capital stock, (e) merge, consolidate or sell
substantially all of its assets, (f) enter into certain transactions with
affiliates, (g) repay or purchase any debt and (h) to make capital expenditures
in the D-J Basin in excess of
F-48
<PAGE> 152
110% of the amounts projected in reports furnished to the Lenders thereunder.
The Credit Agreement also contains certain restrictions on the ability of
Gerrity to declare or pay dividends (other than dividends payable on Gerrity's
convertible preferred stock so long as no default has occurred under the Credit
Agreement). Additionally, the Credit Agreement requires that Gerrity's debt to
capitalization ratio (as defined in the Credit Agreement) may not exceed 60%
through 1995 or 55% thereafter. Gerrity also must maintain a tangible net
worth of $140,000,000 plus 50% of net income (as adjusted) beginning July 1,
1994. Gerrity is currently in compliance with the above covenants.
The carrying amount of the borrowings outstanding under the Credit
Agreement approximates the fair value of such borrowings. The fair value of
the 11 3/4% Senior Subordinated Notes outstanding approximates $94,875,000 at
December 31, 1995.
On September 20, 1994, Gerrity replaced Banque Indosuez with the Bank
of Montreal as agent on its Credit Agreement. All nonagent banks previously
participating in Gerrity's Credit Agreement remained a part of the new bank
group. As a part of the transaction, Gerrity paid Bank of Montreal a fee of
$500,000, which will be amortized over the term of the agreement as additional
interest expense. Gerrity expensed the $2,536,000 of net unamortized debt
issuance costs which had been previously paid as an extraordinary loss during
the year ended December 31, 1994.
In connection with the replacement of an $80,000,000 revolving credit
facility and prepayment of senior subordinated notes and prepayment of a note
payable, Gerrity recognized extraordinary losses on early extinguishments of
debt during 1993 totaling $2,629,000 (net of $1,200,000 of tax benefit)
representing unamortized debt issue costs associated with such borrowings.
During 1993, Gerrity incurred total interest cost of $8,698,000, of
which $7,470,000 was expensed and $1,228,000 was capitalized. During 1994,
Gerrity incurred total interest cost of $11,536,000, of which $10,161,000 was
expensed and $1,375,000 was capitalized. During 1995, Gerrity incurred total
interest cost of $15,244,000, of which $14,505,000 was expensed and $739,000
was capitalized.
5. COMMITMENTS AND CONTINGENCIES
Commitments
Gerrity leases office space and certain equipment under noncancelable
operating lease agreements. Future minimum lease payments under all
noncancelable operating leases with lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
(IN THOUSANDS)
<S> <C>
1996 $ 360
1997 360
1998 359
1999 358
2000 209
------
Total $1,646
======
</TABLE>
Rental expense under all operating leases approximated $866,000,
$1,182,000 and $477,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. Rent expense is included in general and administrative expense
in the accompanying statements of operations.
F-49
<PAGE> 153
In connection with its formation and initial public offering, Gerrity
granted certain entities the right to require Gerrity, at its expense, to
register their shares under the Securities Act of 1933. The number of shares
subject to registration rights as of December 31, 1995 was approximately
697,000. These registration rights may be exercised on up to three occasions,
but may not be exercised within six months of the effective date of any
registration statement filed by Gerrity.
During 1994, Gerrity's Board of Directors approved certain severance
benefits for officers of Gerrity in the event an officer's employment is
terminated subsequent to a change in control, as defined in the agreements. At
December 31, 1995, nine officers of Gerrity were eligible for these benefits,
which include between 12 and 36 months of severance pay depending on length of
service with Gerrity. In addition, two officers of Gerrity are eligible for 36
months of severance benefits under the terms of their three year employment
agreements with Gerrity.
Contingencies
On November 17, 1995, the United States District Court for the
Southern District of New York entered an order dismissing the lawsuit against
Gerrity and certain present and former officers captioned Christopher C. Cline,
et al. v. Gerrity Oil & Gas Corp., et al. (Case Number: 95 Civ. 2456). The
dismissal was entered pursuant to a settlement whereby Gerrity paid a total of
$75,000. Given the uncertainty inherent in litigation, and the projected costs
of continuing this litigation in the foreseeable future, Gerrity decided that a
settlement of this case for $75,000 was in the best interests of its
stockholders, although management of Gerrity continues to believe the case was
without merit.
In January 1996, Gerrity and a number of other producers were served
in a class action suit brought in the state district court in the City and
County of Denver, Colorado. The plaintiffs allege themselves to be or to have
been entitled to have received royalty payments and purport to represent all
persons who, at any time since January 1, 1960, have had agreements providing
for royalties from gas production in Colorado to be paid by Gerrity under a
number of lease provisions. The complaint alleges that Gerrity has improperly
deducted unspecified "post-production" costs incurred prior to calculating
royalty payments which the plaintiffs allege to be in breach of the relevant
lease provisions. Gerrity believes that costs deducted in calculating
royalties are and have been proper under the relevant lease and other
applicable provisions, and intends to vigorously defend this suit. At this
time, Gerrity is unable to estimate the range of potential loss, if any, from
this uncertainty. However, Gerrity believes the resolution of this uncertainty
should not have a material adverse effect upon Gerrity's financial position,
although an unfavorable outcome in any reporting period could have a material
impact on Gerrity's results of operations for that period.
On or about March 8, 1996, a complaint was filed in the Court of
Chancery for the State of Delaware against Gerrity and each of the directors of
Gerrity, Brickell Partners v. Gerrity Oil & Gas Corporation, C.A. No. 14888
(Del. Ch.). The complaint alleges that the "action is brought (a) to restrain
the defendants from consummating a merger which will benefit the holders of
Gerrity's common stock at the expense of the holders of the preferred, and (b)
to obtain a declaration that the terms of the proposed merger constitute a
breach of the contractual rights of the preferred." The complaint seeks, among
other things, certification as a class action on behalf of all holders of
Gerrity's preferred stock, a declaration that the defendants have committed an
abuse of trust and have breached their fiduciary and contractual duties, an
injunction enjoining the Merger and money damages. Defendants believe that the
complaint is without merit and intend to vigorously defend against the action.
At this time, Gerrity is unable to estimate the range of potential loss, if
any, from this uncertainty. However, Gerrity believes the resolution of this
uncertainty should not have a material adverse effect upon Gerrity's financial
position, although an unfavorable outcome in any reporting period could have a
material impact on Gerrity's results of operations for that period.
Gerrity may from time to time be involved in various claims, lawsuits,
disputes with third parties, investigations and actions involving allegations
of discrimination, tax deficiencies or breach of contract
F-50
<PAGE> 154
incidental to the operations of its business. Gerrity is not currently
involved in any such incidental litigation which it believes could have a
materially adverse effect on its financial condition or results of operations.
6. INCOME TAXES
Effective January 1, 1993, Gerrity adopted Statement of Financial
Accounting Standards No. 109 (FAS 109) Accounting for Income Taxes. The
components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current provision (benefit):
Federal $2,124 $ 190 $(2,485)
State 486 121 40
------ ----- -------
2,610 311 (2,445)
------ ----- -------
Deferred provision (benefit):
Federal 432 (270) 2,445
State 286 -- (215)
------ ----- -------
718 (270) 2,230
------ ----- -------
Provision (benefit) for income taxes $3,328 $ 41 $ (215)
====== ===== =======
</TABLE>
Deferred tax assets (liabilities) as of December 31, 1994 and 1995,
are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
FEDERAL STATE TOTAL FEDERAL STATE TOTAL
------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Alternative minimum tax credit
carryforwards $ 2,886 $ -- $ 2,886 $ 400 $ -- $ 400
Less valuation allowance (791) -- (791) -- -- --
Net operating loss carryforward 4,216 653 4,869 8,327 1,818 10,145
------- ----- ------- -------- ------- --------
6,311 653 6,964 8,727 1,818 10,545
Deferred tax liabilities:
Oil and gas properties (5,870) (868) (6,738) (10,739) (1,818) (12,557)
------- ----- ------- -------- ------- --------
Net deferred tax asset (liability)--
non current $ 441 $(215) $ 226 $ (2,012) $ -- $ (2,012)
======= ===== ======= ======== ======= ========
</TABLE>
The difference between the provision for income taxes and the amounts
which would be determined by applying the statutory federal income tax rate to
income before income taxes is analyzed below:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at the expected statutory rate $ 5,923 $ 264 $(2,784)
State income taxes, net of federal benefit, 502 26 (270)
Section 29 credits (2,254) (195) 2,883
Depletion for income tax purposes in excess
of financial statement cost depletion (140) (75) (75)
Other (703) 21 31
------- ----- -------
Total provision (benefit) for income taxes $ 3,328 $ 41 $ (215)
======= ===== =======
</TABLE>
At December 31, 1995, Gerrity has net operating loss carryforwards of
approximately $25,000,000 which may be used to offset taxable income in future
years. These loss carryforwards will expire, if unused, beginning in 2009. In
addition, Gerrity has an alternative minimum tax credit carryforward for income
tax purposes of approximately $400,000, which may be utilized to reduce future
regular tax liability of Gerrity. This credit carryforward has no expiration
date.
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<PAGE> 155
7. CONVERTIBLE PREFERRED STOCK
In May 1993, Gerrity completed a private placement of 3,036,000
Depositary Shares, each representing a one-eighth interest in a share of $12.00
Convertible Preferred Stock (379,500 total shares). Gerrity received
$72,508,000 net proceeds from the offering (after deducting offering costs of
$3,392,000). Each share of the Convertible Preferred Stock is convertible at
any time at the option of the holder into 10.392 shares of Common Stock.
Gerrity has 3,943,764 shares of its Common Stock reserved for conversion.
Annual cumulative dividends of $12.00 per share of Convertible Preferred Stock
($1.50 per Depositary Share) are payable from the date of issuance on each May
15, August 15, November 15, and February 15, when, and if declared by the Board
of Directors. Dividends of $2,390,850 ($6.30 per share), $4,554,000 ($12.00
per share), and $4,554,000 ($12.00 per share) were declared and paid during
1993, 1994 and 1995, respectively. In January 1996, the Board of Directors
declared a dividend of $1,138,500 ($3.00 per share), which was paid on February
15, 1996.
In the case of the voluntary or involuntary liquidation, dissolution
or winding up of Gerrity, holders of Convertible Preferred Stock are entitled
to receive a liquidation preference of $200.00 per share ($75,900,000 or $25
per Depositary Share), plus accrued unpaid dividends. The Convertible
Preferred Stock is not redeemable by Gerrity prior to May 23, 1996. On and
after such date, the shares of Convertible Preferred Stock will be redeemable
at the option of Gerrity, in whole or in part at any time at $208.40 per share,
declining ratably to $200 per share on or after May 23, 2003.
8. ACQUISITIONS AND SALES
In July 1992, Gerrity sold assets consisting primarily of all of its
gas gathering and processing facilities to Associated Natural Gas, Inc. The
purchase price had two components: (a) an initial price of $5,500,000, of which
$5,000,000 was paid to Gerrity at the closing and $500,000, subsequently
adjusted to $319,585, was paid in March 1994, and (b) $3,000,000 in Production
Prepayment Adjustments, as defined, the "Adjustments", of which $1,500,000 was
paid to Gerrity at closing and $1,500,000 was paid on December 1, 1992. No
gain or loss was recognized on the transaction in 1992. Under the terms of the
purchase agreement, the Adjustments represented modifications of the purchase
price and resulted in an ultimate gain recognized of approximately $1,885,000.
During 1993 and 1994, Gerrity recognized $1,452,000 and $433,000, respectively,
of the gain in connection with its delivery of the specified quantities
associated with the Adjustments.
On October 13, 1995, Gerrity received $9,550,000 from an unaffiliated
third party from the sale of an interest in certain of its properties in the
D-J Basin. The sale will enable the purchaser to earn tax credits associated
with future natural gas production from the properties. Gerrity reserved a
variable production payment that generally will entitle Gerrity to 90% of the
net cash flow from the properties. Gerrity will continue to operate the
properties and market the related oil and gas production. Additionally,
Gerrity has the right to repurchase the property interest effective January 1,
2004. Gerrity has recorded the sale proceeds, net of transaction costs of
$154,000, as unearned revenue that will be amortized into revenue on a units of
production method. The proceeds were utilized to prepay principal outstanding
on Gerrity's revolving Credit Agreement.
F-52
<PAGE> 156
9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Net Capitalized Costs
Net capitalized costs related to Gerrity's oil and gas producing
activities are summarized as follows as of December 31, 1994 and 1995.
<TABLE>
<CAPTION>
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Developed properties $348,372 $ 359,959
Wells in progress 6,743 1,783
Undeveloped properties 34,262 28,393
-------- ---------
Total 389,377 390,135
Less accumulated depletion, depreciation and amortization (89,189) (105,023)
-------- ---------
Net capitalized costs $300,188 $ 285,112
======== =========
</TABLE>
Costs Incurred in Oil and Gas Producing Activities
Costs incurred in oil and gas property acquisition, exploration and
development activities, whether capitalized or expensed, are summarized as
follows for the years ended December 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisition costs $ 16,510 $ 3,431 $ 1,517
Exploration costs 25 17 1,417
Development costs 89,306 36,440 14,808
-------- ------- -------
Total $105,841 $39,888 $17,742
======== ======= =======
</TABLE>
Major Customers
For the years ended December 31, 1993, 1994 and 1995, sales to
individual customers constituting 10% or more of total revenue are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Customer A 57% 53% 57%
Customer B 14% -- --
Customer C -- 14% 14%
</TABLE>
Oil and Gas Reserve Quantities (Unaudited)
The reserve information presented below is based upon reports prepared
by the independent petroleum engineering firm of Netherland, Sewell &
Associates, Inc. ("NSAI"). Gerrity emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, these estimates
are expected to change as future information becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil
F-53
<PAGE> 157
and gas reserves are those reserves expected to be recovered through existing
wells with existing equipment and operating methods.
Presented below is a summary of the changes in estimated proved
reserves of Gerrity, all of which are located in the United States, for the
years ended December 31, 1993, 1994 and 1995 and the average sales price at the
end of each such year.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves, beginning of year 16,353 185,161 17,862 208,315 21,297 237,028
Extensions, discoveries and other
additions(1) 4,590 48,572 3,119 27,352 908 12,588
Revisions of previous estimates(2)(3) (2,825) (22,838) 1,962 16,965 (3,669) (21,467)
Production (1,825) (17,978) (2,040) (19,587) (1,618) (17,839)
Purchase of reserves-in-place 1,569 15,398 460 3,983 214 2,021
Sale of reserves-in-place -- -- (66) -- (347) (6,010)
------ ------- ------ ------- ------ -------
Proved reserves, end of year 17,862 208,315 21,297 237,028 16,785 206,321
====== ======= ====== ======= ====== =======
Proved developed reserves, end of year 13,039 171,906 13,717 181,392 11,573 162,286
====== ======= ====== ======= ====== =======
Sales price, end of year $11.87 $ 2.28 $16.16 $ 1.88 $18.75 $ 1.77
====== ======= ====== ======= ====== =======
</TABLE>
(1) Including recompletions of existing wells to previously unproved
reservoirs
(2) Revisions consist of 3,100 Mbbls and 19,900 Mmcfs attributable to
proved undeveloped drilling locations and behind-pipe zones determined
to be uneconomic using the lower oil prices in effect at December 31,
1993.
(3) For purposes of estimating Gerrity's net proved developed and
undeveloped reserves as of December 31, 1995, NSAI prepared such
reserves on a basis consistent with Patina's methodology of estimating
reserves relating to final decline rates and the exclusion of proved
undeveloped reserves with positive future net revenue but negative
present value when discounted at 10 percent. This methodology
represents a change from Gerrity's estimated proved reserves as of
December 31, 1994 prepared by NSAI, resulting in an estimated
reduction in proved reserves of approximately five million barrels of
oil equivalent and no material change in present value before income
taxes.
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
Statement of Financial Accounting Standards No. 69 prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. Gerrity has followed
these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimated future income taxes are computed using
current statutory income tax rates including consideration for estimated future
statutory depletion and Section 29 credits. The resulting future net cash
flows are reduced to present value amounts by applying a 10% annual discount
factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect Gerrity's expectations of actual revenues to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
F-54
<PAGE> 158
The following summary sets forth Gerrity's future net cash flows
relating to proved oil and gas reserves as of December 31, 1993, 1994 and 1995
based on the standardized measure prescribed in Statement of Financial
Accounting Standards No. 69:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows $ 688,057 $ 789,783 $ 680,291
Future production costs (159,850) (207,146) (156,030)
Future development costs (93,245) (122,879) (113,846)
Future income tax provision (41,666) (55,412) (63,370)
--------- --------- ---------
Future net cash flows 393,296 404,346 347,045
Less effect of a 10% discount factor (177,015) (180,408) (150,834)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 216,281 $ 223,938 $ 196,211
========= ========= =========
</TABLE>
The principal sources of change in the standardized measure of
discounted future net cash flows are as follows for the years ended December
31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of year $238,896 $216,281 $223,938
Sales of oil and gas produced, net of
production costs (56,349) (53,831) (43,147)
Net changes in prices and production costs (42,046) (16,343) 13,786
Extensions, discoveries and other, net of
production costs 44,796 24,154 8,881
Net changes in future development costs 31,308 6,224 4,874
Revisions of previous quantity estimates(1) (48,011) 27,000 (7,472)
Purchase of reserves-in-place 19,470 3,733 878
Sale of reserves-in-place -- (456) (12,928)
Changes in timing of production -- -- (18,154)
Accretion of discount 23,890 21,628 22,394
Net change in income taxes 4,327 (4,452) 3,161
-------- -------- --------
Standardized measure, end of year $216,281 $223,938 $196,211
======== ======== ========
</TABLE>
(1) Revisions include $21,900 attributable to proved undeveloped drilling
locations and behind=pipe zones determined to be uneconomic using the
lower oil prices in effect at December 31, 1993.
F-55
<PAGE> 159
SCHEDULE I
INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF SOCO
The following is certain information concerning the executive officers
and directors of SOCO. All of such individuals are U.S. citizens, except that
Peter C. Forbes and Roger W. Britain are citizens of the United Kingdom. The
business address of each of such persons is c/o SOCO's principal executive
offices, 777 Main Street, Suite 2500, Fort Worth, Texas 76102.
JOHN C. SNYDER (54), a director and Chairman, founded SOCO's
predecessor in 1978. From 1973 to 1977, Mr. Snyder was an independent oil
operator in Texas and Oklahoma. Previously, he was a director and the
Executive Vice President of May Petroleum Inc. where he served from 1971 to
1973. Mr. Snyder was the first president of Canadian-American Resources Fund,
Inc., which he founded in 1969. From 1964 to 1966, Mr. Snyder was employed by
Humble Oil and Refining Company (currently Exxon Co., USA) as a petroleum
engineer. Mr. Snyder received his Bachelor of Science Degree in Petroleum
Engineering from the University of Oklahoma and his Masters Degree in Business
Administration from the Harvard University Graduate School of Business
Administration. Mr. Snyder is a director of the Community Enrichment Center,
Inc., Fort Worth.
THOMAS J. EDELMAN (45), a director and President, co-founded SOCO.
Prior to joining SOCO in 1981, he was a Vice President of The First Boston
Corporation. From 1975 through 1980, Mr. Edelman was with Lehman Brothers Kuhn
Loeb Incorporated. Mr. Edelman received his Bachelor of Arts Degree from
Princeton University and his Masters Degree in finance from the Harvard
University Graduate School of Business Administration. Mr. Edelman is Chairman
of the Board, President and Chief Executive Officer of Patina Oil and Gas
Corporation, a director of Command Petroleum Limited and as Chairman of Amerac
Energy Corporation, all affiliates of SOCO. In addition, Mr. Edelman serves as
a director of Petroleum Heat & Power Co., Inc., a Connecticut based fuel oil
distributor, and its affiliate Star Gas Corporation. Mr. Edelman is also
Chairman of Lomak Petroleum, Inc.
CHARLES A. BROWN (49), Senior Vice President -- Rocky Mountain
division, joined SOCO in 1987. He was a petroleum engineering consultant from
1986 to 1987. He served as President of CBW Services, Inc., a petroleum
engineering consulting firm, from 1979 to 1986 and was employed by KN from 1971
to 1979 and Amerada Hess Corporation from 1969 to 1971. Mr. Brown received his
Bachelor of Science Degree in Petroleum Engineering from the Colorado School of
Mines.
STEVEN M. BURR (39), Vice President -- Engineering and Planning,
joined SOCO in 1987. From 1982 to 1987, he was a Vice President with the
petroleum engineering consulting firm of Netherland, Sewell & Associates, Inc.
("NSAI"). From 1978 to 1982, Mr. Burr was employed by Exxon Company, U.S.A. in
the Production Department. Mr. Burr received his Bachelor of Science Degree in
Civil Engineering from Tulane University.
PETER C. FORBES (50), Vice President -- Gulf of Mexico, who was
appointed to that position in February 1996, has been Executive Vice President
of DelMar Petroleum, Inc., SOCO's Gulf Cost subsidiary, since July 1995. From
1994 to 1995, he was President and Chief Executive Officer of SD Resources,
Inc., the general partner of Sand Dollar Resources, a partnership with Enron
Gas Services Corp., a subsidiary of Enron Corp. From 1992 to 1993, Mr. Forbes
was Vice President in charge of the oil and gas property Merger unit of Enron
Gas Services Corp. From 1988 to 1992, he was President and a director of
American Exploration Company. Prior thereto, Mr. Forbes was Vice President,
Finance of Browning-Ferris Industries, Inc. during 1988 and Senior Vice
President and Chief Financial Officer of Zapata Corporation from 1985 to 1987.
He served in several positions, including Vice President and Treasurer, at
Texas Eastern Transmission Corporation from 1975 to 1985. Mr. Forbes received
his Bachelor of Arts Degree from Edinburgh University.
S-1
<PAGE> 160
PETER E. LORENZEN (46), Vice President -- General Counsel and
Secretary, joined SOCO in 1991. From 1983 through 1992, he was a shareholder
in the Dallas law firm of Johnson & Gibbs, P.C. Prior to that, Mr. Lorenzen
was an associate with Cravath, Swaine & Moore. Mr. Lorenzen received his law
degree from New York University School of Law and his Bachelor of Arts Degree
from The Johns Hopkins University.
H. RICHARD PATE (42), Vice President -- Major Gas Projects, joined
SOCO in 1988. From 1981 to 1988, Mr. Pate held various positions with Mitchell
Energy Corporation, including Region Engineer and Production Manager. He was
reemployed by Champlin Petroleum Company from 1979 to 1981 and Atlantic
Richfield Corporation from 1975 to 1979. Mr. Pate received his Bachelor of
Science Degree in Chemical Engineering from the University of Wyoming.
DAVID M. POSNER (42), Vice President -- Gas Management Group, joined
SOCO in 1991. From 1980 to 1991 he held various positions with Ladd Petroleum
Corporation (a subsidiary of the General Electric Company) including Vice
President of Gas Gathering, Processing and Marketing. Mr. Posner received his
Bachelor of Arts from Brown University and his Master of Science in Mineral
Economics from the Colorado School of Mines.
JAMES H. SHONSEY (44), Vice President -- Finance, joined SOCO in 1991.
From 1987 to 1991, Mr. Shonsey served in various capacities including Director
of Operations Accounting for Apache Corporation. From 1976 to 1987 he held
various positions with Deloitte & Touche, Quantum Resources Corporation, Flare
Energy Corporation and Mizel Petro Resources, Inc. Mr. Shonsey received his
CPA certificate from the state of Colorado, his Bachelor of Science Degree in
Accounting from Regis University and his Master of Science Degree in Accounting
from the University of Denver.
EDWARD T. STORY (52), a director and Vice President -- International
of SOCO and President of SOCO International, Inc., joined SOCO in 1991. Mr.
Story became a director of SOCO in February 1996. From 1990 to 1991, Mr.
Story was Chairman of the Board of a jointly-owned Thai/US company, Thaitex
Petroleum Exploration Company from 1981 to 1990. He served as Vice President
Finance and Chief Financial Officer of Superior Oil Company from 1979 to 1981.
Mr. Story held the positions of Exploration and Production Controller and
Refining Controller with Exxon U.S.A. from 1975 to 1979. He held various
positions in Esso Standard's international companies from 1966 to 1975. Mr.
Story received a Bachelor of Science Degree in Accounting from Trinity
University, San Antonio, Texas and a Masters of Business Administration from
The University of Texas in Austin, Texas. Mr. Story is a director of Command
Petroleum Limited, an affiliate of SOCO. In addition, Mr. Story serves as a
director of Bank Texas, Inc., a bank holding company and Hi/Lo Automotive,
Inc., a distributor of automobile parts.
RODNEY L. WALLER (46), Vice President -- Special Projects, joined SOCO
in 1977. Previously, Mr. Waller was employed by Arthur Andersen & Co. Mr.
Waller received his Bachelor of Arts Degree from Harding University.
RICHARD A. WOLLIN (43), Vice President -- Southern Division and
Mergers, joined SOCO in 1990. From 1983 to 1989, Mr. Wollin served in various
management capacities including Executive Vice President of Quinoco Petroleum,
Inc. with primary responsibility for Merger, divesture and corporate finance
activities. From 1976 to 1983, he was employed in various capacities for The
St. Paul Companies, Inc., including Senior Vice President of St. Paul Oil & Gas
Corp. Mr. Wollin received his Bachelor of Science Degree from St. Olaf
College and his law degree from the University of Minnesota Law School. Mr.
Wollin is a member of the Minnesota Bar Association.
ROGER W. BRITTAIN (59), director since 1983, is a director of Guinness
Mahon & Co. Limited ("GM&Co."), a London merchant bank. In March 1990, he
became the Managing Director of Guinness Mahon Energy Services Limited, a
subsidiary of GM&Co. formed to provide investment banking and consultant
services to the oil and gas industry. Mr. Brittain was a founder and the
Managing Director of Energy
S-2
<PAGE> 161
Management and Finance Limited ("EMF"), a position he held from 1985 to
September 1989. EMF managed TR Energy Public Limited Company ("TR Energy") an
investment company making oil and gas investments in the United States. From
1980 through October 1989, Mr. Brittain was first Managing Director and from
mid-1987 an Executive Director of TR Energy, an investment company making oil
and gas investments in the United States. From 1977 to 19890, Mr. Brittain was
a director of Shaw Wallace & Co. Ltd., Calcutta, India. From 1967 to 1977, he
was associated with Hill Samuel & Co. Ltd., William Brandts & Sons Ltd. and
Edward Bates and Sons Ltd., merchant banks in London. Prior to that time, Mr.
Brittain was with Her Majesty's Foreign Service. Mr. Brittain was educated at
Marlborough College and received his M.A. Degree from Balliol College, Oxford.
JOHN A. HILL (54), director since 1981, is a Managing Director of
First Reserve Corporation, an oil and gas investment management company. Prior
to joining First Reserve, Mr. Hill was President, Chief Executive Officer and
Director of Marsh & McLennan Asset Management Company, the money management
subsidiary of Marsh & McLennan Companies, Inc. From 1979 to 1980, Mr. Hill
served as President and Chief Executive Officer of Eberstadt Asset Management
Company, the asset management division of F. Eberstadt & Co., Inc. Prior to
1976, Mr. Hill held several senior positions in the Federal Government
including Deputy Administrator of the Federal Energy Administration from 1975
to 1976 and Deputy Associate Director of the Office of Management and Budget
from 1973 to 1974. Mr. Hill received his Bachelors Degree in Economics from
Southern Methodist University and pursued graduate studies there as a Woodrow
Wilson Fellow. Mr. Hill is a trustee of the Putnam Funds in Boston and a
director of Maverick Tube Corporation, a supplier of tubular goods, and Enterra
Corporation, an oilfield services company.
WILLIAM J. JOHNSON (61), director since 1994, is a private consultant
for the oil and gas industry and is President and a director of JonLoc Inc., an
oil and gas company of which he and his family are the sole shareholders. From
1991 to 1994, Mr. Johnson was President, Chief Operating Officer and a director
of Apache Corporation. Previously, he was a director, President and Chief
Executive Officer of Tex/Con Oil and Gas, where he served from 1989 to 1991.
Prior thereto, Mr. Johnson served in various capacities with major oil
companies, including director and President USA of BP Exploration Company,
President of Standard Oil Production Company and Senior Vice President of The
Standard Oil Company. Mr. Johnson received a Bachelor of Science degree in
Petroleum Geology from Mississippi State University and completed the Advanced
Management Course at the University of Houston. Mr. Johnson is a director of
Patina. Mr. Johnson serves as a director of BJ Services Company, an oilfield
service company, and Camco International, an oilfield manufacturing company.
Mr. Johnson also serves on the advisory board of Texas Commerce Bank, Houston.
B.J. KELLENBERGER (70), director since 1989, is the founder and owner
of Kelloil, Inc. and President and majority owner of Shenandoah Oil, Inc. Each
of these companies is engaged in exploration and production of oil and natural
gas and secondary recovery of oil. In 1965, he founded Shenandoah Oil
Corporation and served as President, Chief Executive Officer and Chairman of
the Board until its voluntary liquidation in 1979. Mr. Kellenberger is a
director of The Jefferson Energy Foundation and a trustee of the Cassata
Learning Center.
JAMES E. MCCORMICK (68), director since 1992, served as President,
Chief Operating Officer and a director of Oryx Energy Company from its
inception in November 1988 until his retirement in March 1992. Prior to his
service with Oryz, Mr. McCormick served from 1953 in a number of positions with
the Sun organization, most recently serving as President, Chief Executive
Officer and a director of Sun Exploration and Production Company. Mr.
McCormick serves as a director of Lone Star Technologies, B.J. Services, Inc.,
an oilfield service company, Texas Commerce Bank, and Petrolite Corporation.
ALFRED M. MICALLEF (53), director since 1989, was elected President of
JMK International, Inc. in 1974 and is currently its sole shareholder and Chief
Executive Officer. JMK International is one of the world's largest producers
of silicone rubber.
S-3
<PAGE> 162
ANNEX A
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
GERRITY OIL & GAS CORPORATION
The undersigned officers of Gerrity Oil & Gas Corporation (the
"Corporation"), a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware, do hereby certify as follows:
1. That the Board of Directors of the Corporation, in accordance
with Sections 151 and 242 of the General Corporation Law of the State of
Delaware, adopted a resolution at its meeting held on October 31, 1996 (i)
proposing that the Certificate of Incorporation of the Corporation be amended
by (A) deleting therefrom Section 1 of Article IV and substituting in its place
the language set forth in Exhibit A attached hereto and (B) deleting therefrom
the terms and provisions of the Certificate of Designation of $12.00
Convertible Preferred Stock as specified in Exhibit A attached hereto
(collectively, the "Amendment") and recommending that the Amendment be
submitted to the stockholders of the Corporation for their consideration and
approval at a special meeting of such stockholders.
2. That in accordance with Sections 151 and 242 of the General
Corporation Law of the State of Delaware, the holders of (i) a majority of the
outstanding shares of Common Stock of the Corporation and (ii) a majority of
the outstanding shares of the Preferred Stock of the Corporation approved and
adopted the Amendment by their affirmative vote at a special meeting of the
stockholders of the Corporation held on October 31, 1996.
3. That upon the filing and effectiveness of this Certificate of
Amendment, Section 1 of Article IV of the Certificate of Incorporation of the
Corporation shall be amended to read as set forth on Exhibit A attached hereto
and the terms and provisions of the Certificate of Designation of $12.00
Convertible Preferred Stock shall be deleted from the Certificate of
Incorporation of the Corporation.
A-1
<PAGE> 163
IN WITNESS WHEREOF, the undersigned officers of the Corporation do
hereby certify under penalties of perjury that this Certificate of Amendment is
the act and deed of the Corporation and that the facts stated herein are true
and accordingly hereunto set our hands this _____ day of _____________, 1996
GERRITY OIL & GAS CORPORATION
By:
-----------------------------------
Name: Thomas J. Edelman
Title: Chairman/Chief Executive Officer
ATTEST:
By:
---------------------------
Name: Rodney L. Waller
Title: Secretary
A-2
<PAGE> 164
EXHIBIT A
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
OF
GERRITY OIL & GAS CORPORATION
RESOLVED, that Section 1 of Article IV of the Certificate of
Incorporation of Gerrity Oil & Gas Corporation is hereby amended to read in its
entirety as follows:
"Section 1A. Authorized Capital. The total number of shares
of stock that the Corporation shall have authority to issue is
40,500,000 shares consisting of 40,000,000 shares of Common Stock,
$.01 par value per share (the "Common Stock") and 500,000 shares of
Preferred Stock, $.01 par value per share (the "Preferred Stock").
Section 1B. Redemption of $12.00 Convertible Preferred Stock.
Upon the Amendment to the Certificate of Incorporation becoming
effective pursuant to the General Corporation Law of the State of
Delaware (the "Effective Time"), and without any further action on the
part of the Corporation or its stockholders, each whole share of the
Corporation's $12.00 Convertible Preferred Stock ("Convertible
Preferred Stock") then issued (including shares, if any, held in the
treasury of the Corporation) shall automatically be redeemed,
reclassified, changed and converted into 4.216 shares of 7 1/8%
Convertible Preferred Stock ("Patina Preferred Stock") of Patina Oil &
Gas Corporation, a Delaware corporation and holder of all of the
issued and outstanding Common Stock of the Corporation ("Patina").
After the Effective Time, each holder of an outstanding
certificate theretofore representing Convertible Preferred Stock shall
surrender such certificate to ____________________________ or such
other person designated by Patina to act as the exchange agent (the
"Exchange Agent"). As soon as practicable after the surrender to the
Exchange Agent of any certificate which prior to the Effective Time
represented any shares of Convertible Preferred Stock, together with a
duly executed transmittal letter and any other documents the Exchange
Agent may specify, the Exchange Agent shall distribute to the person
in whose name such certificate has been issued certificates originally
issued by Patina and registered in the name of such person
representing the number of full shares of Patina Preferred Stock into
which the shares of Convertible Preferred Stock previously represented
by the surrendered certificate shall have been redeemed, reclassified,
changed and converted. Until surrendered as contemplated by the
preceding sentence, each certificate which immediately prior to the
Effective Time represented any shares of Convertible Preferred Stock
shall be deemed at and after the Effective Time to represent the
number of full shares of Patina Preferred Stock contemplated by the
preceding sentence. No service charges, brokerage commissions or
transfer taxes shall be payable by any holder of any certificate which
prior to the Effective Time represented any shares of Convertible
Preferred Stock, except that, if any certificates for Patina Preferred
Stock are to be issued in a name other than that in which the
certificates for shares of Convertible Preferred Stock surrendered are
registered, it shall be a condition of such issuance that (i) the
person requesting such issuance shall pay to Patina any transfer taxes
payable by reason thereof (or of any prior transfer of such
surrendered certificate) or establish to the satisfaction of Patina
that such taxes have been paid or are not payable, and (ii) such
surrendered certificate be properly endorsed and otherwise be in
proper form for transfer. Patina may impose such other reasonable
conditions upon the exchange of certificates as it may deem to be
necessary or desirable and as are consistent with the provisions of
this Article IV.
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<PAGE> 165
No certificates or scrip representing fractional shares shall
be issued in connection with the redemption and reclassification
provided for in this Article IV. Instead, at the Effective Time, each
fraction of a share of Patina Preferred Stock otherwise resulting from
the redemption and reclassification of the Convertible Preferred Stock
shall automatically be converted into the right to receive, upon
surrender to the Exchange Agent as provided above of certificates
which prior to the Effective Time represented shares of Convertible
Preferred Stock, cash in an amount determined by multiplying (x) the
fraction of a share of Patina Preferred Stock to which such holder
would otherwise have been entitled by (y) the closing price of a share
of Patina Preferred Stock, as reported on the New York Stock Exchange
Composite Tape, on the first full trading day on or after the day on
which the Effective Time and on which the Patina Preferred Stock is
traded. Notwithstanding the foregoing, further rules and regulations
concerning the settlement of fractional shares otherwise issuable, not
inconsistent with this Article IV, may be adopted by the Corporation.
Upon the submission to the Exchange Agent of each certificate
which prior to the Effective Time represented shares of Convertible
Preferred Stock, the same shall forthwith be canceled."
RESOLVED FURTHER, that upon the Amendment to the Certificate of
Incorporation becoming effective pursuant to the General Corporation Law of the
State of Delaware, and without any further action on the part of the
Corporation or its stockholders, the terms and provisions of that certain
Certificate of Designation of $12.00 Convertible Preferred Stock, as filed with
the Office of the Secretary of State of the State of Delaware on May 4, 1993
and pursuant to which the Convertible Preferred Stock was established, shall be
deleted from the Certificate of Incorporation of the Corporation.
A-4
<PAGE> 166
ANNEX B
OPINION OF A. G. EDWARDS & SONS, INC.
October 2, 1996
The Board of Directors
Gerrity Oil & Gas Corporation
4100 East Mississippi Avenue, Suite 1200
Denver, Colorado 80222
Gentlemen:
We understand that Gerrity Oil & Gas Corporation (the "Company")
proposes to enter into a transaction (the "Transaction") pursuant to which
holders (other than Patina (defined below)) of Depositary Shares ("Depositary
Shareholders") representing an interest in one eighth of a share of the $12.00
Convertible Preferred Stock of Gerrity will receive, in exchange for each
Depositary Share, 0.527 shares of Patina Oil & Gas Corporation's ("Patina")
Convertible Preferred Stock ("Patina Preferred Stock") together with the amount
of any dividends or other distributions (without interest) which may have
become payable in respect of Patina Preferred Stock during the period
commencing on May 2, 1996 and ending on the date of surrender of the Depositary
Share certificates by the holders (other than Patina) thereof. We further
understand that pursuant to the merger (the "Merger") of the Company with a
wholly-owned subsidiary of Patina under that certain Amended and Restated
Agreement and Plan of Merger (as amended, the "Merger Agreement") dated as of
January 16, 1996 and amended and restated as of March 20, 1996, the Company
became a wholly-owned subsidiary of Patina. We further understand that
simultaneously with the Merger, Patina issued to Depositary Shareholders who
tendered such shares to Patina, 0.527 shares of Patina Preferred Stock in
exchange for each such Depositary Share held by them pursuant to a registered
exchange offer (the "Exchange Offer"). We further understand that the
Transaction will be effected by an amendment to the certificate of incorporation
of the Company and will result in the remaining Depositary Shareholders becoming
holders of Patina Preferred Stock on the same basis as did those persons who
participated in the Exchange Offer. You have asked us to advise you that the
Transaction is fair to the Depositary Shareholders from a financial point of
view. All capitalized terms used herein and not otherwise defined have the
meanings ascribed thereto in the Merger Agreement.
A.G. Edwards & Sons, Inc. ("Edwards") is a nationally recognized
securities and investment banking firm engaged in, among other things, the
valuation of businesses and their securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, private placements and valuations for estate, corporate and other
purposes. In the ordinary course of its business, Edwards and its affiliates
may actively trade the debt and equity securities of the Company and Patina for
their own account and for the account of customers and, accordingly, may at any
time hold a long or short position in such securities. We have been engaged by
the Company to render this fairness opinion and are receiving a fee for our
services. On May 24, 1996, we rendered a fairness opinion to the Company
regarding the fairness to the Company, from a financial point of view, of the
entering into that certain Subordinate Loan Agreement dated as of May 2, 1996
by and among the Company, as borrower, and Soco Wattenberg Corporation ("SWAT")
and Patina, as lenders, as amended by an amendment dated May 2, 1996 and
Edwards received a fee for that opinion.
You have asked for our opinion as to whether the Transaction is fair,
from a financial point of view, to the Depositary Shareholders. In the course
of our review we have:
B-1
<PAGE> 167
(i) analyzed certain public and non-public operating and financial data of
the Company, SWAT and Patina prepared by the respective managements,
technical staff, land personnel and reserve engineers, which data has
been made available to us in our role as financial advisor to the
Company;
(ii) reviewed the reported prices and trading activity of the Company's and
Patina's publicly traded securities;
(iii) discussed with the management of the Company and Patina the historical
operating results, financial condition and the future prospects of the
business of the Company and Patina;
(iv) analyzed published information regarding the financial and market
performance of a limited group of companies which Edwards believes is
comparable to the Company and Patina;
(v) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(vi) analyzed certain financial projections regarding the Transaction and
considered the value of certain tangible and intangible costs and
benefits that may accrue to the Company as a result of the
Transaction;
(vii) reviewed the terms of the Transaction and certain related documents;
(viii) taken into account our general experience in the industry, dealings
with similar transactions and knowledge derived from our role as
financial advisor to the Company; and
(ix) undertaken such additional reviews, analyses and inquiries as we deemed
appropriate.
We have relied upon, without independent verification, the accuracy
and completeness of the information reviewed for the purposes of this opinion.
You did not request and we did not make any independent evaluation or appraisal
of the assets or liabilities of the Company, SWAT or Patina. In addition, with
respect to the financial projections of future performance of the Company, SWAT
and Patina, we have assumed that such information has been reasonably prepared
on a basis reflecting the best currently available estimates and judgments of
management. Our opinion is necessarily based upon economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. We will not, and have no obligation to, update this letter. We
have also assumed, without independent investigation, that the form of the
Transaction complies with applicable law (including, without limitation, that
the Depositary Shareholders are not being asked to submit a proxy in respect of
the Transaction).
This letter is provided for the information of the Board of Directors
in its evaluation of the Transaction, and is not intended to be and does not
constitute a recommendation to any Depositary Shareholder whether to tender any
Depositary Shares or as to how such Depositary Shareholder should vote on the
Transaction. Our opinion may not be published or otherwise used or referred to
for any other purpose, nor shall any public reference to Edwards be made,
without our prior written consent, except that this opinion may be included in
its entity in any filing made by the Company or Patina with the Securities and
Exchange Commission.
Based upon and subject to the foregoing, we are of the opinion that
the terms of the Transaction are fair, from a financial point of view, to the
Depositary Shareholders.
Sincerely,
A.G. EDWARDS & SONS, INC.
By:
-----------------------------------
B-2
<PAGE> 168
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the DGCL, a Delaware corporation has the power,
under specified circumstances, to indemnify its directors, officers, employees
and agents in connection with threatened, pending or completed actions, suits
or proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in right of the corporation), brought against them by
reason of the fact that they were or are such directors, officers, employees or
agents, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in any such action, suit or proceeding.
Article Ninth of Patina's Certificate of Incorporation together with Article VI
of its Bylaws provide for indemnification of each person who is or was made a
party to any actual or threatened civil, criminal, administrative or
investigative action, suit or proceeding because such person is or was an
officer or director of Patina or is a person who is or was serving at the
request of Patina as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service relating to employee benefit plans, to the fullest extent
permitted by the DGCL as it existed at the time the indemnification provisions
of the Certificate of Incorporation and the Bylaws were adopted or as may be
thereafter amended. Article VI of the Registrant's Bylaws and Article Ninth of
its Certificate of Incorporation expressly provide that they are not the
exclusive methods of indemnification.
Article VI of the Bylaws also provides that Patina may maintain
insurance, at its own expense, to protect itself and any director, officer,
employee or agent of Patina or of another entity against any expense, liability
or loss, regardless of whether the Registrant would have the power to indemnify
such person against such expense, liability or loss under the DGCL.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (relating to liability for unauthorized acquisitions or redemptions
of, or dividends on, capital stock) or (iv) for any transaction from which the
director derived an improper personal benefit. Article Eighth of the Patina's
Certificate of Incorporation contains such a provision.
Patina has entered into indemnification agreements with each of its
officers and directors and may in the future enter into such indemnification
agreements with its directors, officers, employees and agents. Such
indemnification agreements are intended to provide a contractual right to
indemnification, to the extent permitted by law, for costs, expenses (including
attorneys' fees and disbursements), judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by the person to be
indemnified in connection with any proceeding (including, to the extent
permitted by law, any derivative action) to which they are, or are threatened
to be made, a party by reason of their status or decisions or actions in such
positions. Such indemnification agreements do not change the basic legal
standards for indemnification set forth in DGCL or the Certificate of
Incorporation of Patina. Such provisions are intended to be in furtherance,
and not in limitation of, the general right to indemnification provided in the
certificate of incorporation and Bylaws of Patina.
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<PAGE> 169
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Certificate of Incorporation of Patina Oil & Gas Corporation
(Incorporated by reference to Exhibit 3.1 of the Registration
Statement of Patina Oil & Gas Corporation on Form S-4 (Registration
No. 333-00572)).
3.2 Certificate of Designation of Patina Oil & Gas Corporation
Preferred Stock (Incorporated by reference to Exhibit 3.2 of the
Registration Statement of Patina Oil & Gas Corporation on Form S-4
(Registration No. 333-00572)).
3.3 Bylaws of Patina Oil & Gas Corporation (Incorporated by reference
to Exhibit 3.3 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
*5.1 Opinion of Vinson & Elkins L.L.P. regarding the legality of the
securities.
10.1 Form of Business Opportunity Agreement (Incorporated by reference
to Exhibit 10.1 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
10.2 Corporate Services Agreement between SOCO and Patina dated as of
January 16, 1996 (Incorporated by reference to Exhibit 10.2 of the
Registration Statement of Patina Oil & Gas Corporation on Form S-4
(Registration No. 333-00572)).
10.3 Form of Registration Rights Agreement (Incorporated by reference to
Exhibit 10.3 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
10.4 Form of Cross-Indemnification Agreement (Incorporated by reference
to Exhibit 10.4 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
10.5 Gas Gathering and Processing Contract between SOCO Wattenberg
Corporation, ANGC Corporation and Snyder Oil Corporation dated
October 1, 1995 (Incorporated by reference to Exhibit 10.5 of the
Registration Statement of Patina Oil & Gas Corporation on Form S-4
(Registration No. 333-00572)).
10.6 Settlement Agreement and General Release dated as of January 16,
1996 between Gerrity Oil & Gas Corporation and Robert W. Gerrity
(Incorporated by reference to Exhibit 10.6 of the Registration
Statement of Patina Oil & Gas Corporation on Form S-4 (Registration
No. 333-00572)).
10.7 Consulting Letter Agreement dated as of January 16, 1996 between
Patina Oil & Gas Corporation and Robert W. Gerrity (Incorporated
by reference to Exhibit 10.7 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.8 Non-Competition Agreement dated as of January 16, 1996 between
Patina Oil & Gas Corporation and Robert W. Gerrity (Incorporated
by reference to Exhibit 10.8 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.9 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Brian J. Cree (Incorporated by
reference to Exhibit 10.9 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
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<PAGE> 170
10.10 Bonus Agreement dated as of January 16, 1996 between Patina Oil &
Gas Corporation and Brian J. Cree (Incorporated by reference to
Exhibit 10.10 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
10.11 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Keith M. Crouch (Incorporated by
reference to Exhibit 10.11 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.12 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and David J. Kornder (Incorporated
by reference to Exhibit 10.12 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.13 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Kenneth P. Elbert (Incorporated
by reference to Exhibit 10.13 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.14 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and F. H. Smith (Incorporated by
reference to Exhibit 10.14 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.15 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and James A. Tuell (Incorporated by
reference to Exhibit 10.15 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.16 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and David R. Macosko (Incorporated
by reference to Exhibit 10.16 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.17 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Terry L. Ruby (Incorporated by
reference to Exhibit 10.17 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.18 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Kenneth A. Wonstolen
(Incorporated by reference to Exhibit 10.18 of the Registration
Statement of Patina Oil & Gas Corporation on Form S-4 (Registration
No. 333-00572)).
10.19 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Christine A. Kennedy
(Incorporated by reference to Exhibit 10.19 of the Registration
Statement of Patina Oil & Gas Corporation on Form S-4 (Registration
No. 333-00572)).
10.20 Form of Patina Oil & Gas Corporation 1996 Employee Stock Option
Plan (Incorporated by reference to Exhibit 10.20 of the
Registration Statement of Patina Oil & Gas Corporation on Form S-4
(Registration No. 333-00572)).
10.21 Form of 1996 Patina Oil & Gas Corporation Stock Option Plan for
Non-Employee Directors (Incorporated by reference to Exhibit 10.21
of the Registration Statement of Patina Oil & Gas Corporation on
Form S-4 (Registration No. 333-00572)).
10.22 First Amendment to Credit Agreement dated June 28, 1996 by and
among Patina Oil & Gas Corporation, Gerrity Oil & Gas Corporation
and SOCO Wattenberg Corporation, as Borrowers, Texas Commerce Bank
national Association, as Administrative Agent, and certain
commercial lending institutions (Incorporated by reference to
Exhibit 10.1.1 of Quarterly Report of Patina Oil & Gas Corporation
on Form 10-Q for the quarter ended June 30, 1996).
II-3
<PAGE> 171
10.23 Agreement dated July 16, 1996 by and between F.H. Smith, employee,
and Patina Oil & Gas Corporation (Incorporated by reference to
Exhibit 10.3 of Quarterly Report of Patina Oil & Gas Corporation on
Form 10-Q for the quarter ended June 30, 1996).
10.24 Sublease Agreement dated as of May 1, 1996 by and between Snyder
Oil Corporation, as Sublandlord, and Patina Oil & Gas Corporation,
as Subtenant (Incorporated by reference to Exhibit 10.4 of
Quarterly Report of Patina Oil & Gas Corporation on Form 10-Q for
quarter ended June 30, 1996).
*12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
*23.1 Consent of Vinson & Elkins L.L.P. (set forth in Exhibit 5.1).
*23.3.1 Consent of Arthur Andersen LLP (Ft. Worth).
*23.3.2 Consent of Arthur Andersen LLP (Denver).
*23.4 Consent of Coopers & Lybrand L.L.P.
23.5 Consent of A. G. Edwards & Sons, Inc.
*23.6 Consent of Netherland, Sewell & Associates, Inc.
* Previously filed.
II-4
<PAGE> 172
ITEM 22. UNDERTAKINGS.
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 in Section 10(a) (3) of the
Securities Act of 1933;
(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;
(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;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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;
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the Registration Statement 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
tide offering thereof;
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request;
(6) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form;
(7) That every prospectus (i) that is filed pursuant to paragraph (6)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes 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; and
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<PAGE> 173
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and Patina Oil & Gas Corporation being acquired
involved therein, that was not the subject of and included in the Registration
Statement when it became effective.
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 provisions described under Item 20 above, 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.
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<PAGE> 174
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on the 27th day of September, 1996.
PATINA OIL & GAS CORPORATION
By: /s/ Thomas J. Edelman
-------------------------------------
Thomas J. Edelman
Chairman of the Board
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas J. Edelman or David J. Kornder, or any of
them, 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 (including post-effective
amendments) to this Registration Statement, and to file the same 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 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
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
/s/ Thomas J. Edelman Chairman of the Board, September 27, 1996
------------------------------------------------------ President, Chief
Thomas J. Edelman Executive Officer and Director
(Principal Executive Officer)
/s/ David J. Kornder Vice President and Chief September 27, 1996
------------------------------------------------------ Financial Officer
David J. Kornder (Principal Financial and
Accounting Officer)
/s/ Brian J. Cree Director September 27, 1996
------------------------------------------------------
Brian J. Cree
/s/ Robert J. Clark Director September 27, 1996
------------------------------------------------------
Robert J. Clark
/s/ Jay W. Decker Director September 27, 1996
------------------------------------------------------
Jay W. Decker
/s/ William J. Johnson Director September 27, 1996
------------------------------------------------------
William J. Johnson
</TABLE>
II-7
<PAGE> 175
<TABLE>
<S> <C> <C> <C>
/s/ Alexander P. Lynch Director September 27, 1996
------------------------------------------------------
Alexander P. Lynch
/s/ John C. Snyder Director September 27, 1996
------------------------------------------------------
John C. Snyder
</TABLE>
II-8
<PAGE> 176
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Certificate of Incorporation of Patina Oil & Gas Corporation
(Incorporated by reference to Exhibit 3.1 of the Registration
Statement of Patina Oil & Gas Corporation on Form S-4 (Registration
No. 333-00572)).
3.2 Certificate of Designation of Patina Oil & Gas Corporation
Preferred Stock (Incorporated by reference to Exhibit 3.2 of the
Registration Statement of Patina Oil & Gas Corporation on Form S-4
(Registration No. 333-00572)).
3.3 Bylaws of Patina Oil & Gas Corporation (Incorporated by reference
to Exhibit 3.3 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
*5.1 Opinion of Vinson & Elkins L.L.P. regarding the legality of the
securities.
10.1 Form of Business Opportunity Agreement (Incorporated by reference
to Exhibit 10.1 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
10.2 Corporate Services Agreement between SOCO and Patina dated as of
January 16, 1996 (Incorporated by reference to Exhibit 10.2 of the
Registration Statement of Patina Oil & Gas Corporation on Form S-4
(Registration No. 333-00572)).
10.3 Form of Registration Rights Agreement (Incorporated by reference to
Exhibit 10.3 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
10.4 Form of Cross-Indemnification Agreement (Incorporated by reference
to Exhibit 10.4 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
10.5 Gas Gathering and Processing Contract between SOCO Wattenberg
Corporation, ANGC Corporation and Snyder Oil Corporation dated
October 1, 1995 (Incorporated by reference to Exhibit 10.5 of the
Registration Statement of Patina Oil & Gas Corporation on Form S-4
(Registration No. 333-00572)).
10.6 Settlement Agreement and General Release dated as of January 16,
1996 between Gerrity Oil & Gas Corporation and Robert W. Gerrity
(Incorporated by reference to Exhibit 10.6 of the Registration
Statement of Patina Oil & Gas Corporation on Form S-4 (Registration
No. 333-00572)).
10.7 Consulting Letter Agreement dated as of January 16, 1996 between
Patina Oil & Gas Corporation and Robert W. Gerrity (Incorporated
by reference to Exhibit 10.7 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.8 Non-Competition Agreement dated as of January 16, 1996 between
Patina Oil & Gas Corporation and Robert W. Gerrity (Incorporated
by reference to Exhibit 10.8 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.9 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Brian J. Cree (Incorporated by
reference to Exhibit 10.9 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.10 Bonus Agreement dated as of January 16, 1996 between Patina Oil &
Gas Corporation and Brian J. Cree (Incorporated by reference to
Exhibit 10.10 of the Registration Statement of Patina Oil & Gas
Corporation on Form S-4 (Registration No. 333-00572)).
<PAGE> 177
10.11 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Keith M. Crouch (Incorporated by
reference to Exhibit 10.11 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.12 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and David J. Kornder (Incorporated
by reference to Exhibit 10.12 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.13 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Kenneth P. Elbert (Incorporated
by reference to Exhibit 10.13 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.14 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and F. H. Smith (Incorporated by
reference to Exhibit 10.14 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.15 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and James A. Tuell (Incorporated by
reference to Exhibit 10.15 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.16 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and David R. Macosko (Incorporated
by reference to Exhibit 10.16 of the Registration Statement of
Patina Oil & Gas Corporation on Form S-4 (Registration No.
333-00572)).
10.17 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Terry L. Ruby (Incorporated by
reference to Exhibit 10.17 of the Registration Statement of Patina
Oil & Gas Corporation on Form S-4 (Registration No. 333-00572)).
10.18 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Kenneth A. Wonstolen
(Incorporated by reference to Exhibit 10.18 of the Registration
Statement of Patina Oil & Gas Corporation on Form S-4 (Registration
No. 333-00572)).
10.19 Officer Settlement Agreement dated as of January 16, 1996 between
Gerrity Oil & Gas Corporation and Christine A. Kennedy
(Incorporated by reference to Exhibit 10.19 of the Registration
Statement of Patina Oil & Gas Corporation on Form S-4 (Registration
No. 333-00572)).
10.20 Form of Patina Oil & Gas Corporation 1996 Employee Stock Option
Plan (Incorporated by reference to Exhibit 10.20 of the
Registration Statement of Patina Oil & Gas Corporation on Form S-4
(Registration No. 333-00572)).
10.21 Form of 1996 Patina Oil & Gas Corporation Stock Option Plan for
Non-Employee Directors (Incorporated by reference to Exhibit 10.21
of the Registration Statement of Patina Oil & Gas Corporation on
Form S-4 (Registration No. 333-00572)).
10.22 First Amendment to Credit Agreement dated June 28, 1996 by and
among Patina Oil & Gas Corporation, Gerrity Oil & Gas Corporation
and SOCO Wattenberg Corporation, as Borrowers, Texas Commerce Bank
national Association, as Administrative Agent, and certain
commercial lending institutions (Incorporated by reference to
Exhibit 10.1.1 of Quarterly Report of Patina Oil & Gas Corporation
on Form 10-Q for the quarter ended June 30, 1996).
10.23 Agreement dated July 16, 1996 by and between F.H. Smith, employee,
and Patina Oil & Gas Corporation (Incorporated by reference to
Exhibit 10.3 of Quarterly Report of Patina Oil & Gas Corporation on
Form 10-Q for the quarter ended June 30, 1996).
10.24 Sublease Agreement dated as of May 1, 1996 by and between Snyder
Oil Corporation, as Sublandlord, and Patina Oil & Gas Corporation,
as Subtenant (Incorporated by reference to
<PAGE> 178
Exhibit 10.4 of Quarterly Report of Patina Oil & Gas Corporation on
Form 10-Q for quarter ended June 30, 1996).
*12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
*23.1 Consent of Vinson & Elkins L.L.P. (set forth in Exhibit 5.1).
*23.3.1 Consent of Arthur Andersen LLP (Ft. Worth).
*23.3.2 Consent of Arthur Andersen LLP (Denver).
*23.4 Consent of Coopers & Lybrand L.L.P.
23.5 Consent of A. G. Edwards & Sons, Inc.
*23.6 Consent of Netherland, Sewell & Associates, Inc.
* Previously filed
<PAGE> 1
EXHIBIT 23.5
September 30, 1996
Gerrity Oil & Gas Corporation
1625 Broadway, Suite 2000
Denver, Colorado 80202
Dear Sirs:
We hereby consent to the inclusion in Amendment No. 1 to the
Registration Statement on Form S-4 (the "Registration Statement") of Patina Oil
& Gas Corporation ("Patina"), relating to the redemption, reclassification and
exchange of Depository Shares representing interests in the $12.00 Preferred
Stock of Gerrity Oil & Gas Corporation for shares of 7.125% Preferred Stock of
Patina, of our opinion letter appearing as Annex B to the Information
Statement/Prospectus which is included in the Registration Statement, and to the
references to our firm name therein. In giving such consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations adopted by the Securities and Exchange Commission thereunder nor do
we admit that we are experts with respect to any part of the Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
A.G. EDWARDS & SONS, INC.
By: /s/ RAY KALINOWSKI
---------------------------
Vice President
