<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 September 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, New York Stock Exchange
$.01 par value New York Stock Exchange
Common Stock Warrants
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 15,799,314 shares of common stock outstanding on November 2, 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 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, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and equivalents $ 12,609 $ 12,464
Accounts receivable 15,307 7,922
Inventory and other 3,152 3,517
--------- ---------
31,068 23,903
--------- ---------
Oil and gas properties, successful efforts method 575,508 592,915
Accumulated depletion, depreciation and amortization (232,675) (263,888)
--------- ---------
342,833 329,027
--------- ---------
Gas facilities and other 5,930 6,648
Accumulated depreciation (3,807) (4,371)
--------- ---------
2,123 2,277
--------- ---------
Other assets, net 851 1,467
--------- ---------
$ 376,875 $ 356,674
========= =========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities
<S> <C> <C>
Accounts payable $ 20,451 $ 16,876
Accrued liabilities 9,846 4,689
------- -------
30,297 21,565
------- -------
Senior debt 49,000 72,000
Subordinated notes 97,435 74,068
Other noncurrent liabilities 11,702 8,773
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.01 par, 5,000,000 shares
authorized, 3,094,363 and 3,200,255 shares issued
and outstanding 31 32
Common Stock, $.01 par, 100,000,000 shares
authorized, 16,450,425 and 15,833,621 shares
issued and outstanding 165 158
Capital in excess of par value 208,525 207,831
Deferred compensation (1,828) (1,394)
Retained earnings (deficit) (18,452) (26,359)
-------- -------
188,441 180,268
-------- -------
$ 376,875 $ 356,674
======== =======
</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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ----------------------
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales $ 21,252 $ 17,353 $ 73,365 $ 55,151
Other 451 1,137 679 2,303
--------- ---------- --------- ---------
21,703 18,490 74,044 57,454
--------- ---------- --------- --------
Expenses
Direct operating 4,185 4,198 13,507 13,093
Exploration 58 25 121 43
General and administrative 1,186 1,707 3,797 5,532
Interest and other 3,988 3,359 12,473 10,022
Depletion, depreciation and
amortization 11,487 10,665 36,263 31,425
--------- ---------- --------- ---------
Income (loss) before taxes 799 (1,464) 7,883 (2,661)
--------- ---------- --------- ---------
Provision (benefit) for income
taxes
Current - - - -
Deferred - - - -
--------- ---------- --------- ---------
- - - -
--------- ---------- --------- ---------
Net income (loss) $ 799 $ (1,464) $ 7,883 $ (2,661)
========= ========= ======== ========
Net income (loss) per
common share $ 0.01 $ (0.19) $ 0.31 $ (0.46)
========= ========= ======== ========
Weighted average shares
outstanding 18,901 15,934 18,908 16,117
</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 - - (992) (10) (6,359) - -
Issuance of common - - 376 3 2,877 (688) -
Preferred dividends and accretion 106 1 - - 2,788 - (4,751)
Common dividends - - - - - - (495)
Net loss - - - - - 1,122 (2,661)
----- ---- ------ ---- -------- ------- --------
Balance, September 30, 1998 (Unaudited) 3,200 $32 15,834 $158 $207,831 $(1,394) $(26,359)
===== ==== ====== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1998
---- ----
(UNAUDITED)
Operating activities
<S> <C> <C>
Net income (loss) $ 7,883 $ (2,661)
Adjustments to reconcile net income (loss) to net
cash provided by operations
Exploration expense 121 43
Depletion, depreciation and amortization 36,263 31,425
Deferred compensation expense - 1,122
Amortization of deferred credits - (418)
Gain on sale of assets (338) (1,124)
Changes in current and other assets and liabilities
Decrease in
Accounts receivable 6,838 7,385
Inventory and other 61 (342)
Increase (decrease) in
Accounts payable 4,715 (3,575)
Accrued liabilities (4,425) (5,157)
Other liabilities (2,417) (3,250)
--------- --------
Net cash provided by operations 48,701 23,448
--------- --------
Investing activities
Acquisition, development and exploration (11,759) (17,760)
Sale of oil and gas properties 1,030 -
Other - 693
--------- --------
Net cash used by investing (10,729) (17,067)
--------- --------
Financing activities
Decrease in indebtedness (27,911) (367)
Deferred credits - 1,271
Issuance of common stock - 1,395
Repurchase of common stock and preferred stock (4,479) (6,369)
Preferred dividends (1,984) (1,961)
Common dividends - (495)
--------- --------
Net cash used by financing (34,374) (6,526)
--------- --------
Increase (decrease) in cash 3,598 (145)
Cash and equivalents, beginning of period 6,153 12,609
--------- --------
Cash and equivalents, end of period $ 9,751 $ 12,464
========= ========
</TABLE>
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
only 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 primarily 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 or exceed
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 nine
months ended September 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
and their disposition, largely proven undeveloped drilling locations, 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, primarily oil and gas prices, 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 nine months ended September 30, 1997
was $1.3 million, related entirely to the noncompete agreement. Included in
Other Assets at December 31, 1997 and September 30, 1998 is $850,000 and $1.4
million 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 $1.3 million and $1.5
million during the nine months ended September 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 September 30, 1998 were insignificant.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $12.6
million and $12.5 million at December 31, 1997 and September 30, 1998. The book
value and estimated fair value of the Company's senior debt was $49.0 million
and $72.0 million at December 31, 1997 and September 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 $74.1 million and the estimated fair value was $100.6 million and $71.3
million at December 31, 1997 and September 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 nine months of 1997 and 1998. The Company recognized a gain of $19,000 in
the nine month period ended September 30, 1997 and a gain of $238,000 in the
nine month period ended September 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 nine month
periods ended September 30, 1997 and 1998. The Company recognized gains of $1.7
million in 1997, and $1.2 million in 1998 related to these swap contracts based
on settlements during the respective periods.
As of September 30, 1998, the Company had entered into CIG index based swap
contracts for natural gas for the month of October 1998 and the period April
1999 through September 1999. The weighted average natural gas price for the
October CIG index based contract was $2.10 for contract volumes of 310,000
MMBtu's of natural gas and $1.76 for contract volumes of 1,372,000 MMBtu's of
natural gas. In June 1998, the Company elected to settle the October 1998 CIG
based swap contract and received cash proceeds of $130,000 in October 1998.
In October 1998, the Company entered into an interest rate swap contract for
a two-year period, extendable for one additional year at the option of the third
party. The contract is for $30.0 million principal with a fixed interest rate
of 4.57% payable by the Company and the variable interest rate, the three month
LIBOR, payable by the third party. The difference between the Company's fixed
rate of 4.57% and the three month LIBOR rate, which is reset ever 90 days, is
received or paid by the Company in arrears every 90 days. The three-month LIBOR
rate on the date the contract was entered into was 5.34%. Accordingly, the
Company will receive $59,000 in January 1999.
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 $1.1 million of non-cash general and administrative expenses for the
nine months ended, September 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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
---- ----
<S> <C> <C>
Stock grant award................................ - $ 688,000
Dividends and accretion - 8.50% preferred stock.. - 2,790,000
</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 $1.1 million
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
of 1997 in conjunction with the redistribution of SOCO's majority ownership of
the Company. See Note (9).
9
<PAGE>
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.
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 September 30, 1998 oil and gas
properties included approximately $528,000 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:
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended
December 31, September 30,
1997 1998
------------ -------------
(In thousands)
<S> <C> <C>
Acquisition............ $ 2,225 $ 2,237
Development............ 17,013 15,480
Exploration and other.. 131 43
------- -------
$ 19,369 $17,760
======= =======
</TABLE>
10
<PAGE>
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(In thousands)
<S> <C> <C>
Bank facilities....... $49,000 $72,000
Less current portion.. - -
------- -------
Senior debt, net...... $49,000 $72,000
======= =======
Subordinated notes.... $97,435 $74,068
======= =======
</TABLE>
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 September 30, 1998 with
$72.0 million outstanding at that time.
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) the prime rate or (b) the
Federal Funds Effective Rate plus .5%, or (ii) the rate at which Eurodollar
deposits for one, two, three or nine 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 nine
months of 1998, the average interest rate under the facility approximated 6.7%.
In October 1998, the Company entered into an interest rate swap contract for
a two-year period, extendable for one additional year at the option of the third
party. The contract is for $30.0 million principal with a fixed interest rate
of 4.57% payable by the Company and the variable interest rate, the three month
LIBOR, payable by the third party. The difference between the Company's fixed
rate of 4.57% and the three month LIBOR rate, which is reset ever 90 days, is
received or paid by the Company in arrears every 90 days. The three-month LIBOR
rate on the date the contract was entered into was 5.34%. Accordingly, the
Company will receive $59,000 in January 1999.
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 $10.5 million as of September 30, 1998, which
may be used to repurchase common stock, preferred stock and warrants and pay
dividends on its common stock.
11
<PAGE>
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. Since the Gerrity
Acquisition, the Company has repurchased $30.0 million principal amount of the
Notes, resulting in $70.0 million of principal amount of Notes outstanding.
These Notes are reflected at a book value of $74.1 million at September 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.
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 $72.0 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 $15.5 million and $13.1 million for the
nine months ended September 30, 1997 and 1998.
(5) STOCKHOLDERS' EQUITY
A total of 100.0 million common shares, $.01 par value, are authorized of
which 15.8 million were issued and outstanding at September 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
5,209,500 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 $49.0 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
September 30, 1998, the Company had two issues of preferred stock outstanding
consisting of 1,467,926 shares of 7.125% preferred and 1,732,329 shares of 8.50%
preferred.
12
<PAGE>
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 September 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 $1,984,000 and $1,961,000 ($.4453 per 7.125% convertible preferred share
each quarter) in preferred dividends during the nine months ended September 30,
1997 and 1998, and had accrued an additional $321,000 and $322,000 at September
30, 1997 and 1998, respectively, for dividends.
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 September 30, 1998, there were
1,732,329 8.50% preferred shares outstanding with an aggregate liquidation
preference of $43.3 million. The 8.50% preferred stock is privately held.
Holders of the 8.50% preferred stock 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 $2.6 million in PIK Dividends
(issued an additional 105,892 8.50% preferred shares) during the nine months
ended September 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
September 30, 1997 and 1998, was $145,000 and ($3,067,000), respectively. Net
income (loss) applicable to common for the nine months ended September 30, 1997
and 1998, was $5,899,000 and ($7,412,000), respectively.
Diluted net income (loss) per share was computed by dividing the net income
(loss), less dividends and accretion on preferred stock, by the weighted average
common shares outstanding during the period plus all dilutive potential shares
outstanding (zero for three months and nine months ended September 30, 1997 and
1998, respectively). The potential common stock equivalents of the 7.125% and
8.50% preferred stock, $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.
13
<PAGE>
(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 the Company's 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 possible purchase by participants at 75%
of the Closing Price during the current Plan Year as defined in the Stock
Purchase Plan. As of September 30, 1998, participants have purchased 257,332
shares of common stock, including 76,712 shares purchased with participant's
1997 bonuses, at prices ranging from $3.69 to $7.31 per share ($2.77 to $5.48
net price per share), resulting in cash proceeds to the Company of $1.3 million.
The Company recorded non-cash general and administrative expenses of $172,000
associated with these purchases in the first nine 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, 25,000 in May 1998, and 8,000 in July 1998 with exercise prices of
$7.06, $6.88, $7.19 and $6.56 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 6,914 shares were
issued in the first nine 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.
14
<PAGE>
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 $1.1 million of non-cash general and administrative
expenses in the first nine months of 1998 with respect to the stock grants.
(7) FEDERAL INCOME TAXES
Prior to the Gerrity Acquisition, the Company had been included in 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 nine months ended September 30, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
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................................... - -
==== ====
</TABLE>
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 nine months ended September 30, 1997 and 1998, Duke Energy Field
Services, Inc. accounted for 42% and 38%, Amoco Production Company accounted for
16% and 13% and Enron Capital & Trade Resources accounted for zero and 11%, 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.
15
<PAGE>
(9) RELATED PARTY
Subsequent to the Gerrity Acquisition, SOCO agreed to provide certain
administrative 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. The Company continues to
sublease certain office space from SOCO through 2001. During the nine months
ended September 30, 1997 and 1998, the Company paid approximately $1.3 million
and $483,000 to SOCO under the corporate services and sublease agreements.
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
promissory 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.
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 8.50% 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 September 30, 1998 compared to three months ended
September 30, 1997. Revenues for the third quarter of 1998 totaled $18.5
million, a 15% 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 third quarter of 1998 was $1.5 million
compared to net income of $799,000 in the third quarter of 1997. The decrease
in net income was primarily attributable to lower oil and gas revenues.
Average daily production for the third quarter of 1998 totaled 4,891 barrels
and 68.1 MMcf (97.5 MMcfe), decreases of 1% and 5%, respectively, from the same
period in 1997. While a slight decline in production was anticipated, certain
other factors negatively impacted production during the quarter. The field
experienced several gas processing plant and compressor station shutdowns during
the second and third quarters of 1998. The shutdowns, combined with unusually
high temperatures, caused line pressures throughout the field to increase
dramatically, restricting production. Ten wells and 23 recompletions and
refracs were placed on production during the quarter, compared to three wells
and 21 recompletions and refracs in the same period of 1997. The Company's
increase in development activity, the benefits of certain minor acquisitions and
the continued success of the production enhancement program appear to have
resulted in the elimination of the Company's long-term production decline.
Average daily production rose three percent from the level reported in the
second quarter of 1998. Continuation of this increased development activity is
partially dependent on future oil and gas prices.
Average oil prices decreased 31% from $18.69 per barrel in the third quarter
of 1997 to $12.83 in 1998. Average natural gas prices decreased 5% from $1.94
per Mcf for the third quarter of 1997 to $1.85 in 1998. The average oil price
includes hedging gains in the third quarter of 1997 of $72,000 ($0.16 per
barrel). The decrease in natural gas prices was primarily the result of the
decrease in the average CIG and PEPL indexes and lower natural gas liquids
prices for the third quarter of 1998 compared to 1997. The average natural gas
prices for the three months ended September 30, 1997 and 1998 include hedging
gains of $116,000 ($0.02 per Mcf) and $677,000 ($0.11 per Mcf), respectively.
Direct operating expenses totaled $4.2 million ($0.47 per Mcfe) for the third
quarter of 1998 compared to $4.2 million ($0.45 per Mcfe) in the prior year
period.
General and administrative expenses, net of third party reimbursements, for
the third quarter of 1998 totaled $1.7 million, a $521,000 increase from the
same period in 1997. The majority of the increase was attributable to $356,000
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. No such expenses were incurred
in the prior year period.
Interest and other expenses totaled $3.4 million in the third quarter of
1998, a decrease of $629,000 or 16% from the prior year period. Interest expense
decreased as a result of lower average debt levels. The Company's average
interest rate for the third quarter of 1998 was 10.0% compared to 9.5% in 1997.
The increase in the average interest rate reflects the reduction in the average
bank debt outstanding during the third quarter of 1998. The Company repurchased
$20.9 million face amount of 11.75% Subordinated Notes in early September 1998
through borrowings on the Company's bank facility. These repurchases are
expected to reduce interest expense by approximately $1.0 million a year.
17
<PAGE>
Depletion, depreciation and amortization expense for the third quarter of
1998 totaled $10.7 million, a decrease of $822,000 or 7% from the third quarter
of 1997. Depletion expense totaled $10.5 million or $1.17 per Mcfe, for the
third quarter of 1998 compared to $11.2 million or $1.21 per Mcfe for the third
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 September 30, 1998 totaled $211,000, or $0.02 per Mcfe compared to
$271,000, or $0.03 per Mcfe for the three months ended September 30, 1997.
Amortization expense for the third quarter of 1997 included $167,000 related to
the expensing of a noncompete agreement.
Nine Months ended September 30, 1998 compared to nine months ended September
30, 1997. Revenues for the first nine months of 1998 totaled $57.5 million, a
22% 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 nine months of 1998 was $2.7 million compared to net
income of $7.9 million in the first nine months of 1997. The decrease in net
income was primarily attributable to lower oil and gas revenues.
Average daily production for the first nine months of 1998 totaled 4,749
barrels and 68.4 MMcf (96.9 MMcfe), decreases of 10% and 8%, respectively, from
the same period in 1997. Twenty three wells and 59 recompletions and refracs
were placed on production during the first nine months of 1998, compared to 22
wells and 64 recompletions and refracs in the same period of 1997. The
Company's increase in development activity, the benefits of certain minor
acquisitions and the continued success of the production enhancement program
appear to have resulted in the elimination of the Company's long-term production
decline. Continuation of this increased development activity is partially
dependent on future oil and gas prices.
Average oil prices decreased 30% from $19.78 per barrel in the first nine
months of 1997 to $13.86 in 1998. Average natural gas prices decreased 10% from
$2.21 per Mcf for the first nine months of 1997 to $1.99 in 1998. The average
oil price includes hedging gains in the first nine months of 1997 of $19,000
($0.01 per barrel) and hedging gains of $285,000 ($0.22 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 nine months of 1998 compared to
1997 and lower natural gas liquids prices in 1998. The average natural gas
prices for the nine months ended September 30, 1997 and 1998 include hedging
gains of $1.7 million ($0.09 per Mcf) and $1.4 million ($0.07 per Mcf),
respectively. Direct operating expenses totaled $13.1 million ($0.50 per Mcfe)
for the first nine months of 1998 compared to $13.5 million ($0.47 per Mcfe) in
the prior year period.
General and administrative expenses, net of third party reimbursements, for
the first nine months of 1998 totaled $5.5 million, a $1.7 million increase from
the same period in 1997. The majority of the increase was attributable to
$1.1 million 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 $173,000
related to the Company's Stock Purchase Plan. No such expenses were incurred in
the prior year period.
Interest and other expenses totaled $10.0 million in the first nine months of
1998, a decrease of $2.5 million or 20% from the prior year period. Interest
expense decreased as a result of lower average debt levels. The Company's
average interest rate for the nine months ended September 30, 1998 was 10.3%
compared to 9.5% in 1997. The increase in the average interest rate reflects
the reduction in average bank debt outstanding during the nine months ended
September 30, 1998. The Company repurchased $20.9 million face amount of 11.75%
Subordinated Notes in early September 1998 through borrowings on the Company's
bank facility. These repurchases are expected to reduce interest expense by
approximately $1.0 million a year.
18
<PAGE>
Depletion, depreciation and amortization expense for the first nine months
of 1998 totaled $31.4 million, a decrease of $4.8 million or 13% from the same
period in 1997. Depletion expense totaled $30.8 million or $1.17 per Mcfe, for
first nine months of 1998 compared to $34.7 million or $1.20 per Mcfe for first
nine months of 1997. The decrease in expense resulted from lower oil and
natural gas production. Depreciation and amortization expense for the nine
months ended September 30, 1998 totaled $582,000, or $0.02 per Mcfe compared to
$1.6 million, or $0.06 per Mcfe for the nine months ended September 30, 1997.
Amortization expense in the first nine months of 1997 included $1.3 million
related to the expensing of a noncompete agreement.
DEVELOPMENT, ACQUISITION AND EXPLORATION
During the first nine months of 1998, the Company incurred $17.8 million in
capital expenditures, with development expenditures comprising $15.5 million.
During the period, the Company successfully drilled 19 wells, was in the process
of drilling five wells, recompleted 20 wells and refraced 39 wells. The Company
anticipates incurring approximately $9.0 million on the further development of
its properties during the remainder of 1998.
FINANCIAL CONDITION AND CAPITAL RESOURCES
At September 30, 1998, the Company had $356.7 million of assets. Total
capitalization was $326.3 million, of which 55% was represented by stockholders'
equity, 22% by senior debt and 23% by subordinated debt. During the nine months
ended September 30, 1998, net cash provided by operations totaled $23.4 million,
as compared to $48.7 million in same period of 1997. At September 30, 1998,
there were no significant commitments for capital expenditures. The Company
anticipates 1998 capital expenditures, exclusive of future acquisitions, to
approximate $26.8 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 September 30, 1998, with
$72.0 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 $10.5 million as of
September 30, 1998, which may be used to repurchase common stock, preferred
stock and warrants and pay dividends on its common stock.
The Company had $74.1 million of 11.75% Senior Subordinated Notes due July
15, 2004 outstanding on September 30, 1998. The Notes have been reflected in
the accompanying financial statements at a book value of 105.875% of their
principal amount ($70.0 million of principal amount outstanding as of September
30, 1998). The Company has repurchased $30.0 million principal amount of the
11.75% Subordinated Notes through borrowings on the Company's bank facility.
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 8.50% 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 $1.3 million
and $1.5 million during the nine months ended September 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
20
<PAGE>
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, 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 and devices with embedded technology as the
millennium approaches. The "Year 2000" problem concerns the inability of
information and technology-based operating systems to properly recognize and
process date-sensitive information beyond December 31, 1999. The Year 2000
problem is potentially pervasive; virtually every computer operation or business
system that utilizes embedded computer technology 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 date sensitive information when the year
changes to 2000, which could result in system failures or miscalculations,
resulting in a serious threat of business disruption.
In response to the potential impact of the Year 2000 issue on the Company's
business and operations, the Company has formed a Year 2000 Committee consisting
of members of senior management and the Information Systems Manager. This
committee will inventory and assess the readiness for Year 2000 compliance by
the Company and its vendors, suppliers, customers and other significant business
relationships.
During the first nine 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 by June 30, 1999, allowing
adequate time for testing. As such, management believes the Year 2000 issues
with respect to the Company's internal systems can be mitigated without a
significant potential effect on the Company's financial position or operations.
In addition, to ensure external Year 2000 readiness, the Company is gathering
information concerning the Year 2000 readiness of its vendors, suppliers,
customers and others with whom the Company has significant business
relationships. A further assessment of the potential impact of the Year 2000
issue on the Company's business and operations will be made as this information
is received and evaluated. As the Company is in the process of collecting this
information from third parties, management cannot currently state whether its
operations will be materially affected by third party compliance issues.
However, the Company is not currently aware of any third party issues that would
cause a significant business disruption. If the assessment of any significant
third party responses indicates that they will not be Year 2000 compliant, it
may be necessary to develop contingency plans to minimize the negative impact on
the Company.
The Company also relies on non-information technology systems such as
telephones, facsimile machines, air conditioning, heating, elevators in its
leased office building and other equipment which may have embedded technology
such as micro processors, which may or may not be Year 2000 compliant. This
technology is outside of the Company's control to assess or remedy and could
adversely affect the Company's ability to conduct business. Management believes
any such disruption is not likely to have a significant effect on the Company's
financial position or operations.
21
<PAGE>
The Company's goal is to have all internal systems Year 2000 compliant, and
third party assessments completed no later than June 30, 1999. This should
allow sufficient time prior to January 1, 2000 to validate the system
modifications and complete any additional contingency planning for third parties
that may not be Year 2000 compliant. However, given the complexity of the Year
2000 issue, there can be no assurance that the Company will be able to address
these problems 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.
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.
<TABLE>
<CAPTION>
Average Prices
---------------------------
Natural Equivalent
Oil Gas Mcf
------- ------- ----------
(Per Bbl) (Per Mcf) (Per Mcfe)
<S> <C> <C> <C>
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
Third....... 12.83 1.72 1.84
</TABLE>
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
None
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
September 30, 1998.
23
<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
November 2, 1998
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,464
<SECURITIES> 0
<RECEIVABLES> 8,305
<ALLOWANCES> (383)
<INVENTORY> 3,162
<CURRENT-ASSETS> 23,903
<PP&E> 599,563
<DEPRECIATION> (268,259)
<TOTAL-ASSETS> 356,674
<CURRENT-LIABILITIES> 21,565
<BONDS> 146,068
0
32
<COMMON> 158
<OTHER-SE> 180,078
<TOTAL-LIABILITY-AND-EQUITY> 356,674
<SALES> 55,151
<TOTAL-REVENUES> 57,454
<CGS> 40,759
<TOTAL-COSTS> 50,050
<OTHER-EXPENSES> 175
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,891
<INCOME-PRETAX> (2,661)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,661)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,661)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
