<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to_______
Commission file number 1-14344
------------------------------
PATINA OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2629477
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1625 Broadway
Denver, Colorado 80202
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (303) 389-3600
Title of class Name of exchange on which listed
------------------------------ ------------------------------
Common Stock, $.01 par value New York Stock Exchange
7.125% Convertible Preferred Stock, $.01 par value New York Stock Exchange
Common Stock Warrants New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- -----------.
There were 15,994,491 shares of common stock outstanding on August 5, 1998.
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
Patina Oil & Gas Corporation (the "Company") was formed in early 1996 to
hold the assets and operations of Snyder Oil Corporation ("SOCO") in the
Wattenberg Field and to facilitate the acquisition of Gerrity Oil & Gas
Corporation (the "Gerrity Acquisition") in May 1996. The results of operations
for periods prior to the Gerrity Acquisition include only the historical results
of SOCO's Wattenberg operations. 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 the Company's financial position and
results of operations.
2
<PAGE>
PATINA OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 12,609 $ 12,575
Accounts receivable 15,307 5,904
Inventory and other 3,152 3,171
--------- ---------
31,068 21,650
--------- ---------
Oil and gas properties, successful efforts method 575,508 586,434
Accumulated depletion, depreciation and amortization (232,675) (253,073)
--------- ---------
342,833 333,361
--------- ---------
Gas facilities and other 5,930 6,563
Accumulated depreciation (3,807) (4,169)
--------- ---------
2,123 2,394
--------- ---------
Other assets, net 851 1,435
--------- ---------
$ 376,875 $ 358,840
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $20,451 $17,550
Accrued liabilities 9,846 7,517
--------- ---------
30,297 25,067
--------- ---------
Senior debt 49,000 47,000
Subordinated notes 97,435 96,222
Other noncurrent liabilities 11,702 7,075
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.01 par, 5,000,000 shares
authorized, 3,094,363 and 3,164,213 shares issued
and outstanding 31 32
Common Stock, $.01 par, 100,000,000 shares
authorized, 16,450,425 and 16,079,491 shares
issued and outstanding 165 161
Capital in excess of par value 208,525 208,161
Deferred compensation (1,828) (1,749)
Retained earnings (deficit) (18,452) (23,129)
--------- ---------
188,441 183,476
--------- ---------
$ 376,875 $358,840
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
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,
------------------ ------------------
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales $ 22,672 $ 17,455 $ 52,113 $ 37,798
Other 182 872 227 1,166
-------- -------- -------- --------
22,854 18,327 52,340 38,964
-------- -------- -------- --------
Expenses
Direct operating 4,347 4,258 9,322 8,895
Exploration 3 (5) 62 18
General and administrative 1,284 1,998 2,611 3,824
Interest and other 4,044 3,355 8,485 6,664
Depletion, depreciation and amortization 12,348 10,222 24,776 20,760
-------- -------- -------- --------
Income (loss) before taxes 828 (1,501) 7,084 (1,197)
-------- -------- -------- --------
Provision (benefit) for income taxes
Current - - - -
Deferred - - - -
-------- -------- -------- --------
- - - -
-------- -------- -------- --------
Net income (loss) $ 828 $ (1,501) $ 7,084 $ (1,197)
======== ======== ======== ========
Net income (loss) per common share $ 0.01 $ (0.19) $ 0.30 $ (0.27)
======== ======== ======== ========
Weighted average shares outstanding 18,910 16,140 18,921 16,210
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital in Retained
------------------ ---------------- Excess of Deferred Earnings
Shares Amount Shares Amount Par Value Compensation (Deficit)
------ ------ ------ ------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,594 $16 18,887 $189 $194,066 $ - $ 1,965
Repurchase of common and preferred (126) (1) (3,101) (31) (32,723) - -
Issuance of common - - 664 7 7,958 (1,828) -
Issuance of preferred 1,600 16 - - 38,516 - -
Preferred dividends and accretion 26 - - - 708 - (3,346)
Common dividends - - - - - - (168)
Net loss - - - - - - (16,903)
----- ---- ------ ---- -------- ------- --------
Balance, December 31, 1997 3,094 31 16,450 165 208,525 (1,828) (18,452)
Repurchase of common - - (716) (7) (4,969) - -
Issuance of common - - 345 3 2,765 (687) -
Preferred dividends and accretion 70 1 - - 1,840 - (3,148)
Common dividends - - - - - - (332)
Net loss - - - - - 766 (1,197)
----- ---- ------ ---- -------- ------- --------
Balance, June 30, 1998 (Unaudited) 3,164 $32 16,079 $161 $208,161 $(1,749) $(23,129)
===== ==== ====== ==== ======== ======= ========
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Operating activities
Net income (loss) $ 7,084 $(1,197)
Adjustments to reconcile net income (loss) to net
cash provided by operations
Exploration expense 62 18
Depletion, depreciation and amortization 24,776 20,760
Deferred compensation expense - 766
Amortization of deferred credits - (260)
Changes in current and other assets and liabilities
Decrease in
Accounts receivable 4,015 9,403
Inventory and other 52 316
Increase (decrease) in
Accounts payable 4,042 (2,901)
Accrued liabilities (2,313) (2,329)
Other liabilities (4,237) (4,563)
------- -------
Net cash provided by operations 33,481 20,013
------- -------
Investing activities
Acquisition, development and exploration (8,348) (11,566)
Other - (228)
------- -------
Net cash used by investing (8,348) (11,794)
------- -------
Financing activities
Decrease in indebtedness (14,909) (3,213)
Deferred credits - 267
Issuance of common stock - 1,308
Repurchase of common stock and preferred stock (4,479) (4,976)
Preferred dividends (1,330) (1,307)
Common dividends - (332)
------- ------
Net cash used by financing (20,718) (8,253)
------- --------
Increase (decrease) in cash 4,415 (34)
Cash and equivalents, beginning of period 6,153 12,609
------- -------
Cash and equivalents, end of period $10,568 $12,575
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
PATINA OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
Patina Oil & Gas Corporation (the "Company" or "Patina"), a Delaware
corporation, was incorporated in early 1996 to hold the assets and operations of
Snyder Oil Corporation ("SOCO") in the Wattenberg Field and to facilitate the
acquisition of Gerrity Oil & Gas Corporation ("Gerrity"). In May 1996, SOCO
contributed its Wattenberg assets to the Company in exchange for 14.0 million
common shares and Gerrity merged into a wholly owned subsidiary of the Company
("Gerrity Acquisition"). Gerrity was subsequently merged into the Company. The
Gerrity Acquisition was accounted for as a purchase. The amounts and results of
operations of the Company for periods prior to the Gerrity Acquisition include
the historical amounts and results of SOCO's Wattenberg operations. The
Company's operations currently consist of the acquisition, development,
exploitation and production of oil and natural gas properties in the Wattenberg
Field of Colorado's D-J Basin.
In October 1997, a series of transactions took place that eliminated SOCO's
ownership in the Company. The transactions included: (i) the sale by SOCO of
10.9 million common shares of its Patina stock in a public offering, (ii) the
repurchase by the Company of SOCO's remaining 3.0 million common shares, (iii)
the sale by the Company of $40.0 million of 8.50% convertible preferred stock
and the issuance of 160,000 common shares to certain institutional investors and
(iv) the sale of 303,797 common shares at $9.875 per share and the grant of
496,250 restricted common shares by the Company to certain officers and
managers. As a result of these transactions, SOCO no longer has any ownership
in the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and natural gas properties. 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. Oil is converted
to natural gas equivalents (Mcfe) at the rate of one barrel to six Mcf.
Amortization of capitalized costs has generally been provided over the entire
Wattenberg Field as the wells are located in the same reservoirs. No accrual has
been provided for estimated future abandonment costs as management estimates
that salvage value and payments from surface owners will approximate such costs.
In 1995, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets." 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, 1997 and 1998, the Company did not provide for any impairments.
During the fourth quarter of 1997, the Company recorded an impairment of $26.0
million to oil and gas properties. In applying this statement, the Company
determined that the estimated future cash flows (undiscounted and without
interest charges) expected to result from these assets, largely proven
undeveloped drilling locations, and their disposition was less than the net book
value of these assets. The impairment primarily resulted from lower year-end oil
and natural gas prices. Changes in the underlying assumptions or the
amortization units could result in additional impairments in the future.
7
<PAGE>
Other Assets
Prior to December 31, 1997, Other Assets reflected the value assigned to a
noncompete agreement. The value of this noncompete agreement was fully amortized
during 1997. Amortization expense for the six months ended June 30, 1997 was
$1.2 million, related entirely to the noncompete agreement. Included in Other
Assets at December 31, 1997 and June 30, 1998 is $850,000 and $1,434,000 of
notes receivable from certain officers and managers of the Company. See Note
(9).
Section 29 Tax Credits
The Company has entered into arrangements to monetize its Section 29 tax
credits. These arrangements result in revenue increases of approximately $0.40
per Mcf on production volumes from qualified Section 29 properties. As a
result, the Company recognized additional gas revenues of $942,000 and
$1,062,000 during the six months ended June 30, 1997 and 1998, respectively.
These arrangements are expected to increase revenues through 2002.
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,
1997 and June 30, 1998 were insignificant.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $12.6
million at December 31, 1997 and June 30, 1998. The book value and estimated
fair value of the Company's senior debt was $49.0 million and $47.0 million at
December 31, 1997 and June 30, 1998. The book value of these assets and
liabilities approximates fair value due to the short maturity or floating rate
structure of these instruments. The book value of the Senior Subordinated Notes
("Subordinated Notes" or "Notes") was $97.4 million and $96.2 million and the
estimated fair value was $100.8 million and $99.3 million at December 31, 1997
and June 30, 1998. The fair value of the Notes is estimated based on their price
on the New York Stock Exchange.
From time to time, the Company enters into commodity contracts to hedge the
price risk of a portion of its production. Gains and losses on such contracts
are deferred and recognized as an adjustment to oil and gas sales revenues in
the period in which the physical product to which the contracts relate, is
actually sold.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. It
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. We have not yet
quantified the impacts of adopting SFAS 133 on our financial statements and have
not determined the timing of or method of our adoption of SFAS 133. However,
SFAS 133 could increase volatility in earnings and other comprehensive income.
8
<PAGE>
The Company entered into various swap contracts for oil (NYMEX based) for the
first six months of 1997 and 1998. The Company recognized a loss of $53,000 in
the six month period ended June 30, 1997 and a gain of $238,000 in the six month
period ended June 30, 1998 related to these swap contracts based on settlements
during the respective periods. The Company entered into various CIG and PEPL
index based swap contracts for natural gas for the six month periods ended June
30, 1997 and 1998. The Company recognized gains of $1.6 million in 1997, and
$543,000 in 1998 related to these swap contracts based on settlements during the
respective periods.
As of June 30, 1998, the Company had entered into various CIG and PEPL index
based swap contracts for natural gas for the months of July through October
1998. The weighted average natural gas price for the CIG index based contracts
is $1.78 for contract volumes of 1,550,000 MMBtu's of natural gas and for the
PEPL index based contracts is $2.30 for contract volumes of 232,500 MMBtu's of
natural gas. In June 1998, the Company cashed out certain CIG and PEPL index
based swap contracts for natural gas for the months of July through September
1998. The Company received cash proceeds of $640,000 related to these contract
buyouts which will be recognized as an increase in gas revenues in the
respective contract months.
Stock Options and Awards
The Company accounts for its stock-based compensation plans under the
principles prescribed by the Accounting Principles Board's Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees." Accordingly, stock
options awarded under the Employee Plan and the Non-Employee Directors Plan are
considered to be "noncompensatory" and do not result in recognition of
compensation expense. However, the restricted stock awarded under the
Restricted Stock Plan is considered to be "compensatory" and the Company
recognized $766,000 of non-cash general and administrative expenses for the six
months ended, June 30, 1998.
Per Share Data
The Company uses the weighted average number of shares outstanding in
calculating earnings per share data. When dilutive, options and warrants are
included as share equivalents using the treasury stock method and are included
in the calculation of diluted per share data. Common stock issuable upon
conversion of convertible preferred securities are also included in the
calculation of diluted per share data if their effect is dilutive.
Supplemental Cash Flow Information
The Company incurred the following significant non-cash items (in thousands).
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
---- ----
<S> <C> <C>
Stock grant award................................ - $ 688,000
Dividends and accretion - 8.50% preferred stock.. - 1,841,000
</TABLE>
The stock grant award represents 100,000 common shares granted to the new
President in conjunction with his appointment in the first quarter of 1998 and
has been recorded as Deferred Compensation in the equity section of the
accompanying consolidated balance sheets. The Company recognized $766,000 of
non-cash general and administrative expenses related to this stock grant and the
stock grants awarded to certain officers and managers in the fourth quarter 1997
in conjunction with the redistribution of SOCO's majority ownership of the
Company. See Note (9).
Gas Facilities and Other
Depreciation of gas gathering and transportation facilities is provided using
the straight-line method over the estimated useful life of 10 years. Equipment
is depreciated using the straight-line method with estimated useful lives
ranging from three to five years.
9
<PAGE>
Risks and Uncertainties
Historically, the market for oil and natural gas has experienced significant
price fluctuations. Prices for natural gas in the Rocky Mountain region have
been particularly volatile in recent years. The price fluctuations can result
from variations in weather, levels of production in the region, availability of
transportation capacity to other regions of the country and various other
factors. Increases or decreases in prices received could have a significant
impact on the Company's future results.
Other
All liquid investments with an original maturity of three months or less are
considered to be cash equivalents. Certain amounts in prior period consolidated
financial statements have been reclassified to conform with current
classification.
The consolidated financial statements include the accounts of the Company 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.
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 Annual
Report on Form 10-K for the year ended December 31, 1997.
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 1997 included no
significant unevaluated leasehold costs. As of June 30, 1998 oil and gas
properties included approximately $500,000 in unevaluated leasehold costs
related to a prospect in Wyoming. Acreage generally held for exploration or
resale and its value, if any, is excluded from amortization. The following table
sets forth costs incurred related to oil and gas properties:
Six
Year Ended Months Ended
December 31, June 30,
1997 1998
---- ----
(In thousands)
Acquisition........................... $ 2,225 $ 2,095
Development........................... 17,013 9,453
Exploration and other................. 131 18
-------- --------
$ 19,369 $ 11,566
======== ========
10
<PAGE>
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
December 31, June 30,
1997 1998
---- ----
(In thousands)
Bank facilities..................... $49,000 $47,000
Less current portion................ - -
------- -------
Senior debt, net.................... $49,000 $47,000
======= =======
Subordinated notes.................. $97,435 $96,222
======= =======
In April 1997, the Company entered into an amended bank Credit Agreement
(the "Credit Agreement"). The Credit Agreement is a revolving credit facility in
an aggregate amount up to $140.0 million. The amount available under the
facility is adjusted semiannually and equaled $90.0 million at June 30, 1998.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the higher of (a) prime rate or (b) the Federal
Funds Effective Rate plus .5%, or (ii) the rate at which Eurodollar deposits for
one, two, three or six months (as selected by the Company) are offered in the
interbank Eurodollar market plus a margin which fluctuates from 0.625% to
1.125%, determined by a debt to EBITDA ratio. During the first six months of
1998, the average interest rate under the facility approximated 6.7%.
The 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 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 causes;
issuance of securities; and non-speculative commodity hedging. Borrowings under
the Credit Agreement mature in 2000, but may be prepaid at anytime. The Company
has periodically negotiated extensions of the Credit Agreement; however, there
is no assurance the Company will be able to do so in the future. The Company had
a restricted payment basket of $12.8 million as of June 30, 1998, which may be
used to repurchase common stock, preferred stock and warrants and pay dividends
on its common stock.
In conjunction with the Gerrity Acquisition, the Company assumed $100
million of 11.75% Senior Subordinated Notes due July 15, 2004. Under purchase
accounting, the Notes have been reflected in the accompanying financial
statements at a book value of 105.875% of their principal amount, their call
price as of July 15, 1999. Interest is payable each January 15 and July 15. 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%, declining to 102.938% on
July 15, 2000, and declining to 100% on July 15, 2001. Upon a change of control,
as defined in the Notes, the Company is 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 the Notes with the net cash proceeds of certain asset sales
at a price of 101% of the principal amount thereof. Subsequent to the Gerrity
Acquisition, the Company repurchased $9.1 million of the Notes, resulting in
$90.9 million of principal amount of Notes outstanding. These Notes are
reflected at a book value of $96.2 million at June 30, 1998 in the accompanying
financial statements. The Notes are unsecured general obligations and are
subordinated to all senior indebtedness and to any existing and future
indebtedness of the Company's subsidiaries.
11
<PAGE>
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 $51.0 million, 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 currently meets
these ratios and accordingly, is not limited in its ability to incur additional
debt.
Scheduled maturities of indebtedness for the next five years are zero for
1998 and 1999 and $47.0 million in 2000, and zero in 2001 and 2002. The bank
credit facility is scheduled to expire in 2000. Management intends to review
the facility and extend the maturity on a regular basis; however, there can be
no assurance that the Company will be able to do so.
Cash payments for interest totaled $8.7 million and $6.8 million for the
six months ended June 30, 1997 and 1998.
(5) STOCKHOLDERS' EQUITY
A total of 100.0 million common shares, $.01 par value, are authorized of
which 16.1 million were issued and outstanding at June 30, 1998. The Company
issued 6.0 million common shares and 3.0 million five year common stock warrants
exercisable at $12.50 (which expire in May 2001), in exchange for all of the
outstanding stock of Gerrity upon consummation of the Gerrity Acquisition.
Subsequent to the acquisition date, the Company has repurchased 4,932,700 shares
of common stock (including the 3.0 million common shares repurchased from SOCO
in conjunction with the redistribution of SOCO's majority ownership in October
1997), 125,682 shares of 7.125% preferred stock, 500,000 warrants issued to
Gerrity's former chief executive officer, and 80,549 five year common stock
warrants for total consideration of $47.6 million. The common stock is listed
on the New York Stock Exchange. Prior to December 1997, no dividends had been
paid on common stock. A quarterly cash dividend of one cent per common share
was initiated in December 1997.
A total of 5.0 million preferred shares, $.01 par value, are authorized. At
June 30, 1998, the Company had two issues of preferred stock outstanding
consisting of 1,467,926 shares of 7.125% preferred and 1,696,287 shares of 8.50%
preferred.
In May 1996, 1.2 million shares of 7.125% preferred stock were issued to
certain Gerrity preferred shareholders electing to exchange their preferred
shares (the "Original Exchange Offer"). There were no proceeds received related
to this issuance. In October 1996, Gerrity's certificate of incorporation was
amended to provide that all remaining shares of Gerrity's preferred stock be
exchanged for 7.125% preferred shares on the same terms as the Original Exchange
Offer. This exchange resulted in the issuance of an additional 389,000 preferred
shares. Each share of 7.125% preferred stock is convertible into common stock
at any time at $8.61 per share, or 2.9036 common shares. The 7.125% preferred
stock pays quarterly cash dividends, when declared by the Board of Directors,
based on an annual rate of $1.78 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 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 at an initial call price of $26.25 per
share. The liquidation preference of the 7.125% preferred stock is $25 per
share, plus accrued and unpaid dividends. As of June 30, 1998, there were
1,467,926 7.125% preferred shares outstanding with an aggregate liquidation
preference of $36.7 million. The 7.125% preferred stock is listed on the New
York Stock Exchange. Holders of the 7.125% preferred stock are not generally
entitled to vote, except with respect to certain limited matters. The Company
paid $1,330,000 and $1,307,000 ($.4453 per 7.125% convertible preferred share)
in preferred dividends during the six months ended June 30, 1997 and 1998, and
had accrued an additional $327,000 at June 30, 1997 and 1998, respectively, for
dividends.
12
<PAGE>
In October 1997, 1.6 million shares of 8.50% preferred stock and 160,000
common shares were issued to a group of private investors for $40.0 million.
The investors agreed not to sell, transfer or dispose of any shares of the 8.50%
preferred prior to October 1999. Each share of the 8.50% preferred stock is
convertible into common stock at any time at $9.50 per share or 2.6316 common
shares. The 8.50 % preferred stock pays quarterly dividends, when declared by
the Board of Directors, and are payable in-kind ("PIK Dividend") until October
1999, and in cash thereafter. The 8.50% preferred stock is redeemable at the
option of the Company at any time after October 2000 at 106% of its stated value
declining by 2% per annum thereafter. The liquidation preference is $25 per
share, plus accrued and unpaid dividends. As of June 30, 1998, there were
1,696,287 8.50% preferred shares outstanding with an aggregate liquidation
preference of $42.4 million. The 8.50% preferred is privately held. Holders of
the 8.50% preferred are entitled to vote with the common stock, based upon the
number of shares of common stock into which the shares of 8.50% preferred stock
are convertible. The Company paid $1.7 million in PIK Dividends (issued an
additional 69,850 8.50% preferred shares) during the six months ended June 30,
1998.
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" during 1997. SFAS 128 specifies computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. All prior period
earnings per share amounts have been restated in accordance with SFAS 128.
In accordance with SFAS 128, the Company computed the net income (loss) per
share by dividing the net income (loss), less dividends and accretion on
preferred stock, by the weighted average common shares outstanding during the
period. Net income (loss) applicable to common for the three months ended June
30, 1997 and 1998, was $174,000 and ($3,084,000), respectively. Net income
(loss) applicable to common for the six months ended June 30, 1997 and 1998, was
$5,754,000 and ($4,345,000), respectively.
Diluted net income (loss) per share was computed by dividing the net income
(loss), less dividends and accretion on preferred stock, by weighted average
common shares outstanding during the period and all dilutive potential shares
outstanding (zero for three months and six months ended June 30, 1997 and 1998,
respectively). The 7.125% and 8.50% preferred stock potential common stock
equivalents and $12.50 common stock warrants and stock options were anti-
dilutive for all periods presented. Net income (loss) per common share and
diluted net income (loss) per common share were the same for all periods
presented.
(6) EMPLOYEE BENEFIT PLANS
401(k) Savings
The Company has a 401(k) profit sharing and savings plan (the "401(k)
Plan"). The initial 401(k) Plan was established in 1996. In conjunction with the
sale of SOCO's ownership of the Company in October 1997, a new plan was adopted
effective January 1, 1997. Eligible employees may make voluntary contributions
to the 401(k) Plan. The amount of employee contributions is limited as specified
in the 401(k) Plan. The Company may, at its discretion, make additional matching
or profit sharing contributions to the 401(k) Plan. The Company has historically
made profit sharing contributions to the 401(k) Plan, which totaled $453,000 for
1997. The 1997 profit sharing contribution was made in shares of common stock
(59,901 shares).
Stock Purchase Plan
In February 1998, the Company adopted and in May 1998, the stockholders
approved, a stock purchase plan ("Stock Purchase Plan"). Pursuant to the Stock
Purchase Plan, certain officers, directors and managers are eligible to purchase
shares of common stock at prices ranging from 50% to 85% of the closing price of
the stock on the trading day prior to the date of purchase ("Closing Price").
In addition, employee participants may be granted the right to purchase shares
pursuant to the Stock Purchase Plan with all or a part of their salary and
bonus. A total of 500,000 shares of common stock are reserved for possible
purchase under the Stock Purchase Plan. In 1998, the Board of Directors
approved 291,250 common shares (exclusive of shares available for purchase with
participants salaries and bonuses) for
13
<PAGE>
possible purchase by participants at 75% of the Closing Price during the current
Plan Year as defined in the Stock Purchase Plan. As of June 30, 1998,
participants have purchased 229,262 shares of common stock, including 76,712
shares purchased with participant's 1997 bonuses, at prices ranging from $6.50
to $7.31 per share ($4.88 to $5.48 net price per share), resulting in cash
proceeds to the Company of $1.2 million. The Company recorded non-cash general
and administrative expenses of $161,000 associated with these purchases in the
first six months of 1998.
Stock Option and Award Plans
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, with an exercise price of $7.75 per common
share, 271,000 options were issued in February 1997, with an exercise price of
$9.25 per common share, 485,000 options were issued in February 1998, 96,000 in
March 1998, and 25,000 in May 1998 with exercise prices of $7.06, $6.88 and
$7.19 per common share, respectively. The options vest over a three-year period
(30%, 60%, 100%) and expire five years from date of grant. In addition, 250,000
fully vested five year options were granted in October 1997 at an exercise price
of $9.875.
In 1996, the shareholders adopted a stock grant and option plan (the
"Directors' Plan") for nonemployee Directors. The Directors' Plan provides for
each eligible Director to receive common shares having a market value equal to
$2,500 quarterly in payment of one-half their retainer. A total of 3,632 shares
were issued in 1996, 4,512 shares were issued in 1997 and 4,054 shares were
issued in the first six months of 1998. It also provides for 5,000 options to
be granted annually to each eligible Director. A total of 20,000 options were
issued in May 1996, with an exercise price of $7.75 per common share, 20,000
options were issued in May 1997, with an exercise price of $8.625, and 25,000
options were issued in May 1998, with an exercise price of $7.75. In addition,
10,000 options were issued in October 1997 with an exercise price of $10.313 and
10,000 options were issued in January 1998 with an exercise price of $7.19. The
options vest over a three-year period (30%, 60%, 100%) and expire five years
from date of grant.
In October 1997, the shareholders approved a special stock grant and
purchase plan for certain officers and managers ("Management Investors") in
conjunction with the redistribution of SOCO's ownership of the Company. The
plan, which was amended effective December 31, 1997, provided for the grant of
496,250 restricted common shares, net of forfeitures, to the Management
Investors. These shares will vest at 25% per year on January 1, 1998, 1999, 2000
and 2001. The Company recognized $2.0 million of non-cash general and
administrative expenses in 1997 with respect to the stock grant. The non-vested
granted common shares have been recorded as Deferred Compensation in the equity
section of the accompanying consolidated balance sheets. The Management
Investors simultaneously purchased 303,797 common shares from the Company at
$9.875 per share. A portion of this purchase ($850,000) was financed by the
Company. See Note (9).
In conjunction with the appointment of a new President in March 1998, the
President was included in the stock grant and purchase plans. He was granted
100,000 restricted common shares that will vest at 33% per year in March 1999,
2000 and 2001. The non-vested granted common shares have been recorded as
Deferred Compensation in the equity section of the accompanying consolidated
balance sheets. The President simultaneously purchased 100,000 common shares
from the Company at $6.875 per share. A portion of this purchase ($584,000) was
financed by the Company. See Note (9).
The Company recognized $766,000 of non-cash general and administrative
expenses in the first six months of 1998 with respect to the stock grants.
14
<PAGE>
(7) FEDERAL INCOME TAXES
Prior to the Gerrity Acquisition, the Company had been included SOCO's
consolidated tax return. 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. Since
the Gerrity Acquisition, the Company has filed its own tax returns.
The reconciliation of the federal statutory rate to the Company's effective
tax rate for the six months ended June 30, 1997 and 1998 is as follows:
1997 1998
---- ----
Federal statutory rate...................................... 35% (35%)
Utilization of net deferred tax asset....................... (35%) -
Increase in valuation allowance against deferred tax asset.. - 35%
---- ----
Effective income tax rate................................... - -
==== ====
For tax purposes, the Company had regular net operating loss carryforwards
of $87.1 million and alternative minimum tax ("AMT") loss carryforwards of $51.2
million at December 31, 1997. Utilization of the regular and AMT net operating
loss carryfowards will be limited to approximately $12.5 million per year as a
result of the redistribution of SOCO's majority ownership in the Company in
October 1997. In addition, utilization of $31.9 million regular net operating
loss carryforwards and $31.6 million AMT loss carryforwards will be limited to
$5.2 million per year as a result of the Gerrity Acquisition in May 1996. These
carryforwards expire from 2006 through 2011. At December 31, 1997, the Company
had alternative minimum tax credit carryforwards of $447,000 which are available
indefinitely. No cash payments were made by the Company for federal taxes during
1996 and 1997.
(8) MAJOR CUSTOMERS
During the six months ended June 30, 1997 and 1998, Duke Energy Field
Services, Inc. accounted for 42% and 39%, Amoco Production Company accounted for
15% and 13% and Enron Capital & Trade Resources accounted for zero and 12%, of
oil and gas sales, respectively. Management believes that the loss of any
individual purchaser would not have a long-term material adverse impact on its
financial position or results of operations.
(9) RELATED PARTY
Prior to the Gerrity Acquisition, 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 Gerrity Acquisition, certain field, administrative and
executive employees of SOCO and Gerrity became employees of the Company. SOCO
had agreed to provide certain services to Patina under a corporate services
agreement through September 1998. As of May 31, 1998, the Company terminated
this agreement and no longer utilizes any corporate services from SOCO. During
the six months ended June 30, 1997 and 1998, the Company paid approximately
$898,000 and $366,000 to SOCO under the corporate services agreement.
In October 1997, certain officers and managers purchased 303,797 common
shares at $9.875 per share from the Company. A portion of this purchase
($850,000) was financed by the Company through the issuance of 8.50% recourse
notes. These notes are secured by the common stock purchased (101,265 shares)
and additional common shares granted (146,250 shares) to the respective officers
and managers. Interest is due annually and the notes mature in January 2001.
These notes have been reflected as Other Assets in the accompanying consolidated
balance sheets.
15
<PAGE>
In conjunction with the appointment of the new President of the Company in
March 1998, the President purchased 100,000 shares of common stock at $6.875 per
share. The Company loaned the President $584,000, or 85% of the purchase price,
represented by a recourse promissory note that bears interest at 8.5% per annum
payable each March 31 until the note is paid. The note matures in March 2001
and is secured by all of the shares purchased and granted to him (100,000
shares) in connection with his employment with the Company.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under non-cancelable
operating leases. Future minimum lease payments under such leases approximate
$500,000 per year from 1998 through 2002.
In March 1996, a complaint was filed in the Court of Chancery for the
State of Delaware against Gerrity 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 defendants from consummating
the Gerrity Acquisition which will benefit the holders of Gerrity's common stock
at the expense of the holders of Gerrity's preferred stock and (b) to obtain a
declaration that the terms of the proposed Gerrity Acquisition constitute a
breach of the contractual rights of the preferred." The complaint sought, 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 Gerrity Acquisition and money damages. In April 1996,
the defendants were granted an indefinite extension of time in which to answer
the complaint and no answer has been filed to date. In February 1997, the
attorney for the plaintiff filed a Status Report with the court stating "Case
has been mooted. Plaintiff is preparing an application for counsel fees." No
such application was filed. In November 1997, the plaintiff filed an amended
complaint. The amended complaint realleges the substance of the original
complaint and includes an allegation that the defendants coerced the holders of
the Gerrity preferred stock into exchanging their stock for the 7.125% Preferred
Stock of the Company. The amended complaint also alleges the defendants
participated in a scheme to eliminate the outstanding Gerrity preferred by
forcing the exchange of those shares for shares of the Company's preferred in
October 1996. The amended complaint seeks rescission of the transactions
described in the complaint or money damages if rescission is impractical. On
January 5, 1998, defendants filed a motion to dismiss the amended complaint. No
further action has been taken with respect to the case. Defendants believe that
the amended complaint is without merit and intend to vigorously defend against
this 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 adverse effect on results 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.
16
<PAGE>
PATINA OIL & GAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended June 30, 1998 compared to three months ended June 30,
1997. Revenues for the second quarter of 1998 totaled $18.3 million, a 20%
decrease from the prior year period. The decrease was due primarily to the sharp
decline in oil prices and lower production. The net loss in the second quarter
of 1998 was $1.5 million compared to net income of $828,000 in the second
quarter of 1997. The decrease was primarily attributable to lower oil and gas
sales.
Average daily production for the second quarter of 1998 totaled 4,470
barrels and 67.6 MMcf (94.4 MMcfe), decreases of 20% and 12%, respectively, from
the same period in 1997. Oil production for the second quarter of 1998 was
negatively impacted due to the build in oil inventory levels as oil inventory in
the field increased by approximately 26,800 net barrels or 295 net barrels per
day for the three month period (oil production as reported is actually the
barrels sold, not produced, during the reporting period). Exclusive of the build
in oil inventory levels, average daily production of oil would have decreased by
14% from the same period in 1997. While a decline in production was anticipated,
certain other factors negatively impacted production during the quarter. The
field's largest gas processing plant was down for part of June. The plant
shutdown combined with unusually high temperatures caused line pressures
throughout the field to increase dramatically, restricting production. Four
wells and 14 recompletions and refracs were placed on production during the
quarter, compared to two wells and 20 recompletions and refracs in the same
period of 1997. The Company's planned increase in development activity in the
second half of 1998, the benefits of certain minor acquisitions and continued
success with the production enhancement program should result in the elimination
of the production decline by late 1998. The increase in development activity is
partially dependent on future oil and gas prices.
Average oil prices decreased 30% from $19.09 per barrel in the second
quarter of 1997 to $13.41 in 1998. Average natural gas prices increased 5% from
$1.85 per Mcf for the second quarter of 1997 to $1.95 in 1998. The average oil
price includes hedging gains in the second quarter of 1997 of $60,000 ($0.12 per
barrel). The increase in natural gas prices was primarily the result of the
increase in the average CIG and PEPL indexes for the second quarter of 1998
compared to 1997, partially offset by lower natural gas liquids prices. The
average natural gas prices for the three months ended June 30, 1997 and 1998
include hedging gains of $39,000 ($0.01 per Mcf) and hedging losses of $116,000
($0.02 per Mcf), respectively. Direct operating expenses totaled $4.3 million
($0.49 per Mcfe) for the second quarter of 1998 compared to $4.3 million ($0.43
per Mcfe) in the prior year period.
General and administrative expenses, net of third party reimbursements, for
the second quarter of 1998 totaled $2.0 million, a $714,000 increase from the
same period in 1997. The majority of the increase was attributable to $473,000
of non-cash expenses related to the common stock grants awarded to certain
officers and managers of the Company in conjunction with the redistribution of
SOCO's ownership of the Company in October 1997 and $48,000 related to the
Company's Stock Purchase Plan. No such expenses were incurred in the prior year
period.
Interest and other expenses totaled $3.4 million in the second quarter of
1998, a decrease of $690,000 or 17% from the prior year period. Interest expense
decreased as a result of lower average debt levels. Since June 30, 1997, the
Company has paid down $39.5 million of debt. The Company's average interest rate
for the second quarter of 1998 was 10.3% compared to 9.4% in 1997. The increase
in the average interest rate reflects the sharp reduction in bank debt. The
11.75% Subordinated Notes have not been significantly reduced.
17
<PAGE>
Depletion, depreciation and amortization expense for the second quarter of
1998 totaled $10.2 million, a decrease of $2.1 million or 17% from the second
quarter of 1997. Depletion expense totaled $10.0 million or $1.17 per Mcfe, for
second quarter of 1998 compared to $12.1 million or $1.20 per Mcfe for the
second quarter of 1997. The decrease in expense resulted primarily from lower
oil and natural gas production. Depreciation and amortization expense for the
three months ended June 30, 1998 totaled $201,000, or $0.02 per Mcfe compared to
$251,000, or $0.02 per Mcfe for the three months ended June 30, 1997.
Amortization expense for the second quarter of 1997 included $167,000 related to
the expensing of a noncompete agreement.
Six Months ended June 30, 1998 compared to six months ended June 30, 1997.
Revenues for the first six months of 1998 totaled $39.0 million, a 26% decrease
from the prior year period. The decrease was due primarily to the sharp decline
in oil and gas prices and, to a lesser extent, lower production. The net loss
in the first six months of 1998 was $1.2 million compared to net income of $7.1
million in the first six months of 1997. The decrease was primarily attributable
to lower oil and gas sales.
Average daily production for the first six months of 1998 totaled 4,676
barrels and 68.5 MMcf (96.6 MMcfe), decreases of 14% and 9%, respectively, from
the same period in 1997. Oil production for the first six months of 1998 was
negatively impacted due to the build in oil inventory levels as oil inventory in
the field increased by approximately 29,200 net barrels or 161 net barrels per
day for the six month period (oil production as reported is actually the barrels
sold, not produced, during the reporting period). Exclusive of the build in oil
inventory levels, average daily production of oil would have decreased by 11%
from the same period in 1997. Twelve wells and 35 recompletions and refracs
were placed on production during the first six months of 1998, compared to 19
wells and 43 recompletions and refracs in the same period of 1997. The Company's
planned increase in development activity in the second half of 1998, the
benefits of certain minor acquisitions and continued success with the production
enhancement program should result in the elimination of the production decline
by late 1998. The increase in development activity is partially dependent on
future oil and gas prices.
Average oil prices decreased 29% from $20.29 per barrel in the first six
months of 1997 to $14.42 in 1998. Average natural gas prices decreased 12% from
$2.35 per Mcf for the first six months of 1997 to $2.06 in 1998. The average oil
price includes hedging losses in the first six months of 1997 of $53,000 ($0.05
per barrel) and hedging gains of $285,000 ($0.34 per barrel) in 1998. The
decrease in natural gas prices was primarily the result of the decrease in the
average CIG and PEPL indexes for the first six months of 1998 compared to 1997
and lower natural gas liquids prices. The average natural gas prices for the six
months ended June 30, 1997 and 1998 include hedging gains of $1.6 million ($0.12
per Mcf) and $720,000 ($0.06 per Mcf), respectively. Direct operating expenses
totaled $8.9 million ($0.51 per Mcfe) for the first six months of 1998 compared
to $9.3 million ($0.48 per Mcfe) in the prior year period.
General and administrative expenses, net of third party reimbursements, for
the first six months of 1998 totaled $3.8 million, a $1.2 million increase from
the same period in 1997. The majority of the increase was attributable to
$766,000 of non-cash expenses related to the common stock grants awarded to
certain officers and managers of the Company in conjunction with the
redistribution of SOCO's ownership of the Company in October 1997 and $161,000
related to the Company's Stock Purchase Plan. No such expenses were incurred in
the prior year period.
Interest and other expenses totaled $6.7 million in the first six months of
1998, a decrease of $1.8 million or 21% from the prior year period. Interest
expense decreased as a result of lower average debt levels. Since June 30, 1997,
the Company has paid down $39.5 million of debt. The Company's average interest
rate for the six months ended June 30, 1998 was 10.3% compared to 9.5% in 1997.
The increase in the average interest rate reflects the sharp reduction in bank
debt. The 11.75% Subordinated Notes have not been significantly reduced.
18
<PAGE>
Depletion, depreciation and amortization expense for the first six months
of 1998 totaled $20.8 million, a decrease of $4.0 million or 16% from the same
period in 1997. Depletion expense totaled $20.4 million or $1.17 per Mcfe, for
first six months of 1998 compared to $23.4 million or $1.20 per Mcfe for first
six months of 1997. The decrease in expense resulted from lower oil and natural
gas production. Depreciation and amortization expense for the six months ended
June 30, 1998 totaled $371,000, or $0.02 per Mcfe compared to $1.3 million, or
$0.07 per Mcfe for the six months ended June 30, 1997. Amortization expense in
the first six months of 1997 included $1.2 million related to the expensing of a
noncompete agreement.
DEVELOPMENT, ACQUISITION AND EXPLORATION
During the first six months of 1998, the Company incurred $11.6 million in
capital expenditures, with development expenditures comprising $9.5 million.
During the period, the Company successfully drilled 10 wells, was in the process
of drilling one well, recompleted 15 wells and refraced 23 wells. The Company
anticipates incurring approximately $16.0 million on the further development of
its properties in the remainder of 1998.
FINANCIAL CONDITION AND CAPITAL RESOURCES
At June 30, 1998, the Company had $358.8 million of assets. Total
capitalization was $326.7 million, of which 56% was represented by stockholders'
equity, 14% by senior debt and 30% by subordinated debt. During the six months
ended June 30, 1998, net cash provided by operations totaled $20.0 million, as
compared to $33.5 million in same period of 1997. At June 30, 1998, there were
no significant commitments for capital expenditures. The Company anticipates
1998 capital expenditures, exclusive of acquisitions, will approximate $26.0
million. 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. The Company plans to finance its ongoing development,
acquisition and exploration expenditures and additional security repurchases
using internal cash flow, proceeds from asset sales and bank borrowings. In
addition, joint ventures or future public and private offerings of debt or
equity securities may be utilized.
The Company entered into an amended Credit Agreement in April 1997. The
Credit Agreement consists of a revolving credit facility in an aggregate amount
up to $140.0 million. The amount available under the revolving credit facility
is adjusted semiannually and equaled $90.0 million at June 30, 1998, with $47.0
million outstanding at that time.
The 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, a minimum current ratio and various other negative
covenants that could limit the Company's ability to incur other debt, consummate
acquisitions, dispose of assets, pay dividends or repurchase securities.
Borrowings under the Credit Agreement mature in 2000, but may be prepaid at
anytime. The Company has periodically negotiated extensions of the Credit
Agreement; however, there is no assurance the Company will be able to do so in
the future. The Company had a restricted payment basket of $12.8 million as of
June 30, 1998, which may be used to repurchase common stock, preferred stock and
warrants and pay dividends on its common stock.
The Company had $96.2 million of 11.75% Senior Subordinated Notes due July
15, 2004 outstanding on June 30, 1998. The Notes have been reflected in the
accompanying financial statements at a book value of 105.875% of their principal
amount ($90.9 million of principal amount outstanding as of June 30, 1998). The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after July 15, 1999 at 105.875% of their principal amount. The Notes
are unsecured general obligations and are subordinated to all senior
indebtedness and to any existing and future indebtedness of the Company's
subsidiaries.
19
<PAGE>
In October 1997, a series of transactions took place that eliminated SOCO's
ownership in the Company. The transactions included: (i) the sale by SOCO of
10.9 million common shares of its Patina stock in a public offering, (ii) the
repurchase by the Company of SOCO's remaining 3.0 million common shares, (iii)
the sale by the Company of $40.0 million of 8.50% convertible preferred stock
and the issuance of 160,000 common shares to certain institutional investors and
(iv) the sale of 303,797 common shares at $9.875 per share and the grant of
496,250 restricted common shares by the Company to certain officers and
managers. As a result of these transactions, SOCO no longer has any ownership in
the Company.
In conjunction with the appointment of a new President of the Company in
March 1998, the President purchased 100,000 shares of Common Stock at $6.875 per
share. The Company loaned the President $584,000, or 85% of the purchase price,
represented by a recourse promissory note that bears interest at 8.5% per annum
payable each March 31 until the note is paid. The note matures in March 2001 and
is secured by all of the shares purchased and granted to him (100,000 shares) in
connection with his employment with the Company.
The Company has entered into arrangements to monetize its Section 29 tax
credits. These arrangements result in revenue increases of approximately $0.40
per Mcf on production volumes from qualified Section 29 properties. As a result,
the Company recognized additional natural gas revenues of $942,000 and
$1,062,000 during the six months ended June 30, 1997 and 1998, respectively.
These arrangements are expected to increase revenues through 2002.
The Company's primary cash requirements will be to finance acquisitions,
development expenditures, repayment of indebtedness, and general working capital
needs. However, future cash flows are subject to a number of variables,
including the level of production and oil and natural gas prices, and there can
be no assurance that operations and other capital resources will provide cash in
sufficient amounts to maintain planned levels of capital expenditures or that
increased capital expenditures will not be undertaken.
The Company believes that available borrowings under the Credit Agreement and
the Company's cash on hand will be sufficient to cover its working capital,
capital expenditures, planned development activities and debt service
requirements for the next 12 months. In connection with consummating any
significant acquisition, the Company will require additional debt or equity
financing, which may not be available on terms that are acceptable to the
Company.
Certain Factors That May Affect Future Results
Statements that are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
capital, development and exploration expenditures (including the amount and
nature thereof), drilling of wells, reserve estimates (including estimates of
future net revenues associated with such reserves and the present value of such
future net revenues), future production of oil and natural gas, business
strategies, expansion and growth of the Company's operations, cash flow and
anticipated liquidity, prospect development and property acquisition, obtaining
financial or industry partners for prospect or program development, or marketing
of oil and natural gas. Factors that could cause actual results to differ
materially ("Cautionary Disclosures") are described, among other places, in the
Marketing, Competition, and Regulation sections in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 and under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Without limiting the Cautionary Disclosures so described,
Cautionary Disclosures include, among others: general economic conditions, the
market price of oil and natural gas, the risks associated with exploration, the
Company's ability to find, acquire, market, develop and produce new properties,
operating hazards attendant to the oil and natural gas business, uncertainties
in the estimation of proved reserves and in the projection of future rates of
production and timing of development expenditures, the strength and financial
resources of the Company's competitors, the Company's ability to find and retain
skilled personnel, climatic conditions, labor relations, availability and cost
of material and equipment, environmental risks, the results of financing
efforts,
20
<PAGE>
and regulatory developments. All written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Disclosures. The Company disclaims
any obligation to update or revise any forward-looking statement to reflect
events or circumstances occurring hereafter or to reflect the occurrence of
anticipated or unanticipated events.
YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in
many existing computer systems as the millennium approaches. The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in some
way by the rollover of the two digit year value to 00. The risk is that computer
systems will not properly recognize sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail, resulting in business interruption.
During the first six months of 1998, the Company purchased and converted to
its own in-house computer system. In conjunction with this process, the Company
is taking steps to identify, correct or reprogram and test its new and existing
systems for Year 2000 compliance. It is anticipated that all new systems,
upgrades and reprogramming efforts will be completed in 1998, allowing adequate
time for testing. As such, management believes the Year 2000 issues can be
mitigated without a significant potential effect on the Company's financial
position or operations. However, given the complexity of the Year 2000 issue,
there can be no assurance that the Company will be able to address the problem
without costs and uncertainties that might affect future financial results or
cause reported financial information not to be necessarily indicative of future
operating results or future financial condition.
21
<PAGE>
INFLATION AND CHANGES IN PRICES
While certain of its costs are affected by general inflation, factors unique
to the oil and gas industry result in independent price fluctuations. Over the
past five years, significant fluctuations have occurred in oil and natural gas
prices. Although it is difficult to estimate future prices of oil and natural
gas, price fluctuations have had, and will continue to have, a material effect
on the Company.
The following table indicates the average oil and natural gas prices received
over the last five years and highlights the price fluctuations by quarter for
1997 and 1998. Average price computations exclude hedging gains and losses and
other nonrecurring items to provide comparability. Average prices per Mcfe
indicate the composite impact of changes in oil and natural gas prices. Oil
production is converted to natural gas equivalents at the rate of one barrel per
six Mcf.
Average Prices
--------------------------------
Natural Equivalent
Oil Gas Mcf
--- --- ---
(Per Bbl) (Per Mcf) (Per Mcfe)
Annual
------
1993........ $15.87 $2.08 $2.22
1994........ 14.84 1.70 1.94
1995........ 16.43 1.34 1.73
1996........ 20.47 1.99 2.41
1997........ 19.54 2.25 2.55
Quarterly
---------
1997
----
First....... $21.79 $2.63 $2.93
Second...... 19.09 1.85 2.26
Third....... 18.53 1.92 2.26
Fourth...... 18.80 2.61 2.76
1998
----
First....... $14.70 $2.04 $2.16
Second...... 13.41 1.95 2.03
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference from Notes
to Consolidated Financial Statements in Part 1 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
On May 13, 1998 the Annual Meeting of the Company's common stockholders was
held. A summary of the proposals upon which a vote was taken and the results of
the voting were as follows:
NUMBER OF SHARES VOTED
----------------------
FOR WITHHELD
--- --------
PROPOSALS
1) Election of Directors
Arnold L. Chavkin 18,229,110 430,277
Robert J. Clark 18,229,827 429,560
Brian J. Cree 18,203,398 455,989
Jay W. Decker 18,225,998 433,389
Thomas R. Denison 18,228,980 430,407
Thomas J. Edelman 18,227,680 431,707
Elizabeth K. Lanier 18,213,753 445,634
Alexander P. Lynch 18,221,058 438,329
FOR AGAINST ABSTAIN
--- ------- -------
2) Approval of proposed 16,714,972 1,870,415 74,000
Amendment to Company's
Article of Corporation
increasing the number of
authorized shares of Common
Stock from 40 million shares
to 100 million shares.
3) Approval of Company's 1998 17,527,877 1,057,117 74,393
Stock Purchase Plan.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule
(b) No reports on Form 8-K were filled by Registrant during the quarter ended
June 30, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATINA OIL & GAS CORPORATION
BY /s/ David J. Kornder
------------------------------------------
David J. Kornder, Vice President and Chief
Financial Officer
August 5, 1998
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,575
<SECURITIES> 0
<RECEIVABLES> 6,264
<ALLOWANCES> (360)
<INVENTORY> 2,968
<CURRENT-ASSETS> 21,650
<PP&E> 592,997
<DEPRECIATION> (257,242)
<TOTAL-ASSETS> 358,840
<CURRENT-LIABILITIES> 25,067
<BONDS> 143,222
0
32
<COMMON> 161
<OTHER-SE> 183,283
<TOTAL-LIABILITY-AND-EQUITY> 358,840
<SALES> 37,798
<TOTAL-REVENUES> 38,964
<CGS> 27,065
<TOTAL-COSTS> 33,479
<OTHER-EXPENSES> 18
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,608
<INCOME-PRETAX> (1,197)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,197)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,197)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
