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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
[Mark One]
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition
period from ____________ to ___________
Commission File Number 0-19753
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GOTHIC ENERGY CORPORATION
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(Name of small business issuer in its charter)
OKLAHOMA 22-2663839
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
5727 SOUTH LEWIS AVENUE - SUITE 700
TULSA, OKLAHOMA 74105
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (918) 749-5666
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class Name of each exchange on which registered
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None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock
(Title of class)
Redeemable Common Stock Purchase Warrants expiring January 24, 2001
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year $11,515,470
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of February 14, 1997 was $22,937,089.
Non-affiliates have been determined on the basis of holdings set forth under
Item 11 of this Annual Report on Form 10-KSB.
The number of shares outstanding of each of the issuer's classes of common
equity, as of February 14, 1997 was 12,381,857.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Issuer's Annual Meeting of
Stockholders to be held on April 22, 1997, are incorporated by reference
herein as portions of Part III of this Annual Report on Form 10-KSB.
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PART I
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION:
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues were $11,515,470 for the year ended December 31, 1996, as compared
to $2,037,950 for the year ended December 31, 1995. This represents a 465%
increase in total revenue for the period. Oil and gas sales for the year ended
December 31, 1996 increased to $10,385,382, with $3,488,021 from oil sales and
$6,897,361 from gas sales, as compared to oil and gas sales of $1,893,717 for
the year ended December 31, 1995, with $1,282,787 from oil sales and $610,930
from gas sales. Of this $8,491,665 increase in oil and gas sales, approximately
$1,546,000 and $4,187,000 related to increases in volumes of oil and gas sold,
respectively, and $659,000 and $2,110,000 related to increases in the average
prices of oil and gas sold, respectively. The increase in volumes of oil and
gas sold resulted primarily from the 1996 Acquisitions. Of the $8,491,665
increase in oil and gas sales approximately $6,913,000 is a direct result of
properties acquired in the 1996 Acquisitions and $1,579,000 is a result of
increased production and prices from continuing properties acquired in 1995.
Oil sales in 1996 were based on the sale of 163,978 barrels at an average price
of $21.27 per barrel as compared to 74,370 barrels at an average price of $17.25
per barrel in 1995. Gas sales in 1996 were based on the sale of 3,403,943 mcf at
an average price of $2.03 per mcf compared to 434,153 mcf at an average price
of $1.41 per mcf in 1995.
The Company incurred lease operating expenses for the year ended December
31, 1996 of $4,806,741 compared with lease operating expenses of $1,202,535 for
the year ended December 31, 1995. Lease operating expenses include
approximately $567,000 and $98,000 in production taxes which the Company
incurred from its share of production in 1996 and 1995, respectively. This
increase in lease operating expenses is a result of the 1996 Acquisitions.
Lease operating expenses as a percentage of oil and gas sales were 46.3% in 1996
as compared to 63.5% in 1995.
Depreciation, depletion and amortization expense was $2,856,000 for the
year ended December 31, 1996 as compared to $882,450 for the prior year. The
increase resulted primarily from the increased production associated with the
1996 Acquisitions.
Selling, general and administrative costs were $1,781,739 for the year
ended December 31, 1996, as compared to $1,009,539 for the year ended December
31, 1995. This increase was primarily the result of additional personnel and
other costs related to the 1996 Acquisitions. The Company added six employees
as a direct result of the 1996 Acquisitions at an approximate cost of $240,000.
This increase also includes certain non-recurring costs related to the
completion of
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the Buttonwood transaction of approximately $51,000. The remaining increase
relates to administrative costs incurred in operating the wells acquired in the
1996 Acquisitions.
The Company accounts for its oil and gas exploration and development
activities using the full cost method of accounting prescribed by the Securities
and Exchange Commission ("SEC"). Accordingly, all productive and non-productive
costs incurred in connection with the acquisition, exploration and development
of oil and gas reserves are capitalized and depleted using the units-of-
production method based on proved oil and gas reserves. The Company capitalizes
costs including; salaries and related fringe benefits of employees directly
engaged in the acquisition, exploration and development of oil and gas
properties, as well as other directly identifiable general and administrative
costs associated with such activities. Such costs do not include any costs
related to production, general corporate overhead, or similar activities. The
Company's oil and gas reserves are estimated annually by petroleum engineers.
The Company's calculation of depreciation, depletion and amortization ("DD&A")
includes estimated future expenditures to be incurred in developing proved
reserves and estimated dismantelment and abandonment costs, net of salvage
values. In the event the unamortized cost of oil and gas properties being
amortized exceeds the full cost ceiling as defined by the SEC, the excess is
charged to expense in the period during which such excess occurs. The full cost
ceiling is based principally on the estimated future discounted net cash flows
from the Company's oil and gas properties. 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. See Note 1 and Note
10 to Notes to Consolidated Financial Statements.
During the first quarter of 1996, the Company recorded a $5,050,000 pre-tax
provision for impairment of oil and gas properties, primarily related to
properties acquired in the Buttonwood Acquisition. Such provision resulted from
a full cost ceiling write-down and was reflected in the balance sheet as a
reduction of the cost of oil and gas properties. The operating results for the
year ended December 31, 1995 reflect a similar provision for impairment of oil
and gas properties in the amount of $2,247,083, including a full cost ceiling
write-down of oil and gas properties in the amount of $1,052,000 resulting from
lower oil and gas prices at December 31, 1995 and $1,195,083 relating to the
write-off of a $1,000,000 deposit for the Buttonwood Acquisition and related
deferred acquisition costs. The Buttonwood Acquisition deposit and the deferred
acquisition costs write-off was a result of the expected full cost ceiling
write-down related to the Buttonwood properties upon completion of the
acquisition. On September 27, 1995, the Company and Buttonwood entered into a
new option for the Company to acquire Buttonwood and terminated the prior option
for which the Company paid $1,850,000. Accordingly, the Company recognized a
loss on the termination of the option in the amount of $1,850,000 during the
year ended December 31, 1995. As a result of the $5,050,000 impairment
provision and the aggregate $2,850,000 of deposits written off, the Company
recorded a tax benefit of $2,992,547 which offset the deferred tax liability
related to the acquired Buttonwood oil and gas properties. The Company also
recorded an extraordinary loss of $1,432,973 on the early extinguishment of debt
during the quarter ended March 31, 1996, associated with the repayment of the
Stratum loan.
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During the third quarter of 1995, the Company determined that its
investment in Vista Technologies, Inc. common stock had a carrying value on its
books above the current estimated net realizable value. The shares were
"restricted securities" as defined under Federal securities laws. In October
1995, the Company was informed of a five to one reverse common stock split by
Vista and a post-reverse split private placement at $2.50 per share of common
stock. Based upon this current information, and consideration of the diminished
value due to the restriction on the sale of the shares, the Company recorded a
$802,287 provision for impairment in the third quarter of 1995, reducing such
investment to $200,000.
Interest and financing costs were $1,528,598 for the year ended December
31, 1996 as compared to $1,627,402 for 1995. The decrease was the result of the
Company's debt restructuring during the year. The Company incurred interest
costs of $1,322,262 with Bank One, Texas, N.A., $55,100 with Stratum, $72,467
with Quest, $69,314 as amortization of loan costs and $9,455 with other parties.
During the year ended December 31, 1996, the Company spent $1,177,327 on
capital enhancements and $35,047,825 on acquiring additional producing
properties, as compared to $402,662 and $11,605,326 spent on capital
enhancements and property acquisitions, respectively, during 1995. The increase
in 1996 was primarily due to the Buttonwood, Comstock and Athena Acquisitions.
The Company also recognized $380,875 in preferred dividends on its 7-1/2%
Cumulative Convertible Preferred Stock during the year ended December 31, 1996.
The profitability and revenues of the Company are dependent, to a
significant extent, upon prevailing spot market prices for oil and gas. In the
past, oil and gas prices and markets have been volatile. Prices are subject to
wide fluctuations in response to changes in supply of and demand for oil and
gas, market uncertainty and a variety of additional factors that are beyond the
control of the Company. Such factors include supply and demand, political
conditions, weather conditions, government regulations, the price and
availability of alternative fuels and overall economic conditions. Gas prices
have fluctuated significantly over the past twelve months.
The Company uses the sales method for recording natural gas sales. The
Company's oil and condensate production is sold, title passed, and revenue
recognized at or near its wells under short-term purchase contracts at
prevailing prices in accordance with arrangements which are customary in the oil
industry. Sales of gas applicable to the Company's interest in producing oil
and gas leases are recorded as revenues when the gas is metered and title
transferred pursuant to the gas sales contracts covering its interest in gas
reserves. During such times as the Company's sales of gas exceed its pro rata
ownership in a well, such sales are recorded as revenues unless total sales from
the well have exceeded the Company's share of estimated total gas reserves
underlying the property at which time such excess is recorded as a gas balancing
liability. Such imbalances are incurred form time to time in the usual course
of business in the operation of gas wells as a consequence of operational
factors. See Note 1 to Notes to Consolidated Financial Statements.
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LIQUIDITY AND CAPITAL RESOURCES
Commencing in the last quarter of 1994, the Company redirected its business
efforts toward acquiring natural gas and oil reserves and the production,
development and exploitation of those reserves. On January 19, 1995, the
Company completed its first acquisition of oil and gas reserves, the Egolf
Acquisition, and on May 31, 1995 completed a second acquisition of oil and gas
properties, the Johnson Ranch Acquisition.
On January 30, 1996, the Company completed the following transactions: (i)
it completed the Buttonwood Acquisition; (ii) it borrowed approximately $11
million pursuant to a Credit Facility; (iii) it completed the Public Offering
yielding net proceeds, including net proceeds from a subsequently exercised
over-allotment option, of approximately $12,966,000; and (iv) it completed 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 such shares.
Herein, the Buttonwood Acquisition, the Credit Facility, the Public Offering and
the Preferred Stock Financing are referred to as the "January 1996
Transactions."
Thereafter, throughout 1996, the Company completed the acquisition of
various working interests in additional producing oil and gas properties. On
May 16, 1996, the Company completed the Comstock Acquisition which included
various working interests in 145 producing oil and gas properties for a
consideration of $6,430,195 and on May 20, 1996 it completed the Stratum
Acquisition including the 7% overriding royalty interest in the Johnson Ranch
Acquisition properties for $800,000. It expended $3,270,000 for the acquisition
of various working interests in approximately 120 wells from various sellers on
August 5, 1996 and on December 27, 1996 it completed the Athena Acquisition for
$4,200,000.
During the year the Company realized net proceeds of approximately $3.11
million from the sale of oil and gas producing properties.
Financing to complete the acquisitions completed subsequent to the January
1996 Transactions was provided under the terms of the Credit Facility, as
amended. At December 31, 1996, the Company's borrowing availability under the
Credit Facility was $25,000,000, of which the Company had borrowed $21,744,000.
On February 18, 1997, the Company completed the following acquisitions:
The Company acquired from Norse, various working interests in 11 oil and
gas producing properties and, through the acquisition of the outstanding capital
stock of Norse Pipeline, Inc., its 40.09% general partnership interest in the
Sycamore System, an Oklahoma gathering system, processing plant and storage
facility. The oil and gas wells and the gathering system are located in the
Springer Field in Carter County, Oklahoma. The purchase price was $10,750,000,
plus
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two-year warrants to purchase 200,000 shares of the Company's Common Stock at a
per share exercise price of $2.50, of which the Company had paid a deposit of
$1,075,000 toward the purchase price in December 1996. Such warrants were valued
at $254,000 (the estimated fair value of the warrants on the date of
acquisition).
The Company acquired from Huffman, various working interests in 13 oil and
gas producing properties and an additional 10.97% interest in the Sycamore
System. The oil and gas wells are located in the same producing area as the
properties acquired from Norse. The total purchase price for the assets
acquired was $3,950,000, of which the Company had paid a deposit of $287,500
toward the purchase price in December 1996.
The Company also acquired, on February 18, 1997, from Horizon, various
working and royalty interests in approximately 100 oil and gas producing
properties. The producing properties are located in Major and Blaine counties
of Oklahoma. The purchase price was $10,000,000.
The effective date of all three acquisitions was January 1, 1997.
Of the deposits paid to the sellers under these agreements, aggregating
$1,362,500, $1,291,295, were paid out of the proceeds from borrowings in
December 1996 from Bank One, Texas, N.A., and the financing to complete these
transactions was provided by the Credit Facility and the bridge financing
described below.
The Company's capital requirements relate to the acquisition, exploration,
enhancement, development and operation of oil and gas producing properties. In
general, because the 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 continuing 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 or to
enter into joint development arrangements and 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, principally under the Credit Facility.
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
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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.
The Company estimates that it will need approximately $6.10 million of
capital to develop its undeveloped oil and gas reserves during the year ending
December 31, 1997 and an additional $3.40 million to develop such reserves
during the following two years. The Company expects to obtain a portion of
these funds from the Special Drilling Advance of $2 million established under
the terms of the Credit Facility. The Company is permitted to draw upon this
advance for certain drilling costs to be incurred during 1997. Additional funds
may be obtained from cash flow and the possible public or private sale of equity
or debt securities. The Company has no present arrangements for future
borrowings, other than possible borrowing availability under the Credit
Facility, or other sales of securities and its cash flow from operations is not
expected to be adequate to provide all the funds needed for drilling purposes.
There can be no assurance that these sources will provide funds in sufficient
amounts to allow the Company to successfully implement its present business
strategy of additional property acquisition or the development of its oil and
gas reserves.
There can be no assurance that the Company will be able to identify and
acquire additional producing oil and gas properties or that any properties that
are acquired will prove to be profitable to the Company. The process of
integrating acquired properties into the Company's operations may result in
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's resources. In connection with
acquisitions, the Company could become subject to significant contingent
liabilities arising from the activities of the acquired properties to the extent
the Company assumes, or an acquired entity becomes liable for, unknown or
contingent liability or in the event that such liabilities are imposed on the
Company under theories of successor liability.
At December 31, 1996, the Company had total current assets of $3,349,246
including cash of $206,648 and total current liabilities of $9,755,135 including
current portions of long-term debt of $5,927,660. As a result of amending the
Credit Facility in February 1997, the Company's debt service requirements under
this Credit Facility for April through December , 1997 will be $14,275,000.
While management expects the acquisitions in late 1996 and in early 1997 to
increase cash flows from oil and gas production, such cash flows are not
expected to be adequate to meet debt service requirements and to pay other
current obligations. Accordingly, the Company will be required to either modify
the terms of the restated Credit Facility or obtain other financing.
Under the terms of the Credit Facility, the Company is prohibited from
paying dividends on its Common Stock. In addition, so long as 3,145 shares of
7-1/2% Cumulative Preferred Stock are outstanding, the Company is restricted
from paying any dividends on its Common Stock.
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Terms of the Credit Facility: The Company's Credit Facility enables the
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Company to borrow up to a maximum aggregate of $75,000,000, subject to meeting
certain conditions. As of February 17, 1997, the aggregate available to be
borrowed under the Credit Facility is comprised of the $32,000,000 borrowing
base, the $10,000,000 Special Advance Facility, and a $2,000,000 Special
Drilling Facility. The Credit Facility currently provides for amortization
payments at the rate of $240,000 on March 1, 1997 and increasing to $475,000
per month commencing April 1, 1997, related to the $32,000,000 borrowing base
with all outstanding principal and interest due and payable on January 30, 1999.
The $10,000,000 Special Advance Facility must be repaid by September 1, 1997.
Interest is payable, at the option of the 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 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 no 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 of not in excess of 25% of consolidated net revenues for the quarter
ended March 31, 1997 and 20% of consolidated net revenues for all subsequent
quarters. The Company is obligated under the terms of its Credit Facility to
enter into commodity hedges covering not less than 75% of the Company's proved
developed production of oil and natural gas for a period of not less than twelve
months with minimum floor prices to be mutually agreed upon by the Company and
Bank One, Texas, N.A., for natural gas and oil, with counterparties acceptable
to the bank. These commodity hedges are required to be in place no later than
March 4, 1997. Material breaches of these or other covenants which are not
cured or waived could result in a default under the Credit Facility resulting in
this indebtedness becoming immediately due and payable and empowering the lender
to foreclose against the collateral for the loan.
During the year ended December 31, 1996 the Company requested and obtained
waivers of the provisions, under the January 1996 Loan Agreement requiring a
1:1 ratio of current assets to current liabilities for the year ended December
31, 1996, and for the quarter ended September 30, 1996, the restriction on
general and administrative expenses for the quarter ended March 31, 1996, and a
covenant violated as a result of the termination of a former officer of the
Company.
In order to provide the funds necessary to complete the Norse, Huffman and
Horizon acquisitions, on February 18, 1997 two investors loaned to the Company
the aggregate sum of $4,500,000 represented by the Company's promissory notes.
Of the aggregate amount, $2,500,000 bears interest at 5% per annum and matures
on April 18, 1997, with the remaining $2,000,000 bearing interest at 12% per
annum and maturing on October 31, 1997. In the event the principal and accrued
interest is not paid when due, such amount is automatically converted into a
number of shares of the Company's Common Stock determined by dividing such
amount
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by a sum equal to 75% of the closing bid price for the Company's Common Stock on
the five (5) days prior to the maturity date, with respect to the $2,500,000
obligation, and on the maturity date with respect to the $2,000,000 obligation.
As additional consideration for making the loan, the investors also purchased at
a price of $.01 per share a total of 250,000 shares of the Company's common
stock. The fair market value of the Company's common stock was $2.63 per share
on the date such shares were issued.
Net cash provided by operations increased to $2,595,745 for the year ended
1996 as compared to net cash provided of $112,629 in 1995, primarily due to the
cash flows generated from the 1996 Acquisitions. The 1996 operating cash flows
of $2,595,745 include a $5,050,000 full cost ceiling writedown and a $1,432,973
loss on early extinquishment of debt, partially offset by a deferred income tax
benefit of $2,992,547, and net changes in operating assets and liabilities.
The Company used $32,790,854 of net cash in investing activities for the
year ended 1996 compared to net cash used of $11,380,529 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 Various Working Interests acquisition for $3,270,000, the
Athena acquisition for $4,200,000, oil and gas enhancements in the amount of
$1,177,327 and other producing property acquisitions of $3,554,657.
Additionally, net cash of $3,434,298 was provided from the sale of property and
equipment.
Net cash provided by financing activities for the year ended 1996 was
$30,244,198 compared to $10,600,481 provided in 1995. The 1996 amount of
$30,244,198 includes proceeds from the issuance of common stock of $13,141,368
and proceeds from the issuance of preferred stock of $3,997,430. The 1996
amount also includes proceeds from long-term debt of $26,528,096, less
repayments of $12,817,815 on short and long-term debt. The net amount was used
to finance the 1996 Acquisitions.
INFLATION
The price the Company receives for its oil and gas has been impacted
primarily by the world oil market and the domestic market for natural gas,
respectively, rather than by any measure of general inflation. Because of the
relatively low rates of inflation experienced in the United States in recent
years, the Company's production costs and general and administrative expenses
have not been impacted significantly by inflation.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this
commentary and elsewhere in this Report are "forward-looking statements" as
defined under the Securities
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Exchange Act of 1934, as amended, that involve risks and uncertainties. Forward-
looking statements include, but are not limited to, statements under the
following headings: (i) under "Year Ended December 31, 1996 Compared with Year
Ended December 31, 1995" relating to the Company's dependence for profits and
revenues on prevailing spot market prices for oil and gas, (ii) under
"Inflation" as to the impact of inflation on the Company, (iii) under "Liquidity
and Capital Resources" as to the Company's capital requirements, business
strategy, ability to attain and maintain profitability and cash flow, dependence
upon the acquisition of and ability to acquire additional oil and gas properties
or entering into joint oil and gas well development arrangements, access to debt
and equity capital and availability of joint venture development arrangements,
estimates as to its needs for additional capital and the times at which such
additional capital will be required, expectations as to the sources of this
capital and funds, ability to successfully implement its business strategy,
ability to identify and integrate successfully any additional producing oil and
gas properties it acquires and whether such properties can be operated
profitably, ability to maintain compliance with covenants of its various loan
documents and other agreements pursuant to which securities have been issued,
ability to borrow funds or maintain levels of borrowing availability under
credit arrangements, statements about Proved Reserves or borrowing availability
based on Proved Reserves and future net cash flows and the present value thereof
and Supplementary Oil and Gas Information in Note 10 to Notes to Consolidated
Financial Statements.
The Company wishes to caution readers that the following important factors,
and those described elsewhere in this commentary and Report, or in other
Securities and Exchange Commission filings, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual consolidated results during 1997 and beyond, to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company:
. The Company has a short operating history in the oil and gas industry,
having entered that business in November 1994 after being engaged in
an entirely different business prior thereto. The Company achieved
losses through mid-1996 during the time it has been engaged in oil and
gas operations and also during all other periods prior thereto since
its organization in 1985. In order for the Company to attain and
maintain profitability and generate cash flow, it will be dependent
upon acquiring or developing additional oil and gas properties. There
can be no assurance that it will be able to do so.
. Without raising additional capital, 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 its available cash flow. Accordingly, in order for the
Company to achieve its business objective and achieve continuing
profitable operations, it will be necessary to generate additional
cash flow from operations, raise additional capital or enter into
joint oil and gas well development arrangements.
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. Management intends to fund future acquisitions and develop its oil and
gas reserves using cash flow from operations as well as public and
private sales of debt and equity securities and joint oil and gas well
development arrangements, among other possible sources. The Company's
cash flow from operations is not expected to be adequate to provide
the funds needed for these purposes. There can be no assurance that
these other sources will provide funds in sufficient amounts to allow
the Company to successfully implement its present business strategy of
additional property acquisition or the development of its oil and gas
reserves. The Company has no definitive present arrangements to raise
additional capital from the sale of its securities or joint
development arrangements. No assurance can be given as to the
availability or terms of any such additional financing or joint
development arrangements or that such terms as are available may not
be dilutive to the interests of the Company's stockholders.
. The profitability and revenues of the Company are dependent, to a
significant extent, upon prevailing spot market prices for oil and
gas. In the past, oil and gas prices and markets have been volatile.
Prices are subject to wide fluctuations in response to changes in
supply of and demand for oil and gas, market uncertainty and a variety
of additional factors that are beyond the control of the Company. Such
factors include supply and demand, political conditions, weather
conditions, government regulations, the price and availability of
alternative fuels and overall economic conditions. Gas prices have
fluctuated significantly over the past twelve months.
. The Company is engaged in seeking to identify and acquire additional
oil and gas producing properties. There can be no assurance that the
Company will be able to identify and acquire additional producing oil
and gas properties or that any properties that are acquired will prove
to be profitable for the Company. The process of integrating acquired
properties into the Company's operations may result in unforeseen
difficulties and may require a disproportionate amount of management's
attention and the Company's resources. In connection with
acquisitions, the Company could become subject to significant
contingent liabilities arising from the activities of the acquired
properties to the extent the Company assumes, or an acquired entity
becomes liable for, unknown or contingent liabilities or in the event
that such liabilities are imposed on the Company under theories of
successor liability.
. The outstanding principal under the Company's Credit Facility must be
amortized at the rate of $240,000 on March 1, 1997 and increasing to
$475,000 per month, commencing April 1, 1997, with the entire
outstanding balance due January 30, 1999. The Credit Facility includes
a $10,000,000 Advance Facility which is due on September 1, 1997. The
Credit Facility is secured by first mortgages on all of the Company's
oil and gas properties. The loan agreement relating to the Credit
Facility contains various affirmative and negative covenants
including, among others, the requirements that the Company maintain
certain ratios of current assets to current
-11-
<PAGE>
liabilities, debt service coverage ratio, minimum tangible net worth,
restrictions on selling, general and administrative expenses and the
payment of dividends. 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. Under such circumstances, the Company's stockholders
could lose their entire investment. There can be no assurance that the
Company will remain in compliance with all of its covenants and
agreements in the Credit Facility. The Company's borrowings under the
Credit Facility as well as its projected borrowing are, to a large
extent, a function of the value of the Company's oil and gas reserves,
which fluctuate from time to time, which are the primary component
used in determining the amount of borrowing available to the Company.
Changes in the Company's cash needs or borrowing availability could
negatively impact the Company's reserve development plans or its
ability to meet its obligations as they come due. Negative revisions
in oil and gas reserves could require reductions in the principal
amounts or otherwise reduce funds available to be borrowed under the
Credit Facility.
. There are numerous uncertainties inherent in estimating quantities of
Proved Reserves and in projecting future rates of production and
timing of development expenditures, including many factors beyond the
control of the producer. The reserve data set forth in this Report
represent estimates only. Oil and gas reserve engineering is a
subjective process of estimating underground accumulations of oil and
gas that cannot be measured in an exact way, and estimates by other
engineers might differ from those included in this Report. The
accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and
judgment. This Report contains estimates of the Company's proved oil
and gas reserves and the projected future net cash flows therefrom,
which have been prepared by an independent petroleum engineering firm.
Actual future production, oil and gas prices, revenue, capital
expenditures, taxes and operating expenses may vary substantially from
those assumed in making estimates, and the Company's reserves may be
subject to material upward or downward revision and the rate of
production from oil and gas properties declines as reserves are
depleted. In addition, the Company's ability to develop its reserves
will be dependent upon the timely availability of financing for this
purpose without which the Company's ability to produce the projected
amounts of oil and gas will be adversely affected thereby adversely
affecting the projected future net cash flows.
. With respect to wells not operated by the Company in which it has a
working interest, the independent operators are, in some cases,
privately-held companies who may have limited financial resources. If
a third party operator experiences financial difficulty and fails to
pay for materials and services in a timely manner, the wells operated
by such third party operators could be subject to material and
workmen's liens. In such event, the Company would incur costs in
discharging such liens.
-12-
<PAGE>
. The Company is dependent upon the services of its President, Michael
Paulk, and Vice-President, John Rainwater. The loss of their services
could have a material adverse effect upon the Company.
-13-
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS:
- ------------------------------
The response to this Item is included in a separate section of this report.
See page F-1.
-14-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GOTHIC ENERGY CORPORATION
BY: /s/ Michael K. Paulk
--------------------------------------------------
MICHAEL K. PAULK, PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Michael K. Paulk President (Principal April 28, 1997
- ------------------------------- Executive Officer
Michael K. Paulk and Director)
/s/ John J. Fleming Director April 28, 1997
-------------------------------
John J. Fleming
/s/ John Rainwater Vice President and April 28, 1997
------------------------------- Director
John Rainwater
/s/ Morton A. Cohen Director April 28, 1997
-------------------------------
Morton A. Cohen
/s/ Brian E. Bayley Director April 28, 1997
-------------------------------
Brian E. Bayley
-15-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheet, December 31, 1996............................. F-3
Consolidated Statements of Operations,
Years ended December 31, 1996 and 1995.................................. F-4
Consolidated Statements of Changes in
Stockholders Equity, Years ended December 31,
1996 and 1995............................................................ F-5
Consolidated Statements of Cash Flows,
Years ended December 31, 1996 and 1995.................................. F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Gothic Energy Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Gothic
Energy Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gothic Energy
Corporation and subsidiaries as of December 31, 1996, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1996 and 1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Tulsa, Oklahoma
February 24, 1997
F-2
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 206,648
Oil and gas receivable 2,802,140
Receivable from officers and employees 51,932
Assets held for sale 209,740
Other 78,786
------------
TOTAL CURRENT ASSETS 3,349,246
PROPERTY AND EQUIPMENT:
Oil and gas properties on full cost method 39,857,665
Equipment, furniture and fixtures 328,492
Accumulated depreciation, depletion (3,636,414)
and amortization ------------
PROPERTY AND EQUIPMENT, NET 36,549,743
OTHER ASSETS, NET 1,566,894
------------
TOTAL ASSETS $ 41,465,883
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable trade $ 1,336,854
Revenues payable 1,978,221
Accrued liabilities 512,400
Current portion long-term debt 5,927,660
------------
TOTAL CURRENT LIABILITIES 9,755,135
LONG-TERM DEBT 15,854,000
GAS IMBALANCE LIABILITY 1,025,266
COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 8)
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 shares 123,819
Additional paid in capital 32,530,561
Accumulated deficit (17,823,175)
------------
TOTAL STOCKHOLDERS' EQUITY 14,831,482
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 41,465,883
============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas sales $10,385,382 $ 1,893,717
Well operations 1,061,804 62,937
Interest and other income 68,284 81,296
----------- -----------
TOTAL REVENUES 11,515,470 2,037,950
COSTS AND EXPENSES:
Lease operating expenses 4,806,741 1,202,535
Depreciation, depletion and
amortization 2,856,000 882,450
Selling, general and administrative
expense 1,781,739 1,009,539
Provision for impairment of oil and
gas properties 5,050,000 2,247,083
Provision for impairment of investment - 802,287
Loss on termination of option - 1,850,000
----------- -----------
Operating loss (2,979,010) (5,955,944)
Interest expense 1,528,598 1,627,402
----------- -----------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (4,507,608) (7,583,346)
INCOME TAX BENEFIT 2,992,547 -
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,515,061) (7,583,346)
LOSS ON EARLY EXTINGUISHMENT OF DEBT
(NOTE 3) 1,432,973 -
----------- -----------
NET LOSS (2,948,034) (7,583,346)
PREFERRED DIVIDENDS ($68.75 PER
PREFERRED SHARE) 380,875 -
----------- -----------
NET LOSS AVAILABLE FOR COMMON SHARES $(3,328,909) $(7,583,346)
=========== ===========
LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM $(.13) $(1.73)
=========== ===========
LOSS PER COMMON SHARE $(.29) $(1.73)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 11,663,117 4,375,417
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON PREFERRED ADDITIONAL TOTAL
SHARES SHARES COMMON PREFERRED PAID-IN ACCUMULATED SUBSCRIPTION STOCKHOLDERS'
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL DEFICIT RECEIVABLE EQUITY
------------ ----------- -------- --------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1994 3,045,777 - $ 30,458 $ - $10,034,078 $ (6,910,920) $(270,000) $ 2,883,616
Issuance of common stock on
conversion of debt 98,000 - 980 - 195,020 - - 196,000
Issuance of common stock in
Private Placement 123,880 - 1,239 - 188,313 - 270,000 459,552
Issuance of common stock
with Quest financing 280,000 - 2,800 - 870,325 - - 873,125
Issuance of common stock
with Stratum financing 954,128 - 9,541 - - - - 9,541
Issuance of common stock in
connection with Johnson
Ranch acquisition 1,000,000 - 10,000 - 2,677,500 - - 2,687,500
Net loss - - - - - (7,583,346) - (7,583,346)
---------- ----- -------- ---- ----------- ------------ --------- -----------
BALANCE,
AT DECEMBER 31, 1995 5,501,785 - $ 55,018 $ - $13,965,236 $(14,494,266) $ - $ (474,012)
Issuance of common stock in
public offering 7,635,000 - 76,350 - 12,890,032 - - 12,966,382
Return of stock with
Stratum repayment (954,128) - (9,541) - - - - (9,541)
Issuance of preferred stock - 5,540 - 277 5,287,153 - - 5,287,430
Preferred fee 28,667 - 287 - (287) - - -
Issuance of common stock
with Quest financing 40,000 - 400 - 62,100 - - 62,500
Issuance of common stock on
conversion of debt 14,000 - 140 - 27,860 - - 28,000
Issuance of common stock in
connection with property
acquisition 116,533 - 1,165 - 298,467 - - 299,632
Preferred stock dividends - - - - - (380,875) - (380,875)
Net loss - - - - - (2,948,034) - (2,948,034)
---------- ----- -------- ---- ----------- ------------ --------- -----------
BALANCE,
AT DECEMBER 31, 1996 12,381,857 5,540 $123,819 $277 $32,530,561 $(17,823,175) $ - $14,831,482
========== ===== ======== ==== =========== ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,948,034) $( 7,583,346)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and
amortization 2,856,000 882,450
Amortization of discount and loan
costs 69,314 1,033,125
Provision for impairment of oil and
gas properties 5,050,000 2,247,083
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 (1,552,481) (82,272)
Decrease (increase) in other current
assets 12,971 (65,432)
Increase in accounts and revenues
payable 894,098 812,716
Increase(decrease) in accrued
liabilities (565,562) 216,018
Decrease in other assets 339,013 -
------------ ------------
NET CASH PROVIDED BY OPERATING $ 2,595,745 $ 112,629
ACTIVITIES
NET CASH USED BY INVESTING ACTIVITIES:
Proceeds from sale of investment 200,000 -
Proceeds from collection of note
receivable 123,000 -
Proceeds from sale of property 3,111,298 627,459
Purchase of property and equipment (17,454,852) (11,605,326)
Property development (1,177,327) (402,662)
Acquisition of business, net of cash
acquired (17,592,973) -
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES $(32,790,854) $(11,380,529)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt - 3,000,000
Payment of short-term debt (1,560,000) (150,000)
Proceeds from long-term debt 26,528,096 7,275,998
Payment of long-term debt (11,257,815) (785,632)
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 (431,756) (517,437)
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 30,244,198 $ 10,600,481
NET CHANGE IN CASH AND CASH EQUIVALENTS 49,089 (667,419)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 157,559 824,978
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 206,648 $ 157,559
============ ============
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 1,386,817 $ 456,309
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL AND ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - 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 in Oklahoma, Texas, Arkansas
and Kansas. Substantially all of the Company's oil and gas reserves are
being sold regionally in the "spot market" or under short-term contracts,
not extending beyond twelve months.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. In addition, accrued and deferred lease operating
expenses, gas imbalance liabilities, oil and gas reserves (see note 10) and
the valuation of stock based compensation (see note 5) also include
significant estimates which could materially differ from the amounts
ultimately realized.
CASH EQUIVALENTS - Cash and Cash Equivalents include cash on hand, amounts
held in banks and highly liquid investments with a maturity of three months
or less at date of purchase.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK - Financial
instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables with a variety of
national and international oil and natural gas companies. The Company does
not generally require collateral related to receivables. Such credit risk
is considered by management to be limited due to the large number of
customers comprising the Company's customer base. In addition, at December
31, 1996, the Company had a concentration of cash of $713,000, with one
bank.
OIL AND GAS PROPERTIES - The Company accounts for its oil and gas
exploration and development activities using the full cost method of
accounting prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all productive and non-productive costs incurred in connection
with the acquisition, exploration and development of oil and gas reserves
are capitalized and depleted using the units-of-production method based on
proved oil and gas reserves. The Company capitalizes costs including:
salaries and related fringe benefits of employees directly engaged in the
acquisition, exploration and development of oil and gas properties, as well
as other directly identifiable general and administrative costs
F-7
<PAGE>
NOTE 1. GENERAL AND ACCOUNTING POLICIES (CONTINUED)
associated with such activities. Such costs do not include any costs
related to production, general corporate overhead, or similar activities.
The Company's oil and gas reserves are estimated annually by petroleum
engineers. The Company's calculation of depreciation, depletion and
amortization ("DD&A") includes estimated future expenditures to be
incurred in developing proved reserves and estimated dismantlement and
abandonment costs, net of salvage values. The average composite rate used
for DD&A on oil and gas properties was $.64 and $.80 per Mcfe in 1996 and
1995, respectively. DD&A on oil and gas properties amounted to $2,820,000
and $747,000 in 1996 and 1995, respectively.
In the event the unamortized cost of oil and gas properties being
amortized exceeds the full cost ceiling as defined by the SEC, the excess
is charged to expense in the period during which such excess occurs. The
full cost ceiling is based principally on the estimated future discounted
net cash flows from the Company's oil and gas properties. The Company
recorded a $5,050,000 provision for impairment of oil and gas properties at
March 31, 1996. As a result of the $5,050,000 impairment provision and an
aggregate of $2,850,000 of Buttonwood deposits written off, the Company
recorded a tax benefit of $2,992,547 which offset the deferred tax
liability related to the acquired Buttonwood oil and gas properties. A
similar provision of $2,247,083 was recorded during the year ended December
31, 1995. As discussed in Note 10, 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 further.
Sales and abandonments of properties are accounted for as adjustments
of capitalized costs with no gain or loss recognized unless a significant
amount of reserves is involved. Since all of the Company's oil and gas
properties are located in the United States, a single cost center is used.
With respect to wells operated by the Company, but in which it has a
working interest, the independent operators are, in some cases, privately-
held companies who may have limited financial resources. If a third party
operator experiences financial difficulty and fails to pay for material and
services in a timely manner, the wells operated by the third party operator
could be subject to material and workmen's liens. The Company has no
reason to believe that its current operators are experiencing significant
financial difficulties.
EQUIPMENT, FURNITURE AND FIXTURES - Equipment, furniture and fixtures are
stated at cost and are depreciated on the straight-line method over their
estimated useful lives which range from three to seven years.
DEBT ISSUANCE COSTS - The unamortized portion of debt issuance costs
included in other assets, which includes the estimated fair value of
warrants, stock or other interests given to obtain financing, is amortized
and included in interest expense using the straight-line
F-8
<PAGE>
NOTE 1. GENERAL AND ACCOUNTING POLICIES (CONTINUED)
method over the term of the related debt. Amortization of debt issuance
costs for the years ended December 31, 1996 and 1995 amounted to $69,314
and $1,033,125, respectively.
NATURAL GAS BALANCING - The Company uses the sales method for recording
natural gas sales. The Company's oil and condensate production is sold,
title passed, and revenue recognized at or near its wells under short-term
purchase contracts at prevailing prices in accordance with arrangements
which are customary in the oil industry. Sales of gas applicable to the
Company's interest in producing oil and gas leases are recorded as revenues
when the gas is metered and title transferred pursuant to the gas sales
contracts covering its interest in gas reserves. During such times as the
Company's sales of gas exceed its pro rata ownership in a well, such sales
are recorded as revenues unless total sales from the well have exceeded the
Company's share of estimated total gas reserves underlying the property at
which time such excess is recorded as a gas balancing liability. At
December 31, 1996, total sales exceeded the Company's share of estimated
total gas reserves on eleven wells by $381,755 (128,468 mcf), based on the
year end "spot market" price of natural gas. The gas balancing liability
has been classified in the balance sheet as non-current, as the Company
does not expect to settle the liability during the next twelve months.
The Company has recorded deferred charges for estimated lease operating
expenses incurred in connection with its underproduced gas imbalance
position. At December 31, 1996, cumulative total gas sales volumes for
underproduced wells were less than the Company's pro-rata share of total
gas production from these wells by 1,214,208 Mcf, resulting in prepaid
lease operating expenses of $1,250,634, which are included in other assets
in the accompanying balance sheet.
In addition, the Company has recorded accrued charges for estimated lease
operating expenses incurred in connection with its overproduced gas
imbalance position. At December 31, 1996, cumulative total gas sales
volumes for overproduced wells exceeded the Company's pro-rata share of
total gas production from these wells by 624,768 Mcf, resulting in accrued
lease operating expenses of $643,511, which are included in the gas
balancing liability in the accompanying balance sheet.
INCOME TAXES - The Company applies the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred tax liabilities or assets arise from
the temporary differences between the tax basis of assets and liabilities,
and their basis for financial reporting, and are subject to tests of
realizability in the case of deferred tax assets.
LOSS PER COMMON SHARE - Loss per common share is computed on the basis of
the weighted average shares of common stock outstanding, including the
effect of dilutive common stock equivalents. Primary and fully diluted
earnings per share are the same for all periods presented.
F-9
<PAGE>
NOTE 1. GENERAL AND ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION - The Company applies Accounting Principles Board
Opinion No. 25 in accounting for its stock option plans. Under this
standard, no compensation expense is recognized for grants of options which
include an exercise price equal to or greater than the market price of the
stock on the date of grant. Accordingly, based on the Company's grants in
1996 and 1995, no compensation expense has been recognized.
HEDGING ACTIVITIES - During 1996, the Company entered into an agreement
with a gas purchaser to hedge a portion of its monthly gas production.
Under the agreement, the difference between the current value of the
Company's gas, based upon the spot market price, and a fixed price was
received or paid by the Company. The Company hedged 5,000 Mcf per day for
the period of July 1, 1996 through December 31, 1996 at a price of $2.06
per Mcf. The Company recorded payments received or made under this
agreement in its oil and gas sales. The Company has a new hedging
agreement in place with the same gas purchaser to hedge 5,000 Mcf per day
for the period January 1, 1997 through March 31, 1997 at a price of $2.65
per Mcf.
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS SUBSEQUENT TO YEAR-END 1996
NORSE ACQUISITION - On February 18, 1997, the Company acquired from Norse
Exploration, Inc., and Norse Pipeline, Inc. (collectively, "Norse"),
various working interests in 11 oil and gas producing properties and,
through the acquisition of the outstanding capital stock of Norse Pipeline,
Inc., its 40.09% general partnership interest in the Sycamore Gas System
(the "Sycamore System"), an Oklahoma gathering system, processing plant and
storage facility. The oil and gas wells and the gathering system are
located in the Springer Field in Carter County, Oklahoma. The total
purchase price was $10,750,000, plus two-year warrants to purchase 200,000
shares of the Company's Common Stock at a per share exercise price of $2.50
of which the Company paid a deposit of $1,075,000 toward the purchase price
in December 1996. The estimated fair value of such warrants at the date of
acquisition was approximately $254,000.
HUFFMAN ACQUISITION - The Company also on February 18, 1997, acquired from
H. Huffman & Company ("Huffman"), an Oklahoma limited partnership, various
working interests in 13 oil and gas producing properties and an additional
10.97% interest in the Sycamore System. The oil and gas wells are located
in the same producing area as the properties acquired from Norse. The
total purchase price for the assets acquired was $3,950,000 of which the
Company paid a deposit of $287,500 toward the purchase price in December
1996.
HORIZON ACQUISITION - The Company also acquired, on February 18, 1997, from
Horizon Gas Partners, L.P. and HSRTW, Inc. (collectively, "Horizon"),
various working and royalty interests in approximately 100 oil and gas
producing properties. The producing properties
F-10
<PAGE>
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS
(CONTINUED)
are located in Major and Blaine counties of Oklahoma. The purchase price
was $10,000,000.
ACQUISITIONS DURING YEAR-END 1996
ATHENA ACQUISITION - On December 27, 1996, the Company completed an
acquisition from Athena Energy, Inc. of various working interest in 85
producing oil and gas properties (the "Athena Acquisition"). The Company
operates approximately 30 of the wells. The purchase price for the
properties acquired was approximately $4,200,000. Substantially all the
properties acquired are located in western Oklahoma and the Texas
Panhandle. Subsequent to year end, substantially all of the non-operated
well interests acquired from Athena were sold for net proceeds of
approximately $210,000.
VARIOUS WORKING INTEREST ACQUISITIONS - On August 5, 1996, the Company
completed the acquisition, from various sellers, of working interests in
approximately 120 wells in the Anadarko Basin of Western Oklahoma, and the
Arkoma Basin of Eastern Oklahoma and Arkansas (the "Working Interest
Acquisitions"). The Company operates 70 of the wells in which the
interests were acquired. The aggregate purchase price for these wells was
$3,270,000.
STRATUM ACQUISITION - On May 20, 1996, the Company acquired from Stratum
Group Energy Capital, L.P. and Stratum Corp. (the "Stratum Acquisition"),
the overriding royalty interest of 7% of the net revenues derived from the
properties acquired in the Johnson Ranch financing provided by Stratum to
the Company in May 1995 for the Johnson Ranch Acquisition. The purchase
price was $800,000.
COMSTOCK ACQUISITION - On May 16, 1996, the Company completed the
acquisition, from Comstock Oil and Gas, Inc. and Comstock Offshore Energy,
Inc. (the "Comstock Acquisition"), of various working interest in 145
producing oil and gas properties. The Company operates 70 of the wells.
The purchase price for the properties acquired was $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.
BUTTONWOOD ACQUISITION - On January 30, 1996 the Company completed the
acquisition of Buttonwood Energy Corporation ("Buttonwood"). Concurrently
with entering into an option agreement with Buttonwood on September 27,
1995 for $1,000,000, the parties terminated without being exercised a
similar option purchased by the Company in March 1995 for $1,850,000. The
Company recorded a loss on termination of these options in 1995, with the
$1,000,000 recorded as an impairment of oil and gas properties. 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:
F-11
<PAGE>
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS
(CONTINUED)
<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 liability (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 transaction was financed with proceeds from a public offering of
the Company's common stock, the sale of preferred stock, a bridge financing
and the establishment of a credit facility with Bank One, Texas. The
public offering and the preferred financing (Note 4), generated net
proceeds of $17,216,000. The remaining purchase price was paid out of the
proceeds from the Bank One, Texas Credit Facility (Note 3).
ACQUISITIONS DURING YEAR-END 1995
JOHNSON RANCH ACQUISITION - On June 2, 1995 the Company completed the
acquisition of working interests in approximately 69 oil and gas wells in
Loving County Texas, through its wholly owned subsidiary, Gothic Texas,
from Johnson Ranch Partners ("Johnson Ranch"). The purchase price was
$7,250,000, plus 1,000,000 shares of the Company's common stock valued at
$2.69 per share, the closing market price on the date the acquisition was
completed.
The transaction was financed with proceeds of a loan from Stratum
Group, L.L.C. ("Stratum"), to Gothic Texas in the maximum aggregate amount
of $8,131,500, of which only $6,756,500 was drawn and used to finance the
acquisition.
As consideration for making the loan, Gothic Texas conveyed to Stratum
an overriding royalty interest of 7% of Gothic's net interest in each of
the properties acquired. As additional consideration for making the loan,
Stratum was issued five-year common stock purchase warrants to purchase an
aggregate of 1,000,000 shares of the Company's Common Stock, exercisable,
at $3.25 per share. The shares issuable upon exercise of the warrants have
certain demand and "piggyback" registration rights.
Stratum also received a security interest in and the right to sell
additional shares of the Company's Common Stock exercisable in the event of
a default under the loan agreement. An aggregate of 954,128 shares were
issued to Stratum, pursuant to this arrangement. On January 30, 1996,
through its new credit facility, the Company paid Stratum all outstanding
amounts due them and received back all common stock held by Stratum as
collateral for the loan.
F-12
<PAGE>
NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS AND DISPOSITIONS
(CONTINUED)
EGOLF ACQUISITION - On January 19, 1995, the Company completed the
acquisition of working interests in approximately 208 oil and gas wells
located primarily in western Oklahoma, for a total purchase price of
$1,584,000 plus one-year common stock purchase warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $2.50 per
share. These warrants expired without being exercised.
All of the above noted acquisitions were accounted for under the purchase
method and, accordingly, results of operations of the acquired properties
are included in the Company's results of operations since the respective
dates of the acquisitions.
The following reflects the unaudited proforma results of operations
assuming the 1995 and 1996 acquisitions had all been consummated on January
1, 1995.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Revenues 14,266 12,592
Operating loss (1,906) (4,443)
Net loss (2,800) (5,337)
Loss per common share (.24) (.46)
</TABLE>
PROPERTY DISPOSITION - Management of the Company reviews the properties
acquired and from time to time disposes of wells that are deemed to be
unprofitable, fail to meet management's operating requirements or, under
certain circumstances, are operated by other persons. From time to time,
the Company disposes of wells operated by the Company where the well does
not meet operating requirements. During the year ended December 31, 1996,
the Company disposed of various interests in an aggregate of 514
properties for a total sales price of $3,111,298. Of such amount,
$2,402,096 was applied to reduce outstanding indebtedness and $709,202 was
used for working capital purposes.
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE
LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
<S>
<C>
Bank One Credit Facility $21,744,000
Others 37,660
Less: Current Portion (5,927,660)
-----------
Total Long-Term Debt $15,854,000
===========
</TABLE>
On January 19, 1996, the Company entered into a Loan Agreement with
Bank One, Texas, N.A. (the "Credit Facility"), which reflecting subsequent
amendments, enabled the Company to borrow, from time to time and, subject
to meeting certain borrowing base
F-13
<PAGE>
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE (CONTINUED)
requirements and other conditions, a maximum aggregate of $25,000,000,
consisting of a $20,000,000 revolving loan and a $5,000,000 acquisition
note. On January 30, 1996, $11,000,000 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 Comstock Acquisition and the Stratum
Acquisition, and on July 31, 1996, proceeds of $2,792,200 were used to
finance the acquisition of well interests from various sellers. In
December 1996, additional proceeds of $5,505,701 were used to finance the
$4,214,406 purchase price for the Athena Acquisition, and $1,291,295 of the
down payments for the Norse and Huffman Acquisitions. The Company has
repaid principal in the amount of $4,784,096 under the Credit Facility
since January 30, 1996. The terms of the Credit Facility provided for
amortization payments at the rate of $240,000 per month under the revolving
loan commencing September 1, 1996, with all outstanding principal and
interest due and payable on January 30, 1999. Of the $5,000,000
acquisition note, $3,010,000 was outstanding at year end and was due on
March 31, 1997. Interest was payable, at the option of the Company,
either at the rate of 1% over the lending bank's 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 was collateralized by first liens on all of the Company's oil
and gas properties. The Credit Facility included 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 no 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 were not cured or waived could
have resulted in a default under the Credit Facility resulting in the
indebtedness becoming immediately due and payable and empowering the lender
to foreclose against the collateral for the loan. During the year ended
December 31, 1996, the Company requested and obtained a waiver of the
provision requiring a 1:1 ratio of current assets to current liabilities
for the year ended December 31, 1996 and for the quarter ended September
30, 1996, the restriction on general and administrative expenses for the
quarter ended March 31, 1996, and a covenant violated as a result of the
termination of a former officer of the Company.
On February 17, 1997, the Company and Bank One, Texas, N.A., entered
into a Restated Loan Agreement (the "Credit Facility") which currently
enables the Company to borrow, from time to time and, subject to meeting
certain borrowing base requirements and other conditions, a maximum
aggregate of $75,000,000. As of February 17, 1997, the aggregate available
to be borrowed under the Credit Facility is comprised of a $32,000,000
borrowing availability (the "borrowing base") based on the Company's oil
and gas reserve reports, a $10,000,000 special advance facility (the
"Special Advance Facility") and a $2,000,000 special drilling facility (the
"Special Drilling Facility").
F-14
<PAGE>
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE (CONTINUED)
On February 18, 1997, the Company drew down the borrowing base and the
Special Advance Facility for a total of $41,668,000. These funds were used
to repay all existing Bank One debt outstanding in the amount of
$21,264,000, to partially finance the February 18, 1997 Huffman, Norse and
Horizon acquisitions in the amount of $19,404,000 and to pay a $1,000,000
loan fee to Bank One. The terms of the Credit Facility currently provide
for amortization payments at the rate of $240,000 on March 1, 1997 and
increasing to $475,000 per month commencing April 1, 1997, with all
outstanding principal and interest due and payable on January 30, 1999.
The Special Advance Facility of $10,000,000 is due on September 1, 1997.
Interest is payable, at the option of the Company, either at the rate of 1%
over the lending bank's base rate (9.25% at December 31, 1996) 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 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 no 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, (iv) maintain selling, general and administrative expenses per
quarter not in excess of 25% of consolidated net revenues for the quarter
ended March 31, 1997 and 20% of consolidated net revenues for all
subsequent quarters and (v) and to arrange for hedges covering not less
than 75% of the Company's proved developed production of oil and natural
gas for a period of not less than twelve months with minimum floor prices
to be mutually agreed upon by the Company and Bank One. Material breaches
of these or other covenants which are not cured or waived could result in a
default under the Credit Facility resulting in the indebtedness becoming
immediately due and payable and empowering the lender to foreclose against
the collateral for the loan.
In the event certain promissory notes owing to the bank by two
officers of the Company in the aggregate amount of $316,000 are not paid
when due on December 31, 1997, the Company has agreed that such amounts
will be drawn against the Company's Credit Facility and the officers will
be obligated to the Company for such sums.
Future maturities of long-term debt, as of December 31, 1996, based on
the terms of the original Bank One loan agreement, or the Bridge Financing
described below are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 5,927,660
1998 2,880,000
1999 12,974,000
-----------
$21,781,660
===========
</TABLE>
F-15
<PAGE>
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE (CONTINUED)
As noted above, on February 17, 1997, the Company and Bank One amended
the Credit Facility to provide for additional borrowings and, accordingly,
the monthly payments were increased from $240,000 per month to $475,000 per
month under the revolving loan. Additionally, the $10,000,000 Special
Advance Facility is due on September 1, 1997.
On June 2, 1995, Gothic Texas entered into an agreement with Stratum
Group, LLC ("Stratum") in which Stratum agreed to loan Gothic Texas a
maximum aggregate of $8,131,500, of which only $6,756,500 was drawn and was
used to complete the Johnson Ranch Acquisition. At December 31, 1995, the
amount outstanding was $6,622,815. On January 30, 1996, the Company, with
proceeds from its new credit facility, paid Stratum in full and terminated
its loan agreement with them. The transaction resulted in a loss on
extinquishment of debt of $1,432,973 and is shown as an extraordinary item
in the statement of operations.
Based on the borrowing rates currently available to the Company for
debt with similar terms and maturities, long-term debt at December 31, 1996
approximates its fair value.
NOTES PAYABLE
In order to provide the funds necessary to complete the Norse,
Huffman, and Horizon acquisitions, on February 18, 1997 two accredited
investors, as defined by the Securities Act, loaned to the Company the
aggregate sum of $4,500,000 represented by the Company's promissory notes
("Bridge Financing"). Of the aggregate amount, $2,500,000 bears interest
at 5% per annum and matures on April 18, 1997, with the remaining
$2,000,000 bearing interest at 12% per annum and maturing on October 31,
1997. In the event the principal and accrued interest is not paid when
due, such amount is automatically converted into a number of shares of the
Company's Common Stock determined by dividing such amount by a sum equal to
75% of the closing bid price for the Company's Common Stock on the five (5)
days prior to the maturity date, with respect to the $2,500,000 obligation,
and on the maturity date with respect to the $2,000,000 obligation. As
additional consideration for making the loan, the investors also purchased
at a price of $.01 per share a total of 250,000 shares of the Company's
common stock. The fair market value of the Company's common stock was
$2.63 per share on the date such shares were issued.
F-16
<PAGE>
NOTE 4. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK OFFERING - On January 30, 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 common
stock and three five year redeemable common stock purchase warrants, each
redeemable for one share of common stock at $2.40 per share. The offering
netted the Company approximately $12,970,000, all of which was applied to
the purchase of Buttonwood Energy Corporation. In connection with the
offering, the Underwriter was granted an option to acquire 230,000
Underwriter Units exercisable at a price of $9.90 per Unit.
Also 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. Additionally, 28,667 shares of common stock were issued
as a placement fee on the preferred stock offering. The financing included
1,290 shares issued to Quest Capital Corporation in exchange for $1,290,000
principal amount of the Quest Note, and the sale for cash of 4,250 shares,
for an aggregate cash price of $4,250,000 (net of fees of $252,570). 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
lessor 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%. On the basis of
the above mentioned conversion price, an aggregate of 2,770,000 shares of
Common Stock are issuable on conversion. The Company has the right to
redeem the shares of Preferred Stock at their liquidation value of $1,000
per share, plus any accrued and unpaid dividends at any time after January
30, 1998, upon giving 30 days prior written notice.
In June 1996, the Company issued 116,533 shares of its common stock to
two separate parties as consideration for their interest in oil and gas
properties located on the Johnson Ranch. The fair value assigned to these
oil and gas properties was $299,600, based on the trading price of the
Company's stock on the date of the acquisition.
In June 1995, the Company issued 1,000,000 shares of its common stock
to Merrill Lynch Capital Corporation as partial consideration for the
Johnson Ranch Acquisition (Note 2). The stock was trading at a value of
$2.69 per share on the date of issuance.
Also in June 1995, the Company issued 650,000 shares of common stock
to the Stratum Group as collateral for financing provided by Stratum to
complete the Johnson Ranch Acquisition (Note 2). Through September 1995, an
additional 304,128 shares of common stock were issued to Stratum as
collateral pursuant to the financing agreement. On January 30, 1996 the
Company repaid Stratum and the 954,128 shares of common stock held by
Stratum as collateral were returned to the Company.
In March 1995 the Company entered into an agreement with Quest Capital
Corporation ("Quest"), at which time Quest loaned the Company $1,850,000.
Pursuant to the agreement the Company issued 100,000 shares of common stock
to Quest in March
F-17
<PAGE>
NOTE 4. STOCKHOLDERS' EQUITY (CONTINUED)
1995. Additionally, the Company was obligated to issue an additional
25,000 shares of common stock for each of the four months of July through
October and 40,000 shares of common stock each month from November forward,
or until the debt was repaid. The Company issued 180,000 additional shares
of common stock to Quest, bringing the total shares issued to Quest at
December 31, 1995, to 280,000. An additional 40,000 shares of common stock
were issued in January 1996, prior to the time the loan was repaid.
During the period January 1995 through June 1995, Noteholders
converted a total of $656,800 in principal and interest into 325,600 shares
of the Company's common stock while retaining 52,500 of $1.00 common stock
warrants.
The following tables reflect the Company's outstanding warrants and
options at December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
EXERCISE NUMBER
PRICE ($) EXPIRATION OUTSTANDING EXPIRED/ OUTSTANDING EXERCISABLE
PER SHARE DATE 12/31/94 GRANTED EXERCISED CANCELED 12/31/95 12/31/95
--------- ---- -------- ------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WARRANTS
1991 Public Offering 5.50 06/30/96 800,000 - - - 800,000 800,000
1991 Underwriter 6.00 11/08/96 160,000 - - - 160,000 160,000
Private Placement 3.00 02/28/95 48,013 - - 48,013 - -
Quest 1.00 04/17/97 - 300,000 - - 300,000 300,000
Egolf 2.50 01/19/96 - 100,000 - - 100,000 100,000
Stratum 3.25 06/02/2000 - 1,000,000 - - 1,000,000 1,000,000
Bridge 2.40 01/30/2001 - 250,000 - - 250,000 -
Note Extenstion 1.00 08/31/97 72,500 - - 20,000 52,500 52,500
--------- ---------- ------ ------ ---------- ----------
Total Warrants 1,080,513 1,650,000 - 68,013 2,662,500 2,412,500
OPTIONS (NOTE 5)
Employees 1.50 11/01/99 - 125,000 - - 125,000 -
3.38 02/28/95 1,109 - - 1,109 - -
Officers & Directors 1.50 11/01/99 - 250,000 - - 250,000 -
2.50 10/04/99 500,000 - - - 500,000 250,000
Former Director/Officer 1.50 07/15/97 20,000 - - - 20,000 20,000
2.00 09/15/2004 30,000 - - - 30,000 30,000
2.65 08/14/95 10,000 - - 10,000 - -
--------- ---------- ------ ------ ---------- ----------
Total Options 561,109 375,000 - 11,109 925,000 300,000
Total 1,641,622 2,025,000 - 79,122 3,587,500 2,712,500
</TABLE>
F-18
<PAGE>
NOTE 4. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
EXERCISE NUMBER
PRICE ($) EXPIRATION OUTSTANDING EXPIRED/ OUTSTANDING EXERCISABLE
PER SHARE DATE 12/31/95 GRANTED EXERCISED CANCELED 12/31/96 12/31/96
--------- ---------- --------- ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WARRANTS
1991 Public Offering 5.50 06/30/96 800,000 - - 800,000 - -
1991 Underwriter 6.00 11/08/96 160,000 - - 160,000 - -
1996 Public Offering(1) 2.40 01/30/2001 - 7,635,000 - - 7,635,000 7,635,000
1996 Underwriter 2.40 01/30/2001 - 690,000 - - 690,000 690,000
Quest 1.00 04/17/97 300,000 - - - 300,000 300,000
Egolf 2.50 01/19/96 100,000 - - 100,000 - -
Stratum 3.25 06/02/2000 1,000,000 - - - 1,000,000 1,000,000
Bridge 2.40 01/30/2001 250,000 - - - 250,000 250,000
Note Extension 1.00 08/31/97 52,500 - - - 52,500 52,500
Underwriter 2.25 08/19/2001 - 200,000 - - 200,000 200,000
Consultant 2.38 03/14/2001 - 29,531 - - 29,531 29,531
--------- ---------- --------- --------- ---------- ----------
Total Warrants 2,662,500 8,554,531 - 1,060,000 10,157,031 10,157,031
OPTIONS (Note 5)
1996 Underwriter Share 3.30 01/30/2001 - 690,000 - - 690,000 690,000
Employee 1.50 11/01/99 125,000 - - - 125,000 62,500
1.75 02/01/2001 - 45,000 - - 45,000 -
2.50 12/18/2001 - 135,000 - - 135,000 -
Officers & Directors 1.50 11/01/99 250,000 - - 150,000 100,000 50,000
2.50 10/04/99 500,000 - - - 500,000 500,000
2.56 07/16/2001 - 600,000 - - 600,000 -
Former Director/Officer 1.50 07/15/97 20,000 - - - 20,000 20,000
2.00 09/15/2004 30,000 - - - 30,000 30,000
--------- ---------- --------- --------- ---------- ----------
Total Options 925,000 1,470,000 - 150,000 1,745,000 1,352,500
Total 3,587,500 10,024,531 - 1,210,000 12,402,031 11,509,531
</TABLE>
(1) Warrants are redeemable at the option of the Company at a per
warrant price of $.01 per warrant at any time after the Warrants
become exercisable, upon not less than 15 business days prior
written notice, if the last sale price of the Common Stock has
been at least 200% of the then exercise price of the Warrants for
the 20 consecutive trading days prior to date of notice. Warrant
holders are entitled to exercise their warrants up to the date of
redemption.
F-19
<PAGE>
NOTE 5. STOCK OPTIONS
INCENTIVE STOCK OPTION PLAN - The Company has an incentive stock option and
non-statutory option plan (the "Plan"), which provides for the issuance of
options to purchase up to 2,500,000 shares of Common Stock to key employees
and Directors. The incentive stock options granted under the Plan are
generally exercisable for a period of ten years from the date of the grant,
except that the term of an incentive stock option granted under the Plan to
a stockholder owning more than 10% of the outstanding common stock must not
exceed five years and the exercise price of an incentive stock option
granted to such a stockholder must not be less than 110% of the fair market
value of the common stock on the date of grant. The exercise price of a
non-qualified option granted under the Plan may not be less than 40% of the
fair market value of the common stock at the time the option is granted.
No non-qualified options have been issued under the Plan.
As of December 31, 1996 and 1995, options to purchase 1,005,000 and
376,109 (1,109 shares expired during 1995) shares of common stock had been
granted under the plan, respectively. Options to employees to purchase an
aggregate of 305,000 common shares are exercisable, with 125,000 shares
exercisable at $1.50 per share through November 1, 1999, 45,000 shares
exercisable at $1.75 per share, through February 1, 2001, and 135,000
shares exercisable at $2.50 per share, through December 18, 2001. Options
to officers and directors to purchase an aggregate of 700,000 common shares
are outstanding, with 100,000 shares exercisable at $1.50 per share,
through November 1, 1999 and 600,000 shares exercisable at $2.56 per share,
through July 16, 2001. Half of the options are exercisable after the
completion of one year of future service as an employee or director with
the remaining options being exercisable upon the completion of the second
year of future service.
OTHER OPTIONS - On October 4, 1994 the Company granted 250,000 options to
each of two officers of the Company to purchase common stock of the Company
at $2.50 per share. Half of the options are exercisable after the
completion of one year of future service as an employee or director with
the remaining options being exercisable upon the completion of the second
year of future service.
On September 15, 1994, the Company granted 10,000 options to each of
two directors and a former consultant. The options are currently
exercisable at $2.00 per share until September 15, 2004, at which time the
options expire.
On July 15, 1992, the Company granted an option to a director/officer
to purchase 20,000 shares of common stock with an exercise price of $2.50
per share, exercisable through July 15, 1997. On September 15, 1994, the
exercise price of these options was decreased to $1.50 per share.
OMNIBUS INCENTIVE PLAN - On August 13, 1996 at the Annual Shareholders'
Meeting, the shareholders approved the 1996 Omnibus Incentive Plan and the
1996 Non-Employees Stock Option Plan. The 1996 Omnibus Incentive Plan
provides for compensatory awards representing or corresponding 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
F-20
<PAGE>
NOTE 5. STOCK OPTIONS (CONTINUED)
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 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.
NON-EMPLOYEE STOCK OPTION 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 exercisable 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.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its Incentive Stock Option Plan and other stock options
issued. Accordingly, no compensation cost has been recognized in 1996 and
1995. Had compensation been determined on the basis of fair value pursuant
to Statement of Financial Accounting Standards No. 123, net loss and loss
per share would have been increased as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net loss available
for common shares:
As reported $(3,328,909) $(7,583,346)
=========== ===========
Proforma $(3,772,571) $(7,646,628)
=========== ===========
Loss per Share:
As reported $ (.29) $ (1.73)
=========== ===========
Proforma $ (.32) $ (1.75)
=========== ===========
</TABLE>
The fair value of each option granted is estimated using the Black Scholes
model. The Company's volatility of stock was 0.90 based on previous stock
performance. Dividend yield was estimated to remain at zero with a risk
free interest rate of 6.0 percent in both 1996 and 1995. Expected life was
3 years based on prior experience, the vesting periods involved and the
make up of participating employees within each grant. Fair value of
options granted during 1996 and 1995 under the Stock Option Plan were
$1,175,000 and $202,500, respectively.
F-21
<PAGE>
NOTE 6. INCOME TAXES
Deferred tax assets and liabilities are comprised of the following at
December 31, 1996:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Gas balancing liability $ 390,000
Net operating loss carryforwards 4,889,000
Depletion carryforwards 257,000
-----------
Gross deferred tax assets 5,536,000
Deferred tax liabilities:
Prepaid lease operating expenses (475,000)
Book over tax basis of oil and gas (4,761,000)
properties
Gross deferred tax liabilities (5,236,000)
Net deferred tax assets 300,000
Valuation allowance (300,000)
-----------
$ 0
===========
</TABLE>
As a result of a change in control of the Company in 1994,
approximately $4,901,000 of net operating loss carryforwards generated
prior to the change in control are unavailable for future use. Net
operating losses generated subsequent to the change in control of
approximately $6,970,000 are available for future use against taxable
income. These net operating loss carryforwards expire in the year 2010.
In addition, the acquisition of Buttonwood Energy Corporation in
January, 1996 made available approximately $5,900,000 of net operating loss
carryforwards and $675,000 of depletion carryforwards generated prior to
the acquisition. However, the loss carryforwards and depletion
carryforwards are limited annually under Internal Revenue Code Section 382
due to a change in ownership. The net operating loss carryforwards expire
in the year 2010 and the depletion carryforwards can be carried forward
indefinitely.
Due to the uncertainty of the Company's ability to utilize the net
operating loss carryforwards and depletion carryforwards and the limitation
under Section 382, a 100% valuation allowance has been recorded.
NOTE 7. COMMITMENTS
The Company has entered into five-year employment agreements with its
President and Vice-President. Under the agreements, as amended in November
1996, each receives a base salary of $121,000 per year plus additional
amounts as may be determined from time to time by the Company's Board of
Directors. In addition, such persons are to receive a cash bonus as may
be determined by the Company's Board of Directors. The Company has the
right to terminate the employment agreements at any time upon 45 days
notice. Unless the agreement has been terminated for cause, as defined,
the Company is obligated to pay each of the officers the sum of $200,000,
together with any sums unpaid under the terms of the
F-22
<PAGE>
NOTE 7. COMMITMENTS (CONTINUED)
employment agreement, and continue their medical insurance in effect for a
period of one year after such termination. In the event of a change of
control in the Company, as defined, each of the officers has the right to
terminate their employment agreements with the Company within 60 days
thereafter and the Company is obligated to pay the same sums and other
benefits described above as if such agreements had been terminated by the
Company without cause.
In the event certain promissory notes owing to the bank by two
officers of the Company in the aggregate amount of $316,000 are not paid
when due on December 31, 1997, the Company has agreed that such amounts
will be drawn against the Company's Credit Facility and the officers will
be obligated to the Company for such sums.
The Company leases its corporate offices and certain office equipment
and automobiles under non-cancelable operating leases. Rental expense
under non-cancelable operating leases was $110,347 and $95,846 for the
years ended December 31, 1996 and 1995, respectively.
Remaining minimum annual rentals under non-cancelable lease agreements
subsequent to December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $131,013
1998 120,022
1999 114,476
2000 9,000
2001 8,250
</TABLE>
NOTE 8. 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 the
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, and accordingly, no amount has been accrued in the
financial statements.
NOTE 9. MAJOR CUSTOMERS
During the year ended December 31, 1996, the Company was a party to
contracts whereby its sold approximately 48% of its gas production to
Aurora Natural Gas, LLC, 11% of its gas production to GPM Gas Corporation
and 82% of its oil production to Sun Refining and Marketing. During the
year ended December 31, 1995, the Company was a party to contracts whereby
it sold approximately 53% of its gas production to GPM Gas Corporation and
24% to Enron Capital and Trade Resources, and 95% of its oil production to
Stratum Group Energy Capital, L.P.
F-23
<PAGE>
NOTE 10. SUPPLEMENTARY OIL AND GAS INFORMATION
FINANCIAL DATA
The following supplemental historical and reserve information is
presented in accordance with Financial Accounting Standards Board Statement
No. 69, "Disclosures About Oil and Gas Producing Activities".
CAPITALIZED COSTS - The aggregate amounts of capitalized costs relating
to oil and gas producing activities, net of valuation allowances, and the
aggregate amounts of the related accumulated depreciation, depletion, and
amortization at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
Proved properties $39,858,000
Less: Accumulated depreciation,
depletion, and amortization (3,567,000)
-----------
Net oil and gas properties $36,291,000
===========
</TABLE>
COSTS INCURRED - Costs, capitalized and expensed, incurred in oil and gas
property acquisition, exploration and development activities for the year
ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Property acquisition $35,347,425
Development costs 1,177,327
-----------
Total costs incurred $36,524,752
===========
</TABLE>
OIL AND GAS RESERVES DATA (UNAUDITED)
ESTIMATED QUANTITIES - Oil and natural gas reserves cannot be measured
exactly. Estimates of oil and natural gas reserves require extensive
judgments of reservoir engineering data and are generally less precise than
other estimates made in connection with financial disclosures.
Proved reserves are those quantities which, upon analysis of
geological and engineering data, appear with reasonable certainty to be
recoverable in the future from known oil and natural gas reservoirs under
existing economic and operating conditions. Proved developed reserves are
those reserves which can be expected to be recovered through existing wells
with existing equipment and operating methods. Proved undeveloped reserves
are those reserves which are expected to be recovered from new wells on
undrilled acreage or from existing wells where a relatively major
expenditure is required.
Estimates of oil and natural gas reserves require extensive judgments
of reservoir engineering data as explained above. Assigning monetary
values to such estimates does
F-24
<PAGE>
NOTE 10. SUPPLEMENTARY OIL AND GAS INFORMATION (CONTINUED)
reduce the subjectivity and changing nature of such reserve estimates.
Indeed, the uncertainties inherent in the disclosure are compounded by
applying additional estimates of the rates and timing of production and the
costs that will be incurred in developing and producing the reserves. The
information set forth herein is therefore subjective and, since judgments
are involved, may not be comparable to estimates submitted by other oil and
natural gas producers. In addition, since prices and costs do not remain
static and no price or cost escalations or de-escalations have been
considered, the results are not necessarily indicative of the estimated
fair market value of estimated proved reserves nor of estimated future cash
flows. Accordingly, these estimates are expected to change as future
information becomes available. All of the Company's reserves are located
onshore in the states of Oklahoma, Texas, Arkansas and Kansas.
The following unaudited table sets forth proved oil and gas reserves at
December 31, 1996:
<TABLE>
<CAPTION>
1996
----------------------
Bbls Mcf
--------- ----------
<S> <C> <C>
Proved Reserves:
Beginning of year 711,000 18,698,000
Revisions of previous estimates 222,000 10,276,000
Purchases of reserves in place 639,000 42,633,000
Production (164,000) (3,404,000)
Sales of reserves in place (250,000) (3,669,000)
--------- ----------
End of year 1,158,000 64,534,000
========= ==========
Proved Developed:
Beginning of year 642,000 5,093,000
End of year 1,135,000 47,485,000
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS - Future net
cash inflows are based on the future production of proved reserves of crude
oil and natural gas as estimated by petroleum engineers by applying current
prices of oil and gas to estimated future production of proved reserves.
Prices used in determining future cash inflows for oil and natural gas as
of December 31, 1996, were $24.20 per barrel and $2.65 per mcf,
respectively. Future net cash flows are then calculated by reducing such
estimated cash inflows by the estimated future expenditures (based on
current costs) to be incurred in developing and producing the proved
reserves and by the estimated future income taxes. Subsequent to December
31, 1996, the "spot market" price of natural gas decreased to below $2.00
per mcf which would have a significant impact on the SMOG values.
Estimated future income taxes are computed by applying the appropriate
year-end tax rate to the future pretax net cash flows relating to the
Company's estimated proved oil and gas reserves. The estimated future
income taxes give effect to permanent differences and tax credits and
allowances.
The standardized measure of discounted future net cash flows is based
on criteria established by Financial Accounting Standards Statement No. 69,
"Accounting for Oil and
F-25
<PAGE>
NOTE 10. SUPPLEMENTARY OIL AND GAS INFORMATION (CONTINUED)
Gas Producing Activities" and is not intended to be a "best estimate" of
the fair value of the Company's oil and gas properties. For this to be the
case, forecasts of future economic conditions, varying price and cost
estimates, varying discount rates and consideration of other than proved
reserves (i.e., probable reserves), would have to be incorporated into the
valuations.
Included in the estimated standardized measure of future cash flows
are certain capital projects. The Company estimates the capital required
to develop its undeveloped oil and gas reserves over the next three years
to be approximately $9.65 million, including $6.10 million during the year
ended December 31, 1997. Bank One established a special drilling advance
fund of $2 million which the Company can draw upon during 1997 to fund its
drilling costs. The Company does not have any present arrangements to
raise additional funds and there can be no assurance that it will be able
to do so on satisfactory terms. If such capital is not employed, the
estimated future cash flows will be impacted.
The following table sets forth the Company's unaudited estimated
standardized measure of discounted future net cash flows, (in thousands).
Proved reserves for the year ended December 31, 1996 were estimated by an
independent petroleum engineering firm and for the year ended December 31,
1995 were estimated by petroleum engineers employed by the Company.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Cash Flows Relating to
Proved Reserves:
Future cash inflows $199,166 $ 43,824
Future production costs (73,976) (16,646)
Future development costs (9,645) (11,030)
Future income tax expense (30,919) (68)
------- -------
84,626 16,080
Ten percent annual discount factor (35,543) (7,901)
------- -------
Standardized Measure of Discounted
Future Net Cash Flows $ 49,083 $ 8,179
======= =======
</TABLE>
The following table sets forth changes in the standardized measure of
discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Standardized measure of discounted
future cash flows-beginning of $ 8,179 $ -
period
Sales of oil and gas produced, net of
operating expenses (5,579) (691)
Purchases of reserves-in-place 30,930 16,007
Sales of reserves-in-place (3,598) (496)
Revisions of previous quantity
estimates and changes in sales
prices and production costs 18,333 (7,381)
Accretion of discount 818 740
------- -------
Standardized measure of discounted
future cash flows-end of period $49,083 $ 8,179
======= =======
</TABLE>
F-26
<PAGE>
William S. Clarke, P.A.
Attorney-At-Law
457 North Harrison Street - Suite 103
Princeton, New Jersey 08540
__________
Telephone: (609) 921-3663
Fax: (609) 921-3933
April 29, 1997
Securities and Exchange Commission
450 Fifth Street Northwest
Washington, DC 20549
Re: GOTHIC ENERGY CORPORATION
FILE NO. 0-19753
AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 10KSB FOR THE YEAR ENDED
DECEMBER 31, 1996
Gentlemen:
On behalf of the above Registrant and pursuant to Section 13 of the
Securities Exchange Act of 1934, and the rules and regulations thereunder, there
is filed herewith Amendment No. 1 to the above Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1996. The Report amends Items 6 and
7 in response to the staff's letter of comment dated April 18, 1997. Changes to
those Items reflected in the Amendment have been marked. A letter explaining
the Registrant's response to that letter accompanies the filing of Amendment No.
1 to the Registrant's Registration Statement on Form S-3 (File No. 33-23239)
which has also been filed with the Commission today.
Please do not hesitate to contact the undersigned, if the staff should have
any further questions or comments.
Very truly yours,
William S. Clarke
WSC/cw
cc: Gothic Energy Corporation
F-27
