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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number O-18667
GERRITY OIL & GAS CORPORATION
Delaware 84-1145802
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1625 Broadway, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
(303) 389-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of November 14, 1996, the Registrant had 100 shares of Common Stock
outstanding.
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<PAGE>
PART I. FINANCIAL INFORMATION
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>
<TABLE>
GERRITY OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and equivalents .......................................................... $ 1,433 $ 7,127
Accounts receivable ........................................................... 12,741 12,881
Inventory and other ........................................................... 941 937
-------- --------
15,115 20,945
-------- --------
Oil and gas properties, successful efforts method ................................ 390,135 217,501
Accumulated depletion, depreciation and amortization .......................... (105,023) (10,359)
-------- --------
285,112 207,142
-------- --------
Gas facilities and other ......................................................... 17,824 1,399
Accumulated depreciation ...................................................... (4,962) (77)
-------- --------
12,862 1,322
Note receivable from related party ............................................... 1,000 -
Other assets, net ................................................................ 5,460 3,528
-------- --------
$319,549 $232,937
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .............................................................. 12,884 12,291
Accrued liabilities ........................................................... 7,689 5,730
Current maturities of long-term debt .......................................... 1,125 -
-------- --------
21,698 18,021
-------- --------
Senior debt ...................................................................... 16,875 28,000
Subordinated notes ............................................................... 100,000 103,264
Payable to affiliate ............................................................. - 10,668
Other noncurrent liabilities ..................................................... 18,751 2,298
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, par value $.01 per share; 500,000 shares
authorized, 379,500 shares issued
and outstanding (liquidation preference of $75,900) ......................... 4 4
Common stock, par value $.01 per share; 40,000,000 and 1,000
shares authorized, 13,781,260 and 100 shares issued and
outstanding ................................................................. 138 -
Capital in excess of par value ................................................ 160,524 73,829
Retained earnings (deficit) ................................................... 1,559 (3,147)
-------- --------
162,225 70,686
-------- --------
$319,549 $232,937
======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1995 1996 1995 1996
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales ....................................... $ 11,355 $ 11,200 $ 39,600 $ 35,569
Other ................................................... 667 456 1,805 1,140
-------- -------- -------- --------
12,022 11,656 41,405 36,709
-------- -------- -------- --------
Expenses
Direct operating ........................................ 1,842 2,336 6,346 6,716
Exploration ............................................. 135 (5) 168 367
General and administrative .............................. 1,783 801 5,474 3,591
Interest and other ...................................... 3,743 3,259 10,972 10,274
Depletion, depreciation and amortization ................ 7,118 7,005 23,249 21,008
Restructuring expenses .................................. - - 828 -
-------- -------- -------- --------
Income (loss) before taxes ................................ (2,599) (1,740) (5,632) (5,247)
Provision (benefit) for income taxes
Current ................................................. - - - -
Deferred ................................................ (63) - (215) (713)
-------- -------- -------- --------
(63) - (215) (713)
-------- -------- -------- --------
Net income (loss) ......................................... $ (2,536) $ (1,740) $ (5,417) $ (4,534)
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK CAPITAL IN
------------------ ---------------------- EXCESS OF RETAINED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS TOTAL
------- ------ ---------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .............. 379,500 $ 4 13,781,260 $ 138 $160,524 $14,086 $174,752
Net loss ................................ - - - - - (7,973) (7,973)
Preferred dividends ..................... - - - - - (4,554) (4,554)
------- ------ ---------- ------- -------- ------- --------
Balance, December 31, 1995 .............. 379,500 4 13,781,260 138 160,524 1,559 162,225
Net loss through the Merger date ........ - - - - - (1,387) (1,387)
Preferred dividends ..................... - - - - - (1,139) (1,139)
Revaluation of assets and liabilities
in Merger to fair value ............... - - (13,781,160) (138) (86,695) 967 (85,866)
Net loss subsequent to the
Merger ................................ - - - - - (3,147) (3,147)
------- ------ ---------- ------- -------- ------- --------
Balance, September 30, 1996
(unaudited) ........................... 379,500 $ 4 100 $ - $ 73,829 $(3,147) $ 70,686
======= ====== ========== ======= ======== ======= ========
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
<TABLE>
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Operating activities
Net loss ....................................................................$ (5,417) $ (4,534)
Adjustments to reconcile net loss to net cash
provided by operations
Exploration expense ................................................... 168 367
Depletion, depreciation and amortization .............................. 23,249 21,008
Restructuring expenses ................................................ 194 -
Deferred taxes and other .............................................. 211 (751)
Change in current and other assets and liabilities Decrease (increase)
in:
Accounts receivable .............................................. 3,178 (205)
Inventory and other .............................................. (171) (24)
Increase (decrease) in:
Accounts payable ................................................. (972) 828
Accrued liabilities .............................................. (3,682) (3,685)
Ad valorem taxes payable ......................................... (1,345) (2,447)
-------- --------
Net cash provided by operations ....................................... 15,413 10,557
-------- --------
Investing activities
Acquisition, development and exploration .................................... (19,158) (5,472)
Sale of oil and gas properties .............................................. - 1,111
Merger expenses ............................................................. - (8,058)
-------- --------
Net cash used in investing ............................................ (19,158) (12,419)
-------- --------
Financing activities:
Repayment of long-term debt ................................................. (16,500) (57,111)
Proceeds from long-term debt ................................................ 23,750 64,500
Payable to affiliate - 1,116
Preferred dividends ......................................................... (3,416) (1,139)
Other ....................................................................... (41) 190
-------- --------
Net cash provided by financing ........................................ 3,793 7,556
-------- --------
Net increase in cash and equivalents ........................................... 48 5,694
Cash and equivalents, beginning of period ...................................... 110 1,433
-------- --------
Cash and equivalents, end of period ............................................$ 158 $ 7,127
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 14,173 $ 13,167
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
GERRITY OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring items and a revaluation of assets and liabilities as a result of
accounting for the merger of the Company as a purchase by Patina) necessary
to present fairly the financial position of Gerrity Oil & Gas Corporation
and its wholly-owned subsidiaries (collectively, the "Company") as of
September 30, 1996 and the results of operations and cash flows for the
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the Securities and Exchange Commission's rules and regulations. The results
of operations for the periods presented are not necessarily indicative of
the results to be expected for the full year. Management believes the
disclosures made are adequate to ensure that the information is not
misleading, and suggests that these financial statements be read in
conjunction with the Company's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1995 and the Company's Proxy
Statement/Prospectus dated April 2, 1996 (SEC Registration No. 333-572).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recent Developments
On May 2, 1996, at a special meeting of the stockholders of the Company,
the Amended and Restated Agreement and Plan of Merger dated January 16,
1996 and amended and restated March 20, 1996 (the "Agreement") and the
transactions contemplated thereby, providing for the merger (the "Merger")
of a wholly owned subsidiary of Patina Oil & Gas Corporation ("Patina"),
which was a wholly owned subsidiary of Snyder Oil Corporation ("SOCO"),
with and into the Company, was approved by the Company's common
stockholders. In accordance with the Agreement, the shares of common stock,
par value $.01 per share, of the Company issued and outstanding immediately
prior to the effective time of the Merger were collectively converted into
an aggregate of 6,000,000 shares of common stock, par value $.01 per share
of Patina, and 3,000,000 five-year warrants initially to purchase one share
of Patina Common Stock at an exercise price of $12.50 per share. Also,
500,000 five-year warrants to purchase one share of Patina Common Stock at
an exercise price of $8.04 per share were issued to the Company's former
chief executive officer. Subsequent to the Merger, Patina has repurchased
707,000 shares of common stock, all 500,000 warrants issued to the
Company's former chief executive officer and 80,549 warrants for total
consideration of $5,100,000. As a result, SOCO currently owns 73% of the
common stock.
In conjunction with the Merger, Patina offered to exchange Patina's
preferred stock for Gerrity's preferred stock (the "Original Exchange
Offer"). A total of 1,204,847 shares were issued in exchange for
approximately 75% of Gerrity's preferred stock. Subsequent to the quarter
end, Gerrity's certificate of incorporation was amended to provide that all
shares of Gerrity's preferred stock not exchanged in the Original Exchange
Offer be exchanged for Patina's preferred stock on the same terms as the
Original Exchange Offer. Additionally, the Company repurchased $1.2 million
of Senior Subordinated Notes ("Subordinated Notes" or "Notes") put to the
Company in accordance with the change of control provision within the
indenture. The Company has also repurchased an additional $1.3 million of
the Notes subsequent to June 30, 1996.
7
<PAGE>
During the second quarter of 1996, the purchase method was used to record
the acquisition of the Company by Patina. In a purchase method combination,
the purchase price is allocated to the assets acquired and liabilities
assumed based on their fair values at the date of acquisition. As a result
of applying pushdown accounting, the assets and liabilities of the Company
were revalued to reflect the purchase price (the estimated value of the
Patina common shares and Patina warrants distributed to the Company's
common shareholders plus all liabilities assumed by Patina) to acquire the
Company. The Company's assets and liabilities were assigned carrying
amounts based on their relative fair market values.
The financial statements reflect the effects of the Merger-related
transactions recorded in the second quarter of 1996. The primary impact of
applying pushdown accounting was the revaluation of oil and gas properties
and the associated impact on depletion, depreciation and amortization.
Periods presented prior to the second quarter of 1996 are presented on a
pre-Merger basis and, therefore, are not comparable.
Risks and Uncertainties
Historically, the market for oil and gas has experienced significant price
fluctuations. Prices for natural gas in the Rocky Mountain region have
traditionally been particularly volatile and have been depressed since
1994. In large part, the decreased natural gas prices are the result of
mild weather, increased production in the region and limited transportation
capacity to other regions of the country. Subsequent to September 30, 1996,
both oil and natural gas prices have increased considerably, however, there
can be no assurance that these increases will be sustained. Increases or
decreases in prices received could have a significant impact on the
Company's future results of operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Consequently, oil and gas leasehold costs are
capitalized when incurred. Unproved properties are assessed periodically
within specific geographic areas and impairments in value are charged to
expense. Exploratory expenses, including geological and geophysical
expenses and delay rentals, are charged to expense as incurred. Exploratory
drilling costs are initially capitalized, but charged to expense if and
when the well is determined to be unsuccessful. Costs of productive wells,
unsuccessful developmental wells and productive leases are capitalized and
amortized on a unit-of-production basis over the life of the remaining
proved or proved developed reserves, as applicable. Gas is converted to
equivalent barrels at the rate of 6 Mcf to one barrel. Amortization of
capitalized costs has generally been provided over the entire DJ Basin as
the wells are located in the same reservoir. The Company expects to review
the appropriateness of this policy in the fourth quarter of 1996. No
accrual has been provided for estimated future abandonment costs as
management estimates that the salvage value will approximate such costs.
8
<PAGE>
During the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS 121 requires the Company to assess the need for an impairment of
capitalized costs of oil and gas properties on a field-by-field basis.
During the nine months ended September 30, 1995 and 1996, the Company did
not provide for any impairments. Changes in the underlying assumptions or
the amortization units could, however, result in impairments in the future.
Other assets reflect the value assigned to a noncompete agreement entered
into as part of the Merger. The value is being amortized over five years at
a rate intended to approximate the decline in the value of the agreement.
Amortization expense for the three months ended September 30, 1996 was
$1,603,000. Scheduled amortization for the next five years is $1,029,000
for the remainder of 1996, $1,500,000 in 1997, $500,000 in 1998, and
$250,000 in each of 1999 and 2000.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $1.4
million and $7.1 million at December 31, 1995 and September 30, 1996. The
book value approximates fair value due to the short maturity of these
instruments. The book value and estimated fair value of the Company's
Senior debt and Subordinated Notes combined was $118 million and $131.3
million at December 31, 1995 and September 30, 1996. The fair value of the
Senior debt is presented at face value given its floating rate structure.
The book value of the Subordinated Notes was $103.3 million and the
estimated fair value was $104.2 million September 30, 1996. The fair value
is estimated based on the instrument's price as quoted on the New York
Stock Exchange.
Other
All liquid investments with an original maturity of three months or less
are considered to be cash equivalents.
Certain amounts in prior period consolidated financial statements have been
reclassified to conform with current classification.
3. INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
11 3/4% Subordinated Notes due 2004 ...................................... $100,000 $103,264
Senior debt, banks ....................................................... 18,000 28,000
-------- --------
Total long-term debt ..................................................... 118,000 131,264
Less current maturities .................................................. (1,125) -
-------- --------
Long-term debt, net ...................................................... $116,875 $131,264
======== ========
</TABLE>
9
<PAGE>
The scheduled maturities of indebtedness for the next five years at
September 30, 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
------------ --------------
<S> <C>
1996 ................................................................ $ -
1997 ................................................................ -
1998 ................................................................ -
1999 ................................................................ 28,000
2000 ................................................................ -
-------
Total ........................................................... $28,000
=======
</TABLE>
As of November 4, 1996, the Company had approximately $125.2 million of
debt outstanding consisting of $22.0 million of Senior debt and $103.2
million of Subordinated Notes.
Simultaneously with the Merger, the Company entered into a bank credit
agreement. The agreement consists of (a) a facility provided to Patina and
SOCO Wattenberg (the "Patina Facility") and (b) a facility provided to the
Company (the "Company Facility").
The Company Facility is a revolving credit facility in an aggregate amount
up to $51 million. The amount available for borrowing under the Company
Facility is limited to a fluctuating borrowing base that equaled $51
million at September 30, 1996. At September 30, 1996, $28.0 million was
outstanding under the Company Facility. On November 1, 1996, the borrowing
base was adjusted to $35 million. To date, the Company Facility has been
used primarily to refinance the previous bank credit facility and pay costs
associated with the Merger.
The borrower may elect that all or a portion of the credit facilities bear
interest at a rate per annum equal to: (i) the higher of (a) prime rate
plus a margin equal to .25% (the "Applicable Margin") and (b) the Federal
Funds Effective Rate plus .5% plus the Applicable Margin, or (ii) the rate
at which eurodollar deposits for one, two, three or six months (as selected
by the applicable borrower) are offered in the interbank eurodollar market
in the approximated amount of the requested borrowing (the "Eurodollar
Rate") plus 1.25% (the "Eurodollar Margin"). From May 2, 1996 through
September 30, 1996, the average interest rate under the facilities
approximated 6.9%.
The bank credit agreement contains certain financial covenants, including
but not limited to a maximum total debt to capitalization ratio, a maximum
total debt to EBITDA ratio and a minimum current ratio. The bank credit
agreement also contains certain negative covenants, including but not
limited to restrictions on indebtedness; certain liens; guaranties,
speculative derivatives and other similar obligations; asset dispositions;
dividends, loans and advances; creation of subsidiaries; investments;
leases; acquisitions; mergers; changes in fiscal year; transactions with
affiliates; changes in business conducted; sale and leaseback and operating
lease transactions; sale of receivables; prepayment of other indebtedness;
amendments to principal documents; negative pledge clauses; issuance of
securities; and non-speculative commodity hedging.
10
<PAGE>
On July 1, 1994, the Company received the net proceeds of approximately $95
million from its offering of $100 million of 11 3/4% Subordinated Notes due
July 15, 2004. In connection with the Merger, the Company repurchased $1.2
million of the Notes. The Company has also repurchased an additional $1.3
million of the Notes subsequent to June 30, 1996. As part of the purchase
method of accounting, the remaining Notes have been reflected in the
accompanying financial statements at a market value of $103.3 million or
105.875% of their principal amount. Interest is payable each January 15 and
July 15. The Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after July 15, 1999, initially at 105.875% of
their principal amount, declining to 100% on or after July 15, 2001. Upon
the occurrence of a change of control, as defined in the Notes, the Company
would be obligated to make an offer to purchase all outstanding Notes at a
price of 101% of the principal amount thereof. In addition, the Company
would be obligated, subject to certain conditions, to make offers to
purchase Notes with the net cash proceeds of certain asset sales or other
dispositions of assets at a price of 101% of the principal amount thereof.
The Notes are unsecured general obligations of the Company and are
subordinated to all senior indebtedness of the Company and to any existing
and future indebtedness of the Company's subsidiaries.
The 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
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 does not meet the
interest coverage ratio necessary to incur indebtedness in excess of
approximately $51 million.
4. STOCKHOLDERS' EQUITY
In 1993, the Company privately placed 3,036,000 Depositary Shares, each
representing a one-eighth interest in a share of $12.00 Convertible
Preferred Stock. The Company received $72.5 million net proceeds from the
offering. Each share of the Convertible Preferred Stock is convertible at
any time at the option of the holder into 10.392 shares of Common Stock.
Annual cumulative dividends of $12.00 per share of Convertible Preferred
Stock ($1.50 per Depositary Share) are payable each May 15, August 15,
November 15, and February 15, when, and if declared by the Board. Dividends
at the rate of $12.00 per share, annually, were paid through February 15,
1996. Subsequent to that date, no dividends have been declared or paid on
the Company's preferred shares.
In the case of the voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Convertible Preferred Stock are
entitled to receive a liquidation preference of $200.00 per share ($75.9
million or $25 per Depositary Share), plus accrued unpaid dividends. The
shares of Convertible Preferred Stock are redeemable at the option of the
Company, in whole or in part at any time at $208.40 per share, declining
ratably to $200 per share in May 2003.
11
<PAGE>
In conjunction with the Merger, Patina offered to exchange Patina's
preferred stock for Gerrity's preferred stock (the "Original Exchange
Offer"). A total of 1,204,847 shares were issued in exchange for
approximately 75% of Gerrity's preferred stock. Subsequent to the quarter
end, Gerrity's certificate of incorporation was amended to provide that all
remaining shares of Gerrity's preferred stock not exchanged in the Original
Exchange Offer be exchanged for Patina's preferred stock on the same terms
as the Original Exchange Offer.
In accordance with the Merger Agreement, the shares of common stock, par
value $.01 per share, of the Company issued and outstanding immediately
prior to the effective time of the Merger (13,781,260 common shares) were
collectively converted into an aggregate of 6,000,000 shares of common
stock, par value $.01 per share of Patina, and 3,000,000 five-year warrants
initially to purchase one share of Patina Common Stock at an exercise price
of $12.50 per share. Immediately subsequent to this conversion, the
authorized common shares of the Company were reduced from 40,000,000 to
1,000 of which 100 are issued and outstanding, all owned by Patina.
5. INCOME TAXES
The difference between the benefit from income taxes for the three and nine
months ended September 30, 1995 and 1996, and the amount which would be
determined by applying statutory income tax rates to income before income
taxes is due primarily to a reduction of the effective tax rate as a result
of the anticipated realization of alternative minimum tax credits and
utilization of Section 29 tax credits, respectively.
6. RELATED PARTY
Subsequent to the Merger, the Company no longer has its own employees.
Employees, certain office space and furniture, fixtures and equipment are
provided by Patina. Patina allocates general and administrative expenses
for the Company on a production volume basis.
7. COMMITMENTS AND CONTINGENCIES
In January 1996, Gerrity and three other producers were sued by five
plaintiffs purporting to represent all persons who, at any time since
January 1, 1960, have had agreements providing for royalties from gas
production in Colorado to be paid by the Company under various lease
provisions. The plaintiffs allege that the Company improperly deducted
unspecified "post-production" costs in calculating royalty payments in
breach of the relevant lease provisions and that fact was fraudulently
concealed from the plaintiffs. The plaintiffs seek unspecified compensatory
and punitive damages and a declaratory judgment that the Company was not
permitted to deduct post-production costs prior to calculating royalties
paid to the class. The Company believes that costs deducted in calculating
royalties are and have been proper under the relevant lease provisions, and
it intends to defend this and any similar suits vigorously. At this time,
the Company is unable to estimate the range of potential loss, if any.
However, the Company believes the resolution of this uncertainty should not
have a material adverse effect upon the Company's financial position,
although an unfavorable outcome in any reporting period could have a
material impact on results for that period.
12
<PAGE>
In March 1996, a complaint was filed in the Court of Chancery for the State
of Delaware against the Company and each of the directors of the Company,
Brickell Partners v. Gerrity Oil & Gas Corporation, C.A. No. 14888 (Del.
Ch.). The complaint alleges that the "action is brought (a) to restrain the
defendants from consummating a merger which will benefit the holders of the
Company's common stock at the expense of the holders of the Preferred and
(b) to obtain a declaration that the terms of the proposed merger
constitute a breach of the contractual rights of the Preferred." The
complaint seeks, among other things, certification as a class action on
behalf of all holders of the Company's preferred stock, a declaration that
the defendants have committed an abuse of trust and have breached their
fiduciary and contractual duties, an injunction enjoining the Merger and
money damages. Defendants believe that the complaint is without merit and
intend to vigorously defend against the action. At this time, the Company
is unable to estimate the range of potential loss, if any, from this
uncertainty. However, the Company believes the resolution of this
uncertainty should not have a material adverse effect upon the Company's
financial position, although an unfavorable outcome in any reporting period
could have a material impact on results for that period.
The financial statements reflect favorable legal proceedings only upon
receipt of cash, final judicial determination or execution of a settlement
agreement. The Company is a party to various other lawsuits incidental to
its business, none of which are anticipated to have a material adverse
impact on its financial position or results of operations.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Gerrity Oil & Gas Corporation (the "Company") is an energy company
primarily engaged in the development and production of low risk oil and gas
wells in the Wattenberg Field. The following discussion should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
Revenue. Revenue for the three and nine months ended September 30, 1996
was $11,656,000 and $36,709,000, a decrease of $366,000, or 3% and $4,696,000,
or 11%, respectively, as compared to the same periods in 1995. These changes
were primarily attributable to decreased average daily production partially
offset by higher average selling prices as summarized in the tables below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ---------------------------
1995 1996 % 1995 1996 %
---- ---- ----- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Barrels of oil production
per day ................................. 4,075 3,102 (24) 4,693 3,353 (29)
Price per barrel ........................... $15.96 $18.91 18 $16.11 $19.26 20
Mcfs of gas production
per day ................................. 47,069 37,513 (20) 50,451 40,234 (20)
Price per Mcf .............................. $ 1.24 $1.68 35 $ 1.38 $1.62 17
Barrels of oil equivalent
production per day ...................... 11,919 9,354 (22) 13,102 10,059 (23)
Price per barrel equivalent ................ $10.35 $13.01 26 $11.07 $12.91 17
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -----------------
<S> <C> <C>
Decrease in oil and gas sales due to production volume .................. $(2,519,000) $(9,623,000)
Increase in oil and gas sales due to selling price ...................... 2,364,000 5,592,000
----------- -----------
Decrease in oil and gas sales ........................................... $ (155,000) $(4,031,000)
Decrease in other revenue ............................................... (211,000) (665,000)
----------- -----------
Decrease in revenues .................................................... $ (366,000) $(4,696,000)
=========== ===========
</TABLE>
Oil and gas production may vary from period to period due to several
factors, including changes in weather, timing of new well hookups, timing of
recompletions, and the purchase or sale of producing properties. In response to
low commodity prices experienced throughout 1995 and the first half of 1996, the
Company reduced the level of its drilling and recompletion activity. More than
half of a typical Codell well's reserves are recovered in the first three years
of production. As a result, each well contributes significantly more production
in the first year than in subsequent years. The Company drilled and completed
860 wells and performed 282 recompletions from January 1, 1992 to December 31,
1994. From January 1, 1995 to the present time, the Company has drilled and
completed 89 wells and performed 108 recompletions. Production was lower during
the three and nine months ended September 30, 1996 in comparison to 1995 as a
result of all of the aforementioned factors.
14
<PAGE>
In March 1996, the Company entered into a crude oil swap agreement in
order to hedge against the volatility in crude oil prices during the summer
months. Although the Company entered into the agreement to minimize exposure to
price decreases, the agreement also limited the Company's ability to benefit
from any significant price increases on the contract volumes. The contract
volume was for 1,500 barrels of crude oil per day during the period from July 1,
1996 through September 30, 1996. The agreements involve the cash settlement of
the differential between the contract prices (an average of $18.34 per barrel)
and the average closing NYMEX crude oil price during each month. The losses
realized on these agreements ($553,000) have been included as a component of oil
and gas sales in the month of production.
Direct Operating Expenses. Direct operating expenses consist of lease
operating expenses and production taxes. The Company's costs for the three and
nine months ended September 30, 1996 were $2,336,000 and $6,716,000, an increase
of $494,000, or 27%, and an increase of $370,000, or 6%, respectively, compared
to the same periods in 1995. The overall increase for the three and nine months
ended September 30, 1996 is attributable to a reclassification of certain
expenses to direct operating expenses to present these costs on a financial
reporting basis consistent with that of SOCO.
General and Administrative Expenses. General and administrative expenses,
which are net of operator fees received by the Company, for the three and nine
months ended September 30, 1996 were $801,000 and $3,591,000, a decrease of
$982,000, or 55% and $1,883,000, or 34%, respectively, compared to the same
periods in 1995. The decreases reflect the Company's cost reduction plan which
was implemented in January 1995 as well as additional cost savings realized as a
result of the Merger.
Interest and Other Expenses. Interest and other expenses for the three and
nine months ended September 30, 1996 was $3,259,000 and $10,274,000, a decrease
of $484,000, or 13%, and $698,000, or 6%, respectively, as compared to the same
periods in 1995. These decreases are due primarily to a decrease in the average
outstanding borrowings between 1995 and 1996 as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Average interest rate .......................................... 10.9% 10.6% 10.8% 10.9%
Average borrowings outstanding
(in thousands) ............................................ $137,936 $123,150 $137,118 $123,239
</TABLE>
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the three and nine months ended September 30, 1996 were
$7,005,000 and $21,008,000, a decrease of $113,000, or 2%, and a decrease of
$2,241,000, or 10%, respectively, compared to the same periods in 1995. As
depletion is calculated using the units-of-production method, the decrease in
the three and nine months ended September 30, 1996 was partially attributable to
the decrease in oil and gas production. The decrease for the three months ended
September 30, 1996 also reflects the reduction in the valuation of oil and gas
properties from historical cost to fair value as of the Merger date somewhat
offset by the inclusion of the amortization of a noncompete agreement entered
into in conjunction with the Merger. Depletion costs per BOE increased from
$6.23 for the first nine months of 1995 to $6.84 for the first nine months of
1996.
15
<PAGE>
Restructuring expenses. Restructuring expenses for the nine months
ended September 30, 1995 were $828,000. These expenses were a result of the
Company's cost reduction plan implemented in January 1995 and were comprised
primarily of severance benefits and to a lesser extent, office lease
renegotiation costs and the related abandonment of leasehold improvements.
Income Taxes. The difference between the benefit from income taxes for
the three and nine months ended September 30, 1995 and 1996, and the amount
which would be determined by applying statutory income tax rates to income
before income taxes is due primarily to a reduction of the effective tax rate as
a result of the anticipated realization of alternative minimum tax credits and
utilization of Section 29 tax credits, respectively.
LIQUIDITY AND CAPITAL RESOURCES
In conjunction with the Merger, the Company entered into a new Bank Credit
Agreement dated as of May 2, 1996 with Texas Commerce Bank National Association,
as administrative agent, NationsBank of Texas, N.A., as documentary agent, Wells
Fargo Bank, N.A., CIBC, Inc. and Credit Lyonnais, as co- agents. The Company's
Credit Agreement currently includes commitments to lend up to $51,000,000 to the
Company. Borrowings under the Credit Agreement are secured by a pledge of the
stock of all of the Company's subsidiaries and a mortgage on substantially all
of the Company's oil and gas properties. As of September 30, 1996, the Company
had $28,000,000 of outstanding borrowings and $23,000,000 available for
borrowing under the Bank Credit Agreement. The average interest rate on
outstanding borrowings under the Bank Credit Agreement at September 30, 1996 was
7.17%.
The amount available to be drawn by the Company under the Credit Agreement
is subject to a borrowing base (the "Borrowing Base"), which is based upon the
Lenders' determination of the amount of Indebtedness (as defined in the Credit
Agreement) for borrowed money that can be supported by the Company's proved oil
and gas reserves. The Borrowing Base is generally determined semi-annually, but
may be redetermined, at the option of either the Company or the Lenders, one
additional time each year, and will be redetermined on certain sales of assets
included in the Borrowing Base. As of November 1, 1996 and until the next
scheduled redetermination, the Borrowing Base has been set at $35,000,000.
The bank credit agreement contains certain financial covenants, including
but not limited to a maximum total debt to capitalization ratio, a maximum total
debt to EBITDA ratio and a minimum current ratio. The bank credit agreement also
contains certain negative covenants, including but not limited to restrictions
on indebtedness; certain liens; guaranties, speculative derivatives and other
similar obligations; asset dispositions; dividends, loans and advances; creation
of subsidiaries; investments; leases; acquisitions; mergers; changes in fiscal
year; transactions with affiliates; changes in business conducted; sale and
leaseback and operating lease transactions; sale of receivables; prepayment of
other indebtedness; amendments to principal documents; negative pledge clauses;
issuance of securities; and non-speculative commodity hedging.
16
<PAGE>
The Company's 11 3/4% Subordinated Notes due July 15, 2004 contain
covenants that, among other things, limit the ability of the Company to incur
additional indebtedness. Specifically, the Notes restrict the Company from
incurring indebtedness (exclusive of the Notes) in excess of approximately
$51,000,000, if after giving effect to the incurrence of such additional
indebtedness and the receipt and application of the proceeds therefrom, the
Company's interest coverage ratio is less than 2.5:1 or adjusted consolidated
net tangible assets is less than 150% of the aggregate indebtedness of the
Company. The Company currently does not meet the interest coverage ratio
necessary to incur indebtedness in excess of approximately $51,000,000. The
Company is of the opinion that this will have no materially adverse effect on
its financial condition.
The Company had a working capital deficit of $6,583,000 and positive
working capital of $2,924,000 at December 31, 1995 and September 30, 1996,
respectively. The Company has historically maintained a working capital deficit
as cash flows from operations have been sufficient to meet its working capital
needs. At September 30, 1996, the Company had an additional $23,000,000 of
available borrowings pursuant to the terms of its Credit Agreement.
During the nine months ended September 30, 1996, the Company performed 52
recompletions. Net cash used in investing activities was $12,419,000. These
capital expenditures were financed through cash provided by operating activities
of $10,557,000 and through net borrowings under the Credit Agreement totaling
$7,389,000. Net cash provided by financing activities was $7,556,000. With the
recent increase in commodity prices, management intends to increase the drilling
and recompletion activity in the fourth quarter of 1996. The Company's capital
expenditures for 1996, exclusive of acquisitions, are currently estimated to be
approximately $6,500,000 to $8,000,000. The Company continually evaluates the
drilling budget and may increase or decrease its development program in response
to market conditions.
The Company believes that its capital resources are adequate to meet the
requirements of its business. However, future cash flows are subject to a number
of variables including the level of production and oil and 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.
INFLATION AND CHANGES IN PRICES
While certain of its costs are affected by the general level of 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 gas prices. Although it is particularly difficult to estimate future
prices of oil and gas, price fluctuations have had, and will continue to have, a
material effect on the Company.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference from
Note 7 of the Notes to Consolidated Financial Statements in Part I of
this report.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the Company's common and preferred stockholders
was held on October 31, 1996. The holders of the common stock and
preferred stock of the Company voted as follows:
Adoption of the Certificate of Amendment to exchange all shares of
Gerrity's preferred stock not exchanged in the Original Exchange Offer
for Patina's preferred stock on the same terms as the Original Exchange
Offer.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
<S> <C> <C> <C>
Common ................. 100 0 0
Preferred .............. 1,204,847 0 0
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits required by Item 601 of Regulation S-K:
EXHIBIT
NO. DESCRIPTION
10.74 - Second Amendment to Credit Agreement effective October 8,
1996 by and among the Company, Patina Oil & Gas Corporation
and SOCO Wattenberg Corporation, as Borrowers, and Texas
Commerce Bank National Association, as Administrative Agent,
and certain commercial lending institutions.
10.75 - Third Amendment to Credit Agreement effective November 1,
1996 by and among the Company, Patina Oil & Gas Corporation
and SOCO Wattenberg Corporation, as Borrowers, and Texas
Commerce Bank National Association, as Administrative Agent,
and certain commercial lending institutions.
10.76 - Sublease Agreement dated as of October 7, 1996 by and
between Gerrity Oil & Gas Corporation, as Sublandlord, and
Shadownet Technologies, L.L.C.
27 - Financial Data Schedule
18
<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.
GERRITY OIL & GAS CORPORATION
(Registrant)
Date: November 14, 1996 By:/S/DAVID J. KORNDER
----------------------------
David J. Kornder
Vice President
Chief Financial Officer
19
EXHIBIT 10.1.2
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement (this "Amendment") is entered
into effective as of the 8th day of October, 1996, by and among Patina Oil & Gas
Corporation ("Patina"), SOCO Wattenberg Corporation ("SWAT"), Gerrity Oil & Gas
Corporation ("Gerrity"), (Patina, SWAT and Gerrity are each individually
referred to herein as "Borrower" and collectively as "Borrowers"), Texas
Commerce Bank National Association, as Administrative Agent ("Administrative
Agent"), NationsBank of Texas, N.A., as Documentary Agent ("Documentary Agent"),
Wells Fargo Bank, N.A., CIBC, Inc. and Credit Lyonnais New York Branch, as
Co-Agents ("Co-Agents") and the financial institutions listed on Schedule 1 to
the Credit Agreement (as hereinafter defined) as Banks (individually a "Bank"
and collectively "Banks").
W I T N E S E T H:
WHEREAS, Borrowers, Administrative Agent, Documentary Agent, Co-Agents and
Banks are parties to that certain Credit Agreement dated as of May 2, 1996 (the
"Credit Agreement") (unless otherwise defined herein, all terms used herein with
their initial letter capitalized shall have the meaning given such terms in the
Credit Agreement); and
WHEREAS, pursuant to the Credit Agreement the Banks have made certain Loans
to Borrowers; and
WHEREAS, pursuant to that certain First Amendment to Credit Agreement,
dated as of June 28, 1996, by and among Borrowers, Agents and Banks, the parties
amended and revised certain provisions of the Credit Agreement, all as more
particularly described therein; and
WHEREAS, subject to the terms and conditions set forth herein, Borrowers,
Agents and Banks desire to further amend and waive certain provisions of the
Credit Agreement, all as more fully described herein.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed,
Borrowers, each Agent, and each Bank hereby agree as follows:
SECTION 1. Amendments. In reliance on the representations, warranties,
covenants and agreements contained in this Amendment, the Credit Agreement shall
be amended effective October 8, 1996 (the "Effective Date") in the manner
provided in this Section 1.
1.1. Amendment to Definitions. The definition of "Loan Papers" contained in
<PAGE>
Section 1.1 of the Credit Agreement shall be amended to read in full as follows:
"Loan Papers" means this Agreement, the Notes, the Patina
Guarantees, the Collateral Assignment of Intercompany Loan, the Tax Credit
Transaction Agreement, the Patina Pledge Agreement, the Gerrity Pledge
Agreement, the First Amendment, the Second Amendment, all Mortgages now or
at any time hereafter delivered pursuant to Section 5.1, and all other
certificates, documents or instruments
1
delivered in connection with this Agreement, as the foregoing may be
amended from time to time.
1.2. Additional Definitions. Section 1.1 of the Credit Agreement shall be
amended to add the following definition to such Section:
"Second Amendment" means the Second Amendment to Credit Agreement
dated effective as of October 8, 1996, entered into by and among
Borrowers, Agents, and Banks.
1.3. Restricted Payments Covenant. Section 9.2 of the Credit Agreement
shall be amended to read in full as follows:
SECTION 9.2. Restricted Payments. Neither any Borrower nor any
Restricted Subsidiary of any Borrower will declare or make any Restricted
Payment; provided, that, so long as no Default, Event of Default or
Borrowing Base Deficiency then exists, and provided that no Default or
Event of Default would result therefrom (a) Patina shall be permitted to
(i) declare and pay accrued dividends on the Preferred Stock, and (ii)
repurchase any of its Common Stock or Preferred Stock or warrants, options
or other rights to acquire such Common Stock or Preferred Stock, so long
as, at any date, the sum of (A) the aggregate amount of all such dividends
declared and paid pursuant to clause (a)(i) above during the period
commencing on the Closing Date to and including such date, plus (B) the
aggregate amount of all such Common Stock or Preferred Stock or warrants,
options or other rights to acquire such Common Stock or Preferred Stock
repurchased by Patina pursuant to clause (a)(ii) above, plus (C) the
aggregate amount of all Investments made by Patina to purchase Gerrity
Preferred Stock from the Closing Date to and including the date of such
declaration or payment (excluding Investments in Gerrity Preferred Stock
made in the form of Preferred Stock or Common Stock) shall not exceed the
Patina Restricted Payment Limit in effect at such time, and (b) Gerrity
<PAGE>
shall be permitted to (i) repurchase or redeem Subordinate Notes (A)
tendered to Gerrity for redemption on the Subordinate Note Redemption Date
pursuant to Section 4.08 of the Indenture, and (B) after the Subordinate
Note Redemption Date, and (ii) declare and pay accrued dividends on the
Gerrity Preferred Stock, so long as, at any date, the sum of (A) the
aggregate amount of all dividends declared and paid on the Gerrity
Preferred Stock during the period commencing on the Closing Date to and
including such date (excluding any such dividends paid to Patina), plus
(B) the excess of the aggregate repurchase or redemption price paid by
Gerrity for all Subordinate Notes repurchased or redeemed by Gerrity
subsequent to the Closing Date over the sum of (1) 101% of the aggregate
principal balance of all such Subordinate Notes on the date of
redemption or repurchase, plus (2) accrued but unpaid interest on all such
Subordinate Notes redeemed on the date of redemption or repurchase, shall
not exceed the Gerrity Restricted Payment Limit in effect on such date.
Nothing
contained in this Section 9.2 shall limit or impair the right and ability
of Gerrity to make Distributions to Patina or the right and ability of the
Restricted Subsidiaries of each Borrower to make Distributions to such
Borrower or to other Restricted Subsidiaries of such Borrower.
1.4. Hedge Transactions Covenant. Section 9.11 of the Credit Agreement
shall be amended to read in full as follows:
SECTION 9.11. _____ Oil and Gas Hedge Transactions. No Borrower
will, and no Borrower will permit any of its Restricted Subsidiaries to,
enter into Oil and Gas Hedge Transactions which would cause the volume of
(a) (i) the aggregate notional volume of oil which is the subject of oil
Oil and Gas Hedge Transactions in existence at any time to exceed
seventy-five percent (75%) of any such Borrower's and its Restricted
Subsidiaries' anticipated production of oil from proved, developed
producing reserves during the entire term of such existing Oil and Gas
Hedge Transactions, and (ii) the notional volume of oil with respect to
which a settlement is required on a particular settlement date under such
oil Oil and Gas Hedge Transactions to exceed (A) [ninety percent (90%)] of
any such Borrower's and its Restricted Subsidiaries' anticipated
production of oil from proved, developed producing reserves for the period
(a "Settlement Period") from the immediately preceding settlement date
under any oil Oil and Gas Hedge Transaction (or the commencement of such
Oil and Gas Hedge Transaction in the event there is no prior settlement
<PAGE>
date) to such settlement date in the case of any Settlement Period ending
on or prior to January 31, 1997, and (B) seventy five percent (75%) of any
such Borrower's and its Restricted Subsidiaries' anticipated production of
oil from proved, developed producing reserves for any Settlement Period
thereafter, and (b) (i) the aggregate notional volume of gas which is the
subject of gas Oil and Gas Hedge Transactions in existence at any time to
exceed seventy-five percent (75%) of any such Borrower's and its
Restricted Subsidiaries' anticipated production of gas from proved,
developed producing reserves during the entire term of such existing Oil
and Gas Hedge Transactions, and (ii) the notional volume of gas with
respect to which a settlement is required on a particular settlement date
under such gas Oil and Gas Hedge Transactions to exceed (A) [ninety
percent (90%)] of any such Borrower's and its Restricted Subsidiaries'
anticipated production of gas from proved, developed producing reserves
for the Settlement Period ending on such settlement date in the case of
any Settlement Period ending on or prior to January 31, 1997, and (B)
seventy-five percent (75%) of any such Borrower's and its Restricted
Subsidiaries' anticipated production of gas from proved, developed
producing reserves for any Settlement Period thereafter.
SECTION 2. Waiver Regarding September 15 Reserve Report. Banks hereby
waive Borrowers' obligation to comply with Section 4.1 of the Credit Agreement
to the extent, but only to the extent, that Section 4.1 requires Borrowers to
deliver to each Bank, by September 15, 1996, a Patina Reserve Report, Patina
Related Asset Report, Gerrity Reserve Report and Gerrity Related Asset Report
prepared as of June 30, 1996 (collectively, the "September 96 Reports"). Each
Borrower hereby acknowledges that such waiver is limited solely to Section 4.1
of the Credit Agreement, and solely to the September 96 Reports. Nothing
contained herein shall obligate Banks to grant any additional or future waiver
of Section 4.1 of the Credit Agreement or any other provision of any other Loan
Paper.
SECTION 3. Representations and Warranties. In order to induce Agents and
Banks to enter into this Amendment and grant the waiver contained in Section 2
hereof, each Borrower hereby represents and warrants to each Agent and each Bank
that:
(a) each representation and warranty of each Borrower and the Restricted
Subsidiaries contained in the Loan Papers are true and correct in all material
respects as of the date hereof (except to the extent that such representations
and warranties are expressly made as of a particular date, in which event such
representations and warranties were true and correct as of such date);
(b) neither a Default nor an Event of Default has occurred which is
continuing; and
<PAGE>
(c) Borrowers have no defenses to payment, counterclaims or rights of
set-off with respect to the Obligations on the date hereof.
SECTION 4. Miscellaneous.
4.1 Reaffirmation of Loan Papers; Extension of Liens. Any and all of the
terms and provisions of the Credit Agreement and the Loan Papers shall, except
as amended and modified hereby, remain in full force and effect. Each Borrower
hereby extends the Liens securing the Obligations until the Obligations have
been paid in full, and agrees that the amendments and modifications herein
contained shall in no manner affect or impair the Obligations or the Liens
securing payment and performance thereof.
4.2 Parties in Interest. All of the terms and provisions of this Amendment
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns.
4.3 Legal Expenses. Each Borrower hereby agrees to pay on demand all
reasonable fees and expenses of counsel to Administrative Agent incurred by
Administrative Agent in connection with the preparation, negotiation and
execution of this Amendment and all related documents.
4.4 Counterparts. This Amendment may be executed in counterparts, and all
parties need not execute the same counterpart; however, no party shall be bound
by this Amendment
until this Amendment has been executed by Borrowers and Required Banks at which
time this Amendment shall be binding on, enforceable against and inure to the
benefit of Borrowers, Agents and all Banks. Facsimiles shall be effective as
originals.
4.5 COMPLETE AGREEMENT. THIS AMENDMENT, THE CREDIT AGREEMENT
AND THE OTHER
LOAN PAPERS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL
AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
4.6 Headings. The headings, captions and arrangements used in this
Amendment are, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of this Amendment, nor affect the
meaning thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective Authorized Officers on October __, 1996, but
effective as of the date and year first above written.
BORROWERS:
PATINA OIL & GAS CORPORATION,
a Delaware corporation
By:
Its:
SOCO WATTENBERG CORPORATION,
a Delaware corporation
By:
Its:
GERRITY OIL & GAS CORPORATION,
a Delaware corporation
By:
Its:
2
<PAGE>
ADMINISTRATIVE AGENT:
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By:
Its:
DOCUMENTARY AGENT:
NATIONSBANK OF TEXAS, N.A.
By:
Its:
CO-AGENTS:
CIBC, INC.
By:
Its:
CREDIT LYONNAIS NEW YORK BRANCH
By:
Its:
BANKS:
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By:
Its:
3
<PAGE>
NATIONSBANK OF TEXAS, N.A.
By:
Its:
CIBC, INC.
By:
Its:
CREDIT LYONNAIS NEW YORK BRANCH
By:
Its:
WELLS FARGO BANK, N.A.
By:
Its:
1/209116.5
4
EXHIBIT 10.1.3
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement (this "Amendment") is entered
into effective as of the 1st day of November, 1996, by and among Patina Oil &
Gas Corporation ("Patina"), SOCO Wattenberg Corporation ("SWAT"), Gerrity Oil &
Gas Corporation ("Gerrity"), (Patina, SWAT and Gerrity are each individually
referred to herein as "Borrower" and collectively as "Borrowers"), Texas
Commerce Bank National Association, as Administrative Agent ("Administrative
Agent"), NationsBank of Texas, N.A., as Documentary Agent ("Documentary Agent"),
Wells Fargo Bank, N.A., CIBC, Inc. and Credit Lyonnais New York Branch, as
Co-Agents ("Co-Agents") and the financial institutions listed on Schedule 1 to
the Credit Agreement (as hereinafter defined) as Banks (individually a "Bank"
and collectively "Banks").
W I T N E S E T H:
WHEREAS, Borrowers, Administrative Agent, Documentary Agent, Co-Agents and
Banks are parties to that certain Credit Agreement dated as of May 2, 1996 (as
amended through the date hereof, the "Credit Agreement") (unless otherwise
defined herein, all terms used herein with their initial letter capitalized
shall have the meaning given such terms in the Credit Agreement); and
WHEREAS, pursuant to the Credit Agreement the Banks have made certain Loans
to Borrowers; and
WHEREAS, pursuant to that certain First Amendment to Credit Agreement,
dated as of June 28, 1996, by and among Borrowers, Agents and Banks, the parties
amended and revised certain provisions of the Credit Agreement, all as more
particularly described therein; and
WHEREAS, pursuant to that certain Second Amendment to Credit Agreement,
dated as of October 8, 1996, by and among Borrowers, Agents and Banks, the
parties further amended and revised certain provisions of the Credit Agreement,
all as more particularly described therein; and
WHEREAS, subject to the terms and conditions set forth herein, Borrowers,
Agents and Banks desire to further amend certain provisions of the Credit
Agreement, all as more fully described herein.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed, each
Borrower, each Agent, and each Bank hereby agree as follows:
SECTION 1. Amendments. In reliance on the representations, warranties,
covenants and agreements contained in this Amendment, the Credit Agreement shall
be amended effective November 1, 1996 (the "Effective Date") in the manner
provided in this Section 1.
1.1. Amendment to Definitions. The definitions of "Initial Restricted
Payment Limit" and "Loan Papers" contained in Section 1.1 of the Credit
Agreement shall be amended to read in full as follows:
1/219276.2
1
<PAGE>
"Initial Restricted Payment Limit" means $11,000,000 and "Allocated
Shares of Initial Restricted Payment Limit" means (a) with respect to
Patina, $9,000,000, and (b) with respect to Gerrity, $2,000,000.
"Loan Papers" means this Agreement, the Notes, the Patina
Guarantees, the Collateral Assignment of Intercompany Loan, the Tax Credit
Transaction Agreement, the Patina Pledge Agreement, the Gerrity Pledge
Agreement, the First Amendment, the Second Amendment, the Third Amendment,
all Mortgages now or at any time hereafter delivered pursuant to Section
5.1, and all other certificates, documents or instruments delivered in
connection with this Agreement, as the foregoing may be amended from time
to time.
1.2. Additional Definitions. Section 1.1 of the Credit Agreement shall be
amended to add the following definition to such Section:
"Third Amendment" means the Third Amendment to Credit Agreement
dated effective as of November 1, 1996, entered into by and among
Borrowers, Agents, and Banks.
1.3. Gerrity Financial Covenant. Section 10.3(b) of the Credit Agreement
shall be amended to read in full as follows:
(b) Gerrity will not permit its ratio of Consolidated Funded Debt to
Consolidated Total Capital as of the end of any Fiscal Quarter ending on
or after September 30, 1996 to exceed .67 to 1.
SECTION 2. Borrowing Base.
(a) Patina Borrowing Base. In accordance with Section 4.2 of the Credit
Agreement, effective November 1, 1996 and continuing until the earlier of (i)
the next Patina Periodic Determination, or (ii) the next Patina Special
Determination, the Patina Borrowing Base shall be $85,000,000.
(b) Gerrity Borrowing Base. In accordance with Section 4.6 of the Credit
Agreement, effective November 1, 1996, and continuing until the earlier of (i)
the next Gerrity Periodic Determination, (ii) the next Gerrity Special
Determination, or (iii) the next Gerrity Readjustment Date, the Gerrity
Borrowing Base shall be $35,000,000.
SECTION 3. Patina Term Loan. Each Borrower, each Agent, and each Bank
acknowledge and agree that the Patina Term Loan (and the Patina Term Commitment
of each Bank) has been terminated effective as of September 30, 1996.
SECTION 4. Representations and Warranties. In order to induce Agents and
Banks to enter into this Amendment, each Borrower hereby represents and warrants
to each Agent and each Bank that:
(a) each representation and warranty of each Borrower and the Restricted
Subsidiaries contained in the Loan Papers are true and correct in all material
respects as of the date hereof (except to the extent that such representations
and warranties are expressly made as of a particular date, in which event such
representations and warranties were true and correct as of such date);
(b) neither a Default nor an Event of Default has occurred which is
continuing; and
(c) Borrowers have no defenses to payment, counterclaims or rights of
set-off with respect to the Obligations on the date hereof.
<PAGE>
SECTION 5. Miscellaneous.
5.1 Reaffirmation of Loan Papers; Extension of Liens. Any and all of the
terms and provisions of the Credit Agreement and the Loan Papers shall, except
as amended and modified hereby, remain in full force and effect. Each Borrower
hereby extends the Liens securing the Obligations until the Obligations have
been paid in full, and agrees that the amendments and modifications herein
contained shall in no manner affect or impair the Obligations or the Liens
securing payment and performance thereof.
5.2 Parties in Interest. All of the terms and provisions of this Amendment
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns.
5.3 Legal Expenses. Each Borrower hereby agrees to pay on demand all
reasonable fees and expenses of counsel to Administrative Agent incurred by
Administrative Agent in connection with the preparation, negotiation and
execution of this Amendment and all related documents.
5.4 Counterparts. This Amendment may be executed in counterparts, and all
parties need not execute the same counterpart; however, no party shall be bound
by this Amendment until this Amendment has been executed by Borrowers and
Required Banks at which time this Amendment shall be binding on, enforceable
against and inure to the benefit of Borrowers, Agents and all Banks. Facsimiles
shall be effective as originals.
5.5 COMPLETE AGREEMENT. THIS AMENDMENT, THE CREDIT AGREEMENT
AND THE OTHER
LOAN PAPERS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL
AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
5.6 Headings. The headings, captions and arrangements used in this
Amendment are, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of this Amendment, nor affect the
meaning thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective Authorized Officers effective as of the date
and year first above written.
BORROWERS:
PATINA OIL & GAS CORPORATION,
a Delaware corporation
By:
Its:
SOCO WATTENBERG CORPORATION,
a Delaware corporation
By:
Its:
<PAGE>
GERRITY OIL & GAS CORPORATION,
a Delaware corporation
By:
Its:
ADMINISTRATIVE AGENT:
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By:
Its:
DOCUMENTARY AGENT:
NATIONSBANK OF TEXAS, N.A.
By:
Its:
CO-AGENTS:
CIBC, INC.
By:
Its:
CREDIT LYONNAIS NEW YORK BRANCH
By:
Its:
BANKS:
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By:
Its:
NATIONSBANK OF TEXAS, N.A.
By:
<PAGE>
Its:
CIBC, INC.
By:
Its:
CREDIT LYONNAIS NEW YORK BRANCH
By:
Its:
WELLS FARGO BANK, N.A.
By:
Its:
1/219276.2
2
EXHIBIT 10.4
SUBLEASE
THIS SUBLEASE is made this 7th day of October, 1996 between Gerrity Oil &
Gas Corporation (the "Lessee") and ShadowNet Mortgage Technologies, LLC, a
Colorado Limited Liability Company (the "Sublessee").
In consideration of the payment of rent and the performance of the
promises by the Sublessee set forth below, the Lessee does hereby lease 3560
rentable square feet located on the tenth floor of the Mountain Towers Office
Building (address below) to the Sublessee the following described premises
situated in the City and County of Denver, State of Colorado, the address of
which is: 4100 E. Mississippi Ave.
Denver, Colorado 80222
TO HAVE AND TO HOLD the same with all the appurtenances unto the said
Sublessee from 12 o'clock noon on the 1st day of November 1996, or the date of
substantial completion, whichever is later to 12 o'clock noon on the 31st day of
July, 2000 at and for a rental of $5,073.00 per month payable without notice and
in advance of the first day of each calendar month during the term of this
Sublease at the office of the Lessee at:
Patina Oil & Gas Corporation
1625 Broadway
Suite 2000
Denver, Colorado 80202
Attn: Steve Studer
The Sublessee, in consideration of the subleasing of the premises, agrees as
follows:
1. To pay the rent for the premises above-described.
2. At the expiration of this Sublease to surrender the premises in as good
a condition as when the Sublessee entered the premises, loss by fire, inevitable
accident, and ordinary wear excepted. To keep the premises in a clean and
sanitary condition as required by the ordinances of the city and county in which
the property is situated.
3. To sublet no part of the premises, and not to assign the sublease or
any interest therein without the written consent of the Lessee. The parties
contemplate that Sublessee may desire to sublet a portion of the premises in the
future, and Lessee will not unreasonably withhold consent to any such sublease.
Further, notwithstanding the foregoing, Sublessee may, with notice to Lessee,
sublet up to 20% of the premises to other individuals or entities who perform
<PAGE>
all or a portion of their services on behalf of the Sublessee or its clients.
Any such subleasing will be made subject to the terms of the primary lease
executed by Lessee on August 22, 1995 ("Primary Lease") and this Sublease.
Finally, any lawyer who is affiliated with Sublessee may provide legal and
related services to clients through an entity other than Sublessee.
4. To use the premises only for general office use and to use the premises
for no purposes prohibited by the laws of the United States or the State of
Colorado, or of the ordinances of the city or town in which said premises are
located, and for no improper or questionable purposes whatsoever, and to neither
permit nor suffer any disorderly conduct, noise or nuisance having a tendency to
annoy or disturb any persons occupying adjacent premises.
5. To neither hold nor attempt to hold the Lessee liable for any injury or
damage, either proximate or remote, occurring through or caused by the repairs,
alterations, injury or accident to the premises, or adjacent premises, or other
parts of the above premises not herein demised, or byreason of the negligence or
default of the owners or occupants thereof or any other person, nor to hold the
Lessee liable for any injury or damage occasioned by defective electric wiring,
or the breakage or stoppage of plumbing or sewerage upon said premises or upon
adjacent premises, whether by breakage or stoppage results from freezing or
otherwise; to neither permit nor suffer said premises, or the walls or floors
thereof, to be endangered by overloading, nor said premises to be used for any
purpose which would render the insurance thereon void or the insurance risk more
hazardous, nor make any alterations in or changes in, upon, or about said
premises without first obtaining written consent of the Lessee therefor.
6. To allow the Lessee to enter upon the premises at any reasonable
hour with reasonable prior notice.
7. This Sublease is subject to all of the terms and conditions of the
Primary Lease. Sublessee agrees to be bound by all terms and conditions of said
Lease, and agrees not to violate any of the terms and conditions thereof, or
cause the terms and conditions thereof to be violated.
8. No assent, express or implied, to any breach of any one or more of the
agreements hereof shall be deemed or taken to be a waiver of any succeeding or
other breach.
<PAGE>
9. Subject to the provisions of a lease of the premises between Sublessee
and the owner of the premises commencing upon termination of this Sublease as
described in Paragraph 5 of the Additional Provisions of this Sublease, if,
after the expiration of this Sublease, the Sublessee shall remain in possession
of the premises and continue to pay rent without a written agreement with Lessee
as to such possession, then such tenancy shall be regarded as a tenancy at
sufferance, at a monthly rental, payable in advance, equivalent to the rent
schedule outlined in the Additional Provisions of this Sublease, and subject to
all the terms and conditions of this Sublease.
10. If the premises are left vacant and any part of the rent reserved
hereunder is not paid, then the Lessee may, without being obligated to do so,
and without terminating this sublease, retake possession of the said premises
and rent the same for such rent, and upon such conditions as the Lessee may
think best, making such change and repairs as may be required, giving credit for
the amount of rent so received less all expenses of such changes and repairs,
and the Sublessee shall be liable for the balance of the rent herein reserved
until the expiration of the term of this sublease.
11. Security deposit is intentionally waived.
12. If any part of the rent provided to be paid herein is not paid when
due, or if there is a default by Sublessee in the observance or performance of
any condition or covenant of this Sublease, and such default continues for ten
(10) days after Lessee provides written notice thereof to Sublessee, Lessee may
treat the occurrence of such event as a default under this Sublease. If, at any
time, this sublease is terminated under this paragraph, the Sublessee agrees to
peacefully surrender the premises to the Lessee immediately upon termination,
and if the Sublessee remains in possession of the premises, the Sublessee shall
be deemed guilty of forcible entry and detainer of the premises, and, waiving
notice, shall be subject to eviction with due process of law.
13. In the event of any dispute arising under the terms of this sublease,
or in the event of non-payment of any sums arising under this sublease and in
the event the matter is turned over to an attorney, the party prevailing in such
dispute shall be entitled, in addition to other damages or costs, to receive
reasonable attorney's fees from the other party.
14. In the event any payment required hereunder is not made within ten
(10) days after the payment is due, a late charge in the amount of five percent
<PAGE>
(5%) of the payment will be due immediately by the Sublessee.
15. If (1) any petition shall be filed by or against Sublessee to declare
Sublessee a debtor under the Federal Bankruptcy Code, for the reorganization or
rehabilitation of Sublessee or to delay, reduce or modify Sublessee's debts or
obligations, or if any petition shall be filed or other action taken to
reorganize or modify Sublessee's capital structure if Sublessee is a corporation
or other entity, or if Sublessee be declared insolvent according to law; and (2)
the Landlord under the Primary Lease terminates the lease between it and
Sublessee with respect to the remainder of the floor on which the premises are
located, Lessee may declare this Sublease ended, and all rights of the Sublessee
shall terminate and cease.
1. ____ Sublessee agrees to carry liability insurance in the amount of $2
million or more, naming the Lessee as additional insured.
THIS SUBLEASE shall be binding on the parties, their personal
representatives, successors and assigns.
ADDITIONAL PROVISIONS:
1. ____ TENANT IMPROVEMENTS. Lessee agrees to complete tenant improvements on
behalf of Sublessee per the attached floor plan (see Exhibit A). Said
improvements shall be constructed by Lessee's contractors with a estimated
budget of $91,241.00. Any savings from this budgetary amount shall inure to the
benefit of Lessee. Lessee is responsible for all construction costs and design
fees per final construction documentation which shall be mutually agreed upon.
2. ____ OPERATING EXPENSES. Sublessee shall be responsible for its share of the
operating expenses as specified in the Primary Lease, except that Sublessee
shall have a 1996 base year expense stop. Sublessee shall pay any increases in
the operating expenses over Sublessee's base year expense stop. Lessee shall
pay, throughout the term of this sublease, the difference between the expense
stop in the primary lease and the 1996 base year expense stop.
3. FLOORPLATE. The floor plan (Exhibit A) by W.E. Kieding Associates
is attached and made a part hereof shall define the premises subleased by
Sublessee from Lessee.
4. PARKING. Lessee will provide three (3) structured surface spaces at no
charge for the term of this Sublease.
5. ____ This Sublease is subject to Sublessee executing a Lease modification
modifying its existing lease relating to the remainder of the floor on which the
premises are located extending that lease until at least October 31, 2001 and
<PAGE>
providing for the lease of the premises from August 1, 2000 until at least
October 31, 2001. In the event the Lease modification is not executed by October
1, 1996, this Sublease shall be void.
6. ____ Lessee shall not exercise any right to terminate the Primary Lease
pursuant to Paragraph 18 (Condemnation) or Paragraph 12.1 (Repair of Damage to
Premises) of the Primary Lease with respect to the premises without the prior
written consent of the Sublessee.
7. ____ Lessee shall not exercise any "Early Termination" rights in the Primary
Lease, including rights described in Paragraph 23.06 of the Primary Lease, with
respect to the premises without the prior written consent of Sublessee.
8. ____ If service is interrupted as described in Paragraph 7.5 of the Primary
Lease, and if the premises remain unusable for their intended purpose as a
result of such failure, interruption or reduction for a continuous period
exceeding one hundred twenty (120) days and Sublessee does not occupy the
premises as a result thereof, and Sublessee exercises its right to terminate its
lease for the remainder of the floor on which the premises are located,
Sublessee may terminate this Sublease upon ten (10) days prior written notice.
9. ____ Lessee warrants that it is not currently in default under the terms of
the Primary Lease. Lessee shall remain responsible for and shall timely pay to
the landlord under the Primary Lease all payments required under the Primary
Lease. If Lessee shall fail to make such payments, Sublessee may make payments
required under the Primary Lease directly to the landlord under the Primary
Lease.
10. Lessee shall be responsible for all broker fees in connection with this
Sublease, including fees due Commercial Broker Associates subject to the terms
and conditions of the separate commission agreement between LundeCommercial and
Commercial Broker Associates.
11. No waiver by Lessee of any breach by Sublessee of any term, condition or
covenant of this Sublease or of the Primary Lease shall constitute a waiver of
any other breach by Sublessee of any such term, condition or covenant.
_____________________________________ Date_____________________________
SUBLESSEE
\_____________________________________ Date _____________________________
LESSEE
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 7,127
<SECURITIES> 0
<RECEIVABLES> 12,881
<ALLOWANCES> 0
<INVENTORY> 746
<CURRENT-ASSETS> 20,945
<PP&E> 218,900
<DEPRECIATION> 10,436
<TOTAL-ASSETS> 232,937
<CURRENT-LIABILITIES> 18,021
<BONDS> 131,264
0
4
<COMMON> 0
<OTHER-SE> 70,682
<TOTAL-LIABILITY-AND-EQUITY> 232,937
<SALES> 35,569
<TOTAL-REVENUES> 36,709
<CGS> 25,201
<TOTAL-COSTS> 31,315
<OTHER-EXPENSES> 367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,192
<INCOME-PRETAX> (5,247)
<INCOME-TAX> (713)
<INCOME-CONTINUING> (4,534)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,534)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
