<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 26, 1997
BELCO OIL & GAS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 011-14256 13-3869719
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
767 FIFTH AVENUE, 46TH FLOOR
NEW YORK, NEW YORK 10153
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES
AND ZIP CODE)
(212) 644-2200
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
-------------------------------
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 26, 1997, Belco Oil & Gas Corp., a Nevada corporation ("Belco"),
completed the Merger (the "Merger") of its subsidiary Belco Acquisition Sub,
Inc., a Delaware corporation ("Belco Sub") with and into Coda Energy, Inc., a
Delaware corporation ("Coda"). The Merger was effected pursuant to the terms of
an Agreement and Plan of Merger, dated as of October 31, 1997, by and among
Belco, Belco Sub and Coda. In connection with the Merger, Belco paid an
aggregate of approximately $191 million in cash ($149 million plus a $42
million adjustment for proceeds from the Taurus disposition described below)
and issued warrants to purchase 1,666,667 shares of common stock, par value
$0.01 per share, of Belco (the "Belco Common Stock") to the holders of the
outstanding common stock, preferred stock and options to purchase common stock
of Coda. The warrants are exercisable for a period of two years commencing on
November 26, 1998 at an exercise price of $27.50 per share. The warrant
exercise price and the number of shares of Belco Common Stock that may be
issued pursuant to the exercise of the warrants will be adjusted to prevent
dilution in the event of stock splits, stock dividends and certain other events
affecting the capital structure of Belco.
The holders of Coda's common stock, preferred stock and options to acquire Coda
common stock who received consideration from Belco pursuant to the Merger
consisted of Joint Energy Development Investments Limited Partnership, a
Delaware limited partnership ("JEDI"), and members of Coda's management. The
consideration paid and issued by Belco in connection with the Merger was
determined by arms' length negotiations among Belco, Coda and certain
stockholders of Coda, including JEDI (the holder of 95% of the Coda common
stock, on a fully diluted basis, and 100% of the Coda preferred stock
outstanding immediately prior to the Merger). JEDI is a limited partnership
whose general partner is an affiliate of Enron Capital & Trade Resources Corp.,
a subsidiary of Enron Corp. ("Enron"). Mr. Robert A. Belfer, the Chairman of
the Board and Chief Executive Officer of Belco and the beneficial owner of
approximately 39% of the outstanding Belco Common Stock, is also a director of
Enron and the beneficial owner of approximately 2.36% of the common stock of
Enron (assuming full conversion of Preferred Convertible Stock of Enron held by
Mr. Belfer, family members and related trusts into shares of common stock of
Enron and including shares of common stock of Enron in which Mr. Belfer
disclaims beneficial interest).
On November 25, 1997 (prior to the Merger), Coda disposed of Taurus Energy
Corp. ("Taurus"), which was a subsidiary of Coda, to unrelated third parties
for $42 million in cash. The business and assets of Taurus consisted primarily
of two natural gas processing facilities and approximately 700 miles of related
gathering pipelines located in West Texas. Coda utilized such funds to repay
outstanding indebtedness under its bank credit facility. As a result of such
disposition, the cash portion of the Merger consideration was increased by the
amount of the cash consideration received by Coda in connection with the sale
of Taurus, resulting in the cash portion of the Merger Consideration being
approximately $191 million gross, $149 million net of the Taurus proceeds.
Concurrently with the Merger, Belco contributed $23 million to Coda that Coda
utilized, together with the funds from the Taurus disposition, to repay all of
the debt outstanding under Coda's revolving credit facility (approximately $65
million in principal amount), plus accrued interest thereon, at the time of the
Merger, and such credit facility was thereafter terminated. Belco funded the
cash portion of the Merger consideration and the cash contribution to Coda
through cash on hand and borrowings of $85 million under Belco's $150 million
revolving credit facility with a group of banks for which The Chase Manhattan
Bank acts as Administrative
<PAGE> 3
Agent (the "Belco Credit Facility"). In connection with the Merger, the Credit
Agreement related to the Belco Credit Facility was amended to (i) revise
certain restrictive covenants In order to permit the Merger to occur and (ii)
increased Belco's borrowing base from $50 million to $105 million (subject to
redetermination by the Administrative Agent from time to time).
As a result of the Merger, Coda will be required to make an offer to purchase
all of the $110 million in principal amount of its 10 1/2% Senior Subordinated
Notes, Series B, due 2006 (the "Coda Notes") currently outstanding at a price
equal to 101% of the principal amount of the Coda Notes plus accrued and unpaid
interest thereon. Notice of such offer was made on December 10, 1997 and such
offer expired January 9, 1998. $1 million principal amount of the Coda Notes
were purchased by Coda pursuant to such offer.
Coda is principally engaged in the acquisition and exploitation of oil and
natural gas properties. Coda's producing properties are concentrated in the
Permian Basin and the mid-continent region of the United States (primarily
Texas and Oklahoma). Coda's exploitation activities consist primarily of
secondary recovery operations, the drilling of development wells or infill
wells, workovers and recompletions in other productive zones.
Belco currently intends to continue to operate the oil and gas business of Coda
in substantially the same manner as currently conducted.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
For Coda, attached hereto as Schedule A are the audited Consolidated Statements
of Operations for each of the two years in the period ended December 31, 1995
and the 319 days ended December 31, 1996; Consolidated Balance Sheets as of
December 31, 1996 and 1995; Consolidated Statements of Cash Flows and
Consolidated Statements of Stockholders' Equity for each of the two years in
the period ended December 31, 1995 and the 319 days ended December 31, 1996;
the related Notes to Consolidated Financial Statements, and the Report of Ernst
& Young LLP, independent auditors, concerning the above-referenced Consolidated
Financial Statements and Notes, together with unaudited supplemental oil and
gas reserve and standardized measure information. In addition, Unaudited
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the 47 days ended February 16, 1996, and Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1996, are provided.
For Coda, attached hereto as Schedule B are the unaudited Consolidated
Statements of Operations for the 47 days ended February 16, 1996, 227 days
ended September 30, 1996, Pro Forma nine months ended September 30, 1996, three
months ended September 30, 1996 and 1997, and nine months ended September 30,
1997; Consolidated Balance Sheets as of December 31, 1996 and September 30,
1997; Consolidated Statements of Cash Flows for the 47 days ended February 16,
1996 and 227 days ended September 30, 1996 and nine months ended September 30,
1997, and the related Notes to Consolidated Financial Statements.
(b) PRO FORMA FINANCIAL STATEMENTS
For Belco and Subsidiaries, attached hereto as Schedule C are the Unaudited Pro
Forma Consolidated Condensed Statements of Operations for the year ended
December 31, 1996 and for the nine-month period ended September 30, 1997, the
Unaudited Pro Forma Consolidated Condensed Balance Sheet as of September 30,
1997 and the Unaudited Pro Forma Supplemental Oil and Gas Disclosures as of
December 31, 1996.
The Pro Forma Financial Statements report pro forma oil and gas revenues
(unhedged) for the combined entities of $144.3 million for the nine month period
ended September 30, 1997. For the same period, pro forma volumes of natural gas
and oil production for the combined entities are reported at 40.4 Bcf and 3.15
MMBO (million barrels of oil), respectively. For the first nine months of 1997,
pro forma natural gas production represented approximately 63% of total
production on an Mcfe basis, with the remaining 37% represented by oil
production.
Belco will account for the acquisition of Coda using the purchase method of
accounting for business combinations. In accordance with the Statement of
Financial Accounting Standards Board No. 109 ("FASB 109"), Belco will record in
the fourth quarter ended December 31, 1997 a one-time non-cash deferred tax
liability of approximately $110 million to reflect the difference between the
tax basis of Coda's assets and liabilities and the amounts recorded for
financial reporting purposes for such assets and liabilities.
This FASB 109 "gross up" is reflected under Deferred Income Taxes in the
Liabilities column of Belco's Unaudited Pro Forma Balance Sheet as of September
30, 1997 included in this Form 8-K/A filing.
Belco will record in the fourth quarter ended December 31, 1997 a non-cash
ceiling test provision of approximately $150 million ($98 million after tax),
which is also reflected in the Unaudited Pro Forma Statements of Operations as
of September 30, 1997. The ceiling test provision includes the effect of the
non-cash $110 million FASB 109 "gross up" attributable to the Coda acquisition
on Belco's full cost pool at year end 1997 and adjustments to the SEC PV10 value
of year-end 1997 reserves, which were significantly impacted by lower product
prices when compared to year-end 1996 prices, among other items. The present
value of estimated future net revenues before income taxes of Belco's proved
reserves were $504 million as of December 31, 1997 (exclusive of price risk
management transactions) based on average prices of $17.28 per barrel of oil and
$2.30 per Mcf of natural gas. This compared to prices of approximately $25.13
per barrel of oil and $3.68 per Mcf of natural gas used in calculating year-end
1996 proved reserves.
<PAGE> 4
(C) EXHIBITS
<TABLE>
<CAPTION>
---------------- ---------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
---------------- ---------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 31,
1997, by and among Belco Oil & Gas Corp., Belco
Acquisition Sub, Inc. and Coda Energy, Inc. (excluding
exhibits and schedules). [Incorporated by reference
from Exhibit 99.2 of Belco's Current Report on Form 8-K
filed with the Commission on November 3, 1997]
23.1* Consent of Ernst & Young LLP
99.1 Press Release, dated November 3, 1997, "Belco Oil & Gas
Corp. agrees to acquire Coda Energy, Inc. for $324
million plus warrants (incorporated by reference to
Exhibit 99.2 to Registrant's Current Report on Form
8-K, dated October 31, 1997, SEC File No. 011-14256,
filed November 3, 1997)
</TABLE>
* filed herewith
Exhibit 99.1
<PAGE> 5
Schedule A
<PAGE> 6
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Coda Energy, Inc.
We have audited the accompanying consolidated balance sheet of Coda Energy,
Inc., and subsidiaries (the "Successor") as of December 31, 1996, and the
related consolidated statements of operations, cash flows, and stockholders'
equity for the 319-day period from February 17, 1996 to December 31, 1996 and
the predecessor's consolidated balance sheet as of December 31, 1995 and its
related consolidated statements of operations, cash flows, and stockholders'
equity as described in Note 1 for each of the two years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Successor's and the predecessor's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements of the Successor referred
to above present fairly, in all material respects, the consolidated financial
position of Coda Energy, Inc., and subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for the 319-day
period from February 17, 1996 to December 31, 1996, in conformity with
generally accepted accounting principles.
In our opinion, the consolidated financial statements of the predecessor
referred to above present fairly, in all material respects, the consolidated
financial position of the predecessor at December 31, 1995, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 19, 1997
F-1
<PAGE> 7
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
------------ ----------
Predecessor Successor
------------ ----------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,604 $ 7,994
Accounts receivable - revenue 10,598 14,432
Accounts receivable - joint interest and other 2,463 1,673
Other current assets 2,206 1,046
-------- --------
19,871 25,145
Oil and gas properties (full cost accounting method):
Proved oil and gas properties 226,650 249,693
Unproved oil and gas properties - 1,000
Less accumulated depletion, depreciation, and amortization (56,042) (20,757)
-------- --------
Oil and gas properties, net 170,608 229,936
Gas plants and gathering systems, at cost 38,068 34,258
Less accumulated depreciation (4,082) (2,305)
-------- --------
Gas plants and gathering systems, net 33,986 31,953
Other properties and assets, net 4,599 8,536
-------- --------
$229,064 $295,570
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 453 $ 120
Accounts payable - trade 7,252 8,934
Accounts payable - revenue and other 3,394 5,210
Accrued interest 342 3,366
Income taxes payable 128 579
-------- --------
11,569 18,209
Long-term debt, less current maturities 123,907 64,966
10 1/2% senior subordinated notes - 110,000
Deferred income taxes 14,400 37,061
Commitments and contingencies
15% cumulative preferred stock, 40,000 shares of
$.01 par value authorized; 20,000 shares issued and outstanding
at December 31, 1996; liquidation preference of $22,738 at
December 31, 1996, including dividends in arrears - 20,000
Common stockholders' equity of management, subject to put
and call rights; 13,611 shares of $.01 par value common
stock issued and outstanding - 4,560
Less related notes receivable - (937)
-------- --------
- 3,623
-------- --------
Other common stockholders' equity:
Common stock, 40 million, $.02 par value, 1 million, $.01 par value,
shares authorized at December 31, 1995 and 1996, respectively
22,088,903 and 900,000 shares issued and outstanding at December 31,
1995 and 1996, respectively 442 9
Additional paid-in capital 68,671 89,991
Retained earnings (deficit) 10,075 (48,289)
-------- --------
Total other common stockholders' equity 79,188 41,711
-------- --------
$229,064 $295,570
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 8
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994 and 1995, 47 days ended February
16, 1996, and 319 days ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Predecessor Successor
-------------------------------- --------------------------
Year ended 47 days 319 days Pro forma
December 31, ended ended year ended
----------------- February 16, December 31, December 31,
1994 1995 1996 1996 1996
-------- ------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $50,683 $60,997 $ 8,079 $ 68,690 $ 76,769
Gas gathering and processing 20,081 35,634 5,322 39,553 44,875
Other income 822 1,207 168 2,139 2,307
------- ------- ------- -------- --------
71,586 97,838 13,569 110,382 123,951
Costs and expenses:
Oil and gas production 21,646 27,119 3,607 28,560 32,167
Gas gathering and processing 17,357 30,473 4,567 32,825 37,392
Depletion, depreciation, and amortization 16,419 19,715 2,583 24,031 27,412
General and administrative 3,144 2,898 320 2,078 2,398
Business combination 1,829 - - - -
Interest 5,281 8,676 1,102 14,555 16,985
Stock option compensation - - 3,199 - -
Writedown of oil and gas properties - - - 83,305 -
------- ------- ------- -------- --------
65,676 88,881 15,378 185,354 116,354
------- ------- ------- -------- --------
Income (loss) before income taxes 5,910 8,957 (1,809) (74,972) 7,597
Income tax expense (benefit) 2,581 3,202 (511) (26,683) 3,146
------- ------- ------- -------- --------
Net income (loss) 3,329 5,755 (1,298) (48,289) 4,451
Preferred stock dividend requirements - - - 2,738 3,173
------- ------- ------- -------- --------
Net income (loss) available for common
stockholders $ 3,329 $ 5,755 $(1,298) $(51,027) $ 1,278
======= ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 9
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994 and 1995, 47 days ended February
16, 1996, and 319 days ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Predecessor Successor
---------------------------------- -------------
Year ended 47 days 319 days
December 31, ended ended
----------------------- February 16, December 31,
1994 1995 1996 1996
----------- ---------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,329 $ 5,755 $ (1,298) $ (48,289)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation, and amortization 16,973 20,256 2,583 24,031
Deferred income tax expense (benefit) 1,567 3,187 (511) (27,254)
Stock option compensation - - 3,199 -
Writedown of oil and gas properties - - - 83,305
Gain on sale of other assets - - - (701)
Other 123 55 6 (14)
Effect of changes in:
Accounts receivable 589 (3,849) 3,386 (6,430)
Other current assets 60 (558) (63) 398
Accounts payable and other
current liabilities 346 (545) (4,166) 10,104
-------- -------- ------ ---------
Net cash provided by operating activities 22,987 24,301 3,136 35,150
Cash flows from investing activities:
Additions to oil and gas properties (49,732) (41,079) (1,717) (13,433)
Additions to gas plant and gathering systems
and other property (4,130) (8,500) (114) (823)
Business combinations, net of $5,740 cash
acquired in 1996 (3,250) - - (174,373)
Investment in common equity securities - (573) - (2,649)
Payments received on amounts due from stockholders - 1,294 130 124
Proceeds from sale of assets 2,515 5,722 110 4,938
Prepaid long-term gas purchases (1,759) - - -
Loan to stockholder - - - (738)
Other, net (423) 106 - 75
-------- -------- ------ ---------
Net cash used in investing activities (56,779) (43,030) (1,591) (186,879)
Cash flows from financing activities:
Proceeds from sale of common and preferred stock - - - 110,000
Proceeds from subordinated notes - - - 210,000
Repayment of debt and subordinated notes (41,542) (11,551) (19) (256,920)
Proceeds from bank borrowings 76,350 30,400 - 97,500
Proceeds from exercise of stock options and warrants 2,370 772 - -
Repurchases of common stock (812) (2,125) - -
Other, net (140) (637) (390) (857)
-------- -------- ------ ---------
Net cash provided by (used in) financing
activities 36,226 16,859 (409) 159,723
-------- -------- ------ ---------
Net increase (decrease) in cash and cash equivalents 2,434 (1,870) 1,136 7,994
Cash and cash equivalents at beginning of period 4,040 6,474 4,604 -
-------- -------- ------- ---------
Cash and cash equivalents at end of period $ 6,474 $ 4,604 $ 5,740 $ 7,994
======== ======== ======= =========
Supplemental cash flow information:
Interest paid $ 3,788 $ 9,584 $ 1,548 $ 11,152
======== ======== ======= =========
Income taxes paid $ 300 $ 618 $ - $ 120
======== ======== ======= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 10
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1994 and 1995, 47 days ended February
16, 1996, and 319 days ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Common Stockholders'
15% Cumulative Equity of Management,
Preferred Stock Subject to Put and Call Rights
------------------- --------------------------------
Notes
Shares Amount Shares Amount receivable
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Predecessor:
Balances December 31, 1993 -- $ -- -- $ -- $ --
Shares issued as director
compensation -- -- -- -- --
Shares issued upon
exercise of stock
options and warrants -- -- -- -- --
Common stock issued to
purchase Taurus
Energy Corp. -- -- -- -- --
Repurchase and
cancellation of
common stock -- -- -- -- --
Common stock issued to
acquire reversionary
interests in oil and gas
properties -- -- -- -- --
Net income -- -- -- -- --
------- ------- ------- ------- -------
Balances December 31, 1994 -- -- -- -- --
Shares issued as director
compensation -- -- -- -- --
Shares issued upon
exercise of stock
options and warrants -- -- -- -- --
Repurchase and
cancellation of common
stock -- -- -- -- --
Net income -- -- -- -- --
------- ------- ------- ------- -------
Balances December 31, 1995 -- -- -- -- --
Stock option compensation
(unaudited) -- -- -- -- --
Net loss for the period
from January 1, 1996
to February 16, 1996
(unaudited) -- -- -- -- --
------- ------- ------- ------- -------
Balances at February 16,
1996 (unaudited) -- $ -- -- -- --
------- ------- ------- ------- -------
Successor:
Transactions related to
the merger:
Common stock issued to
management investors
in exchange for
common stock, options,
warrants, notes
receivable and cash -- $ -- 14 $ 4,560 $ (937)
Common stock issued to
JEDI for cash -- -- -- -- --
Preferred stock issued to
JEDI for cash 20 20,000 -- -- --
Net loss for the period
from February 17, 1996
through December 31, 1996 -- -- -- -- --
------- ------- ------- ------- -------
Balances December 31, 1996 20 $20,000 14 $ 4,560 $ (937)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Other Common Stockholders' Equity
----------------------------------------------------------------
Additional Retained
paid-in earnings
Shares Amount capital (deficit)
------- ------- ----------- ---------
Predecessor:
<S> <C> <C> <C> <C>
Balances December 31, 1993 19,455 $ 389 $ 56,851 $ 991
Shares issued as director
compensation 7 -- 44 --
Shares issued upon
exercise of stock
options and warrants 788 16 2,355 --
Common stock issued to
purchase Taurus
Energy Corp. 1,500 30 7,265 --
Repurchase and
cancellation of
common stock (157) (3) (809) --
Common stock issued to
acquire reversionary
interests in oil and gas
properties 635 13 4,270 --
Net income -- -- -- 3,329
------- -------- -------- --------
Balances December 31, 1994 22,228 445 69,976 4,320
Shares issued as director
compensation 7 -- 45 --
Shares issued upon
exercise of stock
options and warrants 225 5 767 --
Repurchase and
cancellation of common
stock (371) (8) (2,117) --
Net income -- -- -- 5,755
------- -------- -------- --------
Balances December 31, 1995 22,089 442 68,671 10,075
Stock option compensation
(unaudited) -- -- 3,199 --
Net loss for the period
from January 1, 1996
to February 16, 1996
(unaudited) -- -- -- (1,298)
------- -------- -------- --------
Balances at February 16,
1996 (unaudited) 22,089 $ 442 $ 71,870 $ 8,777
======== ======== ======== ========
Successor:
Transactions related to
the merger:
Common stock issued to
management investors
in exchange for
common stock, options,
warrants, notes
receivable and cash $ -- $ -- $ --
Common stock issued to
JEDI for cash 900 9 89,991 --
Preferred stock issued to
JEDI for cash -- -- -- --
Net loss for the period
from February 17, 1996
through December 31, 1996 -- -- -- (48,289)
------- -------- -------- --------
Balances December 31, 1996 900 $ 9 $ 89,991 $(48,289)
======= ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 11
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Merger
On February 16, 1996, pursuant to an Agreement and Plan of Merger dated as
of October 30, 1995 (as amended, the "Merger Agreement"), by and among Coda
Energy, Inc. ("Coda"), Joint Energy Development Investments Limited
Partnership ("JEDI"), which is an affiliate of Enron Capital & Trade
Resources Corp. ("ECT"), and Coda Acquisition, Inc. ("CAI"), which was a
subsidiary of JEDI, JEDI acquired Coda through a merger (the "Merger") at a
price of $7.75 per share in cash (for an aggregate purchase price of
approximately $176.2 million). Coda together with its subsidiaries prior to
and including February 16, 1996 is referred to herein as the Predecessor
and after such date as CEI or Successor and collectively, for both periods
the Company. Concurrently with the execution of the Merger Agreement, JEDI
and CAI entered into certain agreements with--members of management (the
"Management Group"), providing for a continuing role of management in the
Company after the Merger. Following consummation of the Merger, the
Management Group owns approximately 5% of Coda's common stock on a
fully-diluted basis. JEDI owns the remaining 95%.
The sources and uses of funds related to financing the Merger were as
follows:
<TABLE>
<CAPTION>
Sources of Funds
(in millions)
<S> <C>
Credit Agreement (See Note 5) $ 95.0
JEDI debt/(1)/ 100.0
15% cumulative preferred stock issued to JEDI 20.0
Common stock issued to JEDI 90.0
------
Total $305.0
======
Uses of Funds
(in millions)
Payments to Coda stockholders,
warrantholder and optionholders $176.2
Repayment of former credit facility
and other indebtedness 122.7
Merger costs and other expenses 6.1
------
Total $305.0
======
</TABLE>
(1) Represents indebtedness incurred by CAI and assumed by Coda to fund a
portion of the consideration paid in the Merger.
The Merger has been accounted for using the purchase method of accounting.
As such, JEDI's acquisition cost has been allocated to the assets and
liabilities acquired based on estimated fair values. As a result, the
financial position and operating results subsequent to the date of the
Merger reflect a new basis of accounting and are not comparable to prior
periods. The allocation of JEDI's purchase price to the assets and
liabilities acquired resulted in a significant increase in the carrying
value of the oil and gas properties. Based upon the allocation of JEDI's
purchase price and estimated proved reserves and product prices in effect
at the date of the Merger, the purchase price allocated to oil and gas
properties was in excess of the cost center ceiling (see Note 2 - oil and
gas properties) by approximately $83.3 million ($53.3 million net of
F-6
<PAGE> 12
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related deferred taxes). The resulting writedown was a non-cash charge and
has been included in the results of operations for the 319 days ended
December 31, 1996.
2. Summary of significant accounting and reporting policies
Principles of consolidation and basis of financial statement presentation -
The consolidated financial statements include the accounts of Coda and its
majority owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to amounts reported in prior years to
conform with the current presentation. All information contained herein
concerning the 47-day period ended February 16, 1996 is unaudited.
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 these
estimates.
Cash and cash equivalents - Cash and cash equivalents include commercial
paper or eurodollar investments with major financial institutions with
maturities of three months or less when purchased.
Accounts receivable - Substantially all accounts receivable arise from sales
of oil, natural gas, or natural gas liquids or from participants in
operated oil and gas wells. Generally, operators of oil and gas properties
have the right to offset future revenues against unpaid charges related to
operated wells. Oil and gas sales are generally unsecured. Most of the
receivables are from a broad and diverse group of oil and gas companies
and, accordingly, do not generally represent a significant credit risk.
Credit losses, which have been insignificant, are provided for in the
financial statements and have been within management's expectations.
Oil and gas properties - Oil and gas properties are recorded at cost
using the full cost method of accounting, as prescribed by the
Securities and Exchange Commission (the "SEC"). Under the full cost method,
all costs associated with the acquisition, exploration, or development of
oil and gas properties are capitalized as part of the full cost pool.
Sales, dispositions, and other oil and gas property retirements are
accounted for as adjustments to the full cost pool, with no recognition of
gain or loss unless such disposition would significantly alter the
amortization rate. Under rules of the SEC for the full-cost method of
accounting, the net carrying value of oil and gas properties is limited to
the sum of the present value (10% discount rate) of estimated future net
cash flows from proved reserves, based on period-end prices and costs, plus
the lower of cost or estimated fair value of unproved properties (the "cost
center ceiling").
Depletion, depreciation, and amortization of evaluated oil and gas
properties are provided using the unit-of-production method based on total
proved reserves, as determined by independent petroleum reservoir
engineers.
Gas plants and gathering systems - Gas plants and gathering systems are
recorded at cost and depreciated on a straight-line basis over the shorter
of their estimated useful lives or 15 years.
F-7
<PAGE> 13
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other properties and assets, net - Other assets include deferred financing
costs, deferred gas contract costs and a receivable from a related party
(see Note 13). Such costs are amortized over the life of the related loan
agreements and contracts. Amortization of these costs for the 47-day period
ended February 16, 1996 and the 319-day period ended December 31, 1996
amounted to $68,000 and $660,000, respectively, which is included in
depletion, depreciation, and amortization expense in the accompanying
statements of operations.
Overhead reimbursement fees - Fees from overhead charges billed to working
interest owners, including the Company, of $3,372,000, $5,571,000,
$848,000, and $6,011,000 for the years ended December 31, 1994, 1995, and
the 47 days ended February 16, 1996 and 319 days ended December 31, 1996,
respectively, have been classified as a reduction of general and
administrative expenses in the accompanying consolidated statements of
operations.
Financial instruments - The Company enters into swap agreements to reduce
the effects of the volatility of the price of crude oil and natural gas on
the Company's operations. These agreements involve the receipt of fixed
price amounts in exchange for variable payments based on NYMEX prices and
specific volumes. The differential to be paid or received is accrued in the
month of the related production and recognized as a component of oil and
gas revenues.
The Company also sells call options on crude oil. The strike price of these
agreements exceeds current market prices at the time they are entered into.
If the applicable market price exceeds the strike price and option premium,
the differential is accrued and recognized as a reduction of oil revenues
in the month of the related production. Any remaining deferred option
premiums are recognized at the end of the option period.
The fair values of the swap agreements and sold call options are not
included in the accompanying consolidated balance sheet. See Note 11 for
the estimated fair value of these financial instruments. Due to the short
maturity, market sensitive interest rates and/or minimal changes in forward
interest rates since the date of issuance, the carrying value of the
Company's other financial instruments approximates fair value.
New accounting pronouncements - In the first quarter of 1996, the Company
adopted the Financial Accounting Standards Board ("FASB") Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FAS 121"). Adoption of this statement did not
have a material effect on the Company's financial statements.
The FASB has issued its statement No. 123, "Accounting for Stock Based
Compensation" ("FAS 123") which establishes an alternative method of
accounting for stock based compensation to the method set forth in
Accounting Principles Board Opinion No. 25 ("APB 25"). FAS 123 encourages,
but does not require, adoption of a fair value based method of accounting
for stock options and similar equity instruments granted to employees. The
Company has elected to account for such grants under the provisions of APB
No. 25.
Pro forma information (unaudited) - The pro forma statement of operations
information was prepared as if the Merger and the sale of the Notes (see
Note 6) had occurred on January 1, of each 1995 and 1996. The pro forma
information does not purport to represent the results of operations which
would have occurred had such transactions been consummated on January 1,
1995 and 1996 or for any future period. The pro forma information was
prepared by adjusting the historical periods: (i) to adjust depletion,
depreciation, and amortization to reflect JEDI's
F-8
<PAGE> 14
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase price allocated to property and equipment, (ii) to adjust interest
expense to give effect to the net reduction of approximately $37.0 million
under the Company's credit facility, repayment of a note payable to an
officer of the Company, and an increase in the interest rate on borrowings
under the new credit facility of .25%, (iii) to record interest on the
Notes at an interest rate of 10 1/2%, (iv) to record amortization of the
issuance cost of the Notes over the term such debt is expected to be
outstanding (10 years), (v) to adjust the writedown of oil and gas
properties and stock option compensation in 1996 to eliminate these
non-recurring charges related to the Merger, (vi) to adjust the provision
for income taxes for the change in financial taxable income resulting from
the above adjustments, (vii) to record the cumulative dividend requirements
of the 15% cumulative preferred stock issued to JEDI.
<TABLE>
<CAPTION>
Pro forma (unaudited, in thousands)
Year ended December 31,
------------------------------------
1995 1996
----------------- -----------------
<S> <C> <C>
Revenues $97,838 $123,951
------- --------
Net income (loss) available
for common stockholders $(7,593) $ 1,278
------- --------
</TABLE>
3. Predecessor merger with Diamond
On September 30, 1994, pursuant to an Agreement and Plan of Merger, the
Predecessor acquired all of the issued and outstanding stock of Diamond
Energy Operating Company and Diamond A Inc. (collectively, "Diamond"). The
Predecessor issued an aggregate of 3,647,715 shares of common stock to the
Diamond stockholders. Contemporaneously with the merger, Diamond acquired
the overriding royalty and reversionary interests owned by Diamond's
primary lender in certain of Diamond's oil and gas properties for $9.0
million cash. Coda provided the funds necessary to complete such
acquisition and repay $18.5 million of existing Diamond indebtedness. If
the price of oil received from the Diamond properties averages more than
$17.65 per barrel for the 48-month period ending September 30, 1998,
Diamond's former lender will be paid an additional $1.0 million. In
addition, other reversionary interests in oil and gas properties in which
Diamond owns an interest were purchased from certain employees, former
employees, consultants and a financial advisor to Diamond for 634,519
shares of common stock and approximately $39,000 in cash.
The merger with Diamond was accounted for as a pooling of interests.
Accordingly, the merger of the equity interests was given retroactive
effect in these financial statements for periods prior to the merger to
represent the combined financial statements of the previously separate
entities. The acquisitions of the reversionary interests were accounted for
as purchases effective September 30, 1994.
Separate and combined results of the Predecessor and Diamond for periods
prior to the merger were as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Diamond Combined
----------- ------- --------
<S> <C> <C> <C>
Nine months ended September 30, 1994
(unaudited):
Revenues $37,048 $13,314 $50,362
Net income 194 1,831 2,025
</TABLE>
F-9
<PAGE> 15
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the merger, the Predecessor incurred approximately $1.8
million of legal, accounting, printing, and other costs related to the
combination of the previously separate entities. Under pooling of interests
accounting, these costs were expensed in September 1994.
4. Other Predecessor Acquisitions
The Company is continually acquiring oil and gas properties. The
significant transactions that have occurred since January 1, 1994, are
discussed below.
On April 29, 1994, Coda acquired 100% of the issued and outstanding common
stock of Taurus Energy Corporation ("Taurus"), a privately held Texas
corporation, in exchange for 1,500,000 shares of the Predecessor's common
stock, valued at approximately $7.3 million, and $3.25 million cash. The
Predecessor assumed existing Taurus indebtedness of approximately $9.75
million. Taurus operates three natural gas processing facilities and owns
interests in approximately 700 miles of natural gas gathering systems
located primarily in west central Texas.
In July 1994, Taurus acquired ownership of the Shackelford gas gathering
system and processing plant. Taurus had previously been operating the
system and plant under operating leases. Taurus paid $3.8 million for the
system and plant, which was funded under the existing credit agreement. In
related transactions, Taurus entered into an agreement to sell 10,000 MMBTU
per day to the former owner of Shackelford for a period of 48 months.
Simultaneously, Taurus entered into a gas purchase agreement with an
unrelated third party for similar quantities over the same term. Pricing
under both the gas sales agreement and the gas purchase agreement is
structured to allow Taurus to earn a margin on all volumes sold during the
term of the agreements. In January 1995, Taurus acquired the remaining
ownership interest in one of Taurus' gas plants and related facilities for
$6.5 million.
In December 1994, in two separate transactions, the Predecessor acquired
interests in 31 producing oil and gas properties in West Texas from two
major oil companies. The acquisition prices were $13.3Emillion and
$10.0Emillion, respectively. The acquisitions were accounted for as
purchases.
In October 1995, the Predecessor acquired from Snyder Oil Company interests
in 63 producing oil and gas properties located in West Texas (the "Snyder
Properties"). The aggregate purchase price was $17.1 million in cash, of
which $16.0 million was financed by borrowings under the existing credit
facility. The acquisition was accounted for as a purchase.
The following unaudited pro forma data present the consolidated results of
operations of the Predecessor for the year ended December 31, 1995, as if
the acquisition of the Snyder Properties had occurred on January 1, 1995.
The pro forma results of operations are presented for comparative purposes
only and are not necessarily indicative of the results that would have been
obtained had such acquisitions been consummated as presented. The following
data reflect pro forma adjustments for depletion, depreciation, and
amortization related to the acquired oil and gas properties; adjustments to
interest expense on borrowed funds; and resulting adjustments to income tax
expense (in thousands).
F-10
<PAGE> 16
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pro forma
Year ended December 31,
1995
----------
(unaudited)
<S> <C>
Revenues $102,997
========
Net income $6,107
======
</TABLE>
5. Long-term debt
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
----------- ---------
Predecessor Successor
----------- ---------
<S> <C> <C>
NationsBank credit agreements $122,000 $64,500
Note payable to NationsBank 606 486
Senior subordinated debentures 988 -
Other 766 100
-------- -------
124,360 65,086
Less current maturities 453 120
-------- -------
Long-term debt $123,907 $64,966
======== =======
</TABLE>
NationsBank credit agreements - Effective February 16, 1996, CEI entered
into a credit agreement with NationsBank of Texas, N.A. ("NationsBank"), as
lender and as agent, and additional lenders named therein (the "Credit
Agreement"). The Credit Agreement is guaranteed by all of Coda's
subsidiaries and provides for a revolving credit facility in an amount up
to $250.0 million. The borrowing base is subject to redetermination: (i)
semiannually, (ii) upon the sale of Taurus and (iii) upon issuance of
public subordinated debt in an amount greater than $100.0 million. The
lenders under the Credit Agreement agreed to waive their right to
redetermine the borrowing base with respect to the issuance of the Notes
(see Note 6). The borrowing base was redetermined effective July 1, 1996
and remained at $115.0 million. At December 31, 1996, $64.5 million was
outstanding under the Credit Agreement and $50.5 million was available for
borrowing thereunder. The next redetermination of the borrowing base is
scheduled for April 1, 1997.
The Credit Agreement is unsecured. CEI has provided the lenders with first
lien deeds of trust on its oil and natural gas assets which will not become
effective, and the lenders have agreed not to file, unless (i) 80% of any
outstanding borrowings in excess of the borrowing base is not repaid within
a 90-day period, (ii) cash collateral securing a hedge transaction exceeds
20% of the borrowing base or (iii) an event of default or a material
adverse event, as defined in the Credit Agreement, occurs. There are no
scheduled principal payments due on the Credit Agreement until maturity.
F-11
<PAGE> 17
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
So long as no default (as defined in the Credit Agreement) is continuing,
CEI has the option of having all or any portion of the amount borrowed
under the Credit Agreement be the subject of one of the following interest
rates: (i) NationsBank's prime rate, (ii) the CD Rate plus 1 1/4% to 1 5/8%
based upon the ratio of outstanding debt to the available borrowing base
and (iii) LIBOR plus 1 1/4% to 1 5/8% based upon the ratio of outstanding
debt to the available borrowing base. CEI must also pay a commitment fee of
between 0.375% to 0.425% on the unused portion of the credit facility. The
Credit Agreement contains various restrictive covenants, including
limitations on the granting of liens, restrictions on the issuance of
additional debt, restrictions on investments, a requirement to maintain
positive working capital, and restrictions on dividends and stock
repurchases. The Credit Agreement also contains requirements that JEDI or
certain affiliates of JEDI must continue to own a majority of the
outstanding equity of Coda and must have the ability to elect the majority
of the Board of Directors and that certain members of management maintain
specified levels of equity ownership in Coda and continue their employment
with the Company. The Credit Agreement matures on February 16, 2001.
On August 1, 1996, CEI entered into the First Amendment to Credit Agreement
(the "First Amendment") which in general reduced the interest rate. The
First Amendment provides CEI the option of having all or any portion of the
amount borrowed under the Credit Agreement be the subject of one of the
following interest rates: (i) NationsBank's prime rate, (ii) the CD Rate
plus 1% to 1 1/2% based upon the ratio of outstanding debt to the available
borrowing base and (iii) LIBOR plus 1% to 1 1/2% based upon the ratio of
outstanding debt to the available borrowing base. CEI must also pay a
commitment fee of between 0.30% to 0.425% on the unused portion of the
credit facility.
The Predecessor's credit agreement provided that interest rates on
borrowings ranged from NationsBank's prime rate to LIBOR plus between 1%
and 1 3/8% based on the ratio of outstanding debt to the available
borrowing base. The weighted average interest rate on borrowings
outstanding under the Credit Agreement was 7.43% and 6.91% for the year
ended December 31, 1995 and for the 319-day period ended December 31, 1996,
respectively.
Note payable to NationsBank - The promissory note requires monthly
principal and interest payments to January 2, 1998, with interest at
NationsBank's prime rate.
Senior subordinated debentures - The 12% Senior Subordinated Debentures
(the "Debentures") are presented net of unamortized issuance discount of
$165,000 at December 31, 1995. The effective interest rate on the
Debentures is 16.61%. On May 1, 1996, CEI deposited with the trustee of the
Debentures funds sufficient to redeem the Debentures at a redemption price
of 100.0% of the principal amount of the Debentures plus accrued and unpaid
interest thereon, and thereafter interest on the Debentures ceased to
accrue.
Scheduled maturities of long-term debt (including the Notes discussed in
Note 6 below) as of December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 120
1998 366
1999 100
2000 -
2001 64,500
Thereafter 110,000
--------
$175,086
========
</TABLE>
F-12
<PAGE> 18
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the long-term debt bearing interest at floating market rates
and the minimal change in forward market interest rates from the time CEI
completed the sale of the Notes (see Note 6), the carrying value of these
financial instruments approximates fair value.
6. 10 1/2% Senior subordinated notes
On March 18, 1996, CEI completed the sale of $110 million principal amount
of 10 1/2% Senior Subordinated Notes due 2006 (the "Notes"). The proceeds
of the Notes were used to fully repay the JEDI debt assumed in the Merger
and to partially repay bank debt. The Notes bear interest at an annual rate
of 10 1/2% payable semiannually in arrears on April 1 and October 1 of each
year. The Notes are general, unsecured obligations of CEI, are subordinated
in right of payment to all Senior Debt (as defined in the Indenture
governing the Notes) of Coda, and are senior in right of payment to all
future subordinated debt of CEI. The claims of the holders of the Notes are
subordinated to Senior Debt, which, as of December 31, 1996, was $65.1
million.
The Notes were issued pursuant to an Indenture, which contains certain
covenants that, among other things, limit the ability of Coda and its
Restricted Subsidiaries (as defined in the Indenture) to incur additional
indebtedness and issue Disqualified Stock (as defined in the Indenture),
pay dividends, make distributions, make investments, make certain other
restricted payments, enter into certain transactions with affiliates,
dispose of certain assets, incur liens securing pari passu or subordinated
indebtedness of Coda and engage in mergers and consolidations.
The Notes are not redeemable by Coda's prior to April 1, 2001. After April
1, 2001, the Notes will be subject to redemption at the option of Coda, in
whole or in part, at the redemption prices set forth in the Indenture, plus
accrued and unpaid interest thereon to the applicable redemption date. In
addition, until March 12, 1999, up to $27.5 million in aggregate principal
amount of Notes are redeemable, at the option of Coda on any one or more
occasions from the net proceeds of an offering of common equity of Coda, at
a price of 110.5% of the aggregate principal amount of the Notes, together
with accrued and unpaid interest thereon to the date of the redemption;
provided, however, that at least $82.5 million in aggregate principal
amount of Notes must remain outstanding immediately after the occurrence of
such redemption; provided, further, that any such redemption shall occur
within 75 days of the date of the closing of such offering of common
equity.
In the event of a Change of Control (as defined in the Indenture), holders
of the Notes will have the right to require Coda to repurchase their Notes,
in whole or in part, at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon to the
date of repurchase. The Indenture requires that, prior to such a repurchase
but in any event within 90 days of such Change of Control, Coda must either
repay all Senior Debt or obtain any required consent to such repurchase.
Coda's payment obligations under the Notes are fully, unconditionally and
jointly and severally guaranteed on a senior subordinated basis by all of
Coda's current subsidiaries and future Restricted Subsidiaries. Such
guarantees are subordinated to the guarantees of Senior Debt issued by the
Guarantors (as defined in the Indenture) under the Credit Agreement and to
other guarantees of Senior Debt issued in the future. All of Coda's current
subsidiaries are wholly owned. There are currently no contractual
restrictions on distributions from the Guarantors to Coda.
F-13
<PAGE> 19
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Separate financial statements and other disclosures concerning the
Guarantors are not presented because management has determined they are not
material to investors. The combined condensed financial information of
Coda's current subsidiaries, the Guarantors, is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
----------- ---------
Predecessor Successor
----------- ---------
<S> <C> <C>
Current assets $ 5,394 $ 7,745
Oil and gas properties, net 36,469 50,176
Gas plants and gathering systems, net 33,650 31,617
Other properties, net, and other assets 1,713 1,113
------- -------
Total assets $77,226 $90,651
======= =======
Current liabilities $ 5,629 $ 8,321
Intercompany payables 50,172 33,551
Deferred income taxes 7,828 16,191
Stockholder's equity 13,597 32,588
------- -------
Total liabilities and stockholder's equity $77,226 $90,651
======= =======
</TABLE>
F-14
<PAGE> 20
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Predecessor Successor
---------------------------------- -------------
Year ended 47 days 319 days
December 31, ended ended
-------------------- February 16, December 31,
1994 1995 1996 1996
------- -------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $17,660 $18,826 $2,529 $25,115
Gas gathering and processing 20,031 35,634 5,322 39,553
Other income 251 244 2 215
------- ------- ------ -------
37,942 54,704 7,853 64,883
Costs and expenses:
Oil and gas production 4,706 7,023 843 6,718
Gas gathering and processing 17,324 30,473 4,567 32,825
Depletion, depreciation and
amortization 6,719 7,776 1,039 9,537
General and administrative 1,158 3,936 435 2,993
Interest 2,628 3,538 460 2,443
Business combination 1,184 - - -
Writedown of oil and gas
properties - - - 19,159
------- ------- ------ -------
33,719 52,746 7,344 73,675
------- ------- ------ -------
Income (loss) before income
taxes 4,223 1,958 509 (8,792)
Income tax expense (benefit) 1,813 822 277 (2,898)
------- ------- ------ -------
Net income (loss) $ 2,410 $ 1,136 $ 232 $(5,894)
======= ======= ====== =======
</TABLE>
7. Preferred Stock
Under Coda's Restated Certificate of Incorporation, the Board of Directors
is authorized to issue up to 40,000 shares of preferred stock, par value
$0.01 per share. All 40,000 shares of preferred stock are designated as
"15% Cumulative Preferred Stock," (the "Preferred Stock"). The holders of
each share of Preferred Stock are entitled to receive, when and as declared
by the Board of Directors, cumulative preferential dividends, at the rate
of $150.00 per share per annum. There are currently 20,000 shares of
Preferred Stock issued and outstanding. Shares of Preferred Stock in excess
of such 20,000 shares shall be issuable only for the purpose of paying
dividends on the Preferred Stock. As of December 31, 1996, the Preferred
Stock had accumulated approximately $2.7 million in preferred dividends
which had not been declared by the Board of Directors.
As long as any shares of Preferred Stock are outstanding, no dividends
whatsoever, whether paid in cash, stock or otherwise (except for dividends
paid in shares of common stock, either in the form of a stock split or
stock dividend), may be paid or declared, nor may any distribution be made,
on any common stock to the holders of such stock, unless certain conditions
are met.
Coda's Restated Certificate of Incorporation requires that Coda redeem all
the issued and outstanding shares of Preferred Stock at a redemption of
$1,000 per share, plus all accrued and unpaid dividends (including
undeclared dividends) to the date of redemption, if Coda has sufficient
funds legally available for such redemption and if such redemption would
not violate or
F-15
<PAGE> 21
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
conflict with any loan agreement, credit agreement, note agreement,
indenture or other agreement relating to indebtedness to which Coda is a
party, on or before the fifth business day after the earliest to occur of
the following: (i) the closing of the sale by Coda of Taurus and (ii) a
Trigger Event, as such term is defined in the Stockholders Agreement (see
Note 13). The Preferred Stock may be redeemed by Coda at its option, as a
whole or in part, to the extent Coda shall have funds legally available for
such redemption, at any time or from time to time at a redemption price of
$1,000 per share, plus all accrued and unpaid dividends (including
undeclared dividends) to the date of redemption. Such redemption, whether
required or optional, is restricted by the Credit Agreement and the
Indenture.
Upon the complete liquidation, dissolution, or winding up of Coda, whether
voluntarily or involuntarily, the holders of Preferred Stock shall be
entitled, after payment or provision for payment of the debts and other
liabilities of Coda but before any distribution is made to the holders of
any common stock, to be paid $1,000 per share plus all accrued and unpaid
dividends (including undeclared dividends), and shall not be entitled to
any further payment.
Except as otherwise provided herein or required by law, the holders of
shares of Preferred Stock are not entitled to vote on any matters to be
voted on by the stockholders of Coda; provided, however, that so long as
any shares of the Preferred Stock are outstanding, Coda shall not, without
the written consent or the affirmative vote of holders of at least a
majority of the total number of sharers of Preferred Stock then outstanding
and voting as a class, (i) amend its Restated Certificate of Incorporation
or Bylaws or (ii) authorize the merger (whether or not Coda is a surviving
corporation in such merger) of Coda, in each case, if such amendment or
merger would alter, change or abolish the powers, preference or rights of
the Preferred Stock so as to affect the holders of the Preferred Stock
adversely.
8. Common equity
Common stock - At December 31, 1995, the Predecessor had 40.0 million
shares of $0.02 par value common stock authorized with 22.1 million shares
issued and outstanding. At December 31, 1996, CEI had 1.0 million shares of
$0.01 par value common stock authorized with 13,611 shares issued to
management subject to put and call rights (see Note 13. Related Party
Transactions - Stockholders Agreement) and 900,000 issued to JEDI for a
total of 913,611 common shares issued and outstanding.
Stock options and warrants - The Company has stock option plans providing
for the granting of stock options to officers and key employees.
Compensation expense has not been recognized at the time options are
granted because the option price per share represents the market value of
the share at the date of grant.
The 1986 Non-Qualified Stock Option Plan provided that options may be
granted, from time to time, to key employees and directors to purchase a
maximum of 180,000 shares of common stock. This plan expired under its own
terms during 1996. The 1989 Incentive Stock Option Plan provides that
options may be granted, from time to time, to key employees to purchase a
maximum of 750,000 shares of common stock. The 1993 Incentive Stock Option
Plan permits the granting of options to purchase up to 1,500,000 shares of
common stock.
F-16
<PAGE> 22
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option transactions are summarized below:
<TABLE>
<CAPTION>
Number Option
of shares price range
--------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 899,084 $2.25 - $6.00
Granted 525,785 5.00 - 6.50
Exercised (108,629) 2.25 - 5.75
Forfeited (56,708) 3.50 - 5.75
---------
Outstanding at December 31, 1994 1,259,532 2.25 - 6.50
Granted --
Exercised (100,213) 2.25 - 5.75
Forfeited (42,687) 3.50 - 5.75
---------
Outstanding at December 31, 1995 1,116,632 2.25 - 6.50
Granted --
Exercised --
Canceled and exchanged for CEI option (164,375) 2.25 - 6.00
Forfeited (1,917) 5.63
---------
Outstanding at February 16, 1996
(subsequently terminated - see
following discussion) 950,340 2.25 - 6.50
=========
</TABLE>
The following table summarizes warrants outstanding at February 16, 1996
exclusive of warrants covering 700,000 shares exchanged for a CEI option:
<TABLE>
<CAPTION>
Exercise
Number of price
shares under warrants Expiration date per share
------------------------- --------------- ---------
<S> <C> <C>
450,000 December 2000 3.13
50,000 April 2002 3.00
100,000 April 2004 4.88
-------
600,000
-------
</TABLE>
As a result of the Merger, all outstanding options and warrants were fully
vested and the holders thereof were entitled to receive the difference
between $7.75 per share and the exercise price for each share represented
by the options and warrants, an aggregate of approximately $5.4 million.
Additionally, certain members of the management of the Company exchanged
their right to receive payment as it relates to options covering 164,375
shares and warrants covering 700,000 shares with an aggregate value of
approximately $3.2 million for an equity participation in CEI (the
Replacement Options, Note 13). Such amount was recognized as stock option
compensation expense in the 47-day period ended February 16, 1996. This
equity participation took the form of options covering 31,989 CEI common
shares with an exercise price of $.01, a 10-year term and immediately
exercisable.
The stock options outstanding at December 31, 1996, were not issued
pursuant to any of the stock option plans. A certain number of shares could
be reserved for issuance under the stock option plans in future periods;
however, management does not presently expect any options to be granted
pursuant thereto. See Note 13.
F-17
<PAGE> 23
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has elected to follow APB 25 in accounting for its employee
stock options because, as discussed below, the alternative fair value
accounting provided for under FAS 123 requires use of option valuation
models that were not developed for use in valuing employee stock options.
Generally, under APB 25, because the exercise price of the employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. The compensation expense
recognized under APB 25 is due to changing the exercise price of the
options in connection with the Merger.
FAS 123 requires the use of the "minimum value" method for determining the
value of employee stock options for nonpublic companies. This method
estimates the value of the employee stock option as the excess of the fair
value of the stock at the date of grant over the present value of both the
exercise price and the expected dividend payments, each discounted at the
risk-free rate, over the expected life of the option. FAS 123 generally
requires the presentation of pro forma information as if employee stock
options had been accounted for under FAS 123. However, due to the
recognition of compensation expense under APB 25, at the date of the Merger
and the absence of options grants subsequent thereto, the pro forma
information would not be materially different from the historical results
of operations.
9. Employee benefit plan
The Company sponsors a 401(k) defined contribution plan. The 401(k) plan is
available to all employees who have at least six months of service. The
Company matches between 50% and 100% (based on years of service) of an
employee's contribution up to 6% of an employee's compensation. For the
years ended December 31, 1994 and 1995, the 47 days ended February 16, 1996
and the 319 days ended December 31, 1996, the Company 401(k) expense was
$123,000, $252,000, $37,000 and $282,000, respectively, and is included in
general and administrative expenses in the accompanying statements of
operations.
10. Income taxes
At December 31, 1996, Coda has net operating loss carryforwards ("NOLs")
for income tax purposes that expire beginning in 1998. Utilization of the
NOLs is severely restricted because of a change in ownership, as defined by
the Tax Reform Act of 1986, of Coda, which occurred in March 1990. At
December 31, 1996, Coda estimates that approximately $18.0 million of the
NOLs is available to offset future taxable income without limitation, while
the remainder will become available in the future at the rate of
approximately $921,000 per year through 2004. Coda also has available
statutory depletion carryforwards of approximately $1,000,000.
F-18
<PAGE> 24
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of deferred tax liabilities and assets are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
------------ ---------
Predecessor Successor
------------ ---------
<S> <C> <C>
Deferred tax liabilities:
Book basis of oil and gas properties
in excess of tax basis $11,441 $37,611
Book basis of gas plants and gathering
systems in excess of tax basis 6,447 7,633
Other 1,074 1,315
------- -------
Total deferred tax liabilities 18,962 46,559
Deferred tax assets:
Net operating loss carryforwards 8,468 9,323
Other 136 175
Valuation allowance for deferred tax assets (4,042) -
------- -------
Net deferred tax assets 4,562 9,498
------- -------
Net deferred tax liabilities $14,400 $37,061
======= =======
</TABLE>
Significant components of income tax expense attributable to continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Successor
------------------------------------ ------------
Year ended 47 days 319 days
December 31, ended ended
-------------------- February 16, December 31,
1994 1995 1996 1996
-------- ---------- ------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Current $ 733 $ 15 $ - $ 571
Deferred federal 1,848 3,187 (511) (27,254)
------ ------ ------ --------
$2,581 $3,202 $ (511) $(26,683)
====== ====== ====== ========
</TABLE>
F-19
<PAGE> 25
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation, stated as a percentage of pretax income
(loss) taxable at the corporate level, of the U.S. statutory federal income
tax rate to the Company's effective tax rate:
<TABLE>
<CAPTION>
Predecessor Successor
------------------------------------------- -----------
Year ended 47 days 319 days
December 31, ended ended
---------------------------- February 16, December 31,
1994 1995 1996 1996
------------- ------------- ------------- -----------
(unaudited)
<S> <C> <C> <C> <C>
U.S. federal statutory rate 34% 34% 34% 34%
State taxes 5 2 (1) 2
Non-deductible business
combination expenses 5 - - -
---- ---- ---- ----
44% 36% 33% 36%
==== ==== ==== ====
</TABLE>
11. Operations
Nature of Operations
The Company is an independent energy company principally engaged in the
acquisition and exploitation of producing oil and natural gas properties.
The Company seeks to acquire properties whose predominant economic value is
attributable to proved producing reserves and to enhance that value through
control of operations, reduction of costs, and property development. The
Company's producing properties are concentrated in the mid-continent region
of the United States. Through a subsidiary, Taurus, the Company also
operates natural gas processing and liquid extraction facilities and
natural gas gathering systems.
F-20
<PAGE> 26
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oil and Gas Producing Activities
The results of operations from the Company's oil and gas producing
activities are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Successor
---------------------------------------- -------------
Year ended 47 days 319 days
December 31, ended ended
------------------------- February 16, December 31,
1994 1995 1996 1996
----------- ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Oil and gas sales $ 50,683 $ 60,997 $ 8,079 $ 68,690
Production costs (21,646) (27,119) (3,607) (28,560)
Depletion, depreciation, and amortization (14,853) (16,889) (2,161) (20,757)
Writedown of oil and gas properties - - - (83,305)
Income tax (expense) benefit at 34% (4,823) (5,776) (786) 22,570
-------- -------- ------- --------
$ 9,361 $ 11,213 $ 1,525 $(41,362)
======== ======== ======= ========
</TABLE>
Costs incurred in oil and gas producing activities are as follows (in
thousands, except per equivalent barrel amounts):
<TABLE>
<CAPTION>
Predecessor Successor
---------------------------------------- -------------
Year ended 47 days 319 days
December 31, ended ended
------------------------- February 16, December 31,
1994 1995 1996 1996
----------- ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Property acquisition costs $40,109 $25,363 $ 305 $324,732(1)
Development costs 12,450 14,464 1,286 8,608
Exploration costs 206 511 - -
Depletion, depreciation, and amortization
rate per equivalent barrel 4.25 4.33 4.40 5.89
</TABLE>
(1) Includes approximately $320.5 million related to the Merger discussed in
Note 1.
All of the Company's oil and gas revenues are from proved developed
properties located in the United States.
The Company has capitalized internal costs of $712,000, $748,000, $105,000,
and $567,000 for the years ended December 31, 1994, and 1995, the 47 days
ended February 16, 1996, and the 319 days ended December 31, 1996,
respectively. Such capitalized costs include salaries and related benefits
of individuals directly involved in the Company's acquisition, exploration,
and development activities based on the percentage of their time devoted to
such activities.
During the year ended December 31, 1994, sales of oil and gas to two
purchasers accounted for 13% and 22% of consolidated gross revenue. During
the year ended December 31, 1995, sales of
F-21
<PAGE> 27
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
oil and gas to two purchasers accounted for 10% and 18%, respectively, of
consolidated gross revenue. During the 47 days ended February 16, 1996,
sales of oil and gas to one purchaser accounted for 17% of consolidated
gross revenue. During the 319 days ended December 31, 1996, sales of oil
and gas to one purchaser accounted for 20% of consolidated gross revenue
(an affiliate of Enron - see Note 13). Management believes that the loss of
these purchasers would not have a material impact on the Company's
consolidated financial condition or results of operations.
Oil and Gas Hedging Activities and Commitments
In an effort to reduce the effects of the volatility of the price of crude
oil and natural gas on the Company's operations, management has adopted a
policy of hedging oil and gas prices whenever such prices are in excess of
the prices anticipated in the Company's operating budget and profit plan
through the use of commodity futures, options, and swap agreements. The
Company does not hold or issue financial instruments for trading purposes.
While the use of these hedging arrangements limits the downside risk of
adverse price movements, it may also limit future gains from favorable
movements. All hedging is accomplished pursuant to exchange-traded
contracts or master swap agreements based upon standard forms. The Company
addresses market risk by selecting instruments whose value fluctuations
correlate strongly with the underlying commodity being hedged. Credit risk
related to hedging activities, which is minimal, is managed by requiring
minimum credit standards for counterparties, periodic settlements, and
market to market valuations. The Company has not historically been required
to provide any significant amount of collateral relating to its hedging
activities.
At December 31, 1996, the Company had entered into various swap agreements
to fix selling prices for crude oil at a weighted average NYMEX price of
$19.13 per barrel for 735,000 barrels during 1997, certain of which are
with affiliates of JEDI (see Note 13). The Company has also sold call
options, which serve to limit the Company's oil price, covering 25,000
barrels of oil per month at an option price of $20.00 per barrel for the
period January 1997 to August 1997. In connection with two swaps beginning
January 1, 1997 covering 10,000 barrels per month and 15,000 barrels per
month at a strike price of $19.41 and $19.00, respectively, which expire
June 30, 1997 and December 31, 1997, respectively, the Company granted the
counterparty a one day option at the expiration of the swap to extend the
swap for an additional twelve months. While these contracts have no
carrying value in the accompanying balance sheet, their fair value (the
estimated amount that would have been paid by the Company to terminate of
the swaps) at December 31, 1996 was approximately $4.4 million. A one
dollar change in the average NYMEX oil price (which was $25.92 at December
31, 1996) would change the fair value by approximately $1.2 million.
During the years ended December 31, 1994 and 1995, the 47 days ended
February 16, 1996 and the 319 days ended December 31, 1996, oil and gas
sales were reduced by $5,000, increased by $298,000, reduced by $14,000,
and reduced by $3.1 million, respectively, as a result of hedging
transactions.
12. Commitments and contingencies
CEI does not believe that future costs related to site restoration,
dismantlement, and abandonment costs, net of estimated salvage values, will
have a significant effect on its results of operations or
F-22
<PAGE> 28
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial position because the salvage value of equipment and related
facilities should approximate or exceed any future expenditures for
restoration, dismantlement, or abandonment. The Company has not incurred
any net expenditures for costs of this nature during the last three years.
The Company is a defendant or co-defendant in minor lawsuits that have
arisen in the ordinary course of business. In the lawsuits, management
believes, based in part on advice from legal counsel, that the Company has
meritorious defense against the claims asserted. Management believes that
the ultimate resolution of the lawsuits and claims will not have a material
adverse effect on results of operations or financial position.
13. Related party transactions
Subscription Agreement
CAI entered into a Subscription Agreement dated as of October 30, 1995, as
amended by Amendment No. 1 to Subscription Agreement dated as of January
10, 1996, with members of the Management Group (as amended, the
"Subscription Agreement") which provided for the acquisition by such
persons of CAI common stock and the grant to them of nonqualified stock
options to purchase shares of successor common stock (the "Replacement
Options") of Coda. Under the Subscription Agreement, each member of the
Management Group who acquired CAI common stock paid $100 per share for
shares thereof, which is the same price per share paid by JEDI for the
remaining shares of CAI common stock. Under the Subscription Agreement, the
Management Group acquired CAI common stock immediately prior to the
effective time of the Merger in exchange for varying combinations of (i)
proceeds from limited recourse promissory notes payable to CAI in the
aggregate principal amount of $937,300 (the "Promissory Notes"), (ii) Coda
common stock, which was valued for this purpose at $7.75 per share, and
(iii) cash. The CAI common stock so acquired was not registered under any
federal or state securities laws and did not have the benefit of any
registration rights, but was subject to the Stockholders Agreement
described below. By virtue of the Merger, each share of CAI common stock
was converted into one share of Coda common stock.
The Promissory Notes are due on February 16, 2001, bear interest at 5.61%
per annum, are secured by the common stock purchased with the proceeds
thereof and certain rights of the maker under the Stockholders Agreement,
and provide that in no event will an individual maker's liability
thereunder for any deficiency on his respective Promissory Note (after the
sale and disposition of all collateral securing same) exceed 35% of the
original principal balance of the Promissory Note.
The Subscription Agreement provided that the Specified Options
(representing certain options to purchase common stock held by certain
members of the Management Group) and Specified Warrants (representing
certain warrants to purchase common stock held by certain members of the
Management Group) would not be exercised prior to the effective time of the
Merger and would, as of the effective time, be canceled without exercise
and without payment of consideration. Concurrently, the Management Group
entered into Nonstatutory Stock Option Agreements governing the Replacement
Options that provided for the right for a period of 10 years from and after
the effective time of the Merger to purchase shares of CEI common stock for
$0.01 per share. However, the Replacement Options may only be exercised
while the holder remains an
F-23
<PAGE> 29
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employee and for a limited period of time thereafter. The number of shares
of Coda common stock underlying the Replacement Options each member of the
Management Group received is based on the amount of cash the holder would
have received if his Specified Options or Specified Warrants had been
converted into cash in the Merger on the same basis as other outstanding
options and warrants to purchase common stock were converted, divided by
the $100 per share purchase price paid by JEDI and the other Management
Group members for their shares of CAI common stock. Thus, if the
Replacement Options are exercised, the holders will have effectively paid
the same purchase price per share as JEDI and the Management Group paid for
their shares of common stock of Coda.
In connection with the issuance of the Replacement Options, the Company
recognized stock option compensation expense of approximately $3.2 million
in the 47 days ended February 16, 1996 representing the total amount of
cash the holders of the Specified Options and Specified Warrants would have
received if such options and warrants had been converted to cash in the
Merger.
Stockholders Agreement
CAI, JEDI and the Management Group entered into a Stockholders Agreement
dated as of October 30, 1995, as amended by Amendment No. 1 to Stockholders
Agreement dated as of January 10, 1996 (as amended, the "Stockholders
Agreement"), which provides generally that all parties, including JEDI and
the Management Group, (i) have rights of first refusal to acquire
additional shares of common stock of Coda that may be issued by Coda and
(ii) are restricted from transferring their Coda common stock. Coda has a
right to match any third party offer to purchase shares of Coda common
stock from any stockholder, and, in the event that Coda does not purchase
those shares, the other stockholders may have a right to include a pro rata
portion of their Coda common stock in the transaction. The Stockholders
Agreement provides that, if the employment of a member of the Management
Group terminates for any reason (including death or disability) other than
his voluntary termination (except upon retirement at age 65 or older or the
expiration of the term of any employment agreement he has with Coda) or his
termination by Coda for cause, then Coda shall have a right to purchase
such member's shares of Coda common stock (an aggregate of 13,611 shares at
December 31, 1996) at a purchase price to be determined from time to time
by Coda pursuant to a formula that values the shares on the basis of a
comparison of the discretionary cash flow and EBITDA (as defined therein)
of the Company and a group of peer companies. The Stockholders Agreement
also provides that, if the employment of a member of the Management Group
terminates for any reason other than voluntary termination or termination
of such member for cause, then such member shall have the right to require
Coda to purchase such member's shares of Coda common stock based on the
previously described formula. The purchase price under the formula will
vary depending on the financial performance of CEI and the group of peer
companies.
The Stockholders Agreement provides that each member of the Management
Group shall have the right (the "Special Management Rights") to receive
from JEDI, upon the occurrence of certain events (generally an initial
public offering, a business combination with another person or the
liquidation of Coda) (each, a "Trigger Event"), an amount, which is payable
in cash or additional shares of Coda common stock depending upon the cause
of the Trigger Event, designed to result in the Management Group receiving
in connection with the Trigger Event one-third of the proceeds,
attributable to the shares of Coda common stock purchased by JEDI, above
the amount of proceeds necessary for JEDI to achieve an internal annual
rate of return on that investment of 15%. The individual member's interest
in such Special Management Rights is proportional to
F-24
<PAGE> 30
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
such member's ownership of the fully diluted common stock of Coda. The
Stockholders Agreement also provides that if the employment of a member of
the Management Group terminates, his Special Management Rights shall
terminate and, if the termination is other than a voluntary termination or
a termination for cause, he may be entitled to receive an amount based on
the discretionary cash flow and EBITDA formula discussed above. The
Stockholders Agreement further provides that, after the effective time of
the Merger, Coda will establish an employee benefit plan for the benefit of
its employees who are not members of the Management Group and will
contribute to the plan 1,900 shares of Coda common stock. Furthermore,
pursuant to the Stockholders Agreement, 4% of the Special Management Rights
will be allocated thereto.
At September 30, 1996, the discretionary cash flow and EBITDA formula
determines a theoretical value for Coda's common stock which indicates JEDI
would have earned more than a 15% rate of return on its investments. The
information to calculate the discretionary cash flow and EBITDA formula as
of December 31, 1996, is not yet available. As determined by the
discretionary cash flow and EBITDA formula, the value of the Special
Management Rights to the Management Group in the aggregate was approximately
$38 million at September 30, 1996. When a Trigger Event becomes probable,
the Company will record compensation expense equal to the estimated value of
the Special Management Rights at the time of such trigger event, which may
be significantly different than the amount as of September 30, 1996. Since
the Special Management Rights are an obligation of JEDI, the offsetting
credit would be additional paid-in capital.
The Stockholders Agreement will terminate and no party thereto will have
any further obligations or rights thereunder upon the earliest to occur of
(i) the termination of the Merger Agreement in accordance with its terms,
(ii) October 30, 2005, (iii) the date on which an initial public offering
of Coda common stock or any business transaction involving Coda whereby
Coda common stock becomes a publicly traded security is consummated, (iv)
the date of the dissolution, liquidation or winding-up of Coda and (v) the
date of the delivery to Coda of a written termination notice executed by
certain parties to the Stockholders Agreement.
Enron
Enron Corp. ("Enron") is the parent of ECT and accordingly may be deemed to
control indirectly both JEDI and CEI. Enron and certain of its subsidiaries
and other affiliates collectively participate in nearly all phases of the
oil and natural gas industry and are, therefore, competitors of CEI. In
addition, ECT and JEDI have provided, and may in the future provide, and
ECT Securities Corp. has assisted, and may in the future assist, in
arranging, financing to non-affiliated participants in the oil and natural
gas industry who are or may become competitors of CEI. Because of these
various conflicting interests, ECT, CEI, JEDI and the Management Group have
entered into the Business Opportunity Agreement which is intended to make
it clear that Enron and its affiliates have no duty to make business
opportunities available to CEI in most circumstances. The Business
Opportunity Agreement also provides that ECT and its affiliates may pursue
certain business opportunities to the exclusion of CEI. The Business
Opportunity Agreement may limit the business opportunities available to
CEI. In addition, pursuant to the Business Opportunity Agreement there may
be circumstances in which CEI will offer business opportunities to certain
affiliates of Enron. If an Enron affiliate is offered such an opportunity
and decides to pursue it, CEI may be unable to pursue it.
Certain of Enron's affiliates purchase oil and gas from the Company.
Management of the Company had determined that the contracts for sale of oil
and gas to Enron affiliates have been entered into on terms no less
favorable than those available from third parties after receiving
F-25
<PAGE> 31
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
competitive bids from third parties. Enron affiliates paid CEI
approximately $24.1 million under such contracts for the 319 days ended
December 31, 1996. Such amount is included in oil and gas revenue in the
accompanying statement of operations.
The Company has entered into two fixed price oil swaps with ECT. One swap
covers the period from January 1, 1995 through June 30, 1997 at a strike
price of $19.05 covering 15,000 barrels per month. The other covers the
period from January 1, 1997 through December 31, 1997 at a strike price of
$19.55 covering 10,000 barrels per month. Management of the Company had
determined that both swaps were entered into on terms no less favorable
than those available from third parties after receiving competitive bids
from third parties. CEI paid ECT approximately $539,000 under such
contracts for the 319 days ended December 31, 1996.
During August 1996, Douglas H. Miller ("Miller"), the Company's Chief
Executive Officer and Chairman of the Board of Directors, received $738,000
pursuant to a Limited Recourse Promissory Note in the original principal
amount of $1,188,000 (the "Miller Note"). The Miller Note bears interest at
6.74% per annum with final maturity on February 16, 2001, and provides that
in no event will Miller's liability thereunder (after the sale and
disposition of all collateral securing same) exceed 35% of the original
principal balance of the Miller Note. In connection with the execution of
the Miller Note, CEI and Miller entered into an amendment of the agreement
governing Miller's Replacement Option which prohibits the exercise of the
option until all amounts due under the Miller Note have been paid in full.
14. Supplemental oil and gas reserve and standardized measure information
(unaudited)
The Company retains independent engineering firms to provide annual
year-end estimates of the Company's future net recoverable oil, gas, and
natural gas liquids reserves. Estimated proved net recoverable reserves as
shown below include only those quantities that can be expected to be
commercially recoverable at prices and costs in effect at the balance sheet
dates under existing regulatory practices and with conventional equipment
and operating methods. Proved developed reserves represent only those
reserves expected to be recovered through existing wells. Proved
undeveloped reserves include those reserves expected to be recovered from
new wells on undrilled acreage or from existing wells on which a relatively
major expenditure is required for recompletion.
Reserve estimates are imprecise and may be expected to change as additional
information becomes available. Furthermore, estimates of oil and gas
reserves, of necessity, are projections based on engineering data, and
there are uncertainties inherent in the interpretation of such data as well
as the projection of future rates of production and the timing of
development expenditures. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot be measured
in an exact way, and the accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological
interpretation and judgment. Accordingly, there can be no assurance that
the reserves set forth herein will ultimately be produced nor can there be
assurance that the proved undeveloped reserves will be developed within the
periods anticipated. The Company emphasizes with respect to the estimates
prepared by independent petroleum engineers that the discounted future net
cash inflows should not be construed as representative of the fair market
value of the proved oil and gas properties belonging to the Company, since
discounted future net cash inflows are based upon projected cash inflows
which do not provide for changes in oil and gas prices nor for escalation
of expenses and capital
F-26
<PAGE> 32
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
costs. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they were based.
<TABLE>
<CAPTION>
Estimated Quantities of Proved Reserves
(in thousands)
Oil (Bbl) Gas (Mcf)
--------- ---------
<S> <C> <C>
December 31, 1993 30,084 36,196
Purchase of reserves in place 11,038 5,482
Extensions 271 912
Revisions of previous estimates 749 4,107
Production (2,650) (4,982)
Sales of reserves in place (285) (1,907)
------ -------
December 31, 1994 39,207 39,808
Purchase of reserves in place 7,324 7,298
Extensions 783 3,173
Revisions of previous estimates (1,011) 1,459
Production (3,165) (4,416)
Sales of reserves in place (548) (10,192)
------ -------
December 31, 1995 42,590 37,130
Purchase of reserves in place 64 10
Production (405) (500)
Sales of reserves in place (14) (4)
------ -------
February 16, 1996 42,235 36,636
====== =======
Purchase of reserves in place 43,431 36,862
Extensions 121 4,982
Revisions of previous estimates 2,579 604
Production (2,974) (3,310)
Sales of reserves in place (120) (93)
------ -------
December 31, 1996 43,037 39,045
====== =======
</TABLE>
F-27
<PAGE> 33
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated Quantities of Proved Developed Reserves
(in thousands)
<TABLE>
<CAPTION>
Oil (Bbl) Gas (Mcf)
--------- ---------
<S> <C> <C>
December 31, 1993 16,230 30,573
December 31, 1994 20,151 32,890
December 31, 1995 25,877 31,496
February 16, 1996 25,522 31,002
December 31, 1996 33,895 33,255
</TABLE>
The following is a summary of a standardized measure of discounted net cash
flows related to the Company's proved oil, gas, and natural gas liquids
reserves. The information presented is based on a valuation of proved
reserves using discounted cash flows based on year-end prices, costs, and
economic conditions and a 10% discount rate exclusive of the effect of the
oil hedging commitments. The additions to proved reserves from new
discoveries and extensions could vary significantly from year to year;
additionally, the impact of changes to reflect current prices and costs of
reserves proved in prior years could also be significant. Accordingly, the
information presented below should not be viewed as an estimate of the fair
value of the Company's oil and gas properties, nor should it be considered
indicative of any trends.
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows
(in thousands)
Predecessor Successor
-------------------------- ------------
December 31, February 16, December 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Future cash inflows $860,180 $827,883 $1,208,793
Future production and
development costs 366,421 360,511 431,250
Future income taxes 113,775 106,672 206,720
-------- -------- ----------
Future net cash flows 379,984 360,700 570,823
Discount of future net cash
flows at 10% per annum 159,242 152,437 242,964
-------- -------- ----------
Discounted future net cash
flows after income taxes $220,742 $208,263 $ 327,859
======== ======== ==========
</TABLE>
During recent years, there have been significant fluctuations in the prices
paid for crude oil in the world markets. This situation has had a
destabilizing effect on crude oil's posted prices in the United States,
including the posted prices paid by purchasers of the Company's crude oil.
The weighted average prices of oil and gas at December 31, 1995, February
16, 1996 and December 31, 1996 used in the above table, were $18.31, $17.92
and $24.88 per Bbl, respectively, and $2.19, $2.01 and $3.53 per Mcf,
respectively.
F-28
<PAGE> 34
CODA ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are the principal sources of change in the standardized
measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
Predecessor Successor
--------------------------------------- -------------
Year ended 47 Days 319 Days
December 31, ended ended
------------------------ February 16, December 31,
1994 1995 1996 1996
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
Sales and transfers of oil and gas produced,
net of production costs $(29,037) $(33,878) $ (4,472) $ (40,130)
Net changes in prices and production costs 18,674 37,290 (21,595) 152,369
Extensions and discoveries, net of future
development and production costs 3,673 15,932 - 12,338
Development costs during the period 12,656 14,464 1,286 8,608
Revisions of previous quantity estimates 3,579 (19,084) - 48,120
Sales of reserves in place (1,755) (6,323) (70) (365)
Purchases of reserves in place 54,672 35,680 389 215,529
Accretion of discount before income taxes 14,098 21,754 4,880 31,438
Net change in income taxes (23,967) (13,709) 7,103 (100,048)
-------- -------- -------- ---------
Net change $ 52,593 $ 52,126 $(12,479) $ 327,859
======== ======== ======== =========
</TABLE>
F-29
<PAGE> 35
Schedule B
<PAGE> 36
PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
(in thousands)
<TABLE>
<CAPTION>
September 30,
December 31, 1997
1996 (Unaudited)
-------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,994 $ 8,708
Accounts receivable - revenue 14,432 10,881
Accounts receivable - joint interest and other 1,673 1,605
Other current assets 1,046 1,117
-------- --------
25,145 22,311
-------- --------
Oil and gas properties (full cost accounting method):
Proved oil and gas properties 249,693 271,731
Unproved oil and gas properties 1,000 1,000
Less accumulated depletion, depreciation and amortization (20,757) (38,095)
-------- --------
229,936 234,636
-------- --------
Gas plants and gathering systems 34,258 36,539
Less accumulated depreciation (2,305) (4,357)
-------- --------
31,953 32,182
-------- --------
Other properties and assets, net 8,536 8,471
-------- --------
$295,570 $297,600
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 37
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
September 30,
December 31, 1997
1996 (Unaudited)
------------------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt
and notes payable $ 120 $ ---
Accounts payable - trade 8,934 7,187
Accounts payable - revenue and other 5,210 3,872
Accrued interest 3,366 5,917
Income taxes payable 579 473
-------- --------
18,209 17,449
-------- --------
Long-term debt - less current maturities 64,966 67,100
-------- --------
10 1/2% Senior Subordinated Notes 110,000 110,000
-------- --------
Deferred income taxes 37,061 37,396
-------- --------
Commitments and contingent liabilities
15% Cumulative redeemable preferred stock, 40,000 shares of
$.01 par value authorized; 20,000 shares issued and
outstanding; liquidation preference of $25,393 at September
30, 1997, including dividends in arrears 20,000 20,000
-------- --------
Common stockholders' equity of management, subject to put
and call rights, 13,611 shares of $.01 par value common stock
issued and outstanding 4,560 4,560
Less related notes receivable (937) (937)
-------- --------
3,623 3,623
-------- --------
Other common stockholders' equity:
Common stock, 1 million shares,
$.01 par value, authorized,
900,000 shares issued and
outstanding 9 9
Additional paid-in capital 89,991 89,991
Retained deficit (48,289) (47,968)
-------- --------
41,711 42,032
-------- --------
$295,570 $297,600
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 38
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Predecessor Successor
------------------------- ---------------------------------------------------------
Pro Forma
47 Days 227 Days Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended Ended Ended
February 16, September 30, September 30, September 30, September 30, September 30,
1996 1996 1996 1996 1997 1997
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 8,079 $ 47,632 $19,229 $ 55,711 $ 17,275 $ 54,580
Gas gathering and processing 5,322 26,294 10,956 31,616 10,755 32,712
Other income 168 1,386 718 1,554 232 846
-------- -------- ------- -------- -------- --------
13,569 75,312 30,903 88,881 28,262 88,138
-------- -------- ------- -------- -------- --------
Costs and expenses:
Oil and gas production 3,607 20,181 8,080 23,788 8,724 25,734
Gas gathering and processing 4,567 21,836 9,208 26,403 8,998 27,956
Depletion, depreciation and
amortization 2,583 17,439 6,929 20,838 6,762 20,202
General and administrative 320 1,313 437 1,633 742 1,172
Interest 1,102 10,595 4,195 12,808 4,051 12,128
Stock option compensation 3,199 -- -- -- -- --
Writedown of oil and gas
properties -- 83,305 -- -- -- --
-------- -------- ------- -------- -------- --------
15,378 154,669 28,849 85,470 29,277 87,192
-------- -------- ------- -------- -------- --------
Income (loss) before income taxes (1,809) (79,357) 2,054 3,411 (1,015) 946
Income tax expense (benefit) (511) (28,369) 853 1,543 (278) 625
-------- -------- ------- -------- -------- --------
Net income (loss) (1,298) (50,988) 1,201 1,868 (737) 321
Preferred stock dividend
requirements -- 1,898 792 2,306 917 2,655
-------- -------- ------- -------- -------- --------
Net income (loss) available for
common stockholders $ (1,298) $(52,886) $ 409 $ (438) $ (1,654) $ (2,334)
======== ======== ======= ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 39
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Predecessor Successor
------------ ----------------------------
47 Days 227 Days Nine Months
Ended Ended Ended
February 16, September 30, September 30,
1996 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,298) $ (50,988) $ 321
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depletion, depreciation and amortization 2,583 17,439 20,202
Writedown of oil and gas properties -- 83,305 --
Deferred income tax expense (benefit) (511) (28,745) 335
Stock option compensation 3,199 -- --
Other 6 (284) (20)
Effect of changes in:
Accounts receivable 3,386 (3,902) 3,619
Other current assets (63) (171) (77)
Accounts payable and other current liabilities (4,166) 10,793 (640)
--------- --------- ---------
Net cash provided by operating activities 3,136 27,447 23,740
--------- --------- ---------
Cash flows from investing activities:
Additions to oil and gas properties (1,717) (7,697) (25,510)
Proceeds from sale of assets 110 1,381 3,541
Purchase of Coda by JEDI, net of $5,740 cash acquired -- (174,373) --
Gas plant and gathering systems and other property additions (114) (323) (2,422)
Loan to stockholder -- (738) (450)
Payments received on amounts due from stockholders 130 124 --
Other -- (40) --
--------- --------- ---------
Net cash used by investing activities (1,591) (181,666) (24,841)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings -- 2,000 18,500
Proceeds from issuance of subordinated debt -- 210,000 --
Proceeds from issuance of common and preferred stock -- 110,026 --
Repayment of bank borrowings and subordinated debt (19) (152,890) (16,486)
Financing costs (390) (783) (199)
--------- --------- ---------
Net cash provided (used) by financing activities (409) 168,353 1,815
--------- --------- ---------
Increase in cash 1,136 14,134 714
Cash at beginning of period 4,604 -- 7,994
--------- --------- ---------
Cash at end of period $ 5,740 $ 14,134 $ 8,708
========= ========= =========
Supplemental cash flow information:
Interest paid $ 1,544 $ 5,719 $ 9,579
========= ========= =========
Income taxes paid $ -- $ 120 $ 424
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 40
CODA ENERGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. THE JEDI MERGER
On February 16, 1996, pursuant to an Agreement and Plan of Merger, Coda
Energy, Inc. ("Coda"), was acquired by Joint Energy Development Investments
Limited Partnership ("JEDI"), which is an affiliate of Enron Capital & Trade
Resources Corp. ("ECT") (the "JEDI Merger"). Coda, together with its
subsidiaries, prior to and including February 16, 1996 is referred to herein as
the Predecessor and after such date as the Successor and collectively, for both
periods, the Company. In conjunction with the JEDI Merger, JEDI entered into
certain agreements with members of the Company's management (the "Management
Group"), providing for a continuing role of management in the Company after the
JEDI Merger. Following consummation of the JEDI Merger, the Management Group
owns approximately 5% of Coda's common stock on a fully-diluted basis. JEDI
owns the remaining 95%.
The JEDI Merger has been accounted for using the purchase method of
accounting. As such, JEDI's cost of acquiring Coda has been allocated to the
assets and liabilities acquired based on estimated fair values. As a result,
the Company's financial position and operating results subsequent to the date
of the JEDI Merger reflect a new basis of accounting and are not comparable to
prior periods.
The allocation of JEDI's purchase price to the assets and liabilities of Coda
resulted in a significant increase in the carrying value of the Company's oil
and gas properties. Under the full cost method of accounting, the carrying
value of oil and gas properties (net of related deferred taxes) is generally
not permitted to exceed the sum of the present value (10% discount rate) of
estimated future net cash flows (after tax) from proved reserves, based on
current prices and costs, plus the lower of cost or estimated fair value of
unproved properties (the "cost center ceiling"). Based upon the allocation of
JEDI's purchase price and estimated proved reserves and product prices in
effect at the date of the JEDI Merger, the purchase price allocated to oil and
gas properties was in excess of the cost center ceiling by approximately $83.3
million ($53.3 million net of related deferred taxes). The resulting writedown
was a non-cash charge and was included in the results of operations for the
227- day period ended September 30, 1996.
2. ACCOUNTING AND REPORTING POLICIES
The consolidated financial statements include the accounts of Coda and its
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior years' amounts to conform to the current year
presentation.
The accompanying consolidated financial statements, which should be read in
conjunction with the audited consolidated financial statements for the 319-day
period ended December 31, 1996,
5
<PAGE> 41
reflect all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary to present fairly the financial
position as of September 30, 1997, and the results of operations and cash flows
for the 47-day period ended February 16, 1996, the 227-day period ended
September 30, 1996 and the nine months ended September 30, 1997. The results
for the period ended September 30, 1997, are not necessarily indicative of
results for a full year.
Fees from overhead charges billed to working interest owners, including the
Company, of $848,000, $4.3 million and $4.9 million for the 47-day period ended
February 16, 1996, the 227-day period ended September 30, 1996 and the nine
months ended September 30, 1997, respectively, have been classified as a
reduction of general and administrative expenses in the accompanying
consolidated statements of operations.
3. PRO FORMA INFORMATION
The pro forma statement of operations information was prepared as if the JEDI
Merger and the sale of the 10 1/2% Senior Subordinated Notes (the "Notes") had
occurred on January 1, 1996. The pro forma information does not purport to
represent the results of operations which would have occurred had such
transactions been consummated on January 1, 1996 or for any future period. The
pro forma information was prepared by adjusting the 1996 periods: (i) to adjust
depletion, depreciation, and amortization to reflect JEDI's purchase price
allocated to property and equipment, (ii) to adjust interest expense to give
effect to the net reduction of approximately $37.0 million under the Company's
credit facility and repayment of a note payable to an officer of the Company,
partially offset by an increase in the interest rate on borrowings under the
new credit facility of .25%, (iii) to record interest on the Notes at an
interest rate of 10 1/2%, (iv) to record amortization of the issuance cost of
the Notes over the term such debt is expected to be outstanding (10 years), (v)
to adjust the writedown of oil and gas properties and stock option compensation
to eliminate these non-recurring charges related to the JEDI Merger, (vi) to
adjust the provision for income taxes for the change in financial taxable
income resulting from the above adjustments, and (vii) to record the cumulative
dividend requirements of the redeemable preferred stock issued to JEDI.
4. ACQUISITIONS
In February 1997, the Company purchased 123 producing oil and gas properties
from J. M. Huber Corporation for an aggregate purchase price of approximately
$13.5 million, of which $6.5 million was financed under the Company's credit
agreement. The properties are predominately located in Texas, Oklahoma and
Arkansas. The Company estimates the properties have proved reserves of
approximately 1.6 million barrels of oil and 15.1 Bcf of gas as of the
effective date, January 1, 1997.
5. LONG-TERM DEBT
On February 14, 1996, the Company entered into a credit agreement with
NationsBank of Texas, N.A. ("NationsBank"), as lender and as agent, and
additional lenders named therein (as amended, the "Credit Agreement") which
provides for a revolving credit facility in an amount up to $250.0 million.
Pursuant to the terms of the Credit Agreement, the semiannual borrowing base
6
<PAGE> 42
redetermination as of April 1, 1997, resulted in an increase of the Company's
borrowing base from $115 million to $120 million. The next redetermination is
scheduled for January 1, 1998. At September 30, 1997, $67.0 million was
outstanding under the Credit Agreement and $53.0 million was available for
borrowing thereunder. On March 31, 1997, the Company repaid in full (principal
balance of $466,000) it's note payable to NationsBank that was due January 2,
1998.
6. 10 1/2% SENIOR SUBORDINATED NOTES
On March 18, 1996, the Company completed the sale of the Notes which bear
interest at an annual rate of 10 1/2% payable semiannually in arrears on April
1 and October 1 of each year. The Notes are general, unsecured obligations of
the Company, are subordinated in right of payment to all Senior Debt (as
defined in the indenture governing the Notes (the "Indenture")) of Coda, and
are senior in right of payment to all future subordinated debt of the Company.
The claims of the holders of the Notes are subordinated to Senior Debt, which,
as of September 30, 1997, was $67.1 million.
The Notes were issued pursuant to the Indenture, which contains certain
covenants that, among other things, limit the ability of Coda and its
Restricted Subsidiaries (as defined in the Indenture) to incur additional
indebtedness and issue Disqualified Stock (as defined in the Indenture), pay
dividends, make distributions, make investments, make certain other restricted
payments, enter into certain transactions with affiliates, dispose of certain
assets, incur liens securing pari passu or subordinated indebtedness of Coda
and engage in mergers and consolidations.
Coda's payment obligations under the Notes are fully, unconditionally and
jointly and severally guaranteed on a senior subordinated basis by all of
Coda's current subsidiaries and future Restricted Subsidiaries. Such guarantees
are subordinated to the guarantees of Senior Debt issued by the Guarantors (as
defined in the Indenture) under the Credit Agreement and to other guarantees of
Senior Debt issued in the future. All of Coda's current subsidiaries are wholly
owned. There are currently no restrictions on distributions from the Guarantors
to Coda.
Separate financial statements and other disclosures concerning the Guarantors
are not presented because management has determined they are not material to
investors. The combined condensed financial information of the Company's
current subsidiaries, the Guarantors, is as follows:
7
<PAGE> 43
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Current assets $ 7,745 $ 5,820
Oil and gas properties, net 50,176 51,095
Gas plants and gathering systems, net 31,617 31,846
Other properties and assets, net 1,113 781
------- --------
Total assets $90,651 $ 89,542
======= ========
Current liabilities $ 8,321 $ 6,315
Intercompany payables 33,551 29,585
Deferred income taxes 16,191 17,956
Stockholder's equity 32,588 35,686
------- --------
Total liabilities and stockholder's equity $90,651 $ 89,542
======= ========
</TABLE>
<TABLE>
<CAPTION>
Predecessor Successor
----------- -----------------------------
47 Days 227 Days Nine Months
Ended Ended Ended
February 16, September 30, September 30,
1996 1996 1997
----------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 2,529 $ 17,443 $17,463
Gas gathering and processing 5,322 26,294 32,712
Other income (loss) 2 156 (51)
------- -------- -------
7,853 43,893 50,124
Costs and expenses:
Oil and gas production 843 4,758 5,672
Gas gathering and processing 4,567 21,836 27,956
Depletion, depreciation and amortization 1,039 6,924 7,460
General and administrative 435 2,229 2,429
Interest 460 1,881 1,454
Writedown of oil and gas properties -- 19,159 --
------- -------- -------
7,344 56,787 44,971
------- -------- -------
Income (loss) before income taxes 509 (12,894) 5,153
Income tax expense (benefit) 277 (4,488) 2,055
------- -------- -------
Net income (loss) $ 232 $ (8,406) $ 3,098
======= ======== =======
</TABLE>
8
<PAGE> 44
7. PREFERRED STOCK
Under Coda's Restated Certificate of Incorporation, the Board of Directors is
authorized to issue up to 40,000 shares of preferred stock, par value $0.01 per
share. All 40,000 shares of preferred stock are designated as "15% Cumulative
Preferred Stock" (the "Preferred Stock"). The holders of each share of
Preferred Stock are entitled to receive, when and as declared by the Board of
Directors, cumulative preferential dividends, at the rate of $150.00 per share
per annum. There are currently 20,000 shares of Preferred Stock issued and
outstanding. Shares of Preferred Stock in excess of such 20,000 shares are
issuable only for the purpose of paying dividends on the Preferred Stock. As of
September 30, 1997, the Preferred Stock had accumulated approximately $5.4
million in preferred dividends which had not been declared by the Board of
Directors.
8. BELCO MERGER
The Company entered into an Agreement and Plan of Merger (the "Belco Merger
Agreement") dated as of October 31, 1997 among the Company, Belco Oil & Gas
Corp., a Nevada corporation ("Belco"), and Belco Acquisition Sub, Inc., a
Delaware corporation ("Sub"), providing for the merger (the "Belco Merger") of
Sub with and into the Company, with the Company surviving the Belco Merger.
Pursuant to the terms and conditions of the Belco Merger Agreement, (i) the
common stockholders of the Company will receive an aggregate of $134 million in
cash, as increased by the cash proceeds, if any, received by the Company from
the sale of Taurus Energy Corp. ("Taurus"), a wholly owned subsidiary of the
Company, prior to the consummation of the Belco Merger, and as decreased by the
aggregate amount of payments due to Douglas H. Miller pursuant to the Amendment
to Executive Employment Agreement (discussed below), and (ii) the preferred
stockholder of the Company will receive (A) cash equal to the redemption value
of the Company's preferred stock less $10 million, (B) warrants to purchase
1,666,667 shares of common stock of Belco at an exercise price of $27.50 per
share (subject to adjustment), pursuant to the terms and conditions of a
Warrant Agreement to be executed and delivered to the Company's preferred
stockholder at the closing of the Belco Merger and (C) the right to receive
(only under certain circumstances) the aggregate amount received by the Company
from the sale of Taurus after the consummation of the Belco Merger.
Prior to the closing of the Belco Merger, the Company has agreed, among other
things, to (i) operate its business in the ordinary course, consistent with
past practice, (ii) provide Belco full access to all of its properties and
personnel so as to enable Belco to conduct its due diligence, (iii) not
initiate, solicit, negotiate or encourage any proposal or offer to acquire all
or substantially all of the business of the Company, and (iv) use its
reasonable efforts to consummate a transaction disposing of Taurus.
The Belco Merger Agreement provides for the closing of the Belco Merger on
November 26, 1997, which date can be extended to December 3, 1997 upon either
party's election. However, the closing of the Belco Merger is conditioned on a
number of things, including but not limited to, (i) Belco determining that, had
the Company's representations and warranties made in the Belco
9
<PAGE> 45
Merger Agreement been made without any knowledge or materiality qualifiers,
Belco would not suffer or experience losses aggregating greater than $10
million and (ii) the execution and delivery of several ancillary agreements.
The Belco Merger Agreement may be terminated (i) by mutual written consent of
Belco and the Company, (ii) by either Belco or the Company if the closing of
the Belco Merger has not occurred by November 26, 1997 (or December 3, 1997 if
either party has requested such extension in accordance with the Belco Merger
Agreement); provided that the Company cannot terminate the Belco Merger
Agreement pursuant to this clause (ii) for a period of 45 days after December
3, 1997 to allow Belco to obtain all regulatory approvals necessary to
consummate the transactions contemplated by the Belco Merger Agreement if the
disposition of Taurus does not occur before such date, or (iii) by either Belco
or the Company upon written notice to the other in the event of a final
permanent order either enjoining or otherwise prohibiting the consummation of
the transactions contemplated by the Belco Merger Agreement or having a
material adverse effect on the business, operations or financial condition of
Belco or the Company.
Simultaneously with the execution of the Belco Merger Agreement, the Company
entered into a number of ancillary agreements. The Company entered into
Shareholder Agreements, effective as of October 31, 1997 (the "Shareholder
Agreements"), with Belco and each of the Company's minority shareholders
providing, among other things, that (i) the shareholder would vote in favor of
the Belco Merger at any meeting of stockholders and granting Belco an
irrevocable proxy, coupled with an interest, to vote in favor of the Belco
Merger, (ii) the shareholder waives any appraisal rights, and (iii) the
shareholder releases the Company from any claims that the shareholder might
have against the Company or any affiliate. The Company also entered into a
Stockholders Allocation Agreement dated as of October 31, 1997 (the "Allocation
Agreement") with all of the stockholders of the Company wherein the
stockholders, among other things, agreed to the allocation of the proceeds from
the Belco Merger among themselves and approved and adopted the Belco Merger
Agreement. The Company also entered into an Amendment to Executive Employment
Agreement dated as of October 31, 1997 with Douglas H. Miller providing, among
other things, for the cancellation of the remaining term under Mr. Miller's
original Executive Employment Agreement, effective upon the consummation of the
Belco Merger, and the payment to Mr. Miller at the closing of the Belco Merger
of the sum of all payments that would have come due to Mr. Miller under his
original employment agreement if Mr. Miller's employment had continued without
interruption.
In connection with the JEDI Merger, JEDI and the Management Group entered
into a Stockholders Agreement dated October 31, 1995, as amended by Amendment
No. 1 to Stockholders Agreement dated as of January 10, 1996 (as amended, the
"JEDI Stockholders Agreement") that, among other things, provides that each
member of the Management Group shall have the right (the "Special Management
Rights") to receive from JEDI, upon the occurrence of certain events (generally
an initial public offering, a business combination with another person or the
liquidation of Coda) (each, a "Trigger Event"), an amount, which is payable in
cash or additional shares of Coda common stock depending upon the cause of the
Trigger Event, designed to result in the Management Group receiving in
connection with the Trigger Event one-third of the proceeds,
10
<PAGE> 46
attributable to the shares of Coda common stock purchased by JEDI, above the
amount of proceeds necessary for JEDI to achieve an internal annual rate of
return on that investment of 15%. The individual member's interest in such
Special Management Rights is proportional to such member's ownership of the
fully diluted common stock of Coda. The Belco Merger would be a Trigger Event
as described in the JEDI Stockholders Agreement. If the Belco Merger is
consummated, the Company will record compensation expense equal to the value of
the Special Management Rights, currently estimated to range from $17.1 million
to $19.3 million. Since the Special Management Rights are an obligation of
JEDI, the offsetting credit would be to additional paid-in capital.
11
<PAGE> 47
Schedule C
<PAGE> 48
BELCO OIL & GAS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The following unaudited consolidated condensed financial statements and related
notes are presented to show the pro forma effects of the merger of Coda Energy,
Inc. (Coda) with and into a wholly owned subsidiary of Belco Oil & Gas
Corporation (Belco).
The Coda transaction, hereinafter referred to as the "Merger", was completed
November 26, 1997 and will be reported using the purchase method of accounting.
The condensed statements of operations are presented to show income from
continuing operations as if the Merger occurred as of the beginning of the
respective periods. The pro forma condensed balance sheet is based on the
assumption that the merger occurred on September 30, 1997.
Belco will account for the acquisition of Coda using the purchase method of
accounting for business combinations. In accordance with the Statement of
Financial Accounting Standards Board No. 109 ("FASB 109"), Belco will record in
the fourth quarter ended December 31, 1997 a one-time non-cash deferred tax
liability of approximately $110 million to reflect the difference between the
tax basis of Coda's assets and liabilities and the amounts recorded for
financial reporting purposes for such assets and liabilities.
This FASB 109 "gross up" is reflected under Deferred Income Taxes in the
Liabilities column of Belco's Unaudited Pro Forma Balance Sheet as of September
30, 1997 included in this Form 8-K/A filing.
Belco will record in the fourth quarter ended December 31, 1997 a non-cash
ceiling test provision of approximately $150 million ($98 million after tax),
which is also reflected in the Unaudited Pro Forma Statements of Operations as
of September 30, 1997. The ceiling test provision includes the effect of the
non-cash $110 million FASB 109 "gross up" attributable to the Coda acquisition
on Belco's full cost pool at year-end 1997 and adjustments to the SEC PV10 value
of year-end 1997 reserves, which were significantly impacted by lower product
prices when compared to year-end 1996 prices, among other items. The present
value of estimated future net revenues before income taxes of Belco's proved
reserves were $504 million as of December 31, 1997 (exclusive of price risk
management transactions) based on average prices of $17.28 per barrel of oil and
$2.30 per Mcf. This compared to prices of approximately $25.13 per barrel of oil
and $3.68 per Mcf used in calculating year-end 1996 proved reserves.
Pro forma data is based on assumptions and include adjustments as explained in
the notes to the unaudited pro forma consolidated condensed financial
statements. The pro forma data is not necessarily indicative of the financial
results that would have occurred had the transactions been effective on and as
of the dates referenced above, and should not be viewed as indicative of
operations in future periods. The unaudited pro forma consolidated condensed
financial statements should be read in conjunction with the notes thereto,
Belco's Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
Belco's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997, Coda's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, and Coda's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997.
<PAGE> 49
BELCO OIL & GAS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Merger
Belco Coda Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 119,710 $ 76,769 $ $ 196,479
Commodity price risk management activities (5,967) - (5,967)
Gas gathering and processing - 44,875 (44,875) (b) -
Interest and other 2,653 2,307 4,960
---------- ---------- ---------- ----------
Total Revenues 116,396 123,951 (44,875) 195,472
---------- ---------- ---------- ----------
OPERATING EXPENSES
Oil and gas operating expenses 7,847 32,167 40,014
Depreciation, depletion and amortization 40,904 26,614 (3,082) (b) 75,587
11,151 (c)
General and administrative 3,059 2,398 (786) (f) 4,671
Gas gathering and processing - 37,392 (37,392) (b) -
Interest - 15,657 13,772 (a) 23,551
(4,097) (b)
(9,281) (e)
7,500 (h)
Stock option compensation - 3,199 3,199
Writedown of oil and gas properties - 83,305 (83,305) (g) -
---------- ---------- ---------- ----------
Total Costs and Expenses 51,810 200,732 (105,520) 147,022
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 64,586 (76,781) 60,645 48,450
Provision (benefit) for income taxes 21,953 (27,194) (465) (b) 16,554
22,260 (d)
---------- ---------- ---------- ----------
PRO FORMA NET INCOME $ 42,633 $(49,587) $ 38,850 $ 31,896
========== ========== ========== ==========
PRO FORMA NET INCOME PER COMMON SHARE $ 1.42 $ 1.06
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 29,986 29,986
========== ==========
</TABLE>
The accompanying notes to unaudited pro forma
financial statements are an integral part of these statements
<PAGE> 50
BELCO OIL & GAS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Merger
Belco Coda Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 89,742 $ 54,580 $ $ 144,322
Commodity price risk management activities (7,674) - (7,674)
Gas gathering and processing - 32,712 (32,712) (b) -
Interest and other 2,326 846 77 (b) 3,249
---------- ---------- ---------- ----------
Total Revenues 84,394 88,138 (32,635) 139,897
---------- ---------- ---------- ----------
OPERATING EXPENSES
Oil and gas operating expenses 6,657 25,734 32,391
Depreciation, depletion and amortization 32,190 20,202 (2,394) (b) 64,564
14,566 (c)
General and administrative 2,476 1,172 (587) (f) 3,061
Gas gathering and processing - 27,956 (27,956) (b) -
Interest - 12,128 10,329 (a) 17,251
(3,466) (b)
(7,340) (e)
5,600 (h)
Writedown of oil and gas properties - - 150,000 (g) 150,000
---------- ---------- ---------- ----------
Total Costs and Expenses 41,323 87,192 138,752 267,267
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 43,071 946 (171,387) (127,370)
Provision (benefit) for income taxes 14,752 625 (55) (b) (43,551)
(58,873) (d)
---------- ---------- ---------- ----------
PRO FORMA NET INCOME (LOSS) $ 28,319 $ 321 $ (112,459) $ (83,819)
====== ====== ====== ======
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE $ 0.90 $ (2.65)
====== ======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 31,582 31,582
====== ======
</TABLE>
The accompanying notes to unaudited pro forma
financial statements are an integral part of these statements
<PAGE> 51
BELCO OIL & GAS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Merger
Belco Coda Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 138,488 $ 8,708 $ 1,864 (b) $ 17,264
(149,884) (g)
1,188 (i)
16,900 (l)
Accounts receivables, oil and gas 24,717 12,486 (5,113) (b) 32,090
Assets from commodity price risk management
activities - - - -
Advances to oil and gas operators 986 467 (94) (b) 1,359
Other current assets 26 650 3 (b) 679
---------- ---------- ---------- ----------
Total current assets 164,217 22,311 (135,136) 51,392
AMOUNTS DUE FROM STOCKHOLDERS - 1,188 (1,188) (i) -
PROPERTY AND EQUIPMENT:
Proved oil and gas properties 319,552 271,731 (150,000) (m) 591,174
(271,731) (d)
421,622 (e)
Unproved oil and gas properties 83,277 1,000 (1,000) (d) 110,277
27,000 (e)
Gas plants and processing systems - 36,539 (36,539) (b) -
Other properties - 4,521 (45) (b) 6,000
(4,476) (d)
6,000 (e)
Less: Accumulated depreciation, depletion
and amortization (118,865) (42,996) 4,372 (b) (118,865)
38,624 (d)
---------- ---------- ---------- ----------
Net property and equipment 283,964 270,795 33,827 588,586
---------- ---------- ---------- ----------
OTHER ASSETS 39,235 3,306 (540) (b) 39,235
(2,766) (d)
---------- ---------- ---------- ----------
Total Assets $487,416 $297,600 $ (105,803) $679,213
========== ========== ========== ==========
</TABLE>
The accompanying notes to unaudited pro forma
financial statements are an integral part of these statements
<PAGE> 52
BELCO OIL & GAS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Merger
Belco Coda Pro Forma
Historical Historical Adjustments Pro Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 8,812 $ 16,976 $(3,444) (b) $ 29,344
7,000 (c)
Liabilities from commodity price risk management
activities 12,534 - 12,534
Income taxes payable 14 473 (31) (b) 456
---------- ---------- ---------- ----------
Total current liabilities 21,360 17,449 3,525 42,334
---------- ---------- ---------- ----------
LONG-TERM DEBT 150,000 67,100 (67,100) (k) 234,000
84,000 (l)
10 1/2% SUBORDINATED NOTES 110,000 7,090 (j) 117,090
DEFERRED INCOME TAXES 52,105 37,396 (562) (b) 109,338
(52,500) (m)
(36,834) (d)
109,733 (h)
LIABILITIES FROM COMMODITY PRICE RISK
MANAGEMENT ACTIVITIES 2,244 - 2,244
---------- ---------- ---------- ----------
Total liabilities 225,709 231,945 47,352 505,006
STOCKHOLDERS' EQUITY
Preferred stock - 20,000 (20,000) (a) -
Common stock 316 9 (9) (a) 316
Additional paid-in capital 186,807 94,551 (94,551) (a) 196,807
10,000 (f)
Retained earnings (deficit) 76,563 (47,968) 38,023 (a) (20,937)
(97,500) (m)
9,945 (b)
Unearned compensation (1,204) - (1,204)
Notes receivable for equity interest (775) (937) 937 (a) (775)
---------- ---------- ---------- ----------
Total stockholders' equity 261,707 65,655 (153,155) 174,207
---------- ---------- ---------- ----------
Total Liabilities And Stockholders' Equity $487,416 $297,600 $ (105,803) $679,213
========== ========== ========== ==========
</TABLE>
The accompanying notes to unaudited pro
forma financial statements are an integral part of
these statements.
<PAGE> 53
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited pro forma consolidated condensed statements of operations
relative to the Merger are based on the audited historical financial statements
of Belco for the year ended December 31, 1996 and the audited historical
financial statements of Coda for the 319 days ended December 31, 1996 and
unaudited historical financial statements of Coda for the 47 days ended
February 16, 1996 and on the unaudited historical financial statements of Coda
and Belco for the nine months ended September 30, 1997. The pro forma
information relating to the Merger reflects the combination of Belco's and
Coda's historical results of operations, as adjusted to exclude the downstream
gas gathering and processing operations of Coda conducted through its
Subsidiary, Taurus Energy Corp. (Taurus). Differences in accounting policies
and methods between Belco and Coda were reviewed and considered to have an
immaterial impact on the combined pro forma financial results. Certain
historical Coda data have been reclassified to conform to Belco's historical
presentations.
PRO FORMA ADJUSTMENTS
THE UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS REFLECT THE FOLLOWING
ADJUSTMENTS:
(a) Record interest expense and amortization of deferred financing costs
associated with Belco's recent $150 million debt issuance. Interest
expense was computed using an 8 7/8 percent rate on $150 million.
(b) Adjust Coda historical to eliminate the effects of Coda's downstream
operations conducted by Taurus, net of any intercompany allocations.
The Taurus operations are not part of the Merger.
(c) Record incremental DD&A Expense resulting from the merger.
(d) Record pro forma income tax provision (benefit) relating to the pro
forma adjustments assuming an effective federal and state rate of
approximately 34 percent.
(e) Record capitalized interest assuming, on a preliminary basis that
$50 million of the purchase price is initially classified as
unproved property costs and considering Belco's unproved property
costs of $77.6 million and $83.3 million at December 31, 1996 and
September 30, 1997, respectively, for which interest was not
previously incurred or capitalized.
(f) Adjust Coda historical to eliminate the effects of Taurus's general
and administrative expenses, net of any intercompany allocations.
(g) Record pro forma ceiling test provision of $150 million ($98 million
after tax) on a consolidated basis at September 30, 1997 and remove
the Coda stand alone December 31, 1996 ceiling test provision. The
September 30, 1997 ceiling test provision includes the effect of the
non-cash $110 million FASB 109 "gross up" attributable to the Coda
acquisition on Belco's full cost pool at year-end 1997 and
adjustments to the SEC PV 10 value of year-end 1997 reserves, which
were significantly impacted by lower product prices when compared to
year-end 1996 prices, among other items.
<PAGE> 54
(h) Record pro forma interest on credit line draw in connection with the
merger using an assumed interest rate of 8 7/8 for the year ended
December 31, 1996 and the nine months ended September 30, 1997,
respectively. See (l) below.
THE UNAUDITED PRO FORMA BALANCE SHEETS REFLECT THE FOLLOWING
ADJUSTMENTS:
(a) Adjust historical combined preferred stock, common stock,
paid-in capital and retained earnings, net of Taurus account
balances to eliminate the historical carrying value of Coda's
stockholders' equity. The impact of these entries does not result
in a change to total combined stockholders' equity.
(b) Adjust Coda historical to eliminate the balances of Taurus
operations. Taurus is not part of the Merger.
(c) Record assumed liabilities and transaction costs incurred in
connection with the Merger.
(d) To eliminate Coda's historical balances, net of Taurus, as
applicable. See note (b).
(e) Record purchase price allocation as follows:
$ 422 million Proved oil and gas property cost
$ 27 million Unproved oil and gas property costs
$ 6 million Building and other assets
(f) Record fair value of warrants issued in connection with the
Merger.
(g) Record $149.9 million cash paid in connection with the purchase
of Coda's common and preferred stock.
(h) Record deferred tax liability assumed in connection with the
Merger.
(i) Record the pro forma receipt of cash received at closing from
stockholders from subscription agreement.
(j) Record premium on 10 1/2 % Subordinated notes to
reflect debt at fair market value.
(k) Record repayment of Coda's long-term bank debt, including $42
million upon the Disposition of Taurus (see Note (b)).
(l) Record Belco's credit line draw in connection with the merger
($84 million) and excess cash from draw of $16.9 million.
(m) Record full cost impairment of proved oil and gas properties at
September 30, 1997 as described in note (g) to the statement of
operations footnotes
<PAGE> 55
BELCO OIL & GAS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURE
The following table sets forth certain unaudited pro forma information
concerning Belco proved oil and gas reserves at December 31, 1996, giving
effect to the Merger as if the Merger had occurred on January 1, 1996. There
are numerous uncertainties inherent in estimating the quantities of proved
reserves and projecting future rates of production and timing of development
expenditures. The following reserve data represents estimates only and should
not be construed as being exact.
<TABLE>
<CAPTION>
Natural Gas (MMcf)
Belco Coda Pro Forma
----------- --------- ------------
<S> <C> <C> <C>
Balance at December 31, 1995 204,170 37,130 241,300
Purchase of minerals in place 21,993 236 22,229
Extension, discoveries and other additions 87,319 4,982 92,301
Revisions of previous estimates 22,799 604 23,403
Production (51,289) (3,810) (55,099)
Sale of properties - (97) (97)
----------- --------- ------------
Balance at December 31, 1996 284,992 39,045 324,037
=========== ========= ============
Proved developed reserves
December 31, 1995 140,725 31,496 172,221
December 31, 1996 184,904 33,255 218,159
</TABLE>
<TABLE>
<CAPTION>
Oil and Natural Gas Liquids (MBbls)
Belco Coda Pro Forma
--------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1995 2,452 42,590 45,042
Purchase of minerals in place 162 1,260 1,422
Extension, discoveries and other additions 1,411 121 1,532
Revisions of previous estimates 96 2,579 2,675
Production (794) (3,379) (4,173)
Sale of properties - (134) (134)
--------- ----------- --------
Balance at December 31, 1996 3,327 43,037 46,364
========= =========== ========
Proved developed reserves
December 31, 1995 1,838 25,877 27,715
December 31, 1996 2,070 33,895 35,965
</TABLE>
<PAGE> 56
BELCO OIL & GAS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS
DISCLOSURE
(CONTINUED)
The following table sets forth unaudited pro forma information concerning the
discounted future net cash flows from proved oil and gas reserves of Belco as
of December 31, 1996, net of income tax expense, and giving effect to the
Merger as if the Merger had occurred on January 1, 1996. Income tax expense has
been computed using assumptions relating to the future tax rates and the
permanent differences and credits under the tax laws relating to oil and gas
activities at December 31, 1996, and do not take into account subsequent
changes in tax laws. The information should be viewed only as a form of
standardized disclosure concerning possible future cash flows that would result
under the assumptions used, and should not be viewed as indicative of fair
market value.
<TABLE>
<CAPTION>
Standardized measure of discounted future net cash flows
relating to proved reserves, net of income tax expense as of
December 31, 1996: Belco Coda Pro Forma
------------ ------------ ------------
(thousands)
<S> <C> <C> <C>
Future cash inflows (1) $1,071,550 $1,208,793 $2,280,343
Future production and development costs (324,220) (431,250) (755,470)
------------ ------------ ------------
Future net inflows before income taxes (1) 747,330 777,543 1,524,873
Discount at 10% annual rate (331,800) (329,677) (661,477)
------------ ------------ ------------
Discounted future net cash flows before income taxes 415,530 447,866 863,396
Pro forma discounted future income taxes (134,957) (120,007) (254,964)
------------ ------------ ------------
Standardized measure of discounted future net cash flows $ 280,573 $ 327,859 $ 608,432
============ ============ ============
</TABLE>
(1) Belco's oil and gas commodity hedges included in future cash inflows
totaled ($60.8) million at December 31, 1996, and such hedges included in
discounted future net cash flows before income taxes totaled ($55.2)
million at December 31, 1996.
<PAGE> 57
BELCO OIL & GAS CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURE
(CONTINUED)
<TABLE>
<CAPTION>
Change in standardized measure of discounted future net
cash flows related to proved oil and gas reserves for
the year ended December 31, 1996: Belco Coda Pro Forma
------------ ------------ ------------
(thousands)
<S> <C> <C> <C>
Balance, December 31, 1995 $ 148,509 $ 220,742 $ 369,251
Sales, net of production costs (111,780) (44,602) (156,382)
Net change in prices and production costs 145,133 130,774 275,907
Extensions and discoveries, net of 153,920 12,338 166,258
related costs
Changes in estimated future development costs 24,618 9,894 34,512
Revisions in quantities 50,309 48,120 98,429
Purchases of minerals in place 7,843 7,655 15,498
Accretion of discount 20,651 36,318 56,969
Change in income taxes (76,957) (92,945) (169,902)
Sales of reserves in place (435) (435)
Other, principally revisions in estimates of (81,673) - (81,673)
timing of production
------------ ------------ ------------
Balance, December 31, 1996 $ 280,573 $ 327,859 $ 608,432
============ ============ ============
</TABLE>
<PAGE> 58
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BELCO OIL & GAS CORP.
By: /s/ ROBERT A. BELFER
----------------------------
Robert A. Belfer
Chairman of the Board
and Chief Executive
Officer
Date: January 28, 1998
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
---------------- ---------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
---------------- ---------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 31,
1997, by and among Belco Oil & Gas Corp., Belco
Acquisition Sub, Inc. and Coda Energy, Inc. (excluding
exhibits and schedules). [Incorporated by reference
from Exhibit 99.2 of Belco's Current Report on Form 8-K
filed with the Commission on November 3, 1997]
23.1* Consent of Ernst & Young LLP
99.1 Press Release, dated November 3, 1997, "Belco Oil & Gas
Corp. agrees to acquire Coda Energy, Inc. for $324
million plus warrants (incorporated by reference to
Exhibit 99.2 to Registrant's Current Report on Form
8-K, dated October 31, 1997, SEC File No. 011-14256,
filed November 3, 1997)
99.2 Press release, dated January 1, 1998, "Belco Year-End
1997 Proved Reserves up 98%, files form 8-K/A pro forma
for Coda Acquisition".
</TABLE>
* filed herewith
Exhibit 99.1
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm and to the use of our report dated
February 19, 1997, with respect to Coda Energy, Inc., and subsidiaries'
consolidated financial statements included in this current report (Form 8-K/A)
of Belco Oil & Gas Corp.
/s/ Ernst & Young LLP
Dallas, Texas
January 28, 1998
