<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1998
REGISTRATION NUMBER 333-52217
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
GOTHIC ENERGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
OKLAHOMA 1311 22-2663839
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER ID NO.)
JURISDICTION OF INDUSTRIAL
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
5727 SOUTH LEWIS AVENUE, SUITE 700
TULSA, OKLAHOMA 74105
(918) 749-5666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES.)
AGENT FOR SERVICE
MICHAEL K. PAULK, PRESIDENT
GOTHIC ENERGY CORPORATION
5727 SOUTH LEWIS AVENUE, SUITE 700, TULSA, OKLAHOMA 74105
(918) 749-5666
COPIES TO:
WILLIAM S. CLARKE, ESQUIRE
WILLIAM S. CLARKE, P.A.
457 NORTH HARRISON STREET, SUITE 103, PRINCETON, NEW JERSEY 08540
(609) 921-3663
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Effective Date of this Registration Statement.
------------
IF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN
CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE
WITH GENERAL INSTRUCTION G, CHECK THE FOLLOWING BOX: [_]
------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
TITLE OF EACH CLASS OF OFFERING MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AMOUNT TO BE PRICE AGGREGATE REGISTRATION
REGISTERED PER NOTE OFFERING PRICE FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
14 1/8% Series B Senior Secured
Discount Notes due 2006................ $60,155,680(1) 100% $60,155,680(1) $17,746
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The 14 1/8% Series B Senior Secured Discount Notes will be offered in
exchange for the 14 1/8% Series A Senior Secured Discount Notes due 2006
which were issued on April 27, 1998 at a price of 57.842% of their
principal amount and accrete in value until May 1, 2002 at the rate of 14
1/8% per annum at which time the fully accreted amount outstanding will be
$104.0 million. Pursuant to Rule 457(f)(2), the filing fee has been based
on the present discounted book value of the Series A Senior Secured Notes
to be received by the Registrant in the exchange.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 3, 1998
OFFER TO EXCHANGE
ALL OUTSTANDING
14 1/8% SERIES A SENIOR SECURED DISCOUNT NOTES DUE 2006
($104,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
14 1/8% SERIES B SENIOR SECURED DISCOUNT NOTES DUE 2006,
($104,000,000 PRINCIPAL AMOUNT)
OF
GOTHIC ENERGY CORPORATION
The Exchange Offer will expire at 5:00PM, EST, July 7, 1998, unless extended.
Gothic Energy Corporation, an Oklahoma corporation ("Gothic"), hereby offers
(the "Exchange Offer"), upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange up to an aggregate principal amount of $104,000,000
of its 14 1/8% Series B Senior Secured Discount Notes due 2006 (the "Exchange
Notes") for an equal principal amount of its outstanding 14 1/8% Series A
Senior Secured Discount Notes due 2006 (the "Outstanding Notes" and, together
with the Exchange Notes, the "Notes"), in integral multiples of $1,000. The
Exchange Notes are substantially identical (including principal amount,
accretion rights, interest rate, maturity and redemption rights) to the
Outstanding Notes for which they may be exchanged pursuant to this Exchange
Offer, except for certain transfer restrictions and registration rights
relating to the Outstanding Notes and except for certain interest provisions
relating to such rights. The Outstanding Notes have been, and the Exchange
Notes will be, issued under an Indenture dated as of April 21, 1998 (the
"Indenture") between Gothic and The Bank of New York, as trustee (the
"Trustee"). See "Description of the Notes." There will be no proceeds to Gothic
from this offering; however, pursuant to a Registration Rights Agreement dated
as of April 21, 1998 (the "Registration Rights Agreement") among Gothic and the
Purchasers (as defined) of the Outstanding Notes, Gothic will bear certain
offering expenses.
SEE "RISK FACTORS" ON PAGE 14 FOR A DISCUSSION OF CERTAIN RISKS TO BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN EVALUATING AN
INVESTMENT IN THE EXCHANGE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JUNE , 1998
<PAGE>
Gothic will accept for exchange any and all validly tendered Outstanding
Notes on or prior to 5:00PM, EST, on Julu 7, 1998, unless extended (the
"Expiration Date"). Tenders of Outstanding Notes may be withdrawn at any time
prior to 5:00PM, EST, on the Expiration Date; otherwise such tenders are
irrevocable. The Bank of New York is acting as Exchange Agent in connection
with the Exchange Offer. The Exchange Offer is not conditioned upon any
minimum principal amount of Outstanding Notes being tendered for exchange, but
is otherwise subject to certain customary conditions.
The Exchange Notes will accrete in value from the date of issuance at a rate
equal to 14 1/8% per annum, compounded semiannually on May 1 and November 1 of
each year to an aggregate principal amount of $104.0 million at May 1, 2002 on
the same terms as the Outstanding Notes. Thereafter, interest on the Exchange
Notes will be payable semiannually in cash in arrears on May 1 and November 1
of each year commencing November 1, 2002. The Exchange Notes will be secured
by a first priority lien on the outstanding shares of capital stock of Gothic
Production Corporation ("GPC"), an Oklahoma corporation and a wholly owned
subsidiary of Gothic. GPC holds substantially all of the natural gas and oil
producing properties of Gothic. Outstanding Notes that are accepted for
exchange will cease to accrete in value on and after the date on which the
Exchange Notes will begin to accrete in value.
The Outstanding Notes together with warrants (the "Warrants") to purchase
shares of the Company's Common Stock (par value $0.01 per share) (the "Common
Stock") were sold (the "Offering") by Gothic on April 21, 1998 to the
Purchasers (as defined) in a transaction not registered under the Securities
Act of 1933, as amended (the "Securities Act"), in reliance upon the exemption
provided in Section 4(2) of the Securities Act. Gothic sold to the Purchasers
$104.0 million aggregate principal amount of Outstanding Notes and 825,000
Warrants in 104,000 units (the "Units") of securities, each Unit consisting of
$1,000 principal amount of Outstanding Notes and 7.933 Warrants with each
whole Warrant representing the right to purchase one share (the "Warrant
Shares") of Common Stock at a price of $2.40 per share. The Notes and Warrants
will not be separately transferable until the Separation Date (as defined
herein). The Purchasers agreed that the Units, Outstanding Notes and Warrants
may not be re-offered, resold or otherwise transferred in the United States
unless so registered or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered hereunder in order to satisfy the obligations of Gothic under the
Registration Rights Agreement to file a registration statement with respect to
the Outstanding Notes. Gothic intends to file a separate registration
statement for the purpose of satisfying its obligations under the Registration
Rights Agreement with respect to the Warrants and the Warrant Shares. See "The
Exchange Offer."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, Gothic believes that Exchange Notes issued pursuant to this Exchange
Offer may be offered for resale, resold and otherwise transferred by a holder
who is not an affiliate of Gothic without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the Exchange Notes in its ordinary course of business and is not
participating in and has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes. Persons wishing to exchange Outstanding Notes in the
Exchange Offer, must represent to Gothic that such conditions have been met.
Each broker/dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer (a "Participating Broker/Dealer") must acknowledge that
it will deliver a prospectus in connection with any resale of Exchange Notes.
The Letter of Transmittal for the Exchange Offer states that by so
acknowledging and delivering a prospectus, a broker/dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Outstanding Notes where such Outstanding Notes were
acquired by such broker/dealer as a result of marketmaking activities or other
trading activities. Gothic has agreed to make this Prospectus available to any
Participating Broker/Dealer for use in connection with any such resale for a
period of up to one year from the date on which the registration statement, of
which this Prospectus forms a part, is declared effective. See "Plan of
Distribution."
i
<PAGE>
Gothic does not intend to list the Exchange Notes on any national securities
exchange or to seek the admission thereof to trading on The Nasdaq Stock
Market. Accordingly, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes of other holders
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Outstanding Notes could be adversely affected. Following
consummation of the Exchange Offer, the holders of Outstanding Notes will
continue to be subject to the existing restrictions upon transfer thereof.
Gothic expects that the Exchange Notes issued pursuant to this Exchange
Offer will be issued in the form of a Global Exchange Note (as defined
herein), which will be deposited with, or on behalf of, The Depository Trust
Company ("DTC") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Exchange Note representing the
Exchange Notes will be shown on, and transfers thereof will be effected
through, records maintained by DTC and its participants. After the initial
issuance of the Global Exchange Note, Exchange Notes in certificated form will
be issued in exchange for the Global Exchange Note on the terms set forth in
the Indenture. See "Description of Exchange Notes--Global Exchange Note; Book-
Entry Form."
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by Gothic. This Prospectus does not constitute
an offer to sell or the solicitation of an offer to buy any security other
than the Exchange Notes offered hereby nor does it constitute an offer to sell
or the solicitation of an offer to buy any of the Exchange Notes to any person
in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
AVAILABLE INFORMATION
Gothic has filed with the Commission in Washington, DC, a Registration
Statement on Form S-4 (the "Registration Statement") under the Securities Act
with respect to the securities offered by this Prospectus. Certain of the
information contained in the Registration Statement is omitted from this
Prospectus, and reference is hereby made to the Registration Statement and
exhibits and schedules relating thereto for further information with respect
to Gothic and the securities offered by this Prospectus. Gothic is subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in accordance therewith, files reports,
proxy statements. and other information with the Commission. Such reports,
proxy statements and other information are available for inspection at, and
copies of such materials may be obtained upon payment of the fees prescribed,
therefore, by the rules and regulations of the Commission from the Commission
at its principal offices located at Judiciary Plaza, 450 Fifth Street N.W.,
Room 1024, Washington, DC 20549, and at the Regional Offices of the Commission
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and at 7 World Trade Center, Suite 1300, New
York, New York 10048. The public may obtain information on the operation of
the Public Reference Room of the Commission by calling 1-800-SEC-0330. The
Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including Gothic, that file
electronically with the Commission. In addition, the Common Stock of Gothic
("Common Stock") is traded on The Nasdaq SmallCap Market under the symbol
GOTH, and such reports, proxy statements and other information may be
inspected at the offices of The Nasdaq National Market, 1735 "K" Street
Northwest, Washington, DC 20006.
So long as Gothic is subject to the periodic reporting requirements of the
Exchange Act, it is required to furnish the information required to be filed
with the Commission to the Trustee and the holders of the Notes. Gothic has
agreed that, even if it is entitled under the Exchange Act not to furnish such
information to the
ii
<PAGE>
Commission, it will nonetheless continue to furnish information that would be
required to be furnished by Gothic by Section 13 of the Exchange Act to the
Trustee and the holders of the Notes as if it were subject to such periodic
reporting requirements.
In addition, Gothic has agreed that for so long as any of the Notes are
outstanding and are "restricted securities" within the meaning of Rule 144(a)
(3) under the Securities Act, they will make available to any prospective
purchaser of the Notes or beneficial owner of the Notes in connection with any
sale thereof the information required by Rule 144A (d) (4) (i) under the
Securities Act.
INFORMATION INCORPORATED BY REFERENCE
Gothic's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997, Gothic's Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 1998, and Gothic's Current Reports on Form 8-K dated May 16, 1996,
Form 8-K/A filed July 30, 1996, Form 8-K dated December 27, 1996, Form 8-K
dated February 18, 1997, Form 8-K/A filed June 6, 1997, Form 8-K dated
April 16, 1997, Form 8-K dated June 30, 1997, Form 8-K dated September 9,
1997, Form 8-K/A filed October 3, 1997, Form 8-K dated November 25, 1997, Form
8-K dated January 23, 1998, Form 8-K/A filed January 30, 1998, Form 8-K/A
filed February 6, 1998, Form 8-K/A filed February 25, 1998, Form 8-K/A filed
April 8, 1998, Form 8-K dated March 31, 1998 and Form 8-K dated April 27,
1998, and filed with the Commission pursuant to the Exchange Act, are
incorporated by reference in this Prospectus.
All documents filed by Gothic pursuant to Section 13(a), 13(c), 14, or 15(d)
of the Exchange Act, after the date of this Prospectus and prior to the
termination of the Registration Statement of which this Prospectus is a part
with respect to registration of the Exchange Notes, shall be deemed to be
incorporated by reference in this Prospectus and be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this Prospectus
shall be deemed to be modified or superseded for purposes of this Prospectus
to the extent that a statement contained in this Prospectus, or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference, modifies or replaces such statement.
Gothic will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon written or oral request of such person, a copy
of any and all of the information that has been incorporated by reference in
this Prospectus (not including exhibits to the information that are
incorporated by reference unless such exhibits are specifically incorporated
by reference into the information that this Prospectus incorporates). Written
or telephone requests for copies of such material should be directed to Gothic
Energy Corporation, 5727 South Lewis Avenue, Suite 700, Tulsa, Oklahoma 74105
(telephone (918) 749-5666).
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
Prospectus are "forward-looking statements" as defined under the Securities
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: "Prospectus Summary--Gothic--Business Strategy," "Risk
Factors--Future Capital Requirements," "--Volatility of Oil and Natural Gas
Prices and Markets," "--Replacement of Reserves,""--Uncertainty of Estimates
of Reserves and Future Net Revenues; Significant Undeveloped Reserves,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "--Changes in Prices and
Inflation," "Business and Properties--Business Strategy," "--Development and
Exploitation," and "--Exploration." Such forward-looking statements relate to
Gothic's capital requirements, business strategy, ability to attain and
maintain profitability and cash flow, dependence upon the acquisition of and
ability to acquire additional natural gas and oil properties or entering into
joint natural gas and oil well development arrangements, access to debt and
equity capital and availability of joint venture development
iii
<PAGE>
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 natural gas and oil 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 13 to Notes to the December 31, 1997 Consolidated
Financial Statements. Gothic cautions readers that various risk factors
described in this Prospectus (see "Risk Factors") could cause Gothic's
operating results to differ materially from those expressed in any forward-
looking statements made by Gothic and could adversely affect Gothic's ability
to pursue its business strategy and repay the Notes.
iv
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, financial statements and other data appearing elsewhere in this
Prospectus. Unless the context otherwise requires, all references to "Gothic"
are to Gothic Energy Corporation and its subsidiaries. Unless otherwise
indicated, all financial and quantitative information provided in this
Prospectus on a "pro forma basis" give effect, on the date and for the periods
indicated, to certain acquisitions effected by Gothic during 1997, the Amoco
Acquisition (as defined herein) and related financings, the completion of the
Recapitalization (as defined herein) and the application of the estimated net
proceeds therefrom. The estimated proved reserve information included or
incorporated in this Prospectus with respect to Gothic and the Amoco
Acquisition properties is based on reports by Lee Keeling & Associates, Inc.
Certain terms relating to the natural gas and oil business and other terms are
defined in the "Glossary."
GOTHIC
Gothic is an independent energy company primarily engaged, effective with
the Recapitalization, through its wholly owned subsidiary, Gothic Production
Corporation ("GPC"), in the acquisition, development, exploitation, exploration
and production of natural gas and oil. Gothic commenced natural gas and oil
operations in 1994 with a business strategy emphasizing acquisitions of long-
lived, proved producing natural gas properties with significant development and
exploitation potential. As a result of this strategy, Gothic has grown
primarily through 14 acquisitions of producing natural gas and oil properties
(including the Amoco Acquisition) for total consideration of $337.8 million.
Reflecting this successful growth, Gothic is currently pursuing a business
strategy emphasizing the development and exploitation of its existing asset
base, maintenance of low cost operations and selective strategic acquisitions.
As of December 31, 1997, Gothic had, on a pro forma basis, proved reserves of
331.1 Bcfe, of which approximately 92% were natural gas, with a pro forma PV-10
of approximately $298.8 million. These reserves, of which 82% were classified
as proved developed, had an estimated Reserve Life of approximately 10.5 years.
For the year ended December 31, 1997, on a pro forma basis, Gothic had revenues
of $72.7 million and EBITDA of $53.6 million. For the quarter ended March 31,
1998, on a pro forma basis, Gothic had revenues of $15.5 million and EBITDA of
$10.2 million.
Gothic's natural gas and oil reserves and acreage are principally located in
the Anadarko, Arkoma and Permian/Delaware basins, which are historically
prolific basins with multiple producing horizons and long-lived reserves. These
basins generally provide significant development and exploitation potential
through low-risk infill drilling and the implementation of new workover,
drilling and recompletion technologies. Gothic has initiated a comprehensive
development and exploitation program designed to increase its natural gas and
oil reserves, production, earnings, cash flow and net asset value by enhancing
proved producing reserves and converting proved undeveloped reserves to proved
producing reserves. During the nine months ended March 31, 1998, since the
inception of this program, Gothic drilled 16 wells, 15 of which have been
completed and are producing. In addition, Gothic has entered into a
participation agreement involving the drilling of substantially all of its
undeveloped acreage with Chesapeake Energy Corporation ("Chesapeake") which
will support Gothic's comprehensive development and exploitation program.
Gothic has not engaged in any material exploration activities but intends to
devote a limited amount of capital in the future to pursue "controlled-risk"
exploration opportunities.
On a pro forma basis, at December 31, 1997, Gothic held an interest in
627,708 gross acres (319,579 net acres) and had an interest in 1,387 gross
wells (631 net wells). Gothic serves as operator of approximately 710 of the
wells in which it has an interest. Operated wells account for approximately 75%
of the PV-10 of Gothic's pro forma proved reserves as of December 31, 1997.
1
<PAGE>
BUSINESS STRATEGY
Gothic's objective is to increase its reserves, production, earnings, cash
flow and net asset value through a growth strategy that includes (i)
developing, exploiting and exploring its natural gas and oil properties, (ii)
maintaining a low operating cost structure, and (iii) acquiring strategic
natural gas and oil properties in a disciplined manner.
Development, Exploitation and Exploration
Gothic seeks to maximize the value of its natural gas and oil properties
through development drilling, workovers, recompletions, reductions in operating
costs and enhanced operating efficiencies. Gothic's core areas are
characterized by properties with multiple pay zones that allow for integrated
analysis of stratigraphic, seismic and well control data to identify
development and exploitation opportunities. Through such analysis, Gothic has,
as of March 31, 1998, identified 194 development and exploitation projects
within its properties, of which 114 have been assigned proved undeveloped
reserves. Gothic's 1998 development drilling program includes plans to spend
approximately $20.0 to $25.0 million to drill approximately 30 to 40 wells,
many of which are infill development wells on proved undeveloped locations.
Gothic also continually evaluates and pursues exploitation opportunities,
including workover and recompletion projects. Gothic intends to devote a
limited amount of capital in the future to pursue "controlled-risk" exploration
opportunities by drilling on undeveloped acreage in areas in close proximity to
producing properties. Gothic believes geological and geophysical data,
including 3D and 2D seismic surveys acquired in the Amoco Acquisition, will
enable it to reduce costs and risks associated with drilling activities
throughout its core areas.
Maintain Low Cost Operations
Gothic is able to directly control operating and drilling costs as the
operator of wells comprising approximately 75% of the PV-10 of pro forma proved
reserves as of December 31, 1997. In addition, Gothic has been able to reduce
per unit operating costs by eliminating unnecessary field and corporate
overhead costs and by divesting marginal and non-strategic properties with
limited development potential. Lease operating expenses have decreased 57%,
from $1.29 per Mcfe of production in 1995 on a historical basis to $0.55 per
Mcfe for the quarter ended March 31, 1998 on a pro forma basis. Further,
general and administrative expenses per Mcfe of production have decreased 90%,
from $1.15 per Mcfe to $0.10 per Mcfe over the same period. Gothic intends to
further improve the efficiency of and reduce the operating costs associated
with well operations through the use of advanced wireless technology licensed
to Gothic as part of the Amoco Acquisition. This technology enables Gothic to
remotely monitor well operations, thereby reducing the need for on-site
monitoring personnel. Gothic intends to deploy this technology throughout many
of its producing properties in the Anadarko and Arkoma basins.
Strategic Acquisitions
Gothic intends to pursue additional strategically attractive acquisitions to
the extent its capital structure allows. With the recent completion of the
Amoco Acquisition, however, Gothic has reduced the emphasis on acquisitions in
its current business strategy. Gothic has increased its reserves through
acquisitions, having added 424.9 Bcfe through 14 acquisitions, since November
1994, at a total acquisition cost of $337.8 million, or an average cost of
$0.80 per Mcfe. Gothic utilizes a disciplined acquisition strategy, focusing
its acquisition efforts on producing natural gas properties within its core
areas with (i) relatively long-lived natural gas production, (ii) quantifiable
development and exploitation potential, (iii) low risk exploration potential,
(iv) historically low operating expenses or the potential to reduce operating
expenses, (v) close proximity to Gothic's existing production or in areas where
Gothic has the ability to develop operating economies of scale and (vi)
geological, geophysical and other technical and operating characteristics with
which management of Gothic has expertise. Gothic applies strict economic and
reserve risk criteria in evaluating acquisitions of natural gas and oil
properties and companies.
2
<PAGE>
THE RECAPITALIZATION
On April 27, 1998, Gothic completed a series of transactions intended to
recapitalize Gothic through (i) the creation of GPC and transfer of all of
Gothic's natural gas and oil assets to GPC, (ii) the issuance by Gothic of
shares of Series B Preferred Stock, (iii) the sale of assets for $20.0 million,
subject to closing adjustments, (iv) the execution of a participation agreement
granting a 50% interest in substantially all of Gothic's undeveloped acreage,
(v) the issuance by GPC of the Senior Secured Notes (as defined), (vi) the
issuance by Gothic of the Notes and (vii) the repayment and/or refinancing of
substantially all of Gothic's then existing debt and preferred securities
(together, the "Recapitalization").
Certain transactions undertaken in the Recapitalization are described in
greater detail below:
Corporate Restructuring
GPC was organized as a wholly owned subsidiary of Gothic. At the closing of
the Recapitalization, Gothic transferred to GPC its ownership of all its
natural gas and oil properties. The outstanding capital stock of GPC held by
Gothic was pledged to secure Gothic's obligations under the Notes. The natural
gas and oil assets owned by GPC secure its obligations under the Credit
Facility (as defined) and the Senior Secured Notes.
The Chesapeake Transaction
On April 27, 1998, Gothic completed several agreements with Chesapeake
pursuant to which Gothic (i) sold a 50% interest in substantially all of
Gothic's undeveloped acreage, (ii) sold for $20.0 million, subject to closing
adjustments, a 50% interest in Gothic's natural gas and oil properties in the
Arkoma basin, and (iii) sold 50,000 shares of Series B Preferred Stock, having
a liquidation value of $50.0 million, and ten-year warrants to purchase, at an
exercise price of $0.01 per share, 2,439,246 shares of Gothic's Common Stock.
In addition to providing Gothic with additional capital to facilitate the
completion of the Recapitalization, the Chesapeake Transaction is intended to
provide technical expertise, a historic drilling track record and the financial
resources to implement Gothic's comprehensive development and exploitation
program in the Mid-Continent region.
Financing Transactions
The following financing transactions were completed as part of the
Recapitalization:
14 1/8% Senior Secured
Discount Notes........... Gothic sold approximately $60.2 million initial
principal amount ($104.0 million principal amount
at maturity) of Notes secured by the outstanding
capital stock of GPC held by Gothic, together with
the Warrants.
11 1/8% Senior Secured
Notes.................... GPC sold $235.0 million principal amount of Senior
Secured Notes.
Series B Preferred Stock
and Warrants............. Gothic sold 50,000 shares of Series B Preferred
Stock, having a liquidation preference of $50.0
million, and ten-year common stock purchase war-
rants exercisable at $0.01 per share to purchase
2,439,246 shares of Common Stock.
Arkoma Property Sales..... Gothic sold for $20.0 million, subject to closing
adjustments, a 50% interest in its natural gas and
oil properties in the Arkoma basin.
3
<PAGE>
Credit Facility........... GPC entered into the Credit Facility which will
provide, among other things, for an initial borrow-
ing availability to GPC of approximately $25.0 mil-
lion.
Repayments and Redemptions
The net proceeds of approximately $350.5 million from the Recapitalization
described above were applied to repay or redeem the following:
12 1/4% Senior Notes...... These notes, outstanding in the principal amount of
approximately $99.3 million, were redeemed for ap-
proximately $102.3 million, inclusive of a 1% re-
demption premium and accrued interest.
Series A Preferred
Stock.................... These shares were redeemed for $38.7 million, in-
clusive of a 1% redemption premium and payment-in-
kind dividends through the redemption date.
Existing Credit
Facility................. The Bridge Note with an outstanding principal bal-
ance of $56.5 million as of April 27, 1998 was re-
paid. The Revolving Loan with an outstanding prin-
cipal balance of $149.9 million as of April 27,
1998 was repaid.
THE AMOCO ACQUISITION
On January 23, 1998, Gothic purchased from Amoco Production Company, a
subsidiary of Amoco Corporation, natural gas producing properties located in
the Anadarko and Arkoma basins of Oklahoma (the "Amoco Acquisition"). The
consideration paid consisted of $237.5 million in cash, subject to certain
post-closing adjustments, warrants to purchase 1.5 million shares of Gothic's
common stock exercisable at $3.00 per share, and the transfer of certain
producing properties owned by Gothic having a value of less than $1.8 million.
The purchase had an effective date of December 1, 1997. The Amoco Acquisition
involved interests in 821 gross wells, operation of 291 of the properties and
approximately 240.0 Bcfe of proved reserves with a PV-10 of approximately
$230.1 million as of December 31, 1997. Of the proved reserves acquired, 96%
were natural gas and 71% were producing with net daily production of
approximately 60 Mmcfe. The cash portion of the consideration for the Amoco
Acquisition was financed with approximately $216.4 million of borrowings under
Gothic's Existing Credit Facility, including $156.4 million borrowed under a
three-year Revolving Loan and $60.0 million borrowed under a six-month Bridge
Loan. In addition, Gothic issued 37,000 shares of Series A Preferred Stock with
an aggregate liquidation preference of $37.0 million both to pay a portion of
the cash consideration for the Amoco Acquisition and to pay related fees and
expenses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
4
<PAGE>
THE EXCHANGE OFFER
THE OUTSTANDING NOTES....... The Outstanding Notes, together with the War-
rants, were sold by the Company on April 21,
1998, to accredited investors (collectively,
the "Purchasers") pursuant to Purchase Agree-
ments dated April 21, 1998 (the "Purchase
Agreement"). Donaldson, Lufkin & Jenrette Se-
curities Corporation acted as Gothic's finan-
cial advisor in connection with the Recapi-
talization, which included the sale of the
Units of which the Notes are a part, and was
paid an advisory fee of approximately $9.6
million in connection with the Recapitaliza-
tion, of which $2.0 million related to the
sale of the Units.
REGISTRATION REQUIREMENTS... Pursuant to the Purchase Agreements, Gothic
and the Purchasers entered into a Registra-
tion Rights Agreements dated April 21, 1998
(the "Registration Rights Agreement"), which
grant the holders of the Outstanding Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such
exchange and registration rights, which ter-
minate upon the consummation of the Exchange
Offer. If applicable law or applicable inter-
pretations of the staff of the Commission do
not permit Gothic to effect the Exchange Of-
fer, Gothic has agreed to file a shelf regis-
tration (the "Shelf Registration Statement")
covering resales of the Outstanding Notes.
See "The Exchange Offer--Resale of Exchange
Notes" and"--Shelf Registration Statement."
THE EXCHANGE OFFER..........
Gothic is offering to exchange $1,000 princi-
pal amount of the Exchange Notes for each $
1,000 principal amount of Outstanding Notes.
As of the date hereof, $104.0 million aggre-
gate principal amount of Outstanding Notes
are outstanding. Gothic will issue the Ex-
change Notes to tendering holders on July 7,
1998 (the "Exchange Date").
Based on interpretations of the staff of the
Commission set forth in no action letters is-
sued to third parties, Gothic believes that
Exchange Notes issued pursuant to the Ex-
change Offer in exchange for Outstanding
Notes may be offered for resale, resold and
otherwise transferred by any holder thereof
(other than any such holder which is an "af-
filiate" of Gothic within the meaning of Rule
405 under the Securities Act) without compli-
ance with the registration and prospectus de-
livery provisions of the Securities Act, pro-
vided that such Exchange Notes are acquired
in the ordinary course of such holder's busi-
ness and that such holder does not intend to
participate and has no arrangement or under-
standing with any person to participate in
the distribution of such Exchange Notes.
Each Participating Broker/Dealer must ac-
knowledge that it will deliver a prospectus
in connection with any resale of Exchange
Notes. The Letter of Transmittal for the Ex-
change Offer states that by so acknowledging
and by delivering a prospectus, a
broker/dealer will not be deemed to admit
that it is an "underwriter" within the mean-
ing of the Securities Act. This Prospectus,
as it may be amended or supplemented from
time to time, may be used by a broker/dealer
in
5
<PAGE>
connection with resales of Exchange Notes re-
ceived in exchange for Outstanding Notes
where such Outstanding Notes were acquired by
such broker/dealer as a result of market-mak-
ing activities or other trading activities.
Gothic has agreed to make this Prospectus
available to any Participating Broker/Dealer
for use in connection with any such resale
for a period of up to one year from the date
the registration statement, of which this
Prospectus forms a part, is declared effec-
tive. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer
with the intention to participate, or for the
purpose of participating, in a distribution
of the Exchange Notes could not rely on the
position of the staff of the Commission enun-
ciated in Exxon Capital Holdings Corporation
(available April 13, 1989) or similar no-ac-
tion letters and, in the absence of an exemp-
tion therefrom, must comply with the regis-
tration and prospectus delivery requirements
of the Securities Act in connection with the
resale transaction. Failure to comply with
such requirements in such instance may result
in such holder incurring liability under the
Securities Act for which the holder is not
indemnified by Gothic.
EXPIRATION DATE............. 5:00PM, EST, on July 7, 1998
ACCRETION IN VALUE OF THE
NOTES; INTEREST ON THE
NOTES...................... The Notes were sold at a price of $578.42 for
each $1,000 principal amount of Notes (ap-
proximately $60.2 million aggregate purchase
price) and accrete at a rate per annum of 14
1/8%, compounded semi-annually, to $1,000 at
May 1, 2002 ($104.0 million aggregate princi-
pal amount). Thereafter, the Notes will ac-
crue interest at the rate of 14 1/8% per an-
num, payable in cash semi-annually in arrears
on May 1 and November 1 of each year, com-
mencing November 1, 2002.
PROCEDURES FOR TENDERING
OUTSTANDING NOTE........... Each holder of Outstanding Notes wishing to
accept the Exchange Offer must complete, sign
and date the accompanying Letter of Transmit-
tal, or a facsimile thereof, in accordance
with the instructions contained herein and
therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, to-
gether with the Outstanding Notes and any
other required documentation to the Exchange
Agent at the address set forth herein. By ex-
ecuting the Letter of Transmittal, each
holder will represent to Gothic that, among
other things, the holder or the person re-
ceiving such Exchange Notes, whether or not
such person is the holder, is acquiring the
Exchange Notes in the ordinary course of
business and that neither the holder nor any
such other person has any arrangement or un-
derstanding with any person to participate in
the distribution of such Exchange Notes. In
lieu of physical delivery of the certificates
representing Outstanding Notes, tendering
holders may transfer Notes pursuant to the
procedure for book-entry transfer as set
forth under "The Exchange Offer--Procedures
for Tendering."
6
<PAGE>
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.......... Any beneficial owner whose Outstanding Notes
are registered in the name of a
broker/dealer, commercial bank, trust company
or other nominee and who wishes to tender
should contact such registered holder
promptly and instruct such registered holder
to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on
such owner's own behalf, such owner must,
prior to completing and executing the Letter
of Transmittal and delivering its Outstanding
Notes, either make appropriate arrangements
to register ownership of the Outstanding
Notes in such owner's name or obtain a prop-
erly completed bond power from the registered
holder. The transfer of registered ownership
may take considerable time.
GUARANTEED DELIVERY
PROCEDURES................. Holders of Outstanding Notes who wish to ten-
der their Outstanding Notes and whose Out-
standing Notes are not immediately available
or who cannot deliver their Outstanding
Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmit-
tal to the Exchange Agent (or comply with the
procedures for book-entry transfer) prior to
the Expiration Date must tender their Out-
standing Notes according to the guaranteed
delivery procedures set forth in "The Ex-
change Offer--Guaranteed Delivery Proce-
dures."
WITHDRAWAL RIGHT............ Tenders may be withdrawn at any time prior to
5:00PM, EST, on the Expiration Date pursuant
to the procedures described under "The Ex-
change Offer--Withdrawal of Tenders."
ACCEPTANCE OF OUTSTANDING
NOTES AND DELIVERY OF
EXCHANGE NOTES............. Subject to certain conditions, Gothic will
accept for exchange any and all Outstanding
Notes that are properly tendered in the Ex-
change Offer prior to 5:00PM, EST, on the Ex-
piration Date. The Exchange Notes issued pur-
suant to the Exchange Offer will be delivered
on the Exchange Date. See "The Exchange Of-
fer--Terms of the Exchange Offer."
FEDERAL INCOME TAX
CONSEQUENCES............... The exchange pursuant to the Exchange Offer
should not be a taxable event for federal in-
come tax purposes. See "Certain Federal In-
come Tax Considerations--The Exchange Offer."
EFFECT ON HOLDERS OF
OUTSTANDING NOTES.......... As a result of the making of this Exchange
Offer, Gothic will have fulfilled one of its
obligations under the Registration Rights
Agreement, and, with certain exceptions noted
below, holders of Outstanding Notes who do
not tender their Outstanding Notes will not
have any further registration rights under
the Registration Rights Agreement or other-
wise. Such holders will continue to hold the
untendered Outstanding Notes and will be en-
titled to all the rights and subject to all
the limitations applicable thereto under the
Indenture, except to the extent such rights
or limitations, by their terms, terminate or
cease to have further effectiveness as a re-
sult of the Exchange Offer. All untendered
Outstanding Notes will continue to be subject
to certain restrictions on transfer. Accord-
ingly, if any
7
<PAGE>
Outstanding Notes are tendered and accepted
in the Exchange Offer, the trading market of
the untendered Outstanding Notes could be ad-
versely affected. See "Risk Factors--Exchange
Offer Procedures."
Exchange Agent.............. The Bank of New York
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
SECURITIES OFFERED.......... 14 1/8% Series B Senior Secured Discount
Notes due 2006 issued at a discount to their
aggregate principal amount to generate gross
proceeds to Gothic of approximately $60.2
million (the "Exchange Notes").
Maturity Date............. May 1, 2006.
Issue Price............... $578.42 per $1,000 principal amount at matu-
rity.
Interest Rate and Payment
Dates.................... The Notes were issued at a substantial dis-
count to their aggregate principal amount.
See "Certain U.S. Federal Income Tax Consid-
erations." The Exchange Notes will accrete at
a rate per annum of 14 1/8%, compounded
semiannually, to an aggregate amount of
$104.0 million at May 1, 2002. Cash interest
will not accrue on the Exchange Notes prior
to May 1, 2002. Thereafter, the Exchange
Notes will accrue interest at the rate of 14
1/8% per annum payable in cash semiannually
in arrears on May 1 and November 1 of each
year, commencing November 1, 2002. The effec-
tive yield of the Exchange Notes is 14 1/8%
per annum (computed on a semiannual bond
equivalent basis).
Optional Redemption....... The Exchange Notes will be redeemable at the
option of Gothic, in whole or in part, at any
time on and after May 1, 2003, in cash at the
redemption prices set forth herein, plus ac-
crued and unpaid interest and Liquidated Dam-
ages, if any, to the date of redemption. In
addition, at any time prior to May 1, 2003,
Gothic may redeem all or a portion of the
Notes, at the option of Gothic, at the Make-
Whole Price. See "Description of the Notes--
Optional Redemption." In addition, Gothic
may, at its option, redeem prior to May 1,
2001 up to 33 1/3% of the original aggregate
principal amount of the Notes at 114.125% of
the Accreted Value of the Notes so redeemed,
plus accrued and unpaid interest and Liqui-
dated Damages, if any, to the date of redemp-
tion, from the net proceeds of one or more
Equity Offerings, provided that at least 66
2/3% of the original aggregate principal
amount of the Notes remains outstanding fol-
lowing such redemption. See "Description of
the Notes--Optional Redemption."
Mandatory Redemption...... None, except as set forth below under "Change
of Control Offer."
Ranking................... The Exchange Notes offered hereby will be
general, senior, secured obligations of Goth-
ic. The Exchange Notes will rank senior in
right of payment to all existing and future
Subordinated Indebtedness of
8
<PAGE>
Gothic and will rank pari passu in right of
payment with all existing and future Senior
Indebtedness of Gothic. The Exchange Notes
will be collateralized by a first priority
lien against the shares of capital stock of
GPC held by Gothic. See "Description of the
Notes--Security." The Indenture limits
Gothic's ability to incur additional Indebt-
edness and Gothic's ability to grant addi-
tional liens on its assets except for Permit-
ted Liens (as defined). Gothic is a holding
company with no operations and no substantial
assets other than its equity interest in GPC.
Gothic will be dependent upon the cash flow
of GPC to meet its debt obligations, includ-
ing the obligations under the Exchange Notes.
The Exchange Notes will be effectively subor-
dinated to all obligations (including trade
payables) of Gothic's Subsidiaries, including
without limitation Indebtedness of GPC under
the Senior Secured Notes and the Credit Fa-
cility. See "Description of the Notes--Rank-
ing." After giving effect to the transactions
described herein," (i) GPC has no indebted-
ness outstanding under the Credit Facility
and permitted borrowings under a Bank Credit
Facility (as defined) will be initially lim-
ited by the terms of the Exchange Notes to
approximately $30.0 million and (ii) neither
Gothic nor GPC will have any other outstand-
ing Senior Indebtedness other than the Notes
and the Senior Secured Notes.
Security.................. The Notes are secured by a first priority
lien against the outstanding capital stock of
GPC held by Gothic. See "Description of the
Notes--Security."
Change of Control Offer... Upon the occurrence of a Change of Control,
Gothic will offer to repurchase all outstand-
ing Notes at a purchase price in cash equal
to, prior to May 1, 2002, 101% of the Ac-
creted Value of the Notes (determined at the
date of redemption) on the date of repur-
chase, and thereafter 101% of the aggregate
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if
any, thereon to the date of repurchase. See
"Description of the Notes--Change of Con-
trol."
Certain Covenants......... The Indenture governing the Exchange Notes
(the "Indenture") contains certain covenants,
including, but not limited to, covenants lim-
iting Gothic with respect to the following:
(i) incurrence of additional indebtedness;
(ii) restricted payments; (iii) sales of as-
sets; (iv) liens; (v) mergers and consolida-
tions; (vi) sale and leaseback transactions;
(vii) payment restrictions affecting subsidi-
aries; (viii) issuance and sale of subsidiary
stock; (ix) transactions with affiliates;
(x) lines of business; and (xi) the filing of
certain periodic reports. See "Description of
the Notes--Certain Covenants."
Exchange Offer;
Registration Rights;
Liquidated Damages....... Gothic has agreed to use its best efforts to
file with the Commission on or prior to 45
days after the date of issuance of the Out-
standing Notes and cause to become effective
a registration statement (the "Exchange Offer
Registration Statement") on or prior to 120
days after such date with respect to the Out-
standing Notes and, upon the Exchange Offer
Registration Statement becoming effective, to
offer
9
<PAGE>
the holders of the Outstanding Notes the op-
portunity to exchange their Outstanding Notes
for a like principal amount of Exchange Notes
with terms substantially identical to the
Outstanding Notes. If Gothic fails to file
the Exchange Offer Registration Statement, or
if the Exchange Offer Registration Statement
does not become effective within the periods
specified, Gothic will be required to pay
Liquidated Damages to the holders of the Out-
standing Notes. See "Description of the
Notes--Registration Rights; Liquidated
Damages."
Original Issue Discount... The Outstanding Notes were issued with origi-
nal issue discount for United States federal
income tax purposes. Original issue discount
(that is, the difference between the sum of
all payments to be made on the Notes and the
issue price of the Notes) will accrue from
the Issue Date of a Note to its maturity date
and will be included as interest income for
each day during each taxable year in which
the Note is held by a holder in such holder's
gross income for federal income tax purposes
in advance of receipt of the cash payments to
which the income is attributable. See "Cer-
tain U.S. Income Tax Considerations."
All capitalized terms used in this Prospectus with respect to the Exchange
Notes and not otherwise defined herein have the meanings set forth under
"Description of the Notes."
RISK FACTORS
For a discussion of certain risks that should be considered in connection
with the Exchange Offer and in evaluating an investment in the Exchange Notes,
see "Risk Factors."
10
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL,
OPERATING AND OIL AND NATURAL GAS RESERVE DATA
The summary historical financial information presented below has been derived
from the financial statements of Gothic for each of the two years in the period
ended December 31, 1997 included herein and from the unaudited financial
statements of Gothic for the three months ended March 31, 1997 and 1998 which
are incorporated by reference. The pro forma financial information gives effect
to the 1997 Acquisitions, the Amoco Acquisition and related financings, the
completion of the Recapitalization and the application of the estimated net
proceeds therefrom. The historical financial data should be read in conjunction
with the financial statements and the related notes thereto of Gothic included
elsewhere in this Prospectus. The summary pro forma combined financial
information presented below should be read in conjunction with the pro forma
Combined Condensed Financial Statements of Gothic and notes thereto. The pro
forma combined financial data are not necessarily indicative of the operating
results or financial position that would have been achieved had the
transactions to which they give pro forma effect been effective at the date or
during the periods presented or of the results that may be obtained in the
future. The reserve data set forth below is presented as of December 31, 1996
and December 31, 1997. The pro forma reserve data of Gothic as of December 31,
1997 gives effect to the Amoco Acquisition and the Recapitalization.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
HISTORICAL PRO FORMA(1)
-------------------
1996 1997 1997
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total operating revenue................. $ 11,447 $ 23,263 $72,691
Operating expense(2).................... 4,807 10,361 16,132
Depreciation, depletion and amortization
expense................................ 2,856 5,791 29,619
General and administrative expense...... 1,782 2,318 2,918
Interest expense and amortization of
debt issue costs....................... 1,528 8,800 35,881
Loss before extraordinary item.......... (1,515) (3,677) (11,529)
OTHER FINANCIAL DATA:
EBITDA(3)............................... $ 4,858 $ 10,584 $ 53,641
Net cash provided by operating activi-
ties................................... 2,596 7,069 N/A
Ratio of EBITDA to cash interest ex-
pense(3)(4)............................ -- -- 2.1x
Ratio of EBITDA to interest expense(3).. 3.2x 1.2x 1.5x
Ratio of earnings to fixed charges(5)... -- 0.6x 0.6x
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------
HISTORICAL PRO FORMA(1)
-------------------
1997 1998 1998
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total operating revenue................. 6,282 $ 17,102 $15,544
Operating expense(2).................... 2,803 4,664 4,390
Depreciation, depletion and amortization
expense................................ 1,235 7,444 6,289
General and administrative expense...... 547 655 655
Interest expense and amortization of
debt issue costs....................... 1,186 8,033 9,080
Income (loss) before extraordinary
item................................... 528 (4,051) (5,227)
OTHER FINANCIAL DATA:
EBITDA(3)............................... $ 2,932 $ 11,525 $ 10,241
Net cash provided by operating activi-
ties................................... 1,896 2,244 N/A
Ratio of EBITDA to cash interest ex-
pense(3)(4)............................ -- -- 1.6x
Ratio of EBITDA to interest expense(3).. 2.5x 1.4x 1.1x
Ratio of earnings to fixed charges(5)... 1.3x 0.5x 0.4x
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
---------------------------
HISTORICAL PRO FORMA(1)
(IN THOUSANDS, EXCEPT
RATIOS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 3,294 $ 4,102
Working capital..................................... 290 1,098
Total assets........................................ 346,720 325,673
Total debt.......................................... 310,638 295,155
Stockholders' equity................................ (17,437) 10,908
ACNTA(6)............................................ 314,024 267,715
Ratio of ACNTA to total debt(6)..................... 1.0x 0.9x
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
HISTORICAL PRO FORMA(1)
-------------------
1996 1997 1997
<S> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Mbbls)................................. 164 176 416
Natural gas (Mmcf).......................... 3,404 6,583 29,006
Natural gas equivalent (Mmcfe).............. 4,388 7,639 31,502
Average sales prices:
Oil (per Bbl)............................... $21.27 $20.18 $18.00
Natural gas (per Mcf)....................... 2.03 2.11 2.17
Natural gas equivalent (per Mcfe)........... 2.37 2.28 2.24
Expenses (per Mcfe):
Lease and operating expenses(7)............. $0.85 $0.73 $0.44
General and administrative.................. 0.41 0.30 0.09
Depreciation, depletion and
amortization(8)............................ 0.64 0.72 0.94
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
HISTORICAL PRO FORMA(1)
-------------------
1997 1998 1998
<S> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Mbbls)................................. 37 86 86
Natural gas (Mmcf).......................... 1,410 6,956 6,168
Natural gas equivalent (Mmcfe).............. 1,632 7,472 6,684
Average sales prices:
Oil (per Bbl)............................... $23.81 15.10 $15.10
Natural gas (per Mcf)....................... 2.71 2.19 2.20
Natural gas equivalent (per Mcfe)........... 2.88 2.21 2.22
Expenses (per Mcfe):
Lease and operating expenses(7)............. $0.85 $0.55 $0.55
General and administrative(11).............. 0.34 0.09 0.10
Depreciation, depletion and
amortization(8)............................ 0.75 0.99 0.94
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------
HISTORICAL PRO FORMA(1)
----------------
1996 1997 1997
<S> <C> <C> <C>
PROVED RESERVE DATA: (9)(10)
Oil (Mbbls)....................................... 1,158 3,585 4,401
Natural gas (Mmcf)................................ 64,534 127,460 304,647
Total proved reserves (Mmcfe)..................... 71,482 148,970 331,053
% Natural gas..................................... 90% 86% 92%
Proved developed reserves (Mmcfe)................. 54,295 106,708 270,701
% Proved developed................................ 76% 72% 82%
PV-10 (in thousands).............................. $67,087 $122,723 $298,760
Standardized Measure (in thousands)............... 49,083 94,102 249,265
</TABLE>
- --------------------
(1) The pro forma statement of operations data, other financial data and
operating data have been prepared as if the 1997 Acquisitions had been
consummated on January 1, 1997. The pro forma data further reflect the
Amoco Acquisition and related financings, and the pro forma effects of the
Recapitalization, and the application of the estimated net proceeds
therefrom as if such transactions had been consummated on January 1, 1997.
The pro forma balance sheet data has been prepared as if the
Recapitalization and the application of the estimated net proceeds
therefrom had been consummated on March 31, 1998.
(2) Consists of lease operating expense, production taxes and gas system
expenses.
(3) See the Glossary included elsewhere in this Prospectus for the definition
of EBITDA. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. Certain information concerning EBITDA has
been included herein because EBITDA is a measure used by certain investors
in determining Gothic's historical ability to service its indebtedness;
however, this measure may not be comparable to similarly titled measures of
other companies. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in accordance
with generally accepted accounting principles as an indicator of Gothic's
operating performance or liquidity.
(4) Cash interest expense, on a pro forma basis, includes only the cash
interest paid on the Senior Secured Notes.
(5) For the purpose of calculating the ratio of earnings to fixed charges,
fixed charges consist of interest expense, amortization of debt discount
and financing costs and preferred stock dividends. Earnings consist of
income before extraordinary items and income taxes plus fixed charges.
Gothic's historical earnings were insufficient to cover fixed charges by
$5.7 million and $3.9 million for the years ended December 31, 1996 and
1997, respectively and by $5.0 million for the three months ended March 31,
1998. Pro forma earnings of Gothic were insufficient to cover fixed charges
by $19.4 million for the year ended December 31, 1997 and by $7.1 million
for the three months ended March 31, 1998.
(6) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in the
Indenture. See "Description of the Notes--Certain Definitions."
(7) Lease operating expense per Mcfe includes production taxes and is net of
well operator overhead reimbursements billed to working interest owners
which are recorded as well operations revenue.
(8) Represents depreciation, depletion and amortization of oil and gas
properties only.
(9) Based on estimates prepared by Lee Keeling & Associates, Inc. See "Business
and Properties--Natural Gas and Oil Reserves."
(10) Gothic believes that PV-10, while not determined in accordance with
generally accepted accounting principles, is an important financial
measure used by investors in independent oil and natural gas producing
companies for evaluating the relative significance of oil and natural gas
properties and acquisitions. PV-10 should not be construed as an
alternative to the Standardized Measure, as determined in accordance with
generally accepted accounting principles.
(11)Excludes a non-recurring severance payment to a former officer in 1998.
13
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RISK FACTORS
In addition to the other information set forth elsewhere in this Prospectus,
the following factors relating to Gothic and this Exchange Offer should be
considered by prospective investors when evaluating an investment in the
Exchange Notes offered hereby.
RISK FACTORS
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Outstanding Notes pursuant to
the Exchange Offer will be made only after a timely receipt by Gothic of such
Outstanding Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Outstanding Notes desiring to tender such Outstanding Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. Gothic
is under no duty to give notification of defects or irregularities with
respect to the tenders of Outstanding Notes for exchange. Outstanding Notes
that are not tendered or are tendered but not accepted will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof. Upon consummation of the Exchange Offer,
the registration rights under the Registration Rights Agreement will
terminate. In addition, any holder of Outstanding Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if
so, will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any sale of such Exchange Notes. See "Plan of Distribution." To the
extent that some of the Outstanding Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Outstanding Notes could be adversely affected. See "The Exchange Offer."
SUBSTANTIAL INDEBTEDNESS
At March 31, 1998, on a pro forma basis, Gothic would have had
$295.2 million of indebtedness as compared to stockholders' equity of $10.9
million. This level of indebtedness may pose substantial risks to Gothic and
the holders of its securities, including the possibility that Gothic may not
generate sufficient cash flow to pay the principal of and interest on the
Credit Facility, and the Senior Secured Notes and the risk of default
thereunder. Gothic's historical earnings were insufficient to cover fixed
charges, including preferred dividends, by $5.7 million and $3.9 million for
the years ended December 31, 1996 and 1997, respectively and by $5.0 million
for the three months ended March 31, 1998. On a pro forma basis, the earnings
of Gothic were insufficient to cover fixed charges by $19.4 million for the
year ended December 31, 1997 and by $7.1 million for the three months ended
March 31, 1998. If Gothic is unsuccessful in increasing its proved reserves or
realizing production from its proved undeveloped reserves, the future net
revenue from existing proved reserves may not be sufficient to pay the
principal of and interest on its indebtedness in accordance with their terms.
Gothic's levels of indebtedness may also adversely affect its ability to incur
additional indebtedness and finance its future operations and capital needs,
and may limit its ability to pursue other business opportunities. The Notes,
the Credit Facility, the Senior Secured Notes and their respective indentures
contain financial and other restrictive covenants which could limit Gothic's
operating and financial flexibility and, if violated, would result in an event
of default which could preclude Gothic's access to credit under the Credit
Facility or otherwise have a material adverse effect on Gothic. A default
under the Credit Facility could lead to a foreclosure against the assets that
collateralize such indebtedness. In addition, the terms of Gothic's
indebtedness contain provisions whereby a default under one loan agreement may
also constitute a default under other indebtedness. Accordingly, if Gothic
should default under the terms of one loan agreement such default could also
constitute an event of default under other indebtedness which could result in
all of such indebtedness becoming immediately due and payable. There are
currently no defaults under any of Gothic's outstanding indebtedness.
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HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
Upon completion of the Recapitalization, Gothic became a holding company and
does not have any material operations or assets other than ownership of all of
the outstanding capital stock of GPC. Accordingly, the Notes are effectively
subordinated to all existing and future liabilities of GPC including
indebtedness under the Credit Facility and the Senior Secured Notes. After
giving effect to the Recapitalization, Gothic's indebtedness outstanding under
the Notes is approximately $60.2 million and GPC's indebtedness outstanding
under the Senior Secured Notes is $235.0 million. In addition, GPC has a
borrowing availability under the Credit Facility of $25.0 million. GPC's
obligations under the Senior Secured Notes and the Credit Facility are secured
by liens on substantially all of the natural gas and oil properties owned by
Gothic. Any right of Gothic to participate in any distribution of assets of
GPC upon the liquidation, reorganization or insolvency of GPC (and the
consequent right of the holders of the Notes to participate in the
distribution of those assets) will be subject to the prior claims of GPC's
secured creditors. Additionally, Gothic guaranteed GPC's obligations under the
Credit Facility and the Senior Secured Notes.
LIMITATION ON THE PAYMENT OF FUNDS TO GOTHIC BY GPC
Gothic's cash flow, and consequently its ability to pay dividends and to
service debt, including its obligations under the Notes, is dependent upon the
cash flows of GPC and the payment of funds by GPC to Gothic in the form of
loans, dividends, or otherwise. GPC has no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Notes or to make any funds
available therefor. In addition, the Credit Facility and the indenture
governing Gothic's Senior Secured Notes impose, and agreements entered into in
the future may impose, significant restrictions on the payment of dividends
and the making of loans by GPC to Gothic. Under the Credit Facility and Senior
Secured Notes, subject to certain financial covenants, GPC is permitted to pay
dividends to Gothic equal to the semi-annual interest payments due on the
Notes; provided that upon a notice of a default or event of default under the
Credit Facility or Senior Secured Notes, GPC will be prohibited from paying
such dividends until the date such default or event of default is cured or
waived. Accordingly, in such an event, repayment of the Notes may depend upon
the ability of Gothic to effect an offering of capital stock or to refinance
the Notes.
RESTRICTIONS IMPOSED BY LENDERS
The instruments governing the indebtedness of Gothic impose significant
operating and financial restrictions on Gothic. Such restrictions will affect,
and in many respects significantly limit or prohibit, among other things, the
ability of Gothic to incur additional indebtedness, pay dividends, repay
indebtedness prior to its stated maturity, sell assets or engage in mergers or
acquisitions. These restrictions could also limit the ability of Gothic to
effect future financings, make needed capital expenditures, withstand a future
downturn in Gothic's business or the economy in general, or otherwise conduct
necessary corporate activities. A failure by Gothic to comply with these
restrictions could lead to a default under the terms of such indebtedness. In
the event of default, the holders of such indebtedness could elect to declare
all of the funds borrowed pursuant thereto to be due and payable together with
accrued and unpaid interest. In such event, there can be no assurance that
Gothic would be able to make such payments or borrow sufficient funds from
alternative sources to make any such payment. If GPC were unable to repay all
amounts declared due and payable under the Credit Facility or Senior Secured
Notes, the lenders thereunder could proceed against the collateral granted to
satisfy the indebtedness and other obligations due and payable. If the Credit
Facility indebtedness or Senior Secured Notes were to be accelerated, there
can be no assurance that the assets of Gothic would be sufficient to repay in
full such indebtedness and the other indebtedness of Gothic, including the
Notes. Even if additional financing could be obtained, there can be no
assurance that it would be on terms that are favorable or acceptable to
Gothic. In addition, Gothic's obligations under the Credit Facility and Senior
Secured Notes are secured by substantially all of the assets of GPC. The
pledge of such collateral to existing lenders could impair Gothic's ability to
obtain favorable financing from other sources.
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ABILITY TO MANAGE GROWTH
Although individual members of management have significant experience in the
natural gas and oil industry, Gothic has been engaged in the natural gas and
oil business for less than four years and has a limited operating history upon
which investors may base their evaluation of Gothic's performance. As a result
of its brief operating history and rapid growth, the operating results from
Gothic's historical periods are not readily comparable and, as a consequence
of the Amoco Acquisition, are not expected to be indicative of future results.
There can be no assurance that Gothic will continue to experience growth in,
or maintain its current level of, revenues, natural gas and oil reserves or
production. Gothic's natural gas and oil operations to date have focused on
the acquisition of producing natural gas and oil properties. Gothic's business
plan and reserve reports include the drilling of approximately 30 to 40
development wells during 1998.
The Amoco Acquisition and any future growth of Gothic's natural gas and oil
reserves, production and operations will place significant demands on Gothic's
operational, administrative and financial resources, and the increased scope
of operations will present challenges to Gothic due to increased management
time and resources required. Gothic's future performance and profitability
will depend in part on its ability to successfully integrate the operational,
financial and administrative functions of acquired properties into Gothic's
operations, to hire additional personnel and to implement necessary
enhancements to its management systems to respond to changes in its business.
There can be no assurance that Gothic will be successful in these efforts. The
inability of Gothic to integrate acquired properties, to hire additional
personnel or to enhance its management systems could have a material adverse
effect on Gothic's results of operations.
VOLATILITY OF NATURAL GAS AND OIL PRICES; POTENTIAL FULL COST WRITE DOWN
Gothic's revenues, profitability, cash flow, ability to service debt and
future growth will be substantially dependent on prevailing prices for natural
gas and oil. The amounts of and prices obtainable for Gothic's natural gas and
oil production will be affected by market factors beyond Gothic's control.
Such factors include the extent of domestic production, the level of imports
of foreign natural gas and oil, the general level of market demand on a
regional, national and worldwide basis, domestic and foreign economic
conditions that determine levels of industrial production, political events in
foreign oil producing regions, and variations in governmental regulations and
tax laws or the imposition of new governmental requirements upon the natural
gas and oil industry, among other factors. Prices for natural gas and oil are
subject to wide fluctuation in response to relatively minor changes in supply
of and demand for natural gas and oil, market uncertainty and a variety of
additional factors that are beyond the control of Gothic. Any significant
decline in natural gas and oil prices would have a material adverse effect
upon Gothic, including the inability of Gothic to fund planned operations and
capital expenditures, write-downs of the carrying value of its natural gas and
oil properties, and Gothic's inability to meet debt service requirements
resulting in defaults under bank loans and other indebtedness. In addition,
the marketability of Gothic's natural gas and oil production will depend in
part upon the availability, proximity and capacity of gathering systems,
pipelines and processing facilities.
Based on market prices for natural gas and oil in March 1998 and the
anticipated terms of the Recapitalization, Gothic would, as of the end of the
quarter during which the Recapitalization was completed, reflect a full cost
write down in the amount of approximately $33.0 million. Since the
Recapitalization was completed subsequent to March 31, 1998 and since natural
gas and oil prices have changed subsequent to March 31, 1998, the amount of
such write down, if any, will depend upon the market prices for natural gas
and oil at the end of the quarter ending June 30, 1998. Based on rules
promulgated by the Commission, Gothic evaluates impairment of its natural gas
and oil properties, based on prevailing prices as of the end of each quarter,
and accordingly, the actual amount of impairment, if any, will not be
determinable until the end of the quarter in which the Recapitalization
occurs.
RISK OF HEDGING ACTIVITIES
In an attempt to reduce its sensitivity to energy price volatility, Gothic
uses swap arrangements that generally result in a fixed price for sales of its
natural gas and oil production over periods of up to 12 months. If
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Gothic's reserves are not produced at rates equivalent to the hedged position,
Gothic would be required to satisfy its obligations under hedging contracts on
potentially unfavorable terms without the ability to hedge that risk through
sales of comparable quantities of its own production. Hedging contracts limit
the benefits Gothic will realize if actual prices rise above the contract
prices. In addition, hedging contracts are subject to the risk that the other
party may prove unable or unwilling to perform its obligations under such
contracts. Any significant nonperformance could have a material adverse
financial effect on Gothic. These arrangements provide for Gothic to exchange
a floating market price for a fixed contract price. Payments are made by
Gothic when the floating price exceeds the fixed price for a contract month
and payments are received when the fixed price exceeds the floating price.
Settlements on these swaps are based on the difference between the approximate
average closing NYMEX price for a contract month and the fixed contract price
for the same month.
Gothic was required under the terms of its credit facility in effect prior
to the Recapitalization to enter into hedging agreements covering Gothic's
natural gas production. Because of this hedging activity, Gothic's financial
risk resulting from possible declines in the price of natural gas has been
reduced; however, Gothic's ability to benefit from increases in the price of
natural gas is limited. While Gothic is no longer required under the terms of
its bank loan agreement to maintain any minimum amounts of hedging agreements,
Gothic expects it will continue to enter into such agreements in the future.
Any reduction in hedging activity will subject Gothic to more significant
fluctuations in production revenues resulting from price volatility.
At December 31, 1997, Gothic had swap agreements relating to the sale of
5,000 Mcf per day at a price of $2.55 per Mcf and 15,000 Mcf per day at a
price of $2.45 per Mcf during the period January 1, 1998 through
March 31, 1998. In February 1998, Gothic entered into swap agreements relating
to the sale of 62,000 Mcf per day during the period April 1, 1998 through
October 31, 1998 at an average price of $2.09 per Mcf. Of the 62,000 Mcf per
day, 25,000 Mcf per day is subject to a "call spread" agreement which provides
that Gothic will receive additional payments if the actual sales price of
natural gas is between $2.30 and $2.70 per Mcf during the period. The swap
agreements for the period April through October 1998 cover approximately 69%
of Gothic's current natural gas production. In addition, Gothic has entered
into a swap agreement relating to the sale of 60,000 Mcf per day at a "floor"
price of $2.10 per Mcf during the period November 1998 through March 1999. GPC
will assume, in the Recapitalization, all of Gothic's rights and
responsibilities with regard to its existing hedging agreements.
REPLACEMENT OF RESERVES
Gothic's success is substantially dependent on its ability to replace and
expand its natural gas and oil reserves through the acquisition of producing
properties and the exploitation and development of its properties, which
activities involve substantial risks. Without successful acquisition or
drilling ventures, Gothic will be unable to replace the reserves being
depleted by production, and its assets and revenues, including the reserves,
will decline. Gothic's strategy includes increasing its reserve base through
continued exploitation of its existing properties, exploration of new and
existing properties and acquisitions of producing properties. There can be no
assurance that Gothic's acquisition and development activities will result in
the replacement of, or additions to, Gothic's reserves. Similarly, there can
be no assurance that Gothic will have sufficient capital to engage in its
acquisition or development activities. Successful acquisition of producing
properties generally requires accurate assessments of recoverable reserves,
future natural gas and oil prices, operating costs, potential environmental
and other liabilities and other factors. Such assessments are necessarily
inexact, and as estimates their accuracy is inherently uncertain.
ACQUISITION RISKS
Gothic's rapid growth since it commenced natural gas and oil operations has
been largely the result of acquisitions of producing properties. Gothic
expects to continue to evaluate and pursue acquisition opportunities available
on terms management considers favorable to Gothic. The successful acquisition
of producing properties requires an assessment of recoverable reserves, future
natural gas and oil prices, operating costs, potential environmental and other
liabilities and other factors beyond Gothic's control. This assessment is
necessarily
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inexact and its accuracy is inherently uncertain. In connection with such an
assessment, Gothic performs a review of the subject properties it believes to
be generally consistent with industry practices. This review, however, will
not reveal all existing or potential problems, nor will it permit a buyer to
become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections may not be performed on every well,
and structural and environmental problems are not necessarily observable even
when an inspection is undertaken. Gothic generally assumes preclosing
liabilities, including environmental liabilities, and generally acquires
interests in the properties on an "as is" basis. With respect to its
acquisitions to date, Gothic has no material commitments for capital
expenditures to comply with existing environmental requirements. There can be
no assurance that Gothic's acquisitions will be successful. Any unsuccessful
acquisition could have a material adverse effect on Gothic.
DRILLING AND OPERATING RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by Gothic will be productive or that Gothic
will recover all or any portion of its investment. Drilling for natural gas
and oil may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return
a profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. Gothic's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond Gothic's control, including economic
conditions, mechanical problems, title problems, weather conditions,
compliance with governmental requirements and shortages or delays of equipment
and services. Gothic's future drilling activities may not be successful and,
if unsuccessful, such failure may have a material adverse effect on Gothic's
future results of operations or financial condition.
In addition to the substantial risk that wells drilled will not be
productive, hazards such as unusual or unexpected geologic formations,
pressures, downhole fires, mechanical failures, blowouts, cratering,
explosions, uncontrollable flows of natural gas, oil or well fluids, pollution
and other physical and environmental risks are inherent in natural gas and oil
exploration and production. These hazards could result in substantial losses
to Gothic due to injury and loss of life, severe damage to and destruction of
property and equipment, pollution and other environmental damage and
suspension of operations. Gothic, as protection against operating hazards,
maintains insurance coverage against some, but not all, potential losses, as
is common in the natural gas and oil industry. Gothic does not fully insure
against all risks associated with its business either because such insurance
is not available or because the cost thereof is considered prohibitive. The
occurrence of an event that is not covered, or not fully covered, by insurance
could have a material adverse effect on Gothic's financial condition and
results of operations.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES; SIGNIFICANT
UNDEVELOPED RESERVES
There are numerous uncertainties inherent in estimating quantities of proved
reserves, including many factors beyond the control of Gothic. The reserve
information set forth in this Offering Memorandum represents estimates based
on reports prepared by Gothic's independent petroleum engineers, as well as
internally generated reports. Petroleum engineering is not an exact science.
Information relating to proved natural gas and oil reserves is based upon
engineering estimates derived after analysis of information furnished by
Gothic or the operator of the property. Estimates of economically recoverable
natural gas and oil reserves and of future net cash flows necessarily depend
upon a number of variable factors and assumptions, such as historical
production from the area compared with production from other producing areas,
the assumed effects of regulations by governmental agencies and assumptions
concerning future natural gas and oil prices, future operating costs,
severance and excise taxes, capital expenditures and workover and remedial
costs, all of which may in fact vary considerably from actual results. Natural
gas and oil prices, which fluctuate over time, may also affect proved reserve
estimates. For these reasons, estimates of the economically recoverable
quantities of natural gas and oil attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net cash flows expected therefrom prepared by
different engineers or by the same
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engineers at different times may vary substantially. Actual production,
revenues and expenditures with respect to Gothic's reserves will likely vary
from estimates, and such variances may be material. Approximately 14% of
Gothic's estimated PV-10 of proved reserves on a pro forma basis as of
December 31, 1997 are classified as undeveloped. Either inaccuracies in
estimates of proved undeveloped reserves or the inability to fund development
could result in substantially reduced reserves. In addition, the timing of
receipt of estimated future net revenues from proved undeveloped reserves will
be dependent upon the timing and implementation of drilling and development
activities estimated by Gothic for purposes of the reserve report.
FUTURE CAPITAL REQUIREMENTS
Gothic has made, and will continue to make, substantial capital expenditures
for the acquisition, development and production of natural gas and oil
reserves, particularly since a portion of the proved reserves of Gothic
consists of proved undeveloped reserves, which require significant capital
expenditures to develop. Gothic has budgeted capital expenditures of
approximately $20.0 to $25.0 million for the year ending December 31, 1998.
Gothic is not contractually committed to expend these funds. Gothic currently
expects that available cash, cash flows from operations, proceeds from the
private or public sale of debt or equity securities, borrowings under the
Credit Facility, and sales of certain natural gas and oil properties will be
sufficient to fund debt service requirements and planned capital expenditures
for its existing properties through 1998. However, Gothic may need to raise
additional capital to fund acquisitions and the development thereof, which
capital may not be available to Gothic in the future.
Under the terms of the Chesapeake Transaction, both Gothic and Chesapeake
are permitted to designate acreage for development drilling by giving written
notice thereof to the other party. In order for Gothic to participate in any
drilling proposals submitted by Chesapeake in the acreage which is the subject
of the participation agreement, Gothic will need to have available sufficient
funds or borrowing availability to participate in the proposed drilling
activity. Certain terms of the participation agreement limit the number of
wells to be proposed by Chesapeake to the amount that would require capital
expenditures by Gothic of $15.0 million in 1998 and $25.0 million in 1999. In
the event Gothic should not have funds available at the time, Gothic's
interest in the well could be forfeited.
Gothic may seek additional capital, if required, from traditional reserve
base borrowing, equity and debt offerings or joint ventures to further develop
and exploit its properties and to acquire additional properties, subject to
the limitations contained in the terms of its outstanding indebtedness, the
Credit Facility, the Notes and the Senior Secured Notes. Gothic's ability to
access additional capital will depend on its continued success in developing
its natural gas and oil reserves and the status of the capital markets at the
time such capital is sought. Accordingly, there can be no assurance that
capital will be available to Gothic from any source or that, if available, it
will be at prices or on terms acceptable to Gothic. Should Gothic be unable to
access the capital markets or should sufficient capital not be available, the
development and exploitation of Gothic's properties could be delayed or
reduced and, accordingly, natural gas and oil revenues and operating results
may be adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Under the Indenture, Gothic must offer to repurchase the Notes upon the
occurrence of certain events. In the event of a Change of Control, Gothic must
offer to repurchase all Notes then outstanding at a purchase price in cash
equal to, prior to May 1, 2002, 101% of the Accreted Value of the Notes
(determined at the date of redemption) on the date of repurchase, and
thereafter 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
repurchase. See "Description of the Notes--Change of Control."
Prior to repurchasing such Notes, Gothic may be required to (i) repay all or
a portion of indebtedness under the Credit Facility and the Senior Secured
Notes or (ii) obtain any requisite consent to permit the repurchase. If Gothic
is unable to repay all of such indebtedness or is unable to obtain the
necessary consents, then Gothic will
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be unable to offer to purchase the Notes and such failure will constitute an
Event of Default under the Indenture. There can be no assurance that Gothic
will have sufficient funds available at the time of any Change of Control to
make any debt payment (including repurchases of Notes) as described above.
The events that constitute a Change of Control under the Indenture may also
be events of default under the Credit Facility, the Senior Secured Notes or
other senior indebtedness of Gothic. Such events may permit the lenders under
such debt instruments to accelerate the debt and, if the debt is not paid, to
enforce security interests on, or commence litigation which could ultimately
result in a sale of, substantially all the assets of Gothic, thereby limiting
Gothic's ability to raise cash to repurchase the Notes and reducing the
practical benefit of the offer to purchase provisions to the holders of the
Notes.
The Credit Facility and the Senior Secured Note Indenture restrict GPC from
paying dividends or making other distributions to Gothic, provided, however,
the Senior Secured Note Indenture permits GPC to make distributions to Gothic
in such amounts as are necessary to pay interest on the Notes, provided no
default has occurred and is continuing under the Senior Secured Indenture. If
Gothic does not have the ability to receive distributions from GPC or does not
refinance GPC's indebtedness, Gothic will likely not have the financial
resources to purchase the Notes. In any event, there can be no assurance that
GPC will have the resources available to pay any such dividends or make any
such distribution.
RELIANCE ON KEY PERSONNEL
Gothic is dependent upon the services of its Chief Executive Officer and
President, Michael Paulk. The loss of his services could have a material
adverse effect upon Gothic. Gothic has entered into an employment agreement
with Mr. Paulk, expiring on December 31, 1999. In addition, Gothic has
obtained a policy of life insurance on Mr. Paulk in the amount of $1.0
million, naming GPC as beneficiary.
GOVERNMENTAL REGULATION
Gothic's operations are affected by extensive regulation pursuant to various
federal, state and local laws and regulations relating to the exploration for
and development, production, gathering and marketing of natural gas and oil
and the release of materials into the environment or otherwise relating to
protection of the environment. In particular, Gothic's natural gas and oil
exploration, development and production and its activities in connection with
storage and transportation of liquid hydrocarbons are subject to stringent
environmental regulation by governmental authorities. Such regulations have
increased the costs of planning, designing, drilling, installing, operating
and abandoning natural gas and oil wells and other related facilities.
Although Gothic believes that its operations are in general compliance with
all such laws and regulations, including applicable environmental laws and
regulations, risks of substantial costs and liabilities are inherent in
natural gas and oil operations, and there can be no assurance that significant
costs and liabilities will not be incurred in the future. Moreover, it is
possible that other developments, such as increasingly strict environmental
laws, regulations and enforcement policies thereunder, and claims for damages
to property, employees, other persons and the environment resulting from
Gothic's operations, could result in substantial costs and liabilities in the
future.
The discharge of natural gas, oil or other pollutants into the air, soil or
water may give rise to significant liabilities on the part of Gothic to the
government and third parties and may require Gothic to incur substantial costs
of remediation. Moreover, Gothic has agreed to indemnify sellers of producing
properties purchased by Gothic, including Amoco, among others, against
environmental claims associated with such properties. No assurance can be
given that existing environmental laws or regulations, as currently
interpreted or reinterpreted in the future, or future laws or regulations will
not materially adversely affect Gothic's results of operations and financial
condition or that material indemnity claims will not arise against Gothic with
respect to properties acquired by Gothic.
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ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity
of any markets that may develop for the Exchange Notes, the ability of the
holders of Exchange Notes to sell their Exchange Notes or the price at which
holders would be able to sell their Exchange Notes. Future trading prices of
the Exchange Notes will depend on many factors, including, among others,
prevailing interest rates, Gothic's operating results and the market for
similar securities. Gothic does not intend to apply for listing of the
Exchange Notes on any securities exchange. While an application to have the
Exchange Notes accepted for trading in the PORTAL market is expected to be
made, there can be no assurance that an active trading market for the Exchange
Notes will develop on the PORTAL market or elsewhere.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Notes were issued at a significant discount from their aggregate
principal amount at maturity. Consequently, the purchasers of the Notes
generally will be required to include amounts in gross income for federal
income tax purposes in advance of receipt of any cash payment on the Notes to
which the income is attributable. See "Certain U.S. Income Tax Considerations"
for a more detailed discussion of the federal income tax consequences to the
holders of the Notes of the purchase, ownership and disposition of the Notes.
If a bankruptcy case is commenced by or against Gothic under the United
States Bankruptcy Code (the "Bankruptcy Code") after the issuance of the
Notes, the claim of a holder of Notes with respect to the principal amount
thereof will be limited to an amount equal to the sum of (i) the initial
offering price of the Notes and (ii) that portion of the original issue
discount that is not deemed to constitute "unmatured interest" for purposes of
the Bankruptcy Code. Any original issue discount that was not amortized as of
any such bankruptcy filing would most likely constitute "unmatured interest."
COMPETITION
The natural gas and oil industry is highly competitive. Gothic competes in
acquisitions and the development, production and marketing of natural gas and
oil with major oil companies, other independent natural gas and oil concerns,
and individual producers and operators. Many of these competitors have
substantially greater financial and other resources than Gothic. Furthermore,
the natural gas and oil industry competes with other industries in supplying
the energy and fuel needs of industrial, commercial and other consumers.
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RECAPITALIZATION
On April 27, 1998, Gothic completed the Recapitalization which involved the
following:
Corporate Restructuring
GPC was organized as a wholly owned subsidiary of Gothic. Gothic transferred
to GPC the ownership of its natural gas and oil properties. The outstanding
capital stock of GPC held by Gothic was pledged to secure Gothic's obligations
under the Notes. The natural gas and oil assets owned by GPC will secure its
obligations under the Senior Secured Notes and the Credit Facility.
The Chesapeake Transaction
Gothic completed several agreements with Chesapeake pursuant to which Gothic
will (i) sold a 50% interest in substantially all of Gothic's undeveloped
acreage, (ii) sold for $20.0 million, subject to closing adjustments, a 50%
interest in Gothic's natural gas and oil properties in the Arkoma basin, and
(iii) sold 50,000 shares of Gothic's Series B Preferred Stock, having a
liquidation value of $50.0 million, and ten-year warrants to purchase, at an
exercise price of $0.01 per share, 2,439,246 shares of Gothic's Common Stock.
In addition to providing Gothic with additional capital to facilitate the
completion of the Recapitalization, the Chesapeake Transaction is intended to
provide technical expertise, a historic drilling track record and the
financial resources to implement Gothic's comprehensive development and
exploitation program in the Mid-Continent region.
Financing Transactions
The following financing transactions were completed as part of the
Recapitalization:
14 1/8% Senior Secured
Discount Notes............ Gothic sold approximately $60.2 million initial
principal amount ($104.0 million principal amount
at maturity) of Notes secured by the outstanding
capital stock of GPC held by Gothic, together
with the Warrants.
11 1/8% Senior Secured
Notes..................... GPC sold $235.0 million principal amount of Se-
nior Secured Notes.
Series B Preferred Stock
and Warrants.............. Gothic sold 50,000 shares of Series B Preferred
Stock, having a liquidation preference of $50.0
million, and ten-year common stock purchase war-
rants exercisable at $0.01 per share to purchase
2,439,246 shares of Common Stock.
Arkoma Property Sales...... Gothic sold for $20.0 million, subject to closing
adjustments, a 50% interest in its natural gas
and oil properties in the Arkoma basin.
Credit Facility............ GPC entered into the Credit Facility which will
provide, among other things, for an initial bor-
rowing availability to GPC of approximately $25.0
million.
The Recapitalization yielded net proceeds of approximately $350.5 million
with an existing borrowing availability of $25.0 million under the Credit
Facility able to be used for the acquisition and development of oil and gas
properties, letters of credit and general corporate purposes.
22
<PAGE>
Repayments and Redemptions
The net proceeds from the Recapitalization were applied to repay or redeem
the following:
12 1/4% Senior Notes....... These notes outstanding in the principal amount
of $99.3 million were redeemed for $102.3 mil-
lion, inclusive of a 1% redemption premium and
accrued interest.
Series A Preferred Stock... These shares were redeemed for $38.7 million, in-
clusive of a 1% redemption premium and payment-
in-kind dividends through the redemption date.
Existing Credit Facility... The Bridge Note with an outstanding principal
balance of $56.5 million as of April 27, 1998 was
repaid. The Revolving Loan with an outstanding
principal balance of $149.9 million as of April
27, 1998 was repaid.
23
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes together with the Warrants were sold by Gothic on
April 21, 1998 to the Purchasers pursuant to Purchase Agreements entered into
with each Purchaser. As a condition of the purchase of the Outstanding Notes
by the Purchasers, Gothic entered into a Registration Rights Agreement with
the Purchasers, which requires, among other things, that Gothic file with the
Commission a registration statement under the Securities Act with respect to
an offer by Gothic to the holders of the Outstanding Notes to issue and
deliver to such holders, in exchange for Outstanding Notes, a like principal
amount of Exchange Notes. Gothic is required to use its best efforts to cause
the Registration Statement relating to the Exchange Offer to be declared
effective by the Commission under the Securities Act and commence the Exchange
Offer. The Exchange Notes are to be issued without a restrictive legend and
may be reoffered and resold by the holder without restrictions or limitations
under the Securities Act (other than any such holder that is an "affiliate" of
Gothic within the meaning of Rule 405 under the Securities Act). A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The term "Holder" with respect
to the Exchange Offer means any person in whose name the Outstanding Notes are
registered on the books of Gothic or any other person who has obtained a
properly completed bond power from the registered holder.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, Gothic will accept any and all Outstanding
Notes validly tendered and not withdrawn prior to 5:00PM, EST, on the
Expiration Date. On the Exchange Date, Gothic will issue $1,000 principal
amount of Exchange Notes in exchange for $1,000 principal amount of
Outstanding Notes accepted in the Exchange Offer. Holders may tender some or
all of their Outstanding Notes pursuant to the Exchange Offer. However,
Outstanding Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that (i) the Exchange Notes have been
registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (ii) the holders of the Exchange Notes
will not be entitled to certain rights under the Registration Rights
Agreement. The Exchange Notes will evidence the same debt as the Outstanding
Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $104.0 million aggregate principal amount
of the Outstanding Notes was outstanding and registered in the name of Cede &
Co., as nominee for the Depository Trust Company. Gothic has fixed the close
of business on June 3, 1998, as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially.
Holders of Outstanding Notes do not have any appraisal or dissenters' rights
under the Oklahoma General Corporation Act or the Indenture in connection with
the Exchange Offer. Gothic intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, including Rule 14e-1 thereunder.
Gothic shall be deemed to have accepted validly tendered Outstanding Notes
when, as and if Gothic has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the Exchange Notes from Gothic.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Outstanding Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
24
<PAGE>
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. Gothic will pay all charges
and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "--Fees and Expenses."
ACCRETION IN VALUE OF THE NOTES; INTEREST ON THE EXCHANGE NOTES
The Notes were sold at a price of $578.42 for each $1,000 principal amount
of Notes (approximately $60.2 million aggregate purchase price) and will
accrete at a rate per annum of 14 1/8%, compounded semi-annually, to $1,000 at
May 1, 2002 ($104.0 million aggregate principal amount). Thereafter, the Notes
will accrue interest at the rate of 14 1/8% per annum, payable in cash semi-
annually in arrears on May 1 and November 1 of each year, commencing November
1, 2002.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal and
mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Outstanding Notes and any other required documents, to the
Exchange Agent prior to 5:00PM, EST, on the Expiration Date. Gothic is not
asking any Holder for a proxy, and no Holder is requested to send Gothic a
proxy. To be tendered effectively, the Outstanding Notes, Letter of
Transmittal and other required documents must be received by the Exchange
Agent at the address set forth below under "Exchange Agent" prior to 5:00PM,
EST, on the Expiration Date. Delivery of the Outstanding Notes may be made by
book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to Gothic the
representations set forth below in the second paragraph under the heading "--
Resale of Exchange Notes."
The tender by a Holder and the acceptance thereof by Gothic will constitute
agreement between such Holder and Gothic in accordance with the terms and
subject to the conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT
TO GOTHIC. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Outstanding Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be
25
<PAGE>
by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Outstanding Notes listed therein, such Outstanding Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Outstanding
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
Gothic, evidence satisfactory to Gothic of their authority to so act must be
submitted with the Letter of Transmittal.
Gothic understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Exchange Notes at DTC (the "Book-Entry Transfer Facility") for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Outstanding Notes by
causing such Book-Entry Transfer Facility to transfer such Outstanding Notes
into the Exchange Agent's account with respect to the Outstanding Notes in
accordance with the Book-Entry Transfer Facility's procedures for such
transfer. Although delivery of the Outstanding Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures; provided,
however, that a participant in DTC's book-entry system may, in accordance with
DTC's Automated Tender Offer Program procedures and in lieu of physical
delivery to the Exchange Agent of a Letter of Transmittal, electronically
acknowledge its receipt of, and agreement to be bound by, the terms of the
Letter of Transmittal. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Outstanding Notes will be
determined by Gothic in its sole discretion, which determination will be final
and binding. Gothic reserves the absolute fight to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes the Company's
acceptance of which would, in the opinion of counsel for Gothic, be unlawful.
Gothic also reserves the right to waive any defects, irregularities or
conditions of tender as to particular Outstanding Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Outstanding Notes must be cured within such time as Gothic shall
determine. Although Gothic intends to notify Holders of defects or
irregularities with respect to tenders of Outstanding Notes, neither Gothic,
the Exchange Agent nor any other person shall incur any liability for failure
to give such notification. Tenders of Outstanding Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Outstanding Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose Outstanding
Notes are not immediately available, (ii) who cannot deliver their Outstanding
Notes, the Letter of Transmittal or any other required
26
<PAGE>
documents to the Exchange Agent or (iii) who cannot complete the procedures
for book-entry transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate
number(s) of such Outstanding Notes and the principal amount of
Outstanding Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five Nasdaq Stock Market trading
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof), together with the certificate(s) representing the Outstanding
Notes (or a confirmation of book-entry transfer of such Outstanding
Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Outstanding Notes in proper form for transfer (or a
confirmation of book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility) and all
other documents required by the Letter of Transmittal, are received by
the Exchange Agent within five Nasdaq Stock Market trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00PM, EST, on the Expiration Date.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00PM, EST, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Outstanding Notes to be withdrawn (the
"Depositor"), (ii) identify the Outstanding Notes to be withdrawn (including
the certificate number(s) and principal amount of such Outstanding Notes, or,
in the case of Outstanding Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited),
(iii) be signed by the Holder in the same manner as the original signature on
the Letter of Transmittal by which such Outstanding Notes were tendered
(including any required signature guarantees) or be accompanied by documents
of transfer sufficient to have the Trustee with respect to the Outstanding
Notes register the transfer of such Outstanding Notes into the name of the
person withdrawing the tender, (iv) specify the name in which any such
Outstanding Notes are to be registered, if different from that of the
Depositor and (v) if applicable because the Outstanding Notes have been
tendered pursuant to book-entry procedures, specify the name and number of the
participant's account at DTC to be credited, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by Gothic, whose
determination shall be final and binding on all parties. Any Outstanding Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Outstanding Notes so withdrawn are validly retendered. Any
Outstanding Notes which have been tendered but which are not accepted for
exchange, will be returned to the Holder thereof without cost to such Holder
as soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Outstanding Notes may be retendered by
following one of the procedures described above under "Procedures for
Tendering" at any time prior to the Expiration Date.
27
<PAGE>
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn: Reorganization Dept.
Santino Ginocchietti
By Overnight Mail or Hand:
The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground Level
New York, New York 10286
Attn: Reorganization Dept.
Santino Ginocchietti
By Facsimile:
The Bank of New York
Attn: Reorganization Dept.
(212) 815-6339
Confirm by telephone
(212) 815-2963
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Gothic. The principal solicitation is being made by mail; however,
additional solicitation may be made by telegraph, telephone, facsimile or in
person by officers and regular employees of Gothic and its affiliates.
Gothic has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers or others soliciting
acceptances of the Exchange Offer. Gothic, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration
expenses, including fees and expenses of the Trustee, filing fees, blue sky
fees and printing and distribution expenses.
Gothic will pay all transfer taxes, if any, applicable to the exchange of
the Outstanding Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Outstanding Notes for the
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be issued in the name of, any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of the Outstanding Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered Holder or any other person) will be payable by the tendering
Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, which is face value, as reflected in the Company's
accounting records on the date of exchange. Accordingly, no gain or loss for
accounting purposes will be recognized. The expenses of the Exchange Offer
will be amortized over the term of the Exchange Notes.
28
<PAGE>
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, Gothic believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange for Outstanding Notes may be
offered for resale, resold and otherwise transferred by any holder of such
Exchange Notes (other than any such holder which is an "affiliate" of Gothic
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holder's business and such holder does not intend to participate and has
no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating,
in a distribution of the Exchange Notes may not rely on the position of the
staff of the Commission enunciated in Exxon Capital Holdings Corporation
(available April 13, 1989) and Morgan Stanley & Co., Incorporated (June 5,
1991), or similar no-action letters, but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In addition, any such resale
transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-B of the Securities Act. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Outstanding Notes, where
such Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder will represent to Gothic
that, among other things, (i) the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such Holder incurring liability
under the Securities Act for which such Holder is not indemnified by Gothic.
Further, by tendering in the Exchange Offer, each Holder that may be deemed an
"affiliate" (as defined under Rule 405 of the Securities Act) of Gothic, will
represent to Gothic that such Holder understands and acknowledges that the
Exchange Notes may not be offered for resale, resold or otherwise transferred
by that Holder without registration under the Securities Act or an exemption
therefrom.
As set forth above, affiliates of Gothic are not entitled to rely on the
foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
SHELF REGISTRATION STATEMENT
If Gothic is not permitted to consummate the Exchange Offer because the
Exchange Offer is not permitted by any applicable law or applicable
interpretation of the Commission or the staff of the Commission, Gothic has
agreed to file with the Commission and use its best efforts to have declared
effective and keep continuously effective for up to two years a registration
statement that would allow resales of Outstanding Notes owned by such holders.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Outstanding Notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
29
<PAGE>
Gothic may in the future seek to acquire untendered Outstanding Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. Gothic has no present plans to acquire any Outstanding
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Outstanding Notes.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights
Agreement. Gothic will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, Gothic will receive Outstanding Notes in like
principal amount, the form and terms of which are substantially similar to the
form and terms of the Exchange Notes, except as otherwise described herein.
The Outstanding Notes surrendered in exchange for Exchange Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase or decrease in the indebtedness
of Gothic.
30
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization at March 31, 1998 of Gothic on a pro forma basis giving effect
to the Recapitalization and the application of the estimated net proceeds
therefrom. The historical data should be read in conjunction with the
historical financial statements of Gothic included elsewhere herein and
incorporated herein by reference. The pro forma data has been prepared on the
basis described in the Pro Forma Combined Condensed Financial Statements
included elsewhere herein.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------------------------
PRO FORMA(1)
HISTORICAL RECAPITALIZATION AS ADJUSTED
<S> <C> <C> <C>
Cash and cash equivalents......... $ 3,294 $ 808 $ 4,102
======== ========= ========
Total debt, including current por-
tion:
Existing Credit Facility........ $210,434 $(210,434) $ --
12 1/4% Series A and Series B
Notes due 2004, net............ 100,204 (100,204) --
11 1/8% Series A and Series B
Senior Secured Notes due 2005.. -- 235,000 235,000
14 1/8% Series A and Series B
Senior Secured Discount Notes
due 2006....................... -- 60,155 60,155
-------- --------- --------
Total Debt.................... 310,638 (15,483) 295,155
-------- --------- --------
Series A redeemable preferred
stock, par value $0.05, 37,000
shares........................... 33,909 (33,909) --
Stockholders' equity(2):
Series B preferred stock, par
value $0.05, authorized 500,000
shares; issued and outstanding 0
and 50,000 shares................ -- 31,283 31,283
Common Stock, $0.01 par value,
100,000,000 shares authorized,
16,261,640 shares issued and
outstanding(2) .................. 162 -- 162
Additional paid-in capital........ 38,118 5,717 43,835
Stockholder note receivable....... (169) -- (169)
Accumulated deficit............... (55,548) (8,655) (64,203)
-------- --------- --------
Total stockholders' equity.... (17,437) 28,345 10,908
-------- --------- --------
Total capitalization.......... $327,110 $ (21,047) $306,063
======== ========= ========
</TABLE>
_____________________
(1) See Note 4 of Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
(2) Excludes (i) the 825,000 Warrant Shares issuable upon the exercise of the
Warrants, (ii)14,770,309 shares of Common Stock, subject to anti-dilution
adjustments, issuable upon the exercise of other outstanding warrants, and
(iii) 2,000,000 shares issuable upon the exercise of outstanding options
held by employees, officers and directors. See "Description of Capital
Stock."
31
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical financial information presented below has been
derived from the financial statements of Gothic for each of the two years in
the period ended December 31, 1997 included herein and from the unaudited
financial statements of Gothic for the three months ended March 31, 1997 and
1998 which are incorporated herein by reference. The pro forma financial
information gives effect to the 1997 Acquisitions, the Amoco Acquisition and
related financings, the completion of the Recapitalization and the application
of the estimated net proceeds therefrom. The historical financial data should
be read in conjunction with the financial statements and the related notes
thereto of Gothic included elsewhere in this Prospectus and incorporated
herein by reference. The summary pro forma combined financial information
presented below should be read in conjunction with the Pro Forma Combined
Condensed Financial Statements of Gothic and notes thereto. The pro forma
combined financial data are not necessarily indicative of the operating
results or financial position that would have been achieved had the
transactions to which they give pro forma effect been effective at the date or
during the periods presented or of the results that may be obtained in the
future. The reserve data set forth below is presented as of December 31, 1996
and December 31, 1997. The pro forma reserve data of Gothic as of December 31,
1997 gives effect to the Amoco Acquisition and the Recapitalization.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
HISTORICAL PRO FORMA
1996 1997 1997(1)
------- ------- -------------
(IN THOUSANDS, EXCEPT WHERE
OTHERWISE SPECIFIED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas and oil sales............... $10,385 $17,418 $ 70,471
Gas system revenues..................... -- 4,562 --
Well operations......................... 1,062 1,283 2,220
------- ------- --------
Total revenues........................ 11,447 23,263 72,691
------- ------- --------
Cost and expenses:
Operating expenses...................... 4,807 6,860 16,132
Gas system expenses..................... -- 3,501 --
Depreciation, depletion and
amortization........................... 2,856 5,791 29,619
General and administrative expenses..... 1,782 2,318 2,918
Provision for impairment of natural gas
and oil properties..................... 5,050 -- --
------- ------- --------
Total costs and expenses.............. 14,495 18,470 48,669
------- ------- --------
Operating income (loss)................... (3,048) 4,793 24,022
Interest expense and amortization of debt
issuance costs........................... (1,528) (8,800) (27,286)
Senior Secured Discount Notes non cash
interest and amortization of related debt
issuance costs........................... -- -- (8,595)
Interest and other income................. 68 330 330
------- ------- --------
Loss before income taxes and extraordinary
item..................................... (4,508) (3,677) (11,529)
Income tax benefit........................ 2,993 -- --
------- ------- --------
Loss before extraordinary item............ $(1,515) $(3,677) $(11,529)
======= ======= ========
Loss per common share before extraordinary
item, basic and diluted.................. $ (0.23) $ (0.28) $ (1.18)
======= ======= ========
OTHER FINANCIAL DATA:
EBITDA(2)................................. $ 4,858 $10,584 $ 53,641
Ratio of EBITDA to interest expense(2).... 3.2x 1.2x 1.5x
Ratio of earnings to fixed charges and
preferred dividends(3)................... -- 0.6x 0.6x
Net cash provided by operating
activities............................... $ 2,596 $ 7,069 N/A
Net cash used in investng activities...... 32,791 86,168 N/A
Net cash provided by financing
activities............................... 30,244 95,614 N/A
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
HISTORICAL PRO FORMA
1997 1998 1998(1)
------------------ --------------
(IN THOUSANDS, EXCEPT WHERE
OTHERWISE SPECIFIED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas and oil sales................ $ 4,707 $ 16,516 $ 14,861
Gas system revenues...................... 1,269 -- --
Well operations.......................... 306 586 683
------- -------- --------
Total revenues......................... 6,282 17,102 15,544
------- -------- --------
Cost and expenses:
Operating expenses....................... 1,700 4,664 4,390
Gas system expenses...................... 1,103 -- --
Depreciation, depletion and
amortization............................ 1,235 7,444 6,289
General and administrative expenses...... 547 655 655
Severance for former officer............. -- 258 258
------- -------- --------
Total costs and expenses............... 4,585 13,021 11,592
------- -------- --------
Operating income........................... 1,697 4,081 3,952
Interest expense and amortization of debt
issuance costs............................ (1,186) (8,033) (6,895)
Senior Secured Discount Notes non cash
interest and amortization of related debt
issuance costs............................ -- -- (2,185)
Interest and other income.................. 17 166 166
Loss on sale of investments................ -- (265) (265)
------- -------- --------
Income (loss) before extraordinary item.... $ 528 $ (4,051) $ (5,227)
======= ======== ========
Income (loss) per common share before
extraordinary item, basic and diluted..... $ 0.03 $ (0.31) $ (0.38)
======= ======== ========
OTHER FINANCIAL DATA:
EBITDA(2).................................. $ 2,932 $ 11,525 $ 10,241
Ratio of EBITDA to interest expense(2)..... 2.5x 1.4x 1.1x
Ratio of earnings to fixed charges and
preferred dividends(3).................... 1.3x 0.5x 0.4x
Net cash provided by operating activities.. $ 1,896 $ 2,244 N/A
Net cash used in investing activities...... 24,781 212,717 N/A
Net cash provided by financing activities.. 22,868 197,045 N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
---------------------------
HISTORICAL PRO FORMA(1)
(IN THOUSANDS, EXCEPT
RATIOS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 3,294 $ 4,102
Working capital..................................... 290 1,098
Total assets........................................ 346,720 325,673
Total debt.......................................... 310,638 295,155
Stockholders' equity................................ (17,437) 10,908
ACNTA(4)............................................ 314,024 267,715
Ratio of ACNTA to total debt(4)..................... 1.0x 0.9x
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
HISTORICAL PRO FORMA(1)
----------------
1996 1997 1997
<S> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Mbbls).................................... 164 176 416
Natural gas (Mmcf)............................. 3,404 6,583 29,006
Natural gas equivalent (Mmcfe)................. 4,388 7,639 31,502
Average sales prices:
Oil (per Bbl).................................. $ 21.27 $ 20.18 $ 18.00
Natural gas (per Mcf).......................... 2.03 2.11 2.17
Natural gas equivalent (per Mcfe).............. 2.37 2.28 2.24
Expenses (per Mcfe):
Lease and operating expenses(5)................ $ 0.85 $ 0.73 $ 0.44
General and administrative..................... 0.41 0.30 0.09
Depreciation, depletion and amortization(6).... 0.64 0.72 0.94
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
HISTORICAL PRO FORMA(1)
----------------
1997 1998 1998
<S> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Mbbls)..................................... 37 86 86
Natural gas (Mmcf).............................. 1,410 6,956 6,168
Natural gas equivalent (Mmcfe).................. 1,632 7,472 6,684
Average sales prices:
Oil (per Bbl)................................... $23.81 $15.10 $15.10
Natural gas (per Mcf)........................... 2.71 2.19 2.20
Natural gas equivalent (per Mcfe)............... 2.88 2.21 2.22
Expenses (per Mcfe):
Lease and operating expenses(7)................. $0.85 $0.55 $0.55
General and administrative (9).................. 0.34 0.09 0.10
Depreciation, depletion and amortization(8)..... 0.75 0.99 0.94
<CAPTION>
AS OF DECEMBER 31,
------------------------------
HISTORICAL PRO FORMA(1)
----------------
1996 1997 1997
<S> <C> <C> <C>
PROVED RESERVE DATA: (7)(8)
Oil (Mbbls)...................................... 1,158 3,585 4,401
Natural gas (Mmcf)............................... 64,534 127,460 304,647
Total proved reserves (Mmcfe).................... 71,482 148,970 331,053
% Natural gas.................................... 90% 86% 92%
Proved developed reserves (Mmcfe)................ 54,295 106,708 270,701
% Proved developed............................... 76% 72% 82%
PV-10 (in thousands)............................. $67,087 $122,723 $298,760
Standardized Measure (in thousands).............. 49,083 94,102 249,265
</TABLE>
(Footnotes on next page)
34
<PAGE>
- ---------------------
(1) The pro forma statement of operations data, other financial data and
operating data have been prepared as if the 1997 Acquisitions had been
consummated on January 1, 1997. The pro forma data further reflect the
Amoco Acquisition and the pro forma effects of the Recapitalization and
the application of the estimated net proceeds therefrom as if such
transactions had been consummated on January 1, 1997. The pro forma
balance sheet data have been prepared as if the Recapitalization and the
application of the estimated net proceeds therefrom had been consummated
on March 31, 1998.
(2) See the Glossary included elsewhere in this Prospectus for the definition
of EBITDA. EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. Information concerning EBITDA has been
included herein because EBITDA is a measure used by certain investors in
determining Gothic's historical ability to service its indebtedness;
however, this measure may not be comparable to similarly titled measures
of other companies. EBITDA should not be considered as an alternative to,
or more meaningful than, net income or cash flows as determined in
accordance with generally accepted accounting principles as an indicator
of Gothic's operating performance or liquidity.
(3) For the purpose of calculating the ratio of earnings to fixed charges,
fixed charges for Gothic consist of interest expense, the amortization of
debt discount and financing costs and preferred stock dividends. Earnings
consist of income before extraordinary items and income taxes plus fixed
charges. Gothic did not incur income tax expense for all periods presented
due to losses or being able to utilize net operating loss carry forwards
to offset income taxes and, accordingly, the preferred stock dividends
were not adjusted for the imputed income taxes. Gothic's historical
earnings were insufficient to cover fixed charges by $5.7 million and $3.9
million for the years ended December 31, 1996 and 1997, respectively and
by $5.0 million for the three months ended March 31, 1998. Pro forma
earnings for Gothic were insufficient to cover fixed charges by $19.4
million for the year ended December 31, 1997 and by $7.1 million for the
three months ended March 31, 1998.
(4) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in the
Indenture. See "Description of the Notes--Certain Definitions."
(5) Lease operating expense per Mcfe includes production taxes and is net of
well operator overhead reimbursements billed to working interest owners
which is recorded as well operations revenue.
(6) Represents depreciation, depletion and amortization of natural gas and oil
properties only.
(7) Represents proved reserves based on estimates prepared by Lee Keeling &
Associates, Inc. as of December 31, 1997. See "Business and Properties--
Natural Gas and Oil Reserves".
(8) Gothic believes that PV-10, while not determined in accordance with
generally accepted accounting principles, is an important financial
measure used by investors in independent oil and natural gas producing
companies for evaluating the relative significance of oil and natural gas
properties and acquisitions. PV-10 should not be construed as an
alternative to the Standardized Measure, as determined in accordance with
generally accepted accounting principles.
(9) Excludes a non-recurring severance payment to a former officer in 1998.
35
<PAGE>
GOTHIC ENERGY CORPORATION
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma financial data are derived from the
historical consolidated financial statements of Gothic, set forth elsewhere in
this Prospectus and incorporated herein by reference, and gives effect to the
1997 Acquisitions, the Amoco Acquisition, the Recapitalization and the
application of the estimated net proceeds therefrom.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------- ------------------------------------------------------
AMOCO ACQUISITION
1997 ---------------------- RECAPITALIZATION AS
GOTHIC ACQUISITIONS(A) AMOCO(B) ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Natural gas and oil
sales................. $17,418 $3,380 $56,809 $ -- $77,607 $(7,136)(d) $ 70,471
Gas system revenue..... 4,562 -- -- (4,562)(c) -- -- --
Well operations........ 1,283 301 745 2,329 (109)(d) 2,220
------- ------ ------- ------- ------- ------- --------
Total revenues......... 23,263 3,681 57,554 (4,562) 79,936 (7,245) 72,691
------- ------ ------- ------- ------- ------- --------
Costs and expenses:
Lease operating
expense............... 6,860 1,019 9,424 -- 17,303 (1,171)(d) 16,132
Gas system expense..... 3,501 -- -- (3,501)(c) -- -- --
Depreciation, depletion
and amortization...... 5,791 -- -- 25,994 (e) 31,785 (2,166)(f) 29,619
General and
administrative
expense............... 2,318 -- -- 600 (g) 2,918 -- 2,918
------- ------ ------- ------- ------- ------- --------
Operating income
(loss)................ 4,793 2,662 48,130 (27,655) 27,930 (3,908) 24,022
------- ------ ------- ------- ------- ------- --------
Other income(expense):
Interest and
amortization of debt
issue costs........... (8,800) -- -- (24,194)(h) (32,994) 5,708 (i) (35,881)
(8,595)(j)
Interest and other
income................ 330 -- -- -- 330 -- 330
------- ------ ------- ------- ------- ------- --------
Net other
income(expense)....... (8,470) -- -- (24,194) (32,664) (2,887) (35,551)
Income (loss) before
extraordinary item.... (3,677) 2,662 48,130 (51,849) (4,734) (6,795) (11,529)
------- ------ ------- ------- ------- ------- --------
Preferred dividends:
Cash................... 264 264
Non cash............... -- 6,000 (k) 6,000
Amortization of
discount.............. -- 1,622 (l) 1,622
------- --------
Income (loss) before
extraordinary item
available for common
shares................ $(3,941) $(19,415)
======= ========
Income (loss) before
extraordinary item per
common share, basic
and diluted........... $ (0.28) $ (1.18)
======= ========
Weighted average shares
outstanding, basic and
diluted............... 14,019 2,439 (m) 16,458
======= ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
combined condensed financial statements.
36
<PAGE>
GOTHIC ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- -------------------------
RECAPITALIZATION AS
GOTHIC ADJUSTMENTS ADJUSTED
<S> <C> <C> <C>
Revenues:
Natural gas and oil sales................ $16,516 $(1,655)(d) $14,861
Well operations.......................... 586 97 (d) 683
------- ------- -------
Total revenues........................... 17,102 (1,558) 15,544
------- ------- -------
Costs and expenses:
Lease operating expense.................. 4,664 (274)(d) 4,390
Depreciation, depletion and
amortization............................ 7,444 (1,155)(f) 6,289
General and administrative expense....... 655 -- 655
Severance for former officer............. 258 -- 258
------- ------- -------
Operating income (loss).................. 4,081 (129) 3,952
------- ------- -------
Other income(expense):
Interest and amortization of debt issue
costs................................... (8,033) (1,047)(i) (9,080)
Interest and other income................ 166 -- 166
Loss on sale of investments.............. (265) -- (265)
------- ------- -------
Net other income(expense)................ (8,132) (1,047) (9,179)
Income (loss) before extraordinary item.. (4,051) (1,176) (5,227)
------- ------- -------
Preferred dividends:
Cash.................................... -- -- --
Non cash................................ 974 526 (k) 1,500
Amortization of discount................. -- 406 (l) 406
------- ------- -------
Income (loss) before extraordinary item
available for common shares............. $(5,025) $(2,108) $(7,133)
======= ======= =======
Income (loss) before extraordinary item
per common share, basic and diluted..... $ (0.31) $ (0.38)
======= =======
Weighted average shares outstanding,
basic and diluted....................... 16,261 2,439 (m) 18,700
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
condensed financial statements.
37
<PAGE>
GOTHIC ENERGY CORPORATION
(THE PARENT AND SUBSIDIARIES)
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1998
(In thousands, except par value)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
HISTORICAL AS
GOTHIC RECAPITALIZATION ADJUSTED
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 3,294 $ 224,900 (1) $ 4,102
57,755 (1)
(281,643)(1)
10,500 (2)
37,000 (3)
(47,500)(3)
(1,000)(1)
796 (1)
Natural gas and oil receivables........ 8,187 -- 8,187
Receivable from officers and
employees............................. 66 -- 66
Other.................................. 2,140 -- 2,140
-------- ---------- --------
Total current assets................. 13,687 808 14,495
-------- ---------- --------
Property and equipment:
Natural gas and oil properties on full
cost method:
Properties being amortized............ 338,471 (10,500)(2) 308,471
(20,000)(2)
500 (1)
Unproved properties not subject to
amortization......................... 2,103 -- 2,103
Equipment, furniture and fixtures...... 607 -- 607
Accumulated depreciation, depletion and
amortization.......................... (16,645) -- (16,645)
-------- ---------- --------
Property and equipment, net............ 324,536 (30,000) 294,536
Other assets, net....................... 8,497 12,000 (1) 16,642
(3,855)(1)
Note receivable from officer and
director............................... -- -- --
-------- ---------- --------
Total assets......................... $346,720 $ (21,047) $325,673
======== ========== ========
</TABLE>
(continued)
38
<PAGE>
GOTHIC ENERGY CORPORATION
(PARENT AND SUBSIDIARIES)
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET--(CONTINUED)
AS OF MARCH 31, 1998
(In thousands, except par value)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
HISTORICAL AS
GOTHIC RECAPITALIZATION ADJUSTED
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities............................ $ 13,397 $ -- $ 13,397
Current portion of long-term debt....... -- -- --
-------- --------- --------
Total current liabilities............... 13,397 -- 13,397
Long-term debt:
12 1/4% Senior Notes, net............... 100,204 (100,204)(1) --
Senior Secured Notes.................... -- 235,000 (1) 235,000
Senior Secured Discount Notes........... -- 60,155 (1) 60,155
Existing Credit Facility................ 210,434 (181,643)(1) --
(8,791)(3)
(20,000)(2)
-------- --------- --------
Total long-term debt, net............... 310,638 (15,483) 295,155
Gas imbalance liability................. 6,213 -- 6,213
Series A redeemable preferred stock, par
value $0.05, issued and outstanding
37,000 and -0- shares.................. 33,909 (33,909)(3) --
Stockholders' equity:
Series B preferred stock, par value
$0.05, authorized 500,000 shares;
issued and outstanding -0- and 50,000
shares................................. -- 37,000 (3) 37,000
Less: Unamortized discount.............. -- (5,717)(3) (5,717)
Common stock, par value $.01, authorized
100,000,000 shares; issued and
outstanding 16,261,640 shares.......... 162 -- 162
Additional paid in capital.............. 38,118 5,717 (3) 43,835
Stockholder note receivable............. (169) -- (169)
Accumulated deficit..................... (55,548) (4,800)(3) (64,203)
(3,855)(1)
-------- --------- --------
Total stockholders' equity.............. (17,437) 28,345 10,908
-------- --------- --------
Total liabilities and stockholders'
equity................................. $346,720 $ (21,047) $325,673
======== ========= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
condensed financial statements.
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
NOTE 1--THE PROPERTIES
On January 23, 1998, Gothic purchased from Amoco, with an effective date of
December 1, 1997, various working interests in a total of 821 natural gas and
oil producing properties located in the Anadarko and Arkoma basins of
Oklahoma. Gothic operates 291 of the properties. The purchase price for the
properties acquired was $237.5 million in cash, including post-closing
adjustments, plus five-year warrants to purchase 1.5 million shares of Common
Stock at a per share exercise price of $3.00. The estimated fair value of the
warrants at the date of acquisition was approximately $1.2 million. In
addition, Gothic transferred certain properties to Amoco valued at
approximately $1.8 million.
NOTE 2--FINANCING
The $237.5 million purchase price for the Amoco Acquisition, together with
loan and consent fees totaling $27.7 million, was financed as follows: (i)
$216.4 million of borrowings under the Existing Credit Facility, which
included $156.4 million under the three-year Revolving Loan and the $60.0
million Bridge Loan, (ii) $37.0 million in proceeds from an offering of Series
A Preferred Stock and (iii) $11.8 million from Gothic's working capital.
Gothic incurred $4.8 million in financing costs associated with the Existing
Credit Facility, fees of $5.8 million paid in cash and $15.0 million paid in
Series A Preferred Stock and warrants for amendments to the terms of Gothic's
12 1/4% Senior Notes which were issued in September 1997 and $2.1 million in
offering costs associated with the sale of 37,000 shares of Series A Preferred
Stock.
NOTE 3--RECAPITALIZATION PLAN
Gothic issued 50,000 shares of Series B Preferred Stock with a liquidation
value of $50.0 million, and used the net proceeds of $37.0 million to redeem
the Series A Preferred Stock and to repay debt. Concurrently, Gothic issued
$235.0 million of Senior Secured Notes and realized proceeds of approximately
$60.0 million from the sale of the Notes which were used to repay the
remainder of the Bridge Loan, redeem the existing 12 1/4% Senior Notes and
repay the outstanding debt under the Revolving Loan. Gothic incurred offering
costs of approximately $15.0 million related to the Recapitalization. Gothic
also sold a 50% interest in certain producing and undeveloped properties for
aggregate proceeds of $30.5 million.
NOTE 4--BASIS OF PRESENTATION
The accompanying unaudited pro forma combined condensed statement of
operations and the balance sheet are presented to reflect the consummation of
the 1997 Acquisitions, the Amoco Acquisition and the Recapitalization, as if
these transactions had occurred at January 1, 1997 for purposes of the
statements of operations and as of March 31, 1998 for purposes of the balance
sheet, and may not be indicative of the results that would have occurred if
the transactions had been effective on the dates indicated or of the results
that may be obtained in the future. The accompanying unaudited pro forma
combined condensed statements of operations and balance sheet should be read
in conjunction with the historical consolidated financial statements and notes
to consolidated financial statements of Gothic for the year ended December 31,
1997 included herein and the three months ended March 31, 1998, and the
Historical Schedule of Gross Revenues and Direct Lease Operating Expenses of
the Amoco Properties, which are incorporated herein by reference.
NOTE 5--PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma combined condensed statement of
operations includes the following adjustments:
(a) Reflects the historical revenues and lease operating expenses of the
properties acquired during 1997 for the allocable portion of 1997 not
included in Gothic's historical 1997 financial statements. The 1997
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Acquisitions' allocable results include properties acquired from Fina Oil
and Chemical Company for three months, properties acquired from Kerr-McGee
Corporation for seven months, and the properties acquired from HS
Resources, Inc. for eight months. The 1997 Acquisitions also reflect a
deduction for revenues and lease operating expenses associated with certain
properties sold in November 1997.
(b) Reflects the historical revenues and lease operating expenses during
1997 of the properties acquired in the Amoco Acquisition, net of the
historical revenues and lease opening expenses related to the properties
transferred to Amoco and the results of operations of the Amoco gas
gathering systems which were concurrently sold.
(c) Reflects the elimination of the results of operations of the Sycamore
System which was sold concurrently with the Amoco Acquisition.
(d) Reflects the elimination of historical revenues and lease operating
expenses associated with properties sold to Chesapeake for approximately
$20.0 million.
(e) Depreciation, depletion and amortization ("DD&A") was calculated
using a DD&A rate based on production for 1997 and for the three months
ended March 31, 1998, and estimated reserves at the beginning of 1997 and
1998, respectively, under the full cost method of accounting for natural
gas and oil properties, after giving effect to the Amoco Acquisition.
(f) Adjustment to DD&A to reflect the recalculated DD&A under the full
cost method of accounting, after giving effect to the Chesapeake
Transaction.
(g) Reflects estimated additional general and administrative costs
associated with operating the assets acquired in the Amoco Acquisition.
(h) Adjustment to interest expense to reflect the debt incurred
associated with the expanded credit facility used to finance the Amoco
Acquisition and amortization of debt issuance costs in connection
therewith.
(i) Adjustment to interest expense to reflect the repayment of the 12
1/4% Senior Notes and the Existing Credit Facility, and the new debt
incurred of $235.0 million in the Senior Secured Offering at an assumed
rate of 11%.
(j) Adjustment to interest expense to reflect the additional debt
incurred related to the $60.0 million in Notes under the Recapitalization,
at an assumed imputed interest rate of 14%.
(k) Reflects the dividends associated with 50,000 shares of Series B
Preferred Stock.
(l) Adjustment to show effect of amortization of the excess of the
redemption amount over the carrying value associated with the Series B
Preferred Stock.
(m) Reflects the issuance to Chesapeake of warrants to purchase 2,439,246
shares of Common Stock for $0.01 per share.
The pro forma statement of operations for the year ended December 31, 1997
does not reflect an estimated extraordinary loss of $26.2 million related to
the redemption of the 12 1/4% Senior Notes and $4.8 million related to the
payment of the Existing Credit Facility.
The accompanying unaudited pro forma combined balance sheets include the
following adjustments:
(1) Reflects receipt of the net proceeds from the issuance of the Notes
and the Senior Secured Notes and application of the proceeds to reduce
outstanding debt, as well as adjustments to record associated loan costs
and to write off existing debt discount and loan costs.
(2) Adjustment to reflect the sale of certain natural gas and oil
properties to Chesapeake for $20.0 million and an undivided 50% interest in
certain of the Company's undeveloped natural gas and oil properties for
$10.5 million.
41
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(3) Reflects receipt of the net proceeds from the issuance of the Series
B Preferred Stock and the application of the proceeds therefrom to redeem
the Series A Preferred Stock and reduce outstanding debt.
Based on market prices for natural gas and oil in March 1998 and the
anticipated terms of the Recapitalization, Gothic would, as of the end of the
quarter following the completion of the Recapitalization, reflect a full cost
write down in the amount of approximately $33.0 million. Based on rules
promulgated by the Commission, Gothic evaluates impairment of its natural gas
and oil properties, based on prevailing prices as of the end of each quarter,
and accordingly, the actual amount of impairment, if any, will not be
determinable until the end of the quarter ending June 30, 1998. The possible
full cost write down has not been included in the accompanying pro forma
financial statements.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to the operating history of Gothic. GPC was
organized in March 1998 for the purpose of facilitating the Recapitalization.
As part of the Recapitalization, GPC succeeded to the natural gas and oil
operations of Gothic. Accordingly, following the Recapitalization, Gothic, as
the parent corporation, operates solely as a holding company with the
outstanding capital stock of GPC as its only material asset. The discussion
herein of Gothic includes the operating results and assets of the natural gas
and oil properties that will be transferred to GPC.
See "Information Incorporated By Reference" herein for a description of
periodic reports filed with the Commission pursuant to the Exchange Act by
Gothic, including its Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 1998, which are incorporated in this Prospectus by reference.
GENERAL
Gothic's results of operations have been significantly affected by its
acquisition of producing natural gas and oil properties over the last two
years. During 1997, Gothic completed seven acquisitions (the "1997
Acquisitions") of producing natural gas and oil properties for an aggregate
purchase price of approximately $52.8 million. These acquisitions included an
aggregate of approximately 102.2 Bcfe. During 1996, Gothic completed four
acquisitions (the "1996 Acquisitions") of producing natural gas and oil
properties for an aggregate purchase price of approximately $34.4 million.
These acquisitions included an aggregate of approximately 44.8 Bcfe.
The 1996 Acquisitions and 1997 Acquisitions were financed primarily through
the sale of equity securities in January 1996, borrowings under Gothic's pre-
existing credit facility throughout 1996 and 1997 and the sale of Gothic's 12
1/4% Senior Notes in September 1997.
The following table reflects certain summary operating data for the periods
presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
RESULTS OF OPERATIONS -------------------------------------------
1995 1996 1997
(IN THOUSANDS, UNLESS OTHERWISE INDICATED)
<S> <C> <C> <C>
NET PRODUCTION:
Oil (Mbbls)...................... 74 164 176
Natural gas (Mmcf)............... 434 3,404 6,583
Natural gas equivalent (Mmcfe)... 878 4,388 7,639
NATURAL GAS AND OIL SALES:
Oil.............................. $ 1,283 $ 3,488 $ 3,551
Natural gas...................... 611 6,897 13,867
------------- -------------- --------------
Total............................ $ 1,894 $ 10,385 $ 17,418
============= ============== ==============
AVERAGE SALES PRICE:
Oil (per Bbl).................... $ 17.34 $ 21.27 $ 20.18
Natural gas (per Mcf)............ 1.41 2.03 2.11
Natural gas equivalent (per
Mcfe)........................... 2.16 2.37 2.28
EXPENSES (PER MCFE):
Lease and operating(1)........... $ 1.29 $ 0.85 $ 0.73
General and administrative....... 1.15 0.41 0.30
Depreciation, depletion and
amortization(2)................. 0.85 0.64 0.72
</TABLE>
- ---------------------
(1) Includes lease operating costs and production taxes and is net of well
operator overhead reimbursement billed to working interest owners which is
recorded as well operations revenue.
(2) Represents depreciation, depletion and amortization of oil and natural gas
properties only.
43
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues were $23.3 million for the year ended December 31, 1997, as
compared to $11.4 million for the year ended December 31, 1996. This
represents a 104% increase in total revenue for the period. Natural gas and
oil sales for the year ended December 31, 1997 increased $7.0 million (67%) to
$17.4 million, with $3.6 million from oil sales and $13.9 million from natural
gas sales, as compared to natural gas and oil sales of $10.4 million for the
year ended December 31, 1996, with $3.5 million from oil sales and $6.9
million from natural gas sales. The increase in natural gas and oil sales was
primarily the result of a 93% increase in natural gas production and a 7%
increase in oil production from 1997 compared to 1996. The increase in volumes
of oil and gas sold resulted primarily from the 1997 Acquisitions. Oil sales
in 1997 were based on the sale of 176,000 barrels at an average price of
$20.18 per barrel as compared to 164,000 barrels at an average price of $21.27
per barrel in 1996. Natural gas sales in 1997 were based on the sale of
6,583,000 mcf at an average price of $2.11 per mcf compared to 3,404,000 mcf
at an average price of $2.03 per mcf in 1996. Also included in Gothic's
revenue total for the year ended December 31, 1997 is $4.6 million related to
the sale of natural gas and related products from Gothic's interest in the
Sycamore System, an Oklahoma gathering system, processing plant and storage
facility acquired effective January 1, 1997.
Gothic incurred lease operating expenses for the year ended December 31,
1997 of $6.9 million compared with lease operating expenses of $4.8 million
for the year ended December 31, 1996. Lease operating expenses include
approximately $1.3 million and $567,000 in production taxes which Gothic
incurred from its share of production in 1997 and 1996, respectively. This
increase in lease operating expenses is primarily due to the 74% increase in
natural gas and oil production (on an Mcfe basis) resulting primarily from the
1997 Acquisitions. Lease operating expenses as a percentage of natural gas and
oil sales were 40% in 1997 as compared to 46% in 1996. Gothic also incurred
$3.5 million in operating costs associated with the Sycamore System during the
year ended December 31, 1997.
Subsequent to December 31, 1997, Gothic sold its interest in the Sycamore
System, as well as certain other gas gathering assets, for $6.0 million in
cash.
Depreciation, depletion and amortization expense was $5.8 million for the
year ended December 31, 1997 as compared to $2.9 million for the prior year.
The increase resulted primarily from the increased production associated with
the 1997 Acquisitions.
General and administrative costs were $2.3 million for the year ended
December 31, 1997, as compared to $1.8 million for the year ended December 31,
1996. This increase was primarily the result of additional personnel and other
costs related to the 1997 Acquisitions and the administrative costs incurred
in operating the wells acquired in the 1997 Acquisitions. Gothic added five
employees as a direct result of the 1997 Acquisitions at an approximate cost
of $202,000. Although general and administrative costs increased $536,000
during 1997, the costs per Mcfe decreased from $0.41 in 1996 to $0.30 in 1997.
During the first quarter of 1996, Gothic recorded a $5.0 million 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 natural gas and oil properties. As a result of the
$5.0 million impairment provision and the aggregate $2.9 million of deposits
written off, Gothic recorded a tax benefit of $3.0 million which offset the
deferred tax liability related to the acquired Buttonwood oil and gas
properties. Gothic also recorded an extraordinary loss of $1.4 million on the
early extinguishment of debt during the quarter ended March 31, 1996,
associated with the repayment of the Stratum loan.
Interest and debt issuance costs were $8.8 million for the year ended
December 31, 1997 as compared to $1.5 million for 1996. This increase was
primarily due to amending and restating Gothic's Credit Facility with Bank One
in February 1997 and again in September 1997, and the completion in September
1997 of the sale of the 12 1/4% Senior Notes.
44
<PAGE>
Gothic also earned $330,000 in interest and other income during the year
ended December 31, 1997 compared to $68,000 in 1996. The 1997 amount includes
$268,000 of interest income related to the invested unexpended proceeds from
the sale of the 12 1/4% Senior Notes in September.
Gothic recorded an extraordinary loss on the early extinguishment of debt in
the amount of $907,000 during the quarter ended September 30, 1997 related to
repayment of its pre-existing credit facility prior to the stated maturity.
Gothic also recorded an extraordinary loss of $1.4 million on the early
extinguishment of debt during the quarter ended March 31, 1996.
During the year ended December 31, 1997, Gothic spent $6.1 million on
capital enhancements and $83.4 million on acquiring additional producing
properties, as compared to $1.2 million and $35.0 million spent on capital
enhancements and property acquisitions, respectively, during 1996. The
increase in 1997 was primarily due to the 1997 Acquisitions.
Gothic also recognized $264,000 in preferred dividends on its 7 1/2%
Cumulative Convertible Preferred Stock during the year ended December 31,
1997, compared to the recognition of $381,000 in preferred dividends and
$791,000 in amortization of preferred discount in 1996. Because the initial
conversion price of Gothic's outstanding 7 1/2% Cumulative Convertible
Preferred Stock was at a discount of 12 1/2% less than the $2.00 market price
for Gothic's Common Stock on January 30, 1996, the date of issuance, Gothic
computed an imputed dividend of $791,000 on the shares of preferred stock. The
discount was treated as an imputed dividend for the period ending December 31,
1996 and, accordingly, affects income (loss) available for holders of common
shares. All of the shares of 7 1/2% Cumulative Convertible Preferred Stock
were converted into Common Stock prior to December 31, 1997.
The profitability and revenues of Gothic are dependent, to a significant
extent, upon prevailing spot market prices for natural gas and oil. In the
past, natural gas and oil prices and markets have been volatile. Prices are
subject to wide fluctuations in response to changes in the supply of and
demand for natural gas and oil, market uncertainty and a variety of additional
factors that are beyond the control of Gothic. Such factors include supply and
demand, political conditions, weather conditions, government regulations, the
price and availability of alternative fuels and overall economic conditions.
Natural gas prices have fluctuated significantly over the past twelve months.
Gothic uses the sales method for recording natural gas sales. Gothic'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 Gothic's interest in producing natural gas wells 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 Gothic'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
Gothic's shares of estimated total gas reserves underlying the property at
which time such excess is recorded as a gas balancing liability. Such
imbalances are incurred from time to time in the ordinary course of business
in the operation of gas wells as a consequence of operational factors. See
Note 1 to Notes to Consolidated Financial Statements.
At December 31, 1997, Gothic had a gas balancing asset of $759,000 and a gas
balancing liability of $551,000. The balances that existed at December 31,
1997, except for possible immaterial amounts, were not the result of producing
operations conducted by Gothic, but were the results of asset acquisitions. It
is not Gothic's policy to operate wells in such a manner that imbalances are
created. Gothic expects that the imbalances that existed at December 31, 1997
will be settled upon abandonment of the wells or will be reflected in the
price if the respective well interest is sold prior to then.
45
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Since 1994, Gothic's principal sources of cash have been bank borrowings,
the sale of equity and debt securities and cash flow from operations. The
following summary table reflects comparative cash flows for Gothic for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities........... $ 2,596 $ 7,069
Net cash used in investing activities............... 32,791 86,168
Net cash provided by financing activities........... 30,244 95,614
</TABLE>
Net cash provided by operations increased to $7.1 million for the year ended
December 31, 1997 as compared to net cash provided of $2.6 million for the
same period in 1996. The improved operating cash flows for the year ended
December 31, 1997 relate primarily to the significant increase in income from
operations before non-cash charges resulting from the 1997 Acquisitions and
the 1996 Acquisitions.
Gothic used $86.2 million of net cash in investing activities for the year
ended December 31, 1997 compared to net cash used of $32.8 million for the
same period in 1996. This increase was primarily due to the 1997 Acquisitions
for an aggregate of $52.8 million, the Sycamore System acquisition for $5.0
million, the deposit under the Amoco Acquisition agreement of $23.7 million
and property enhancements of $6.1 million. These uses were offset by proceeds
of $4.3 million received from the sale of property and equipment during 1997.
Net cash provided by financing activities for the year ended December 31,
1997 was $95.6 million compared to $30.2 million provided in 1996. The 1997
amount includes proceeds from short and long-term debt related to the 1997
Acquisitions, payments of short and long term debt, and the payment of $2.0
million in loan fees.
OUTSTANDING INDEBTEDNESS AND OTHER SECURITIES
Existing Credit Facility. On January 23, 1998, Gothic entered into a Second
Restated Loan Agreement (the "Existing Credit Facility") with Bank One, Texas,
N.A. ("Bank One"), as principal and as agent for a syndicate of lenders, which
agreement replaced Gothic's credit facility entered into in January 1996. The
Existing Credit Facility consists of a revolving loan with a lending
commitment of $160.0 million, subject to a monthly commitment reduction of
$2.0 million commencing February 1, 1998 (the "Revolving Loan"), and a bridge
loan with a lending commitment of $60.0 million (the "Bridge Loan"). The
initial borrowing base under the Revolving Loan is $160.0 million. Proceeds
under the Revolving Loan were used to finance a portion of the purchase price
for the Amoco Acquisition and are available for the acquisition and
development of natural gas and oil properties, obtaining letters of credit and
for general corporate purposes. The Revolving Loan matures on December 31,
2000. Borrowings under the Bridge Loan were used to finance a portion of the
purchase price for the Amoco Acquisition. The Bridge Loan is due and payable
on June 30, 1998 and is subject to prepayment out of Gothic's excess cash
flow, as defined.
Interest on borrowings under the Existing Credit Facility is payable monthly
calculated at the Bank One Base Rate, as determined from time to time by Bank
One, provided, however, so long as the Bridge Loan is outstanding interest on
the Revolving Loan is at the Base Rate plus 0.5% and interest on the Bridge
Loan is at the Base Rate plus 1.0% through March 31, 1998 and at the Base Rate
plus 2.0% thereafter. Gothic may elect to calculate interest under a London
Interbank Offered Rate ("LIBOR") plus 1.5%, if less than 50% of the borrowing
base is utilized, up to plus 2% if more than 75% of the borrowing base is
utilized, provided, however, so long as the Bridge Loan is outstanding the
LIBOR rate is plus 3.0%. The interest rate under the Existing Credit Facility
is subject to increases of up to 2.0% in the event Gothic fails to fulfill
timely certain agreements
46
<PAGE>
relating to obtaining additional capital. Pursuant to the foregoing, the
interest rate increased 1% on February 28, 1998 and is subject to a further 1%
increase on March 31, 1998. Gothic is required to pay a fee on the unused
portion of the lending commitment equal to 1/2% per annum.
Under the Existing Credit Facility, the lenders hold liens on substantially
all of Gothic's natural gas and oil properties, whether currently owned or
hereafter acquired, including the properties acquired in the Amoco
Acquisition. The Existing Credit Facility requires, among other things, semi-
annual engineering reports covering oil and natural gas reserves on the basis
of which semi-annual and other redeterminations of the borrowing base and
monthly commitment reduction will be made. The Existing Credit Facility also
includes various affirmative and negative covenants, including, among others,
(i) prohibitions against additional indebtedness unless approved by the
lenders, subject to certain exceptions, (ii) prohibitions against the creation
of liens on the assets of Gothic, subject to certain exceptions, (iii)
prohibitions against cash dividends, (iv) maintaining certain hedging
positions and interest rate protection agreements satisfactory to Bank One,
(v) prohibitions on asset sales, subject to certain exceptions, (vi)
restrictions on mergers or consolidations, (vii) a requirement to maintain a
ratio of current assets to current liabilities of 1.0 to 1.0, (viii) a
requirement to maintain on a quarterly basis a minimum tangible net worth of
at least (a) $45 million as of January 23, 1998, and (b) $75 million as of
March 31, 1998, plus 50% of net income, if positive, before extraordinary
gains but after extraordinary losses, for the period commencing April 1, 1998,
plus 100% of the net proceeds from the issuance of common or preferred stock,
(ix) a minimum interest coverage ratio of not less than 1.5 to 1.0 as of the
end of each quarter for the preceding four quarters beginning with the quarter
ended September 30, 1997 and increasing to 2.0 to 1.0 as of the end of each
quarter for the preceding four quarters beginning with the quarter ended
September 30, 1998, (x) issuance of common stock with proceeds of $65.0
million by March 31, 1998, and (xi) the escrow of interest payments due on
Gothic's outstanding 12 1/4% Senior Notes due 2004. Events of default include
the non-payment of principal, interest or fees, a default under other
outstanding indebtedness of Gothic, a breach of Gothic's representations and
warranties contained in the loan agreement, material judgments, bankruptcy or
insolvency, a default under certain covenants not cured within a grace period,
and a change in the management or control of Gothic.
The amount of borrowings available to Gothic under the Existing Credit
Facility depend upon the redetermination of Gothic's borrowing base by the
lenders, subject to the limits imposed by the lending commitment. The
borrowing base is subject to periodic redetermination, at the discretion of
the lenders, based on a review of Company reserve and other information with
the initial scheduled review to occur on April 1, 1998. A reduction in the
borrowing base could require Gothic to repay outstanding indebtedness under
the Revolving Loan in excess of the redetermined borrowing base, and would
limit available borrowings thereunder.
On March 30, 1998, the Existing Credit Facility was amended to provide,
among other things, that Gothic is required by April 30, 1998 to issue new
equity with proceeds of $50.0 million and $225.0 million of senior notes to
replace the 12 1/4% Senior Notes, to escrow on or before May 1, 1998 one-third
of the next semi-annual interest payment on the 12 1/4% Senior Notes and on
the first day of each month thereafter one-sixth of the next semi-annual
interest payment on the 12 1/4% Senior Notes, and to have a tangible net worth
of $60.0 million as of April 30, 1998.
12 1/4% Senior Notes due 2004. On September 9, 1997, Gothic completed the
sale of 100,000 units consisting of an aggregate of $100 million principal
amount of 12 1/4% Senior Notes due 2004 ("12 1/4% Senior Notes") and warrants
to purchase an aggregate of 1.4 million shares of Common Stock of Gothic at
purchase price of $3.00 per share. The proceeds to Gothic from the sale of the
units were approximately $95.7 million, net of offering costs of $4.3 million,
and were used to complete the acquisition of natural gas and oil properties
from HS for $27.5 million, repay the Existing Credit Facility balances of
$47.4 million, repay other indebtedness and accrued interest of $4.7 million
and apply approximately $16.0 million to working capital. The estimated fair
value of the 1.4 million warrants issued in connection with the offering was
$1.2 million. Such amount has been treated as an original issue discount and
together with the offering costs is being amortized over the life of the 12
1/4% Senior Notes using the effective interest method.
47
<PAGE>
The 12 1/4% Senior Notes bear interest at an annual rate of 12 1/4%, payable
semiannually in arrears on March 1 and September 1 of each year. The 12 1/4%
Senior Notes are senior, unsecured obligations of Gothic, ranking pari passu
with all existing and future unsecured senior indebtedness of Gothic, and
senior in right of payment to all future subordinated indebtedness of Gothic.
Subject to certain limitations set forth in the indenture covering the 12 1/4%
Senior Notes (the "Senior Note Indenture"), Gothic and its subsidiaries may
incur additional senior indebtedness and other indebtedness.
The Senior Note Indenture contains certain affirmative and negative
covenants which, among other things, limit Gothic and its Restricted
Subsidiaries, as defined, with respect to the following: (i) asset sales; (ii)
restricted payments, including cash dividends; (iii) the incurrence of
additional indebtedness and the issuance of certain redeemable preferred
stock; (iv) liens; (v) sale and leaseback transactions; (vi) lines of
business; (vii) dividend and other payment restrictions affecting
subsidiaries; (viii) mergers and consolidations; and (ix) transactions with
affiliates.
In addition, the 12 1/4% Senior Notes are redeemable at the option of Gothic
at any time prior to March 31, 1998 at a redemption price of 100% of the
principal amount, plus accrued and unpaid interest thereon, and thereafter
through April 30, 1998, when such redemption right expires, at a redemption
price of 101% of the principal amount, plus accrued and unpaid interest
thereon. Gothic intends to exercise this right of redemption in connection
with the Recapitalization.
The 12 1/4% Senior Notes are unconditionally guaranteed (the "Guarantee") by
the two subsidiaries of Gothic, Gothic Energy of Texas, Inc. and Gothic Gas
Corporation ("Guarantors"). The Guarantee is a general unsecured senior
obligation of the Guarantors, ranking pari passu with all existing and future
subordinated indebtedness of the Guarantors. The Senior Note Indenture
provides that all existing and future Restricted Subsidiaries shall enter into
the Guarantee.
In connection with obtaining consents to an amendment of Gothic's
outstanding 12 1/4% Senior Notes in connection with obtaining the financing to
complete the Amoco Acquisition, Gothic agreed to raise a total of at least
$45.0 million in equity by February 28, 1998 and at least $100.0 million from
the sale of senior subordinated notes by March 31, 1998. As Gothic has failed
to comply with either of these agreements, until such conditions are met, the
interest rate on the 12 1/4% Senior Notes will increase by 1% until the
additional equity is raised and also by 1% until the senior subordinated notes
are sold; provided, that if the senior subordinated notes are not issued by
June 30, 1998, the interest rate on the 12 1/4% Senior Notes will increase
by 2% until such senior subordinated notes are issued. By reason of the
foregoing, the interest rate increased by 2%.
The 12 1/4% Senior Notes were redeemed on April 27, 1998.
Series A Preferred Stock and Warrants. On January 23, 1998, Gothic issued an
aggregate of 37,000 shares of Series A Preferred Stock with each share having
a liquidation preference of $1,000. Gothic has the right to redeem the Series
A Preferred Stock at any time upon payment in cash of 101% of the liquidation
preference, inclusive of accrued but unpaid dividends, and the shares are
mandatorily redeemable on December 31, 2004. The shares of Series A Preferred
Stock entitle the holders to receive cumulative dividends payable in
additional shares of Series A Preferred Stock at a rate per annum initially of
14% of the liquidation preference of the Series A Preferred Stock increasing
on April 1, 1998 and each 90-day period thereafter that the Series A Preferred
Stock remains outstanding by 1%, but not to exceed a maximum dividend per
annum of 20%, excluding any other adjustments to the dividend rate. The Series
A Preferred Stock ranks senior to all classes of Gothic's Common Stock and
preferred stock outstanding or hereafter issued. The holders of the shares of
Series A Preferred Stock have no voting rights except (i) as required by
Oklahoma law, or (ii) in the event the shares of Series A Preferred Stock are
then outstanding and so long as such shares remain outstanding, commencing on
September 30, 1998 the holders are entitled to elect two members of Gothic's
Board of Directors, on December 31, 1998 the holders are entitled to elect
three members of Gothic's Board of Directors, and on March 31, 1999 the
holders are entitled to elect four members of Gothic's Board of Directors.
Such directors, if elected, will serve until the shares are redeemed. The
dividend rate on the Series A Preferred Stock is subject to increase under
certain circumstances in the event Gothic fails to comply with certain
covenants relating to the registration under the Securities Act of
48
<PAGE>
1933, as amended, of shares of Series A Preferred Stock to be offered in
exchange for the outstanding shares of Series A Preferred Stock, a change in
control of Gothic, or the failure of Gothic to redeem the shares from the
proceeds of certain offerings of its securities. The issuance of the shares
provided a portion of the cash paid as consideration in the Amoco Acquisition
and were applied to payment of a fee in connection with an amendment obtained
from the holders of certain terms of Gothic's outstanding 12 1/4% Senior Notes
thereby permitting the Amoco Acquisition.
Concurrently with the sale of the Series A Preferred Stock, Gothic issued
warrants expiring five years from the date of issuance to purchase an
aggregate of 1,175,778 shares of Common Stock exercisable at the lesser of
$2.75 per share or the average of the daily closing bid prices commencing five
days and ending one day before the date of exercise. The exercise price and
number of shares issuable is subject to adjustment under certain circumstances
and the holders have certain rights to have the shares issuable on exercise of
the warrants registered under the Securities Act or included in a registration
statement filed by Gothic under the Securities Act. In the event the Series A
Preferred Stock remains outstanding on March 31, 1998, the exercise price of
the warrants will reduce to $0.01 per share and the holders of the Series A
Preferred Stock will receive additional five-year warrants, also having an
exercise price of $.01 per share, which will represent the right to purchase,
when aggregated with the warrants, 10% of Gothic's fully-diluted equity. In
the event the Series A Preferred Stock remains outstanding at each of June 30,
1998, September 30, 1998, December 31, 1998 and March 31, 1999, the holders of
the Series A Preferred Stock will receive additional five-year warrants which
will represent the right to purchase, when aggregated with the warrants and
any additional warrants previously issued, 20%, 30%, 40% and 50%,
respectively, of Gothic's fully-diluted equity.
In March 1998, Gothic obtained consents from the holders of approximately
95% of the Series A Preferred Stock and the related warrants to extend through
April 30, 1998 the date on which (i) the warrant exercise price on existing
warrants will reduce to $0.01 and (ii) such holders would receive additional
warrants. Gothic exercised its right to redeem the Series A Preferred Stock on
April 27, 1998 in connection with the Recapitalization.
FUTURE CAPITAL REQUIREMENTS AND RESOURCES
Gothic's capital requirements relate to the acquisition, exploration,
enhancement, development and operation of natural gas and oil properties. In
general, because the natural gas and oil reserves Gothic has acquired are
depleted by production over time, the success of its business strategy is
dependent upon a continuous acquisition, exploitation, enhancement, and
development program. In order to achieve profitability and generate cash flow,
Gothic will be dependent upon acquiring or developing additional natural gas
and oil properties or entering into joint natural gas and oil well development
arrangements. Gothic currently has no borrowing capacity available under its
Existing Credit Facility and, as described above, the failure to meet certain
covenants in the Existing Credit Facility would likely result in an event of
default under the Existing Credit Facility. Such default could result in the
entire indebtedness under the Existing Credit Facility becoming immediately
due and payable.
See "Recapitalization" for a description of Gothic's plans to refinance its
outstanding indebtedness which includes, among other things, the redemption of
its outstanding 12 1/4% Senior Notes and the redemption of the Series A
Preferred Stock.
On March 31, 1998, Gothic entered into agreements with Chesapeake, with an
expected closing date of April 27, 1998, pursuant to which Gothic will (i)
enter into a participation agreement regarding the development of
substantially all of Gothic's undeveloped acreage, (ii) sell for $20.0
million, before closing adjustments, a 50% interest in Gothic's natural gas
and oil properties in the Arkoma basin, and (iii) sell, for $39.5 million,
shares of Series B Preferred Stock, having a liquidation value of $50.0
million, and ten-year warrants to purchase, at an exercise price of $0.01 per
share, 2,439,246 shares of Common Stock. In addition, Gothic is seeking to
sell up to an aggregate of $295.0 million of debt securities, including the
Notes and the Senior Secured Notes. It is intended that the net cash proceeds
of the foregoing will be used to redeem the outstanding 12 1/4% Senior Notes,
49
<PAGE>
repay in full the outstanding balance of approximately $206.4 million under
the Existing Credit Facility, including the Bridge Loan due and payable on
June 30, 1998, and redeem the outstanding Series A Preferred Stock for a
redemption price of approximately $38.7 million. The consummation of each
transaction will be cross-conditioned on the consummation of all of the other
transactions. There can be no assurance that the transaction with Chesapeake
will be completed or that Gothic's outstanding indebtedness will be refinanced
and the Series A Senior Preferred Stock will be redeemed.
CHANGES IN PRICES AND INFLATION
Gothic's revenues and value of its natural gas and oil properties have been
and will continue to be affected by changes in natural gas and oil prices.
Natural gas and oil prices are subject to seasonal and other fluctuations that
are beyond Gothic's ability to control or predict.
From time to time, Gothic hedges natural gas prices through the use of
commodity swap agreements in an effort to reduce the effects of the volatility
of the price of natural gas and crude oil on Gothic's operations. These
agreements involve the receipt of fixed-price amounts in exchange for variable
payments based on NYMEX prices and specific volumes. In connection with the
commodity swap agreements, Gothic may also enter into basis swap agreements to
reduce the effects of unusual fluctuations between prices actually received at
the well head and NYMEX prices. Through the use of commodity price and basis
swap agreements, Gothic can fix the price to be received for specified volumes
of production to the commodity swap price less the basis swap price. The
differential to be paid or received, under the swap agreement, is accrued in
the month of the related production and recognized as a component of crude
natural gas and oil sales. Gothic does not acquire, hold or issue financial
instruments for trading purposes.
At December 31, 1997, Gothic had entered into swap agreements relating to
the sale of 5,000 Mcf per day at a price of $2.55 per Mcf and expiring on
March 31, 1998 and 15,000 Mcf per day at a price of $2.45 per Mcf during the
period January 1, 1998 through March 31, 1998. In February 1998, Gothic
entered into swap agreements relating to the sale of 30,000 Mcf per day for
the month of March 1998 at $2.16 per Mcf and 62,000 Mcf per day during the
period April 1, 1998 through October 31, 1998 at an average price of $2.09 per
Mcf. Of the 62,000 Mcf per day, 25,000 Mcf per day is subject to a "call
spread" agreement which provides that Gothic will receive additional payments
if the actual sales price of natural gas is between $2.30 and $2.70 per Mcf
during the period. The swap agreements for the month of March 1998 and the
period April through October 1998 cover approximately 55% and 69%,
respectively of Gothic's current natural gas production. In addition, Gothic
has entered into a swap agreement relating to the sale of 60,000 Mcf per day
at a "floor" price of $2.10 per Mcf during the period November 1998 through
March 1999.
While the use of hedging arrangements limits the downside risk of adverse
price movements, it may also limit future gains from favorable movements. All
hedging is accomplished pursuant to swap agreements based upon standard forms.
Gothic addresses market risk by selecting instruments whose value fluctuations
correlate strongly with the underlying commodity being hedged. Gothic has not
been required to provide collateral relating to hedging activities.
Although certain of Gothic's costs and expenses are affected by the level of
inflation, inflation has not had a significant effect on Gothic's results of
operations during the year ended December 31, 1997.
YEAR 2000 COMPUTER ISSUES
Gothic has reviewed its computer systems and hardware to locate potential
operational problems associated with the year 2000. Such review will continue
until all potential problems are located and resolved. Gothic believes that
all year 2000 problems in its computer systems have been or will be resolved
in a timely manner and have not caused and will not cause disruption of its
operations or have a material adverse effect on its financial condition or
results of operations. However, it is possible that Gothic's cash flows could
be disrupted by year 2000 problems experienced by outside operators of its
wells, buyers of its natural gas and oil, financial
50
<PAGE>
institutions or other persons. Gothic is unable to quantify the effect, if
any, of year 2000 computer problems that may be experienced by these third
parties.
OTHER
Accounting Matters. Gothic accounts for its natural gas and oil exploration
and development activities using the full cost method of accounting prescribed
by the Commission. Accordingly, all productive and non-productive costs
incurred in connection with the acquisition, exploration and development of
natural gas and oil reserves are capitalized and depleted using the units-of-
production method based on proved natural gas and oil reserves. Gothic
capitalizes costs including salaries and related fringe benefits of employees
and consultants directly engaged in the acquisition, exploration and
development of natural gas and oil 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. Gothic's natural gas and oil reserves are
estimated annually by petroleum engineers. Gothic'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 natural gas and oil properties being amortized exceeds the
full cost ceiling as defined by the Commission, 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
Gothic's natural gas and oil properties. Changes in the estimates or declines
in natural gas and oil prices could cause Gothic in the near-term to reduce
the carrying value of its natural gas and oil properties, thereby decreasing
earnings in such period.
Based on market prices for natural gas and oil in March 1998 and the
anticipated terms of the Recapitalization, the Company would, as of the end of
the quarter following the completion of the Recapitalization, reflect a full
cost write down in the amount of approximately $33.0 million. The amount of
any such write down will depend upon the market prices for natural gas and oil
at the end of the quarter ending June 30, 1998. Based on rules promulgated by
the Commission, Gothic evaluates impairment of its natural gas and oil
properties, based on prevailing prices as of the end of each quarter.
Management of Gothic evaluates natural gas and oil reserve acquisition
opportunities in the light of many factors only a portion of which may be
reflected in the amount of proved natural gas and oil reserves proposed to be
acquired. In determining the purchase price to be offered, Gothic does not
solely rely on proved natural gas and oil reserves or the value of such
reserves, as defined in and determined in accordance with Rule 4-10 of
Regulation S-X adopted under the Securities Exchange Act of 1934, as amended.
Factors considered include, among others, the probable reserves of the
interests intended to be acquired, anticipated efficiencies and cost
reductions that can be made in operating the producing properties, additional
reserves that management believes can be proven relatively inexpensively based
on management's knowledge of the area where the interests are located and
existing producing properties owned by Gothic. Management does not necessarily
conclude that an acquisition is not favorable because there may be a full cost
ceiling write-down associated with it. Gothic does not perform a ceiling test
for specific properties acquired because the ceiling test is performed at each
quarter and year end for all of Gothic's properties included in its cost
center and is based on prices for natural gas and oil as of that date which
may be higher or lower than the prices used when evaluating potential
acquisitions. Management reviews the transaction in the light of proved and
probable reserves, historic and seasonal fluctuations in the prices of natural
gas and oil, anticipated future prices for natural gas and oil, the factors
described above as well as other factors that may relate to the specific
properties under review.
51
<PAGE>
BUSINESS AND PROPERTIES
OVERVIEW
Gothic is an independent energy company primarily engaged in the
acquisition, development, exploitation, exploration and production of natural
gas and oil. Gothic commenced natural gas and oil operations in 1994 with a
business strategy emphasizing acquisitions of long-lived, proved producing
natural gas properties with significant development and exploitation
potential. As a result of this strategy, Gothic has grown primarily through 14
acquisitions of producing natural gas and oil properties (including the Amoco
Acquisition) for total consideration of $337.8 million. Reflecting this
successful growth, Gothic is currently pursuing a business strategy
emphasizing the development and exploitation of its existing asset base,
maintenance of low cost operations and selective strategic acquisitions. As of
December 31, 1997, Gothic had, on a pro forma basis, proved reserves of 331.1
Bcfe, of which approximately 92% were natural gas, with a pro forma PV-10 of
approximately $298.8 million. These reserves, of which 82% were classified as
proved developed, had an estimated Reserve Life of approximately 10.5 years.
For the year ended December 31, 1997, on a pro forma basis, Gothic had
revenues of $72.7 million and EBITDA of $53.6 million. For the quarter ended
March 31, 1998, on a pro forma basis, Gothic had revenues of $15.5 million and
EBITDA of $10.2 million.
Gothic's natural gas and oil reserves and acreage are principally located in
the Anadarko, Arkoma and Permian/Delaware basins, which are historically
prolific basins with multiple producing horizons and long-lived reserves.
These basins generally provide significant development and exploitation
potential through low-risk infill drilling and the implementation of new
workover, drilling and recompletion technologies. Gothic has initiated a
comprehensive development and exploitation program designed to increase its
natural gas and oil reserves, production, earnings, cash flow and net asset
value by enhancing proved producing reserves and converting proved undeveloped
reserves to proved producing reserves. During the nine months ended March 31,
1998, since the inception of this program, Gothic drilled 16 wells, 15 of
which have been completed and are producing. In addition, Gothic entered into
a participation agreement involving the drilling of substantially all of its
undeveloped acreage with Chesapeake which will support Gothic's comprehensive
development and exploitation program. Gothic has not engaged in any material
exploration activities but intends to devote a limited amount of capital in
the future to pursue "controlled-risk" exploration opportunities.
On a pro forma basis, at December 31, 1997, Gothic held an interest in
627,708 gross acres (319,579 net acres) and had an interest in 1,387 gross
wells (631 net wells). Gothic serves as operator of approximately 710 of the
wells in which it has an interest. Operated wells account for approximately
75% of the PV-10 of Gothic's pro forma proved reserves as of December 31,
1997.
BUSINESS STRATEGY
Gothic's objective is to increase its reserves, production, earnings, cash
flow and net asset value through a growth strategy that includes (i)
developing, exploiting and exploring its natural gas and oil properties, (ii)
maintaining a low operating cost structure and (iii) acquiring strategic
natural gas and oil properties in a disciplined manner.
Development, Exploitation and Exploration
Gothic seeks to maximize the value of its natural gas and oil properties
through development drilling, workovers, recompletions, reductions in
operating costs and enhanced operating efficiencies. Gothic's core areas are
characterized by properties with multiple pay zones that allow for integrated
analysis of stratigraphic, seismic and well control data to identify
development and exploitation opportunities. Through such analysis Gothic has,
as of March 31, 1998, identified 194 development and exploitation projects
within its properties, of which 114 have been assigned proved undeveloped
reserves. Gothic's 1998 development drilling program includes plans to spend
approximately $20.0 to $25.0 million to drill approximately 30 to 40 wells,
many of which are infill development wells on proved undeveloped locations.
Gothic also continually evaluates and pursues exploitation opportunities,
including workover and recompletion projects. Gothic intends to devote a
limited amount of
52
<PAGE>
capital in the future to pursue "controlled-risk" exploration opportunities by
drilling on undeveloped acreage in areas in close proximity to producing
properties. Gothic believes geological and geophysical data, including 3D and
2D seismic surveys acquired in the Amoco Acquisition, will enable it to reduce
costs and risks associated with drilling activities throughout its core areas.
Maintain Low Cost Operations
Gothic is able to directly control operating and drilling costs as the
operator of wells comprising approximately 75% of the PV-10 of pro forma
proved reserves as of December 31, 1997. In addition, Gothic has been able to
reduce per unit operating costs by eliminating unnecessary field and corporate
overhead costs and by divesting marginal and non-strategic properties with
limited development potential. Lease operating expenses have decreased 57%,
from $1.29 per Mcfe of production in 1995 on a historical basis to $0.55 per
Mcfe for the quarter ended March 31, 1998 on a pro forma basis. Further,
general and administrative expenses per Mcfe of production have decreased 90%,
from $1.15 per Mcfe to $0.10 per Mcfe over the same period. Gothic intends to
further improve the efficiency of and reduce the operating costs associated
with well operations through the use of advanced wireless technology licensed
to Gothic as part of the Amoco Acquisition. This technology enables Gothic to
remotely monitor well operations, thereby reducing the need for on-site
monitoring personnel. Gothic intends to deploy this technology throughout many
of its producing properties in the Anadarko and Arkoma basins.
Strategic Acquisitions
Gothic intends to pursue additional strategically attractive acquisitions to
the extent its capital structure allows.With the recent completion of the
Amoco Acquisition, however, Gothic has reduced the emphasis on acquisitions in
its current business strategy. Gothic has increased its reserves through
acquisitions, having added 424.9 Bcfe through 14 acquisitions, since November
1994, at a total acquisition cost of $337.8 million, or an average cost of
$0.80 per Mcfe. Gothic utilizes a disciplined acquisition strategy, focusing
its acquisition efforts on producing natural gas properties within its core
areas with (i) relatively long-lived natural gas production, (ii) quantifiable
development and exploitation potential, (iii) low risk exploration potential,
(iv) historically low operating expenses or the potential to reduce operating
expenses, (v) close proximity to Gothic's existing production or in areas
where Gothic has the ability to develop operating economies of scale and (vi)
geological, geophysical and other technical and operating characteristics with
which management of Gothic has expertise. Gothic applies strict economic and
reserve risk criteria in evaluating acquisitions of natural gas and oil
properties and companies.
THE AMOCO ACQUISITION
On January 23, 1998, Gothic purchased from Amoco Production Company, a
subsidiary of Amoco Corporation, natural gas producing properties located in
the Anadarko and Arkoma basins of Oklahoma. The consideration paid consisted
of $237.5 million in cash, subject to certain post-closing adjustments,
warrants to purchase 1.5 million shares of Gothic's common stock exercisable
at $3.00 per share and certain producing properties owned by Gothic having a
value of less than $1.8 million. The purchase had an effective date of
December 1, 1997. The Amoco Acquisition involved interests in 821 gross wells,
operation of 291 of the properties and approximately 240.0 Bcfe of proved
reserves with a PV-10 of approximately $230.1 million as of December 31, 1997.
Of the proved reserves acquired, 96% were natural gas and 71% were producing
with net daily production of approximately 60 Mmcfe. The cash portion of the
consideration paid for the Amoco Acquisition was financed with approximately
$216.4 million of borrowings under Gothic's Existing Credit Facility,
including $156.4 million borrowed under a three-year revolving loan and $60.0
million borrowed under a six-month Bridge Loan. In addition, Gothic issued
37,000 shares of Series A Preferred Stock of Parent with a liquidation
preference of $37.0 million both to pay a portion of the cash consideration
for the Amoco Acquisition and to pay related fees and expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
53
<PAGE>
SIGNIFICANT ACQUISITIONS
Since November 1994, Gothic has actively engaged in the acquisition of
producing natural gas and oil properties, primarily in Oklahoma, Texas, New
Mexico and Kansas. The following table summarizes certain information
concerning Gothic's significant acquisitions from November 1994 through
January 23, 1998.
<TABLE>
<CAPTION>
ESTIMATED PROVED
RESERVES AT
DATE OF ACQUISITION ACQUISITION
ACQUISITION(1) COST(2) COST(2)
DATE OF ACQUISITION PRINCIPAL SELLER (BCFE) (IN MILLIONS) (PER MCFE)
<S> <C> <C> <C> <C>
January 23, 1998 Amoco Production Company(3) 240.0 $239.9 $1.00
September 9, 1997 Affiliates of HS Resources, Inc. 50.6 27.5 0.54
August 12, 1997 Kerr-McGee Corporation 7.1 3.6 0.51
May 15, 1997 Fina Oil and Chemical Company 7.8 3.3 0.42
February 18, 1997 Horizon Gas Partners, L.P. 13.8 10.0 0.72
February 18, 1997 Norse Exploration, Inc.;
H. Huffman & Company(4) 22.9 8.4 0.37
December 27, 1996 Athena Energy, Inc. 4.9 4.2 0.86
May 16, 1996; Comstock Oil & Gas, Inc. and
August 5, 1996 additional working interest
acquisition(5) 13.2 9.7 0.73
January 30, 1996 Buttonwood Energy Corporation 26.7 20.5 0.77
May 31, 1995; Johnson Ranch Partners and
May 20, 1996 additional working interest
acquisition(6) 37.9 10.7 0.28
----- ------ -----
Total 424.9 $337.8 $0.80
===== ====== =====
</TABLE>
_____________________
(1) Estimated proved reserves at date of acquisition are based on reserve
reports prepared for the specific acquisition for the 1996 Acquisitions
and the 1997 Acquisitions (as such terms are defined in the Glossary).
Estimated proved reserves for the Amoco Acquisition are based on the
December 31, 1997 reserve report prepared by Gothic's independent
petroleum engineer.
(2) Does not include costs to develop these properties, which properties may
include a substantial amount of proved undeveloped reserves.
(3) Includes cash paid of $237.5 million, $1.7 million for post-closing
adjustments and five-year warrants to purchase 1.5 million shares of
Common Stock at an exercise price of $3.00 per share which were valued by
Gothic at $1.2 million, less amounts allocated to gas systems totaling
$467,000.
(4) Includes cash paid of $14.7 million and two-year warrants to purchase
200,000 shares of Common Stock at an exercise price of $2.50 per share
which were valued by Gothic at $254,000, less amounts allocated to a gas
system and to unproved properties. Also includes additional interests
acquired in the same properties in a subsequent transaction.
(5) Includes natural gas and oil properties acquired on the date indicated for
$6.4 million, as well as the subsequent acquisition of additional working
interests on the date indicated for $3.3 million in the same area as the
earlier acquisition.
(6) Includes properties purchased for $7.2 million in cash and 1.0 million
shares of Common Stock valued at $2.69 per share and the subsequent
purchase by Gothic of related overriding royalty interests for $800,000.
Gothic continually reviews potential acquisition opportunities (including
opportunities to acquire natural gas and oil properties or related assets or
entities owning natural gas and oil properties or related assets and
opportunities to engage in mergers, consolidations or other business
combinations with entities owning natural gas and oil properties or related
assets) and at any given time may be in various stages of evaluating such
54
<PAGE>
opportunities and anticipates making additional acquisitions if such
properties fit into its overall business strategy. Gothic does not have a
budget specifically for acquisitions, however, since the timing and size of
potential acquisitions cannot be predicted. As of March 15, 1998, Gothic had
no definitive agreements with respect to any significant acquisitions.
NATURAL GAS AND OIL RESERVES
The following table sets forth certain information on the total proved
natural gas and oil reserves, and the PV-10 of estimated future net revenues
of total proved natural gas and oil reserves as of December 31, 1997 for
Gothic, on a pro forma basis, based on the report of Lee Keeling and
Associates, Inc. The calculations which Lee Keeling and Associates, Inc. used
in preparation of such report were prepared using geological and engineering
methods generally accepted by the petroleum industry and in accordance with
Commission guidelines.
<TABLE>
<CAPTION>
PRO FORMA AS OF DECEMBER 31, 1997
----------------------------------------------
NATURAL GAS
NATURAL GAS OIL EQUIVALENT PV-10
(MMCF) (MBBLS) (MMCFE) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Proved developed reserves....... 249,839 3,477 270,701 $256,986
Proved undeveloped reserves..... 54,808 924 60,352 41,774
------- ----- ------- --------
Total proved reserves......... 304,647 4,401 331,053 $298,760
======= ===== ======= ========
</TABLE>
Prices used in calculating future net revenue of proved reserves and related
PV-10 were $2.30 per Mcf of natural gas and $17.30 per barrel of oil for
proved reserves as of December 31, 1997. The foregoing natural gas prices
reflect price hedging in effect on such dates.
Gothic has not filed any estimates of proved natural gas and oil reserves
with any federal authority or agency other than the Commission.
PRINCIPAL AREAS OF OPERATIONS
The following table sets forth, on a pro forma basis, the principal areas of
operation and estimated proved natural gas and oil reserves, PV-10 of the
estimated future net revenues and percent of total PV-10 of Gothic at December
31, 1997.
<TABLE>
<CAPTION>
NATURAL
OIL AND NATURAL GAS % OF
CONDENSATE GAS EQUIVALENT PV-10 TOTAL
FIELD (MBBLS) (MMCF) (MMCFE) (IN THOUSANDS) PV-10
<S> <C> <C> <C> <C> <C> <C>
Anadarko Basin:
Springer Field........ 142 17,923 18,775 $ 25,831 9%
Northwest
Okeene/Cedardale
Field................ 323 42,840 44,778 40,177 13
Cement Field.......... 372 60,846 63,078 57,446 19
Mocane Laverne &
Hugoton Fields....... 77 18,235 18,697 15,084 5
Watonga-Chickasha..... 915 90,771 96,261 93,982 31
Arkoma Basin:
Arkoma Field.......... -- 28,998 28,998 26,478 9
Permian/Delaware Basin:
Johnson Ranch/Brushy
Draw................. 2,572 24,123 39,555 29,320 10
Pecos Slope........... -- 20,911 20,911 10,442 4
----- ------- ------- -------- ---
Totals.................. 4,401 304,647 331,053 $298,760 100%
===== ======= ======= ======== ===
</TABLE>
55
<PAGE>
DEVELOPMENT AND EXPLOITATION
Gothic seeks to maximize the value of its natural gas and oil properties
through development drilling, workovers, recompletions, reductions in
operating costs and enhanced operating efficiencies. Including the Amoco
Acquisition, Gothic has identified 194 development and exploitation projects
within its properties. Gothic is currently evaluating the exploitation and
development potential of the properties acquired in the Amoco Acquisition and
expects that it will expand its current drilling program as a result of its
ongoing evaluation. In particular, Gothic plans (i) to continue infill
drilling on many of its properties and (ii) to recomplete additional producing
zones that have been assigned "behind pipe" proved reserves as of December 31,
1997. Some of Gothic's more significant development and exploitation
activities and opportunities are described below.
ANADARKO BASIN
Approximately 241.6 Bcfe (or 73%) of Gothic's proved reserves are located in
the Anadarko Basin which is a geographic area encompassing Western Oklahoma
and the Texas Panhandle. This basin is considered a mature gas producing field
that is characterized by multiple producing horizons and long-lived reserves.
Producing wells often have additional reserves "behind pipe" or additional
zones with producing capabilities that are not completed initially in the well
bore. These zones are categorized as proved developed non-producing, and
require recompletion or workover activities to be performed in order to
convert to proved producing and thereby increasing the wells' cash flow. A
significant number of Gothic's properties are located on 640-acre producing
units which in some cases may enable an additional well or wells, known as
increased density or infill wells, to be drilled on the same acreage without
adversely effecting the existing production.
Northwest Okeene/Cedardale Field, Major and Blaine Counties,
Oklahoma. Gothic operates approximately 150 wells in this field. Additionally,
Gothic owns substantial royalty interests in approximately 55 wells in the
field as well as numerous non-operated interests. The properties currently
produce approximately 11.4 net Mmcf of gas and 91.0 net Bbls of oil per day
from numerous producing zones ranging in depths from 6,500 to 12,500 feet.
Gothic's management believes there are numerous recompletion and infill
drilling possibilities from multiple formations at depths of 6,500 to 12,500
feet. Gothic has identified five proved developed non-producing locations and
one development location. The Company has over 200 linear miles of 2D seismic
data in this field.
Cement Field, Caddo and Grady Counties, Oklahoma. Gothic has working
interests in 166 producing wells in the Cement Field, of which 21 are operated
by Gothic. The majority of Gothic's interests in its wells within this field
were acquired pursuant to the Amoco Acquisition. Current net daily production
in the field is approximately 15.1 Mmcf of natural gas and 200.0 Bbls of oil.
Natural gas and oil has been produced from over 14 separate producing zones
ranging from 5,000 to 17,000 feet in depth. Gothic has currently identified
six proved undeveloped drilling locations. Gothic believes that numerous
recompletion opportunities exist due to the field's highly faulted nature and
has identified 17 recompletion projects that involve testing unproduced zones.
Gothic's seismic database acquired from Amoco covers its interest in the
Cement Field and Gothic believes that the use of 3D and 2D seismic data will
enable Gothic to lower the risks associated with development and exploitation
activities in the field. In addition, the Company believes the structural
complexity of the field will provide multiple opportunities to exploit
potentially undrained fault blocks as identified from seismic data. The Cement
Field is currently experiencing a high level of industry activity and Gothic
believes that further development opportunities will become available in the
near term.
Springer Field, Carter County, Oklahoma. Gothic has significant non-
operating working interests in 31 gas wells in the Springer Field, three of
which are not yet in production. Current net production in the field is 4.4
Mmcf of gas and 24.0 Bbls of oil per day predominately from the Sycamore
Formation at approximately 6,000 feet. The field also has produced from the
Woodford Shale at 6,500 feet, and to a limited extent, the Viola Formation at
7,000 feet. The field has recently been approved for increased density
development to 160 acres. Gothic has drilled 12 wells in this field with plans
to drill 13 additional infill development wells. Two wells are currently being
completed, one well is currently drilling, one well is awaiting completion and
the Company expects to drill six additional locations in 1998.
56
<PAGE>
Watonga/Chickasha, Canadian County, Oklahoma. Gothic has working interests
in 428 producing wells, of which 236 are operated by Gothic. The properties
currently produce 28.2 net Mmcf of gas and 227.0 net Bbls of oil per day
predominantly from the Atoka, Morrow, Springer and Red Fork formations. Gothic
has identified 25 drilling locations, of which 20 are characterized as proved
undeveloped. The structural complexity is expected to provide multiple
potential drilling opportunities to exploit undrained fault blocks as
identified on seismic data. In addition to detailed geological mapping
completed throughout the area, over 157 square miles of 3D seismic has been
shot near the center of the trend.
Mocane Laverne and Hugoton Fields, Beaver and Texas Counties,
Oklahoma. Gothic operates approximately 68 wells in these fields located in
Northwestern Oklahoma and the Oklahoma Panhandle. The properties currently
produce 4.2 net Mmcf of gas and 35.0 net Bbls of oil per day predominately
from the Morrow and Chester Formations at depths of 6,000 to 7,000 feet. These
wells are spaced on 640 acres. Gothic has identified 11 potential drilling
locations in the fields and plans to drill six to eight wells in 1998.
ARKOMA BASIN
Approximately 29.0 Bcfe (or 9%) of Gothic's proved reserves are located in
the Arkoma basin, a geological area encompassing Southeastern Oklahoma and
Southwestern Arkansas. Gothic is the operator of 70 producing gas wells in
this field and has interests in an additional 103 wells. The properties
currently produce 7.9 net Mmcf per day. The Arkoma basin is a geologically
complex, highly folded and faulted natural gas basin characterized by a series
of thrust and normal faults which create numerous separated fault blocks which
are the primary trapping mechanisms for accumulations of natural gas. The
principal producing formations are the Spiro, Atoka, and Wapanucka from depths
of 3,000 feet to 16,000 feet. Gothic has identified 17 drilling locations, of
which 12 are proved. Also, there are five proved recompletion projects
identified. All of Gothic's properties in the Arkoma basin were acquired in
the Amoco Acquisition.
DELAWARE/PERMIAN BASIN
Approximately 60.5 Bcfe (or 18%) of Gothic's proved reserves are located in
the Delaware/Permian Basin, a geological area encompassing Southeast New
Mexico and Southwest Texas. The basin is known for its production from various
Delaware formations and deeper gas sands.
Johnson Ranch, Loving County, Texas/Brushy Draw, Edy County. Gothic has
interests in 98 producing wells and operates 94 of these. The properties
currently produce 1.7 Mmcf of gas per day and 430 Bbls of oil per day,
predominantly from the Delaware/Cherry Canyon Formations at depths from 4,000
to 7,000 feet. Gothic owns approximately 3,300 acres of gross undeveloped
leasehold, and has identified 26 drilling projects of which 19 are classified
as proved. There are also 25 recompletion projects identified with 14
classified as proved. Four of the drilling locations are for deeper
Pennsylvanian/Atoka sands from 8,000 to 15,000 feet. Gothic drilled five
development wells in these fields in 1997, all of which are currently
producing.
Pecos Slope, Chaves County, New Mexico. Gothic has interests in 76 wells and
operates 67 of these, in Chaves County with current net daily production of
1.8 Mmcf of natural gas from the Abo Formation at an average depth of 4,500
feet. Gothic has identified 33 proved development drilling locations in the
field. The Company intends to drill four to six wells in Pecos Slope in 1998.
EXPLORATION
Gothic intends to devote a limited amount of capital in the future to pursue
"controlled-risk" exploration opportunities by drilling on undeveloped acreage
in areas in proximity to producing properties. Gothic attempts to lessen the
risks inherent in exploratory drilling by (i) concentrating on acreage in
proximity to producing properties, (ii) drilling wells with multiple pay
objectives, and (iii) utilizing 3D and other seismic data acquired from Amoco.
57
<PAGE>
NATURAL GAS AND OIL PRODUCTION
The following table sets forth the approximate net natural gas and oil
production attributable to (i) Gothic on a historical basis reflecting the
1997 Acquisitions, (ii) properties acquired in the Amoco Acquisition on an
historical basis, and (iii) Gothic on a pro forma combined basis as if the
1997 Acquisitions, the Amoco Acquisition and the Chesapeake Transaction all
occurred on January 1, 1997, for the periods indicated, net of all royalties,
overriding royalties, and other third party interests.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31, 1998
-------------------------- ------------------
1995 1996 1997
<S> <C> <C> <C> <C>
Gothic (Historical):
Natural gas (Mmcf)............ 434 3,404 6,583 6,956
Oil (Mbbls)................... 74 164 176 86
Natural gas equivalent
(Mmcfe)...................... 878 4,388 7,639 7,472
Amoco Acquisition
(Historical)(1):
Natural gas (Mmcf)............ 22,544 21,805 24,802
Oil (Mbbls)................... 54 167 196
Natural gas equivalent
(Mmcfe)...................... 22,868 22,807 25,978
Pro Forma Combined(2):
Natural gas (Mmcf)............ 29,006 6,168
Oil (Mbbls)................... 416 86
Natural gas equivalent
(Mmcfe)...................... 31,502 6,684
</TABLE>
_________________
(1) Production amounts resulting from the Amoco Acquisition are included in
Gothic (Historical) for the three months ended March 31, 1998.
(2) Excludes production from certain divested properties, including Gothic's
50% interest in the Arkoma properties.
PRODUCTIVE WELL SUMMARY
The following table sets forth, by field, the respective interests in
productive wells owned by Gothic on a pro forma basis as of December 31, 1997.
<TABLE>
<CAPTION>
WELL
COUNT
---------
FIELD GROSS NET
<S> <C> <C>
ANADARKO BASIN:
Springer Field...................................................... 31 12
Northwest Okeene/Cedardale Field.................................... 297 139
Cement Field........................................................ 166 29
Mocane Laverne & Hugoton Fields..................................... 110 69
Watonga-Chickasha................................................... 428 193
ARKOMA BASIN:
Arkoma Field........................................................ 181 38
PERMIAN/DELAWARE BASIN:
Johnson Ranch/Brushy Draw........................................... 98 88
Pecos Slope......................................................... 76 63
----- ---
Total............................................................. 1,387 631
===== ===
</TABLE>
58
<PAGE>
ACREAGE
The following table shows the approximate gross and net acres of leasehold
interests of Gothic on a pro forma basis as of December 31, 1997.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
--------------- ------------
FIELD GROSS NET GROSS NET
<S> <C> <C> <C> <C>
ANADARKO BASIN
Springer Field................................... 7,200 4,680 150 75
Northwest Okeene/Cedardale Field................. 78,752 41,672 1,920 274
Cement Field..................................... 83,674 44,277 3,201 920
Mocane Laverne & Hugoton Fields.................. 93,518 49,485 -- --
Watonga-Chickasha................................ 236,256 125,016 8,157 2,850
ARKOMA BASIN
Arkoma Field..................................... 74,240 18,560 -- --
PERMIAN/DELAWARE BASIN
Johnson Ranch/Brushy Draw........................ 22,000 21,079 6,640 1,691
Pecos Slope...................................... 12,000 9,000 -- --
------- ------- ------ -----
Total............................................ 607,640 313,769 20,068 5,810
======= ======= ====== =====
</TABLE>
DRILLING ACTIVITY
Gothic did not engage in any drilling activity prior to 1996. The following
table sets forth development drilling results for the years ended December 31,
1996 and 1997. There were no exploratory wells drilled during those years.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1996 1997
--------- ---------
GROSS NET GROSS NET
<S> <C> <C> <C> <C>
Productive............................................... 2.0 0.5 17.0 9.9
Non-Productive........................................... -- -- -- --
--- --- ---- ---
Total.................................................. 2.0 0.5 17.0 9.9
=== === ==== ===
</TABLE>
Gothic completed the drilling of two development wells in the Arkoma basin
of Southwestern Arkansas in which it owned a 25% working interest during 1996.
Both wells are now productive wells. These interests were sold in the second
quarter of 1997. In the third quarter of 1997, Gothic initiated a
comprehensive development program and through March 31, 1998 had drilled 16
wells, 15 of which have been completed and are producing. Gothic's 1998
development drilling program includes plans to spend approximately $20.0 to
$25.0 million to drill approximately 30 to 40 wells, all of which are infill
development wells on proved undeveloped locations. Gothic also continually
evaluates and pursues exploitation opportunities, including workover and
recompletion projects. Gothic intends to devote a limited amount of capital in
the future to pursue "controlled-risk" exploration opportunities by drilling
on undeveloped acreage in areas in close proximity to producing properties.
Gothic believes geological and geophysical data, including 3D and 2D seismic
surveys acquired in the Amoco Acquisition, will enable it to reduce costs and
risks associated with drilling activities throughout its Anadarko basin
properties.
The final determination with respect to any potential drilling locations and
the expected time frame for the drilling of any well will depend on a number
of factors, including (i) the results of exploration efforts and the review
and analysis of the seismic or other data, (ii) the availability of sufficient
capital resources by Gothic for drilling prospects, and (iii) economic and
industry conditions at the time of drilling, including prevailing and
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<PAGE>
anticipated prices for natural gas and oil and the availability of drilling
rigs and crews. There can be no assurance that any wells will, if drilled,
encounter reservoirs of commercial quantities of natural gas or oil.
OPERATING CONTROL OVER PRODUCTION ACTIVITIES
On a pro forma basis, Gothic operates 710 of the 1,387 wells in which it
owns an interest, representing approximately 75% of its PV-10 as of December
31, 1997. The non-operated properties are being operated by unrelated third
parties pursuant to operating agreements which are, for the most part,
standard to the industry. Decisions about operations regarding non-operated
properties may be determined by the outside operator rather than Gothic. If
Gothic declines to participate in additional activities proposed by the
outside operator, under certain operating agreements, Gothic will not receive
revenues from, and/or will lose its interest in, the activity in which it
declines to participate.
Pursuant to the Amoco Acquisition, Gothic received a license to use advanced
well automation technology developed by Amoco. This technology is a wireless
application that allows Gothic to remotely monitor production, well pressure
and temperature along with other well control factors on a real-time basis.
Further, the technology helps to regulate the well's productivity and makes
periodic adjustments to allow the well to flow more efficiently. Gothic
believes that the application of this wireless technology will allow Gothic to
employ fewer personnel to monitor well activity and operate wells more
economically. This technology is currently being utilized on certain of the
Anadarko basin wells acquired in the Amoco Acquisition. Gothic intends to
deploy this technology to other properties in the Anadarko and Arkoma basins
and, as a result, expects to further reduce overall lease operating costs.
TITLE TO NATURAL GAS AND OIL PROPERTIES
Gothic has acquired interests in producing and non-producing acreage in the
form of working interests, royalty interests and overriding royalty interests.
Substantially all of Gothic's property interests are held pursuant to leases
from third parties. The leases grant the lessee the right to explore for and
extract natural gas and oil from specified areas. Consideration for a lease
usually consists of a lump sum payment (i.e., bonus) and a fixed annual charge
(i.e., delay rental) prior to production (unless the lease is paid up) and,
once production has been established, a royalty based generally upon the
proceeds from the sale of natural gas and oil. Once wells are drilled, a lease
generally continues so long as production of natural gas and oil continues. In
some cases, leases may be acquired in exchange for a commitment to drill or
finance the drilling of a specified number of wells to predetermined depths.
Some of Gothic's non-producing acreage is held under leases from mineral
owners or a government entity which expire at varying dates. Gothic is
obligated to pay annual delay rentals to the lessors of certain properties in
order to prevent the leases from terminating. Because substantially all of
Gothic's undeveloped acreage is held by production, annual delay rentals are
generally nominal.
Title to leasehold properties is subject to royalty, overriding royalty,
carried, net profits and other similar interests and contractual arrangements
customary in the natural gas and oil industry, and to liens incident to
operating agreements, liens relating to amounts owed to the operator, liens
for current taxes not yet due and other encumbrances. In addition, in certain
areas Gothic's interests in producing properties are subject to certain
agreements and other instruments that have not been recorded in real property
records. The effect of these unrecorded instruments has been confirmed based
upon a review of historic cost and revenue information, including joint
interest billings, division orders, check stubs and other production
accounting information reflecting such unrecorded interests. Gothic believes
that such burdens and unrecorded instruments neither materially detract from
the value of its interest in the properties, nor materially interfere with the
use of such properties in the operation of its business.
While updated title opinions may not always be received prior to the
acquisition of a producing natural gas and oil property, title opinions on
significant producing properties have historically been obtained in connection
with pledging Gothic's producing properties under the Existing Credit
Facility. On non-productive leases, title opinions are usually not obtained
until immediately prior to the drilling of a well on a property. Accordingly,
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<PAGE>
Gothic's proved undeveloped reserves may be the subject of significantly less
title investigation. It is contemplated, however, that investigations will be
made in accordance with standard practices in the industry before the
acquisition of producing properties and before exploratory drilling.
PRODUCTION AND SALES PRICES
Gothic's production of natural gas and oil is derived solely from within the
United States. Gothic is not obligated to provide a fixed and determinable
quantity of oil and/or natural gas in the future under existing contracts or
agreements with customers. However, from time to time, Gothic does enter into
hedging agreements with respect to its natural gas and oil production and
currently has put such hedging agreements in place for a significant portion
of expected 1998 production. At December 31, 1997, Gothic had entered into
swap agreements relating to the sale of 5,000 Mcf per day at a price of $2.55
per Mcf and 15,000 Mcf per day at a price of $2.45 per Mcf during the period
January 1, 1998 through March 31, 1998.
In February 1998, Gothic entered into swap agreements relating to the sale
of 30,000 Mcf per day for the month of March 1998 at $2.16 per Mcf and 62,000
Mcf per day during the period April 1, 1998 through October 31, 1998 at an
average price of $2.09 per Mcf. Of the 62,000 Mcf per day, 25,000 Mcf per day
is subject to a "call spread" agreement which provides that Gothic will
receive additional payments if the actual sales price of natural gas is
between $2.30 and $2.70 per Mcf during the period. The swap agreements for the
month of March 1998 and the period April through October 1998 cover
approximately 55% and 69%, respectively of Gothic's current natural gas
production. In addition, Gothic has entered into a swap agreement relating to
the sale of 60,000 Mcf per day at a "floor" price of $2.10 per Mcf during the
period November 1998 through March 1999.
Gothic does not refine or process the natural gas and oil it produces, but
sells the production to unaffiliated natural gas and oil purchasing companies
in the area in which it is produced. Gothic sells crude oil on a market price
basis and sells natural gas under contracts to both interstate and intrastate
natural gas pipeline companies.
MARKETING OF PRODUCTION
Gothic's production of natural gas and oil is marketed to third parties
consistent with industry practices. Typically, oil is sold at the wellhead at
field posted prices, and gas is sold under contract at negotiated prices based
upon factors normally considered in the industry, such as distance from the
well to the pipeline, well pressure, estimated reserves, quality of gas and
prevailing supply/demand conditions.
Typically, gas production is sold to various pipeline companies. The basic
terms of all the contracts are essentially the same in that Gothic makes gas
production available to the pipeline companies at certain given points of
delivery on their pipelines and the pipeline company accepts such gas and
delivers it to the end user. The pipeline company then has the obligation to
pay Gothic a price for the gas which is based on published indices of average
pipeline prices or upon a percentage of the pipeline resale value.
In January 1998 Gothic entered into a ten-year marketing agreement with
Continental Natural Gas, Inc. ("Continental") whereby the majority of the
natural gas produced from the properties associated with the Amoco Acquisition
will be sold to Continental at market prices adjusted for marketing and
transportation fees.
Gothic's revenues, earnings and cash flows are highly dependent upon current
prices for natural gas and oil. In general, prices of natural gas and oil are
dependent upon numerous factors beyond the control of Gothic, including supply
and demand, competition, imports and various economic, political,
environmental and regulatory developments, and accordingly, future prices of
natural gas and oil may be different from prices in effect at December 31,
1996 and 1997.
During the year ended December 31, 1997, Gothic sold approximately 31% of
its gas production to Aurora Natural Gas, LLC, 15% of its gas production to
Warren NGL, Inc., 13% of its gas production to Phillips Gas
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Marketing Co., 13% of its gas production to ONEOK Resources, Inc. and 58% of
its oil production to Sun Company Inc.
In view of the many uncertainties affecting the supply and demand for crude
oil, natural gas and refined petroleum products, Gothic is unable to
accurately predict future natural gas and oil prices and demand or the overall
effect they will have on Gothic.
COMPETITION
The natural gas and oil industry is highly competitive in all of its phases.
Gothic encounters competition from other natural gas and oil companies in all
areas of its operations, including the acquisition of producing properties and
the marketing of natural gas and oil. Many of these companies possess greater
financial and other resources than Gothic. Competition for acquisition of
producing properties is affected by the amount of funds available to Gothic,
information about producing properties available to Gothic and any standards
established from time to time by Gothic for the minimum projected return on
investment. Because gathering systems are the only practical method for the
intermediate transportation of natural gas, competition is presented by other
pipelines and gas gathering systems. Competition may also be presented by
alternative fuel sources, including heating oil and other fossil fuels.
Because the primary markets for natural gas liquids are refineries,
petrochemical plants and fuel distributors, prices are generally set by or in
competition with the prices for refined products in the petrochemical, fuel
and motor gasoline markets.
REGULATION
The natural gas and oil business is regulated extensively by federal, state
and local authorities. Various governmental agencies, both federal and state,
have promulgated rules and regulations binding on the natural gas and oil
industry and its individual members, some of which carry substantial penalties
for the failure to comply. The regulatory burdens on the natural gas and oil
industry increase its cost of doing business and, consequently, affect its
profitability. Because such laws and regulations are frequently amended or
reinterpreted, Gothic is unable to predict the future cost of complying with
such regulations. Gothic believes that it is in material compliance with its
regulatory obligations.
The States of Oklahoma and Texas and many other states require permits for
drilling operations, drilling bonds and reports concerning operations and
impose other requirements relating to the exploration and production of
natural gas and oil. These states also have statutes or regulations addressing
conservation matters, including provisions for the unitization or pooling of
natural gas and oil properties, the establishment of maximum rates of
production from wells and the regulation of spacing, plugging and abandonment
of such wells.
Environmental Matters. Gothic's operations and properties are subject to
extensive and changing federal, state and local laws and regulations relating
to environmental protection, including the generation, storage, handling,
emission, transportation and discharge of materials into the environment, and
relating to safety and health. The recent trend in environmental legislation
and regulation generally is toward stricter standards, and this trend will
likely continue. These laws and regulations may require the acquisition of a
permit or other authorization before construction or drilling commences and
for certain other activities; limit or prohibit construction, drilling and
other activities on certain lands lying within wilderness and other protected
areas; and impose substantial liabilities for pollution resulting from
Gothic's operations. The permits required for various of Gothic's operations
are subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violators are subject to fines or injunction, or both. In the
opinion of management, Gothic is in substantial compliance with current
applicable environmental laws and regulations, and Gothic has no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on
Gothic, as well as the natural gas and oil industry in general. The
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons
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who dispose of or arrange for the disposal of "hazardous substances" found at
such sites. Although CERCLA currently excludes petroleum from its definition
of "hazardous substance," state laws affecting Gothic's operations impose
clean-up liability relating to petroleum and petroleum related products. It is
not uncommon for the neighboring land owners and other third parties to file
claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. The Resource Conservation
and Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize imposition of substantial
fines and penalties for noncompliance. Although RCRA classifies certain oil
field wastes as "non-hazardous," such exploration and production wastes could
be reclassified as hazardous wastes, thereby making such wastes subject to
more stringent handling and disposal requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as Gothic, to prepare and implement spill
prevention, control countermeasure and response plans relating to the possible
discharge of oil into surface waters. The Oil Pollution Act of 1990 contains
numerous requirements relating to the prevention of and response to oil spills
into waters of the United States. For onshore facilities that may affect
waters of the United States, the Environmental Protection Agency ("EPA")
requires an operator to demonstrate $10.0 million in financial responsibility,
and for offshore facilities the financial responsibility requirement is at
least $35.0 million. Regulations are currently being developed under federal
and state laws concerning oil pollution prevention and other matters that may
impose additional regulatory burdens on Gothic. In addition, the Clean Water
Act and analogous state laws require permits to be obtained to authorize
discharge into surface waters or to construct facilities in wetland areas.
With respect to certain of its operations, Gothic is required to maintain such
permits or meet general permit requirements. The EPA recently adopted
regulations concerning discharges of storm water runoff. This program requires
covered facilities to obtain individual permits, participate in a group or
seek coverage under an EPA general permit. Gothic believes that it will be
able to obtain, or be included under, such permits, where necessary, and to
make minor modifications to existing facilities and operations that would not
have a material effect on Gothic.
Gothic has acquired leasehold interests in numerous properties that for many
years have produced natural gas and oil. Although the previous owners of these
interests may have used operating and disposal practices that were standard in
the industry at the time, hydrocarbons or other wastes may have been disposed
of or released on or under the properties. In addition, some of Gothic's
properties are or have been operated by third parties over whom Gothic has or
had no control. Notwithstanding Gothic's lack of control over properties
operated by others, the failure of the operator to comply with applicable
environmental regulations may, in certain circumstances, adversely impact
Gothic.
Marketing and Transportation. In the past, the transportation and sale for
resale of natural gas in interstate commerce has been regulated pursuant to
the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 (the "NGPA"),
and the regulations promulgated thereunder by the Federal Energy Regulatory
Commission (the "FERC"). Since 1978, maximum selling prices of certain
categories of natural gas sold in the "first sales," whether sold in
interstate or intrastate commerce, has been regulated pursuant to the NGPA.
The term "first sales" means the first time gas is sold as a severed
hydrocarbon after it is produced from the ground. The NGPA established various
categories of natural gas and provided for graduated deregulation of price
controls of several categories of natural gas. There is currently no price
regulation for "first sales" of gas. On July 26, 1989, the Natural Gas
Wellhead Decontrol Act was enacted. This act amended the NGPA to remove both
price and non-price controls from natural gas sold in "first sales" as of
January 1, 1993. Under current market conditions, deregulated gas prices under
new contracts tend to be substantially lower than most regulated price
ceilings prescribed by the NGPA. The effect of termination of these price
controls cannot be determined.
The FERC regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of gas produced by Gothic, as well as
the revenues received by Gothic for sales of such production. Since the mid-
1980s, FERC has issued a series of orders, culminating in Order Nos. 636, 636-
A and 636-B ("Order 636"), that have significantly altered the marketing and
transportation of natural gas. Order 636 mandates a fundamental restructuring
of interstate pipeline sales and transportation service, including the
unbundling by interstate pipelines of the sale, transportation, storage and
other components of the city-gate sales
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services such pipelines previously performed. One of FERC's purposes in
issuing the order was to increase competition within all phases of the natural
gas industry. Numerous parties have filed petitions for review of Order 636,
as well as orders in individual pipeline restructuring proceedings. In July
1996, Order 636 was generally upheld on appeal, and the portions remanded for
further action do not appear to materially affect Gothic. Because Order 636
may be modified as a result of the appeals, it is difficult to predict the
ultimate impact of the orders on Gothic and its gas marketing efforts.
Generally, Order 636 has eliminated or substantially reduced the interstate
pipelines' traditional role as wholesalers of natural gas and has
substantially increased competition and volatility in natural gas markets.
The price Gothic receives from the sale of natural gas liquids and oil is
affected by the cost of transporting products to markets. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such
rates to inflation, subject to certain conditions and limitations. Gothic is
not able to predict with certainty the effect, if any, of these regulations on
its operations. However, the regulations may increase transportation costs or
reduce well head prices for natural gas liquids and oil.
OPERATIONAL HAZARDS AND INSURANCE
Gothic maintains various types of insurance to cover its operations,
including $2 million of general liability insurance and an additional $5
million of excess liability insurance. Gothic's insurance does not cover every
potential risk associated with the drilling and production of natural gas and
oil. Coverage is not obtainable for certain types of environmental hazards.
The occurrence of a significant adverse event, the risks of which are not
fully covered by Gothic's insurance, could have a material adverse effect on
Gothic's financial condition and results of operations. Moreover, no assurance
can be given that Gothic will be able to maintain adequate insurance in the
future at reasonable rates.
EMPLOYEES
As of April 1, 1998, Gothic had a total of 25 employees consisting of 14
production and land personnel, and 11 financial, accounting and administrative
personnel, two of whom are executive officers.
EXECUTIVE OFFICE
Gothic leases approximately 8,164 square feet of space in Tulsa, Oklahoma
for its corporate and administrative offices. The annual rental is
approximately $95,060 and the lease expires December 31, 1999. Gothic believes
this facility is adequate for its present requirements.
Gothic is an Oklahoma corporation. It was incorporated on November 19, 1985
under the laws of the State of New Jersey and was reincorporated as a Delaware
corporation on June 23, 1994. On December 4, 1996, Gothic was reincorporated
as an Oklahoma corporation by merging the Delaware corporation with and into a
wholly owned subsidiary incorporated for that purpose under the laws of the
State of Oklahoma. Gothic's principal office is at 5727 South Lewis Avenue,
Suite 700, Tulsa, Oklahoma 74105, and its telephone number is (918) 749-5666.
LITIGATION
No legal proceedings are pending against Gothic other than ordinary
litigation incidental to Gothic's business, the outcome of which management
believes will not have a material adverse effect on Gothic.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of Gothic, their ages and positions
with Gothic are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
<S> <C> <C>
John J. Fleming........................ 57 Chairman of the Board and
Director
Michael K. Paulk....................... 49 President and Director
Steven P. Ensz......................... 46 Vice-President, Finance and Chief
Financial Officer
Morton A. Cohen........................ 62 Director
Brian E. Bayley........................ 45 Director
</TABLE>
John J. Fleming was elected a Director of Gothic in October 1994. Mr.
Fleming is currently Chairman, President and Chief Executive Officer of Profco
Resources, Ltd., which engages in oil and gas exploration. From 1992 through
December 1995, Mr. Fleming was Chairman and chief executive officer of Excel
Energy, Inc., engaged in oil and gas exploration. Prior thereto, commencing in
1989, he was Chairman and chief executive officer of Trical Resources, Inc.
and its successor Voyager Energy, Inc. Mr. Fleming was Chairman of the Board
of American Natural Energy Corporation ("ANEC") from August 1993 to July 1994.
He has been involved in the oil and gas industry as president, chairman or
chief executive officer of a number of corporations for more than the past
fifteen years. Mr. Fleming is also a Director of Poco Petroleum Ltd., Imco
Recycling Inc., Newfoundland Capital Corp and Canadian Helicopters Limited.
Michael K. Paulk was elected President and Director of Gothic in October
1994. Mr. Paulk has been engaged in the oil and gas industry for more than
fifteen years. He was President of ANEC from its inception in 1985 until his
resignation in September 1994, after the acquisition of ANEC by Alexander
Energy Corporation in July 1994.
Steven P. Ensz has been Vice-President, Finance and Chief Financial Officer
of Gothic since March 18, 1998 and is responsible for the financial activities
of Gothic. From July 1991 to February 1998, he was Vice-President, Finance of
Anglo-Suisse, Inc., an oil and natural gas exploration and producing company.
From December 1983 to June 1991, he held various positions within the energy
industry, including President of Waterford Energy, an independent oil and gas
producer. Prior to December 1983, he was a partner with Oak, Simon & Ott,
CPAs. He is a certified public accountant.
Morton A. Cohen was elected a Director of Gothic in October 1995. Mr. Cohen
has been, for more than ten years, the President and Chairman of Clarion
Capital Corporation, a small business investment company. Mr. Cohen is a
Director of Zemec Corporation, DHB Capital Corporation, Sentx Technologies,
Inc., and is Chairman of Cohesant Technologies, Inc.
Brian E. Bayley has been since December 1996 a partner of Quest Management
Corp. and Quest Ventures, Ltd., private merchant banking companies. Prior
thereto through April 1997, he held a variety of positions with Quest Oil and
Gas, Inc. (formerly Quest Capital Corporation), including President from
October 1990 to October 1996 and Director and Secretary from October 1996 to
April 1997. Mr Bayley holds an MBA degree from Queen's University, Kingston,
Ontario. Mr. Bayley is a Director of Kinetic Ventures, Inc., as well as a
number of other corporations that do not file reports under the Exchange Act.
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SIGNIFICANT EMPLOYEES
In addition to its executive officers, employees of Gothic who are expected
to make a significant contribution to Gothic are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
<S> <C> <C>
James S. Blair............................ 45 Vice-President, Corporate
Development
Bennett G. Shelton........................ 40 Land Contracts Manager
Richard O. Mulford........................ 44 Operations Manager
Robert G. Snead........................... 59 Geologist
John Coughlon............................. 40 Geologist
David Evans............................... 41 Petroleum Engineer
R.L. Hilbun............................... 49 Full-Time Consultant, Drilling
and Completion Engineer
R. Andrew McGuire......................... 31 Controller
</TABLE>
James S. Blair has been Vice-President, Corporate Development of Gothic
since June 1997 and is responsible for the management and coordination of
acquisition and divestiture activities. From January 1989 to June 1997, he was
Vice-President, Land and Acquisitions of Toreador Royalty Corporation where he
was responsible for implementing Toreodor's restructuring plan, and in charge
of increasing production through acquisitions and joint ventures. From May
1988 to January 1989, he was Vice-President of Business Development of German
Oil Company, and from 1980 to May 1988, he was employed by Tenneco Oil Company
where he was involved with business development and acquisitions.
Bennett G. Shelton has been employed by Gothic as Land Contracts Manager
since May 1995. From August 1994 to May 1995, he was a Senior Landman with
AEOK and prior thereto he was a Land and Acquisition Manager with ANEC. Prior
to April 1991, he was a staff landman with Santa Fe Minerals, Inc. for
approximately ten years.
Richard O. Mulford has been employed as Operations Manager with Gothic since
April 1995. From April 1985 to April 1995, he was a Production Superintendent
with ANEC and has been employed in the oil and natural gas industry since
1978.
Robert G. Snead who has served as a geologist for Gothic on a full-time
consulting basis since April 1997, was hired as a full-time employee effective
September 1, 1997. Between early 1994 and April 1997, he was employed as an
independent geologist and from 1985 to 1994 was the Senior Vice-President/
Exploration Manager of LOGO, Inc., an oil and natural gas well operating
company.
John Coughlon has been employed by Gothic since March 1998. Prior thereto,
he was, commencing in December 1994, employed by Amoco Production Company,
most recently as Senior Staff Geologist. From October 1993 to December 1994 he
served as Geological Consultant/Principle of Tower Energy Corporation and
prior thereto he was from July 1987 to October 1993 Senior Geologist for Nicor
Oil & Gas and from April 1980 to July 1987 he was employed by Mobil Oil Corp.
David Evans was hired by Gothic as a petroleum engineer in November 1997.
Prior thereto, he was Production Manager for Petroleum Properties Management
Co. from March 1996 to October 1997. From April 1992 to March 1996, he was
Engineering Manager for AEOK and from September 1987 to April 1992 he was
Vice-President of Exploration and Production for Bradmar Petroleum
Corporation.
R.L. Hilbun is a full-time consultant to Gothic serving as a drilling and
completion engineer. He has served in this capacity since March 1997. Prior
thereto, commencing in 1982, he was Vice-President, Operations of PSEC, Inc.,
a natural gas and oil well operating company. He has been employed in the
natural gas and oil industry since 1970.
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<PAGE>
R. Andrew McGuire has been employed by Gothic as Controller since November
1994. From February 1991 to October 1994, he was employed as Accounting
Manager of ANEC. From May 1988 to February 1991, he was employed by OXY-USA,
Inc., a subsidiary of Occidental Petroleum Corp., as an accountant. Mr.
McGuire is a certified public accountant.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation paid
during Gothic's three fiscal years ended December 31, 1997 to Gothic's chief
executive officer and all other executive officers who received compensation
exceeding $100,000 and who served in such capacities at December 31, 1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
COMPENSATION
-------------------
OTHER LONG-TERM
NAME AND ANNUAL AWARD'S ALL OTHER
PINCIPAL POSITIONR YEAR SALARY BONUS COMP. OPTION(#) COMP.
<S> <C> <C> <C> <C> <C> <C>
Michael K. Paulk............. 1997 $150,000 $150,000 -0- -0- -0-
1996 107,458 50,000 -0- 125,000 -0-
1995 96,000 -0- -0- -0- -0-
John Rainwater(1)............ 1997 $125,000 -0- -0- -0- -0-
1996 107,458 $ 25,000 -0- 125,000 -0-
1995 96,000 -0- -0- -0- -0-
</TABLE>
- ---------------------
(1) Mr. Rainwater resigned as a Director and executive officer of Gothic
effective on February 18, 1998.
No options were granted to either Mr. Paulk or Mr. Rainwater during 1997.
STOCK OPTION HOLDINGS AT DECEMBER 31, 1997
The following table provides information with respect to the above named
executive officers regarding options held at December 31, 1997 (such officers
did not exercise any options during the most recent fiscal year).
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
------------------------------------ -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Michael K. Paulk........ 312,500(2) 62,500 -0- -0-
John Rainwater.......... 312,500(2) 62,500 -0- -0-
</TABLE>
- ---------------------
(1) Based on the closing sales price on December 31, 1997 of $2.375.
(2) Includes 250,000 shares exercisable at $2.50 per share and 62,500 shares
exercisable at $2.56 per share.
EMPLOYMENT AGREEMENT
Gothic has entered into an employment agreement with Michael Paulk pursuant
to which he is employed as the President of Gothic. Mr. Paulk currently
receives a base salary of $150,000 per year, plus such additional amounts as
may be determined from time to time by Gothic's Board of Directors. In
addition, he is eligible to receive such cash bonuses as may be determined by
Gothic's Board of Directors. Mr. Paulk is also entitled to participate in such
incentive compensation and benefit programs as Gothic makes available. Mr.
Paulk's agreement expires on December 31, 1999 and is thereafter automatically
extended for successive three-year terms. In the event the employment
agreement is terminated by Gothic (other than for cause, as defined) or is not
automatically extended on any termination date for a successive three-year
term, Mr. Paulk is entitled to
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<PAGE>
receive payment equal to three times his then base salary, together with any
sums unpaid under the terms of the employment agreement, and Gothic is
obligated to continue his medical insurance in effect for a period of one year
after such termination. In the event of a change in control, as defined, of
Gothic, Mr. Paulk has the right to terminate his employment agreement with
Gothic within sixty days thereafter, whereupon Gothic would be obligated to
pay to him the same sums and other benefits described above as if such
agreement had been terminated by Gothic without cause. The agreement also
contains certain provisions restricting Mr. Paulk from engaging in business
activities in competition with Gothic for a period of one year.
DIRECTORS COMPENSATION
Directors of Gothic do not receive any compensation for serving in that
capacity; however, they are reimbursed for their out-of-pocket expenses in
attending meetings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 30, 1996, Quest Oil & Gas, Inc. ("Quest"), a corporation of which
Mr. Bayley, a Director of Gothic, was an officer and Director at the time,
exchanged $1,290,000 principal amount of a loan in the aggregate amount of
$1,850,000 from Quest for 1,290 shares of Gothic's 7 1/2% Cumulative
Convertible Preferred Stock. After reflecting the exchange of $1,290,000
principal amount for 1,290 shares of 7 1/2% Cumulative Convertible Preferred
Stock, the remaining $560,000 of principal and accrued interest of $173,000 on
the loan and other obligations aggregating $92,000 owing to Quest was replaced
with a Subordinated Note in the principal amount of $825,000 bearing interest
at 7 1/2% per annum, due, together with all accrued interest thereon, ten
years from its date of issuance. The $825,000 note was prepaid on March 13,
1996 and subsequently Quest sold its shares of 7 1/2% Convertible Preferred
Stock.
On November 14, 1995, Quest purchased Gothic's secured notes in the
principal amount of $333,333 and common stock purchase warrants to purchase
83,333 shares of Gothic's Common Stock at an exercise price of $2.40 per share
the proceeds of which were used to fund a portion of the purchase price for
certain producing natural gas and oil properties. The note, which bore
interest at 1% per month compounded monthly, was repaid on January 30, 1996
and bore interest at 1% per month, compounded monthly and subsequently Quest
sold the common stock purchase warrants.
Mr. Paulk is indebted to Gothic in the amount of $169,110 under a non-
interest bearing promissory note dated September 1, 1997. On February 26,
1998, the Compensation Committee of the Board of Directors approved the
extension of the due date of the Note from January 31, 1998 to January 31,
1999.
On January 23, 1998, Gothic completed the Amoco Acquisition pursuant to
which, among other things, Gothic issued to Amoco a five-year common stock
purchase warrant to purchase 1.5 million shares of Common Stock exercisable at
$3.00 per share.
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<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information concerning the Common Stock ownership of all
persons known by Gothic to own beneficially 5% or more of Gothic's Common
Stock, and the Common Stock ownership of each Director of Gothic and all
Directors and officers of Gothic as a group, as of May 29, 1998. As of May 29,
1998, Gothic had 16,261,640 shares of Common Stock outstanding.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL
HOLDER, IDENTITY OF GROUP(1)(2) AMOUNT(3) PERCENT OF CLASS
<S> <C> <C>
Michael Paulk............................. 487,476(4) 2.9%
John Fleming.............................. 150,000(5) 1.0%
Morton A. Cohen........................... 680,222(6) 4.1%
Brian E. Bayley........................... 150,000(7) 1.0%
Stratum Group, L.L.C.(8).................. 1,000,000(9) 5.8%
650 Fifth Avenue
New York, New York 10019
Cambridge Investments, Ltd.(8)............ 1,161,800 7.1%
600 Montgomery Street--27th Floor
San Francisco, California 94111
Carl C. Icahn(8).......................... 1,600,000 9.8%
High River Limited Partnership(8)
Riverdale LLC(8)
Little Meadow Corp.(8)
100 South Bedford Road
Mount Kisco, New York 10549
Amoco Corporation(8)...................... 1,500,000(10) 8.4%
200 East Randolph Drive
Chicago, Illinois 60601
Croft-Leominster, Inc.(11)................ 838,700 5.4%
207 East Redwood Street--Suite 208
Baltimore, Maryland 21202
Chesapeake Energy Corporation (12)........ 2,439,246 13.0%
6100 N. Western Avenue
Oklahoma City, OK 73154
All Officers and Directors as a Group (4 1,467,698 9.0%
persons).................................
</TABLE>
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<PAGE>
- ---------------------
(1) This tabular information is intended to conform with Rule 13d-3
promulgated under the Securities Exchange Act of 1934 relating to the
determination of beneficial ownership of securities. The tabular
information gives effect to the exercise of warrants or options
exercisable within 60 days of the date of this table owned in each case by
the person or group whose percentage ownership is set forth opposite the
respective percentage and is based on the assumption that no other person
or group exercise their option.
(2) The address of Mr. Paulk is c/o Gothic, 5727 South Lewis Avenue, Suite
700, Tulsa, Oklahoma 74105. The address of Mr. Fleming is 1500, 340 12th
Avenue SW, Calgary, Alberta T2R 1L5. The address of Mr. Cohen is c/o
Clarion Capital Corporation, Ohio Savings Plaza, Suite 510, 1801 East
Ninth Street, Cleveland, Ohio 44114. The address of Mr. Bayley is c/o
Quest Oil & Gas, Inc., 1095 West Pender Street-Suite 850, Vancouver,
British Columbia, Canada V6E 2M6.
(3) Except as otherwise noted, shares beneficially owned by each person as of
March 9, 1998 were owned of record and each person had sole voting and
investment power with respect to all shares beneficially held by such
person.
(4) Includes 250,000 shares issuable upon exercise of options at an exercise
price of $2.50 per share. Also includes 125,000 shares issuable upon
exercise of options at an exercise price of $2.56 per share of which
options to purchase 62,500 shares became exercisable on July 16, 1997 and
options to purchase the remaining 62,500 shares become exercisable on July
16, 1998. In the event of a "change of control" of Gothic, as defined in
the option agreement, such remaining options become immediately
exercisable.
(5) Includes 100,000 shares issuable on exercise of options at an exercise
price of $1.50 per share which are exercisable during the five-year period
beginning July 11, 1996 and 50,000 shares issuable on exercise of options
at an exercise price of $2.56 per share which are exercisable during the
five-year period beginning July 16, 1997.
(6) Includes shares held by Clarion Capital Corp., of which Mr. Cohen is an
officer, director and principal shareholder, and other entities affiliated
with Mr. Cohen, as well as 150,000 shares issuable on exercise of options
held by Mr. Cohen at an exercise price of $2.56 per share which are
exercisable during the five-year period beginning July 11, 1996 and 91,998
shares issuable on exercise of a warrant held by an affiliated partnership
exercisable at $2.40 per share.
(7) Includes 150,000 shares issuable on exercise of options at an exercise
price of $2.56 per share which are exercisable during the five-year period
beginning July 11, 1996.
(8) Based on information contained in Schedule 13D provided by such person.
(9) Issuable on exercise of common stock purchase warrants at $3.19 per share.
The general partner of Stratum Group, L.P. is Stratum Finance, L.L.C. and
the members of Stratum Finance, L.L.C. are Energy Investment Partners, a
New York general partnership, Joseph M. Rinaldi, Michael W. Walker,
Richard E. Bani, John C. Alvardo, Curt S. Taylor, and Betsy D. Cotton.
Stratum Finance, L.L.C. is managed by Energy Investment Partners, which
has four votes, Joseph M. Rinaldi, who has one vote, and Michael W.
Walker, appointed by the natural person members of Stratum Finance,
L.L.C., who has one vote. Energy Investment Partners has three general
partners, SGLLC Partners, L.P. ("SGLLC"), SGLLC Partners Offshore, L.P.
("Offshore") and The Beacon Group Energy Investment Fund, L.P. ("Fund").
The sole general partner of each of SGLLC and Offshore is SG-GP, L.P.
whose sole general partner is Energy Fund GPI, Inc. ("GPI"). The sole
general partner of Fund is Beacon Energy Investors, L.P. ("Investors").
The sole general partner of Investors is BEIGP, Inc. ("BEIGP"). The names
of the officers and Directors of both GPI and BEIGP are Geoffrey Boisi,
John McWilliams, Preston Miller, Harold Pote, Faith Rosenfeld, Robert
Semmens, David Remmington, Thomas Mendell and Frank Murray.
(10) Issuable on exercise of common stock purchase warrants at $3.00 per
share.
(11) Based on information contained in Schedule 13G provided by such person.
(12) Issuable on exercise of common stock purchase warrants at $0.01 per
share.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
Gothic's Board of Directors has a Compensation Committee consisting of
Messrs. Fleming and Bayley and an Audit Committee consisting of Messrs.
Fleming and Bayley. The Compensation Committee makes determinations on behalf
of the Board of Directors concerning salaries and incentive compensation for
officers
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<PAGE>
and employees of and consultants to Gothic. The Audit Committee considers the
retention of Gothic's independent accountants, reviews Gothic's annual
financial statements and discusses the financial statements with Gothic's
independent accountants, reviews the independence of accountants conducting
the audit, reviews the services of independent accountants, discusses with
management and the independent accountants Gothic's accounting system and
related systems of internal control and consults as necessary with the
independent accountants and Gothic's financial staff. The Board of Directors
does not have a nominating committee.
DESCRIPTION OF CREDIT FACILITY
On April 27, 1998, GPC entered into a Loan Agreement with Bank One, (the
"Credit Facility") with Gothic as a guarantor of the obligations of GPC
thereunder. The following summary of the Credit Facility does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the applicable agreements.
The Credit Facility consists of a revolving line of credit, with an initial
Borrowing Base of $25.0 million. The limitations contained in the Indenture
will initially limit borrowings under a Bank Credit Facility to approximately
$30.0 million. Such borrowings initially will be limited to being available
for the acquisition and development of natural gas and oil properties, letters
of credit and general corporate purposes. The Borrowing Base will be
redetermined at least semi-annually and the initial redetermination is
scheduled for October 1, 1998. The principal is due at maturity, April 30,
2001. Interest will be payable monthly calculated at the Bank One Base Rate,
as determined from time to time by Bank One. Gothic may elect to calculate
interest under a London Interbank Offered Rate ("LIBOR") plus 1.5% (or up to
2.0% in the event the loan balance is greater than 75% of the Borrowing Base).
Gothic is required to pay a commitment fee on the unused portion of the
Borrowing Base equal to 1/2 of 1% per annum.
Under the Credit Facility, Bank One will hold first priority liens on
substantially all of the natural gas and oil properties of GPC, whether
currently owned or hereafter acquired. The Credit Facility requires, among
other things, semi-annual engineering reports covering natural gas and oil
properties. The Credit Facility will contain substantially the same financial
and other covenants of the Existing Credit Facility described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Outstanding Indebtedness and
Other Securities--Existing Credit Facility." The Credit Facility includes
additional covenants prohibiting cash dividends, distributions, loans or
advances to third parties, subject to certain exceptions. The covenant
regarding the interest coverage ratio is calculated quarterly on the basis of
the coverage for the preceding quarter and requires a minimum interest
coverage ratio of not less than 1.5 to 1.0 for each quarter through the
quarter ended December 31, 1998 and not less than 2.0 to 1.0 for each quarter
ended March 31, 1999 and thereafter. In addition, if GPC is required to
purchase or redeem any portion of the Notes, or if any portion of the Notes
become due, the Borrowing Base is subject to reduction. GPC is required to
escrow interest payments due on the Senior Secured Notes at such times as its
borrowings under the Credit Facility equal or exceed 75% of the Borrowing
Base.
The amount of borrowings available under the Credit Facility will depend
upon the determination of the Borrowing Base by Bank One. The Borrowing Base
is subject to periodic redetermination, at the discretion of Bank One, based
on a review of reserve and other information. A reduction in the Borrowing
Base could require the repayment of outstanding indebtedness under the Credit
Facility in excess of the redetermined Borrowing Base, and would limit
available borrowings thereunder.
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<PAGE>
DESCRIPTION OF THE NOTES
The Outstanding Notes were issued and the Exchange Notes will be issued
pursuant to an Indenture dated as of April 21, 1998 among Gothic Energy
Corporation and The Bank of New York, as trustee (the "Trustee"). The
following summary of certain provisions of the Notes and the Indenture do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, the Notes and the Indenture, including the definitions
therein of certain capitalized terms used but not defined herein.
GENERAL
The Notes were issued at a substantial discount to their aggregate principal
amount at maturity. Each Note matures on May 1, 2006. The Notes accrete in
value until May 1, 2002 at an annual rate of 14 1/8% per annum, compounded
semiannually on May 1 and November 1 of each year to an aggregate principal
amount of $104.0 million. Cash interest on the Notes will not accrue prior to
May 1, 2002. Thereafter the Notes will bear interest at an annual rate of 14
1/8% per annum, payable semiannually in cash in arrears on May 1 and
November 1 of each year, commencing November 1, 2002, to the Person in whose
name the Note is registered at the close of business on April 15 or October 15
preceding such interest payment date. Interest (and accretion in value prior
to May 1, 2002) will be computed on the basis of a 360-day year, or twelve 30-
day months. Principal, premium and Liquidated Damages, if any, and interest
will be payable at the offices of the Trustee and Paying Agent, provided that,
at the option of Gothic, payment of interest may be made by check mailed to
the address of the Person entitled thereto as it appears in the register of
the Notes maintained by the Registrar.
The Notes are secured by a first priority lien on the outstanding shares of
capital stock of GPC which holds substantially all of the assets of Gothic.
Under certain circumstances, Gothic will be able to designate existing or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to most of the restrictive covenants set forth in the
Indenture. The Indenture provides that GPC cannot be designated as an
Unrestricted Subsidiary. In addition, failure of GPC to remain a Wholly Owned
Subsidiary of Gothic is an Event of Default under the Indenture.
All of the natural gas and oil consolidated assets of Gothic are held by its
wholly-owned operating subsidiary, GPC. Simultaneously with the issuance of
the Notes, (i) GPC issued approximately $235.0 million of Senior Secured
Notes, secured by a second lien on substantially all of GPC's assets and
guaranteed by Gothic on an unsecured basis, and (ii) GPC entered into a Credit
Facility with a currently allowed commitment under the Indenture of
approximately $30.0 million, secured by a first lien on substantially all of
GPC's assets and guaranteed by Gothic on an unsecured basis.
RANKING
The Notes are the general, senior, secured obligations of Parent. The Notes
rank senior in right of payment to all existing and future Subordinated
Indebtedness of Parent and rank pari passu in right of payment with all
existing and future Senior Indebtedness of Parent. The Indenture limits
Gothic's ability to incur additional Indebtedness and Gothic's ability to
grant additional liens on its assets except for Permitted Liens. As of
December 31, 1997, on a pro forma basis after giving effect to the Amoco
Acquisition and the Recapitalization, and the application of the estimated
proceeds therefrom, Parent would have no senior indebtedness other than the
Notes and its guarantees of the Credit Facility and the Senior Secured Notes.
There is currently no indebtedness of Parent which would constitute
subordinated indebtedness.
The operations of Gothic are conducted primarily through GPC. Therefore,
Parent will be dependent upon the cash flow of GPC to meet its debt
obligations, including the obligations under the Notes. After giving effect to
the Recapitalization, GPC is expected to initially have outstanding senior
secured indebtedness of approximately $235.0 million that will be structurally
senior to the Notes. Moreover, as obligations of a holding
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<PAGE>
company, the Notes are effectively subordinated to all existing and future
Indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of Parent's Subsidiaries, including the Indebtedness of
GPC under the Senior Secured Notes and the Credit Facility.
SECURITY
The Notes are secured pursuant to a Pledge Agreement (as defined in the
Indenture) by all of the present and future equity interests of direct wholly
owned Restricted Subsidiaries of Parent (collectively, including any and all
proceeds therefrom, the "Collateral"). GPC is not permitted to be designated
as an Unrestricted Subsidiary. Pursuant to the Senior Secured Note Indenture,
GPC will be the only permitted direct Subsidiary of Parent.
Gothic and the Collateral Agent (as defined in the Pledge Agreement) entered
into the Pledge Agreement providing for the pledge by Gothic to the Collateral
Agent, for the benefit of Holders of the Notes, of the Collateral. Such pledge
secures the payment and performance when due of all of the obligations of
Gothic under the Indenture and the Notes as provided in the Pledge Agreement
and the Indenture.
So long as no Event of Default shall have occurred and be continuing, and
subject to certain terms and conditions in the Indenture and the Pledge
Agreement, Gothic will be entitled to receive all cash dividends, interest and
other payments made upon or with respect to the Collateral and to exercise any
voting and other consensual rights pertaining to the Collateral. Upon the
occurrence and during the continuance of an Event of Default: (a) all rights
of Gothic to exercise such voting or other consensual rights will cease, and
all such rights will become vested in the Collateral Agent for the benefit of
the Holders; (b) all rights of Gothic to receive all cash dividends, interest
and other payments made upon or with respect to the Collateral will cease and
such cash dividends, interest and other payments will be required to be paid
to the Collateral Agent for the benefit of the Holders, provided, however,
that Gothic will be entitled to receive such cash dividends, interest and
other payments from GPC that are sufficient to permit Gothic to satisfy its
ordinary course operating expenses whether or not an Event of Default shall
have occurred; and (c) the Collateral Agent, for the benefit of the Holders,
may sell the Collateral or any part thereof in accordance with the terms of
the Pledge Agreement. All funds distributed under the Pledge Agreement and
received by the Collateral Agent and Trustee for the benefit of the Holders of
the Notes will be distributed by the Trustee in accordance with the provisions
of the Pledge Agreement. Upon the occurrence and during the continuance of an
Event of Default, the Pledge Agreement provides that all funds held by the
Collateral Agent (including all proceeds from the sale or any other
realization upon the Collateral) will be applied (after the payment of certain
fees and expenses of the Collateral Agent) to the payment of the Accreted
Value of, and other obligations with respect to, Notes that are outstanding
under the Indenture.
The Pledge Agreement provides that it may be amended in compliance with the
terms and provisions of the Indenture. As a result, the Pledge Agreement
generally may be amended with the consent of one-half in aggregate principal
amount at maturity of the Notes.
Under the terms of the Pledge Agreement, upon an Event of Default, the
Collateral Agent will determine the circumstances and manner in which the
Collateral will be disposed of, including, but not limited to, the
determination of whether to release all or any portion of the Collateral from
the Liens created by the Pledge Agreement and whether to foreclose on the
Collateral following an Event of Default. Upon the full and final payment and
performance of all Obligations of Gothic under the Indenture and the Notes,
the Pledge Agreement will terminate and the remaining Collateral will be
released to Gothic.
GUARANTEES
The Indenture provides that, except to the extent prohibited by the Credit
Facility or the Senior Secured Notes, each Person that becomes a Restricted
Subsidiary after the Issue Date will guarantee the payment of the Notes. The
Senior Secured Note Indenture prohibits GPC or any other Restricted Subsidiary
from guaranteeing the Notes.
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<PAGE>
The obligations of each Guarantor are limited to the amount as will, after
giving effect to all other contingent and fixed liabilities of such Guarantor
and after giving effect to any collections from or payments made by or on
behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to its contribution obligations
under the Indenture, result in the obligations of such Guarantor under its
Guarantee not constituting a fraudulent conveyance or fraudulent transfer
under federal, state or foreign law. Each Guarantor that makes a payment or
distribution under a Guarantee shall be entitled to a contribution from each
other Guarantor in a pro rata amount based on the Adjusted Net Assets of each
Guarantor.
The Indenture provides that, subject to the next succeeding paragraph, no
Guarantor may consolidate or merge with or into (whether or not such Guarantor
is the surviving entity or Person) another corporation, entity or Person
unless, (i) the entity or Person formed by or surviving any such consolidation
or merger (if other than such Guarantor) assumes all the obligations of such
Guarantor pursuant to a supplemental indenture, in a form reasonably
satisfactory to the Trustee, under the Notes to which such Indenture relates
and such Indenture, and (ii) immediately after such transaction, no Default or
Event of Default exists. The foregoing will not prohibit a merger between
Subsidiary Guarantors or a merger between Gothic and a Subsidiary Guarantor.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock or other ownership interests of such Guarantor, or a Subsidiary
ceases to be a Guarantor, then such Subsidiary (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock or other ownership interests of such Subsidiary) or the
corporation acquiring the property (in the event of a sale or other
disposition of all or substantially all of the assets of such Subsidiary) will
be released and relieved of any obligations under its Guarantees.
OPTIONAL REDEMPTION
At any time on or after May 1, 2003, Gothic may, at its option, redeem all
or any portion of the Notes at the redemption prices (expressed as percentages
of the principal amount of the Notes) set forth below, plus, in each case,
accrued and unpaid interest and Liquidated Damages thereon to the applicable
redemption date, if redeemed during the 12 month period beginning May 1 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003.......................... 107.063%
2004.......................... 103.532%
2005.......................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to May 1, 2003, Gothic may,
at its option, redeem all or a portion of the Notes at the Make-Whole Price.
In addition, in the event Gothic consummates one or more Equity Offerings on
or prior to May 1, 2001, Gothic, at its option, may redeem up to 33 1/3% of
the original aggregate principal amount of the Notes with all or a portion of
the aggregate net proceeds received by Gothic from such Equity Offering or
Equity Offerings at a redemption price of 114.125% of the Accreted Value of
the Notes so redeemed, plus accrued and unpaid interest and Liquidated Damages
thereon to the redemption date; provided however, that following such
redemption, at least 66 2/3% of the original aggregate principal amount of the
Notes remains outstanding and provided, further, that Gothic shall make such
redemption not more than 90 days after the consummation of any such Equity
Offering.
Except as set forth under "--Change of Control" and "--Sale of Assets,"
Gothic is not required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot
or by any other method that the Trustee considers fair and appropriate and
that complies with the requirements of any securities exchange on which the
Notes may be listed provided that no Notes with a principal amount of $1,000
or less will be redeemed in part. Notice of redemption will be
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<PAGE>
mailed by first class mail at least thirty (30) but not more than sixty (60)
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note will state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note on and after the redemption date,
interest ceases to accrue on Notes or portions of them called for redemption.
CHANGE OF CONTROL
The Indenture provides that, following the occurrence of any Change of
Control, Gothic will offer (a "Change of Control Offer") to repurchase all
outstanding Notes at a purchase price equal to, prior to May 1, 2002, 101% of
the Accreted Value of the Notes on the date of purchase and, thereafter, 101%
of the aggregate principal amount of the Notes, plus accrued and unpaid
interest and Liquidated Damages to the date of repurchase. The Change of
Control Offer will be deemed to have commenced upon mailing of a notice
pursuant to the Indenture and will terminate twenty (20) Business Days after
its commencement, unless a longer offering period is required by law. Promptly
after the termination of the Change of Control Offer, Gothic will repurchase
and mail or deliver payment for all Notes tendered in response to the Change
of Control Offer.
On the Change of Control payment date, Gothic will, to the extent lawful,
(i) accept for payment Notes or portions thereof tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to
the Change of Control payment in respect of all Notes or portions thereof so
tendered and (iii) deliver to the Trustee the Notes so accepted together with
an officers' certificate stating the principal amount (or Accreted Value, as
applicable) of the Notes or portions thereof tendered to Gothic. The Paying
Agent will promptly mail to each Holder of Notes so accepted payment in an
amount equal to the repurchase price for such Notes, and the Trustee will
promptly authenticate and mail to each Holder a new Note in principal amount
to any unpurchased portion of the Notes surrendered, if any; provided, that
each such new Note will be in a principal amount of $1,000 or an integral
multiple thereof.
Change of Control means the occurrence of any of the following: (i) the
sale, lease or transfer, in one or a series or related transactions, of all or
substantially all of Gothic's assets to any Person or group (as such term is
used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of a plan
relating to the liquidation or dissolution of Gothic; (iii) the acquisition,
directly or indirectly, by any Person or group (as such term is used in
Section 13(d)(3) of the Exchange Act) of beneficial ownership (as defined in
Rule 13d-3 under the Exchange Act) of more than 50% of the aggregate voting
power of the Voting Stock of Gothic (for the purposes of this definition, such
other Person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other Person is
the beneficial owner (as defined above), directly or indirectly, of more than
35% of the voting power of the Voting Stock of such parent corporation); and
(iv) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Gothic
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of Gothic was approved by a
vote 66 2/3% of the directors of the company then still in office who were
either directors as the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the board of Directors of Gothic then in office.
Gothic will comply with Section 14 of the Exchange Act and the provisions of
Regulation 14E and any other tender offer rules under the Exchange Act and any
other federal and state securities laws, rules and regulations which may then
be applicable to any Change of Control Offer.
The Credit Facility and the Senior Secured Note Indenture restrict GPC from
paying dividends or making other distributions to Parent. If Parent does not
have the ability to receive dividends from GPC or does not refinance GPC's
indebtedness, Parent will likely not have the financial resources to purchase
the Notes. In any event, there can be no assurance that GPC will have the
resources available to pay any such dividend or make any such distribution.
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<PAGE>
CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness
The Indenture provides that Gothic will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, issue, incur, assume,
guarantee, become liable, contingently or otherwise, with respect to or
otherwise become responsible for the payment of (collectively, incur) any
Indebtedness (other than Permitted Indebtedness); provided, however, that if
no Default or Event of Default shall have occurred and be continuing at the
time or as a consequence of the incurrence of such Indebtedness, Gothic or its
Restricted Subsidiaries may incur indebtedness if, on a pro forma basis, after
giving effect to such incurrence and the application of the proceeds
therefrom, both of the following tests shall have been satisfied (i) the
Consolidated Interest Coverage Ratio for the last four fiscal quarter
Reference Period immediately preceding the incurrence of such Indebtedness is
at least (A) prior to May 1, 1999: 2.5-to-1.0 and (B) thereafter: 3.0-to-1.0
and (ii) the percentage of Adjusted Consolidated Net Tangible Assets to
Indebtedness of Gothic and its Restricted Subsidiaries would have been equal
to or greater than (A) prior to May 1, 1999: 125% and (B) thereafter: 150%.
Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing at the time or as a consequence of the incurrence
of such indebtedness, Gothic and its Restricted Subsidiaries may incur
Permitted Indebtedness.
Any Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to be incurred by such Restricted Subsidiary at the
time it becomes a Restricted Subsidiary.
Limitation on Restricted Payments
The Indenture provides that Gothic will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, make any Restricted
Payment, unless, (i) no Default or Event of Default shall have occurred and be
continuing at the time of or immediately after giving effect to such
Restricted Payment; (ii) at the time of and immediately after giving effect to
such Restricted Payment, Gothic would be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
first paragraph of the covenant captioned "Limitation on Incurrence of
Additional Indebtedness;" and (iii) immediately after giving effect to such
Restricted Payment, the aggregate of all Restricted Payments declared or made
after the Issue Date does not exceed the sum of (A) 50% of the Consolidated
Net Income of Gothic and its Restricted Subsidiaries (or in the event such
Consolidated Net Income shall be a deficit, minus 100% of such deficit) during
the period (treated as one accounting period) subsequent to December 31, 1997
and ending on the last day of the fiscal quarter for which financial
information is available immediately preceding the date of such Restricted
Payment (less the aggregate amount of dividends described in clauses (i) and
(ii) of the following paragraph that are either (x) paid after the last day of
the fiscal quarter for which financial information is available immediately
preceding the date of such Restricted Payment or (y) declared but not yet paid
as of such date); (B) the aggregate Net Cash Proceeds received by Gothic after
May 1, 1998 from any Person other than a Subsidiary of Gothic as a result of
the issuance or sale of Capital Stock of Gothic (other than any Disqualified
Stock), other than in connection with the conversion of indebtedness or
Disqualified Stock; (C) the aggregate Net Cash Proceeds received by Gothic
after May 1, 1998 from any Person other than a Subsidiary of Gothic as a
result of the issuance or sale of any indebtedness or Disqualified Stock to
the extent that at the time the determination is made such indebtedness or
Disqualified Stock, as the case may be, has been converted into or exchanged
for Capital Stock of Gothic (other than Disqualified Stock); (D) (i) in case
any Unrestricted Subsidiary has been redesignated a Restricted Subsidiary, an
amount equal to the lesser of (x) the book value (determined in accordance
with GAAP) at the date of such redesignation of the aggregate Investments made
by Gothic and its Restricted Subsidiaries in such Unrestricted Subsidiary and
(y) the fair market value of such investments in such Unrestricted Subsidiary
at the time of such redesignation, as determined in good faith by Gothic's
Board of Directors, including a majority of Gothic's Disinterested Directors,
whose determination shall be conclusive and evidenced by a resolution of such
Board (less, in the case of each of clauses (x) and (y), the amount of
original investment (based upon book value
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determined in accordance with GAAP at the time of such Investment) made by
Gothic or any Restricted Subsidiary pursuant to clause (x) of the definition
of "Permitted Business Investment" minus the aggregate cash dividends paid by
such Unrestricted Subsidiary to Gothic or any other Restricted Subsidiary
since the date of such original Investment, provided that the result of the
foregoing shall not be less than zero); or (ii) in case any Restricted
Subsidiary has been redesignated an Unrestricted Subsidiary, minus the greater
of (x) the book value (determined in accordance with GAAP) at the date or
redesignation of the aggregate Investments made by Gothic and its Restricted
Subsidiaries and (y) the fair market value of such Investments in such
Restricted Subsidiary at the time of such redesignation, as determined in good
faith by Gothic's Board of Directors, including a majority of Gothic's
Disinterested Directors, whose determination shall be conclusive and evidenced
by a resolution of such Board; and (E) $2.5 million.
Notwithstanding the foregoing, the above limitations will not prevent (i)
the payment of any dividend within sixty (60) days after the date of
declaration thereof, if at such date of declaration such payment complied with
the provisions hereof; (ii) any dividend on shares of Capital Stock of Gothic
or any Restricted Subsidiary payable solely in shares of Capital Stock (other
than Disqualified Stock); (iii) any dividend or other distribution payable
from a Subsidiary to Gothic or any Restricted Subsidiary that is wholly-owned
directly or indirectly by Gothic; and (iv) subject to the following paragraph,
the repurchase, redemption or other acquisition or retirement of any shares of
any class of Capital Stock of Gothic or any Restricted Subsidiary, in exchange
for, or out of the aggregate net proceeds (the "Equity Proceeds") of a
substantially concurrent issue and sale (other than to a Restricted
Subsidiary) of shares of Capital Stock of Gothic (other than Disqualified
Stock).
The Indenture provides that prior to any repurchase, redemption or other
acquisition or retirement of the shares pursuant to subsection (iv) in the
preceding paragraph, Gothic will redeem, or at its option, offer to so redeem
(such offer an "Equity Proceeds Offer") Notes having an aggregate principal
amount equal to the lesser of (i) the Equity Proceeds or (ii) 33 1/3%, of the
original aggregate principal amount of the Notes; provided however, that
following such redemption, at least 66 2/3%, of the original aggregate
principal amount of the Notes remains outstanding (such purchase to be made on
a pro rata basis if the amount available for such repurchase is less than the
principal amount of Notes tendered) at a repurchase price of 100% of the
principal amount thereof (or if such date is prior to May 1, 2002, of the
Accreted Value thereof) plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of repurchase. The Equity Proceeds Offer will be
conducted in substantially the same manner as a Net Proceeds Offer.
Gothic will comply with Section 14 of the Exchange Act and the provisions of
Regulation 14E and any other tender offer rules under the Exchange Act and any
other federal and state securities laws, rules and regulations which may then
be applicable to any Equity Proceeds Offer.
Limitation on Sale of Assets
The Indenture provides that Gothic will not, and will not permit any
Restricted Subsidiary to, make any Asset Sale unless: (i) Gothic (or its
Restricted Subsidiary as the case may be) receives consideration at the time
of such sale or other disposition at least equal to the fair market value
thereof (as determined in good faith by Gothic, which determination, with
respect to Asset Sales or series of related Asset Sales with proceeds valued
at greater than $5.0 million, shall be evidenced by a resolution duly adopted
by Gothic's Board of Directors, including a majority of Gothic's Disinterested
Directors); (ii) at least 85% of the proceeds from such Asset Sale consist of
cash or U.S. dollar denominated Cash Equivalents; and (iii) the Net Cash
Proceeds received by Gothic (or its Restricted Subsidiary, as the case may be)
from such Asset Sale are applied in accordance with the following two
paragraphs.
Gothic may apply such Net Cash Proceeds, within four hundred twenty-five
(425) days from the date of the receipt of Net Cash Proceeds from any Asset
Sale, to: (a) the repayment of indebtedness of Gothic or a Restricted
Subsidiary under a Bank Credit Facility or other Senior Indebtedness of Gothic
or a Restricted Subsidiary that results in a permanent reduction in any
revolving credit or other commitment relating thereto or the maximum principal
amount that may be borrowed thereunder in an amount equal to the principal
amount so repaid,
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(b) make an investment in assets used in the Oil and Gas business in
replacement of the assets that were the subject of the Asset Sale giving rise
to such Net Cash Proceeds or (c) develop by drilling, completing and producing
reserves from the oil and gas properties of Gothic and the Restricted
Subsidiaries.
If, upon completion of the 425-day period, the Net Cash Proceeds of any
Asset Sale less the aggregate amount applied by Gothic during such period as
described in clauses (a), (b) or (c) in the immediately preceding paragraph,
together with any Net Cash Proceeds in excess of amounts similarly applied by
Gothic from any prior Asset Sale after the date of receipt of such Net Cash
Proceeds (such aggregate constituting "Excess Proceeds"), exceeds $5.0
million, then Gothic will be obligated to make an offer (the "Net Proceeds
Offer") to repurchase the Notes (and any other Senior Indebtedness in respect
of which such an offer to repurchase is also required to be made concurrently
with the Net Proceeds Offer) having an aggregate principal amount equal to the
Excess Proceeds (such repurchase to be made on a pro rata basis if the amount
available for such repurchase is less than the principal amount of the Notes
and other Senior Indebtedness tendered in such Net Proceeds Offer) at a
repurchase price of 100% of the principal amount (or, prior to May 1, 2002,
the Accreted Value) thereof plus accrued interest, if any, to the date of
repurchase. Upon the completion of the Net Proceeds Offer, the amount of
Excess Proceeds will be reset to zero, subject to further increase resulting
from subsequent Asset Sales.
Any Net Proceeds Offer will be conducted in substantially the same manner as
a Change of Control Offer. Gothic will comply with Section 14 of the Exchange
Act and the provisions of Regulation 14E and any other tender offer rules
under the Exchange Act and any other federal and state securities laws, rules
and regulations which may then be applicable to any Net Proceeds Offer.
During the period between any Asset Sale and the application of the Net Cash
Proceeds therefrom in accordance with this covenant, all Net Cash Proceeds
shall, except as otherwise required by the Senior Secured Note Indenture, be
either (i) maintained in a segregated account and shall be invested in
Permitted Financial Investments or (ii) applied to temporarily reduce
borrowings under any revolving credit facility constituting Senior
Indebtedness of Gothic or a Restricted Subsidiary.
Notwithstanding the foregoing, Gothic will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, make any Asset Sale of any
of the Capital Stock of a Restricted Subsidiary except pursuant to an Asset
Sale of all of the Capital Stock of such Restricted Subsidiary.
Limitation on Liens Securing Indebtedness
The Indenture provides that Gothic will not, and will not permit any of its
Restricted Subsidiaries to, create, incur, assume or suffer to exist any Liens
(other than Permitted Liens) upon any of their respective properties.
Limitation on Mergers and Consolidations
The Indenture provides that Gothic will not consolidate with or merge with
any Person or convey, transfer or lease all or substantially all of its assets
to any Person, unless: (i) Gothic survives such merger or the Person formed by
such consolidation or into which Gothic is merged or that acquires by
conveyance or transfer, or which leases, all or substantially all of the
assets of Gothic is a corporation organized and existing under the laws of the
United States of America, any state thereof or the District of Columbia and
expressly assumes, by supplemental indenture, the due and punctual payment of
the principal of, premium, if any, and interest on, all the Notes and the
performance of every other covenant and obligation of Gothic under the
Indenture; (ii) immediately before and after giving effect to such
transaction, no Default or Event of Default exists; (iii) immediately after
giving effect to such transaction on a pro forma basis, the Consolidated Net
Worth of Gothic (or the surviving or transferee entity) is equal to or greater
than the Consolidated Net Worth of Gothic immediately before such transaction;
and (iv) immediately after giving effect to such transaction on a pro forma
basis, Gothic (or the surviving or transferee entity) would be able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the first paragraph of the covenant captioned "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness." Upon any such
consolidation, merger, lease, conveyance or transfer in accordance with the
foregoing, the successor Person formed by such
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consolidation or into which Gothic is merged or to which such lease,
conveyance or transfer is made shall succeed to, and be substituted for, and
may exercise every right and power of, Gothic under the Indenture with the
same effect as if such successor had been named as Gothic herein and
thereafter the predecessor corporation will be relieved of all further
obligations and covenants under the Indenture and the Notes.
Limitation on Sale/Leaseback Transactions
The Indenture provides that Gothic will not, and will not permit any of its
Restricted Subsidiaries to, enter into any Sale/Leaseback Transaction unless
(i) Gothic or such Restricted Subsidiary, as the case may be, would be able to
incur Indebtedness in an amount equal to the Attributable Indebtedness with
respect to such Sale/Leaseback Transaction or (ii) Gothic or such Restricted
Subsidiary receives proceeds from such Sale/Leaseback Transaction at least
equal to the fair market value thereof (as determined in good faith by
Gothic's Board of Directors, whose determination in good faith, evidenced by a
resolution of such Board shall be conclusive) and such proceeds are applied in
the same manner and to the same extent as Net Cash Proceeds and Excess
Proceeds from an Asset Sale.
Limitation on Payment Restrictions Affecting Subsidiaries
The Indenture provides that Gothic will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or
consensual restriction on the ability of any Restricted Subsidiary of Gothic
to (i) pay dividends or make any other distributions on its Capital Stock or
on any other interest or participation in Gothic or a Restricted Subsidiary;
(ii) pay any Indebtedness owed to Gothic or a Restricted Subsidiary of Gothic;
(iii) make loans or advances to Gothic or a Restricted Subsidiary of Gothic;
or (iv) transfer any of its properties or assets to Gothic or a Restricted
Subsidiary of Gothic (each, a "Payment Restriction"), except for (a)
encumbrances or restrictions under the Senior Secured Notes and a Bank Credit
Facility; (b) Permitted Refinancing Indebtedness; (c) consensual encumbrances
or consensual restrictions binding upon any Person at the time such Person
becomes Restricted Subsidiary of Gothic (unless the agreement creating such
consensual encumbrances or consensual restrictions was entered into in
connection with, or in contemplation of, such entity becoming a Restricted
Subsidiary); (d) consensual encumbrances or consensual restrictions under any
agreement that refinances or replaces any agreement described in clauses (a)
and (b) above, provided that the terms and conditions of any such restrictions
are in the aggregate no less favorable to the Holders of the Notes than those
under the agreement so refinanced or replaced; and (e) customary non-
assignment provisions in leases, purchase money financings and any encumbrance
or restriction due to applicable law.
Limitation on Issuance and Sale of Restricted Subsidiary Stock
The Indenture provides that Gothic (i) will not permit any Restricted
Subsidiary to issue any Preferred Stock (other than to Gothic or a Restricted
Subsidiary) and (ii) will not permit any Person (other than Gothic and/or one
or more Restricted Subsidiaries) to own any Capital Stock of any Restricted
Subsidiary; provided, however, that this covenant shall not prohibit (a) the
issuance or sale of all, but not less than all, of the issued and outstanding
Capital Stock of any Restricted Subsidiary owned by Gothic or any of its
Restricted Subsidiaries in compliance with the other provisions of the
Indenture, (b) the ownership by directors of directors' qualifying shares or
the ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law or (c) customary non-
assignment provisions in leases or purchase money financings and any customary
encumbrances or restriction relating to same.
Limitation on Transactions with Affiliates
The Indenture provides that Gothic will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, enter into any transaction
or series of transactions (including, without limitation, the sale, purchase
or lease of any assets or properties or the rendering of any services) with
any Affiliate or beneficial owner (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act) of 10% or more of Gothic's common stock (other
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than with a Wholly Owned Restricted Subsidiary of Gothic) (an "Affiliate
Transaction"), on terms that are less favorable to Gothic or such Restricted
Subsidiary, as the case may be, than would be available in a comparable
transaction with an unrelated Person. In addition, Gothic will not, and will
not permit any Restricted Subsidiary of Gothic to, enter into an Affiliate
Transaction, or any series of related Affiliate Transactions having a value of
(a) more than $5 million, unless a majority of the Board of Directors of
Gothic (including a majority of Gothic's Disinterested Directors) determines
in good faith, as evidenced by a resolution of such Board, that such Affiliate
Transaction or series of related Affiliate Transactions is fair to Gothic and
in compliance with the first sentence of this paragraph; or (b) more than $10
million, unless Gothic receives a written opinion from a nationally recognized
investment banking firm that such transaction or series of transactions is
fair to Gothic from a financial point of view.
Limitation on Line of Business
The Indenture provides that Gothic and the Subsidiaries will be operated in
a manner such that their business activities will be the Oil and Gas Business,
or an Investment in a business or Person engaged in the Oil and Gas Business.
SEC Reports
Notwithstanding that Gothic may not be required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, Gothic will
file with the SEC (if the SEC will so accept) and provide the Trustee and
Holders with annual reports and such information, documents and other reports
specified in Sections 13 and 15(d) of the Exchange Act.
Future Designation of Restricted and Unrestricted Subsidiaries
The foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens) may
be affected by the designation by Gothic of any existing or future Subsidiary
of Gothic as an Unrestricted Subsidiary. Generally, a Restricted Subsidiary
includes any Subsidiary of Gothic, whether existing on or after the date of
the Indenture, unless the Subsidiary of Gothic is designated as an
Unrestricted Subsidiary pursuant to the terms of the Indenture. The definition
of "Unrestricted Subsidiary" set forth under the caption "Certain Definitions"
describes the circumstances under which a future Subsidiary of Gothic may be
designated as an Unrestricted Subsidiary by the Board of Directors of Gothic.
The Indenture will prohibit the designation of GPC as an Unrestricted
Subsidiary.
CERTAIN DEFINITIONS
The following is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms
and for the definitions of capitalized terms used herein and not defined
below.
"Accreted Value" means for each $1,000 face amount of Notes, as of any date
of determination prior to May 1, 2002, the sum of (i) the initial offering
price of each Note ($578.42) and (ii) that portion of the excess of the
principal amount of each Note over such initial offering price which shall
have been accreted thereon through such date, such amount to be so accreted on
a daily basis and compounded semi-annually on each May 1 and November 1 at the
rate of 14 1/8% per annum from the date of issuance of the Notes through the
date of determination.
"Adjusted Consolidated Net Tangible Assets" or "ACNTA" means without
duplication, as of the date of determination, (a) the sum of (i) discounted
future net revenue from proved oil and gas reserves of Gothic and its
Restricted Subsidiaries calculated in accordance with SEC guidelines before
any state or federal income taxes, as estimated by independent petroleum
engineers in a reserve report prepared as of the end of Gothic's most recently
completed fiscal year, as increased by, as of the date of determination, the
discounted future net revenue of (A) estimated proved oil and gas reserves of
Gothic and its Restricted Subsidiaries attributable to any
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acquisition consummated since the effective date of such initial or year-end
reserve reports and (B) estimated oil and gas reserves of Gothic and its
Restricted Subsidiaries attributable to extensions, discoveries and other
additions and upward revisions of estimates of proved oil and gas reserves due
to exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the effective date of such initial or
year-end reserve reports which, in the case of sub-clauses (A) and (B), would,
in accordance with standard industry practice, result in such increases, in
each case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such initial or year-end reserve reports), and decreased by, as of
the date of determination, the discounted future net revenue of (C) estimated
proved oil and gas reserves of Gothic and its Restricted Subsidiaries produced
or disposed of since the effective date of such initial or year-end reserve
report and (D) reductions in the estimated oil and gas reserves of Gothic and
its Restricted Subsidiaries since the effective date of such initial or year-
end reserve reports attributable to downward revisions of estimates of proved
oil and gas reserves due to exploration, development or exploitation,
production or other activities conducted or otherwise occurring since the
effective date of such initial or year-end reserve reports which would, in
accordance with standard industry practice, result in such revisions, in each
case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such initial or year-end reserve reports); provided that, in the
case of each of the determinations made pursuant to sub-clause (A) through (D)
above, such increases and decreases shall be as estimated by Gothic's
engineers, except that if as a result of such acquisitions, dispositions,
discoveries, extensions or revisions, there is a Material Change and in
connection with the incurrence of Indebtedness under the covenant captioned
"--Certain Covenants--Limitation on Incurrence of Additional Indebtedness,"
all or any part of an increase in discounted future net revenue resulting from
the matters described in sub-clauses (A) and (B) above are needed to permit
the incurrence of such Indebtedness, then the discounted future net revenue
utilized for purposes of this clause (a)(i) shall be confirmed in writing by
independent petroleum engineers, provided that, in the event that the
determinations made pursuant to subclauses (C) and (D) above, when taken
alone, would not cause a Material Change, then such written confirmation need
only cover the incremental additions to discounted future net revenues
resulting from the determinations made pursuant to sub-clauses (A) and (B)
above to the extent needed to permit the incurrence of such Indebtedness, (ii)
the capitalized costs that are attributable to oil and gas properties of
Gothic and its Restricted Subsidiaries to which no proved oil and gas reserves
are attributed, based on Gothic's books and records as of a date no earlier
than the date of Gothic's latest annual or quarterly financial statements plus
the fair value of any unproved properties acquired since such date, (iii) the
Net Working Capital on a date no earlier than the date of Gothic's latest
annual or quarterly financial statements and (iv) the greater of (I) the net
book value on a date no earlier than the date of Gothic's latest annual or
quarterly financial statements and (II) the appraised value, as estimated by
independent appraisers, of other tangible assets (including Investments in
unconsolidated Subsidiaries) of Gothic and its Restricted Subsidiaries, as of
a date no earlier than the date of Gothic's latest audited financial
statements, minus (b) the sum of (i) minority interests, (ii) any non-current
portion of gas balancing liabilities of Gothic and its Restricted Subsidiaries
reflected in Gothic's latest annual or quarterly financial statements, (iii)
the discounted future net revenue, calculated in accordance with SEC
guidelines (utilizing the prices utilized in Gothic's initial or year-end
reserve reports), attributable to reserves which are required to be delivered
to third parties to fully satisfy the obligations of Gothic and its Restricted
Subsidiaries with respect to Volumetric Production Payments on the schedules
specified with respect thereto, (iv) the discounted future net revenue,
calculated in accordance with SEC guidelines, attributable to reserves subject
to Dollar-Denominated Production Payments which, based on the estimates of
production included in determining the discounted future net revenue specified
in (a)(i) above (utilizing the same prices utilized in Gothic's initial or
year-end reserve reports), would be necessary to fully satisfy the payment
obligations of Gothic and its Restricted Subsidiaries with respect to Dollar-
Denominated Production Payments on the schedules specified with respect
thereto and (v) the discounted future net revenue, calculated in accordance
with SEC guidelines (utilizing the same prices utilized in Gothic's initial or
year-end reserve reports), attributable to reserves subject to participation
interests, overriding royalty interests or other interests of third parties,
pursuant to participation, partnership, vendor financing or other agreements
then in effect, or which otherwise are required to be delivered to third
parties. If Gothic changes its method of accounting from the full cost method
to the successful efforts method or a similar method of accounting, Adjusted
Consolidated Net Tangible Assets will continue to be calculated as if Gothic
was still using the full cost method of accounting.
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Discounted future net revenue attributable to reserves subject to Production
Payments or other third party interests are excluded from the definition of
Adjusted Consolidated Net Tangible Assets to the extent indicated, thereby
limiting the amount of Indebtedness that may be incurred pursuant to the test
set forth in clause (ii) of the first paragraph of the covenant captioned "--
Certain Covenants--Limitation on Incurrence of Additional Indebtedness."
However, certain estimated volumes of reserves in excess of the delivery
requirements under such Production Payments or with respect to commitments to
third party interests that are available for sale by Gothic are included in
the definition of Adjusted Consolidated Net Tangible Assets, thereby
increasing the amount of Indebtedness that may be incurred under such test.
"Adjusted Net Assets" of a Guarantor at any date shall mean the Issuer of
(i) the amount by which the fair value of the property of such Guarantor
exceeds the total amount of liabilities, including, without limitation,
contingent liabilities (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date), but excluding liabilities under
the Guarantee of such Guarantor at such date and (ii) the amount by which the
present fair saleable value of the assets of such Guarantor at such date
exceeds the amount that will be required to pay the probable liability of such
Guarantor on its debts (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date and after giving effect to any
collection from any Subsidiary of such Guarantor in respect of the obligations
of such Subsidiary under the Guarantee), excluding debt in respect of the
Guarantee, as they become absolute and matured.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
control when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through the ownership of Voting Stock, by contract or otherwise; and
the terms controlling and controlled have meanings correlative to the
foregoing; provided that a corporation shall not be deemed an Affiliate of
Gothic solely by reason of having a single common director with Gothic who
constitutes less than a majority of the directors of either Gothic and the
other corporation.
"Asset Sale" means any sale, lease, transfer, exchange or other disposition
after the Issue Date having a fair market value of $1 million or more (or
series of sales, leases, transfers, exchanges or dispositions during any
fiscal year having an aggregate fair market value of such amount) of shares of
Capital Stock of a Restricted Subsidiary (other than directors' Qualifying
Shares), or of property or assets (including the creation of Dollar-
Denominated Production Payments and Volumetric Production Payments, other than
Dollar-Denominated Production Payments and Volumetric Production Payments
created or sold in connection with the financing of, and within thirty (30)
days after, the acquisition of the properties subject thereto) or any
interests therein (each referred to for purposes of this definition as a
disposition) by Gothic or any of its Restricted Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction (other
than (a) by Gothic to a Wholly Owned Restricted Subsidiary or by a Subsidiary
to Gothic or a Wholly Owned Restricted Subsidiary, (b) a sale of oil, gas or
other hydrocarbons or other mineral products in the ordinary course of
business of Gothic's oil and gas production operations, (c) any abandonment,
farm-in, lease and sub-lease of developed and/or undeveloped properties made
or entered into in the ordinary course of business (but excluding (x) any sale
of a net profits or overriding royalty interest, in each case conveyed from or
burdening proved developed or proved undeveloped reserves and (y) any sale of
hydrocarbons or other mineral products as a result of the creation of Dollar-
Denominated Production Payments or Volumetric Production Payments, other than
Dollar-Denominated Production Payments and Volumetric Production Payments
created or sold in connection with the financing of, and within thirty (30)
days after, the acquisition of the properties subject thereto), (d) the
disposition of all or substantially all of the assets of Gothic in compliance
with the covenant captioned "--Certain Covenants--Limitation on Mergers and
Consolidations" and "--Limitations on Sale/Leaseback Transactions," (e) the
provision of services and equipment for the operation and development of
Gothic's oil and gas wells, in the ordinary course of Gothic's oil and gas
service businesses, notwithstanding that such transactions may be recorded as
asset sales in accordance with full cost accounting guidelines, (f) the
issuance by Gothic of shares of its Capital Stock, (g) any trade or exchange
by Gothic or any Restricted Subsidiary of oil and gas properties for other oil
and gas properties owned or held by another Person provided that (x) the fair
market value of the
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properties traded or exchanged by Gothic or such Restricted Subsidiary
(including any cash or Cash Equivalents, not to exceed 15% of such fair market
value, to be delivered by Gothic or such Restricted Subsidiary) is reasonably
equivalent to the fair market value of the properties (together with any cash
or Cash Equivalents, not to exceed 15% of such fair market value) to be
received by Gothic or such Restricted Subsidiary as determined in good faith
by the Board of Directors of Gothic, which determination shall be certified by
a resolution of the Board of Directors delivered to the Trustee if such fair
market value is in excess of $5 million, provided that if such resolution
indicates that such fair market value is in excess of $10 million such
resolution shall be accompanied by a written appraisal by a nationally
recognized investment banking firm or appraisal firm, in each case
specializing or having a specialty in oil and gas properties, and (y) such
exchange is approved by a majority of Disinterested Directors of Gothic, (h)
the sale, transfer or other disposition in the ordinary course of business of
oil and natural gas properties, or interests therein, provided that such
properties either (A) do not have proved reserves attributed to them or (B)
were purchased for the purpose of offering such properties for resale or
participation's by other Persons), and (i) any transaction provided for in the
Sale and Participation Agreement dated March 31, 1998 among the Company,
Parent and Chesapeake.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount
of rent required to be paid by such Person under the lease during the primary
term thereof, without giving effect to any renewals at the option of the
lessee, discounted from the respective due dates thereof to such date at the
rate of interest per annum implicit in the terms of the lease. As used in the
preceding sentence, the net amount of rent under any lease for any such period
shall mean the sum of rental and other payments required to be paid with
respect to such period by the lessee thereunder excluding any amounts required
to be paid by such lessee on account of maintenance and repairs, insurance,
taxes, assessments, water rates or similar charges. In the case of any lease
which is terminable by the lessee upon payment of a penalty, such net amount
of rent shall also include the amount of such penalty, but not rent shall be
considered as required to be paid under such lease subsequent to the first
date upon which it may be so terminated.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the product of (x) the
number of years from such date to the date of each successive scheduled
principal payment of such Indebtedness multiplied by (y) the amount of such
principal payment by (ii) the sum of all such principal payments.
"Bank Credit Facility" means a revolving credit, term credit and/or letter
of credit facility, the proceeds of which are used for working capital and
other general corporate purposes to be entered into by one or more of Gothic
and/or its Restricted Subsidiaries and certain financial institutions, as
amended, extended or refinanced from time to time. The Credit Facility will
constitute a Bank Credit Facility.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee of the Board of Directors of such
Person duly authorized to act on behalf of the Board of Directors of such
Person.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation's or other equivalents (however designated) of
corporate stock or partnership interests and any and all warrants, options and
rights with respect thereto (whether or not currently exercisable), including
each class of common stock and preferred stock of such Person.
"Capitalized Lease Obligations" of any Person means the obligations of such
Person to pay rent or other amounts under a lease of property, real or
personal, that is required to be capitalized for financial reporting purposes
in accordance with GAAP, and the amount of such obligations shall be the
capitalized amount thereof determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidences of Indebtedness with a maturity
of ninety (90) days or less issued or directly and fully guaranteed or insured
by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in
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support thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of ninety (90) days or less of any financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500 million; (iii)
commercial paper with a maturity of ninety (90) days or less issued by a
corporation that is not an Affiliate of Gothic and is organized under the laws
of any state of the United States or the District of Columbia and rated at
least A-1 by Standard & Poor's Rating Services or at least P-1 by Moody's
Investors Services, Inc.; (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (i)
above entered into with any commercial bank meeting the specifications of
clause (ii) above; and (v) overnight bank deposits and bankers' acceptances at
any commercial bank meeting the qualifications specified in clauses (ii)
above.
"Consolidated Interest Coverage Ratio" means, for any Reference Period, the
ratio on a pro forma basis of (a) the sum of (i) Consolidated Net Income, (ii)
Consolidated Interest Expense, (iii) Consolidated Tax Expense, (iv)
depreciation and depletion of Gothic and its Restricted Subsidiaries, as
determined in accordance with GAAP on a consolidated basis plus (v)
amortization of Gothic and its Restricted Subsidiaries including, without
limitation, amortization of capitalized debt issuance costs, as determined in
accordance with GAAP on a consolidated basis, in each case as determined for
the Reference Period to (b) Consolidated Interest Expense for such Reference
Period; provided that, in calculating each of the items set forth in the
foregoing (i) acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio (the "Transaction Date") shall be assumed to have occurred on
the first day of the Reference Period, (ii) the incurrence of any Indebtedness
(including the issuance of the Notes) or issuance of any Disqualified Stock
during the Reference Period or subsequent to the Reference Period and on or
prior to the Transaction Date shall be assumed to have occurred on the first
day of such Reference Period, (iii) any Indebtedness that had been outstanding
during the Reference Period that has been repaid on or prior to the
Transaction Date shall be assumed to have been repaid as of the first day of
such Reference Period, (iv) the Consolidated Interest Expense attributable to
interest on any Indebtedness or dividends on any Disqualified Stock bearing a
floating interest (or dividend) rate shall be computed on a pro forma basis as
if the rate in effect on the Transaction Date was the average rate in effect
during the entire Reference Period and (v) in determining the amount of
Indebtedness pursuant to the covenant captioned "--Certain Covenants--
Limitation on Incurrence of Additional Indebtedness," the incurrence of
Indebtedness or issuance of Disqualified Stock giving rise to the need to
calculate the Consolidated Interest Coverage Ratio and, to the extent the net
proceeds from the incurrence or issuance thereof are used to retire
Indebtedness, the application of the proceeds therefrom shall be assumed to
have occurred on the first day of the Reference Period.
"Consolidated Interest Expense" means, with respect to Gothic and its
Restricted Subsidiaries, for the Reference Period, the aggregate amount
(without duplication) of (a) interest expensed in accordance with GAAP
(including, in accordance with the following sentence, interest attributable
to Capitalized Lease Obligations, but excluding interest attributable to
Dollar-Denominated Production Payments and amortization of deferred debt
expense) during such period in respect of all Indebtedness of Gothic and its
Restricted Subsidiaries (including (i) amortization of original issue discount
on any Indebtedness (ii) the interest portion of all deferred payment
obligations, calculated in accordance with GAAP and (iii) all commissions,
discounts and other fees and charges owed with respect to bankers' acceptance
financings and currency and interest rate swap arrangements, in each case to
the extent attributable to such period), and (b) dividend requirements of
Gothic and its Restricted Subsidiaries with respect to any Preferred Stock or
Disqualified Stock dividends (whether in cash or otherwise (except dividends
paid solely in shares of Capital Stock other than Disqualified Stock)) paid
(other than to Gothic or any of its Restricted Subsidiaries), declared,
accrued or accumulated during such period, divided by one minus the applicable
actual combined federal, state, local and foreign income tax rate of Gothic
and its Subsidiaries (expressed as a decimal), on a consolidated basis, for
the Reference Period preceding the date of the transaction giving rise to the
need to calculate Consolidated Interest Expense, in each case to the extent
attributable to such period and excluding items eliminated in consolidation.
For purposes of this definition, (a) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
by Gothic to be the rate of interest implicit in such Capitalized Lease
Obligation in accordance with GAAP and (b) interest
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expense attributable to any Indebtedness represented by the guarantee by
Gothic or a Restricted Subsidiary of Gothic of an obligation of another Person
(other than Gothic or any other Restricted Subsidiary) shall be deemed to be
the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Net Income" of Gothic means, for any period, the aggregate net
income (or loss) of Gothic and its Restricted Subsidiaries for such period on
a consolidated basis, determined in accordance with GAAP; provided, however,
that there shall not be included in such Consolidated Net Income; (a) any net
income of any Person if such Person is not Gothic or a consolidated Restricted
Subsidiary, except that (i) subject to the limitations contained in clause (d)
below, Gothic's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount
of cash or Cash Equivalents actually distributed by such Person during such
period to Gothic or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution in a
Restricted Subsidiary, to the limitations contained in clause (c) below) and
(ii) Gothic's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period shall be included in determining such
Consolidated Net Income; (b) any net income (or loss) of any Person acquired
by Gothic or a Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition; (c) the net income of any Restricted
Subsidiary to the extent that the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly, to
Gothic, is prohibited; (d) any gain (but not loss) realized upon the sale or
other disposition of any property, plant or equipment of Gothic or any
Restricted Subsidiary (including pursuant to any Sale/Leaseback Transaction)
which is not sold or otherwise disposed of in the ordinary course of business
and any gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person; (e) any gain (but not loss) from currency
exchange transactions not in the ordinary course of business consistent with
past practice; (f) the cumulative effect of a change in accounting principles;
(g) to the extent deducted in the calculation of net income, the non-cash
charges associated with the repayment of Indebtedness with the proceeds from
the Recapitalization and the sale of the Notes and the prepayment of any of
the Notes; (h) any write-downs of non-current assets; provided, however, that
any ceiling limitation write-downs under SEC guidelines shall be treated as
capitalized costs, as if such write-downs had not occurred; and (i) any gain
(but not loss) attributable to extraordinary items.
"Consolidated Net Worth" means, with respect to Gothic and its Restricted
Subsidiaries, as at any date of determination, the sum of Capital Stock (other
than Disqualified Stock) and additional paid-in capital plus retained earnings
(or minus accumulated deficit) minus all intangible assets, including, without
limitation, organization costs, patents, trademarks, copyrights, franchises,
research and development costs, and any amount reflected in treasury stock, of
Gothic and its Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP.
"Consolidated Tax Expense" means, for any Reference Period, the provisions
for federal, state, local and foreign income taxes (including some franchise
taxes accounted for as income taxes in accordance with GAAP) of Gothic and its
Restricted Subsidiaries for such Reference Period as determined on a
consolidated basis in accordance with GAAP; provided, that if for any
Reference Period Gothic and its Restricted Subsidiaries has a federal, state,
local and foreign income tax benefit reported in accordance with GAAP, such
benefit shall be subtracted from the numerator of the Consolidated Interest
Coverage Ratio.
"Disinterested Director" means, with respect to an Affiliate Transaction or
series of related Affiliate Transactions, a member of the Board of Directors
of Gothic who has no financial interest, and whose employer has no financial
interest, in such Affiliate Transaction or series of related Affiliate
Transactions.
"Disqualified Stock" means any Capital Stock of Gothic or any Restricted
Subsidiary of Gothic which, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable), or upon the
happening of any event or with the passage of time, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the Maturity Date or which is exchangeable or convertible into debt
securities of Gothic or any Restricted Subsidiary of Gothic, except to the
extent that such exchange or conversion rights cannot be exercised prior to
the Maturity Date.
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"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Equity Offering" means any underwritten public offering of common stock of
Gothic pursuant to a registration statement (other than Form S-8) filed
pursuant to the Securities Act or any private placement of Capital Stock
(other than Disqualified Stock) of Gothic (other than to any Person who, prior
to such private placement, was a Subsidiary of Gothic or any other Person
controlled by Gothic) which offering or placement is consummated after the
Issue Date.
"Exchange Act" means the Securities and Exchange Act of 1934, as amended,
and the rules and regulations of the SEC thereunder.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as of the Issue Date.
"Guarantee" or "Guarantees" means any Guarantee issued by existing or future
Restricted Subsidiaries pursuant to Article X of the Indenture.
"Guarantor" means, (i) each of the Subsidiaries that becomes a guarantor of
the Notes in compliance with the provisions of Article X of the Indenture and
(ii) each of the Subsidiaries executing a supplemental indenture in which such
Subsidiary agrees to be bound by the terms of the Indenture; in each case
until such time, if any, as such Subsidiary is released from the Guarantee
pursuant to Section 10.04 of the Indenture.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indebtedness" means, without duplication, with respect to any Person, (a)
all obligations of such Person (i) in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such Person or
only to a portion thereof), (ii) evidenced by bonds, notes, debentures or
similar instruments, (iii) representing the balance deferred and unpaid of the
purchase price of any property or services (other than accounts payable or
other obligations arising in the ordinary course of business), (iv) evidenced
by bankers' acceptances or similar instruments issued or accepted by banks;
(v) for the payment of money relating to a Capitalized Lease Obligation, or
(vi) evidenced by a letter of credit or a reimbursement obligation of such
Person with respect to any letter of credit; (b) all net obligations of such
Person under interest rate swap obligations, commodity swap obligations and
foreign currency hedges, except to the extent such net obligations are taken
into account in the determination of future net revenues from proved oil and
gas reserves for purposes of the calculation of Adjusted Consolidated Net
Tangible Assets; (c) all liabilities of others of the kind described in the
preceding clauses (a) or (b) that such Person has guaranteed or that are
otherwise its legal liability (including, with respect to any Production
Payment, any warranties or guaranties of production or payment by such Person
with respect to such Production Payment but excluding other contractual
obligations of such Person with respect to such Production Payment); (d)
Indebtedness (as otherwise defined in this definition) of another Person
secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person, the amount of such obligation being
deemed to be the lesser of (1) the full amount of such obligations so secured
and (2) the fair market value of such asset, as determined in good faith by
the Board of Directors of such Person, which determination shall be evidenced
by a resolution of such Board; (e) with respect to such Person, the
liquidation preference or any mandatory redemption payment obligations in
respect of Disqualified Stock; (f) the aggregate preference in respect of
amounts payable on the issued and outstanding shares of Preferred Stock of any
of Gothic's Restricted Subsidiaries in the event of any voluntary or
involuntary liquidation, dissolution or winding up (excluding any such
preference attributable to such shares of Preferred Stock that are owned by
such Person or any of its Restricted Subsidiaries; provided, that if such
Person is Gothic, such exclusion shall be for such preference attributable to
such shares of Preferred Stock that are owned by Gothic or any of its
Restricted Subsidiaries); and (g) any and all deferrals, renewals, extensions,
refinancings and refundings (whether direct or indirect) of, or amendments,
modifications or supplements to, any liability of the kind described in any of
the
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preceding clauses (a), (b), (c), (d), (e), (f) or this clause (g), whether or
not between or among the same parties. Subject to clause (c) of the preceding
sentence, neither Dollar Denominated Production Payments nor Volumetric
Production Payments shall be deemed to be Indebtedness.
"Investment" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions, (ii) all
guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of assets, Indebtedness, Capital Stock or other securities of any other
Person (iv) investments in the Notes and (v) all other items that would be
classified as investments (including, without limitation, purchases of assets
outside the ordinary course of business) or advances on a balance sheet of
such Person prepared in accordance with GAAP.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to
sell, in each case securing obligations of such Person and any filing of or
agreement to give any financing statement under the Uniform Commercial Code
(or equivalent statute or statutes) of any jurisdiction).
"Make-Whole Amount" with respect to a Note means an amount equal to the
excess, if any, of (i) the present value of the remaining interest, premium,
and principal payment due on such Note as if such Note were redeemed on May 1,
2003, in each case computed using a discount rate equal to the Treasury Rate
plus 50 basis points, over (ii) the outstanding principal amount of such Note.
"Treasury Rate" is defined as the yield to maturity at the time of the
computation of United States Treasury securities with a constant maturity (as
compiled by and published in the most recent Federal Reserve Statistical
Release H.15(519), which has become publicly available at least two business
days prior to the date of the redemption notice or, if such Statistical
Release is no longer published, any publicly available source of similar
market data) most nearly equal (a) to the then remaining maturity of the Notes
assuming redemption of the Notes on May 1, 2003; provided, however, that if
the Make-Whole Average Life of such Note is not equal to the constant maturity
of the United States Treasury security for which a weekly average yield is
given, the Treasury Rate shall be obtained by linear interpolation (calculated
to the nearest one-twelfth of a year) from the weekly average yields of United
States Treasury securities for which such yields are given, except that if the
Make-Whole Average Life of such Notes is less than one year, the weekly
average yield on actually traded United States Treasury securities adjusted to
a constant maturity of one year shall be used. "Make-Whole Average Life" means
the number of years (calculated to the nearest one-twelfth of a year) between
the date of redemption and May 1, 2003.
"Make-Whole Price" means the greater of (i) the sum of (A)(1) prior to May
1, 2003, the Accreted Value of such Note or (2) thereafter, the outstanding
principal amount of such Note and (B) Make-Whole Amount of such Note, and (ii)
prior to May 1, 2003 the Accreted Value, and thereafter the outstanding
principal amount, of such Note.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than either (i) 10% from the end
of the immediately preceding fiscal quarter in the estimated discounted future
net revenue from proved oil and gas reserves of Gothic and its Restricted
Subsidiaries, or (ii) 20% from the end of the immediately preceding year in
the estimated discount future net revenue from proved oil and gas reserves of
Gothic and its Restricted Subsidiaries, in each case calculated in accordance
with clause (a)(i) of the definition of Adjusted Consolidated Net Tangible
Assets; provided, however, that the following will be excluded from the
calculation of Material Change: (a) any acquisitions of oil and gas reserves
made after the end of the immediately preceding year for which the discounted
future net revenues have been estimated by independent petroleum engineers
since the end of the preceding year and on which a report or reports exist and
(b) any disposition of properties existing at the beginning of the current
year, as the case may be, for purposes of clause (i) or clause (ii) above,
that have been disposed of as provided in the covenant captioned "--Certain
Covenants--Limitation on Sale of Assets."
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"Maturity Date" means May 1, 2006.
"Net Cash Proceeds" means (a) with respect to any Asset Sale or
Sale/Leaseback Transaction of any Person, an amount equal to aggregate cash
proceeds received (including any cash proceeds received by way of deferred
payment of principal pursuant to a note or installment receivable or
otherwise, but only as and when received, and excluding any other
consideration until such time as such consideration is converted into cash)
therefrom, in each case net of all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all federal, state or
local taxes required to be accrued as a liability as a consequence of such
Asset Sale or Sale/Leaseback Transaction and (b) in the case of any sale by
Gothic of securities pursuant to clauses (B) or (C) of section (iii) of the
covenant captioned "--Certain Covenants--Limitation on Restricted Payments,"
the amount of aggregate net cash proceeds received by Gothic, after payment of
expenses, commissions, discounts and any other transaction costs incurred in
connection therewith.
"Net Working Capital" means (i) all current assets of Gothic and its
Restricted Subsidiaries, minus (ii) all current liabilities of Gothic and its
Restricted Subsidiaries (including the current portion of gas balancing
liabilities), except current liabilities included in Indebtedness.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of a Person as to which (a) neither Gothic nor any Restricted
Subsidiary (i) provides credit support including any undertaking, agreement or
instrument which would constitute Indebtedness or (ii) is directly or
indirectly liable for such Indebtedness and (b) no default with respect to
such Indebtedness (including any rights which the holders thereof may have to
take enforcement action against such Person) would permit (upon notice, lapse
of time or both) any holder of any other Indebtedness (other than Non-Recourse
Indebtedness) of Gothic or its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity.
"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, production, processing (but not refining),
marketing, storage and transportation of, hydrocarbons, and other related
energy and natural resources businesses.
"Oil and Gas Securities" means the Voting Stock of a Person primarily
engaged in the Oil and Gas Business, provided that such Voting Stock shall
constitute a majority of the Voting Stock of such Person.
"Permitted Business Investments" means (i) Investments in assets used in the
Oil and Gas Business; (ii) the acquisition of Oil and Gas Securities; (iii)
the entry into operating agreements, joint ventures, processing agreements,
farm-out agreements, development agreements, area of mutual interest
agreements, contracts for the sale, transportation or exchange of oil and
natural gas, utilization agreements, pooling arrangements, joint bidding
agreements, service contracts, partnership agreements (whether general or
limited) or other similar or customary agreements, transactions, properties,
interests or arrangements, and Investments and expenditures in connection
therewith or pursuant thereto, in each case made or entered into in the
ordinary course of the Oil and Gas Business, excluding solely for purposes of
this clause (iii), however, Investments in corporations; (iv) the acquisition
of working interests, royalty interests or mineral leases relating to oil and
gas properties; (v) Investments by Gothic or any Wholly Owned Restricted
Subsidiary in any Person which immediately prior to the making of such
Investment, is a Wholly-Owned Restricted Subsidiary; (vi) Investments in
Gothic by any Wholly Owned Restricted Subsidiary; (vii) Investments permitted
under the covenant captioned "--Certain Covenants--Limitation on Sales of
Assets" and "--Limitations on Sale/Leaseback Transactions;" (viii) Investments
in any Person the consideration for which consists of Capital Stock (other
than Disqualified Stock); and (ix) Investments constituting obligations under
hedging arrangements described in clause (viii) of the definition of
"Permitted Indebtedness."
"Permitted Company Refinancing Indebtedness" means Indebtedness of Gothic
and its Restricted Subsidiaries, the net proceeds of which are used to renew,
extend, refinance, refund or repurchase outstanding Indebtedness of Gothic and
its Restricted Subsidiaries, provided that (i) if the Indebtedness (including
the Notes)
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being renewed, extended, refinanced, refunded or repurchased is pari passu
with or subordinated in right of payment to the Notes, then such Indebtedness
is pari passu or subordinated in right of payment to, as the case may be, the
Notes at least to the same extent as the Indebtedness being renewed, extended,
refinanced, refunded or repurchased, (ii) such Indebtedness is scheduled to
mature no earlier than the Indebtedness being renewed, extended, refinanced,
refunded or repurchased, and (iii) such Indebtedness has an Average Life at
the time such Indebtedness is incurred that is equal to or greater than the
Average Life of the Indebtedness being renewed, extended, refinanced, refunded
or repurchased; provided, further, that such Indebtedness (to the extent that
such Indebtedness constitutes Permitted Company Refinancing Indebtedness) is
in an aggregate principal amount (or, if such Indebtedness is issued at a
price less than the principal amount thereof, the aggregate amount of gross
proceeds therefrom is) not in excess of the aggregate principal amount then
outstanding of the Indebtedness being renewed, extended, refinanced, refunded
or repurchased (or if the Indebtedness being renewed, extended, refinanced,
refunded or repurchased was issued at a price less than the principal amount
thereof, then not in excess of the amount of liability in respect thereof
determined in accordance with GAAP).
"Permitted Financial Investments" means the following kinds of instruments
if, in the case of instruments referred to in clauses (i) through (iv) below,
on the date of purchase or other acquisition of any such instrument by Gothic
or any Subsidiary, the remaining term to maturity is not more than one year:
(i) readily marketable obligations issued or unconditionally guaranteed as to
principal of and interest on by the United States of America or by any agency
or authority controlled or supervised by and acting as an instrumentality of
the United States of America; (ii) repurchase obligations for instruments of
the type described in clause (i) for which delivery of the instrument is made
against payment; (iii) obligations (including, but not limited to, demand or
time deposits, bankers' acceptances and certificates of deposit) issued by a
depository institution or trust company incorporated or branch or subsidiary
of any such depository institution or trust company has, at the time of
Gothic's or such Subsidiary's investment therein or contractual commitment
providing for such investment, capital surplus or undivided profits (as of the
date of such institution's most recently published financial statements) in
excess of $500 million; (iv) commercial paper issued by any corporation, if
such commercial paper has, at the time of Gothic's or any Subsidiary's
investment therein or contractual commitment providing for such investment,
credit ratings of A-1 (or higher) by Standard & Poor's Ratings Services and P-
1 (or higher) by Moody's Investors Services, Inc.; and (v) money market mutual
or similar funds having assets in excess of $500 million.
"Permitted Indebtedness" means (i) Indebtedness of Gothic and its Restricted
Subsidiaries outstanding as of the Issue Date; (ii) Indebtedness of Gothic and
its Restricted Subsidiaries under a Bank Credit Facility as the same may be
amended, refinanced or replaced in a principal amount outstanding at any time
not to exceed a principal amount equal to the greater of (a) $25 million and
(b) 10% of Adjusted Consolidated Net Tangible Assets plus related accrued
interest and costs, less any Net Cash Proceeds applied pursuant to the
covenant "--Limitation on Sale of Assets" to repay or prepay such Indebtedness
that results in a permanent reduction in any revolving credit or other
commitment relating thereto or the maximum amount that may be borrowed
thereunder; (ii) other Indebtedness of Gothic and its Restricted Subsidiaries
in a principal amount not to exceed $10 million at any one time outstanding;
(iii) Non-Recourse Indebtedness; (iv) Indebtedness of Gothic to any Wholly
Owned Restricted Subsidiary of Gothic and Indebtedness of any Restricted
Subsidiary of Gothic to Gothic or another Wholly Owned Restricted Subsidiary
of Gothic; (v) Permitted Company Refinancing Indebtedness; (vi) Permitted
Subsidiary Refinancing Indebtedness; (vii) obligations under hedging
arrangements that Gothic and its Subsidiaries enter into in the ordinary
course of business for the purpose of protecting their production against
fluctuations in oil and natural gas prices; (viii) Indebtedness under the
Notes; (ix) Indebtedness of Gothic and its Restricted Subsidiaries under the
Senior Secured Notes; and (x) any interest rate hedging obligations so long as
the related Indebtedness constitutes the Notes, the Senior Secured Notes or
the Bank Credit Facility.
"Permitted Investments" means Permitted Business Investments and Permitted
Financial Investments.
"Permitted Liens" means (i) Liens outstanding as of the Issue Date; (ii)
Liens now or hereafter securing a Bank Credit Facility; provided, however,
such Liens are limited to securing Indebtedness in an amount not in excess of
that permitted to be incurred in accordance with clause (ii) of the definition
of Permitted Indebtedness;
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(iii) Liens now or hereafter securing any interest rate hedging obligations so
long as the related Indebtedness constitutes the Notes, the Senior Secured
Notes or the Bank Credit Facility(or any Refinancing Indebtedness of Gothic
and its Restricted Subsidiaries in respect thereof); (iv) Liens securing
Indebtedness, the proceeds of which are used to refinance secured Indebtedness
of Gothic or its Restricted Subsidiaries; provided, that such Liens extend to
or cover only the property or assets currently securing the Indebtedness being
refinanced; (v) Liens for taxes, assessments and governmental charges not yet
delinquent or being contested in good faith and for which adequate reserves
have been established to the extent required by GAAP; (vi) mechanics;
workmen's, materialmen's, operators' or similar Liens arising in the ordinary
course of business; (vii) Liens in connection with workers' compensation,
unemployment insurance or other social security, old age pension or public
liability obligations; (viii) Liens, deposits or pledges to secure the
performance of bids, tenders, contracts (other than contracts for the payment
of money), leases, public or statutory obligations, surety, stay, appeal
indemnity, performance or other similar bonds, or other similar obligations
arising in the ordinary course of business; (ix) survey exceptions,
encumbrances, easements or reservations of, or rights of others for, rights of
way, zoning or other restrictions as to the use of real properties, and minor
defects in title which, in the case of any of the foregoing, were not incurred
or created to secure the payment of borrowed money or the deferred purchase
price of property or services, and in the aggregate do not materially
adversely affect the value of such properties or materially impair use for the
purposes of which such properties are held by Gothic or any Restricted
Subsidiaries; (x) Liens on, or related to, properties to secure all or part of
the costs incurred in the ordinary course of business of exploration,
drilling, development or operation thereof, (xi) Liens on pipeline or pipeline
facilities which arise out of operation of law; (xii) judgment and attachment
Liens not giving rise to an Event of Default or Liens created by or existing
from any litigation or legal proceeding that are currently being contested in
good faith by appropriate proceedings and for which adequate reserves have
been made; (xiii) (a) Liens upon any property of any Person existing at the
time of acquisition thereof by Gothic or a Restricted Subsidiary; (b) Liens
upon any property of a Person existing at the time such Person is merged or
consolidated with Gothic or any Restricted Subsidiary or existing at the time
of the sale or transfer of any such property of such Person to Gothic or any
Restricted Subsidiary; or (c) Liens upon any property of a Person existing at
the time such Person becomes a Restricted Subsidiary; provided, that in each
case such Lien has not been created in contemplation of such sale, merger,
consolidation, transfer or acquisition, and provided that in each such case no
such Lien shall extend to or cover any property of Gothic or any Restricted
Subsidiary other than the property being acquired and improvements thereon;
(xiv) Liens on deposits to secure public or statutory obligations or in lieu
of surety or appeal bonds entered into in the ordinary course of business;
(xv) Liens in favor of collecting or payor banks having a right of setoff,
revocation, refund or chargeback with respect to money or instruments of
Gothic or any Subsidiary on deposit with or in possession of such bank; (xvi)
purchase money security interests granted in connection with the acquisition
of assets in the ordinary course of business and consistent with past
practices, provided, that (A) such Liens attach only to the property so
acquired with the purchase money indebtedness secured thereby and (B) such
Liens secure only Indebtedness that is not in excess of 100% of the purchase
price of such assets; (xvii) Liens reserved in oil and gas mineral leases for
bonus or rental payments and for compliance with the terms of such leases;
(xviii) Liens arising under partnership agreements, oil and gas leases, farm-
out agreements, division orders, contracts for the sale, purchase, exchange,
transportation or processing (but not refining) of oil, gas or other
hydrocarbons, unitization and pooling declarations and agreements, development
agreements, operating agreements, area of mutual interest agreements, and
other similar agreements which are customary in the Oil and Gas Business;
(xix) Liens securing obligations under hedging arrangements that Gothic enters
into in the ordinary course of business for the purpose of protecting its
production against fluctuations in oil and natural gas prices; (xx) Liens to
secure Dollar-Denominated Production Payments and Volumetric Production
Payments; and (xxi) Liens now or hereafter securing the Senior Secured Notes,
provided, however, such Liens are limited to securing Indebtedness in an
amount not in excess of that permitted to be incurred in accordance with
clause (ix) of the definition of Permitted Indebtedness.
"Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of any
Restricted Subsidiary, the net proceeds of which are used to renew, extend,
refinance, refund or repurchase outstanding Indebtedness of such Restricted
Subsidiary, provided that (i) such Indebtedness is scheduled to mature no
earlier than the Indebtedness being renewed, extended, refinanced, refunded or
repurchased, and (ii) such Indebtedness has an Average Life at
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the time such Indebtedness is incurred that is equal to or greater than the
Average Life of the Indebtedness being renewed, extended, refinanced, refunded
or repurchased, provided, further, that such Indebtedness (to the extent that
such Indebtedness constitutes Permitted Subsidiary Refinancing Indebtedness)
is in an aggregate principal amount (or, if such Indebtedness is issued at a
price less than the principal amount thereof, the aggregate amount of gross
proceeds therefrom is) not in excess of the aggregate principal amount then
outstanding of the Indebtedness being renewed, extended, refinanced, refunded
or repurchased (or if the Indebtedness being renewed, extended, refinanced,
refunded or repurchased was issued at a price less than the principal amount
thereof, then not in excess of the amount of liability in respect thereof
determined in accordance with GAAP); provided, however, that a Restricted
Subsidiary shall not incur refinancing Indebtedness to renew, extend,
refinance, refund or repurchase outstanding Indebtedness of another Subsidiary
unless such other Subsidiary is a Restricted Subsidiary.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, trust, estate, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Stock" as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated), which is preferred
as to the payment of dividends, or upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of Capital Stock
of any other class of such corporation.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Reference Period" means, with respect to any Person, the four full
consecutive fiscal quarters ended with the last full fiscal quarter for which
financial information is available immediately preceding any date upon which
any determination is to be made pursuant to the terms of the Notes or the
Indenture.
"Restricted Payment" means, with respect to any Person, any of the
following: (i) any dividend or other distribution in respect of such Person's
Capital Stock (other than (a) dividends or distributions payable solely in
Capital Stock (other than Disqualified Stock); (b) in the case of Restricted
Subsidiaries of Gothic, dividends or distributions payable to Gothic or to a
Restricted Subsidiary of Gothic) (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock, or any option,
warrant, or other right to acquire shares of Capital Stock, of Gothic or any
of its Restricted Subsidiaries (but excluding (a) any cashless exercise of
warrants or options or (b) payments in respect of cash elections or phantom
stock or similar awards under any director or employee benefit plan or
arrangements provided such payment is recorded as a compensation expense);
(iii) the making of any principal payment on, or the purchase, defeasance,
repurchase, redemption or other acquisition or retirement for value, prior to
any scheduled maturity, scheduled repayment or scheduled sinking fund payment,
of any Indebtedness which is subordinated in right of payment to the Notes;
and (iv) the making by such Person of any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of Gothic other than an
Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that, immediately
after giving effect to such designation, Gothic could incur at least $1.00 in
additional Indebtedness pursuant to the first paragraph of the covenant
captioned "--Certain Covenants Limitation on Incurrence of Additional
Indebtedness." Initially, GPC, the only Subsidiary of Gothic, shall be the
Restricted Subsidiary on the Issue Date.
"Sale Leaseback Transaction" means with respect to the company or any of its
Restricted Subsidiaries, any arrangement with any Person providing for the
leasing by Gothic or any of its Restricted Subsidiaries of any principal
property, acquired or placed into service more than one hundred eighty (180)
days prior to such arrangement, whereby such property has been or is to be
sold or transferred by Gothic or any of its Restricted Subsidiaries to such
Person.
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"Senior Indebtedness" means, as to a Person, Indebtedness of such Person
(whether outstanding on the Issue Date or thereafter incurred), unless such
Indebtedness is contractually subordinate or junior in right of payment of
principal, premium and interest to the Notes.
"Senior Indebtedness of a Guarantor" means any Indebtedness of such
Guarantor (whether outstanding on the date hereof or hereafter incurred),
unless such Indebtedness is contractually subordinate or junior in right of
payment of principal, premium and interest to the Guarantees.
"Subordinated Indebtedness of a Guarantor" means any Indebtedness of such
Guarantor (whether outstanding on the date hereof or hereafter incurred) which
is contractually subordinate or junior in right of payment of principal,
premium and interest to the Guarantees.
"Subordinated Indebtedness of Gothic" means any Indebtedness of Gothic
(whether outstanding on the date hereof or hereafter incurred) which is
contractually subordinate or junior in right of payment of principal, premium
and interest to the Notes.
"Subsidiary" means any subsidiary of Gothic. A subsidiary of any Person
means (i) a corporation a majority of whose Voting Stock is at the time,
directly or indirectly, owned by such Person, by one or more subsidiaries of
such Person or by such Person and one or more subsidiaries of such Person,
(ii) a partnership in which such Person or a subsidiary of such Person is, at
the date of determination, a general or limited partner of such partnership,
but only if such Person or its subsidiary is entitled to receive more than 50%
of the assets of such partnership upon its dissolution, or (iii) any other
Person (other than a corporation or partnership) in which such Person,
directly or indirectly, at the date of determination thereof, has (x) at least
a majority ownership interest or (y) the power to elect or direct the election
of a majority of the directors or other governing body of such Person.
"Unrestricted Subsidiary" means (i) any Subsidiary of an Unrestricted
Subsidiary or (ii) any Subsidiary of Gothic or of a Restricted Subsidiary that
is designated as an Unrestricted Subsidiary by a resolution adopted by the
Board of Directors in accordance with the requirements of the following
sentence; provided that in no event shall the assets owned by GPC on the Issue
Date (after giving effect to the Recapitalization) be transferred to or held
by an Unrestricted Subsidiary. Gothic may designate any Subsidiary of Gothic
or of a Restricted Subsidiary (including a newly acquired or newly formed
Subsidiary or any Restricted Subsidiary of Gothic), to be an Unrestricted
Subsidiary by a resolution of the Board of Directors of Gothic, as evidenced
by written notice thereof delivered to the Trustee, if after giving effect to
such designation, (i) Gothic could incur at least $1.00 of additional
Indebtedness pursuant to the first paragraph of the covenant captioned "--
Certain Covenants--Limitation on Incurrence of Additional Indebtedness," (ii)
Gothic could make an additional Restricted Payment of at least $1.00 pursuant
to the first paragraph of the covenant captioned "--Certain Covenants--
Limitation on Restricted Payments," (iii) such Subsidiary does not own or hold
any Capital Stock of, or any lien on any property of, Gothic or any Restricted
Subsidiary, (iv) such Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness, other than Non-Recourse Indebtedness, (v) neither
the Company nor any Restricted Subsidiary guarantees any Indebtedness of such
Subsidiary or otherwise directly or indirectly provides any credit support of
such Subsidiary, (vi) such Subsidiary is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation, (x) to subscribe for additional Capital Stock, or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results and (vii) no Default or
Event of Default would occur or be continuing after giving effect to such
designation. The Indenture will prohibit the designation of GPC as an
Unrestricted Subsidiary.
"U.S. Government Securities" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case
under clause (i) or (ii) are not callable or redeemable at the option of the
issuer thereof.
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"U.S. Legal Tender" means such coin or currency of the United States as at
the time of payment shall be legal tender for the payment of public and
private debts.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or only so long as no senior class of stock has voting power by
reason of contingency) to vote in the election of members of the Board of
Directors or other governing body of such person.
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all of
the Capital Stock (other than directors' qualifying shares if applicable) of
which is owned by Gothic or another Wholly Owned Restricted Subsidiary.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default by Gothic in the payment of principal of or premium, if any,
on the Notes when due and payable at maturity, upon repurchase pursuant to a
Change of Control Offer or a Net Proceeds Offer, upon acceleration or
otherwise; or
(ii) default by Gothic for 30 days in payment of any interest or
Liquidated Damages on the Notes; or
(iii) default by Gothic in the deposit of any optional redemption
payment; or
(iv) default by Gothic in the performance of the covenants discussed
under "--Certain Covenants--Limitation on Mergers and Consolidations;" or
(v) default by Gothic or any Restricted Subsidiary in the performance of
any other covenant or agreement in the Indenture (other than those
described in clauses (i) through (iv) above) or in the Pledge Agreement
which shall not have been remedied within thirty (30) days after written
notice by the Trustee or by the Holders of at least 25% in principal amount
of the Notes then outstanding; or
(vi) the occurrence and continuation beyond any grace period of any
default in the payment when due, whether by acceleration or otherwise, of
the principal of (premium, if any, on) and interest on any other
Indebtedness of Gothic or any Restricted Subsidiary of Gothic, or any other
default causing Acceleration of any Indebtedness of Gothic or any
Restricted Subsidiary having an outstanding principal amount of $10 million
or more, individually or in the aggregate; or
(vii) the commencement of proceedings, or the taking of any enforcement
action (including by way of set-off), by any holder of at least $10 million
in aggregate principal amount of Indebtedness (including any amounts owed
pursuant to a judgment or order) of Gothic or any Subsidiary (other than an
Unrestricted Subsidiary provided that neither Gothic nor any Restricted
Subsidiary is liable, directly or indirectly, for such Indebtedness), after
a default under such Indebtedness, to retain in satisfaction of such
Indebtedness or to collect or seize, dispose of or apply in satisfaction of
such Indebtedness, property or assets of Gothic or its Restricted
Subsidiaries having a fair market value in excess of $10 million
individually or in the aggregate; provided that if any such proceedings or
actions are terminated or rescinded, or such Indebtedness is repaid or
settled, such Event of Default under the Indenture and any consequential
acceleration of the Notes shall be automatically rescinded, so long as (a)
such rescission does not conflict with any judgment or decree and (b) the
holders of such Indebtedness shall not have applied any such property or
assets in satisfaction of such Indebtedness; or
(viii) the entry by a court of one or more judgments or orders for the
payment in cash or other assets of $10 million or more individually or in
the aggregate (net of applicable insurance coverage acknowledged in writing
by the insurance carrier) having been rendered against Gothic or any
Subsidiary (other than an
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Unrestricted Subsidiary; provided that neither Gothic nor any Restricted
Subsidiary is liable, directly or indirectly, for such judgment or order)
and such judgment or order shall continue unsatisfied and unstayed for a
period of sixty (60) days; or
(ix) the occurrence of certain events giving rise to ERISA liability; or
(x) certain events involving bankruptcy, insolvency or reorganization of
Gothic or any Restricted Subsidiary of Gothic; or
(xi) GPC shall cease for any reason to be a direct wholly-owned
subsidiary of Gothic; or
(xii) the failure of a Guarantee by a Guarantor to be in full force and
effect (other than a release of a Guarantee in accordance with the
Indenture), or the denial or disaffirmance by such entity thereof; or
(xiii) the Pledge Agreement ceases to be in full force and effect (other
than in accordance with its terms or the terms of the Indenture), or the
Pledge Agreement ceases to give the Trustee the Liens, rights, powers and
privileges purported to be created thereby, or the Pledge Agreement is
declared null and void, or Gothic denies any of its obligations under the
Pledge Agreement or any Collateral becomes subject to any Lien other than
the Liens created or permitted by the Pledge Agreement.
The Indenture provides that the Trustee may withhold notice to the Holders
of any Notes of any default (except in payment of principal of, or premium, if
any, or interest on the Notes) if the Trustee considers it in the interest of
the Holders of the Notes to do so.
The Indenture provides that if an Event of Default occurs and is continuing
with respect to the Indenture, the Trustee or the Holders of not less than 25%
in principal amount of the Notes outstanding may declare the principal (or
prior to May 1, 2002, the Accreted Value) of and premium, if any, and accrued
but unpaid interest will be due and payable immediately. If no Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of Gothic or any Subsidiary of Gothic occurs and is continuing, the principal
of, and premium, if any, and interest on all the Notes will become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any Holders of the Notes. The amount due and payable on the
acceleration of any Note will be equal to 100% of the principal amount of such
Notes, plus accrued interest to the date of payment. Under certain
circumstances, the Holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
The Indenture provides that no Holder of a Note may pursue any remedy under
the Indenture unless (i) the Trustee shall have received written notice of a
continuing Event of Default, (ii) the Trustee shall have received a request
from Holders of at least 25% in principal amount of the Notes to pursue such
remedy, (iii) the Trustee shall have been offered indemnity reasonably
satisfactory to it, (iv) the Trustee shall have failed to act for a period of
sixty (60) days after receipt of such notice, request and offer of indemnity
and (v) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Notes; provided, however, such provision does not
affect the right of a Holder of a Note to sue for enforcement of any overdue
payment thereon.
The Holders of a majority in principal amount of the Notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee under the
Indenture, subject to certain limitations specified in the Indenture. The
Indenture will require the annual filing by Gothic with the Trustee of a
written statement as to compliance with the covenants contained in the
Indenture.
MODIFICATION AND WAIVER
The Indenture provides that modifications and amendments to the Indenture or
the Notes may be made by Gothic, the Guarantors and the Trustee with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding; provided that no such modification or amendment may, without the
consent of the Holder of each Note then outstanding affected thereby; (i)
reduce the percentage of principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver; (ii) reduce the rate or change the time
for
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payment of interest, including defaulted interest, on any Note; (iii) reduce
the principal amount of any Note or change the Maturity Date of the Notes;
(iv) reduce the redemption price, including premium, if any, payable upon
redemption of any Note or change the time at which any Note may or shall be
redeemed; (v) reduce the repurchase price, including premium, if any, payable
upon the repurchase of any Note or change the time at which any Note may or
shall be repurchased; (vi) make any Note payable in money other than that
secured in the Note; (vii) impair the right to institute suit for the
enforcement of any payment of principal of, or premium, if any, or interest
on, any Note; (viii) make any change in the percentage of principal amount of
Notes necessary to waive compliance with certain provisions of the Indenture;
or (ix) waive a continuing Default or Event of Default in the payment of
principal of, premium, if any, or interest on the Notes. The Indenture will
provide that modifications and amendments of the Indenture may be made by
Gothic and the Trustee without the consent of any holders of Notes in certain
limited circumstances, including (a) to cure any ambiguity, omission, defect
or inconsistency, (b) to provide for the assumption of the obligations of
Gothic under the Indenture upon the merger, consolidation or sale or other
disposition of all or substantially all of the assets of Gothic, (c) to comply
with any requirement of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act of 1939 or (d) to
make any change that would provide any additional benefit to the Holders or
that does not adversely affect the rights of any Holder of Notes in any
material respect.
The Indenture provides that neither Gothic nor any of its Subsidiaries
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fees or otherwise, to any Holder of any Notes for
or as an inducement to any consent, waiver or amendment of any terms or
provisions of the Notes or the Indenture unless such consideration is offered
to be paid or agreed to be paid to all Holders of the Notes which so consent,
waive or agree to amend in the time period set forth in any solicitation
documents relating to such consent.
The Indenture provides that the Holders of a majority in aggregate principal
amount of the Notes then outstanding may waive any past default under the
Indenture, except a default in the payment of principal, premium, if any, or
interest.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Gothic may, at its option and at any time, elect to have its obligations
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
Legal Defeasance means that Gothic will be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Notes, except for (i)
the rights of Holders of such Notes to receive payments in respect of the
principal of, premium and Liquidated Damages, if any, and interest on such
Notes when such payments are due, (ii) Gothic's obligations with respect to
such Notes concerning the issuance of temporary Notes, transfers and exchanges
of Notes, replacement of mutilated, destroyed, lost or stolen Notes, the
maintenance of an office or agency where the Notes may be surrendered for
transfer or exchange or presented for payment, and duties of paying agents,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
Gothic's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, Gothic may, at its option and at any
time, elect to have the obligations of Gothic released with respect to certain
covenants described under "--Certain Covenants" ("Covenant Defeasance"), and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment events) described
under "--Events of Default" will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Gothic must irrevocably deposit with the Trustee or other qualifying Trustee,
in trust, for the benefit of the Holders of the Notes, cash in U.S. Legal
Tender, U.S. Government Securities, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium and
Liquidated Damages, if any, and interest on the outstanding Notes on the
Maturity Date or on the applicable mandatory redemption date, as the case may
be, of such principal or installment of principal, premium, if any, or
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interest; (ii) in the case of Legal Defeasance, Gothic must deliver to the
Trustee an opinion of counsel reasonably acceptable to the Trustee confirming
that (A) Gothic has received from or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture, there has
been a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, Gothic shall have
delivered to the Trustee an opinion of counsel reasonably acceptable to the
Trustee to the effect that the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under any other material
agreement or instrument to which Gothic is a party or by which Gothic is
bound; (vi) Gothic shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by Gothic with the intent of
preferring the Holders of Notes over other creditors of Gothic or with the
intent of defeating, hindering, delaying or defrauding creditors of Gothic or
others; and (vii) Gothic shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasances have been complied with.
GOVERNING LAW
The Indenture provides that it will be governed by, and constituted in
accordance with, the laws of the State of New York, but without giving effect
to principles of conflicts of law to the extent that the application of the
law of another jurisdiction would be required thereby.
THE TRUSTEE
The Bank of New York is the Trustee under the Indenture. Its address is 101
Barclay Street, New York, New York 10286. The Company has also appointed the
Trustee as the initial Registrar, Transfer Agent and Paying Agent under the
Indenture. The Trustee is also the trustee under the Senior Secured Note
Indenture.
The Trustee is permitted to become an owner or pledgee of Notes and may
otherwise deal with the Company or its Subsidiaries or Affiliates with the
same rights it would have if it were not Trustee. If, however, the Trustee
acquires any conflicting interest (as defined in the Trust Indenture Act of
1939), it must eliminate such conflict or resign. The Indenture will provide
that in case an Event of Default shall occur (and be continuing), the Trustee
will be required to use the degree of care and skill of a prudent person in
the conduct of such person's own affairs. The Trustee will be under no
obligation to exercise any of its powers under the Indenture at the request of
any of the Holders of the Notes, unless such Holders have offered the Trustee
indemnity reasonably satisfactory to it.
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BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
GENERAL
The Notes which are sold to QIBs initially will be in the form of one or
more registered global notes without interest coupons (collectively, the "U.S.
Global Notes"). Upon issuance, the U.S. Global Notes will be deposited with
the Trustee, as custodian for The Depository Trust Company ("DTC"), in New
York, New York, and registered in the name of DTC or its nominee, in each case
for credit to the accounts of DTC's Direct Participants and Indirect
Participants (as defined below). The Notes which are sold in offshore
transactions in reliance on Regulation S, if any, initially will be in the
form of one or more registered, global book-entry notes without interest
coupons (the "Reg S Global Notes"). The Reg S Global Notes will be deposited
with the Trustee, as custodian for DTC, in New York, New York, and registered
in the name of a nominee of DTC for credit to the accounts of Indirect
Participants at the Euroclear System ("Euroclear") and Cedel Bank, societe
anonyme ("CEDEL"). During the 40-day period commencing on the date after the
later of the offering date and the Issue Date of the Notes (the "40-Day
Restricted Period"), beneficial interests in the Reg S Global Notes may be
held only through Euroclear or CEDEL and, pursuant to DTC's procedures,
Indirect Participants that hold a beneficial interest in the Reg S Global Note
will not be able to transfer such interest to a Person that takes delivery
thereof in the form of an interest in the U.S. Global Notes. After the 40-Day
Restricted Period, (i) beneficial interests in the Reg S Global Notes may be
transferred to a Person that takes delivery in the form of an interest in the
U.S. Global Notes and (ii) beneficial. interest in the U.S. Global Notes may
be transferred to a Person that takes delivery in the form of an interest in
the Reg S Global Notes, provided, in each case, that the certification
requirements described below are complied with. See "--Transfers of Interests
in One Global Note for Interests in Another Global Note" below. All registered
global notes are referred to herein collectively as "Global Notes".
Beneficial interests in all Global Notes and all Certificated Notes (as
defined below), if any, will be subject to certain restrictions on transfer
and will bear a restrictive legend as described under "Notice to Investors."
In addition, transfer of beneficial interests in any Global Notes will be
subject to the applicable rules and procedures of DTC and its Direct
Participants or Indirect Participants (including, if applicable, those of
Euroclear and CEDEL), which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Notes in certificated form in certain limited circumstances. See
"--Transfers Of Interests in Global Notes for Certificated Notes" below.
Initially, the Trustee will act as Paying Agent and Registrar. The Notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITARY PROCEDURES
DTC has advised Gothic that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through
electronic book-entry changes in accounts of Participants. The Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations, including Euroclear and
CEDEL. Access to DTC's system is also available to other entities that clear
through or maintain a direct or indirect custodial relationship with a Direct
Participant (collectively, the "Indirect Participants"). DTC may hold
securities beneficially owned by other Persons only through the Direct
Participants or Indirect Participants and such other Persons' ownership
interest and transfer of ownership interest will be recorded only on the
records of the Direct Participant and/or Indirect Participant, and not on the
records maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Purchasers with portions of the
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principal amount of the Global Notes allocated by the Purchasers to such
Direct Participants, and (ii) DTC will maintain records of the ownership
interests of such Direct Participants in the Global Notes and the transfer of
ownership interests by and between Direct Participants. DTC will not maintain
records of the ownership interests of, or the transfer of ownership interests
by and between, Indirect Participants or other owners of beneficial interests
in the Global Notes. Direct Participants and Indirect Participants must
maintain their own records of the ownership interests of, and the transfer of
ownership interests by and between, Indirect Participants and other owners of
beneficial interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. Investors in the Reg S
Global Notes may hold their interests therein directly through Euroclear or
CEDEL or indirectly through organizations that are participants in Euroclear
or Cedel. After the expiration of the 40-Day Restricted Period (but not
earlier), investors may also hold interests the Reg S Global Notes through
organizations other than Euroclear and CEDEL that are Direct Participants in
the DTC system. Morgan Guaranty Trust Company of New York, Brussels office is
the operator and depositary of Euroclear and CitiBank, N.A. is the operator
and depositary of CEDEL (each a "Nominee" of Euroclear or CEDEL,
respectively). Therefore, they will each be recorded on DTC's records as the
Holders of all ownership interests held by them on behalf of Euroclear and
CEDEL, respectively. Euroclear and CEDEL will maintain on their records the
ownership interests, and transfers of ownership interests by and between,
their own customers' securities accounts. DTC will not maintain records of the
ownership interests of, or the transfer of ownership interests by and between,
customers of Euroclear or CEDEL. All ownership interests in any Global Notes,
including those of customers' securities accounts held through Euroclear or
CEDEL, may be subject to the procedures and requirements of DTC.
The laws of some states require that certain Persons take physical delivery
in definitive, certificated form of securities that they own. This may limit
or curtail the ability to transfer beneficial interests in a Global Note to
such Persons. Because DTC can act only on behalf of Direct Participants, which
in turn act on behalf of Indirect Participants and others, the ability or a
Person having a beneficial interest in a Global Note to pledge such interest
to Persons or entities that are not Direct Participants in DTC or to otherwise
take actions in respect of such interests, may be affected by the lack of
physical certificates evidencing such interests. For certain other
restrictions on the transferability of the Notes, see "--Transfers of
Interests in Global Notes for Certificated Notes" below.
EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL
NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY
OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS
OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, Gothic and the Trustee will treat the
Persons in whose names the Notes are registered (including Notes represented
by Global Notes) as the owners thereof for the purpose of receiving payments
and for any and all other purposes whatsoever. Payments in respect of the
principal of, and premium and Liquidated Damages, if any, and interest on
Global Notes registered in the name of DTC or its nominee will be payable by
the Trustee to DTC or its nominee as the registered Holder under the
Indenture. Consequently, neither Gothic, the Trustee nor any agent of Gothic
or the Trustee has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Direct Participant's or Indirect Participant's
records relating to or Payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
of DTC's records or any Direct Participant's or Indirect Participant's records
relating to the beneficial ownership interests in any Global Notes or (ii) any
other matter relating to the actions and practices of DTC or any of its Direct
Participants or Indirect Participants.
DTC has advised Gothic that its current payment practice (for payments of
principal, interest and the like) with respect to securities such as the Notes
is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to
the
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beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC,
the Trustee, or Gothic. Neither Gothic nor the Trustee will be liable for any
delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes, and Gothic and the Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee as the registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect
Participants who hold an interest in the Notes through Euroclear or CEDEL) who
hold an interest through a Direct Participant will be effected in accordance
with the procedures of such Direct Participants but generally will settle in
immediately available funds. Transfers between and among Indirect Participants
who hold interests in the Notes through Euroclear and CEDEL will be effected
in the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with transfer restrictions applicable to the Notes
described herein, cross-market transfers between Direct Participants will, in
DTC, on the one hand, and Indirect Participants who hold interests in the
Notes through Euroclear and CEDEL on the other hand, be effected by Euroclear
and CEDEL's respective Nominee through DTC in accordance with DTC's rules on
behalf of Euroclear and CEDEL; provided, that delivery of instructions
relating to cross-market transactions must be made directly to Euroclear or
CEDEL, as the case may be, by the counterparty in accordance with the rules
and procedures of Euroclear or CEDEL and within their established deadlines
(Brussels time for Euroclear and UK time for CEDEL). Indirect Participants who
hold interests in the Notes through Euroclear and CEDEL may not deliver
instructions directly to Euroclear's or CEDEL's Nominee. Euroclear or CEDEL
will, if the transaction meets its settlement requirements, deliver
instructions to its respective Nominee to deliver or receive interests on
Euroclear's or CEDEL's behalf in the relevant Global Note in DTC, and make or
receive payment in accordance with normal procedures for same-day fund
settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will
be credited, and any such crediting will be reported to Euroclear or CEDEL
during the European business day immediately following the settlement date of
DTC in New York. Although recorded in DTC's accounting records as of DTC's
settlement date in New York, Euroclear and CEDEL customers will not have
access to the cash amount credited to their accounts as a result of a sale of
an interest in a Reg S Global Note to a DTC Participant until the European
business day for Euroclear or CEDEL immediately following DTC's settlement
date.
DTC has advised Gothic that it will take any action permitted to be taken by
a Holder of Notes only at the direction of one or more Direct Participants to
whose account interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of the Notes as to which
such Direct Participant or Direct Participants has or have given direction.
However if there is an Event of Default under the Notes, DTC reserves the
right to exchange Global Notes (without the direction of one or more of its
Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Reg S Global Notes and the U.S.
Global Notes among Direct Participants, Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither Gothic nor the Trustee
will have any responsibility for the performance by DTC, Euroclear or CEDEL or
their respective Direct Participants and Indirect Participants of their
respective obligations under the rules and procedures governing any of their
operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that Gothic believes
to be reliable, but Gothic takes no responsibility for the accuracy thereof.
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TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL
NOTE
Prior to the expiration of the 40-Day Restricted Period, an Indirect
Participant who holds an interest in the Reg S Global Note through Euroclear
or CEDEL will not be permitted to transfer its interest to a U.S. Person who
takes delivery in the form of an interest in U.S. Global Notes. After the
expiration of the 40-Day Restricted Period, an Indirect Participant who holds
an interest in Reg S Global Notes will be permitted to transfer its interest
to a U.S. Person who takes delivery in the form of an interest in U.S. Global
Notes only upon receipt by the Trustee of a written certification from the
transferor to the effect that such transfer is being made in accordance with
the restrictions on transfer set forth under "Notice to Investors" and set
forth in the legend printed on the Reg S Global Notes.
Prior to the expiration of the 40-Day Restricted period, a Direct
Participant or Indirect Participant who holds an interest in the U.S. Global
Note will not be permitted to transfer its interests to any Person that takes
delivery thereof in the form of an interest in the Reg S Global Notes. After
the expiration of the 40-Day Restricted Period, a Direct Participant or
Indirect Participant who holds an interest in U.S. Global Notes may transfer
its interest to a Person who takes delivery in the form of an interest in Reg
S Global Notes only upon receipt by the Trustee of a written certification
from the transferor to the effect that such transfer is being made in
accordance with Rule 904 of Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection
with such transfer, appropriate adjustments will be made to reflect a decrease
in the principal amount of one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in one Global Note that is transferred to a Person who takes delivery
in the form of the other Global Note will, upon transfer, cease to be an
interest in such first Global Note and become an interest in such other Global
Note and, accordingly, will thereafter be subject to all transfer restrictions
and other procedures applicable to beneficial interests in such other Global
Note for as long as it remains such an interest.
TRANSFERS OF INTEREST IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC
(x) notifies Gothic that it is unwilling or unable to continue as depositary
for the Global Notes and Gothic thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) Gothic, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Certificated Notes or (iii)
there shall have occurred and be continuing an Event of Default with respect
to the Notes. In any such case, Gothic will notify the Trustee in writing
that, upon surrender by the Direct Participants and Indirect Participants of
their interest in such Global Note, Certificated Notes will be issued to each
Person that such Direct Participants and Indirect Participants and the DTC
identify as being the beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct Participant or
Indirect Participant may be exchanged for Certificated Notes upon request to
DTC, by such Direct Participant (for itself or on behalf of an Indirect
Participant), through the Trustee in accordance with customary DTC procedures.
Certificated Notes delivered in exchange for any beneficial interest in any
Global Note will be registered in the names, and issued in any approved
denominations, requested by DTC on behalf of such Direct Participants or
Indirect Participants (in accordance with DTC's customary procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors" unless Gothic
determines otherwise in compliance with applicable law.
Neither Gothic nor the Trustee will be liable for any delay by the Holder of
the Global Notes or DTC in identifying the beneficial owners of Notes, and
Gothic and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Holder of the Global Notes or DTC for all
purposes.
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TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer it has complied
with the restrictions on transfer described under "Notice to Investors."
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
same day funds to the accounts specified by the Holder of interests in such
Global Note. With respect to Certificated Notes, Gothic will make all payments
of principal, premium, if any, interest and Liquidated Damages, if any, by
wire transfer of immediately available same day funds to the accounts
specified by the Holders thereof or, if no such account is specified, by
mailing a check to each such Holder's registered address. Gothic expects that
secondary trading in Certificated Notes will also be settled in immediately
available funds.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material United States federal income
tax considerations relating to the purchase, ownership and disposition of the
Notes and Exchange Notes that may be received for the Outstanding Notes, but
does not purport to be a complete analysis of all the potential tax
considerations relating thereto. This summary is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), existing, temporary and
proposed Treasury Regulations, Internal Revenue Service ("IRS") rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations.
This summary does not deal with all aspects of U.S. federal income taxation
that may be relevant to particular investors in light of their personal
investment circumstances (for example, to persons holding the Notes, Warrants,
or Units as part of a "conversion" transaction or as a part of a "hedge" or
"hedging" transaction, "integrated" transaction, or as a position in a
"straddle" for U.S. federal income tax purposes), nor does it discuss U.S.
federal income tax considerations applicable to certain types of investors
subject to special treatment under the U.S. federal income tax laws (for
example, insurance companies, tax-exempt organizations, financial
institutions, traders or dealers in securities or currencies or persons that
have a "functional currency" other than the U.S. dollar, and taxpayers subject
to the alternative minimum tax).
In addition, this summary does not consider the effect of any foreign,
state, local, gift, estate or other tax laws that may be applicable to a
particular investor. Gothic has not sought any ruling from the IRS with
respect to the statements made and the conclusions reached in the following
summary, and there can be no assurance that the IRS will agree with such
statements and conclusions.
This summary deals only with holders ("Holders") that will hold Notes or
Exchange Notes as "capital assets" (within the meaning of Section 1221 of the
Code).
EACH POTENTIAL INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE
PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING, AND DISPOSING OF THE NOTES
AND EXCHANGE NOTES, INCLUDING THE APPLICABILITY OF STATE, LOCAL, GIFT, ESTATE,
AND FOREIGN TAX LAWS.
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Holder of Notes and Exchange Notes that is (i) a
citizen or resident (as defined in Section 7701(b) of the Code) of the United
States, or any state thereof, (ii) a corporation or partnership created or
organized under the laws of the United States, or any political subdivision
thereof (including the District of Columbia), (iii) an estate the income of
which is subject to U.S. federal income tax regardless of its source, (iv) a
trust whose administration is subject to the primary supervision of a U.S.
court and that has one or more U.S. persons with the authority to control all
substantial decisions of the trust, or (v) a person whose worldwide income or
gain is otherwise subject to U.S. federal income taxation on a net income
basis (a "U.S. Holder").
NOTES
The following discussion assumes that the form of the Notes will be
respected for U.S. federal income tax purposes.
Original Issue Discount. The Notes will be issued with original issue
discount ("OID") for U.S. federal income tax purposes. OID is the excess of
the "stated redemption price at maturity" of a Note over its "issue price."
The "stated redemption price at maturity" of a Note is the sum of all
payments provided by the instrument, whether denominated as interest or
principal, required to be made on the Note other than payments of "qualified
stated interest." Qualified stated interest is stated interest that is
unconditionally payable at least annually at a single fixed rate that
appropriately takes into account the length of the interval between payments.
Because
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interest is not payable on the Notes until November 1, 2002, none of the
interest payments on the Notes will constitute qualified stated interest. All
stated interest will be included in a Note's stated redemption price at
maturity.
Each Note will be treated by the IRS as having been issued as part of an
"investment unit" consisting of the Note and the associated Warrants. The
"issue price" of the Unit will be the first price at which a substantial
amount of the Units are sold to the public (excluding sales to bond houses,
brokers, or similar persons or organizations acting in the capacity as
underwriters, placement agents, or wholesalers). The issue price of a Unit
will be allocated by Gothic between the Note and the associated Warrants on
the basis of their relative fair market values. A U.S. Holder may make a
different allocation, provided that it explicitly discloses to the IRS that
its allocation is different from the one made by Gothic. Such disclosure must
be made on a form prescribed by the IRS and must be attached to the U.S.
Holder's timely filed federal income tax return for the taxable year that
includes the acquisition date of the Unit. In all other instances, the
allocation to be made by Gothic will be binding on Gothic and all U.S.
Holders. The allocation is not, however, binding on the IRS, and it is
possible that the IRS will assert that a different allocation is appropriate.
If such an assertion were made successfully, the amount of OID associated with
the Notes would be increased or decreased accordingly.
All Notes acquired by a particular U.S. Holder in the Offering will be
treated as a single debt instrument for purposes of applying the OID rules. A
U.S. Holder is required to include OID in gross income as ordinary income as
it accrues under a constant yield method in advance of receipt of the cash
payments attributable to such income, regardless of such U.S. Holder's regular
method of accounting. A U.S. Holder will not be required to report separately
as taxable income actual distributions of stated interest with respect to the
Notes; such stated interest will be included in income as OID.
The amount of income includable in income by a U.S. Holder is the sum of the
daily portions of OID for each day during the taxable year on which such
holder held such Note. The "daily portion" is determined by allocating the OID
for an accrual period equally to each day in that accrual period. The "accrual
period" for a Note may be of any length and may vary in length over the term
of a Note, provided that each accrual period is no longer than one year and
each scheduled payment of principal or interest occurs either on the first or
final day of an accrual period. The amount of OID for an accrual period is
generally equal to the product of the Note's adjusted issue price at the
beginning of such accrual period and its yield to maturity (determined on the
basis of a compounding assumption that reflects the length of the accrual
period). The "adjusted issue price" of a Note at the beginning of any accrual
period equals the issue price of the Note increased by the amount of all
previously accrued OID (disregarding any reduction on account of acquisition,
premium, described below) and reduced by the amount of all prior cash payments
on the Note. The "yield to maturity" of a Note is the interest rate that, when
used in computing the present value of all payments to be made on a Note,
produces an amount equal to the issue price of the Note. Under these rules, a
U.S. Holder generally will have to include in income increasingly greater
amounts of OID in successive accrual periods.
Because there is only a remote possibility that there will be a Registration
Default in connection with the Exchange Offer Registration Statement, Gothic
believes that Liquidated Damages payable to U.S. Holders will not be treated
as OID and that any Liquidated Damages should be taken into account by each
U.S. Holder as ordinary income only to the extent and at such time that such
amounts become fixed or are actually paid, in accordance with each U.S.
Holder's method of accounting for U.S. federal income tax purposes.
Acquisition Premium. A U.S. Holder who purchases a Note for an amount
greater than its adjusted issue price as of the purchase date but less than or
equal to its stated redemption price at maturity will be considered to have
purchased the Note at an "acquisition premium." The amount of OID that such
holder must include in its gross income with respect to such Note for any
taxable year is generally reduced by the amount of acquisition premium
properly allocable to such year.
Bond Premium. If a U.S. Holder purchases a Note for an amount greater than
its stated redemption price at maturity, the Note has "bond premium." A U.S.
Holder may elect to amortize such bond premium over the remaining term of the
Note (or, if it results in a smaller amount of amortizable bond premium, until
an earlier call date).
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If bond premium is amortized, the amount of interest that must be included
in the U.S. Holder's income for each period ending on an interest payment date
or at the stated maturity, as the case may be, will be reduced by the portion
of premium allocable to such period based on the Note's yield to maturity. If
such an election to amortize bond premium is not made, a U.S. Holder must
include the full amount of each interest payment in income in accordance with
its regular method of accounting and will receive a tax benefit from the
premium only in computing such U.S. Holder's gain or loss upon the sale or
other disposition or payment of the principal amount of the Note.
An election to amortize premium will apply to amortizable bond premium on
all Notes and other debt instruments, the interest on which is includable in
the U.S. Holder's gross income, held at the beginning of the U.S. Holder's
first taxable year to which the election applies or that are thereafter
acquired and may be revoked only with the consent of the IRS.
Market Discount. If a U.S. Holder purchases a Note (other than at original
issue) for an amount that is less than its adjusted issue price as of the
purchase date, the amount of the difference generally will be treated as
"market discount," unless such difference is less than a specified de minimis
amount. With certain exceptions, a U.S. Holder will be required to treat any
gain realized on the sale, exchange, redemption, retirement, or other
disposition (including by gift) of a Note purchased with market discount as
ordinary income (rather than capital gain) to the extent of the accrued market
discount that has not previously been included in income. In addition, a U.S.
Holder may be required to defer, until the maturity date of the Note or its
earlier disposition in a taxable transaction, the deduction of a portion of
the interest expense on any indebtedness incurred or continued to purchase or
carry such Note.
Any market discount will accrue on a straight line basis during the period
from the date of acquisition to the maturity date of the Note, unless the U.S.
Holder elects to accrue market discount on a constant interest method. A U.S.
Holder of a Note may elect to include market discount in income currently as
it accrues (under either the straight line or constant interest method). This
election, once made, applies to all market discount obligations acquired in or
after the first taxable year to which the election applies and may not be
revoked without IRS consent. If a U.S. Holder makes such an election, the rule
referenced above with respect to the deferral of interest deductions on debt
incurred or maintained to purchase or carry such debt instruments would not
apply.
Election to Treat All Interest as OID. A U.S. Holder of a Note may elect,
subject to certain limitations, to include all interest that accrues on the
Note in gross income on a constant yield basis. For purposes of this election,
interest includes stated interest, OID, market discount, de minimis market
discount and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium.
In applying the constant yield method to a Note with respect to which this
election has been made, the issue price of a Note will equal the U.S. Holder's
basis in the Note immediately after its acquisition and the issue date of the
Note will be the date of its acquisition by the U.S. Holder. This election
generally will apply only to the Note with respect to which it is made and may
not be revoked without IRS consent.
If the election to apply the constant yield method to all interest on a Note
is made with respect to a Note on which there is market discount, the electing
U.S. Holder will be treated as having made the election described above under
"--Market Discount" to include market discount in income currently over the
life of all debt instruments held or thereafter acquired by such holder.
Applicable High Yield Discount Obligations. If, as is expected, the Notes
constitute "applicable high yield discount obligations," the OID on the Notes
will not be deductible by Gothic until paid. An "applicable high yield
discount obligation" is any debt instrument that (i) has a maturity date that
is more than five years from the date of issue, (ii) has a yield to maturity
that equals or exceeds the applicable federal rate ("AFR") for the calendar
month in which the obligation is issued plus five percentage points and (iii)
has "significant original issue discount." The AFR is an interest rate,
announced monthly by the IRS, that is based on the yield of debt obligations
issued by the U.S. Treasury. A debt instrument generally has "significant
original issue discount" if,
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as of the close of any accrual period ending more than five years after the
issue date, the excess of the interest (including OID) that has accrued on the
obligation over the interest (including OID) that is required to be paid
thereunder exceeds the product of the issue price of the instrument and its
yield to maturity.
In addition, if the yield to maturity of the Notes exceeds the AFR plus six
percentage points, as is expected, a ratable portion of Gothic's deduction for
OID (the "Disqualified OID") (based on the portion of the yield to maturity
that exceeds the AFR plus six percentage points) will not be deductible by
Gothic. For purposes of the dividends' received deduction under Section 243 of
the Code, the Disqualified OID will be treated as a dividend to the extent of
Gothic's current and accumulated earnings and profits.
Sale, Exchange, and Retirement of Notes. A U.S. Holder's adjusted tax basis
in a Note generally will equal such holder's cost for the Note, increased by
any amounts included in income as OID, market discount or de minimis market
discount that the U.S. Holder has previously elected to accrue in gross income
on an annual basis and reduced by any amortized premium that the U.S. Holder
has previously elected to offset against interest on the Note and any cash
payments in respect of the Note. Subject to the discussion of the Exchange
Offer below, upon the sale, exchange, redemption, retirement, or other
disposition of a Note, a U.S. Holder generally will recognize gain or loss
equal to the difference between the amount realized on such disposition and
the U.S. Holder's adjusted tax basis in the Note. Because Gothic believes that
an intention to call the Notes prior to their maturity does not exist at the
time of their original issue as an agreement or understanding between Gothic
and the original holders of a substantial amount of the Notes, gain or loss
recognized by a U.S. Holder on the disposition of a Note will be capital gain
or loss, except as described above regarding market discount. Such gain or
loss will, in the case of individuals, be long-term capital gain or loss
subject to a maximum rate of 20% if the Note has been held for more than
eighteen months at the time of such disposition. Net capital gain will be
taxed at a rate of 28% for a Note held for 18 months or less but for more than
one year. Special rules (and generally lower maximum rates) apply to
individuals who are not in the highest marginal tax bracket.
THE EXCHANGE OFFER
The exchange of Notes for Exchange Notes pursuant to the Exchange Offer
should not constitute a significant modification of the terms of the Notes
and, accordingly, such exchange should not be treated as a taxable event for
U.S. federal income tax purposes. Therefore, such exchange should have no U.S.
federal income tax consequences to U.S. Holders of Notes, and each U.S. Holder
of Exchange Notes will continue to be required to include OID in gross income
as ordinary income as it accrues in advance of receipt of the cash payments
attributable to such income, regardless of such U.S. Holder's regular method
of accounting.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Gothic is required to provide the IRS and U.S. Holders of record other than
corporations and other exempt holders with information returns each year
stating the amount of OID that accrued on the Notes during the calendar year.
This information will be based on the adjusted issue price of the Notes as if
the U.S. Holder were the original holder of the Note who purchased it at the
original issue price. Therefore, a U.S. Holder who purchases Notes for an
amount other than the original issue price will be required to determine for
itself the amount of OID with respect to the Notes it holds.
In general, information reporting requirements may apply to principal and
interest payments on a Note, to dividend payments on Warrant Shares, and to
payments of the proceeds of a sale of a Note, Warrant, or Warrant Shares. A
31% backup withholding tax may apply to such payments unless the U.S. Holder
(i) is a corporation or comes within certain other exempt categories and, when
required, demonstrates its exemption, or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. Holder of a Note who does not provide Gothic with
its correct taxpayer identification number may be subject to penalties imposed
by the IRS.
105
<PAGE>
Any amounts withheld under the backup withholding rules from a payment to a
U.S. Holder will be allowed as a credit against such holder's U.S. federal
income tax, provided that the required information is furnished to the IRS.
106
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such Exchange Notes. The Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for
Outstanding Notes where such Outstanding Notes were acquired as a result of
market-making activities or other trading activities. Gothic has agreed that
for a period of one year after the date the registration statement, of which
this Prospectus forms a part, is declared effective, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
Gothic will not receive any proceeds from any sales of the Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal for the Exchange Offer states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 90 days after the Expiration Date, Gothic will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. Gothic has agreed to pay certain expenses incident to the
Exchange Offer, other than commissions or concessions of any brokers or
dealers, and will indemnify the holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from Gothic of the happening of any event which makes
any statement in the Prospectus untrue in any material respect or which
request the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice Gothic agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until Gothic has amended or supplemented the Prospectus to correct
such misstatement or omission and has furnished copies of the amended or
supplemental Prospectus to such broker-dealer. If Gothic shall give any such
notice to suspend the use of the Prospectus, it shall extend the 90-day period
referred to above by the number of days during the period from and including
the date of the giving of such notice to and including when broker-dealers
shall have received copies of the supplemented or amended Prospectus necessary
to permit resales of the Exchange Notes.
LEGAL MATTERS
Certain legal matters will be passed upon for Gothic by William S. Clarke,
P.A., Princeton, New Jersey.
107
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated balance sheet of Gothic as of December 31, 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the two years in the period ended December 31,
1997, appearing elsewhere in this Prospectus, and incorporated by reference in
this Prospectus and in this Registration Statement of which this Prospectus
forms a part, have been included/incorporated herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority
of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information as of and for
the three month period ended March 31, 1998, incorporated by reference in this
Prospectus, the independent accountants have reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report included in Gothic's
quarterly report on Form 10-QSB for the quarter ended March 31, 1998, and
incorporated by reference herein, states that they did not audit and that they
do not express an opinion on that interim financial information. Accordingly,
the degree of reliance on their report on such information should be
restricted in light of the limited nature of the review procedures applied.
The accountants are not subject to the liability provisions of Section 11 of
the Securities Act for their report on the unaudited interim financial
information because that report is not a "report" or a part of the
registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act.
The historical schedule of gross revenues and direct lease operating
expenses of the Comstock Properties for the year ended December 31, 1995,
incorporated by reference in this Prospectus and in this Registration
Statement of which this Prospectus forms a part, have been incorporated herein
in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The historical schedule of gross revenues and direct operating expenses of
the Norse and Horizon Properties for the year ended December 31, 1996,
incorporated by reference in this Prospectus and in this Registration
Statement of which this Prospectus forms a part, have been incorporated herein
in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The historical schedule of gross revenues and direct lease operating
expenses of the HS Properties for the years ended December 31, 1996 and 1995,
incorporated by reference in this Prospectus and in the Registration Statement
of which this Prospectus forms a part, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The historical schedule of gross revenues and direct lease operating
expenses of the Amoco Properties for the years ended December 31, 1997 and
1996, incorporated by reference in this Prospectus and in the Registration
Statement of which this Prospectus forms a part, have been incorporated herein
in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
ENGINEERS
The historical reserve information prepared by Lee Keeling and Associates,
Inc. included in this Offering Memorandum has been included herein in reliance
upon the authority of such firm as experts with respect to matters contained
in such reserve report.
108
<PAGE>
GLOSSARY
Wherever used herein, the following terms shall have the meanings specified.
12 1/4% Senior Notes--Gothic's 12 1/4% Series A and Series B Senior Notes
due 2004 outstanding in the principal amount of $100.0 million issued under an
Indenture dated September 9, 1997 with The Bank of New York, as Trustee.
1996 Acquisitions--The acquisitions completed by Gothic during 1996
including the natural gas and oil producing properties acquired from
Buttonwood, Comstock Oil and Gas, Inc., Stratum Group, L.P., Athena Energy,
Inc. and the properties acquired on August 5, 1996 from various sellers.
1997 Acquisitions--The acquisitions completed by Gothic during 1997
including the natural gas and oil producing properties acquired from Norse
Exploration, Inc. and Norse Pipeline, Inc., H. Huffman & Company, Horizon Gas
Partners, L.P., Fina Oil and Chemical Company, Kerr-McGee Corporation and HS
Resources, Inc.
Amoco--Amoco Production Company, a subsidiary of Amoco Corporation.
Amoco Acquisition--The acquisition by Gothic pursuant to an agreement dated
November 15, 1997 with Amoco of natural gas producing properties located in
the Anadarko and Arkoma Basins of Oklahoma for a purchase price of $237.5
million in cash, subject to closing adjustments, a five-year warrant to
purchase 1.5 million shares of Common Stock exercisable at $3.00 per share
valued by Gothic at $1.2 million, and certain producing properties owned by
Gothic having a value of less than $1.8 million. The acquisition was completed
on January 23, 1998.
Bank One--Bank One, Texas, N.A.
Bbl--One stock tank barrel, or 42 US gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf--One billion cubic feet.
Bcfe--One billion cubic feet of natural gas equivalent.
Behind Pipe--Hydrocarbons in a potentially producing horizon penetrated by a
well bore the production of which has been postponed pending the production of
hydrocarbons from another formation penetrated by the well bore. These
hydrocarbons are classified as proved but non-producing reserves.
Boe--Barrels of oil equivalent (converting six Mcf of natural gas to one Bbl
of oil).
Bridge Loan--A six month loan under the Existing Credit Facility of up to
$60.0 million, the proceeds of which were used to finance a portion of the
purchase price for the Amoco Acquisition.
Buttonwood--Buttonwood Energy Corporation
Chesapeake--Chesapeake Energy Corporation.
Chesapeake Transaction--The agreement with Chesapeake pursuant to which
Gothic (i) entered into a participation agreement with Chesapeake whereby
Chesapeake will have the right to participate, subject to certain limited
exceptions, in up to 50% of Gothic's working interest in future development
drilling activities, (ii) sold for $20.0 million a 50% interest in Gothic's
producing natural gas and oil properties in the Arkoma basin, and (iii) sold,
for $50.0 million, shares of Gothic's Series B Preferred Stock and ten-year
warrants to purchase at an exercise price of $0.01 per share 2,439,246 shares
of Gothic's Common Stock.
Commission--U.S. Securities and Exchange Commission.
109
<PAGE>
Common Stock--The shares of Common Stock, $0.01 par value, of Gothic.
Credit Facility--The Loan Agreement between GPC and Bank One pursuant to
which the Company may initially borrow, subject to meeting certain borrowing
base and other conditions, up to $25.0 million secured by a first priority
lien on substantially all of the natural gas and oil properties of GPC.
Developed Acreage--Acres which are allocated or assignable to producing
wells or wells capable of production.
Development Well--A well drilled within the proved area of a natural gas and
oil reservoir to the depth of a stratigraphic horizon known to be productive.
Dry Well--A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion as an oil or natural gas
well.
EBITDA--Earnings (excluding discontinued operations, extraordinary items,
charges resulting from changes in accounting and significant non-recurring
revenues and expenses) before interest expense, provision for (or benefit for)
income taxes, depletion, depreciation and amortization expenses, and the
provision for impairment of natural gas and oil properties. EBITDA is not a
measure of cash flow as determined by generally accepted accounting
principles. EBITDA information has been included in this Prospectus because
EBITDA is a measure used by certain investors in determining historical
ability to service indebtedness. EBITDA should not be considered as an
alternative to, or more meaningful than, net income or cash flows as
determined in accordance with generally accepted accounting principles as an
indicator of operating performance or liquidity.
Existing Credit Facility--The Second Restated Loan Agreement, as amended and
restated by the Third Restated Loan Agreement, between Gothic and Bank One
pursuant to which Gothic may borrow, subject to meeting certain borrowing base
and other conditions, (i) up to $160.0 million under the Revolving Loan, and
(ii) up to $60.0 million under the Bridge Loan.
Exploratory Well--A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
GPC--Gothic Production Corporation, an Oklahoma corporation and wholly owned
subsidiary of Gothic.
Gross Acres or Gross Wells--The total acres or wells, as the case may be, in
which a working interest is owned.
Infill Well--A well drilled between known producing wells to better exploit
the reservoir.
Mbbl--One thousand Bbl.
Mmbbl--One million Bbl.
Mboe--One thousand barrels of oil equivalent.
Mcf--One thousand cubic feet.
Mcfe--One thousand cubic feet of natural gas equivalent, using the ratio of
one Bbl of crude oil to six Mcf of natural gas.
Mmcf--One million cubic feet.
Mmcfe--One million cubic feet of natural gas equivalent.
110
<PAGE>
Natural Gas and Oil Lease--An instrument by which a mineral fee owner grants
to a lessee the right for a specific period of time to explore for natural gas
and oil underlying the lands covered by the lease and the right to produce any
natural gas and oil so discovered generally for so long as there is production
in economic quantities from such lands.
Net Acres or Net Wells--The sum of the fractional working interests owned in
gross acres or gross wells.
NYMEX--New York Mercantile Exchange.
Overriding Royalty Interest--A fractional undivided interest in a natural
gas and oil property entitling the owner to a share of natural gas and oil
production, in addition to the usual royalty paid to the owner, free of costs
of production.
Parent--Gothic Energy Corporation, an Oklahoma corporation.
PDNP--Proved developed, non-producing or behind the pipe reserves.
Productive Well--A well that is producing oil or natural gas or that is
capable of production.
Proved Developed Reserves--Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves--The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Reserves or PUD--Reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for completion.
PV-10--The discounted future net cash flows for proved natural gas and oil
reserves computed on the same basis as the Standardized Measure, but without
deducting income taxes, which is not in accordance with generally accepted
accounting principles. PV-10 is an important financial measure for evaluating
the relative significance of natural gas and oil properties and acquisitions,
but should not be construed as an alternative to the SEC PV-10 (as determined
in accordance with generally accepted accounting principles).
Reserve Life--The estimated productive life of a proved reservoir based upon
the economic limit of such reservoir producing hydrocarbons in paying
quantities assuming certain price and cost parameters. For purposes of this
Offering Memorandum, reserve life is calculated by dividing the Proved
Reserves (on an Mcfe basis), as of December 31, 1997 by pro forma production
volumes for the 12 months ended December 31, 1997.
Revolving Loan--A reducing revolving loan under the Existing Credit Facility
of up to $160.0 million, the proceeds of which were used to finance a portion
of the purchase price for the Amoco Acquisition, the acquisition and
development of natural gas and oil properties, letters of credit and general
corporate purposes.
Royalty Interest--An interest in a natural gas and oil property entitling
the owner to a share of natural gas and oil production free of costs of
production.
Secondary Recovery--A method of natural gas and oil extraction in which
energy sources extrinsic to the reservoir are utilized.
Senior Secured Notes--GPC's Senior Secured Notes, due May 1, 2005, in the
aggregate principal amount of $235.0 million.
Series A Preferred Stock--Gothic's 37,000 shares of non-voting Senior
Redeemable Preferred Stock, Series A, par value $0.05 per share, having a
liquidation preference of $1,000 per share issued on January 23, 1998.
111
<PAGE>
Series B Preferred Stock--Gothic's 50,000 shares of non-voting Senior
Redeemable Preferred Stock, Series B, par value $0.05 per share, having a
liquidation preference of $1,000 per share issued concurrently with the sale
of the Notes.
Standardized Measure--The estimated future net cash flows from proved
natural gas and oil reserves computed using prices and costs, at the dates
indicated, after income taxes and discounted at 10%.
The Recapitalization--A series of transactions including, among others, the
reorganization of Gothic through the creation of GPC as a wholly owned
subsidiary and the transfer to GPC of all of Gothic's natural gas and oil
properties, the consummation of the Chesapeake Transaction, the issuance of
the Notes and Senior Secured Notes, the redemption of Gothic's 12 1/4% Senior
Notes, Series A Preferred Stock and repayment of all outstanding indebtedness
under the Existing Credit Facility and the execution and delivery of the
Credit Facility to provide for an initial borrowing availability of $25.0
million.
Undeveloped Acreage--Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.
Working Interest--The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production, subject to all royalties, overriding royalties and other burdens
and to all costs of exploration, development and operations and all risks in
connection therewith.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets, December 31, 1997............................ F-3
Consolidated Statements of Operations, Years ended December 31, 1996 and
1997..................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity, Years ended
December 31, 1996 and 1997............................................... F-5
Consolidated Statements of Cash Flows, Years ended December 31, 1996 and
1997..................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
See "Information Incorporated By Reference" herein for a description of
periodic reports filed with the Commission pursuant to the Exchange Act by
Gothic, including its Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 1998, which are incorporated in this Prospectus by reference.
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 ("Gothic") as of December 31, 1997 and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years ended December 31, 1996 and 1997. These
financial statements are the responsibility of Gothic'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, 1997, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1996 and 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 3, subsequent to year end, Gothic completed a
significant acquisition of natural gas and oil properties. The associated
financing included preferred stock and bank debt, a portion of which was
financed on a short-term basis, all of which Gothic is attempting to
refinance.
Coopers & Lybrand L.L.P.
Tulsa, Oklahoma
March 13, 1998
F-2
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
ASSETS HISTORICAL PRO FORMA
------ ---------- ------------
(UNAUDITED
SEE NOTE 14)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 16,722 $ 6,199
Available-for-sale investments....................... 406 406
Natural gas and oil receivables...................... 3,200 2,844
Receivable from officers and employees............... 82 82
Other................................................ 78 1,878
-------- --------
TOTAL CURRENT ASSETS............................... 20,488 11,409
PROPERTY AND EQUIPMENT:
Natural gas and oil properties on full cost method:
Properties being amortized......................... 94,168 334,104
Unproved properties not subject to amortization.... 2,103 2,103
Deposit for natural gas and oil property
acquisition......................................... 23,750 --
Gas gathering and processing system.................. 5,404 --
Equipment, furniture and fixtures.................... 558 558
Accumulated depreciation, depletion and
amortization........................................ (9,456) (9,229)
-------- --------
PROPERTY AND EQUIPMENT, NET.......................... 116,527 327,536
OTHER ASSETS, NET...................................... 1,360 7,407
NOTE RECEIVABLE FROM OFFICER AND DIRECTOR.............. 167 167
-------- --------
TOTAL ASSETS....................................... $138,542 $346,519
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable trade............................... $ 2,081 $ 2,081
Revenues payable..................................... 1,553 1,553
Accrued interest expense............................. 4,018 4,018
Accrued liabilities.................................. 182 182
Current portion of long-term debt.................... -- 78,500
-------- --------
TOTAL CURRENT LIABILITIES.......................... 7,834 86,334
LONG-TERM DEBT......................................... 123,750 231,934
Less: Unamortized discount and loan costs............ (5,250) (5,250)
Less: Senior Notes in Treasury, at cost.............. (796) (796)
-------- --------
LONG-TERM DEBT, NET.................................... 117,704 225,888
GAS IMBALANCE LIABILITY................................ 551 6,639
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 9)
SERIES A REDEEMABLE PREFERRED STOCK, PAR VALUE $.05,
issued and outstanding 0 and 37,000 shares............ -- 33,909
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.05, authorized 500,000
shares.............................................. -- --
Common stock, par value $.01, authorized 100,000,000
shares; issued and outstanding 16,261,640 shares.... 162 162
Additional paid in capital........................... 36,043 38,139
Accumulated deficit.................................. (23,462) (44,262)
Unrealized loss on available-for-sale investments.... (121) (121)
Note receivable...................................... (169) (169)
-------- --------
TOTAL STOCKHOLDERS' EQUITY......................... 12,453 (6,251)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $138,542 $346,519
======== ========
</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 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
REVENUES:
Natural gas and oil sales.................................. $10,385 $17,418
Gas system revenue......................................... -- 4,562
Well operations............................................ 1,062 1,283
------- -------
Total revenues............................................. 11,447 23,263
COSTS AND EXPENSES:
Lease operating expense.................................... 4,807 6,860
Gas system expense......................................... -- 3,501
Depletion, depreciation and amortization................... 2,856 5,791
General and administrative expense......................... 1,782 2,318
Provision for impairment of natural gas and oil proper-
ties...................................................... 5,050 --
------- -------
Operating income (loss)...................................... (3,048) 4,793
Interest expense and amortization of debt issuance costs..... (1,528) (8,800)
Interest and other income.................................... 68 330
------- -------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.............. $(4,508) (3,677)
INCOME TAX BENEFIT........................................... 2,993 --
------- -------
LOSS BEFORE EXTRAORDINARY ITEM............................... (1,515) (3,677)
LOSS ON EARLY EXTINGUISHMENT OF DEBT (NOTE 4)................ 1,433 907
------- -------
NET LOSS..................................................... $(2,948) $(4,584)
PREFERRED DIVIDEND ($47.65 PER PREFERRED SHARE).............. 381 264
PREFERRED DIVIDEND--AMORTIZATION OF PREFERRED DISCOUNT....... 791 --
------- -------
NET LOSS AVAILABLE FOR COMMON SHARES......................... $(4,120) $(4,848)
======= =======
LOSS PER COMMON SHARE BEFORE EXTRAORDINARY ITEM, BASIC
AND DILUTED................................................. $ (.23) $ (.28)
======= =======
LOSS PER COMMON SHARE, BASIC AND DILUTED..................... $ (.35) $ (.35)
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................... 11,663 14,019
======= =======
</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 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON SALE OF
COMMON PREFERRED ADDITIONAL AVAILABLE-FOR- TOTAL
SHARES SHARES COMMON PREFERRED PAID-IN ACCUMULATED SALE NOTE STOCKHOLDERS'
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL DEFICIT INVESTMENTS RECEIVABLE EQUITY
----------- ----------- ------ --------- ---------- ----------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
31, 1995........ 5,502 -- $ 55 $ -- $13,965 $(14,494) $ -- $ -- $ (474)
Issuance of
common stock in
public
offering....... 7,635 -- 76 -- 12,890 -- -- -- 12,966
Return of stock
with Stratum
repayment...... (954) -- (10) -- -- -- -- -- (10)
Issuance of
preferred
stock.......... -- 6 -- -- 5,287 -- -- -- 5,287
Preferred stock
placement fee.. 29 -- -- -- -- -- -- -- --
Issuance of
common stock
with Quest
financing...... 40 -- 1 -- 62 -- -- -- 63
Issuance of
common stock on
conversion of
debt........... 14 -- -- -- 28 -- -- -- 28
Issuance of
common stock in
connection with
property
acquisition.... 116 -- 1 -- 299 -- -- -- 300
Preferred stock
dividends
($68.75 per
preferred
share)......... -- -- -- -- -- (381) -- -- (381)
Preferred
dividend--
amortization
of discount.... -- -- -- -- 791 (791) -- -- --
Net loss........ -- -- -- -- -- (2,948) -- -- (2,948)
------ --- ---- ----- ------- -------- ----- ----- -------
BALANCE, AT
DECEMBER 31,
1996............ 12,382 6 123 -- 33,322 (18,614) -- -- 14,831
Issuance of
common stock on
exercise of
note extension
warrants....... 35 -- -- -- 35 -- -- -- 35
Issuance of
common stock on
conversion of
debt........... 14 -- -- -- 28 -- -- -- 28
Issuance of
common stock on
exercise of
Quest
warrants....... 300 -- 3 -- 297 -- -- -- 300
Warrants issued
in connection
with property
acquisition.... -- -- -- -- 254 -- -- -- 254
Issuance of
common stock
with bridge
financing...... 450 -- 5 1,059 -- -- -- 1,064
Issuance of
common stock on
conversion of
preferred
stock.......... 3,055 (6) 31 -- (31) -- -- -- --
Costs related to
form S-3
registration
statement...... -- -- -- -- (153) -- -- -- (153)
Warrants issued
in connection
with Senior
Notes
Offering....... -- -- -- -- 1,190 -- -- -- 1,190
Issuance of
common stock on
exercise of
option......... 5 -- -- -- 10 -- -- -- 10
Issuance of
common stock as
employee
bonuses........ 21 -- -- -- 32 -- -- -- 32
Preferred stock
dividends
($47.65 per
preferred
Share)......... -- -- -- -- -- (264) -- -- (264)
Net loss........ -- -- -- -- -- (4,584) -- -- (4,584)
Unrealized loss
on available-
for-sale
investments.... -- -- -- -- -- -- (121) -- (121)
Advance to
officer to
purchase
stock.......... -- -- -- (169) (169)
------ --- ---- ----- ------- -------- ----- ----- -------
BALANCE, AT
DECEMBER 31,
1997............ 16,262 -- $162 $ -- $36,043 $(23,462) $(121) $(169) $12,453
====== === ==== ===== ======= ======== ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (2,948) $ (4,584)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization................. 2,856 5,791
Amortization of discount and loan costs.................. 69 1,804
Provision for impairment of natural gas and oil
properties.............................................. 5,050 --
Deferred income tax benefit.............................. (2,993) --
Loss on early extinguishment of debt..................... 1,433 907
CHANGES IN ASSETS AND LIABILITIES:
Increase in accounts receivable.......................... (1,552) (428)
Decrease in other current assets......................... 13 1
Increase in accounts and revenues payable................ 894 317
Decrease in gas imbalance payable........................ -- (737)
Increase (decrease) in accrued liabilities............... (565) 3,688
Decrease in other assets................................. 339 310
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. $ 2,596 $ 7,069
NET CASH USED BY INVESTING ACTIVITIES:
Increase in notes receivable from officers and direc-
tors.................................................... -- (336)
Purchase of available-for-sale investments............... -- (527)
Proceeds from sale of investment......................... 200 --
Proceeds from collection of note receivable.............. 123 --
Proceeds from sale of property and equipment............. 3,111 4,276
Purchase of property and equipment....................... (17,455) (83,440)
Property development costs............................... (1,177) (6,141)
Acquisition of business, net of cash acquired............ (17,593) --
-------- --------
NET CASH USED BY INVESTING ACTIVITIES...................... $(32,791) $(86,168)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings...................... -- 14,500
Payments of short-term borrowings........................ (1,560) (14,500)
Proceeds from long-term borrowings....................... 26,528 160,347
Payments of long-term borrowings......................... (11,258) (61,864)
Purchase of senior notes for treasury.................... -- (796)
Proceeds from sale of common stock, net.................. 13,141 --
Proceeds from sale of preferred stock, net............... 3,998 --
Proceeds from exercise of common stock warrants.......... -- 345
Payment of loan fees..................................... -- (2,084)
Payment of preferred dividends........................... (173) (264)
Other.................................................... (432) (70)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. $ 30,244 $ 95,614
NET CHANGE IN CASH AND CASH EQUIVALENTS.................... 49 16,515
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 158 207
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 207 $ 16,722
======== ========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID................... $ 1,387 $ 7,011
======== ========
</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 "Parent", and its
subsidiaries, Gothic Energy of Texas, Inc. ("Gothic Texas"), since its
inception in 1995 and Gothic Gas Corporation ("Gothic Gas"), since its
inception in 1997 (together "Gothic"). All significant intercompany balances
and transactions have been eliminated. Gothic is primarily engaged in the
business of acquiring, developing and exploiting natural gas and oil reserves
in Oklahoma, Texas, New Mexico and Kansas. Substantially all of Gothic's
natural gas and oil 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, natural gas and oil reserves (see note 13) and the tax valuation
allowance (see note 7) also include significant estimates which, in the near
term, could materially differ from the amounts ultimately realized.
CASH EQUIVALENTS--Cash equivalents include cash on hand, amounts held in
banks, money market funds and other highly liquid investments with a maturity
of three months or less at date of purchase.
INVESTMENTS--Gothic applies the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). Under SFAS No. 115, Gothic classifies its
investment securities into one of three categories: trading, available-for-
sale, or held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity are those
debt securities which Gothic has the ability and intent to hold until
maturity. All other securities not included in trading or held-to-maturity are
classified as available-for-sale. At December 31, 1997, all of Gothic's
investments are classified as available-for-sale.
Available-for sale securities are recorded at fair value. Unrealized holding
gains and losses are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. A decline in the market
value of any available-for-sale security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a new cost
basis for the security. Realized gains and losses are included in earnings and
are derived using the specific identification method for determining the cost
of securities sold.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
subject Gothic to concentrations of credit risk consist principally of cash,
cash equivalents and trade receivables. Gothic's accounts receivable are
primarily from the purchasers (See Note 11--Major Customers) of natural gas
and oil products and exploration and production companies which own interests
in properties operated by Gothic. The industry concentration has the potential
to impact Gothic's overall exposure to credit risk, either positively or
negatively, in that the customers may be similarly affected by changes in
economic, industry or other conditions. Gothic generally does not require
collateral from customers. The cash and cash equivalents are with major banks
or institutions with high credit ratings. At December 31, 1997, Gothic had a
concentration of cash of $1,400,000 with three banks, which was in excess of
federally insured limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by Gothic using available market
information. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. The use of different market assumptions
or valuation methodologies may have a material effect on the estimated fair
value amounts.
F-7
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. Gothic estimates the fair value of its 12 1/4% Senior Notes using
estimated market prices. Gothic's carrying amount for such debt at December
31, 1997, was $98,071,000, compared to an approximate fair value of
$106,197,000. The carrying value of other long-term debt approximates its fair
value as interest rates are primarily variable, based on prevailing market
rates.
HEDGING ACTIVITIES--Gothic has only limited involvement with derivative
financial instruments, as defined in Statement of Financial Accounting
Standards No. 119 "Disclosure About Derivative Financil Instruments and Fair
Value of Financial Instruments", and does not use them for trading purposes.
Gothic's objective is to hedge a portion of its exposure to price volatility
from producing natural gas. These arrangements may expose Gothic to credit
risk from its counterparty.
During 1996 and 1997, Gothic entered into agreements with a gas purchaser to
hedge a portion of its monthly gas production in an effort to reduce the
effects of the volatility of the price of natural gas on Gothic's operations,
and to adhere to requirements called for under Gothic's Credit Facility. Under
the agreements, the difference between the current value of Gothic's gas
sales, based upon the spot market price, and a fixed price was received or
paid by Gothic.
At December 31, 1997, Gothic had swap agreements relating to the sale of
5,000 Mcf per day at a price of $2.55 per Mcf and 15,000 Mcf of natural gas
per day at a price of $2.45 per Mcf during the period January 1, 1998 through
March 31, 1998. At December 31, 1997, all swap contracts relating to the sale
of natural gas were designated as hedges; therefore, any gains and losses on
such contracts will be included in natural gas and oil sales in 1998 when the
gas is sold. Gothic estimates that had all of the natural gas swap agreements
in effect for production periods beginning on or after January 1, 1998
terminated on December 31, 1997, based on the closing prices for NYMEX futures
contracts as of that date, Gothic would have received a net amount of
approximately $747,000 from the counterparty which would have represented the
estimated "fair value" at that date. These agreements were not terminated.
Gothic had no swap agreements or other open futures contracts at December 31,
1996.
In February 1998, Gothic entered into swap agreements related to the sale of
30,000 Mcf per day for the month of March 1998 at $2.16 per Mcf and 62,000 Mcf
per day during the period April 1, 1998 through October 31, 1998 at an average
price of $2.09 per Mcf. Of this 62,000 Mcf per day, 25,000 Mcf is subject to a
"call spread" agreement which provides that Gothic will receive additional
payments for 25,000 Mcf if the actual sales price of natural gas is between
$2.30 and $2.70 per Mcf during the period. The swap agreements for the month
of March 1998 and the period April through October 1998 cover approximately
55% and 69%, respectively, of Gothic's current natural gas production. In
addition, Gothic has entered into a "floor" agreement relating to the sale of
60,000 Mcf per day at a price of $2.10 per Mcf for the period of November 1,
1998 to March 31, 1999.
NATURAL GAS AND OIL PROPERTIES--Gothic accounts for its natural gas and oil
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 natural gas and oil
reserves are capitalized and depleted using the units-of-production method
based on proved natural gas and oil reserves. Gothic capitalizes costs
including: salaries and related fringe benefits of employees and/or
consultants directly engaged in the acquisition, exploration and development
of natural gas and oil 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.
F-8
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gothic's natural gas and oil reserves are estimated annually by independent
petroleum engineers. Gothic'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 of natural gas
and oil properties was $.64 and $.72 per Mcfe in 1996 and 1997, respectively.
DD&A of natural gas and oil properties amounted to $2,820,000 and $5,530,000
in 1996 and 1997, respectively.
In the event the unamortized cost of natural gas and oil 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 Gothic's natural gas and oil properties. Gothic recorded a
$5,050,000 provision for impairment of natural gas and oil 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 in 1995, Gothic recorded a
tax benefit of $2,993,000 which offset the deferred tax liability related to
the acquired Buttonwood natural gas and oil properties. As discussed in Note
13, estimates of natural gas and oil reserves are imprecise. While no such
impairment provisions were recorded in 1997, changes in the estimates or
declines in natural gas and oil prices could cause Gothic in the near-term to
reduce the carrying value of its natural gas and oil properties.
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 Gothic's natural gas and oil properties
are located in the United States, a single cost center is used.
GAS SYSTEM AND 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. The
gas gathering and processing system is also stated at cost and is depreciated
on the straight-line method over its estimated useful life of 20 years.
DEBT ISSUANCE COSTS--Debt issuance costs, including the original issue
discount, associated with the Company's 12 1/4% Senior Notes Due 2004 are
amortized and included in interest expense using the interest method over the
term of the notes. The unamortized portion of debt issuance costs associated
with Gothic's Credit Facility is included in other assets and amortized and
included in interest expense using the straight-line method over the term of
the Facility. Amortization of debt issuance costs for the years ended December
31, 1996 and 1997 amounted to $69,000 and $1,804,000, respectively.
NATURAL GAS AND OIL SALES AND NATURAL GAS BALANCING--Gothic uses the sales
method for recording natural gas sales. Gothic'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 Gothic's interest in producing natural gas and oil 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
Gothic'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 Gothic's
share of estimated total gas reserves underlying the property at which time
such excess is recorded as a gas imbalance liability. At December 31, 1997,
total sales exceeded Gothic's share of estimated total gas reserves on fifteen
wells by $229,000 (98,000 Mcf), based on the year end "spot market" price of
natural gas. The gas imbalance liability has been classified in the balance
sheet as non-current, as Gothic does not expect to settle the liability during
the next twelve months.
Gothic has recorded deferred charges for estimated lease operating expenses
incurred in connection with its underproduced gas imbalance position. At
December 31, 1997, cumulative total gas sales volumes for
F-9
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
underproduced wells were less than Gothic's pro-rata share of total gas
production from these wells by 1,054,000 Mcf, resulting in prepaid lease
operating expenses of $759,000, which are included in other assets in the
accompanying balance sheet. The rate used to calculate the deferred charge is
the average annual production costs per Mcf.
In addition, Gothic has recorded accrued charges for estimated lease
operating expenses incurred in connection with its overproduced gas imbalance
position. At December 31, 1997, cumulative total gas sales volumes for
overproduced wells exceeded Gothic's pro-rata share of total gas production
from these wells by 446,000 Mcf, resulting in accrued lease operating expenses
of $322,000, which are included in the gas imbalance liability in the
accompanying balance sheet. The rate used to calculate the accrued liability
is the average annual production costs per Mcf.
INCOME TAXES--Gothic 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. A valuation allowance is provided for
deferred tax assets to the extent realization is not judged to be more likely
than not.
LOSS PER COMMON SHARE--Loss per common share before extraordinary item and
loss per common share are computed in accordance with Statement of Financial
Accounting Standards No. 128 ("FAS 128"), which is effective for reporting
periods ending after December 15, 1997. FAS 128 requires the restatement of
prior year's loss per share to conform to the new standard. Presented on the
Consolidated Statements of Operations is a reconciliation of loss available to
common shareholders. There is no difference between actual weighted average
shares outstanding, which are used in computing basic loss per share and
diluted weighted average shares, which are used in computing diluted loss per
share because the effect of outstanding options and warrants would be
antidilutive. (See Note 6 for options and warrants outstanding during 1996 and
1997 and options still outstanding at December 31, 1997, which were not
included in the computation of diluted loss per share.)
STOCK BASED COMPENSATION--Gothic 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 Gothic's grants in 1996 and 1997, no
compensation expense has been recognized.
NOTE 2. INVESTMENTS
The cost and estimated market values of available-for-sale securities at
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
--------------------------------------
GROSS GROSS APPROXIMATE
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Equities........................... $527 $ -- $121 $406
==== ===== ==== ====
</TABLE>
Net unrealized holding losses on available-for-sale securities of $121,000
are included as a separate component of stockholders' equity in 1997.
F-10
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. NATURAL GAS AND OIL PROPERTY ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS SUBSEQUENT TO YEAR-END 1997
AMOCO ACQUISITION--On January 23, 1998, Gothic completed the acquisition
from Amoco Production Company ("Amoco"), a subsidiary of Amoco Corporation, of
certain producing natural gas properties, located in the Anadarko and Arkoma
Basins of Oklahoma. The purchase price was $237,500,000, subject to certain
post-closing adjustments. Amoco also received warrants to purchase 1,500,000
shares of Parent common stock for $3.00 per share, with an estimated fair
value at the date of acquisition of $1,155,000 and certain producing
properties having a value of less than $1,800,000. The acquisition and related
fees and expenses were financed through a new credit facility with Bank One,
Texas, NA. ("Bank One") (See Note 4) and the issuance of $37,000,000 of Series
A Preferred Stock (See Note 6). Gothic acquired interests in 821 gross wells
and assumed operations of 291 of the properties. Gothic will also receive
approximately 10,000 net undeveloped acres located throughout the Anadarko
Basin area as well as substantial mineral and overriding royalty interests.
Gothic paid a deposit of $23,750,000 toward the purchase price in November
1997. (See also Note 14).
ACQUISITIONS DURING 1997
HS ACQUISITION--On September 9, 1997, Gothic acquired from two affiliates of
HS Resources, Inc. ("HS") various working interests in a total of
approximately 250 natural gas and oil producing wells located in New Mexico
and Oklahoma (the "HS Acquisition"). The purchase price for the properties
(the "HS Properties") was approximately $27,500,000, plus the transfer of
certain producing properties owned by Gothic having a value of less than
$1,000,000. The New Mexico properties acquired from HS consist of working
interests in approximately 100 wells located in four fields in Chavez and Eddy
counties in the Delaware/Permian basin. Gothic operates 92 of these wells. The
Oklahoma properties acquired from HS consist of working interests in
approximately 150 wells located in various fields in the Anadarko Basin where
Gothic has other operations. Gothic operates 50 of these wells.
KERR-MCGEE ACQUISITION--On August 12, 1997, Gothic acquired from Kerr-McGee
Corporation ("Kerr-McGee") various working interests and royalty interests in
162 wells located in Canadian and Grady Counties, Oklahoma for approximately
$3,600,000. Gothic is the operator of 16 of these wells.
FINA ACQUISITION--On May 15,1997, Gothic acquired from Fina Oil and Chemical
Company various working interests in 20 producing gas wells located in Beaver
County, Oklahoma and Clarke County, Kansas. The purchase price was $3,350,000.
Gothic operates all 20 producing wells.
NORSE ACQUISITION--On February 18, 1997, Gothic acquired from Norse
Exploration, Inc., and Norse Pipeline, Inc. (collectively, "Norse"), various
working interests in 11 natural gas and oil 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 natural gas and oil 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 Parent's
Common Stock at a per share exercise price of $2.50. The estimated fair value
of such warrants at the date of acquisition was approximately $254,000.
HUFFMAN ACQUISITION--Gothic also on February 18, 1997, acquired from H.
Huffman & Company ("Huffman"), an Oklahoma limited partnership, various
working interests in 13 natural gas and oil producing properties and an
additional 10.97% interest in the Sycamore System. The natural gas and oil
wells are located
F-11
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in the same producing area as the properties acquired from Norse. The total
purchase price for the assets acquired was $3,950,000.
HORIZON ACQUISITION--Gothic 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 natural gas and oil
producing properties. The producing properties are located in Major and Blaine
counties of Oklahoma. The purchase price was $10,000,000.
ACQUISITIONS DURING 1996
ATHENA ACQUISITION--On December 27, 1996, Gothic completed an acquisition
from Athena Energy, Inc. of various working interests in 85 producing natural
gas and oil properties (the "Athena Acquisition"). Gothic operates
approximately 30 of the wells. The purchase price for the properties acquired
was approximately $4,200,000. Substantially all of the properties acquired are
located in western Oklahoma and the Texas Panhandle.
VARIOUS WORKING INTEREST ACQUISITIONS--On August 5, 1996, Gothic 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"). Gothic
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, Gothic 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
Gothic in May 1995 for the Johnson Ranch Acquisition. The purchase price was
$800,000.
COMSTOCK ACQUISITION--On May 16, 1996, Gothic completed the acquisition,
from Comstock Oil and Gas, Inc. and Comstock Offshore Energy, Inc. (the
"Comstock Acquisition"), of various working interests in 145 producing natural
gas and oil properties. Gothic operates 70 of the wells. The purchase price
for the properties acquired was $6,430,000. 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 Gothic 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
Gothic in March 1995 for $1,850,000. Gothic recorded a loss on termination of
these options in 1995, with the $1,000,000 recorded as an impairment of
natural gas and oil properties. The aggregate purchase price was $18,009,000
including acquisition costs of $389,000.
The transaction was financed with proceeds from a public offering of the
Parent'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 generated net proceeds of $17,216,000. The
remaining purchase price was paid out of the proceeds from the Bank One, Texas
Credit Facility.
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 Gothic's results of operations since the respective dates of the
acquisitions.
F-12
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY DISPOSITIONS--Management of Gothic 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 parties. During 1997, Gothic disposed of
various interests in an aggregate of approximately 450 properties for a total
sales price of $3,993,000. All of such proceeds were used for working capital
purposes. During 1996, Gothic disposed of various interests in an aggregate of
approximately 500 properties for a total sales price of $3,111,000. Of such
amount, $2,402,000 was applied to reduce outstanding indebtedness and $709,000
was used for working capital purposes.
The following reflects the unaudited proforma results of operations assuming
the 1996 and 1997 acquisitions and disposition had all been consummated on
January 1, 1996.
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues.............................................. 29,209 26,944
Operating income...................................... 3,996 7,250
Loss before extraordinary item........................ (6,543) (6,047)
Net loss.............................................. (7,716) (6,311)
Basic and diluted loss per common share............... (.64) (.45)
</TABLE>
NOTE 4. FINANCING ACTIVITIES
CREDIT FACILITY
On January 19, 1996, Gothic entered into a Loan Agreement with Bank One,
(the "Initial Credit Facility"), which reflecting subsequent amendments,
enabled Gothic to borrow, from time to time and, subject to meeting certain
borrowing base 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 February 17, 1997, Gothic and Bank One, entered into a Restated Loan
Agreement (the "Prior Credit Facility") which enabled Gothic to borrow, from
time to time and, subject to meeting certain borrowing base requirements and
other conditions, a maximum aggregate of $75,000,000. The aggregate available
to be borrowed under the Prior Credit Facility was comprised of a $35,100,000
borrowing availability (the "borrowing base") based on Gothic's natural gas
and oil reserves, a $10,000,000 special advance facility (the "Special Advance
Facility") and a $2,000,000 special drilling facility (the "Special Drilling
Facility").
On September 9, 1997, Gothic repaid in full the outstanding borrowings under
the Prior Credit Facility with a portion of proceeds from the issuance of $100
million principal amount of 12 1/4% Senior Notes due 2004 ("Senior Notes").
See Note 5. The transaction resulted in a loss on early extinguishment of debt
of $907,000 ($.07 per weighted average share outstanding) and is shown as an
extraordinary item in the 1997 Statement of Operations.
In September 1997, Gothic entered into a substantially revised Prior Credit
Facility with Bank One consisting of a revolving line of credit with an
initial borrowing base of $30,000,000. At December 31, 1997, Gothic had
$23,750,000 borrowed under the Prior Credit Facility which was used for a
downpayment on the Amoco Acquisition. The facility matures January 30, 1999.
On January 23, 1998, Gothic entered into a Second Restated Loan Agreement
(the "Credit Facility") with Bank One, as principal and as agent for a
syndicate of lenders, which agreement replaced Gothic's credit facility
entered into in January 1996 and revised in February and September 1997. The
Credit Facility consists of a revolving loan with a lending commitment of
$160,000,000, subject to a monthly commitment
F-13
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reduction of $2,000,000 commencing February 1, 1998 (the "Revolving Loan"),
and a bridge loan (the "Bridge Loan") with a lending commitment of
$60,000,000. The initial borrowing base under the Revolving Loan is
$160,000,000. Proceeds of $156,400,000 under the Revolving Loan and the
$60,000,000 Bridge Loan were used to finance a portion of the purchase price
for the Amoco Acquisition. The Bridge Loan is due and payable on June 30, 1998
and is subject to prepayment out of Gothic's excess cash flow, as defined.
Failure to repay the $60,000,000 Bridge Loan when due would be an event of
default under Gothic's Credit Facility which would result in the entire
indebtedness under the Credit Facility becoming immediately due and payable.
In such event, the lenders could assert their rights as secured creditors and
foreclose on Gothic's assets. In addition, such event of default would also be
an event of default under Gothic's 12 1/4% Senior Notes resulting in such
notes becoming immediately due and payable. See Note 5.
Interest on borrowings under the Credit Facility is payable monthly
calculated at the Bank One Base Rate, as determined from time to time by Bank
One, provided, however, so long as the Bridge Loan is outstanding interest on
the Revolving Loan is at the Base Rate plus 0.5% and interest on the Bridge
Loan is at the Base Rate plus 1.0% through March 31, 1998 and at the Base Rate
plus 2% thereafter. Gothic may elect to calculate interest under a London
Interbank Offered Rate ("LIBOR") plus 1.5%, if less than 50% of the borrowing
base is utilized, up to plus 2% if more than 75% of the borrowing base is
utilized, provided, however, so long as the Bridge Loan is outstanding the
LIBOR rate is plus 3.0%. The interest rate under the Credit Facility is
subject to a 1.0% increase in the event Gothic fails to fulfill timely certain
agreements relating to obtaining additional capital. Gothic is required to pay
a fee on the unused portion of the lending commitment equal to 1/2% per annum.
Under the Credit Facility, the lenders hold liens on substantially all of
Gothic's natural gas and oil properties, whether currently owned or hereafter
acquired, including the properties acquired in the Amoco Acquisition. The
Credit Facility requires, among other things, semi-annual engineering reports
covering natural gas and oil reserves on the basis of which semi-annual and
other redeterminations of the borrowing base and monthly commitment reduction
will be made. The Credit Facility also includes various affirmative and
negative covenants, including, among others, (i) prohibitions against
additional indebtedness unless approved by the lenders, subject to certain
exceptions, (ii) prohibitions against the creation of liens on the assets of
Gothic, subject to certain exceptions, (iii) prohibitions against cash
dividends, (iv) maintaining certain hedging positions and interest rate
protection agreements satisfactory to Bank One, (v) prohibitions on asset
sales, subject to certain exceptions, (vi) restrictions on mergers or
consolidations, (vii) a requirement to maintain a ratio of current assets to
current liabilities of 1.0 to 1.0, (viii) a requirement to maintain on a
quarterly basis a minimum tangible net worth of at least (a) $45,000,000 as of
January 23, 1998, and (b) $75,000,000 as of March 31, 1998, plus 50% of net
income, if positive, before extraordinary gains but after extraordinary
losses, for the period commending April 1, 1998, plus 100% of the net proceeds
from the issuance of common or preferred stock, (ix) a minimum interest
coverage ratio of not less than 1.5 to 1.0 as of the end of each quarter for
the preceding four quarters beginning with the quarter ended September 30,
1997 and increasing to 2.0 to 1.0 as of the end of each quarter for the
preceding four quarters beginning with the quarter ended September 30, 1998,
(x) issuance of common stock with proceeds of $65,000,000 by March 31, 1998,
and (xi) the escrow of interest payments due on Gothic's outstanding Senior
Notes. Events of default include the non-payment of principal, interest or
fees, a default under other outstanding indebtedness of Gothic, a breach of
Gothic's representations and warranties contained in the loan agreement,
material judgements, bankruptcy or insolvency, a default under certain
covenants not cured within a grace period, and a change in the management or
control of Gothic.
The amount of borrowings available to Gothic under the Credit Facility
depend upon the redetermination of Gothic's borrowing base by the Bank,
subject to the limits imposed by the lending commitment. The borrowing base is
subject to periodic redetermination, at the discretion of the Bank, based on a
review of Gothic's reserve and other information with the initial scheduled
review to occur on April 1, 1998. A reduction in the borrowing base could
require Gothic to repay outstanding indebtedness under the Revolving Loan in
excess of the redetermined borrowing base, and would limit available
borrowings thereunder.
F-14
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 under the Securities Act of 1933, loaned to Gothic the aggregate sum
of $4,500,000 represented by Gothic's promissory notes ("Bridge Financing").
Of the aggregate amount, $2,500,000 bore interest at 5% per annum and matured
on April 18, 1997, however, the lender extended the maturity date to September
30, 1997 for additional consideration of 200,000 shares of Parent's common
stock when the fair value of Parent's Common Stock was $2.25 per share with
respect to the first 100,000 shares and $1.81 per share with respect to the
second 100,000 shares. The remaining $2,000,000 bore interest at 12% per annum
and had a maturity date of October 31, 1997. As additional consideration for
making the loan, the investors also received a total of 250,000 shares of the
Parent's common stock when the fair market value of the Parent's common stock
was $2.63 per share. Also, Gothic paid a $250,000 fee for the $2,500,000
advance on the Bridge Financing.
On September 9, 1997, Gothic repaid the outstanding indebtedness under the
Bridge Financing plus accrued interest with a portion of the proceeds from the
issuance of Gothic's 12 1/4% Senior Notes.
NOTE 5. 12 1/4% SENIOR NOTES
On September 9, 1997, Gothic completed the sale of 100,000 units consisting
of an aggregate of $100,000,000 principal amount of 12 1/4% Senior Notes due
2004 and 1,400,000 Warrants to purchase an aggregate of 1,400,000 shares of
Common Stock of the Parent at a purchase price of $3.00 per share. The net
proceeds to Gothic from the sale of the units were approximately $95,729,000,
net of offering costs of $4,271,000, and were used to complete the HS
Acquisition for $27,500,000, repay the Bank One Prior Credit Facility balances
of $47,444,000, repay other indebtedness and accrued interest of $4,703,000
and apply approximately $16,082,000 to working capital. The estimated fair
value of the 1,400,000 warrants issued in connection with the offering was
$1,190,000. Such amount has been treated as an original issue discount, and
together with the offering costs is being amortized over the life of the
Senior Notes using the effective interest method.
The Senior Notes bear interest at an annual rate of 12 1/4%, payable
semiannually in arrears on March 1 and September 1 of each year. The Senior
Notes are senior, unsecured obligations of Gothic, ranking pari passu with all
existing and future unsecured senior indebtedness of Gothic, and senior in
right of payment to all future subordinated indebtedness of Gothic. Subject to
certain limitations set forth in the indenture covering the Senior Notes (the
"Indenture"), the Parent and its subsidiaries may incur additional senior
indebtedness and other indebtedness.
The Indenture contains certain covenants limiting the Parent and its
Restricted Subsidiaries, as defined, with respect to the following: (i) asset
sales; (ii) restricted payments; (iii) the incurrence of additional
indebtedness and the issuance of certain redeemable preferred stock; (iv)
liens; (v) sale and leaseback transactions; (vi) lines of business; (vii)
dividend and other payment restrictions affecting subsidiaries; (viii) mergers
and consolidations; and (ix) transactions with affiliates.
In the event the Parent consummates one or more Equity Offerings, as
defined, on or prior toSeptember 1, 1998, Gothic, at its option, may redeem up
to $25,000,000 of the aggregate principal amount of the Senior Notes with all
or a portion of the aggregate net proceeds received by the Parent from such
Equity Offering or Equity Offerings at a redemption price of 112.25% of the
aggregate principal amount of the Senior Notes so redeemed, plus accrued and
unpaid interest thereon to the redemption date; provided, however, that
following such redemption, at lease $75,000,000 of the aggregate principal
amount of the Senior Notes remains outstanding.
F-15
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon a Change of Control, as defined, Gothic will be required, subject to
certain conditions, to offer to repurchase all outstanding Senior Notes at
101% of the principal amount thereof, plus accrued and unpaid interest to the
date of purchase.
The Senior Notes are unconditionally guaranteed ("the Guarantee") by the two
subsidiaries of the Parent, Gothic Energy of Texas, Inc. and Gothic Gas
Corporation ("Guarantors"). The Guarantee is a general unsecured senior
obligation of the Guarantors, ranking pari passu with all existing and future
subordinated indebtedness of the Guarantors. The Indenture provides that all
existing and future Restricted Subsidiaries shall enter into the Guarantee.
In connection with obtaining consents to the amendment of Gothic's
outstanding 12 1/4% Senior Notes, the Parent agreed to raise a total of at
least $45,000,000 of equity by February 28, 1998 and at least $100,000,000
from the sale of senior subordinated notes by March 31, 1998. In the event the
Parent fails to comply with either of these agreements, until such conditions
are met, the interest rate on the 12 1/4% Senior Notes will increase by 1%
until the additional equity is raised and also by 1% until the senior
subordinated notes are sold, provided, if the senior subordinated notes are
not sold by June 30, 1998, the interest rate on the12 1/4% Senior Notes will
increase by 2% until such senior subordinated notes are sold. Such additional
equity was not sold by February 28, 1998, and, accordingly, the interest rate
increased to 13 1/4%. Pursuant to such consents, the holder of the 12 1/4%
Senior Notes agreed that the Parent will have the right to redeem such notes
through March 31, 1998 at 100% of the principal amount thereof and at 101% of
the principal amount thereof through April 30, 1998 when such redemption right
will expire.
In November 1997, Gothic purchased $796,000 (face value) of its 12 1/4%
Senior Notes. The market value of these notes was $803,000 as of December 31,
1997. The cost has been treated as treasury bonds and reported as a reduction
of long-term debt on the balance sheet as of December 31, 1997 and the related
interest income and interest expense of $15,000 has been eliminated from the
1997 statement of operations.
NOTE 6. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK OFFERING--On January 30, 1996, the Parent
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 Parent'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 Gothic
approximately $12,970,000, all of which was applied to the purchase of
Buttonwood. 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 Parent 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 related to 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 $253,000). The 5,540
shares of 7 1/2% Cumulative Convertible Preferred Stock were convertible
commencing December 31, 1996, into shares of the Parent'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 Parent's Common
stock during the 30 business days prior to the day the shares are converted
less a discount of 12%. During 1997, the Parent issued an aggregate of
3,054,783 shares of its common stock upon conversion of all 5,540 shares of
its 7 1/2% Cumulative Convertible Preferred Stock. Due to the fact that the
preferred stock was convertible into the Parent's common stock at a discount
from market, Gothic computed an imputed dividend of $791,000, which was based
on the common stock market value of $2.00 per share at the date of issuance,
less a 12 1/2% discount. The discount was accreted as an imputed dividend
through December 31, 1996 and, accordingly, affects income (loss) available
for common shares in 1996.
F-16
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1996, the Parent issued 116,533 shares of its common stock to two
separate parties as consideration for their interest in natural gas and oil
properties located on the Johnson Ranch. The fair value assigned to these
natural gas and oil properties was $300,000, based on the trading price of the
Parent's stock on the date of the acquisition.
During 1997, the Parent issued 335,000 shares of its common stock upon
exercise of outstanding warrants, at a price of $1.00 per share, 14,000 shares
upon conversion of a note, and 5,000 shares upon exercise of an option held by
a former director of the Parent at a price of $2.00 per share. Additionally,
the Parent issued 250,000 shares of its common stock during the period as
consideration to enter into a note payable and later issued an additional
200,000 shares to extend the maturity date of the note.
On January 23, 1998, the Parent issued an aggregate of 37,000 shares of
Series A Preferred Stock with each share having a liquidation preference of
$1,000. The Parent has the right to redeem the Series A Preferred Stock at any
time upon payment in cash of 101% of the liquidation preference, inclusive of
accrued but unpaid dividends, and the shares are mandatorily redeemable on
December 31, 2004. The shares of Series A Preferred Stock entitle the holders
to receive cumulative dividends payable in additional shares of Series A
Preferred Stock at a rate per annum initially of 14% of the liquidation
preference of the Series A Preferred Stock increasing on April 1, 1998 and
each 90-day period thereafter that the Series A Preferred Stock remains
outstanding by 1%, but not to exceed a maximum dividend per annum of 20%,
excluding any other adjustments to the dividend rate. The Series A Preferred
Stock ranks senior to all classes of the Parent's Common Stock and preferred
stock outstanding or hereafter issued. The holders of the shares of Series A
Preferred Stock have no voting rights except (i) as required by Oklahoma law,
or (ii) in the event the shares of Series A Preferred Stock are then
outstanding and so long as such shares remain outstanding, commencing on
September 30, 1998 the holders are entitled to elect two members of the
Parent's Board of Directors, on December 31, 1998 the holders are entitled to
elect three members of the Parent's Board of Directors, and on March 31, 1999
the holders are entitled to elect four members of the Parent's Board of
Directors. Such directors, if elected, will serve until the shares are
redeemed. The dividend rate on the Series A Preferred Stock is subject to
increase under certain circumstances in the event the Parent fails to comply
with certain covenants relating to the registration under the Securities Act
of 1933, as amended, of shares of Series A Preferred Stock to be offered in
exchange for the outstanding shares of Series A Preferred Stock, a change in
control of the Parent, or the failure of the Parent to redeem the shares from
the proceeds of certain offerings of its securities. The issuance of the
shares provided a portion of the cash paid as consideration in the Amoco
Acquisition and were applied as payment of a fee in connection with an
amendment of certain terms of Gothic's outstanding 12 1/4% Senior Notes
thereby permitting the Amoco Acquisition.
Concurrently with the sale of the Series A Preferred Stock, the Parent
issued five-year Warrants to purchase an aggregate of 1,175,778 shares of
Common Stock exercisable at the lesser of $2.75 per share or the average of
the daily closing bid prices commencing five days and ending one day before
the date of exercise. The estimated fair value of such Warrants was $941,000
on the date of issuance. The exercise price and number of shares issuable is
subject to adjustment under certain circumstances and the holders have certain
rights to have the shares issuable on exercise of the warrants registered
under the Securities Act or included in a registration statement filed by the
Parent under the Securities Act. In the event the Series A Preferred Stock
remains outstanding on March 31, 1998, the exercise price of the Warrants will
reduce to $.01 per share and the holders of the Series A Preferred Stock will
receive additional five-year warrants, also having an exercise price of $.01
per share, which will represent the right to purchase, when aggregated with
the Warrants, 10% of Gothic's fully-diluted equity. In the event the Series A
Preferred Stock remains outstanding at each of June 30, 1998, September 30,
1998, December 31, 1998 and March 31, 1999, the holders of the Series A
Preferred Stock will receive additional five-year warrants which will
represent the right to purchase, when aggregated with the Warrants and any
additional warrants previously issued, 20%, 30%, 40% and 50%, respectively, of
Gothic's fully-diluted equity.
F-17
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with past financing arrangements and as compensation for
consulting and professional services, the Parent has issued warrants to
purchase its common stock. The following tables reflect the activity of the
Parent's warrants and options for 1996 and 1997. (See Note 7)
<TABLE>
<CAPTION>
EXERCISE NUMBER
PRICE ($) EXPIRATION OUTSTANDING OUTSTANDING EXERCISABLE
PER SHARE DATE 12/31/95 GRANTED EXERCISED EXPIRED/CANCELED 12/31/96 12/31/96
--------- ---------- ----------- ---------- --------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WARRANTS
1991 Public Offering... 5.50 06/30/1996 800,000 -- -- 800,000 -- --
1991 Underwriter....... 6.00 11/08/1996 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 04/17/1997 300,000 -- -- -- 300,000 300,000
Egolf.................. 2.50 01/19/1996 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 08/31/1997 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 7)
1996 Underwriter
Share................. 3.30 01/30/2001 -- 690,000 -- -- 690,000 690,000
Employees.............. 1.50 11/01/1999 125,000 -- -- -- 125,000 62,500
Employees.............. 1.75 02/01/2001 -- 45,000 -- -- 45,000 --
Employees.............. 2.50 12/18/2001 -- 135,000 -- -- 135,000 --
Officers and Direc-
tors.................. 1.50 11/01/1999 250,000 -- -- 150,000 100,000 50,000
Officers and Direc-
tors.................. 2.50 10/04/1999 500,000 -- -- -- 500,000 500,000
Officers and Direc-
tors.................. 2.56 07/16/2001 -- 600,000 -- -- 600,000 --
Former
Director/Officer...... 1.50 07/15/2002 20,000 -- -- -- 20,000 20,000
Former
Director/Officer...... 2.00 09/15/2004 30,000 -- -- -- 30,000 30,000
---------- ---------- ------- --------- ---------- ----------
Total Options......... 925,000 1,470,000 -- 150,000 2,245,000 1,352,500
Total Warrants &
Options.............. 3,587,500 10,024,531 -- 1,210,000 12,402,031 11,509,531
========== ========== ======= ========= ========== ==========
<CAPTION>
EXERCISE NUMBER
PRICE ($) EXPIRATION OUTSTANDING OUTSTANDING EXERCISABLE
PER SHARE DATE 12/31/96 GRANTED EXERCISED EXPIRED/CANCELED 12/31/97 12/31/97
--------- ---------- ----------- ---------- --------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WARRANTS
1996 Public Offer-
ing(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 04/17/1997 300,000 -- 300,000 -- -- --
Norse.................. 2.50 02/18/1999 -- 200,000 -- -- 200,000 200,000
Senior Notes........... 3.00 09/01/2004 -- 1,400,000 -- -- 1,400,000 1,400,000
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 08/31/1997 52,500 -- 35,000 17,500 -- --
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........ 10,157,031 1,600,000 335,000 17,500 11,404,531 11,404,531
OPTIONS (NOTE 7)
1996 Underwriter
Share................. 3.30 01/30/2001 690,000 -- -- -- 690,000 690,000
Employees.............. 1.50 11/01/1999 125,000 -- -- -- 125,000 125,000
Employees.............. 1.75 02/01/2001 45,000 -- -- -- 45,000 22,500
Employees.............. 2.50 12/18/2001 135,000 -- -- -- 135,000 67,500
Employees.............. 2.00 06/01/2002 -- 100,000 -- -- 100,000 --
Employees.............. 1.84 08/01/2002 -- 350,000 -- -- 350,000 --
Officers & Directors... 1.50 11/01/1999 100,000 -- -- -- 100,000 100,000
Officers & Directors... 2.50 10/04/1999 500,000 -- -- -- 500,000 500,000
Officers & Directors... 2.56 07/16/2001 600,000 -- -- -- 600,000 300,000
Former
Director/Officer...... 1.50 07/15/2002 20,000 -- -- -- 20,000 20,000
Former
Director/Officer...... 2.00 09/15/2004 30,000 -- 5,000 -- 25,000 25,000
---- ---------- ---------- ---------- ------- --------- ---------- ----------
Total Options......... 2,245,000 450,000 5,000 -- 2,690,000 1,850,000
Total Warrants &
Options.............. 12,402,031 2,050,000 340,000 17,500 14,094,531 13,254,531
========== ========== ======= ========= ========== ==========
</TABLE>
F-18
<PAGE>
GOTHIC ENERGY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
- ---------------------
(1) Warrants are redeemable at the option of the Parent at a per warrant price
of $.01 per warrant at anytime 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.
NOTE 7. STOCK OPTIONS
INCENTIVE STOCK OPTION PLAN--The Parent 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. As of December
31, 1996 and 1997, options to purchase 1,005,000 and 1,455,000 shares of
common stock, respectively, had been issued under the Plan. 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
completion of the second year of future service. No non-qualified options have
been issued under the Plan.
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 of up to an aggregate of 1,000,000 shares of Common
Stock of the Parent to officers, directors and certain other key employees.
Awards may be granted for no consideration and consist of stock options, stock
awards, stock appreciation rights, dividend equivalents, other stock-based
awards (such as phantom stock) and performance awards consisting of any
combination of the foregoing. Generally, options will be granted at an
exercise price equal to the lower of (i) 100% of the 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 Parent and consultants
to Gothic can be given an opportunity to purchase stock in the Parent. The
Plan provides that a total of 1,000,000 shares of the Parent'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 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 thirty (30) days after the date the Director is no longer a
Director of the Parent. No options have been issued under the Non-Employee
Plan.
Gothic applies Accounting Principles Board Opinion No. 25 in accounting for
stock options granted to employees, including directors, and Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123") for stock options and
warrants granted to non-employees. No compensation cost has been recognized in
1997 and 1996. Had compensation been determined on the basis of fair value
pursuant to SFAS No. 123, net loss and loss per share would have been
increased as follows:
F-19
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net loss available for common shares:
As reported.......................................... $(4,120) $(4,848)
======= =======
Pro Forma............................................ $(4,564) $(5,698)
======= =======
Basic and diluted loss per share:
As reported.......................................... $ (.35) $ (.35)
======= =======
Pro Forma............................................ $ (.39) $ (.41)
======= =======
</TABLE>
The fair value of each option granted is estimated using the Black Scholes
model. The Parent's stock volatility was 0.90 and 0.81 in 1996 and 1997,
respectively, based on previous stock performance. Dividend yield was
estimated to remain at zero with an average risk free interest rate of 6.0
percent and 6.25 percent in 1996 and 1997, respectively. Expected life was 3
years for options issued in both 1996 and 1997 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 1997 under the Stock
Option Plan were $1,175,000 and $474,000, respectively.
NOTE 8. INCOME TAXES
Deferred tax assets and liabilities are comprised of the following at
December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Gas balancing liability........................................ $ 240
Net operating loss carryforwards............................... 5,626
Depletion carryforwards........................................ 256
Unrealized loss on available-for-sale investments.............. 46
Accrued wages.................................................. 34
-------
Gross deferred tax assets...................................... 6,202
Deferred tax liabilities:
Deferred lease operating expenses.............................. (361)
Book over tax basis of oil and gas properties.................. (5,524)
-------
Gross deferred tax liabilities................................. (5,885)
Net deferred tax assets.......................................... 317
Valuation allowance............................................ (317)
-------
$ --
=======
</TABLE>
Net operating losses of approximately $8,905,000 are available for future
use against taxable income. These net operating loss carryforwards ("NOL")
expire in the years 2010 through 2012.
In addition, the acquisition of Buttonwood 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. Realization of a benefit from Gothic's NOL's is
dependent upon the generation of sufficient future taxable income prior to the
expiration of the NOL's.
F-20
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, in
the event that a substantial change in the ownership of the Parent were to
occur in the future (whether through the sale of stock by a significant
shareholder or shareholders, new issuances of stock by the Parent,
conversions, a redemption, recapitalization, reorganization, any combination
of the foregoing or any other method) so that ownership of more than 50% of
the value of the Parent's capital stock changed during any three-year period,
Gothic's ability to utilize its NOL's could be substantially limited.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Parent has entered into a five-year employment agreement with its
President. Under the agreement, as amended in November 1996, the President
receives a base salary of $121,000 per year plus additional amounts as may be
determined from time to time by the Parent's Board of Directors. The agreement
was again amended in October 1997 to increase the base salary to $150,000 per
year and upon expiration of the current term on December 31, 1999 the
Agreement will be automatically extended three years. In addition, such person
is to receive a cash bonus as may be determined by the Parent's Board of
Directors. The Parent has the right to terminate the employment agreement at
any time upon 45 days notice. Unless the agreement has been terminated for
cause, as defined, the Parent is obligated to pay the officer the sum of
$200,000, together with any sums unpaid under the terms of the employment
agreement, and continue medical insurance in effect for a period of one year
after such termination. In the event of a change in control of the Parent, as
defined, the officer has the right to terminate the employment agreement with
the Parent within 60 days thereafter and the Parent is obligated to pay the
same sums and other benefits described above as if such agreement had been
terminated by the Parent without cause.
In January 1998 Gothic entered into a ten-year marketing agreement, whereby
the majority of the natural gas associated with the Amoco Acquisition will be
marketed, at market prices, under this agreement.
Gothic 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 $121,535 for the years ended
December 31, 1996 and 1997, respectively.
Remaining minimum annual rentals under non-cancelable lease agreements
subsequent to December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.......................................... $120,022
1999.......................................... 115,423
2000.......................................... 9,000
2001.......................................... 8,250
2002.......................................... --
</TABLE>
Gothic is not a defendant in any pending legal proceedings other than
routine litigation incidental to its business. While the ultimate results of
these proceedings cannot be predicted with certainty, Gothic does not believe
that the outcome of these matters will have a material adverse effect on
Gothic.
NOTE 10. BENEFIT PLAN
Gothic maintains a 401(k) Plan for the benefit of its employees. The Plan
was implemented in October 1997. The Plan permits employees to make
contributions on a pre-tax salary reduction basis. Gothic makes limited
matching contributions to the Plan, and may also make other discretionary
contributions. Gothic's contributions for 1997 were $35,000.
F-21
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. MAJOR CUSTOMERS
During the year ended December 31, 1997, Gothic was a party to contracts
whereby it sold approximately 31% of its gas production to Aurora Natural Gas,
LLC, ("Aurora") who also serves as the counterparty to Gothic's swap
agreements (see Note 1), 15% of its gas production to Warren NGL, Inc., 13% of
its gas production to GPM Gas Corporation ("GPM"), 13% of its gas production
to ONEOK Resources, Inc., and 58% of its oil production to Sun Refining and
Marketing ("Sun"). During the year ended December 31, 1996, Gothic was a party
to contracts whereby it sold approximately 48% of its gas production to
Aurora, 11% of its gas production to GPM and 82% of its oil production to Sun.
NOTE 12 RELATED PARTY TRANSACTIONS
During 1997, Gothic made advances totaling $336,000 to two officers and
directors of the Parent. These advances are non-interest bearing and are
expected to be repaid in full. The balance outstanding related to these
advances was $336,000 as of December 31, 1997. In February 1998, $168,000 was
received in connection with a severance agreement.
NOTE 13 SUPPLEMENTARY NATURAL GAS AND OIL 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
natural gas and oil producing activities, net of valuation allowances, and the
aggregate amounts of the related accumulated depreciation, depletion, and
amortization at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1997
--------------
(IN THOUSANDS)
<S> <C>
Proved properties........................................ $94,168
Unproved properties, not subject to depreciation,
depletion and amortization(1)........................... 2,103
Less: Accumulated depreciation, depletion, and
amortization............................................ (9,456)
-------
Net natural gas and oil properties..................... $86,815
=======
</TABLE>
- ---------------------
(1) Gothic expects to evaluate the unproved properties during the next two
years.
COSTS INCURRED--Costs incurred in natural gas and oil property acquisition,
exploration and development activities for the years ended December 31, 1996
and 1997 were as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Property acquisition..................................... $35,348 $83,694
Development costs........................................ 1,177 6,141
------- -------
Total costs incurred................................... $36,525 $89,835
======= =======
</TABLE>
F-22
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NATURAL GAS AND OIL RESERVES DATA (UNAUDITED)
ESTIMATED QUANTITIES--Natural gas and oil reserves cannot be measured
exactly. Estimates of natural gas and oil 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 natural gas and oil reserves require extensive judgments of
reservoir engineering data as explained above. Assigning monetary values to
such estimates does not 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
and significant revisions could occur in the near term. Accordingly, these
estimates are expected to change as future information becomes available. All
of Gothic's reserves are located onshore in the states of Oklahoma, Texas,
Arkansas and Kansas.
The following unaudited table, which is based on reports of Lee Keeling and
Associates, Inc., sets forth proved natural gas and oil reserves:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------------
BBLS MCF BBLS MCF
------- ------- ------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Proved Reserves:
Beginning of year.......................... 711 18,698 1,158 64,534
Revisions of previous estimates............ 222 10,276 552 (13,154)
Purchases of reserves in place............. 639 42,633 2,195 89,016
Production................................. (164) (3,404) (176) (6,583)
Sales of reserves in place................. (250) (3,669) (144) (6,353)
------ ------- ------ --------
End of year 1,158 64,534 3,585 127,460
====== ======= ====== ========
Proved Developed:
Beginning of year.......................... 642 5,093 1,135 47,485
End of year................................ 1,135 47,485 2,503 91,690
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS--Future net cash
inflows are based on the future production of proved reserves of natural gas
and crude oil as estimated by Lee Keeling and Associates, Inc., independent
petroleum engineers, by applying current prices of natural gas and oil to
estimated future production of proved reserves. The average prices used in
determining future cash inflows for natural gas and oil as of December 31,
1997, were $2.30 per mcf, and $17.30 per barrel, 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.
F-23
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Estimated future income taxes are computed by applying the appropriate year-
end statutory tax rate to the future pretax net cash flows relating to
Gothic's estimated proved natural gas and oil reserves. The estimated future
income taxes give effect to permanent differences and tax credits and
allowances. Subsequent toDecember 31, 1997, the "spot market" price of natural
gas decreased to approximately $2.00 per mcf, and oil prices dropped to as low
as approximately $12.00 per barrel, through March 13, 1998. This decline would
have a significant impact on the SMOG values.
Included in the estimated standardized measure of future cash flows are
certain capital projects (future development costs). Gothic estimates the
capital required to develop its undeveloped natural gas and oil reserves
during 1998 to be approximately $20--30 million. Gothic's planned financial
arrangements are discussed in Note 4. If such capital is not employed, the
estimated future cash flows will be impacted.
The following table sets forth Gothic's unaudited estimated standardized
measure of discounted future net cash flows.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows Relating to Proved Reserves:
Future cash inflows................................ $199,166 $ 351,915
Future production costs............................ (73,976) (102,353)
Future development costs........................... (9,645) (26,911)
Future income tax expense.......................... (30,919) (51,925)
-------- ---------
84,626 170,726
Ten percent annual discount factor................. (35,543) (76,624)
-------- ---------
Standardized Measure of Discounted Future Net Cash
Flows............................................. $ 49,083 $ 94,102
======== =========
</TABLE>
The following table sets forth changes in the standardized measure of
discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Standardized measure of discounted future cash
flows-beginning of period.......................... $ 8,179 $ 49,083
Sales of natural gas and oil produced, net of
Operating expenses................................. (5,579) (10,558)
Purchases of reserves-in-place...................... 30,930 75,736
Sales of reserves-in-place.......................... (3,598) (5,832)
Revisions of previous quantity estimates and Changes
in sales prices and production costs............... 18,333 (19,235)
Accretion of discount............................... 818 4,908
------- --------
Standardized measure of discounted future Cash
flows-end of period................................ $49,083 $ 94,102
======= ========
</TABLE>
F-24
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. PRO FORMA BALANCE SHEET (UNAUDITED)
As discussed in Note 3, on January 23, 1998, Gothic completed the Amoco
Acquisition for a purchase price of $237,500,000, subject to certain closing
adjustments. Amoco also received warrants to purchase $1,500,000 shares of
Parent common stock for $3.00 per share, with an estimated fair value of
$1,155,000 and certain producing properties having a value of less than
$1,800,000. The Amoco Acquisition was financed with approximately $22,000,000
in Series A Preferred Stock and $216,400,000 in bank debt. Concurrent with the
Amoco Acquisition and as part of the financing, Gothic sold the Sycamore
System and other gas systems acquired from Amoco for $6,000,000. In addition,
as part of the financing, Gothic incurred (i) bank financing costs of
approximately $4,800,000, (ii) fees of approximately $5,800,000 paid in cash,
$15,000,000 paid in Series A Preferred Stock, and $941,000 paid in warrants,
all for amendments to the terms of Gothic's 12 1/4% Senior Notes. Due to the
significance of this transaction, Gothic has provided a pro forma balance
sheet which gives effect to the Amoco Acquisition and the related financing.
NOTE 15. SUBSEQUENT EVENT (UNAUDITED)
On March 31, 1998, Gothic entered into agreements with Chesapeake Energy
Corporation ("Chesapeake"), with an expected closing date of not later than
April 27, 1998, pursuant to which Gothic will (i) sell to Chesapeake a 50%
interest in substantially all of Gothic's undeveloped acreage for $10,500,000,
(ii) sell for $20,000,000 a 50% interest in Gothic's producing natural gas and
oil properties in the Arkoma basin, and (iii) sell for $39,500,000 shares of
the Parent's Series B Senior Non-voting Preferred Stock and ten-year warrants
to purchase at an exercise price of $.01 per share 2,439,246 shares of
Parent's Common Stock. In addition, Gothic is seeking to sell in privately
negotiated transactions or transactions subject to Rule 144A under the
Securities Act up to $235,000,000 of debt securities and Parent is seeking to
sell $60 million in Senior Secured Discount Notes. Herein, such transactions,
including the transaction with Chesapeake are referred to as the
"Recapitalization." It is intended that the net cash proceeds from the
Recapitalization will be used to redeem Gothic's outstanding 12 1/4% Senior
Notes, repay the outstanding balance under the Credit Facility, including the
bridge loan due and payable on June 30, 1998, and redeem the Parent's Series A
Preferred Stock. The consummation of each transaction will be cross-
conditioned on the consummation of all of the other transactions. There can be
no assurance that the Recapitalization will be completed or that Gothic's
outstanding indebtedness will be refinanced and the Parent's Series A
Preferred Stock will be redeemed.
F-25
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER
THAN THE UNITS OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE UNITS TO ANYONE OR BY ANYONE IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECUTS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF GOTHIC SINCE THE DATE HEREOF OR
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information.................................................... ii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 14
Recapitalization......................................................... 22
The Exchange Offer ...................................................... 24
Use of Proceeds.......................................................... 30
Capitalization........................................................... 31
Selected Historical and Pro Forma Financial Data......................... 32
Pro Forma Combined Condensed Financial Statements........................ 36
Management's Discussion and Analysis of Financial Conditions and Results
of Operations........................................................... 43
Business and Properties.................................................. 61
Management............................................................... 74
Security Ownership of Certain Beneficial Owners and Management........... 78
Description of Other Indebtedness........................................ 80
Description of the Notes................................................. 81
Book-Entry; Delivery; Form and Transfer.................................. 106
Certain U.S. Federal Income Tax Considerations........................... 111
Plan of Distribution..................................................... 116
Legal Matters............................................................ 116
Independent Public Accountants........................................... 117
Engineers................................................................ 117
Glossary................................................................. 118
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOTHIC ENERGY CORPORATION
14 1/8%
SENIOR SECURED DISCOUNT NOTES DUE 2006
----------------
PRELIMINARY PROSPECTUS
----------------
JUNE , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1031 of the Oklahoma General Corporation Act and Article VI of the
Registrant's By-Laws provide for indemnification of present and former
officers, directors, employees and agents.
ITEM 21(A). EXHIBITS.
The information required by this Item 21(a) is set forth in the Index to
Exhibits accompanying this Registration Statement and is incorporated herein
by reference.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in the
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
Registrants has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Tulsa, Oklahoma on
the 2nd day of June, 1998.
Gothic Energy Corporation
/s/ Michael K. Paulk
By: _________________________________
Michael K. Paulk
President, Chief Executive Officer
and Chief Financial Officer
II-2
<PAGE>
GOTHIC ENERGY CORPORATION
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors and
officers of Gothic Energy Corporation, an Oklahoma corporation, which is
filing a Registration Statement on Form S-4 with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act
of 1933, as amended (the "Securities Act"), hereby constitutes and appoints
Michael K. Paulk and Steven P. Ensz, and each of them, the individual's true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for the person and in his name, place and stead, in any and
all capacities, to sign such Registration Statement and any or all amendments,
including post-effective amendments, to the Registration Statement, including
a Prospectus or an amended Prospectus therein and any registration statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act, and all other documents in connection
therewith to be filed with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact as agents or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael K. Paulk Director, President and May 8, 1998
____________________________________ Chief Executive Officer
Michael K. Paulk
/s/ Steven P. Ensz Vice President, Finance and May 8, 1998
____________________________________ Chief Financial Officer
Steven P. Ensz (Principal Financial and
Accounting Officer)
/s/ John J. Fleming Director May 8, 1998
____________________________________
John J. Fleming
/s/ Morton A. Cohen Director May 8, 1998
____________________________________
Morton A. Cohen
/s/ Brian E. Bayley Director May 8, 1998
____________________________________
Brian E. Bayley
</TABLE>
II-3
<PAGE>
GOTHIC ENERGY CORPORATION
REGISTRATION STATEMENT ON FORM S-4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
3.1 Certificate of Incorporation of Gothic Energy Newco, Inc.
("Gothic"), an Oklahoma corporation (filed as Exhibit 3.1 to
Annual Report on Form 10-KSB for the year ended December 31,
1997)
3.2 Certificate of Ownership and Merger filed with the State of
Oklahoma (changed name from Gothic Energy Newco, Inc. to Gothic
Energy Corporation (filed as Exhibit 3.2 to Annual Report on
Form 10-KSB for the year ended December 31, 1997)
3.3 By-Laws of Gothic filed as Exhibit 3.3 to Annual Report on Form
10-KSB for the year ended December 31, 1997)
4.1 Indenture dated as of April 27, 1998 among Gothic and the Bank
of New York relating to the 14 1/8% Series A Senior Secured
Notes due 2006 and 14 1/8% Series B Senior Secured Notes due
2006 (filed as Exhibit 10.7 to the Current Report on Form 8-K
of Gothic for April 27, 1998)
4.2 Forms of Series A and Series B Notes (included in Exhibit 4.1
hereto)
5.1 Opinion of William S. Clarke, P.A.*
10.1 Form of Purchase Agreement dated April 21, 1998 among Gothic
and the Purchasers named therein (filed as Exhibit 10.6 to the
Current Report on Form 8-K of Gothic for April 27, 1998)
10.2 Notes Registration Rights Agreement dated April 27, 1998 among
Gothic and the Purchasers named therein (filed as Exhibit 10.9
to the Current Report on Form 8-K of Gothic for April 27, 1998)
12.1 Statement re Computation of Ratio of Earnings to Fixed Charges
and Preferred Dividends**
15.1 Letter Regarding Unaudited Interim FInancial Information.**
23.1 Consent of Coopers & Lybrand**
23.2 Consent of William S. Clarke, P.A. (included in Exhibit 5.1)*
23.3 Consent of Lee Keeling and Associates, Inc.*
24.1 Power of Attorney (included on the signature pages of this
Registration Statement)
25.1 Statement of Eligibility of The Bank of New York*
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
</TABLE>
- ---------------------
* Previously filed as an Exhibit to this Registration Statement.
**Filed herewith.
<PAGE>
EXHIBIT 12.1
GOTHIC ENERGY CORPORATION
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
HISTORICAL PRO FORMA
--------------------- ------------------------
1996 1997 1997
------- ------- ------------------------
<S> <C> <C> <C>
Loss before income taxes
and extraordinary item $(4,508) $(3,677) $(11,529)
Add:
Interest on indebtedness 1,460 6,996 25,850
Non cash interest on indebtedness --- --- 8,400
Amortization of debt
discount and financing
costs 69 1,804 1,631
-------- -------- ---------
Income as adjusted (2,979) 5,123 24,352
Fixed Charges:
Interest on indebtedness 1,460 6,996 25,850
Non cash interest on indebtedness --- --- 8,400
Amortization of debt
discount and financing
costs 69 1,804 1,631
Preferred dividends 1,173 264 7,886
-------- -------- ---------
$ 2,702 $9,064 $ 43,767
Ratio of earnings to fixed
charges --- 0.6 0.6
======== ======== =========
Insufficiency of earnings to
cover fixed charges $(5,681) $(3,941) $(19,415)
======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
HISTORICAL PRO FORMA
--------------------- ------------------------
1997 1998 1998
------- ------- ------------------------
<S> <C> <C> <C>
Income (loss) before income taxes
and extraordinary item $ 528 $(4,051) $ (5,227)
Add:
Interest on indebtedness 806 7,113 6,536
Interest income (17) (166) (166)
Loss on sale of investments --- 265 265
Non cash interest on indebtedness --- --- 2,185
Amortization of debt
discount and financing
costs 380 920 359
-------- -------- ---------
Income as adjusted 1,697 4,081 3,952
Fixed Charges:
Interest on indebtedness 806 7,113 6,536
Interest income (17) (166) (166)
Loss on sale of investments --- 265 265
Non cash interest on indebtedness --- --- 2,185
Amortization of debt
discount and financing
costs 380 920 359
Preferred dividends 104 974 1,906
-------- -------- ---------
$ 1,273 $9,106 $ 11,085
Ratio of earnings to fixed
charges 1.3 0.5 0.4
======== ======== =========
Insufficiency of earnings to
cover fixed charges $ --- $(5,025) $ (7,133)
======== ======== =========
</TABLE>
<PAGE>
EXHIBIT 15.1
GOTHIC ENERGY CORPORATION
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street Northwest
Washington, DC 20549
Re: GOTHIC ENERGY CORPORATION AND SUBSIDIARIES
REGISTRATION STATEMENT ON FORM S-4
Gentlemen:
We are aware that our report dated May 15, 1998 on our review of the
interim financial information of Gothic Energy Corporation for the three month
period ended March 31, 1998 is incorporated by reference in the Company's
Registration Statement on Form S-4 (File No. 333-52217). Pursuant to Rule 436(c)
under the Securities Act of 1933, these reports should not be considered a part
of the Registration Statement prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
June 2, 1998
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion/incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 (File No.
333-52217) of our report dated March 13, 1998, on our audits of the consolidated
financial statements of Gothic Energy Corporation and Subsidiaries.
We also consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Gothic Energy
Corporation (File No. 333-52217) of our report dated March 4, 1998 on our audit
of the historical schedule of gross revenues and direct lease operating expenses
of the Amoco Properties for the years ended December 31, 1997 and 1996.
We also consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Gothic Energy
Corporation (File No. 333-52217) of our report dated July 11, 1997 on our audit
of the historical schedule of gross revenues and direct lease operating expenses
of the HS Properties for the years ended December 31, 1996 and 1995.
We also consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Gothic Energy
Corporation (File No. 333-52217) of our report dated April 30, 1997 on our audit
of the historical schedule of gross revenues and direct operating expenses of
the Norse and Horizon Properties for the year ended December 31, 1996.
We also consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Gothic Energy
Corporation (File No. 333-52217) of our report dated July 19, 1996 on our audit
of the historical schedule of gross revenues and direct lease operating expenses
of the Comstock Properties for the year ended December 31, 1995.
We also consent to the reference to our firm under the caption
"Independent Public Accountants."
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
June 2, 1998
