-----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, V8TqwwVkJO5nHlmX1CP1O3KEDrcOyKNmmNk7KTkdeBT3chgI5Q++SYvlPMdZFL4J kFsz0pRU4+l0DFkavhIYuQ== 0000930661-99-001240.txt : 19990518 0000930661-99-001240.hdr.sgml : 19990518 ACCESSION NUMBER: 0000930661-99-001240 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-19753 FILM NUMBER: 99628455 BUSINESS ADDRESS: STREET 1: 5727 S LEWIS AVE STE 700 STREET 2: P O BOX 186 CITY: TULSA STATE: OK ZIP: 74105 BUSINESS PHONE: 9187495666 FORMER COMPANY: FORMER CONFORMED NAME: TNC MEDIA INC DATE OF NAME CHANGE: 19930328 10QSB 1 FORM 10-QSB 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 March 31, 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 May 13, 1999, 16,291,640 shares of the Registrant's Common Stock, $.01 par value, were outstanding. 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 March 31,1999................................ 3 Consolidated Unaudited Statement of Operations Three months ended March 31, 1998 and 1999......................... 4 Consolidated Unaudited Statement of Cash Flows Three months ended March 31, 1998 and 1999......................... 5 Notes to Unaudited Consolidated Financial Statements............... 6 Report of Review by Independent Accountants........................ 8 Item 2 - Management's Discussion and Analysis Management's Discussion and Analysis or Plan of Operation.......... 9 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K.......................... 14 Signatures......................................................... 15 2 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (in thousands, except par value)
December 31, March 31, ASSETS 1998 1999 ------ ------------------ ------------------ (Unaudited) Current assets: Cash and cash equivalents $ 2,289 $ 5,691 Natural gas and oil receivables 7,236 8,032 Receivable from officers and employees 55 52 Other 221 224 --------- --------- Total current assets 9,801 13,999 Property and equipment: Natural gas and oil properties on full cost method: Properties being amortized 242,012 244,539 Unproved properties not subject to amortization 2,862 3,524 Equipment, furniture and fixtures 3,327 3,522 Accumulated depreciation, depletion and amortization (33,201) (38,486) --------- --------- Property and equipment, net 215,000 213,099 Other assets, net 12,487 11,955 --------- --------- Total assets $ 237,288 $ 239,053 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) - ---------------------------------------------- Current liabilities: Accounts payable trade $ 3,208 $ 2,547 Revenues payable 6,031 6,277 Accrued interest expense 4,358 10,893 Other accrued liabilities 253 193 --------- --------- Total current liabilities 13,850 19,910 Long-term debt, net 301,179 304,962 Gas imbalance and other liabilities 6,180 3,707 Stockholders' equity (deficit): Series B Preferred Stock, Par Value $.05, authorized 165,000 shares; 54,187 shares issued and outstanding 36,945 39,010 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) (171,531) Note receivable (179) (179) --------- --------- Total stockholders' equity (deficit) (83,921) (89,526) --------- --------- Total liabilities and stockholders' equity (deficit) $ 237,288 $ 239,053 ========= =========
See accompanying notes 3 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
For the three months ended March 31, ---------------------------------------------- 1998 1999 -------------------- -------------------- Revenues: Natural gas and oil sales $ 16,516 $10,853 Well operations 586 617 -------- ------- Total Revenues 17,102 11,470 Costs and expenses: Lease operating expenses 4,664 2,339 Depletion, depreciation and amortization 7,444 5,285 General and administrative expense 913 971 -------- ------- Operating income 4,081 2,875 Interest expense and amortization of debt issuance costs (8,033) (9,277) Interest and other income 166 781 Loss on sale of investments (265) - -------- ------- Loss before extraordinary item (4,051) (5,621) Loss on early extinguishment of debt 27,061 - -------- ------- Net loss (31,112) (5,621) Preferred dividend ($26.32 and $29.59 per preferred share) 974 1,603 Preferred dividend - amortization of preferred discount - 462 -------- ------- Net loss available for common shares $(32,086) $(7,686) ======== ======= Loss per common share before extraordinary item, basic and diluted $ (.31) $ (.47) ======== ======= Net loss per common share, basic and diluted $ (1.97) $ (.47) ======== ======= Weighted average common shares outstanding 16,261 16,281 ======== =======
See accompanying notes 4 GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (Unaudited)
For the three months ended March 31, ---------------------------------------------- 1998 1999 -------------------- -------------------- Cash flows from operating activities: Net loss $ (31,112) $(5,621) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 7,444 5,285 Amortization of discount and loan costs 920 414 Accretion of interest on discount notes - 2,283 Loss on early extinguishment of debt 27,061 - Changes in assets and liabilities: Increase in accounts receivable (4,971) (793) Increase in other current assets (62) (3) Increase (decrease) in accounts and revenues payable 4,128 (415) Increase (decrease) in accrued liabilities (1,164) 6,475 Decrease in gas imbalance liability - (76) --------- ------- Net cash provided by operating activities $ 2,244 $ 7,549 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 724 - Proceeds from sale of property and equipment 4,000 2,095 Purchase of property and equipment (214,511) (2,839) Property development costs (2,635) (4,875) --------- ------- Net cash used by investing activities $(212,717) $(5,619) Cash flows from financing activities: Proceeds from short-term borrowings 60,000 - Payment of short-term borrowings (1,500) - Proceeds from long-term borrowings 132,684 1,500 Payments of long-term borrowings (4,500) - Proceeds from sale of preferred stock, net 36,475 - Payment of loan fees (26,114) (28) --------- ------- Net cash provided by financing activities $ 197,045 $ 1,472 Net change in cash and cash equivalents (13,428) 3,402 Cash and cash equivalents, beginning of period 16,722 2,289 --------- ------- Cash and cash equivalents, end of period $ 3,294 $ 5,691 ========= ======= Supplemental disclosure of interest paid $ 7,113 $ 6,579 ========= =======
See accompanying notes 5 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 March 31, 1999, and the results of its operations and cash flows for the periods ended March 31, 1998 and 1999. The results of operations for the 1999 period is not necessarily indicative of the results of operations to be expected for the full year. 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 March 31, 1999 which were not included in the computation of diluted loss per share. Recently issued Financial Accounting Pronouncements - In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". FAS 133 is effective for fiscal years beginning after June 15, 1999, but earlier application is permitted as of the beginning of any fiscal quarter subsequent to June 15, 1998. 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 the 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 has continued to affect the ongoing revenues and cash flows of the Company, resulting in a net loss of $5,621,000 for the three months ended March 31, 1999. 6 NOTE 2. GOING CONCERN (Continued) 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 commodity prices continuing to reflect the excess of supply in the overall system, the prices of natural gas continue to be depressed. These depressed prices affect the Company's ability to generate sufficient reserves to replace current production. Absent an overall increase in commodity prices, the Company will continue to 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. NOTE 3. NATURAL GAS AND OIL PROPERTIES In early 1999, the natural gas and oil industry experienced a downturn in natural gas prices. Utilizing natural gas and oil prices in effect at March 31, 1999, the Company's calculation of its ceiling with respect to costs capitalized associated with its natural gas and oil properties indicated that a write-down of $46 million before taxes was warranted. Subsequent to March 31, 1999, both natural gas and oil prices have increased to levels which indicate no such impairment, and accordingly, no write-down of the Company's natural gas and oil properties has been reflected in the accompanying statement of operations. Future declines in natural gas and oil prices experienced by the Company could cause the Company in the near term to reduce the carrying value of its natural gas and oil properties. NOTE 4. 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 March 31, 1999 and for the three month period ended March 31, 1999. (in thousands)
As of March 31, 1999 --------------------------------------------------------------------------------------- Gothic Energy Gothic Energy Gothic Production Corporation Corporation Corporation Consolidated ----------- ----------------- -------------- Current assets $ - $ 13,999 $ 13,999 Non-current assets 1,982 223,072 225,054 Current liabilities - 19,910 19,910 Non-current liabilities 68,462 240,207 308,669
For the three months ended March 31, 1999 --------------------------------------------------------------------------------------- Gothic Energy Gothic Energy Gothic Production Corporation Corporation Corporation Consolidated ----------- ----------------- -------------- Total revenues $ - $11,470 $11,470 Operating costs and expenses - 8,595 8,595 Interest expense and amortization of debt issuance cost 2,355 6,922 9,277 Net loss (2,355) (3,266) (5,621)
7 INDEPENDENT ACCOUNTANT'S REPORT To the Board of Directors and Stockholders: We have reviewed the accompanying consolidated balance sheet of Gothic Energy Corporation and Subsidiaries as of March 31, 1999 and the related consolidated statements of operations and cash flows for the three-month periods ended March 31, 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 May 14, 1999 8 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 Amoco Acquisition was financed primarily through borrowings under the Company's Credit Facility. The following table reflects certain summary operating data for the periods presented: Results of Operations
Quarter Ended March 31, 1998 1999 -------------- ---------------- (in thousands, unless otherwise indicated) Net Production: Oil (Mbbls) 86 40 Natural gas (Mmcf) 6,956 6,422 Natural gas equivalent (Mmcfe) 7,472 6,662 Oil and Natural Gas Sales: Oil $ 1,299 $ 481 Natural gas 15,217 10,372 ------- ------- Total $16,516 $10,853 ======= ======= Average Sales Price: Oil (Bbl) $ 15.10 $ 12.03 Natural gas (Mcf) 2.19 1.62 Natural gas equivalent (Mcfe) 2.21 1.63 Expenses ($ per Mcfe): Lease operating/(1)(2)/ $ 0.48 $ 0.24 General and administrative/(3)/ 0.09 0.15 Depreciation, depletion and 0.99 0.77 amortization/(4)/
- ------------------------------------------------- (1) Includes lease operating costs 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) Excludes a non-recurring severance payment to a former officer in 1998. (4) Represents depreciation, depletion and amortization of oil and natural gas properties only. 9 Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued) - ------------------------------------------------------------------------------ Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998 Revenues were $11.5 million for the quarter ended March 31, 1999, as compared to $17.1 million for the quarter ended March 31, 1998. This represents a 33% decrease in total revenue for the period. Natural gas and oil sales for the quarter ended March 31, 1999 decreased $5.6 million (34%) to $10.9 million, with $481,000 from oil sales and $10.4 million from natural gas sales, as compared to natural gas and oil sales of $16.5 million for the quarter ended March 31, 1998, with $1.3 million from oil sales and $15.2 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 and the sale of properties by the Company subsequent to the first quarter of 1998. Of the $5.6 million decrease in comparable natural gas and oil sales, approximately $3.6 million was the result of the lower commodity prices and approximately $2.0 million was the result of lower production volumes resulting from property sales. Oil sales in 1999 were based on the sale of 40,000 barrels at an average price of $12.03 per barrel as compared to 86,000 barrels at an average price of $15.10 per barrel in 1998. Natural gas sales in 1999 were based on the sale of 6,422,000 Mcf at an average price of $1.62 per Mcf compared to 6,956,000 Mcf at an average price of $2.19 per Mcf in 1998. The Company incurred lease operating expenses for the quarter ended March 31, 1999 of $2.3 million compared with lease operating expenses of $4.7 million for the quarter ended March 31, 1998. Lease operating expenses include approximately $731,000 and $1.1 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 22% in 1999 as compared to 28% in 1998. Depreciation, depletion and amortization expense was $5.3 million for the quarter ended March 31, 1999 as compared to $7.4 million for the quarter ended March 31, 1998. The decrease resulted primarily from the writedown of natural gas and oil properties in 1998 and the decreased production associated with the properties sold in 1998. General and administrative costs were $971,000 for the quarter ended March 31, 1999, as compared to $913,000 for the quarter ended March 31, 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 $0.12 in 1998 to $0.15 in 1999. Interest and debt issuance costs were $9.3 million for the quarter ended March 31, 1999 as compared to $8.0 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, $2.3 million related to the 14 1/8% Senior Secured Discount Notes, $42,000 with Bank One, Texas, NA and $414,000 as amortization of loan costs. The Company earned $781,000 in interest and other income during the quarter ended March 31, 1999 compared to $166,000 in 1998. The 1999 amount includes $720,000 from the sale of seismic data. The Company recorded an extraordinary loss on early extinguishment of debt in the amount of $27.1 million (reflecting the payment of $20.8 million in consent fees and the write-off of $6.2 million in unamortized discount and debt issue costs) in the quarter ending March 31, 1998. The loss was recognized as a result of amendments to the Company's 12 1/4% Senior Notes which constituted a substantial modification to the terms of these notes. The Company also incurred $2.1 million in preferred dividends and amortization of preferred discount costs on its Series B Preferred Stock during the quarter ended March 31, 1999, compared to $974,000 in preferred dividends on its Series A Preferred Stock in 1998. 10 Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued) - ------------------------------------------------------------------------------ The profitability and revenues of the Company are dependent, to a significant extent, upon prevailing spot market prices for natural gas and oil. In the past, natural gas and oil prices and markets have been volatile. Prices are subject to wide fluctuations in response to changes in 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. In April 1999, the Company entered into a hedge agreement in the form of a collar with respect to the production of 50,000 MMBTU of natural gas per day during the period of May through October 1999. The 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 March 1999 the Company entered into a similar collar agreement with respect to the production of 50,000 MMBTU per month during the period of April through October 1999 at a floor price of $1.65 per MMBTU and a ceiling of $2.16 per MMBTU. The Company will pay the other party $0.05 per MMBTU per month over the term of the agreement. In early 1999, the natural gas and oil industry experienced a downturn in natural gas prices. Utilizing natural gas and oil prices in effect at March 31, 1999, the Company's calculation of its ceiling with respect to costs capitalized associated with its natural gas and oil properties indicated that a write-down of $46 million before taxes was warranted. Subsequent to March 31, 1999, both natural gas and oil prices have increased to levels which indicate no such impairment, and accordingly, no write-down of the Company's natural gas and oil properties has been reflected in the accompanying statement of operations. Future declines in natural gas and oil prices experienced by the Company could cause the Company in the near term to reduce the carrying value of its natural gas and oil properties. 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 quarters ended March 31, 1998 and 1999:
Quarter ended March 31, 1998 1999 ---------------- ---------------- (in thousands) Net cash provided by operating activities $ 2,244 $7,549 Net cash used in investing activities 212,717 5,619 Net cash provided by financing activities 197,045 1,472
Net cash provided by operations was $7.5 million for the quarter ended March 31, 1999 as compared to net cash provided of $2.2 million for the same period in 1998. The operating cash flows for the quarter ended March 31, 1999 reflect the decrease in income from operations resulting from lower commodity prices and production volumes, partially offset by changes in working capital. The Company used $5.6 million of net cash in investing activities for the quarter ended March 31, 1999 compared to net cash used of $212.7 million for the same period in 1998. This includes well enhancement costs of approximately $4.9 million and approximately $2.8 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. 11 Item 2 - Management's Discussion and Analysis or Plan of Operation (Continued) - ------------------------------------------------------------------------------ Net cash provided by financing activities for the quarter ended March 31, 1999 was $1.5 million compared to $197.0 million provided in 1998. The March 31, 1999 amount includes proceeds from the Company's credit facility of $1.5 million, partially offset by the payment of $28,000 in bank and other loan fees. 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 $25,000,000. Borrowings initially 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 will be 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 $25,000,000. 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 1.5% (or up to 2.0% in the event the loan balance is 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 March 31, 1999, Gothic Production had $1,500,000 outstanding under the Credit Facility. 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 1.2 to 1.0 for the quarter ended March 31, 1999, 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 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 currently has $23.5 million in borrowing capacity available under its Credit Facility. 12 Year 2000 Computer Issues The Company has reviewed its computer systems and hardware to locate potential operational problems associated with the year 2000. Such review will continue until all potential problems are located and resolved. The Company believes that all year 2000 problems in its computer systems have been or will be resolved in a timely manner and have not caused and will not cause disruption of its operations or have a material adverse effect on its financial condition or results of operations. However, it is possible that the Company's cash flows could be disrupted by year 2000 problems experienced by outside operators of its wells, buyers of its natural gas and oil, financial institutions or other persons. The Company is unable to quantify the effect, if any, of year 2000 computer problems that may be experienced by these third parties. 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 Notes 2 and 3 to Notes to Consolidated Financial Statements herein, "Item 2. Management's Discussion and Analysis or Plan of Operations -General," "- Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 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 oil and gas, the ability of the Company to expand through acquisitions and to redeploy its equipment among regional operations, 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, 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. 13 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 March 31, 1999, the Company did not file any Current Reports on Form 8-K. 14 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 14, 1999 By: /s/ Michael Paulk ----------------------------------- MICHAEL PAULK, President, Chief Executive Officer Date: May 14, 1999 By: /s/ Steven P. Ensz ----------------------------------- STEVEN P. ENSZ, Vice President of Finance, Chief Financial Officer Date: May 14, 1999 By: /s/ Andrew McGuire ----------------------------------- ANDREW MCGUIRE, Controller 15 EX-15 2 LETTER FROM PRICEWATERHOUSECOOPERS 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 FORM S-3 Gentlemen: We are aware that our report dated May 13, 1999 on our review of the interim financial information of Gothic Energy Corporation for the periods ended March 31, 1999 and 1998 and included in the Company's quarterly report on Form 10-QSB for the quarter ended March 31, 1999, is incorporated by reference in the Company's Registration Statement on Form S-3 (File No. 333-38679). PricewaterhouseCoopers LLP Tulsa, Oklahoma May 14, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 5,691 0 8,084 0 0 13,999 251,585 (38,486) 239,053 19,910 303,462 0 39,010 163 (128,699) 239,053 10,853 11,470 8,595 8,595 0 0 9,277 (5,621) 0 (5,621) 0 0 0 (5,621) (.47) (.47)
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