<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
AMENDMENT NO. 2
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period from _______________ to _______________.
Commission file number 0-19753
---------------------------
GOTHIC ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2663839
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5727 SOUTH LEWIS, #700, TULSA, OKLAHOMA 74105-7148
(Address of principal executive offices)
918-749-5666
(Registrant's telephone number, including area code)
Check whether the issuer (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 .
-------------- ------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 7, 1996, 12,353,190 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
FORM 10-QSB/A
AMENDMENT NO. 2
INTRODUCTION
This amendment to Part 1, Items 1 and 2 of Gothic Energy Corporation's quarterly
filing on Form 10-QSB for the quarterly period ended June 30, 1996 includes
changes from the previous filing to reflect an imputed dividend of $359,740 and
$215,844 on the Company's 7 1/2% Cummulative Covertible Preferred Stock for the
six months and quarter ended June 30, 1996, respectively.
<PAGE>
GOTHIC ENERGY CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Unaudited Balance Sheets
June 30, 1996 and December 31, 1995 3
Consolidated Unaudited Statements of Operations
Six Months ended June 30, 1996 and 1995 4
Consolidated Unaudited Statements of Operations
Three Months ended June 30, 1996 and 1995 5
Consolidated Unaudited Statements of Cash Flows
Six Months ended June 30, 1996 and 1995 6
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis or
Plan of Operations 10
PART II - OTHER INFORMATION PAGE
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities 14
Item 3 - Defaults Upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
5/23/97
<TABLE>
<CAPTION>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, December 31,
ASSETS 1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 142,811 $ 157,559
Oil and gas receivable 2,743,973 295,344
Receivable from officers and
employees 25,861 16,459
Other 77,934 74,697
----------- -----------
Total current assets 2,990,579 544,059
Property and equipment:
Oil and gas properties on full cost method 32,518,219 8,640,480
Equipment, furniture and fixtures 265,576 135,807
Accumulated depreciation and depletion (2,341,414) (780,414)
----------- -----------
Property and equipment, net 30,442,381 7,995,873
Notes receivable:
Affiliate - 123,000
Other 61,648 61,648
Investment - 200,000
Other assets, net 1,660,752 377,541
----------- -----------
Total assets $35,155,360 $ 9,302,121
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade $ 712,037 $ 1,019,543
Oil and gas revenue payable 1,762,069 94,841
Accrued liabilities 116,337 516,176
Notes payable 25,000 2,900,000
Current portion long-term debt 4,033,895 2,220,000
----------- -----------
Total current liabilities 6,649,338 6,750,560
Long-term debt 13,073,696 3,025,573
Gas imbalance liability 1,189,956 -
Stockholders' equity:
Preferred stock, par value $.05,
authorized 500,000 shares; issued and outstanding
5,540 shares 277 -
Common stock, par value $.01, authorized 30,000,000
shares; issued and outstanding 12,353,190
and 5,501,785 shares 123,532 55,018
Additional paid in capital 32,890,587 13,965,236
Accumulated deficit (18,772,026) (14,494,266)
----------- -----------
Total stockholders' equity 14,242,370 (474,012)
----------- -----------
Total liabilities and
stockholders' equity $35,155,360 $ 9,302,121
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
<CAPTION>
GOTHIC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the six months ended
June 30,
-------------------------
1996 1995
----------- ------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 4,343,126 $ 487,033
Well operations 483,865 12,104
Interest and other income 31,642 7,296
----------- -----------
Total revenues 4,858,633 506,433
Costs and expenses:
Lease operating expenses 2,059,735 275,071
Depletion, depreciation and amortization 1,586,782 175,900
Selling, general and administrative expense 818,324 457,421
Provision for impairment of oil and gas properties 5,050,000 486,000
----------- -----------
Operating loss (4,656,208) (887,959)
Interest expense 648,261 527,265
----------- -----------
Loss before income taxes and extraordinary item $(5,304,469) $(1,415,224)
Income tax benefit 2,992,547 -
----------- -----------
Loss before extraordinary item (2,311,922) (1,415,224)
Loss on early extinguishment of debt 1,432,973 -
----------- -----------
Net loss $(3,744,895) $(1,415,224)
Preferred dividend 173,125 -
Preferred dividend - amortization of
preferred discount 359,740 -
----------- -----------
Net loss available for common shares $(4,277,760) $(1,415,224)
=========== ===========
Loss per common share before
extraordinary item (A) (.26) (.41)
=========== ===========
Loss per common share $ (.39) $ (.41)
=========== ===========
Weighted average common shares outstanding 10,954,947 3,422,580
=========== ===========
</TABLE>
(A) Loss per common share before extraordinary item is computed after giving
effect to the preferred dividends, both actual and imputed.
See accompanying notes
4
<PAGE>
GOTHIC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
June 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 2,734,910 $ 349,506
Well operations 322,652 12,104
Interest and other income 30,485 3,994
----------- ----------
TOTAL REVENUES 3,088,047 365,604
COSTS AND EXPENSES:
Lease operating expenses 1,176,638 188,602
Depletion, depreciation and amortization 960,415 115,000
Selling, general and administrative expense 412,017 224,487
----------- ----------
Operating income (loss) 538,977 (162,485)
Interest expense 326,716 477,955
----------- ----------
NET INCOME (LOSS) $ 212,261 $ (640,440)
PREFERRED DIVIDEND 103,875 -
PREFERRED DIVIDEND - AMORTIZATION OF
PREFERRED DISCOUNT 215,844 -
----------- -----------
NET LOSS AVAILABLE FOR COMMON SHARES (107,458) (640,440)
=========== ==========
LOSS PER COMMON SHARE $ (0.01) $ (0.17)
=========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,295,564 3,774,713
=========== ==========
</TABLE>
See accompanying notes
5
<PAGE>
<TABLE>
<CAPTION>
GOTHIC ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the six months ended
June 30,
-------------- --------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,744,895) $ (1,415,224)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 1,586,782 175,900
Amortization of discount and loan costs - 375,625
Provision for impairment of oil and gas properties 5,050,000 486,000
Deferred income tax benefit (2,992,547) -
Loss on early extinguishment of debt 1,432,973 -
Changes in assets and liabilities:
Increase in accounts receivable (1,258,503) (279,167)
Decrease in other current assets 13,823 (42,372)
Increase (decrease) in accounts and
revenues payable 53,129 245,070
Decrease in accrued liabilities (753,874) 99,162
Decrease in other assets 205,700 -
------------ ------------
Net cash used by operating activities (407,412) (355,006)
Cash flows from investing activities:
Proceeds from sale of investment 200,000 -
Proceeds from collection on note receivable 123,000 -
Proceeds from sale of property 191,239 129,328
Purchase of property and equipment (7,962,335) (10,403,319)
Property development (347,423) (138,473)
Acquisition of business, net of cash acquired (17,592,973) -
------------ ------------
Net cash used by investing activities (25,388,492) (10,412,464)
Cash flows from financing activities:
Payments on short-term debt (1,560,000) (150,000)
Proceeds of short-term debt - 2,000,000
Payments on long-term debt (7,608,983) (275,502)
Proceeds of long-term debt 18,230,195 6,885,210
Proceeds from sale of common stock, net 13,141,368 1,724,000
Proceeds from sale of preferred stock, net 3,997,430 -
Payment of Dividends (173,125) -
Other (245,729) (145,056)
------------ ------------
Net cash provided by financing activities 25,781,156 10,038,652
Net change in cash and cash equivalents (14,748) (728,818)
Cash and cash equivalents, beginning of period 157,559 824,978
------------ ------------
Cash and cash equivalents, end of period $ 142,811 $ 96,160
============ ============
</TABLE>
See accompanying notes
6
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL AND ACCOUNTING POLICIES
BUSINESS - The consolidated financial statements include the accounts of
Gothic Energy Corporation, (the "Company"), and its subsidiaries, Gothic Energy
of Texas, Inc. ("Gothic Texas"), since its inception in 1995 and Buttonwood
Energy Corporation and its subsidiaries Buttonwood Petroleum, Inc. and Dakota
Services, Inc. ("Buttonwood") since their acquisition on January 30, 1996.
Since November 1994, the Company has been primarily engaged in the business of
acquiring, developing and exploiting oil and gas reserves.
PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The December 31, 1995 consolidated balance sheet data was derived
from the audited financial statements but does not include all disclosures
required by generally accepted accounting principles. The condensed financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
In the opinion of management of the Company, the accompanying financial
statements contain all adjustments, none of which were other than normal
recurring accruals, necessary to present fairly the financial position of the
Company as of June 30, 1996, and the results of its operations and cash flows
for the periods ended June 30, 1996 and 1995. The results of operations for the
periods represented are not necessarily indicative of the results of operations
to be expected for the full year.
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS
COMSTOCK ACQUISITION - On May 16, 1996 the Company completed the
acquisition, effective as of January 1, 1996, from Comstock Oil and Gas, Inc.
and Comstock Offshore Energy, Inc. ("Comstock"), of various working interests in
145 producing oil and gas properties. The Company will operate 70 of the wells.
The purchase price for the properties acquired was $6,600,000, subject to
certain post-closing adjustments which reduced the amount paid to $6,430,195.
Substantially all of the properties acquired are located in the Anadarko Basin
of western Oklahoma and the Arkoma Basin of eastern Oklahoma and Arkansas. The
purchase was financed through an increase in the amount of borrowings under the
Company's Loan Agreement dated January 19, 1996 with Bank One, Texas, N.A.
STRATUM OVERRIDE ACQUISITION - On May 16, 1996 the Company completed the
acquisition of the Stratum Group, L.L.C. ("Stratum") 7% overriding royalty
interests in the Company's Johnson Ranch wells. The purchase price for the
interests acquired was $800,000. The purchase price was financed through an
increase in the Company's borrowing facility at Bank One, Texas, N.A. and from
the Company's working capital.
7
<PAGE>
BUTTONWOOD ACQUISITION - On January 30, 1996 the Company completed the
acquisition of Buttonwood Energy Corporation (the "Buttonwood Acquisition"), at
a price of $17,912,500, net of a $1,000,000 deposit paid in 1995 and charged to
expense. The aggregate purchase price of $18,008,712 including acquisition
costs of $389,212, was allocated to he assets acquired and liabilities assumed
as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 1,632,327
Property and equipment 20,784,016
Other assets 1,435,500
Current liabilities (1,660,628)
Gas imbalance (1,189,956)
Deferred income taxes (2,992,547)
------------
Aggregate purchase price 18,008,712
Less: Cash acquired (415,739)
------------
Net cash paid $ 17,592,973
============
</TABLE>
The Buttonwood Acquisition was financed with proceeds from a public offering
of the Company's common stock and preferred stock, a bridge financing and the
establishment of a credit facility with Bank One, Texas. The public offering
and the preferred stock financing, generated net proceeds of $17,216,000. The
remaining purchase price was paid out of the proceeds from the Bank One, Texas
Credit Facility. The acquisition was accounted for under the purchase method
and, accordingly, results of operations of the acquired operations are included
in the Company's results of operations since the date of acquisition.
NOTE 3. FINANCING ACTIVITIES
BANK ONE LOAN - Effective January 30, 1996, the Company entered into an $11
million revolving credit facility with Bank One Texas. The proceeds of the
borrowing were used to finance a portion of the purchase price of the Buttonwood
Acquisition , and to repay outstanding indebtedness to Stratum Group, L.L.C.
("Stratum"). On May 16, 1996 the revolving credit facility was increased to
$17.7 million. The proceeds from this increase were used to finance the
purchase price of the Comstock and Stratum acquisitions (See Note 2). Of the
increase $669,895 was part of a one-time $1 million Special Advance which must
be repaid in full prior to October 1, 1996 and bears interest at a rate of 5%
over the bank's base rate. The Company anticipates repaying the special advance
out of excess working capital and through the sale of marginal properties. The
remaining increase was granted under the original terms of the credit facility.
The total amount outstanding on the Bank One Loan was $17,092,595 at June 30,
1996.
The terms of the Bank One Loan provide for principal reduction payments at the
rate of $232,000 per month, plus interest with all outstanding principal and
interest due and payable on January 30, 1999. Interest is payable at the option
of the Company, either at the rate of 1% over Bank One's base rate or up to
3.75% (based on the principal balance outstanding), over the rate for borrowed
dollars by the lending bank in the London Interbank Market. The indebtedness is
collateralized by first liens on all of the Company's oil and gas properties,
including those acquired from Buttonwood and Comstock. The loan agreement
relating to the credit facility includes various affirmative and negative
covenants including, among others, the requirements that the Company maintain
certain ratios of current assets to current liabilities, and debt service
coverage. The loan agreement also established an amount of minimum tangible net
worth and places a limitation on annual selling, general and administrative
expenses. Material breaches of these or other covenants which are not cured or
waived could result in this indebtedness becoming immediately due and payable
and empowering the lender to foreclose against the collateral for the loan.
8
<PAGE>
STRATUM LOAN - On June 2, 1995, Gothic Texas entered into an agreement with
Stratum in which Stratum agreed to loan Gothic Texas a maximum amount of
$8,131,500, of which $6,756,500 was drawn and used to complete the Johnson Ranch
Acquisition. At January 30, 1996 the amount outstanding was $6,575,687. On
that date the Company, with proceeds from its new credit facility, paid Stratum
in full and terminated its loan agreement with them. This transaction resulted
in a loss on extinguishment of debt of $1,432,973.
Effective January 30, 1996 Quest Capital Corporation ("Quest"), converted
$1,290,000 of its $1,850,000 note into 1,290 shares of the Company's 7 1/2%
Cumulative Convertible Preferred Stock. The remaining $560,000 of indebtedness
and $265,000 of accrued interest and other amounts due Quest were converted into
a subordinated note in the principal amount of $825,000 which was paid in full
by the Company on March 13, 1996.
BRIDGE FINANCING - A $1,000,000 note owing to Quest, Epoch Capital
Corporation and another lender , along with accrued interest, was paid in full,
on January 30, 1996 at the closing of the public offering by the Company.
PUBLIC OFFERING - During the quarter ended March 31, 1996, the Company
completed a public offering of 2,545,000 Units at a price of $6.00 per Unit.
Each Unit consisted of three shares of the Company's $.01 par value common stock
and three redeemable common stock purchase warrants, each exercisable for one
share of common stock at $2.40 per share. The offering netted the Company
approximately $12,970,000, which, together with the proceeds from the credit
facility and preferred stock financing, was applied to the purchase of
Buttonwood and the repayment of indebtedness.
PREFERRED STOCK OFFERING - On January 30, 1996 the Company completed a
preferred stock financing of 5,540 shares of the Company's 7 1/2% Cumulative
Convertible Preferred Stock. The financing included 1,290 shares issued to Quest
in exchange for $1,290,000 principal amount of a note. The remaining 4,250
shares were sold for an aggregate cash price of $4,250,000. The 5,540 shares of
7 1/2% Cumulative Convertible Preferred Stock issued are convertible commencing
December 31, 1996, into shares of the Company's Common Stock at a conversion
price per share of Common Stock of $2.00. On the basis of the above mentioned
conversion price, an aggregate of 2,770,000 shares of Common Stock would be
issuable on conversion. Due to the fact that the preferred stock is convertible
into the Company's common stock at a discount from market, the Company has
computed an imputed dividend of $791,429, which is based on the common stock
market value of $2.00 per share at the date of issuance and a 12 1/2% discount.
The discount is being accreted as an imputed dividend through December 31, 1996
and accordingly affects income (loss) available for common shares.
NOTE 4. CONTINGENCIES
A former officer and employee of the company, on May 6, 1996, commenced an
arbitration proceeding under the Rules of the American Arbitration Association
against the Company seeking to recover damages for an alleged breach of contract
and intentional interference with contract. The damages sought are
approximately $384,000. The Company believes that it has adequate basis to
prove that the termination for cause was appropriate.
NOTE 5. SUBSEQUENT EVENTS
ADDITIONAL ACQUISITIONS - Subsequent to the quarter ending June 30, 1996,
the Company completed the acquisition of working interests from various sellers,
in approximately 120 wells in the Anadarko Basin of Western Oklahoma, and the
Arkoma Basin of Eastern Oklahoma and Arkansas. The purchase price of the
transactions was approximately $3.3 million and was financed from the Company's
working capital and an increase in the revolving credit facility with Bank One,
Texas, N.A. The loan facility was increased to approximately $19.3 million on
July 31, 1996, with $18.5 million being under the original terms of the loan and
$800,000 falling under the terms of the Special Advance (See Note 4). The
Company's monthly principal payment will increase to $290,000 beginning
September 1, 1996.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is management's discussion and analysis of certain significant
factors which have affected the Company's earnings, financial condition and
liquidity during the periods included in the accompanying Consolidated Financial
Statements.
On January 19, 1995, the Company completed its first acquisition of oil and
gas reserves, the Egolf Acquisition, and on June 2, 1995, the Company completed
a second acquisition of oil and gas reserves, the Johnson Ranch Acquisition.
On January 30, 1996, the Company completed the following transactions: (i)
it completed the acquisition of Buttonwood Energy Corporation (the "Buttonwood
Acquisition"); (ii) it borrowed $11 million pursuant to a credit facility
(the "Credit Facility") entered into with a bank; (iii) it completed the
public sale of securities (the "Offering") yielding net proceeds of
approximately $12,970,000; and (iv) it sold 5,540 shares of 7 1/2% Cumulative
Preferred Stock (the "Preferred Stock Financing") for aggregate consideration of
$5,540,000 inclusive of $1,290,000 principal amount of a note of the Company
exchanged for the preferred shares.
On May 16, 1996, the Company completed the acquisition from Comstock of
various working interests in 145 producing oil and gas properties for the
purchase price of $6,430,195. In addition, on May 16, 1996, the Company
completed the acquisition of the Stratum 7% overriding royalty interests in the
Company's Johnson Ranch wells for the purchase price of $800,000. The purchase
prices were financed through an increase in the Company's borrowing facility at
Bank One, Texas, N.A. and from the Company's working capital.
RESULTS OF OPERATIONS
- ---------------------
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues were $4,858,633 for the six months ended June 30, 1996, as compared
to $506,433 for the same period ended June 30, 1995. This increase is primarily
the result of acquisitions of oil and gas properties made by the Company since
June 1995, as described above. Higher prices for oil and gas sales also
contributed to the increase. Oil and gas revenues for the period ended June 30,
1996 were $4,343,126, with $1,577,120 coming from oil sales and $2,766,006 from
gas sales. Oil sales were based on the sale of 82,726 barrels at an average
price of $19.06 per barrel. Gas sales were based on the sale of 1,399,688 mcf
at an average price of $1.98 per mcf.
The Company incurred lease operating expenses during the six months ended June
30, 1996 of $2,059,735. This compares to $275,071 for the same period in 1995.
This increase is also a result of the acquisitions completed since June 1995,
as described above.
Depletion, depreciation and amortization expense increased to $1,586,782 for
the six months ended June 30, 1996 from $175,900 for the same period in the
prior year. Depletion of the oil and gas properties increased to $1,543,000 for
the six months ended June 30, 1996 from $165,000 for the comparable period in
1995 primarily due to the acquisitions since June 1995, as described above.
Selling, general and administrative costs were $818,324 for the six months
ended June 30, 1996, as compared to $457,421 for the six months ended June 30,
1995. The major reason for this increase is the addition of personnel and
related costs due to acquisitions made since June of 1995. The increase also
includes some nonrecurring costs related to the completion of the Buttonwood
transaction.
With the recording of the Buttonwood acquisition, and based on the reserve
report for the quarter ending March 31, 1996, the Company recorded a $5,050,000
provision for impairment of oil and gas properties at March 31, 1996. Such
provision was reflected in the balance sheet as a reduction of the cost of oil
and gas properties. Estimates of oil and gas reserves are imprecise. Changes in
the estimates or declines in oil and natural gas prices could cause the Company
in the near-term to reduce the carrying value of its oil and natural gas
properties.
Management of the Company evaluates oil and gas reserve acquisition
opportunities in the light of many factors, only a portion of which may be
reflected in the amount of proved oil and gas reserves proposed to be acquired.
In determining the purchase price to be offered, the Company does not solely
rely on proved oil and gas reserves nor the value of such reserves, as defined
and determined in accordance with Regulation S-X Rule 4-10. Factors considered
include, among others, the probable reserves of the interests inteneded to be
acquired, anticipated efficiencies and cost reductions that can be made in
operating the producing properties, additional reserves that management believes
can be proven relatively inexpensively based on management's knowledge of the
area where the interests are located and existing producing properties owned by
the Company. Management does not necessarily conclude that an acquisition is not
favorable because there may be a full cost ceiling write-down associated with it
(in fact the Company does not perform a ceiling test for specific properties
acquired because the ceiling test is performed at each quarter and year end for
all of the Company's properties included in its cost center and is based on
prices for oil and gas as of that date which may be higher or lower than the
prices used when evaluating potential acquisitions) but will review the
transaction in the light of proved and probable reserves, historic and seasonal
fluctuations in the prices of oil and gas, future prices for oil and gas, the
factors described above as well as other factors that may relate to the specific
properties under review. Accordingly, although the Company does not anticipate
any further full cost ceiling write-downs which may be indirectly attributed to
the Buttonwood Acquisition, the Company may, however, experience ceiling test
write-downs in the future arising out of other acquisitions.
10
<PAGE>
Interest and financing costs increased to $648,261 for the six months ended
June 30, 1996. This compares to $527,265 for the same period in 1995. The
increase is the result of interest costs related to the financing used by the
Company to acquire oil and gas properties.
The Company recorded an extraordinary loss of $1,432,973 on the early
extinguishment of debt during the quarter ended March 31, 1996, with the payoff
of the Stratum loan. The Company also recognized $173,125 in preferred dividends
and $359,740 in amortization of preferred discount on its 7 1/2% cumulative
preferred stock during the six months ended June 30, 1996.
THREE MONTHS ENDED JUNE 30, 1996 AS COMPARED TO THREE MONTHS ENDED JUNE 30,
1995.
Revenues were $3,088,047 for the three months ended June 30, 1996, as compared
to $365,604 for the same period ended June 30, 1995. This increase is the
result of acquisitions of oil and gas properties made by the Company since June
0f 1995, as described above. Oil and gas revenues for the period ended June 30,
1996 were $2,734,910, of which $900,570 came from oil sales and $1,834,340 from
gas sales. Oil sales were based on the sale of 46,919 barrels at an average
price of $19.19 per barrel. Gas sales were based on the sale of 905,287 mcf at
an average price of $2.03 per mcf.
The Company incurred lease operating expenses during the three months ended
June 30, 1996 of $1,176,638. This compares to $188,602 for the same period in
1995. This increase is also a result of the acquisitions completed since June
1995, as described above.
Depletion, depreciation and amortization expense was $960,415 for the three
months ended June 30, 1996 as compared to $115,000 for the same period in the
prior year. Such increase was primarily due to higher volumes of oil and gas
sold related to the properties acquired since June of 1995.
Selling, general and administrative costs were $412,017 for the three months
ended June 30, 1996, as compared to $224,487 for the three months ended June 30,
1995. The major reason for this increase is the addition of personnel and
related costs due to acquisitions made since June of 1995.
Interest and financing costs decreased $151,239 to $326,716 for the three
months ended June 30, 1996 as compared to the same period in 1995. This is a
result of the Company's debt restructuring, which was completed in January 1996,
and lower financing costs.
The Company also recognized $103,875 in preferred dividends and $215,844 in
amortization of preferred discount on its 7 1/2% cumulative preferred stock
during the three months ended June 30, 1996.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
GENERAL
- -------
The Company's capital requirements relate to the acquisition, exploration,
enhancement, development and operation of oil and gas producing properties. In
general, because oil and gas reserves the Company has acquired and intends to
acquire are depleted by production over time, the success of its business
strategy is dependent upon a continuous acquisition, exploitation, enhancement,
development and operation program. In order to achieve profitability and
generate cash flow, the Company will be dependent upon acquiring or developing
additional oil and gas properties or entering into joint oil and gas well
development arrangements. The Company will continue to require access to debt
and equity capital or the availability of joint venture development
arrangements, among other possible sources, to pursue its business strategy of
additional property acquisition and development. The Company has no present
arrangements to raise additional capital from the sale of its securities and no
assurance can be given that the Company will be able to obtain additional
capital or enter into joint venture development arrangements on
11
<PAGE>
satisfactory terms to implement the Company's business strategy. The Company
has funded its recent capital needs through the issuance of capital stock and
borrowings. Without raising additional capital or entering into joint oil and
gas well development arrangements, the Company will be unable to acquire
additional producing oil and gas properties and its ability to develop its
existing oil and gas properties will be limited to the extent of the available
cash flow. No assurance can be given as to the availability or terms of any
such additional capital or joint development arrangements or that such terms as
are available may not be dilutive to the interests of the Company's
stockholders.
At June 30, 1996 the Company had a cash position of $142,811 and a working
capital deficit of $3,658,759 including $4,033,895 of current portion of long-
term debt.
ACQUISITION FINANCING
- ---------------------
Under the terms of the Buttonwood Acquisition agreement, which was completed
on January 30, 1996, the Company paid $17,912,500, in consideration for the
acquisition, net of a $1,000,000 deposit paid in 1995 and charged to expense.
The Bank One Credit Facility currently enables the Company to borrow up to
$19.3 million. The proceeds of the borrowing were used on January 30, 1996 to
finance a portion of the purchase price for the Buttonwood Acquisition and repay
outstanding indebtedness. Additional proceeds were used on May 16, 1996 to
finance the purchase of the Comstock and Stratum well interests, and on July 31,
1996 to finance the acquisition of well interests from various sellers. The
terms currently provide for amortization payments at the rate of $232,000 per
month through August 1996 and $290,000 per month commencing September 1, 1996,
with all outstanding principal and interest due and payable on January 30, 1999.
Interest is payable, at the option of Company, either at the rate of 1% over the
lending bank's base rate or up to 3.75% (based on the principal balance
outstanding) over the rate for borrowed dollars by the lending bank in the
London Interbank market. The indebtedness is collateralized by first liens on
all of the Company's oil and gas properties. The loan agreement relating to the
Credit Facility includes various affirmative and negative covenants, including,
among others, the requirements that the Company (i) maintain a ratio of current
assets to current liabilities, as defined, of not less than 1.0 to 1.0, (ii)
maintain a debt service coverage ratio of net cash flow per quarter to required
quarterly reduction of indebtedness of not less than 1.10 to 1.0, (iii)
maintain minimum tangible net worth at the end of each fiscal quarter of
$10,250,000, plus certain percentages of net income and proceeds received from
the sale of securities, and (iv) maintain selling, general and administrative
expenses per quarter not in excess of 25% of consolidated net revenues.
Material breaches of these or other covenants which are not cured or waived
could result in a default under the loan agreement resulting in this
indebtedness becoming immediately due and payable and empowering the lender to
foreclose against the collateral for the loan.
Pursuant to the Preferred Stock Financing, the Company issued and sold 5,540
shares of its 7 1/2% Cumulative Convertible Preferred Stock for an aggregate
consideration of $5,540,000, of which $4,250,000 was paid in cash, and
$1,290,000 was paid by Quest by exchange of $1,290,000 of outstanding principal
amount of indebtedness held by Quest for 1,290 shares. The proceeds were used
by the Company, together with the net proceeds from the offering and the Credit
Facility, for the balance of the purchase price of the Buttonwood Acquisition
and to repay indebtedness and expenses of the 1996 transactions. The 5,540
shares of 7 1/2% Cumulative Convertible Preferred Stock are convertible,
commencing December 31, 1996, into shares of the Company's Common Stock at a
conversion price per share of Common Stock equal to the lesser of (i) $2.00 or
(ii) a price equal to the average of the closing prices of the Company's Common
Stock during the 30 business days prior to the day the shares are converted less
a discount of 12 1/2%. The number of shares of Common Stock to be issued on
conversion is determined by multiplying the number of shares of 7 1/2%
Cumulative Convertible Preferred Stock to be converted by $1,000 and dividing
the result by the conversion price in effect. The shares pay a cumulative
preferred dividend of 7 1/2% of the stated value per annum payable semi-
annually. The shares of 7 1/2% Cumulative Convertible Preferred Stock have no
voting rights. In addition, due to the fact that the preferred stock is
convertible into the Company's common stock at a discount from market, the
Company has computed an imputed dividend of $791,429, which is based on the
common stock market value of $2.00 per share at the date of issuance and a
12 1/2% discount. The discount is being accreted as an imputed dividend through
December 31, 1996 and accordingly affects income (loss) available for common
shares.
12
<PAGE>
After reflecting the exchange of $1,290,000 principal amount of indebtedness
for 1,290 shares of 7 1/2% Cumulative Convertible Preferred Stock in the
Preferred Stock Financing, the remaining $560,000 of principal and accrued
interest of $173,000 owing to Quest on a note, and other obligations owing to
Quest aggregating $92,000 were replaced at the closing of the Preferred Stock
Financing with a new subordinated note in the principal amount of $825,000
bearing interest at 7 1/2% per annum, due, together with all accrued interest
thereon, ten years from the date it is issued. The $825,000 note was repaid on
March 13, 1996.
CASH FLOW
- ---------
Net cash used in operating activities increased to $407,412 for the six months
ended June 30, 1996 as compared to net cash used of $355,006 for same period in
1995. This was primarily a result of an increase in cash flow from operations
before changes in operating assets and liabilities, offset by an increase in
working capital.
The Company used $25,388,492 of net cash in investing activities for the first
six months of 1996 compared with $10,412,464 for the same period in 1995. This
was primarily due to the acquisition of Buttonwood, net of cash acquired, for
$17,592,973, the acquisition of Comstock for $6,430,195, net of adjustments, and
oil and gas well enhancements in the amount of $347,423 and other producing
property acquisitions of $1,532,140.
Net cash provided by financing activities for the six months ended June 30,
1996 was $25,781,156 compared to $10,038,652 provided in 1995. During the six
months ended June 30, 1996 the Company received proceeds from long-term debt of
$18,230,195, proceeds from the issuance of common stock of $13,141,368 and
proceeds from the issuance of preferred stock of $3,997,430. The Company also
used funds of $9,168,983 to pay short and long-term debt during the period, and
$173,125 to pay preferred dividends.
CAUTIONARY STATEMENT - Reference is made to the Cautionary Statement for
------------------------
Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation
- -----------------------------------------------------------------------------
Reform Act of 1995 contained in the Company's Annual Report on Form 10-KSB for
- ------------------
the year ended December 31, 1995, which Cautionary Statement is incorporated
herein by reference.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) A former officer and employee of the company, Larry L. Terry, on May 6,
1996, commenced an arbitration proceeding under the Rules of the American
Arbitration Association against the Company seeking to recover damages for an
alleged breach of contract and intentional interference with contract. The
damages sought are approximately $384,000. The Company believes that it has
adequate basis to prove that the termination of Mr. Terry for cause was
appropriate.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1996, the Company filed a
Current Report on Form 8-K dated May 16, 1996, reporting under
"Item 2 - Acquisition or Disposition of Assets" and "Item 7 -
Financial Statements and Exhibits".
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
GOTHIC ENERGY CORPORATION
DATE: MAY 29, 1997 BY: /S/ MICHAEL PAULK
------------------------------------
MICHAEL PAULK,
PRESIDENT, CHIEF EXECUTIVE OFFICER
DATE: MAY 29, 1997 BY: /S/ ANDREW MCGUIRE
------------------------------------
ANDREW MCGUIRE,
CONTROLLER
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 142,811
<SECURITIES> 0
<RECEIVABLES> 2,839,834
<ALLOWANCES> (70,000)
<INVENTORY> 0
<CURRENT-ASSETS> 2,990,579
<PP&E> 32,783,795
<DEPRECIATION> (2,341,414)
<TOTAL-ASSETS> 35,155,360
<CURRENT-LIABILITIES> 6,649,338
<BONDS> 0
0
277
<COMMON> 123,532
<OTHER-SE> 14,118,561
<TOTAL-LIABILITY-AND-EQUITY> 35,155,360
<SALES> 4,343,126
<TOTAL-REVENUES> 4,858,633
<CGS> 0
<TOTAL-COSTS> 2,059,735
<OTHER-EXPENSES> 818,324
<LOSS-PROVISION> 5,050,000
<INTEREST-EXPENSE> 648,261
<INCOME-PRETAX> (5,304,469)
<INCOME-TAX> 2,992,547
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (1,432,973)
<CHANGES> 0
<NET-INCOME> (4,277,760)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
