-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LconjjrfZPB4pPTgImgwnsjv6dCY5EuVqbYxvJsr4yhOYjRs3mxKEJwGyH1FQIIe o/7SMGm7X2YibIFWE5MjYg== 0000930661-97-001476.txt : 19970610 0000930661-97-001476.hdr.sgml : 19970610 ACCESSION NUMBER: 0000930661-97-001476 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970606 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOTHIC ENERGY CORP CENTRAL INDEX KEY: 0000878482 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 222663839 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19753 FILM NUMBER: 97620032 BUSINESS ADDRESS: STREET 1: 5727 S LEWIS AVE STE 700 STREET 2: P O BOX 186 CITY: TULSARD STATE: OK ZIP: 74105 BUSINESS PHONE: 9187495666 FORMER COMPANY: FORMER CONFORMED NAME: TNC MEDIA INC DATE OF NAME CHANGE: 19930328 10QSB/A 1 FORM 10-QSB/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB/A AMENDMENT NO. 1 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from ________________ to _________________. Commission file number 0-19753 --------------------------------------------------------------------- GOTHIC ENERGY CORPORATION (Exact name of registrant as specified in its charter) OKLAHOMA 22-2663839 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5727 SOUTH LEWIS, #700, TULSA, OKLAHOMA 74105-7148 (Address of principal executive offices) 918-749-5666 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --------- --------- APPLICABLE ONLY TO CORPORATE ISSUERS: As of November 11, 1996, 12,381,857 shares of the Registrant's Common Stock, $.01 par value, were outstanding. FORM 10-QSB/A AMENDMENT NO. 1 INTRODUCTION This amendment to Part 1, Items 1 and 2 of Gothic Energy Corporation's quarterly filing on Form 10-QSB for the quarterly period ended September 30, 1996 includes changes from the previous filing to reflect an imputed dividend of $575,584 and $215,844 on the Company's 7 1/2% Cumulative Convertible Preferred Stock for the nine months and quarter ended September 30, 1996, respectively. GOTHIC ENERGY CORPORATION TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Consolidated Unaudited Balance Sheets September 30, 1996 and December 31, 1995 3 Consolidated Unaudited Statements of Operations Nine Months ended September 30, 1996 and 1995 4 Consolidated Unaudited Statements of Operations Three Months ended September 30, 1996 and 1995 5 Consolidated Unaudited Statements of Cash Flows Nine Months ended September 30, 1996 and 1995 6 Notes to Unaudited Consolidated Financial Statements 7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion and Analysis or Plan of Operations 11 PART II - OTHER INFORMATION PAGE Item 1 - Legal Proceedings 15 Item 2 - Changes in Securities 15 Item 3 - Defaults Upon Senior Securities 15 Item 4 - Submission of Matters to a Vote of Security Holders 15 Item 5 - Other Information 16 Item 6 - Exhibits and Reports on Form 8-K 17 Signatures 18
2 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 471,419 $ 157,559 Oil and gas receivable 2,377,577 295,344 Receivable from officers and employees 33,607 16,459 Other 34,531 74,697 ------------ ------------ TOTAL CURRENT ASSETS 2,917,134 544,059 PROPERTY AND EQUIPMENT: Oil and gas properties on full cost method 35,593,890 8,640,480 Equipment, furniture and fixtures 308,715 135,807 Accumulated depreciation and depletion (3,051,414) (780,414) ------------ ------------ PROPERTY AND EQUIPMENT, NET 32,851,191 7,995,873 NOTES RECEIVABLE: Affiliate - 123,000 Other 61,648 61,648 Investment - 200,000 Other assets, net 1,617,704 377,541 ------------ ------------ TOTAL ASSETS $ 37,447,677 $ 9,302,121 ============ ============ LIABILITIES AND STOCKHOLDERS'EQUITY ----------------------------------- CURRENT LIABILITIES: Accounts payable trade $ 1,128,075 $ 1,019,543 Revenues payable 1,793,780 94,841 Accrued liabilities 219,420 516,176 Notes payable 25,000 2,900,000 Current portion long-term debt 5,068,202 2,220,000 ------------ ------------ TOTAL CURRENT LIABILITIES 8,234,477 6,750,560 LONG-TERM DEBT 13,672,436 3,025,573 GAS IMBALANCE LIABILITY 1,186,273 - STOCKHOLDERS' EQUITY: Preferred stock, par value $.05, authorized 500,000 shares; issued and outstanding 5,540 shares 277 - Common stock, par value $.01, authorized 100,000,000 shares; issued and outstanding 12,381,857 and 5,501,785 shares 123,819 55,018 Additional paid in capital 33,106,144 13,965,236 Accumulated deficit (18,875,749) (14,494,266) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 14,354,491 (474,012) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,447,677 $ 9,302,121 ============ ============
See accompanying notes 3 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1996 1995 ---------- ----------- REVENUES: Oil and gas sales $ 7,270,252 $ 1,221,664 Well operations 754,160 38,563 Interest and other income 48,705 1,139 ----------- ----------- TOTAL REVENUES 8,073,117 1,261,366 COSTS AND EXPENSES: Lease operating expenses 3,481,114 728,961 Depletion, depreciation and 2,318,975 422,550 amortization Selling, general and administrative 1,250,484 719,383 expense Provision for impairment of oil and 5,050,000 486,000 gas properties Provision for impairment of investment - 802,287 Loss on termination of option - 1,850,000 ----------- ----------- Operating loss (4,027,456) (3,747,815) Interest expense 1,061,017 1,282,680 ----------- ----------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM $(5,088,473) $(5,030,495) INCOME TAX BENEFIT 2,992,547 - ----------- ----------- LOSS BEFORE EXTRAORDINARY ITEM (2,095,926) (5,030,495) LOSS ON EARLY EXTINGUISHMENT OF DEBT 1,432,973 - ----------- ----------- NET LOSS $(3,528,899) $(5,030,495) =========== =========== PREFERRED DIVIDEND 277,000 - Preferred dividend-amortization of preferred discount 575,584 - ----------- ----------- NET LOSS AVAILABLE FOR COMMON SHARES $(4,381,483) $(5,030,495) =========== =========== Loss per common share before extraordinary item (A) (.26) (1.25) =========== =========== LOSS PER COMMON SHARE $ (.38) $ (1.25) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,443,994 4,009,315 =========== ===========
(A) Loss per common share before extraordinary item is computed after giving effect to the preferred dividends, both actual and imputed. See accompanying notes 4 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------------- 1996 1995 ----------- ----------- REVENUES: Oil and gas sales $ 2,927,126 $ 734,630 Well operations 270,295 26,459 Interest and other income 17,063 (6,156) ----------- ----------- TOTAL REVENUES 3,214,484 754,933 COSTS AND EXPENSES: Lease operating expenses 1,421,379 453,890 Depletion, depreciation and amortization 732,193 246,650 Selling, general and administrative expense 432,160 261,962 Provision for impairment of investment - 802,287 Loss on termination of option - 1,850,000 ----------- ----------- Operating income (loss) 628,752 (2,859,856) Interest expense 412,756 417,915 ----------- ----------- NET INCOME (LOSS) $ 215,996 $(3,277,771) PREFERRED DIVIDEND 103,875 - Preferred dividend-amortization of preferred discount 215,844 - ----------- ----------- NET LOSS AVAILABLE FOR COMMON SHARES $ (103,723) $(3,277,771) =========== =========== LOSS PER COMMON SHARE $ (.01) $ (0.63) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,353,190 5,163,651 =========== ===========
See accompanying notes 5 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1995 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,528,899) $ (5,030,495) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Depreciation and amortization 2,318,975 422,550 Amortization of discount and loan costs - 919,285 Provision for impairment of oil and gas properties 5,050,000 486,000 Provision for impairment of investment - 802,287 Loss on termination of option - 1,850,000 Deferred income tax benefit (2,992,547) - Loss on early extinguishment of debt 1,432,973 - CHANGES IN ASSETS AND LIABILITIES: Increase in accounts receivable (899,853) (243,848) Decrease (increase) in other current assets 57,226 (38,365) Increase in accounts and revenues payable 500,878 573,033 Increase (decrease) in accrued liabilities (754,667) 239,070 Decrease in other assets 226,555 - ------------ ------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,410,641 (20,483) NET CASH USED BY INVESTING ACTIVITIES: Proceeds from sale of investment 200,000 - Proceeds from collection on note receivable 123,000 - Proceeds from sale of property 991,507 306,318 Purchase of property and equipment (11,552,620) (10,589,675) Property development (676,216) (368,753) Acquisition of business, net of cash acquired (17,592,973) - ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES (28,507,302) (10,652,110) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on short-term debt (1,560,000) (150,000) Proceeds of short-term debt - 2,000,000 Payments on long-term debt (8,768,135) (614,366) Proceeds of long-term debt 21,022,395 7,194,654 Proceeds from sale of common stock, net 13,141,368 1,777,552 Proceeds from sale of preferred stock, net 3,997,430 - Payment of Dividends (173,125) - Other (249,412) (198,432) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 27,410,521 10,009,408 NET CHANGE IN CASH AND CASH EQUIVALENTS 313,860 (663,185) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 157,559 824,978 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 471,419 $ 161,793 ============ ============
See accompanying notes 6 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. GENERAL AND ACCOUNTING POLICIES BUSINESS - The consolidated financial statements include the accounts of Gothic Energy Corporation, (the "Company"), and its subsidiaries, Gothic Energy of Texas, Inc. ("Gothic Texas"), since its inception in 1995 and Buttonwood Energy Corporation and its subsidiaries Buttonwood Petroleum, Inc. and Dakota Services, Inc. ("Buttonwood") since their acquisition on January 30, 1996. Since November 1994, the Company has been primarily engaged in the business of acquiring, developing and exploiting oil and gas reserves. Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The December 31, 1995 consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. The condensed financial statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995. In the opinion of management of the Company, the accompanying financial statements contain all adjustments, none of which were other than normal recurring accruals, necessary to present fairly the financial position of the Company as of September 30, 1996, and the results of its operations and cash flows for the periods ended September 30, 1996 and 1995. The results of operations for the periods represented are not necessarily indicative of the results of operations to be expected for the full year. NOTE 2. OIL AND GAS PROPERTY ACQUISITIONS VARIOUS WORKING INTEREST ACQUISITIONS- On August 5, 1996 the Company completed the acquisition, from various sellers, of working interest in approximately 120 wells in the Anadarko Basin of Western Oklahoma, and the Arkoma Basin of Eastern Oklahoma and Arkansas. The Company currently operates 70 of the wells in which the interests were acquired. The purchase price was financed through an increase in the amount of borrowings under the Company's Loan Agreement dated January 19, 1996 with Bank One, Texas, N.A. of $2,792,200, and from the Company's working capital. COMSTOCK ACQUISITION - On May 16, 1996 the Company completed the acquisition, effective as of January 1, 1996, from Comstock Oil and Gas, Inc. and Comstock Offshore Energy, Inc. ("Comstock"), of various working interests in 145 producing oil and gas properties. The Company operates 70 of the wells. The purchase price for the properties acquired was $6,600,000, subject to certain post-closing adjustments which reduced the amount paid to $6,430,195. Substantially all of the properties acquired are located in the Anadarko Basin of western Oklahoma and the Arkoma Basin of eastern Oklahoma and Arkansas. The purchase was financed through an increase in the amount of borrowings under the Company's Loan Agreement dated January 19, 1996 with Bank One, Texas, N.A. STRATUM OVERRIDE ACQUISITION - On May 16, 1996 the Company completed the acquisition of the Stratum Group, L.L.C. ("Stratum") 7% overriding royalty interests in the Company's Johnson Ranch wells. The purchase price for the interests acquired was $800,000. The purchase price was financed through an increase in the Company's borrowing facility at Bank One, Texas, N.A. and from the Company's working capital. 7 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) BUTTONWOOD ACQUISITION - On January 30, 1996 the Company completed the acquisition of Buttonwood Energy Corporation (the "Buttonwood Acquisition"), at a price of $17,912,500, net of a $1,000,000 deposit paid in 1995 and charged to expense. The aggregate purchase price of $18,008,712 including acquisition costs of $389,212, was allocated to the assets acquired and liabilities assumed as follows: Current assets $ 1,632,327 Property and equipment 20,784,016 Other assets 1,435,500 Current liabilities (1,660,628) Gas imbalance (1,189,956) Deferred income taxes (2,992,547) ------------ Aggregate purchase price 18,008,712 Less: Cash acquired (415,739) ------------ Net cash paid $ 17,592,973 ============ The Buttonwood Acquisition was financed with proceeds from a public offering of the Company's common stock and preferred stock, a bridge financing and the establishment of a credit facility with Bank One, Texas. The public offering and the preferred stock financing, generated net proceeds of $17,216,000. The remaining purchase price was paid out of the proceeds from the Bank One, Texas Credit Facility. The acquisition was accounted for under the purchase method and, accordingly, results of operations of the acquired operations are included in the Company's results of operations since the date of acquisition. NOTE 3. FINANCING ACTIVITIES BANK ONE LOAN - Effective January 30, 1996, the Company entered into an $11 million revolving credit facility with Bank One Texas. The proceeds of the borrowing were used to finance a portion of the purchase price of the Buttonwood Acquisition , and to repay outstanding indebtedness to Stratum Group, L.L.C. ("Stratum"). On May 16, 1996 the revolving credit facility was increased to $17.7 million. The proceeds from this increase were used to finance the purchase price of the Comstock and Stratum acquisitions (See Note 2). Of the increase $669,895 was part of a one-time $1 million Special Advance which must be repaid in full prior to November 1, 1996 and bears interest at a rate of 5% over the bank's base rate. The Company anticipates repaying the special advance out of excess working capital and through the sale of marginal properties. The remaining increase was granted under the original terms of the credit facility. On July 31, 1996 the revolving credit facility was increased to $19.3 million. The proceeds from this increase were used to finance the purchase of various working interest in some 120 wells (See Note 2). The total amount outstanding on the Bank One Loan was $18,726,795 at September 30, 1996. The terms of the Bank One Loan provide for principal reduction payments at the rate of $290,000 per month, plus interest with all outstanding principal and interest due and payable on January 30, 1999. Interest is payable at the option of the Company, either at the rate of 1% over Bank One's base rate or up to 3.75% (based on the principal balance outstanding), over the rate for borrowed dollars by the lending bank in the London Interbank Market. The indebtedness is collateralized by first liens on all of the Company's oil and gas properties, including those acquired from Buttonwood and Comstock. The loan agreement relating to the credit facility includes various affirmative and negative covenants including, among others, the requirements that the Company maintain certain ratios of current assets to current liabilities, and debt service coverage. The loan agreement also established an amount of minimum tangible net worth and places a limitation on annual selling, general and administrative expenses. Material breaches of these or other covenants which are not cured or waived could result in this indebtedness becoming immediately due and payable and empowering the lender to foreclose against the collateral for the loan. At September 30, 1996, the Company was not in compliance with its secured bank loan agreement requiring a 1:1 ratio of current assets to current liabilities. The Company has obtained a waiver from the bank in regard to this non compliance. 8 GOTHIC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STRATUM LOAN - On June 2, 1995, Gothic Texas entered into an agreement with Stratum in which Stratum agreed to loan Gothic Texas a maximum amount of $8,131,500, of which $6,756,500 was drawn and used to complete the Johnson Ranch Acquisition. At January 30, 1996 the amount outstanding was $6,575,687. On that date the Company, with proceeds from its new credit facility, paid Stratum in full and terminated its loan agreement with them. This transaction resulted in a loss on extinguishment of debt of $1,432,973. Effective January 30, 1996 Quest Capital Corporation ("Quest"), converted $1,290,000 of its $1,850,000 note into 1,290 shares of the Company's 7 1/2% Cumulative Convertible Preferred Stock. The remaining $560,000 of indebtedness and $265,000 of accrued interest and other amounts due Quest were converted into a subordinated note in the principal amount of $825,000 which was paid in full by the Company on March 13, 1996. BRIDGE FINANCING - A $1,000,000 note owing to Quest, Epoch Capital Corporation and another lender , along with accrued interest, was paid in full, on January 30, 1996 at the closing of the public offering by the Company. PUBLIC OFFERING - During the quarter ended March 31, 1996, the Company completed a public offering of 2,545,000 Units at a price of $6.00 per Unit. Each Unit consisted of three shares of the Company's $.01 par value common stock and three redeemable common stock purchase warrants, each exercisable for one share of common stock at $2.40 per share. The offering netted the Company approximately $12,970,000, which, together with the proceeds from the credit facility and preferred stock financing, was applied to the purchase of Buttonwood and the repayment of indebtedness. PREFERRED STOCK OFFERING - On January 30, 1996 the Company completed a preferred stock financing of 5,540 shares of the Company's 7 1/2% Cumulative Convertible Preferred Stock. The financing included 1,290 shares issued to Quest in exchange for $1,290,000 principal amount of a note. The remaining 4,250 shares were sold for an aggregate cash price of $4,250,000. The 5,540 shares of 7 1/2% Cumulative Convertible Preferred Stock issued are convertible commencing December 31, 1996, into shares of the Company's Common Stock at a conversion price per share of Common Stock of $2.00. On the basis of the above mentioned conversion price, an aggregate of 2,770,000 shares of Common Stock would be issuable on conversion. Due to the fact that the preferred stock is convertible into the Company's common stock at a discount from market, the Company has computed an imputed dividend of $791,429, which is based on the common stock market value of $2.00 per share at the date of issuance and a 12 1/2% discount. The discount is being accreted as an imputed dividend through December 31, 1996 and accordingly affects income available for common shares. NOTE 4. STOCKHOLDERS' EQUITY On August 13, 1996 at the Annual Shareholders' meeting, the shareholders approved; (I) an increase in the number of shares of common stock authorized from 30,000,000 to 100,000,000; (ii) the 1996 Omnibus Incentive Plan; (iii) the 1996 Non-Employees Stock Option Plan; and (iv) an increase in the shares reserved for issuance under the 1989 Incentive Stock Option Plan from 1,500,000 to 2,500,000. The shareholders approved the merger of the Company into a newly- formed wholly-owned subsidiary, incorporated in the State of Oklahoma, which changed the Company's state of incorporation from Delaware to Oklahoma. This transaction was accounted for as a combination of entities under common control, similar to a pooling of interests, and had no effect on the Company's results of operations or financial position. The 1996 Omnibus Incentive Plan provides for compensatory awards representing or corresponding to up to an aggregate of 1,000,000 shares of Common Stock of the Company to officers, directors and certain other key employees. Awards may be granted for no consideration and consist of stock options, stock awards, stock appreciation rights, dividend equivalents, other stock-based awards (such as phantom stock) and performance awards consisting of any combination of the foregoing. Generally, options will be granted at an exercise price equal to the lower of (I) 100% of fair market value of the shares of Common Stock on the date of grant or (ii) 85% of the fair market value of the shares of 9 Common Stock on the date of exercise. Each option will be exercisable for the period or periods specified in the option agreement, which will generally not exceed 10 years from the date of grant. No options have been issued under the Omnibus Incentive Plan. The 1996 Non-Employee Stock Option Plan provides a means by which non- employee Directors of the Company and consultants to the Company can be given an opportunity to purchase stock in the Company. The Plan provides that a total of 1,000,000 shares of the Company's Common Stock may be issued pursuant to options granted under the Non-Employee Plan, subject to certain adjustments. The exercise price for each option granted under the Non-Employee Plan will be not less than the fair market value of the Common Stock underlying the option on the date of grant. Each option granted under the Non-Employee Plan is 10 years after the date of grant. Options granted to Directors will terminate to the extent such options have not been previously exercised thirty (30) days after the date the Director is no longer a Director of the Company. No options have been issued under the Non-Employee Plan. NOTE 5. CONTINGENCIES A former officer and employee of the company, on May 6, 1996, commenced an arbitration proceeding under the Rules of the American Arbitration Association against the Company seeking to recover damages for an alleged breach of contract and intentional interference with contract. The damages sought are approximately $384,000. The Company believes that it has adequate basis to prove that the termination for cause was appropriate. NOTE 6. SUBSEQUENT EVENTS PROPERTY SALE - Subsequent to the quarter ended September 30, 1996, the Company completed the sale of its interest in approximately 290 wells of which 15 were operated by the Company. The net sales price was $2,080,550. The Company used $1,143,701 to reduce its revolving credit facility with Bank One and $444,501 to repay the Bank One Special Advance. The remaining sale proceeds were used as working capital. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following is management's discussion and analysis of certain significant factors which have affected the Company's earnings, financial condition and liquidity during the periods included in the accompanying Consolidated Financial Statements. On January 19, 1995, the Company completed its first acquisition of oil and gas reserves, the Egolf Acquisition, and on June 2, 1995, the Company completed a second acquisition of oil and gas reserves, the Johnson Ranch Acquisition. On January 30, 1996, the Company completed the following transactions: (i) it completed the acquisition of Buttonwood Energy Corporation (the "Buttonwood Acquisition"); (ii) it borrowed $11 million pursuant to a credit facility (the "Credit Facility") entered into with a bank; (iii) it completed the public sale of securities (the "Offering") yielding net proceeds of approximately $12,970,000; and (iv) it sold 5,540 shares of 7 1/2% Cumulative Preferred Stock (the "Preferred Stock Financing") for aggregate consideration of $5,540,000 inclusive of $1,290,000 principal amount of a note of the Company exchanged for the preferred shares. On May 16, 1996, the Company completed the acquisition from Comstock of various working interests in 145 producing oil and gas properties for the purchase price of $6,430,195. In addition, on May 16, 1996, the Company completed the acquisition of the Stratum 7% overriding royalty interests in the Company's Johnson Ranch wells for the purchase price of $800,000. The purchase prices were financed through an increase in the Company's borrowing facility at Bank One, Texas, N.A. and from the Company's working capital. On August 5, 1996 the company completed the acquisition from various sellers, of working interest in approximately 120 wells in the Anadarko Basin of Western Oklahoma, and the Arkoma Basin of Eastern Oklahoma and Arkansas. Gothic currently operates 70 of the wells in which the interests were acquired. The purchase price of the transaction was approximately $3.3 million. This amount was financed through an increase in the Company's borrowing facility at Bank One, Texas N.A. of $2,792,200, and from the Company's working capital. RESULTS OF OPERATIONS - --------------------- NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 Revenues were $8,073,117 for the nine months ended September 30, 1996, as compared to $1,261,366 for the same period ended September 30, 1995. This increase is primarily the result of acquisitions of oil and gas properties made by the Company since September 1995, as described above. Higher prices for oil and gas sales also contributed to the increase. Oil and gas revenues for the period ended September 30, 1996 were $7,270,252 with $2,648,801 coming from oil sales and $4,621,451 from gas sales. Oil sales were based on the sale of 131,020 barrels at an average price of $20.22 per barrel. Gas sales were based on the sale of 2,396,746 mcf at an average price of $1.93 per mcf. The Company incurred lease operating expenses during the nine months ended September 30, 1996 of $ 3,481,114. This compares to $ 728,961 for the same period in 1995. This increase is also a result of the acquisitions completed since September, 1995, as described above. Depletion, depreciation and amortization expense increased to $2,318,975 for the nine months ended September 30, 1996 from $422,550 for the same period in the prior year. Depletion of the oil and gas properties increased to $2,244,000 for the nine months ended September 30, 1996 from $395,000 for the comparable period in 1995 primarily due to the acquisitions since September 1995, as described above. Selling, general and administrative costs were $1,250,484 for the nine months ended September 30, 1996, as compared to $719,383 for the nine months ended September 30, 1995. The major reason for this increase is the addition of personnel and related costs due to acquisitions made since September of 1995. The increase also includes some nonrecurring costs related to the completion of the Buttonwood transaction. With the recording of the Buttonwood acquisition, and based on the reserve report for the quarter ending March 31, 1996, the Company recorded a $5,050,000 provision for impairment of oil and gas properties at March 31, 1996. Such provision was reflected in the balance sheet as a reduction of the cost of oil and gas properties. Estimates of oil and gas reserves are imprecise. Changes in the estimates or declines in oil and natural gas prices could cause the Company in the near-term to reduce the carrying value of its oil and natural gas properties. Management of the Company evaluates oil and gas reserve acquisition opportunities in the light of many factors, only a portion of which may be reflected in the amount of proved oil and gas reserves proposed to be acquired. In determining the purchase price to be offered, the Company does not solely rely on proved oil and gas reserves nor the value of such reserves, as defined and determined in accordance with Regulation S-X Rule 4-10. Factors considered include, among others, the probable reserves of the interests inteneded to be acquired, anticipated efficiencies and cost reductions that can be made in operating the producing properties, additional reserves that management believes can be proven relatively inexpensively based on management's knowledge of the area where the interests are located and existing producing properties owned by the Company. Management does not necessarily conclude that an acquisition is not favorable because there may be a full cost ceiling write-down associated with it (in fact the Company does not perform a ceiling test for specific properties acquired because the ceiling test is performed at each quarter and year end for all of the Company's properties included in its cost center and is based on prices for oil and gas as of that date which may be higher or lower than the prices used when evaluating potential acquisitions) but will review the transaction in the light of proved and probable reserves, historic and seasonal fluctuations in the prices of oil and gas, future prices for oil and gas, the factors described above as well as other factors that may relate to the specific properties under review. Accordingly, although the Company does not anticipate any further full cost ceiling write-downs which may be indirectly attributed to the Buttonwood Acquisition, the Company may, however, experience ceiling test write-downs in the future arising out of other acquisitions. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) Interest and financing costs decreased to $1,061,017 for the nine months ended September 30, 1996. This compares to $1,282,680 for the same period in 1995. The decrease is the result of the Company's debt restructuring which was completed in January 1996, and lower financing costs. The Company recorded an extraordinary loss of $1,432,973 on the early extinguishment of debt during the quarter ended March 31, 1996, with the payoff of the Stratum loan. The Company also recognized $277,000 in preferred dividends and $575,584 in amortization of preferred discount on its 7 1/2% cumulative preferred stock during the nine months ended September 30, 1996. THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1995. Revenues were $3,214,484 for the three months ended September 30, 1996, as compared to $754,933 for the same period ended September 30, 1995. This increase is the result of acquisitions of oil and gas properties made by the Company since September 1995, as described above. Oil and gas revenues for the period ended September 30, 1996 were $2,927,126 of which $1,071,681 came from oil sales and $1,855,445 from gas sales. Oil sales were based on the sale of 48,294 barrels at an average price of $22.19 per barrel. Gas sales were based on the sale of 997,058 mcf at an average price of $1.86 per mcf. The Company incurred lease operating expenses during the three months ended September 30, 1996 of $1,421,379. This compares to $453,890 for the same period in 1995. This increase is also a result of the acquisitions completed since September 1995, as described above. Depletion, depreciation and amortization expense was $732,193 for the three months ended September 30, 1996 as compared to $246,650 for the same period in the prior year. Such increase was primarily due to higher volumes of oil and gas produced related to the properties acquired since September of 1995. Selling, general and administrative costs were $432,160 for the three months ended September 30, 1996, as compared to $261,962 for the three months ended September 30, 1995. The major reason for this increase is the addition of personnel and related costs due to acquisitions made since September of 1995. Interest and financing costs remained relatively constant at $412,756 for the three months ended September 30, 1996 as compared to $417,915 for the same period in 1995. The Company also recognized $103,875 in preferred dividends and $215,844 in amortization of preferred discount on its 7 1/2% cumulative preferred stock during the three months ended September 30, 1996. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- GENERAL - ------- The Company's capital requirements relate to the acquisition, exploration, enhancement, development and operation of oil and gas producing properties. In general, because oil and gas reserves the Company has acquired and intends to acquire are depleted by production over time, the success of its business strategy is dependent upon a continuous acquisition, exploitation, enhancement, development and operation program. In order to achieve profitability and generate cash flow, the Company is dependent upon acquiring or developing additional oil and gas properties or entering into joint oil and gas well development arrangements. The Company will continue to require access to debt and equity capital or the availability of joint venture development arrangements, among other possible sources, to pursue its business strategy of additional property acquisition and development. No assurance can be given that the Company will be able to obtain additional capital or enter into joint venture development arrangements on satisfactory terms to implement the Company's business strategy. The Company has funded its recent capital needs through the issuance of capital stock and borrowings. Without raising additional capital or 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) entering into joint oil and gas well development arrangements, the Company will be unable to acquire additional producing oil and gas properties and its ability to develop its existing oil and gas properties will be limited to the extent of the available cash flow. No assurance can be given as to the availability or terms of any such additional capital or joint development arrangements or that such terms as are available may not be dilutive to the interests of the Company's stockholders. At September 30, 1996 the Company had a cash position of $471,419 and a working capital deficit of $5,317,343 including $5,068,202 of current portion of long-term debt, of which $1,588,202 has been paid subsequent to the period end with proceeds received from the sale of properties (See Note 6). ACQUISITION FINANCING - --------------------- Under the terms of the Buttonwood Acquisition agreement, which was completed on January 30, 1996, the Company paid $17,912,500, in consideration for the acquisition, net of a $1,000,000 deposit paid in 1995 and charged to expense. The Bank One Credit Facility currently enables the Company to borrow up to $19.3 million. On January 30, 1996, $11 million of the credit facility was used to finance a portion of the purchase price for the Buttonwood Acquisition and repay outstanding indebtedness. Additional proceeds of $7,230,195 were used on May 16, 1996 to finance the purchase of the Comstock and Stratum well interests, and on July 31, 1996, proceeds of $2,792,200 were used to finance the acquisition of well interests from various sellers. The Company has repaid $2,295,600 under the facility since January 30, 1996. The terms currently provide for amortization payments at the rate of $290,000 per month commencing September 1, 1996, with all outstanding principal and interest due and payable on January 30, 1999. Interest is payable, at the option of Company, either at the rate of 1% over the lending bank's base rate or up to 3.75% (based on the principal balance outstanding) over the rate for borrowed dollars by the lending bank in the London Interbank market. The indebtedness is collateralized by first liens on all of the Company's oil and gas properties. The loan agreement relating to the Credit Facility includes various affirmative and negative covenants, including, among others, the requirements that the Company (i) maintain a ratio of current assets to current liabilities, as defined, of not less than 1.0 to 1.0, (ii) maintain a debt service coverage ratio of net cash flow per quarter to required quarterly reduction of indebtedness of not less than 1.10 to 1.0, (iii) maintain minimum tangible net worth at the end of each fiscal quarter of $10,250,000, plus certain percentages of net income and proceeds received from the sale of securities, and (iv) maintain selling, general and administrative expenses per quarter not in excess of 25% of consolidated net revenues. Material breaches of these or other covenants which are not cured or waived could result in a default under the loan agreement resulting in this indebtedness becoming immediately due and payable and empowering the lender to foreclose against the collateral for the loan. At September 30, 1996, the Company was not in compliance with its secured bank loan agreement requiring a 1:1 ratio of current assets to current liabilities. The Company has obtained a waiver from the bank in regard to this non compliance. Pursuant to the Preferred Stock Financing, the Company issued and sold 5,540 shares of its 7 1/2% Cumulative Convertible Preferred Stock for an aggregate consideration of $5,540,000, of which $4,250,000 was paid in cash, and $1,290,000 was paid by Quest by exchange of $1,290,000 of outstanding principal amount of indebtedness held by Quest for 1,290 shares. The proceeds were used by the Company, together with the net proceeds from the offering and the Credit Facility, for the balance of the purchase price of the Buttonwood Acquisition and to repay indebtedness and expenses of the 1996 transactions. The 5,540 shares of 7 1/2% Cumulative Convertible Preferred Stock are convertible, commencing December 31, 1996, into shares of the Company's Common Stock at a conversion price per share of Common Stock equal to the lesser of (i) $2.00 or (ii) a price equal to the average of the closing prices of the Company's Common Stock during the 30 business days prior to the day the shares are converted less a discount of 12 1/2%. The number of shares of Common Stock to be issued on conversion is determined by multiplying the number of shares of 7 1/2% Cumulative Convertible Preferred Stock to be converted by $1,000 and dividing the result by the conversion price in effect. The shares pay a cumulative preferred dividend of 7 1/2% of the stated value per annum payable semi- annually. The shares of 7 1/2% Cumulative Convertible Preferred Stock have no voting rights. In addition, due to the fact that the preferred stock is convertible into the Company's common stock at a discount from market, the Company has computed an imputed dividend of $791,429, which is based on the common stock market value of $2.00 per share at the date of issuance and a 12 1/2% discount. The discount is being accreted as an imputed dividend through December 31, 1996 and accordingly affects income available for common shares. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED) After reflecting the exchange of $1,290,000 principal amount of indebtedness for 1,290 shares of 7 1/2% Cumulative Convertible Preferred Stock in the Preferred Stock Financing, the remaining $560,000 of principal and accrued interest of $173,000 owing to Quest on a note, and other obligations owing to Quest aggregating $92,000 were replaced at the closing of the Preferred Stock Financing with a new subordinated note in the principal amount of $825,000 bearing interest at 7 1/2% per annum, due, together with all accrued interest thereon, ten years from the date it is issued. The $825,000 note was repaid on March 13, 1996. CASH FLOW - --------- Net cash provided by operating activities increased to $1,410,641 for the nine months ended September 30, 1996 as compared to net cash used of $20,483 for same period in 1995. This was primarily the result of an increase in cash flow from operations, partially offset by an increase in working capital. The Company used $28,507,302 of net cash in investing activities for the first nine months of 1996 compared with $10,652,110 for the same period in 1995. This was primarily due to the acquisition of Buttonwood, net of cash acquired, for $17,592,973, the acquisition of Comstock for $6,430,195, net of adjustments, the August Working Owner acquisition for $3,290,000, and oil and gas well enhancements in the amount of $676,216 and other producing property acquisitions of $1,832,425. Net cash provided by financing activities for the nine months ended September 30, 1996 was $27,410,521 compared to $10,009,408 provided in 1995. During the nine months ended September 30, 1996 the Company received proceeds from long-term debt of $21,022,395 proceeds from the issuance of common stock of $13,141,368 and proceeds from the issuance of preferred stock of $3,997,430. The Company also used funds of $10,328,135 to pay short and long-term debt during the period, and $173,125 to pay preferred dividends. CAUTIONARY STATEMENT - Reference is made to the Cautionary Statement for ------------------------ Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation - ----------------------------------------------------------------------------- Reform Act of 1995 contained in the Company's Annual Report on Form 10-KSB for - ------------------ the year ended December 31, 1995, which Cautionary Statement is incorporated herein by reference. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (a) A former officer and employee of the Company, Larry L. Terry, on May 6, 1996, commenced an arbitration proceeding under the Rules of the American Arbitration Association against the Company seeking to recover damages for an alleged breach of contract and intentional interference with contract. The damages sought are approximately $384,000. The Company believes that it has adequate basis to prove that the termination of Mr. Terry for cause was appropriate. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held an annual meeting of stockholders on August 13, 1996. On August 13, 1996, the following proposals were voted on. (i) The following persons were elected as Directors to serve until the annual meeting of stockholders in 1997 and until their successors have been elected and qualified by the following vote:
Votes for Votes against ---------- ------------- John J. Fleming 10,912,153 55,772 Michael K. Paulk 10,912,153 55,772 John L. Rainwater 10,911,103 56,822 Morton A. Cohen 10,912,153 55,772 Brian E. Bayley 10,912,153 55,772
(ii) The Proposal to increase the number of shares of common stock authorized from 30,000,000 to 100,000,000 was approved by the following vote:
Votes ----------- In favor 10,420,812 Against 368,213 Abstentions 73,900 Not voted 105,000
(iii) The proposal to approve the 1996 Omnibus Incentive Plan was approved by the following vote:
Votes --------- In favor 3,991,499 Against 419,092 Abstentions 158,525 Not voted 6,398,809
(iv) The proposal to approve the 1996 Non-Employee Stock Option Plan was approved by the following vote:
Votes --------- In favor 4,019,129 Against 462,887 Abstentions 87,100 Not voted 6,398,809
15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED) (v) The proposal to approve the amendment of the Company's 1989 Incentive Stock Option Plan so as to increase the number of shares reserved for the grant of options thereunder from 1,500,000 to 2,500,000 was approved by the following vote:
Votes --------- In favor 3,988,579 Against 490,037 Abstentions 90,500 Not voted 6,398,809
(b) At an adjournment of the Annual Meeting held on October 4, 1996, the following proposals were voted on. (i) The proposal to reincorporate the Company as an Oklahoma corporation by merger of the Company into a newly-formed wholly-owned subsidiary of the Company incorporated in Oklahoma was approved by the following vote:
Votes --------- In favor 6,252,140 Against 206,927 Abstentions 80,350 Not voted 4,956,911
(ii) The proposal to increase the number of shares of Preferred Stock authorized from 500,000 to 2,500,000 was not approved by the following vote:
Common Stock Preferred Stock ------------ --------------- In favor 5,912,614 4,100 Against 514,103 Abstentions 103,700 Non-voted 4,956,911 1,440
ITEM 5. OTHER INFORMATION On October 22, 1996, Gothic Energy Corporation, a Delaware corporation, merged with and into its wholly owned subsidiary corporation incorporated under the laws of the State of Oklahoma. Thereby the Company changed its state of incorporation from Delaware to Oklahoma. 16 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 6(i) Certificate of Incorporation of Gothic Energy Newco, Inc., an Oklahoma corporation 6(ii) Bylaws of Gothic Energy Newco, Inc. 6(iii) Certificate of Ownership and Merger filed with the State of Oklahoma (b) Reports on Form 8-K During the quarter ended September 30, 1996, the Company filed an Amendment No. 1 to its Current Report on Form 8-K dated May 16, 1996, reporting under "Item 7 - Financial Statements and Exhibits". 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. GOTHIC ENERGY CORPORATION DATE: MAY 30, 1997 BY: /S/ MICHAEL PAULK ----------------- MICHAEL PAULK, PRESIDENT, CHIEF EXECUTIVE OFFICER DATE: MAY 30, 1997 BY: /S/ ANDREW MCGUIRE ------------------ ANDREW MCGUIRE, CONTROLLER 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 471,419 0 2,480,174 (68,990) 0 2,917,134 35,902,605 (3,051,414) 37,447,677 8,234,477 0 0 277 123,819 14,230,395 37,447,677 7,270,252 8,073,117 0 3,481,114 1,250,484 5,050,000 1,061,017 (5,088,473) 2,992,547 0 0 (1,432,973) 0 (4,381,438) (.38) (.38)
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