<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period from________________________to________________________.
---------------------------------------------------------------------
Commission file number 0-19753
GOTHIC ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma 22-2663839
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5727 South Lewis, #700, Tulsa, Oklahoma 74105-7148
(Address of principal executive offices)
918-749-5666
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------- --------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 13, 1999, 16,291,640 shares of the Registrant's Common
Stock, $.01 par value, were outstanding.
<PAGE>
GOTHIC ENERGY CORPORATION
GOTHIC PRODUCTION CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
Item 1 - Financial Statements
Consolidated Unaudited Balance Sheet
December 31, 1998 and June 30, 1999..................................... 3
Consolidated Unaudited Statement of Operations
Six months ended June 30, 1998 and 1999.................................. 4
Consolidated Unaudited Statement of Operations
Three months ended June 30, 1998 and 1999................................ 5
Consolidated Unaudited Statement of Cash Flows
Six months ended June 30, 1998 and 1999.................................. 6
Notes to Unaudited Consolidated Financial Statements..................... 7
Report of Review by Independent Accountants.............................. 10
Item 2 - Management's Discussion and Analysis
Management's Discussion and Analysis or Plan of Operation................ 11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................ 18
Signatures............................................................... 19
2
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands, except par value and share data)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1998 1999
------ ------------------- --------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,289 $ 1,869
Natural gas and oil receivables 7,236 9,711
Receivable from officers and employees 55 62
Other 221 301
--------- ---------
Total current assets 9,801 11,943
Property and equipment:
Natural gas and oil properties on full cost method:
Properties being amortized 242,012 249,158
Unproved properties not subject to amortization 2,862 4,121
Equipment, furniture and fixtures 3,327 3,546
Accumulated depreciation, depletion and amortization (33,201) (43,853)
--------- ---------
Property and equipment, net 215,000 212,972
Other assets, net 12,487 11,585
--------- ---------
Total assets $ 237,288 $ 236,500
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Accounts payable trade $ 3,208 $ 1,886
Revenues payable 6,031 7,078
Accrued interest expense 4,358 4,357
Other accrued liabilities 253 496
--------- ---------
Total current liabilities 13,850 13,817
Long-term debt, net 301,179 313,353
Gas imbalance and other liabilities 6,180 3,706
Stockholders' equity (deficit):
Series B Preferred Stock, Par Value $.05, authorized
165,000 shares; 54,187 and 55,790 shares issued and
outstanding 36,945 41,159
Common stock, par value $.01, authorized 100,000,000 shares;
issued and outstanding 16,261,640 and 16,291,640 shares 162 163
Additional paid in capital 42,996 43,011
Accumulated deficit (163,845) (178,530)
Note receivable (179) (179)
--------- ---------
Total stockholders' equity (deficit) (83,921) (94,376)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 237,288 $ 236,500
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------------------------
1998 1999
-------------------- --------------------
Revenues:
<S> <C> <C>
Natural gas and oil sales $ 27,921 $ 23,417
Well operations 1,152 1,259
-------- --------
Total Revenues 29,073 24,676
Costs and expenses:
Lease operating expense 7,495 4,601
Depletion, depreciation and amortization 13,755 10,652
General and administrative expense 1,770 1,984
-------- --------
Operating income 6,053 7,439
Interest expense and amortization of debt issuance costs (17,094) (18,727)
Interest and other income 179 817
Loss on sale of investments (305) -
-------- --------
Loss before extraordinary item (11,167) (10,471)
Loss on early extinguishment of debt 31,459 -
-------- --------
Net loss (42,626) (10,471)
Preferred dividend ($65.92 and $59.84 per preferred share) 2,464 3,291
Preferred dividend - amortization of preferred discount 4,171 923
-------- --------
Net loss available for common shares $(49,261) $(14,685)
======== ========
Loss per common share before extraordinary item,
basic and diluted $(1.09) $( .90)
======== ========
Net loss per common share, basic and diluted $(3.03) $( .90)
======== ========
Weighted average common shares outstanding 16,262 16,286
======== ========
</TABLE>
See accompanying notes
4
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
June 30,
----------------------------------------------
1998 1999
-------------------- --------------------
<S> <C> <C>
Revenues:
Natural gas and oil sales $ 11,405 $12,564
Well operations 566 642
-------- -------
Total Revenues 11,971 13,206
Costs and expenses:
Lease operating expense 2,831 2,262
Depletion, depreciation and amortization 6,311 5,367
General and administrative expense 857 1,013
-------- -------
Operating income 1,972 4,564
Interest expense and amortization of debt issuance costs (9,061) (9,450)
Interest and other income 13 36
Loss on sale of investments (40) -
-------- -------
Loss before extraordinary item (7,116) (4,850)
Loss on early extinguishment of debt 4,398 -
-------- -------
Net loss (11,514) (4,850)
Preferred dividend ($31.91 and $30.26 per preferred share) 1,490 1,688
Preferred dividend - amortization of preferred discount 4,171 461
-------- -------
Net loss available for common shares $(17,175) $(6,999)
======== =======
Loss per common share before extraordinary item,
basic and diluted $(.79) $(.43)
======== =======
Net loss per common share, basic and diluted $(1.06) $(.43)
======== =======
Weighted average common shares outstanding 16,262 16,292
======== =======
</TABLE>
See accompanying notes
5
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------------------------
1998 1999
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (42,626) $(10,471)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation, depletion and amortization 13,755 10,652
Amortization of discount and loan costs 1,173 832
Accretion of interest on discount notes 1,579 4,674
Loss on early extinguishment of debt 31,459 -
Changes in assets and liabilities:
Increase in accounts receivable (2,729) (2,482)
Increase in other current assets (68) (80)
Increase (decrease) in accounts and revenues payable 2,054 (275)
Increase in accrued liabilities 576 243
Decrease in gas imbalance liability - (76)
--------- --------
Net cash provided by operating activities $ 5,173 $ 3,017
Net cash used by investing activities:
Collection of note receivable from officer and director 167 -
Purchase of available-for-sale investments (462) -
Proceeds from sale of investment 1,359 -
Proceeds from sale of property and equipment 43,025 2,104
Purchase of property and equipment (217,476) (3,659)
Property development costs (6,158) (9,306)
--------- --------
Net cash used by investing activities $(179,545) $(10,861)
Cash flows from financing activities:
Proceeds from short-term borrowings 60,000 -
Payment of short-term borrowings (60,000) -
Proceeds from long-term borrowings 429,340 17,500
Payments of long-term borrowings (257,934) (10,000)
Proceeds from sale of preferred stock, net 73,475 -
Redemption of preferred stock, net (40,809) -
Payment of loan fees (38,271) (76)
Other (141) -
--------- --------
Net cash provided by financing activities $ 165,660 $ 7,424
Net change in cash and cash equivalents (8,712) (420)
Cash and cash equivalents, beginning of period 16,722 2,289
--------- --------
Cash and cash equivalents, end of period $ 8,010 $ 1,869
========= ========
Supplemental disclosure of interest paid $ 14,342 $ 13,221
========= ========
</TABLE>
See accompanying notes
6
<PAGE>
GOTHIC ENERGY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED 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, a "holding company", and its
subsidiary, Gothic Production Corporation ("Gothic Production") since its
formation in April of 1998, (collectively referred to as the ''Company''). All
significant intercompany balances and transactions have been eliminated. The
Company 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 the Company's natural gas and oil production is
being sold regionally in the ''spot market'' or under short-term contracts, not
extending beyond twelve months.
Preparation of Financial Statements - The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The December 31, 1998 consolidated balance sheet data was derived from the
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The financial statements should be
read in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998.
In the opinion of management of the Company, the accompanying financial
statements contain all adjustments, none of which were other than normal
recurring accruals, necessary to present fairly the financial position of the
Company as of June 30, 1999, and the results of its operations and cash flows
for the periods ended June 30, 1998 and 1999. The results of operations for the
1999 period are not necessarily indicative of the results of operations to be
expected for the full year.
Our independent accountants have performed a review of these interim financial
statements in accordance with standards established by the American Institute of
Certified Public Accountants. Pursuant to Rule 436(c) under the Securities Act
of 1933, their report of that review should not be considered a part of any
registration statements prepared or certified by them within the meaning of
Section 7 and 11 of that Act.
Loss per common share - Loss per common share before extraordinary item and
net loss per common share are computed in accordance with Statement of Financial
Accounting Standards No. 128 ("FAS 128"). Presented on the Consolidated
Statement 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.
Warrants and options to purchase approximately 21,575,000 shares were
outstanding as of June 30, 1999 and were excluded from the computation of
diluted loss per share due to their anti-dilutive impact.
Hedging Activities - In April 1999, the Company entered into a hedge agreement
in the form of a costless collar with respect to the production of 50,000 MMBTU
of natural gas per day during the period of May through October 1999. The
costless collar places a floor of $1.80 per MMBTU and a ceiling of $2.26 per
MMBTU for the effective price of natural gas received by the Company.
Additionally, in July 1999 the Company entered into a similar costless collar
agreement with respect to the production of 50,000 MMBTU per day during the
period of November 1999 through March 2000 which places a floor of $2.30 per
MMBTU and a ceiling of $3.03 per MMBTU. The collars represent approximately 62%
of the Company's current daily production. Collar arrangements limit the
benefits the Company will realize if actual prices rise above the ceiling price.
These arrangements provide for the Company to exchange a floating market price
for a fixed range contract price. Payments are made by the Company when the
floating price exceeds the fixed range for a contract month and payments are
received when the fixed range price exceeds the floating price. The commodity
reference price for both contracts is the Panhandle Eastern Pipeline Company,
Texas, Oklahoma Mainline Index.
7
<PAGE>
NOTE 1. GENERAL AND ACCOUNTING POLICIES (Continued)
Recently issued Financial Accounting Pronouncements - In June 1998, the FASB
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". FAS 133, as amended, is effective for all fiscal quarters
beginning after June 15, 2000. FAS 133 standardizes the accounting for
derivative instruments by requiring that all derivatives be recognized as assets
and liabilities and measured at fair value. Upon the Statement's initial
application, all derivatives are required to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all existing hedging relationships must be designated, reassessed,
documented and the accounting conformed to the provisions of FAS 133. Due to
the limited nature of the Company's hedging activities, the Company does not
expect the adoption of FAS 133 to have a significant impact on its financial
position or results of operations when adopted.
NOTE 2. GOING CONCERN
The Company incurred a significant net loss in 1998, due principally to a
decline in commodity prices during that year. This commodity price decline
required the Company to write down the carrying value of its natural gas and oil
properties by $76,000,000. More significantly, the commodity price decline
continued to affect the ongoing revenues and cash flows of the Company during
early 1999, resulting in a net loss of $10,471,000 for the six months ended
June 30, 1999.
It is the intention of the Company to continue to spend available cash flow
(EBITDA less cash interest payable on Senior Secured Notes) on the development
of natural gas and oil properties. With the continued volatility of commodity
prices, hedging programs will continue to be utilized by the Company. This
should help to stabilize cash flow, but a sustained price increase will be
necessary to ensure the Company's ability to generate sufficient reserves to
replace current production. Should commodity prices fall below current levels,
the Company would be limited in its ability to increase production and related
cash flow to a level sufficient to meet its ongoing financial covenants under
its Credit Facility. The price of natural gas and oil has recently been
increasing, but there is no assurance that it will continue to increase or
remain at the current level.
8
<PAGE>
NOTE 3. SUMMARIZED FINANCIAL INFORMATION
Gothic Production Corporation was organized in March 1998 as a wholly owned
subsidiary of the Company. On April 27, 1998, the Company transferred to Gothic
Production its ownership in all its natural gas and oil properties. Following
is the summarized financial information related to Gothic Production as of June
30, 1999 and for the six month and three month periods ended June 30, 1999. (in
thousands)
<TABLE>
<CAPTION>
As of June 30, 1999
-----------------------------------------------------------------------------------
Gothic Energy
Gothic Energy Gothic Production Corporation
Corporation Corporation Consolidated
---------------------------- ---------------------------- --------------------------
<S> <C> <C> <C>
Current assets $ - $ 11,943 $ 11,943
Non-current assets 1,912 222,645 224,557
Current liabilities - 13,817 13,817
Non-current liabilities 70,853 246,206 317,059
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
------------------------------------------------------------------------------------
Gothic Energy
Gothic Energy Gothic Production Corporation
Corporation Corporation Consolidated
---------------------------- ---------------------------- --------------------------
<S> <C> <C> <C>
Total revenues $ - $24,676 $ 24,676
Operating costs and
expenses - 17,237 17,237
Interest expense and
amortization of debt
issuance cost 4,814 13,913 18,727
Net loss (4,814) (5,657) (10,471)
For the three months ended June 30, 1999
------------------------------------------------------------------------------------
Gothic Energy
Gothic Energy Gothic Production Corporation
Corporation Corporation Consolidated
---------------------------- ---------------------------- --------------------------
Total revenues $ - $13,206 $ 13,206
Operating costs and
expenses - 8,642 8,642
Interest expense and
amortization of debt
issuance cost 2,460 6,990 9,450
Net loss (2,460) (2,390) (4,850)
</TABLE>
9
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders:
We have reviewed the accompanying consolidated balance sheet of Gothic
Energy Corporation and Subsidiary as of June 30, 1999 and the related
consolidated statements of operations for the three and six-month periods ended
June 30, 1998 and 1999, and the consolidated statement of cash flows for the
six-month periods ended June 30, 1998 and 1999. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
March 12, 1999, we expressed an unqualified opinion on those consolidated
financial statements. Our report included an explanatory paragraph that
described the substantial doubt about the Company's ability to continue as a
going concern, as discussed in Note 2 to those statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1998 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
August 10, 1999
10
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation
The following is management's discussion and analysis of certain
significant factors which have affected the Company's earnings, financial
condition and liquidity during the periods included in the accompanying
Consolidated Financial Statements.
General
The Company's results of operations have been significantly affected by its
acquisition of producing natural gas and oil properties over the last three
years. During the first quarter of 1998, the Company completed the Amoco
Acquisition for a purchase price of approximately $242.0 million. This
acquisition included approximately 240.0 Bcfe.
The profitability and revenues of the Company are dependent, to a
significant extent, upon prevailing spot market prices for natural gas and oil.
Over the past 18 months, natural gas and oil prices and markets have fluctuated
widely. Prices are subject to wide fluctuations in response to 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 the Company. Such factors
include political conditions, weather conditions, government regulations, the
price and availability of alternative fuels and overall economic conditions.
The Company incurred a significant net loss in 1998, due principally to a
decline in commodity prices during that year. This commodity price decline
required the Company to write down the carrying value of its natural gas and oil
properties by $76,000,000. More significantly, the commodity price decline
continued to affect the ongoing revenues and cash flows of the Company during
early 1999, resulting in a net loss of $10,471,000 for the six months ended
June 30, 1999.
It is the intention of the Company to continue to spend available cash flow
(EBITDA less cash interest payable on Senior Secured Notes) on the development
of natural gas and oil properties. With the continued volatility of commodity
prices, hedging programs will continue to be utilized by the Company. This
should help to stabilize cash flow, but a sustained price increase will be
necessary to ensure the Company's ability to generate sufficient reserves to
replace current production. Should commodity prices fall below current levels,
the Company would be limited in its ability to increase production and related
cash flow to a level sufficient to meet its ongoing financial covenants under
its Credit Facility. The price of natural gas and oil has recently been
increasing, but there is no assurance that it will continue to increase or
remain at the current level.
11
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued)
The following table reflects certain summary operating data for the periods
presented:
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
1998 1999 1998 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(in thousands, unless otherwise indicated)
Net Production:
Oil (Mbbls) 52 35 138 75
Natural gas (Mmcf) 5,710 6,469 12,666 12,891
Natural gas equivalent (Mmcfe) 6,022 6,679 13,494 13,341
Oil and Natural Gas Sales:
Oil $ 725 $ 564 $ 2,024 $ 1,045
Natural gas 10,680 12,000 25,897 22,372
------- ------- ------- -------
Total $11,405 $12,564 $27,921 $23,417
======= ======= ======= =======
Average Sales Price:
Oil (Bbl) $ 13.94 $ 16.11 $ 14.67 $ 13.93
Natural gas (Mcf) 1.87 1.86 2.04 1.74
Natural gas equivalent (Mcfe) 1.89 1.88 2.07 1.76
Expenses ($ per Mcfe):
Lease operating (1) (2) $ 0.33 $ 0.21 $ 0.41 $ 0.22
General and administrative(3) 0.14 0.15 0.13 0.15
Depreciation, depletion and amortization 1.05 0.80 1.02 0.80
- -------------------------------------------
</TABLE>
(1) Includes lease operating and direct field costs only.
(2) The 1998 lease operating expense amount includes $1.1 million of non-
recurring costs associated with the Amoco Acquisition transition.
(3) Includes a non-recurring severance payment to a former officer in 1998.
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998
Revenues were $24.7 million for the six months ended June 30, 1999, as
compared to $29.1 million for the six months ended June 30, 1998. This
represents a 15% decrease in total revenue for the period. Natural gas and oil
sales for the six months ended June 30, 1999 decreased $4.5 million (16%) to
$23.4 million, with $1.0 million from oil sales and $22.4 million from natural
gas sales, as compared to natural gas and oil sales of $27.9 million for the six
months ended June 30, 1998, with $2.0 million from oil sales and $25.9 million
from natural gas sales. The decrease in natural gas and oil sales was primarily
the result of lower commodity prices within the natural gas and oil industry
during the first quarter of 1999. Of the $4.5 million decrease in comparable
natural gas and oil sales, approximately $3.9 million was the result of the
lower commodity prices and approximately $600,000 was the result of lower oil
production volumes resulting from property sales in 1998. Oil sales in 1999
were based on the sale of 75,000 barrels at an average price of $13.93 per
barrel as compared to 138,000 barrels at an average price of $14.67 per barrel
in 1998. Natural gas sales in 1999 were based on the sale of 12,891,000 Mcf at
an average price of $1.74 per Mcf compared to 12,666,000 Mcf at an average price
of $2.04 per Mcf in 1998.
The Company incurred lease operating expenses for the six months ended
June 30, 1999 of $4.6 million compared with lease operating expenses of $7.5
million for the six months ended June 30, 1998. Lease operating expenses
include approximately $1.6 million and $1.9 million, respectively, in production
taxes which the Company incurred from its share of production in 1999 and 1998.
The decrease in lease operating expenses is primarily due to the sale of oil
properties in the Johnson Ranch and Brushy Draw areas. Lease operating expenses
as a percentage of natural gas and oil sales were 20% in 1999 as compared to 27%
in 1998.
12
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued)
Depreciation, depletion and amortization expense was $10.7 million for the
six months ended June 30, 1999 as compared to $13.8 million for the six months
ended June 30, 1998. The decrease resulted primarily from the writedown of
natural gas and oil properties in the latter half of 1998, which created a
smaller depletable base, and the decreased production associated with the
properties sold in 1998.
General and administrative costs were $2.0 million for the six months
ended June 30, 1999, as compared to $1.8 million for the six months ended June
30, 1998. This increase was primarily the result of additional personnel and
other costs related to the Amoco Acquisition and the administrative costs
incurred in operating the wells acquired from Amoco. General and administrative
costs per Mcfe increased from $0.13 in 1998 to $0.15 in 1999.
Interest and debt issuance costs were $18.7 million for the six months
ended June 30, 1999 as compared to $17.1 million for 1998. The increase
primarily relates to interest, and costs associated with the 11 1/8% Senior
Secured Notes and the 14 1/8% Senior Secured Discount Notes issued as part of
the Company's recapitalization in April 1998. The Company incurred interest
costs of $13.1 million related to the 11 1/8% Senior Secured Notes, $4.7 million
related to the 14 1/8% Senior Secured Discount Notes, $149,000 with Bank One,
Texas, N.A. and $832,000 as amortization of loan costs.
The Company earned $817,000 in interest and other income during the six
months ended June 30, 1999 compared to $179,000 in 1998. The 1999 amount
includes $720,000 from the sale of seismic data.
The Company also incurred $4.2 million in preferred dividends and
amortization of preferred discount costs on its Series B Preferred Stock during
the six months ended June 30, 1999, compared to $6.6 million in preferred
dividends and amortization of preferred discount costs on its Series A, redeemed
in April 1998, and its Series B Preferred Stock in 1998.
Three Months Ended June 30, 1999 Compared with Three Months Ended June 30, 1998
Revenues were $13.2 million for the three months ended June 30, 1999, as
compared to $12.0 million for the three months ended June 30, 1998. This
represents a 10% increase in total revenue for the period. Natural gas and oil
sales for the three months ended June 30, 1999 increased $1.2 million (10%) to
$12.6 million, with $564,000 from oil sales and $12.0 million from natural gas
sales, as compared to natural gas and oil sales of $11.4 million for the three
months ended June 30, 1998, with $725,000 from oil sales and $10.7 million from
natural gas sales. The increase in natural gas and oil sales was primarily the
result of an increase in natural gas production of 759,000 Mcf in the 1999
period due to the completion of several new wells under the Company's drilling
program in late 1998 and early 1999. Oil sales in 1999 were based on the sale of
35,000 barrels at an average price of $16.11 per barrel as compared to 52,000
barrels at an average price of $13.94 per barrel in 1998. Natural gas sales in
1999 were based on the sale of 6,469,000 Mcf at an average price of $1.86 per
Mcf compared to 5,710,000 Mcf at an average price of $1.87 per Mcf in 1998.
The Company incurred lease operating expenses for the three months ended
June 30, 1999 of $2.3 million compared with lease operating expenses of $2.8
million for the three months ended June 30, 1998. Lease operating expenses
include approximately $883,000 and $827,000, respectively, in production taxes
which the Company incurred from its share of production in 1999 and 1998. Lease
operating expenses as a percentage of natural gas and oil sales were 18% in 1999
as compared to 25% in 1998.
Depreciation, depletion and amortization expense was $5.4 million for the
three months ended June 30, 1999 as compared to $6.3 million for the three
months ended June 30, 1998. The decrease resulted primarily from the
writedown of natural gas and oil properties in the latter half of 1998, which
created a smaller depletable base, and the decreased production associated with
the properties sold in 1998.
13
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued)
General and administrative costs were $1.0 million for the three months
ended June 30, 1999, as compared to $857,000 for the three months ended June
30, 1998. This increase was primarily the result of additional personnel and
other costs related to the Amoco Acquisition and the administrative costs
incurred in operating the wells acquired from Amoco. General and administrative
costs per Mcfe increased from $0.14 in 1998 to $0.15 in 1999.
Interest and debt issuance costs were $9.5 million for the three months
ended June 30, 1999 as compared to $9.1 million for 1998. The increase
primarily relates to interest, and costs associated with the 11 1/8% Senior
Secured Notes and the 14 1/8% Senior Secured Discount Notes issued as part of
the Company's recapitalization in April 1998. The Company incurred interest
costs of $6.5 million related to the 11 1/8% Senior Secured Notes, $2.4 million
related to the 14 1/8% Senior Secured Discount Notes, $107,000 with Bank One,
Texas, N.A. and $417,000 as amortization of loan costs.
The Company earned $36,000 in interest and other income during the three
months ended June 30, 1999 compared to $13,000 in 1998.
The Company also incurred $2.1 million in preferred dividends and
amortization of preferred discount costs on its Series B Preferred Stock during
the three months ended June 30, 1999, compared to $5.7 million in preferred
dividends and amortization of preferred discount costs on its Series A, redeemed
in April 1998, and its Series B Preferred Stock in 1998.
In April 1999, the Company entered into a hedge agreement in the form of a
costless collar with respect to the production of 50,000 MMBTU of natural gas
per day during the period of May through October 1999. The costless collar
places a floor of $1.80 per MMBTU and a ceiling of $2.26 per MMBTU for the
effective price of natural gas received by the Company. Additionally, in July
1999 the Company entered into a similar costless collar agreement with respect
to the production of 50,000 MMBTU per day during the period of November 1999
through March 2000 which places a floor of $2.30 per MMBTU and a ceiling of
$3.03 per MMBTU. The collars represent approximately 62% of the Company's
current daily production. Collar arrangements limit the benefits the Company
will realize if actual prices rise above the ceiling price. These arrangements
provide for the Company to exchange a floating market price for a fixed range
contract price. Payments are made by the Company when the floating price
exceeds the fixed range for a contract month and payments are received when the
fixed range price exceeds the floating price. The commodity reference price for
both contracts is the Panhandle Eastern Pipeline Company, Texas, Oklahoma
Mainline Index.
Liquidity and Capital Resources
General
Since 1994, the Company'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 the
Company for the six months ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Six Months ended June 30,
1998 1999
---------------- ----------------
(in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 5,173 $ 3,017
Net cash used in investing activities 179,545 10,861
Net cash provided by financing activities 165,660 7,424
</TABLE>
Net cash provided by operations was $3.0 million for the six months ended
June 30, 1999 as compared to net cash provided of $5.2 million for the same
period in 1998. The operating cash flows for the six months ended June 30,
1999 reflect the decrease in revenues resulting from lower commodity prices
during the first quarter of 1999, and the decrease in accounts and revenues
payable.
14
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued)
The Company used $10.9 million of net cash in investing activities for the
six months ended June 30, 1999 compared to net cash used of $179.5 million for
the same period in 1998. The 1999 cash used for investing activities includes
property development costs of approximately $9.3 million and approximately $3.7
million in cash paid for property acquisitions. These uses were partially
offset by proceeds of $2.1 million received from the sale of substantially all
of the Company's Johnson Ranch operations. The 1998 cash used for investing
activities includes approximately $217.5 million paid for property acquisitions,
including the Amoco Acquisition, offset by approximately $43.0 million received
from property sales.
Net cash provided by financing activities for the six months ended June
30, 1999 was $7.4 million compared to $165.7 million provided in 1998. The June
30, 1999 amount includes net proceeds from the Company's credit facility of $7.5
million, partially offset by the payment of $76,000 in bank and other loan
fees. The 1998 amount includes approximately $429.3 million received from long-
term borrowings and approximately $73.5 million received from the sale of
preferred stock, offset by the payment of long-term borrowings of approximately
$257.9 million, the redemption of preferred stock of approximately $40.8 million
and the payment of loan fees of approximately $38.3 million.
Outstanding Indebtedness and Other Securities
Credit Facility.
On April 27, 1998, Gothic Production, with the Company as guarantor,
entered into the Credit Facility. The Credit Facility consists of a revolving
line of credit, with an initial Borrowing Base of $25.0 million. Borrowings are
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 is redetermined at least semi-annually and was initially
redetermined on October 1, 1998. Upon completion of the April 1, 1999
redetermination, the borrowing base remained at $25.0 million. The principal is
due at maturity, April 30, 2001. Interest is payable monthly calculated at the
Bank One Base Rate, as determined from time to time by Bank One. Gothic
Production may elect to calculate interest under a London Interbank Offered Rate
("LIBOR") plus; (i) 2.0 % whenever the Total Outstandings are 50% or less of the
Borrowing Base; (ii) 2.25% whenever the Total Outstandings are greater than 50%
but less than or equal to 75% of the Borrowing Base; or (iii) 2.5% whenever the
Total Outstandings are greater than 75% of the Borrowing Base. Gothic
Production 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
holds first priority liens on substantially all of the natural gas and oil
properties of Gothic Production, whether currently owned or hereafter acquired.
As of June 30, 1999, Gothic Production had $7.5 million outstanding under the
Credit Facility and had $5.0 million outstanding as of the date of this
quarterly report.
The 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 are made. The Credit Facility, as amended on May 7, 1999, 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 the Company, subject to certain exceptions, (iii) prohibitions
against cash dividends, (iv) prohibitions against hedging positions unless
consented to by 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, and
(viii) a minimum interest coverage ratio of not less than 1.25 to 1.0 for the
quarter ended June 30, 1999, 1.50 to 1.0 for the quarter ended September 30,
1999, 1.75 to 1.0 for the quarter ended December 31, 1999 and 2.0 to 1.0 for
each remaining quarter starting with the quarter ending March 31, 2000. The
Credit Facility includes covenants prohibiting cash dividends, distributions and
loans or advances to third parties, subject to certain exceptions. If Gothic
Production is required to purchase or redeem any portion of the 11 1/8% Senior
Secured Notes, or if any portion of the 11 1/8% Senior Secured Notes become due,
the Borrowing Base is subject to reduction. Gothic Production 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.
Events of default include
15
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued)
the non-payment of principal, interest or fees, a default under other
outstanding indebtedness, a breach of the 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 the Company.
Future Capital Requirements and Resources
The Company'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 the Company 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,
the Company will be dependent upon acquiring or developing additional natural
gas and oil properties or entering into joint natural gas and oil well
development arrangements. The Company had $17.5 million in borrowing capacity
available under its Credit Facility at June 30, 1999 and had $20.0 million
available as of the date of this quarterly report.
Year 2000 Computer Issues
The Year 2000 computer issue is the result of computer programs being
written to use two digits to define year dates. Computer programs running date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in systems failure or miscalculations causing
disruptions of operations.
We initiated a comprehensive assessment of our information technology and
non-information technology systems to ensure that our systems either will be
unaffected by the year 2000 issue or will be upgraded to enable compliance with
Year 2000 standards. In general, our information technology computer systems
consist of our office computer network and financial management software. Our
other computer systems, which are non-information technology, consist of certain
office equipment and other systems associated with our natural gas and oil
properties. We are also evaluating the Year 2000 compliance by our customers
and suppliers to ascertain the potential impact on us of the extent of our
customers and suppliers compliance with Year 2000 issues.
We began an in-house assessment of our year 2000 problem with respect to
our information technology systems in mid 1997. Since that time, we have
upgraded all of our financial management software to newer versions which are
Year 2000 compliant. In addition, we have replaced nearly all of our
information technology hardware so that this hardware is now Year 2000
compliant. To date the cost of the upgrade and of this software and hardware
has been approximately $75,000.
Additionally, we have assessed our non-information technology systems which
consist primarily of embedded technology at our Watonga, Oklahoma field office
and the production telemetry equipment used on our operated wellsites. We
believe that our non-information technology systems will be Year 2000 compliant
by September 1999 without any material costs.
We are conducting an assessment of Year 2000 exposures related to our
suppliers and customers. We have identified our key customers and suppliers and
have requested information as to the Year 2000 compliance of such customers.
Although no contingency plans have been developed to date, we will begin to
formulate such plans as we ascertain the preparedness of our customers and
suppliers.
We anticipate that all of our internal systems and equipment will be Year
2000 compliant by the end of the third quarter of 1999. We believe that the
total costs associated with modifying our existing systems will not have a
material adverse effect on our results of operations or financial condition.
Nonetheless, if all Year 2000 issues are not adequately assessed or if the
necessary remedial efforts are not implemented on a timely basis, we may not be
Year 2000 compliant which, in turn, could have a material adverse effect on our
business, operating results or financial condition. In addition, our operations
may be disrupted in the event our suppliers or service providers are not Year
2000 compliant and such failure could have a material adverse effect on our
business, operating results or
16
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued)
financial condition.
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
Report 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, the matters described below, as well
as Note 2 to Notes to Consolidated Financial Statements herein, "Item 2.
Management's Discussion and Analysis or Plan of Operations - General," "- Six
Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998,"
"Quarter Ended June 30, 1999 Compared with Quarter Ended June 30, 1998, "-
Liquidity and Capital Resources." Such forward-looking statements relate to the
Company's ability to attain and maintain profitability and cash flow, the
stability of and future prices for natural gas and oil, the ability of the
Company to acquire additional reserves, the ability of the Company to raise
additional capital to meet its requirements and to obtain additional financing,
its ability to successfully implement its business strategy, and its ability to
maintain compliance with the covenants of its various loan documents and other
agreements pursuant to which securities have been issued. The inability of the
Company to meet these objectives or the consequences on the Company from adverse
developments in general economic conditions, adverse developments in the oil and
gas industry, declines in the prices of natural gas and oil and other factors
could have a material adverse effect on the Company. The Company cautions
readers that various risk factors described above and in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998 could cause the
Company's operating results to differ materially from those expressed in any
forward-looking statements made by the Company and could adversely affect the
Company's financial condition and its ability to pursue its business strategy.
17
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
15 - Letter Regarding Unaudited Interim Financial Information
27 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, the Company did not file
any Current Reports on Form 8-K.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
GOTHIC ENERGY CORPORATION
Date: August 13, 1999 By: /s/ MICHAEL PAULK
--------------------------------------------------
MICHAEL PAULK,
President, Chief Executive Officer
Date: August 13, 1999 By: /s/ STEVEN P. ENSZ
--------------------------------------------------
STEVEN P. ENSZ,
Vice President of Finance, Chief Financial Officer
Date: August 13, 1999 By: /s/ ANDREW MCGUIRE
--------------------------------------------------
ANDREW MCGUIRE,
Controller
19
<PAGE>
EXHIBIT 15
GOTHIC ENERGY CORPORATION
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: GOTHIC ENERGY CORPORATION
REGISTRATION ON FORMS S-3 AND S-8
Gentlemen:
We are aware that our report dated August 10, 1999 on our review of the
interim financial information of Gothic Energy Corporation for the periods ended
June 30, 1999 and 1998 and included in the Company's quarterly report on Form
10-QSB for the quarter ended June 30, 1999, is incorporated by reference in the
Company's Registration Statements on Form S-3 (File Nos. 333-68085 and
333-38679) and Form S-8 (File Nos. 333-82287, 333-82291, and 333-82289).
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
August 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 APR-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 1,869 0
<SECURITIES> 0 0
<RECEIVABLES> 9,773 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,943 0
<PP&E> 256,825 0
<DEPRECIATION> (43,853) 0
<TOTAL-ASSETS> 236,500 0
<CURRENT-LIABILITIES> 13,817 0
<BONDS> 305,853 0
0 0
41,159 0
<COMMON> 163 0
<OTHER-SE> (135,698) 0
<TOTAL-LIABILITY-AND-EQUITY> 236,500 0
<SALES> 23,417 12,564
<TOTAL-REVENUES> 24,676 13,206
<CGS> 17,237 8,642
<TOTAL-COSTS> 17,237 8,642
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 18,727 9,450
<INCOME-PRETAX> (10,471) (4,850)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,471) (4,850)
<EPS-BASIC> (0.90) (0.43)
<EPS-DILUTED> (0.90) (0.43)
</TABLE>
