<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
AMENDMENT NO. 1
[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
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
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GOTHIC ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
OKLAHOMA 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 November 11, 1996, 12,381,857 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
FORM 10-QSB/A
AMENDMENT NO. 1
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 September 30, 1996 includes
changes from the previous filing to reflect an imputed dividend of $575,584 and
$215,844 on the Company's 7 1/2% Cumulative Convertible Preferred Stock for the
nine months and quarter ended September 30, 1996, respectively.
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GOTHIC ENERGY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Unaudited Balance Sheets
September 30, 1996 and December 31, 1995 3
Consolidated Unaudited Statements of Operations
Nine Months ended September 30, 1996 and 1995 4
Consolidated Unaudited Statements of Operations
Three Months ended September 30, 1996 and 1995 5
Consolidated Unaudited Statements of Cash Flows
Nine Months ended September 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 11
PART II - OTHER INFORMATION PAGE
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
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GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
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(UNAUDITED)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 471,419 $ 157,559
Oil and gas receivable 2,377,577 295,344
Receivable from officers and employees 33,607 16,459
Other 34,531 74,697
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TOTAL CURRENT ASSETS 2,917,134 544,059
PROPERTY AND EQUIPMENT:
Oil and gas properties on full cost method 35,593,890 8,640,480
Equipment, furniture and fixtures 308,715 135,807
Accumulated depreciation and depletion (3,051,414) (780,414)
------------ ------------
PROPERTY AND EQUIPMENT, NET 32,851,191 7,995,873
NOTES RECEIVABLE:
Affiliate - 123,000
Other 61,648 61,648
Investment - 200,000
Other assets, net 1,617,704 377,541
------------ ------------
TOTAL ASSETS $ 37,447,677 $ 9,302,121
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY
-----------------------------------
CURRENT LIABILITIES:
Accounts payable trade $ 1,128,075 $ 1,019,543
Revenues payable 1,793,780 94,841
Accrued liabilities 219,420 516,176
Notes payable 25,000 2,900,000
Current portion long-term debt 5,068,202 2,220,000
------------ ------------
TOTAL CURRENT LIABILITIES 8,234,477 6,750,560
LONG-TERM DEBT 13,672,436 3,025,573
GAS IMBALANCE LIABILITY 1,186,273 -
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.05,
authorized 500,000 shares; issued
and outstanding 5,540 shares 277 -
Common stock, par value $.01,
authorized 100,000,000 shares; issued
and outstanding 12,381,857 and
5,501,785 shares 123,819 55,018
Additional paid in capital 33,106,144 13,965,236
Accumulated deficit (18,875,749) (14,494,266)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,354,491 (474,012)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,447,677 $ 9,302,121
============ ============
</TABLE>
See accompanying notes
3
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GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
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<S> <C> <C>
REVENUES:
Oil and gas sales $ 7,270,252 $ 1,221,664
Well operations 754,160 38,563
Interest and other income 48,705 1,139
----------- -----------
TOTAL REVENUES 8,073,117 1,261,366
COSTS AND EXPENSES:
Lease operating expenses 3,481,114 728,961
Depletion, depreciation and 2,318,975 422,550
amortization
Selling, general and administrative 1,250,484 719,383
expense
Provision for impairment of oil and 5,050,000 486,000
gas properties
Provision for impairment of investment - 802,287
Loss on termination of option - 1,850,000
----------- -----------
Operating loss (4,027,456) (3,747,815)
Interest expense 1,061,017 1,282,680
----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM $(5,088,473) $(5,030,495)
INCOME TAX BENEFIT 2,992,547 -
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (2,095,926) (5,030,495)
LOSS ON EARLY EXTINGUISHMENT OF DEBT 1,432,973 -
----------- -----------
NET LOSS $(3,528,899) $(5,030,495)
=========== ===========
PREFERRED DIVIDEND 277,000 -
Preferred dividend-amortization of
preferred discount 575,584 -
----------- -----------
NET LOSS AVAILABLE FOR COMMON SHARES $(4,381,483) $(5,030,495)
=========== ===========
Loss per common share before
extraordinary item (A) (.26) (1.25)
=========== ===========
LOSS PER COMMON SHARE $ (.38) $ (1.25)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,443,994 4,009,315
=========== ===========
</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
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GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
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<S> <C> <C>
REVENUES:
Oil and gas sales $ 2,927,126 $ 734,630
Well operations 270,295 26,459
Interest and other income 17,063 (6,156)
----------- -----------
TOTAL REVENUES 3,214,484 754,933
COSTS AND EXPENSES:
Lease operating expenses 1,421,379 453,890
Depletion, depreciation and amortization 732,193 246,650
Selling, general and administrative expense 432,160 261,962
Provision for impairment of investment - 802,287
Loss on termination of option - 1,850,000
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Operating income (loss) 628,752 (2,859,856)
Interest expense 412,756 417,915
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NET INCOME (LOSS) $ 215,996 $(3,277,771)
PREFERRED DIVIDEND 103,875 -
Preferred dividend-amortization of
preferred discount 215,844 -
----------- -----------
NET LOSS AVAILABLE FOR COMMON SHARES $ (103,723) $(3,277,771)
=========== ===========
LOSS PER COMMON SHARE $ (.01) $ (0.63)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,353,190 5,163,651
=========== ===========
</TABLE>
See accompanying notes
5
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,528,899) $ (5,030,495)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Depreciation and amortization 2,318,975 422,550
Amortization of discount and loan costs - 919,285
Provision for impairment of oil and gas
properties 5,050,000 486,000
Provision for impairment of investment - 802,287
Loss on termination of option - 1,850,000
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 (899,853) (243,848)
Decrease (increase) in other current assets 57,226 (38,365)
Increase in accounts and revenues payable 500,878 573,033
Increase (decrease) in accrued liabilities (754,667) 239,070
Decrease in other assets 226,555 -
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,410,641 (20,483)
NET CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of investment 200,000 -
Proceeds from collection on note receivable 123,000 -
Proceeds from sale of property 991,507 306,318
Purchase of property and equipment (11,552,620) (10,589,675)
Property development (676,216) (368,753)
Acquisition of business, net of cash acquired (17,592,973) -
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (28,507,302) (10,652,110)
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 (8,768,135) (614,366)
Proceeds of long-term debt 21,022,395 7,194,654
Proceeds from sale of common stock, net 13,141,368 1,777,552
Proceeds from sale of preferred stock, net 3,997,430 -
Payment of Dividends (173,125) -
Other (249,412) (198,432)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27,410,521 10,009,408
NET CHANGE IN CASH AND CASH EQUIVALENTS 313,860 (663,185)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 157,559 824,978
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 471,419 $ 161,793
============ ============
</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 September 30, 1996, and the results of its operations and cash
flows for the periods ended September 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
VARIOUS WORKING INTEREST ACQUISITIONS- On August 5, 1996 the Company
completed the acquisition, from various sellers, of working interest in
approximately 120 wells in the Anadarko Basin of Western Oklahoma, and the
Arkoma Basin of Eastern Oklahoma and Arkansas. The Company currently operates
70 of the wells in which the interests were acquired. The purchase price 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. of $2,792,200,
and from the Company's working capital.
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 operates 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>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 the assets acquired and liabilities assumed
as follows:
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
============
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 November 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.
On July 31, 1996 the revolving credit facility was increased to $19.3 million.
The proceeds from this increase were used to finance the purchase of various
working interest in some 120 wells (See Note 2). The total amount outstanding
on the Bank One Loan was $18,726,795 at September 30, 1996.
The terms of the Bank One Loan provide for principal reduction payments at
the rate of $290,000 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. At
September 30, 1996, the Company was not in compliance with its secured bank
loan agreement requiring a 1:1 ratio of current assets to current liabilities.
The Company has obtained a waiver from the bank in regard to this non
compliance.
8
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GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. STOCKHOLDERS' EQUITY
On August 13, 1996 at the Annual Shareholders' meeting, the shareholders
approved; (I) an increase in the number of shares of common stock authorized
from 30,000,000 to 100,000,000; (ii) the 1996 Omnibus Incentive Plan; (iii) the
1996 Non-Employees Stock Option Plan; and (iv) an increase in the shares
reserved for issuance under the 1989 Incentive Stock Option Plan from 1,500,000
to 2,500,000. The shareholders approved the merger of the Company into a newly-
formed wholly-owned subsidiary, incorporated in the State of Oklahoma, which
changed the Company's state of incorporation from Delaware to Oklahoma. This
transaction was accounted for as a combination of entities under common control,
similar to a pooling of interests, and had no effect on the Company's results of
operations or financial position.
The 1996 Omnibus Incentive Plan provides for compensatory awards
representing or corresponding to up to an aggregate of 1,000,000 shares of
Common Stock of the Company to officers, directors and certain other key
employees. Awards may be granted for no consideration and consist of stock
options, stock awards, stock appreciation rights, dividend equivalents, other
stock-based awards (such as phantom stock) and performance awards consisting of
any combination of the foregoing. Generally, options will be granted at an
exercise price equal to the lower of (I) 100% of fair market value of the shares
of Common Stock on the date of grant or (ii) 85% of the fair market value of the
shares of
9
<PAGE>
Common Stock on the date of exercise. Each option will be exercisable for the
period or periods specified in the option agreement, which will generally not
exceed 10 years from the date of grant. No options have been issued under the
Omnibus Incentive Plan.
The 1996 Non-Employee Stock Option Plan provides a means by which non-
employee Directors of the Company and consultants to the Company can be given an
opportunity to purchase stock in the Company. The Plan provides that a total of
1,000,000 shares of the Company's Common Stock may be issued pursuant to
options granted under the Non-Employee Plan, subject to certain adjustments.
The exercise price for each option granted under the Non-Employee Plan will be
not less than the fair market value of the Common Stock underlying the option on
the date of grant. Each option granted under the Non-Employee Plan is 10 years
after the date of grant. Options granted to Directors will terminate to the
extent such options have not been previously exercised thirty (30) days after
the date the Director is no longer a Director of the Company. No options have
been issued under the Non-Employee Plan.
NOTE 5. 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 6. SUBSEQUENT EVENTS
PROPERTY SALE - Subsequent to the quarter ended September 30, 1996, the
Company completed the sale of its interest in approximately 290 wells of which
15 were operated by the Company. The net sales price was $2,080,550. The
Company used $1,143,701 to reduce its revolving credit facility with Bank One
and $444,501 to repay the Bank One Special Advance. The remaining sale proceeds
were used as working capital.
10
<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.
On August 5, 1996 the company completed the acquisition from various
sellers, of working interest in approximately 120 wells in the Anadarko Basin of
Western Oklahoma, and the Arkoma Basin of Eastern Oklahoma and Arkansas. Gothic
currently operates 70 of the wells in which the interests were acquired. The
purchase price of the transaction was approximately $3.3 million. This amount
was financed through an increase in the Company's borrowing facility at Bank
One, Texas N.A. of $2,792,200, and from the Company's working capital.
RESULTS OF OPERATIONS
- ---------------------
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenues were $8,073,117 for the nine months ended September 30, 1996, as
compared to $1,261,366 for the same period ended September 30, 1995. This
increase is primarily the result of acquisitions of oil and gas properties made
by the Company since September 1995, as described above. Higher prices for oil
and gas sales also contributed to the increase. Oil and gas revenues for the
period ended September 30, 1996 were $7,270,252 with $2,648,801 coming from oil
sales and $4,621,451 from gas sales. Oil sales were based on the sale of
131,020 barrels at an average price of $20.22 per barrel. Gas sales were based
on the sale of 2,396,746 mcf at an average price of $1.93 per mcf.
The Company incurred lease operating expenses during the nine months ended
September 30, 1996 of $ 3,481,114. This compares to $ 728,961 for the same
period in 1995. This increase is also a result of the acquisitions completed
since September, 1995, as described above.
Depletion, depreciation and amortization expense increased to $2,318,975
for the nine months ended September 30, 1996 from $422,550 for the same period
in the prior year. Depletion of the oil and gas properties increased to
$2,244,000 for the nine months ended September 30, 1996 from $395,000 for the
comparable period in 1995 primarily due to the acquisitions since September
1995, as described above.
Selling, general and administrative costs were $1,250,484 for the nine
months ended September 30, 1996, as compared to $719,383 for the nine months
ended September 30, 1995. The major reason for this increase is the addition of
personnel and related costs due to acquisitions made since September 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
Interest and financing costs decreased to $1,061,017 for the nine months
ended September 30, 1996. This compares to $1,282,680 for the same period in
1995. The decrease is the result of the Company's debt restructuring which
was completed in January 1996, and lower financing costs.
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 $277,000 in preferred dividends
and $575,584 in amortization of preferred discount on its 7 1/2% cumulative
preferred stock during the nine months ended September 30, 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995.
Revenues were $3,214,484 for the three months ended September 30, 1996, as
compared to $754,933 for the same period ended September 30, 1995. This
increase is the result of acquisitions of oil and gas properties made by the
Company since September 1995, as described above. Oil and gas revenues for the
period ended September 30, 1996 were $2,927,126 of which $1,071,681 came from
oil sales and $1,855,445 from gas sales. Oil sales were based on the sale of
48,294 barrels at an average price of $22.19 per barrel. Gas sales were
based on the sale of 997,058 mcf at an average price of $1.86 per mcf.
The Company incurred lease operating expenses during the three months ended
September 30, 1996 of $1,421,379. This compares to $453,890 for the same period
in 1995. This increase is also a result of the acquisitions completed since
September 1995, as described above.
Depletion, depreciation and amortization expense was $732,193 for the three
months ended September 30, 1996 as compared to $246,650 for the same period in
the prior year. Such increase was primarily due to higher volumes of oil and
gas produced related to the properties acquired since September of 1995.
Selling, general and administrative costs were $432,160 for the three
months ended September 30, 1996, as compared to $261,962 for the three months
ended September 30, 1995. The major reason for this increase is the addition of
personnel and related costs due to acquisitions made since September of 1995.
Interest and financing costs remained relatively constant at $412,756 for
the three months ended September 30, 1996 as compared to $417,915 for the same
period in 1995.
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 September 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 is 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. No assurance can be given that
the Company will be able to obtain additional capital or enter into joint
venture development arrangements on 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
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
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 September 30, 1996 the Company had a cash position of $471,419 and a
working capital deficit of $5,317,343 including $5,068,202 of current portion of
long-term debt, of which $1,588,202 has been paid subsequent to the period end
with proceeds received from the sale of properties (See Note 6).
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. On January 30, 1996, $11 million of the credit facility was used
to finance a portion of the purchase price for the Buttonwood Acquisition and
repay outstanding indebtedness. Additional proceeds of $7,230,195 were used on
May 16, 1996 to finance the purchase of the Comstock and Stratum well interests,
and on July 31, 1996, proceeds of $2,792,200 were used to finance the
acquisition of well interests from various sellers. The Company has repaid
$2,295,600 under the facility since January 30, 1996. The terms currently
provide for amortization payments at the rate of $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. At
September 30, 1996, the Company was not in compliance with its secured bank
loan agreement requiring a 1:1 ratio of current assets to current liabilities.
The Company has obtained a waiver from the bank in regard to this non
compliance.
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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
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 provided by operating activities increased to $1,410,641 for the
nine months ended September 30, 1996 as compared to net cash used of $20,483 for
same period in 1995. This was primarily the result of an increase in cash flow
from operations, partially offset by an increase in working capital.
The Company used $28,507,302 of net cash in investing activities for the
first nine months of 1996 compared with $10,652,110 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,
the August Working Owner acquisition for $3,290,000, and oil and gas well
enhancements in the amount of $676,216 and other producing property acquisitions
of $1,832,425.
Net cash provided by financing activities for the nine months ended
September 30, 1996 was $27,410,521 compared to $10,009,408 provided in 1995.
During the nine months ended September 30, 1996 the Company received proceeds
from long-term debt of $21,022,395 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 $10,328,135 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.
14
<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
(a) The Company held an annual meeting of stockholders on August 13, 1996.
On August 13, 1996, the following proposals were voted on.
(i) The following persons were elected as Directors to serve until the
annual meeting of stockholders in 1997 and until their successors have been
elected and qualified by the following vote:
<TABLE>
<CAPTION>
Votes for Votes against
---------- -------------
<S> <C> <C>
John J. Fleming 10,912,153 55,772
Michael K. Paulk 10,912,153 55,772
John L. Rainwater 10,911,103 56,822
Morton A. Cohen 10,912,153 55,772
Brian E. Bayley 10,912,153 55,772
</TABLE>
(ii) The Proposal to increase the number of shares of common stock
authorized from 30,000,000 to 100,000,000 was approved by the following vote:
<TABLE>
<CAPTION>
Votes
-----------
<S> <C>
In favor 10,420,812
Against 368,213
Abstentions 73,900
Not voted 105,000
</TABLE>
(iii) The proposal to approve the 1996 Omnibus Incentive Plan was
approved by the following vote:
<TABLE>
<CAPTION>
Votes
---------
<S> <C>
In favor 3,991,499
Against 419,092
Abstentions 158,525
Not voted 6,398,809
</TABLE>
(iv) The proposal to approve the 1996 Non-Employee Stock Option Plan
was approved by the following vote:
<TABLE>
<CAPTION>
Votes
---------
<S> <C>
In favor 4,019,129
Against 462,887
Abstentions 87,100
Not voted 6,398,809
</TABLE>
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
(v) The proposal to approve the amendment of the Company's 1989
Incentive Stock Option Plan so as to increase the number of shares reserved for
the grant of options thereunder from 1,500,000 to 2,500,000 was approved by the
following vote:
<TABLE>
<CAPTION>
Votes
---------
<S> <C>
In favor 3,988,579
Against 490,037
Abstentions 90,500
Not voted 6,398,809
</TABLE>
(b) At an adjournment of the Annual Meeting held on October 4, 1996, the
following proposals were voted on.
(i) The proposal to reincorporate the Company as an Oklahoma
corporation by merger of the Company into a newly-formed wholly-owned subsidiary
of the Company incorporated in Oklahoma was approved by the following vote:
<TABLE>
<CAPTION>
Votes
---------
<S> <C>
In favor 6,252,140
Against 206,927
Abstentions 80,350
Not voted 4,956,911
</TABLE>
(ii) The proposal to increase the number of shares of Preferred Stock
authorized from 500,000 to 2,500,000 was not approved by the following vote:
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ---------------
<S> <C> <C>
In favor 5,912,614 4,100
Against 514,103
Abstentions 103,700
Non-voted 4,956,911 1,440
</TABLE>
ITEM 5. OTHER INFORMATION
On October 22, 1996, Gothic Energy Corporation, a Delaware
corporation, merged with and into its wholly owned subsidiary corporation
incorporated under the laws of the State of Oklahoma. Thereby the Company
changed its state of incorporation from Delaware to Oklahoma.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
6(i) Certificate of Incorporation of Gothic Energy Newco, Inc., an
Oklahoma corporation
6(ii) Bylaws of Gothic Energy Newco, Inc.
6(iii) Certificate of Ownership and Merger filed with the State of
Oklahoma
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, the Company filed an
Amendment No. 1 to its Current Report on Form 8-K dated May 16, 1996, reporting
under "Item 7 - Financial Statements and Exhibits".
17
<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 30, 1997 BY: /S/ MICHAEL PAULK
-----------------
MICHAEL PAULK,
PRESIDENT, CHIEF EXECUTIVE OFFICER
DATE: MAY 30, 1997 BY: /S/ ANDREW MCGUIRE
------------------
ANDREW MCGUIRE,
CONTROLLER
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 471,419
<SECURITIES> 0
<RECEIVABLES> 2,480,174
<ALLOWANCES> (68,990)
<INVENTORY> 0
<CURRENT-ASSETS> 2,917,134
<PP&E> 35,902,605
<DEPRECIATION> (3,051,414)
<TOTAL-ASSETS> 37,447,677
<CURRENT-LIABILITIES> 8,234,477
<BONDS> 0
0
277
<COMMON> 123,819
<OTHER-SE> 14,230,395
<TOTAL-LIABILITY-AND-EQUITY> 37,447,677
<SALES> 7,270,252
<TOTAL-REVENUES> 8,073,117
<CGS> 0
<TOTAL-COSTS> 3,481,114
<OTHER-EXPENSES> 1,250,484
<LOSS-PROVISION> 5,050,000
<INTEREST-EXPENSE> 1,061,017
<INCOME-PRETAX> (5,088,473)
<INCOME-TAX> 2,992,547
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (1,432,973)
<CHANGES> 0
<NET-INCOME> (4,381,438)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
