<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------- -------
Commission file number 0-22576
COHO ENERGY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2488635
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
14785 Preston Road, Suite 860
Dallas, Texas 75240
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(972) 774-8300
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1999
---------------------------- ---------------------------
Common Stock, $.01 par value 25,603,512
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Public Accountants...............................................1
Condensed Consolidated Balance Sheets -
December 31, 1998 and March 31, 1999...................................................2
Condensed Consolidated Statements of Operations -
three months ended March 31, 1998 and 1999............................................ 3
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 1998 and 1999............................................ 4
Notes to Condensed Consolidated Financial Statements.................................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................14
Item 2. Changes in Securities.................................................................14
Item 3. Defaults Upon Senior Securities.......................................................14
Item 4. Submission of Matters to a Vote of Security Holders...................................14
Item 5. Other Information.....................................................................14
Item 6. Exhibits and Reports on Form 8-K......................................................15
Signatures.....................................................................................16
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Coho Energy, Inc.:
We have reviewed the accompanying condensed balance sheet of Coho
Energy, Inc. and subsidiaries as of March 31, 1999 and the related condensed
statements of operations and the condensed statement of cash flows for the
three month period ended March 31, 1999, in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute
of Certified Public Accountants. All information included in these financial
statements is the representation of the management of Coho Energy, Inc. and
subsidiaries.
A review of interim financial information consists principally of
applying analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from
operations, has received two notices of default from its lenders under its
existing bank credit facility and may be in default under the terms of its 8
7/8% Senior Subordinated notes, and projects negative cash flow from operations
in 1999 that raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Arthur Andersen LLP
Dallas, Texas
May 7, 1999
1
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COHO ENERGY, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31 MARCH 31
1998 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................................... $ 6,901 $ 6,060
Cash in escrow .......................................................................... 1,505 1,522
Accounts receivable, principally trade .................................................. 9,960 8,204
Other current assets .................................................................... 948 644
--------- ---------
19,314 16,430
PROPERTY AND EQUIPMENT, at cost net of accumulated depletion and
depreciation, based on full cost accounting method (note 3) ............................. 324,574 320,655
OTHER ASSETS ............................................................................... 6,180 5,971
--------- ---------
$ 350,068 $ 343,056
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, principally trade ..................................................... $ 5,577 $ 2,420
Accrued liabilities and other payables .................................................. 18,003 18,517
Current portion of long term debt (note 4) .............................................. 384,031 388,649
--------- ---------
407,611 409,586
LONG TERM DEBT, excluding current portion .................................................. -- --
DEFERRED INCOME TAXES ...................................................................... -- --
--------- ---------
407,611 409,586
COMMITMENTS AND CONTINGENCIES (note 6) ..................................................... 3,700 3,700
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01 per share
Authorized 10,000,000 shares, none issued
Common stock, par value $0.01 per share
Authorized 100,000,000 shares
Issued and outstanding 25,603,512 shares .............................................. 256 256
Additional paid-in capital .............................................................. 137,812 137,812
Retained deficit ........................................................................ (199,311) (208,298)
--------- ---------
Total shareholders' equity .......................................................... (61,243) (70,230)
--------- ---------
$ 350,068 $ 343,056
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE> 5
COHO ENERGY, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1998 1999
---------- -----------
<S> <C> <C>
OPERATING REVENUES
Net crude oil and natural gas production............................................ $ 21,143 $ 8,967
---------- -----------
OPERATING EXPENSES
Crude oil and natural gas production................................................ 6,413 3,487
Taxes on oil and gas production..................................................... 1,002 286
General and administrative.......................................................... 2,140 2,727
Reorganization costs................................................................ -- 297
Depletion and depreciation.......................................................... 7,794 3,594
Writedown of crude oil and natural gas properties................................... 32,000 --
---------- -----------
Total operating expenses........................................................ 49,349 10,391
---------- -----------
OPERATING LOSS......................................................................... (28,206) (1,424)
---------- -----------
OTHER INCOME AND EXPENSES
Interest and other income........................................................... 46 89
Interest expense.................................................................... (7,809) (7,652)
---------- -----------
(7,763) (7,563)
---------- -----------
LOSS FROM OPERATIONS BEFORE INCOME TAXES............................................... (35,969) (8,987)
INCOME TAX BENEFIT..................................................................... (13,668) --
---------- -----------
NET LOSS............................................................................... $ (22,301) $ (8,987)
========== ===========
BASIC LOSS PER COMMON SHARE (note 5)................................................... $ (.87) $ (.35)
========== ==========
DILUTED LOSS PER COMMON SHARE (note 5)................................................. $ (.87) $ (.35)
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 6
COHO ENERGY, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................................ $ (22,301) $ (8,987)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depletion and depreciation........................................................ 7,794 3,594
Writedown of crude oil and natural gas properties................................. 32,000 ---
Deferred income tax benefit....................................................... (13,689) ---
Amortization of debt issue costs and other........................................ 208 255
Changes in operating assets and liabilities:
Accounts receivable and other assets.............................................. (1,105) 2,024
Accounts payable and accrued liabilities.......................................... 4,740 (1,345)
------------ ------------
Net cash provided by (used in) operating activities.................................... 7,647 (4,459)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment.............................................................. (22,639) 326
Changes in accounts payable and accrued liabilities related to
exploration and development....................................................... 1,762 (1,297)
------------ ------------
Net cash used in investing activities.................................................. (20,877) (971)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long term debt.......................................................... 11,029 4,600
Repayment of long term debt......................................................... (11) (11)
------------ ------------
Net cash provided by financing activities.............................................. 11,018 4,589
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............................................. (2,212) (841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................................... 3,817 6,901
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................. $ 1,605 $ 6,060
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest.......................................................................... $ 4,395 $ 4,748
Income taxes...................................................................... $ --- $ 33
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 7
COHO ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED)
(UNAUDITED)
1. BASIS OF PRESENTATION
GENERAL
The accompanying condensed consolidated financial statements of Coho
Energy, Inc. (the "Company") have been prepared without audit, in accordance
with the rules and regulations of the Securities and Exchange Commission and do
not include all disclosures normally required by generally accepted accounting
principles or those normally made in annual reports on Form 10-K. All material
adjustments, consisting only of normal recurring accruals, which, in the
opinion of management, were necessary for a fair presentation of the results
for the interim periods, have been made. The results of operations for the
three month period ended March 31, 1999 are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated financial
statements should be read in conjunction with the notes to the financial
statements, which are included as part of the Company's annual report on Form
10-K for the year ended December 31, 1998.
2. FUTURE OPERATIONS
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. Due to a continued period of depressed prices since December 1997 and
production declines, the Company generated an operating loss of $185 million
for the year ended December 31, 1998, including a writedown of its oil and gas
properties of $188 million, and an operating loss of $1.4 million for the three
months ended March 31, 1999.
Additionally, as discussed in Note 4, the Company received two separate
notices of default in March and April 1999 from its lenders under its existing
bank credit facility because the Company was unable to cure an over advance
position of $89.6 million due to the reduction of its borrowing base as a
result of the depressed crude oil and natural gas prices. Additionally, the
Company did not make the April 6, 1999 interest payment of approximately $4
million due on its bank credit facility, the May 3, 1999 interest payment of
approximately $1 million due on its bank credit facility or the April 15, 1999
interest payment of approximately $6.7 million due on its 8 7/8% Senior
Subordinated Notes ("Senior Notes"). Although the lenders under the existing
bank credit facility have not accelerated the full principal amount outstanding
of $239.6 million as of March 31, 1999 and although the Company has until May
15, 1999 to make its interest payment on the Senior Notes before being
considered in default on the Senior Notes, all amounts outstanding under these
facilities as of March 31, 1999 have been classified as current maturities
because the Company is currently unable to cure the existing or pending defaults
within the required terms of the related agreements. As of May 4, 1999, the
Company has obtained a forbearance letter from its bank group whereby the bank
group will forbear from exercising its remedies under the bank credit facility
through May 14, 1999.
The Company is exploring its alternatives to resolve its current liquidity
problems, including (a) the current default under the existing bank credit
facility, (b) the potential acceleration of all amounts due under its existing
bank credit facility and the Senior Notes, and (c) inadequate cash flow from
operations to support past due and accruing interest due on the bank credit
facility and on the Senior Notes or to meet other accrued liabilities as they
become due. The alternatives available to the Company include, but are not
limited to, the conversion of a portion or all of the Senior Notes to equity,
raising additional equity and/or refinancing the Company's existing bank credit
facility to make overdue principal and interest payments on its indebtedness
and to provide additional capital to fund repairs on and the continued
development of the Company's properties. The Company is also evaluating cost
reduction programs to enhance cash flow from operations. There can be no
assurance that the Company will be successful in resolving its liquidity
problems
5
<PAGE> 8
COHO ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
through the alternatives set forth above and may seek protection under Chapter
11 of the United States Bankruptcy Code while pursuing its other financing
and/or reorganization alternatives. These factors, among others, raise
substantial doubt concerning the ability of the Company to continue as a going
concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts (including $320.7
million in net property, plant and equipment) or the amount and classification
of liabilities that might result should the Company be unable to continue as a
going concern. The ability of the Company to continue as a going concern is
dependent upon raising additional equity and/or the refinancing of the
Company's existing bank credit facility and the conversion of a portion or all
of the Senior Notes to equity.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31 March 31
1998 1999
--------- ---------
<S> <C> <C>
Crude oil and natural gas leases and rights including exploration,
development and equipment thereon, at cost ................... $ 678,547 $ 678,222
Accumulated depletion and depreciation ........................... (353,973) (357,567)
--------- ---------
$ 324,574 $ 320,655
========= =========
</TABLE>
Overhead expenditures directly associated with exploration and development
of crude oil and natural gas reserves have been capitalized in accordance with
the accounting policies of the Company. Such charges totalled $1,245,000 and
$-0- for the three months ended March 31, 1998 and 1999, respectively.
During the three months ended March 31, 1998 and 1999, the Company did not
capitalize any interest or other financing charges on funds borrowed to finance
unproved properties or major development projects.
Unproved crude oil and natural gas properties totalling $58,854,000 and
$58,958,000 at December 31, 1998 and March 31, 1999, respectively, were
excluded from costs subject to depletion. These costs are anticipated to be
included in costs subject to depletion during the next three to five years.
4. LONG-TERM DEBT
On February 22, 1999, the Company was informed by the lenders under the
Revolving Credit Facility that its borrowing base was reduced to $150 million
effective January 31, 1999 creating an over advance of $89.6 million under the
new borrowing base. The Company was unable to cure the over advance as required
by the Revolving Credit Facility by March 2, 1999 by either (a) providing
collateral with value and quantity in amounts equal to such excess, (b)
prepaying, without premium or penalty, such excess plus accrued interest or (c)
paying the first of five equal monthly installments to repay the over advance.
On March 8, 1999 and April 5, 1999, the Company received two separate written
notices from the lenders under the Revolving Credit Facility that it was in
default under the terms of the Revolving Credit Facility and the lenders
reserved all rights, remedies and privileges as a result of the payment
default. Additionally, the Company did not pay the April 6, 1999 interest
payment of approximately $4 million or the May 3, 1999 interest payment of
approximately $1 million due on its bank borrowings. On May 7, 1999, the Company
paid $2 million as a partial payment on past due interest. As a result of the
payment defaults, the past due installments to repay the over advance and the
past due interest payments will bear interest at the default interest rate of
prime plus 4%. Although the lenders have not accelerated the full amount
outstanding under the Revolving Credit Facility, the outstanding advances of
$239.6 million as of March 31, 1999 have been reclassified to current maturities
because the
6
<PAGE> 9
COHO ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company is currently unable to cure the default within the required terms. As of
May 4, 1999, the Company has obtained a forbearance letter from its bank group
whereby the bank group will forbear from exercising its remedies under the bank
credit facility through May 14, 1999. The Company is continuing its discussions
with the lenders under the Revolving Credit Facility in an attempt to
restructure this repayment schedule so that the Company can continue to pursue
alternative arrangements.
The Restated Credit Agreement contains certain financial and other
covenants including, among other covenants, (i) the maintenance of minimum
amounts of shareholders' equity, (ii) maintenance of minimum ratios of cash flow
to interest expense as well as current assets to current liabilities, (iii)
limitations, on the Company's ability to incur additional debt, and (iv)
restrictions on the payment of dividends. At March 31, 1999, the Company was not
in compliance with the minimum shareholders' equity, cash flow to interest
expense and current assets to current liabilities covenants.
The Company did not pay the April 15, 1999 interest payment of $6.7
million due on its Senior Notes. The Company has until May 15, 1999 to make its
interest payment before being considered in default under the Senior Notes
Indenture (the "Indenture"). Under an event of default of the Senior Notes, the
Trustee, by written notice to the Company, or the holders of at least 25% in
principal amount of the outstanding Senior Notes, may declare the principal and
accrued interest on all the Senior Notes due and payable immediately. However,
the Company may not pay the principal of, premium (if any) or interest on the
Senior Notes so long as any required payments due on the Revolving Credit
Facility remain outstanding and have not been cured or waived. All amounts
outstanding under the Senior Notes as of March 31, 1999 have been classified as
current maturities because the Company is currently unable to cure the pending
default within the required terms of the Indenture.
5. EARNINGS PER SHARE
Basic earnings per share ("EPS") have been calculated based on the
weighted average number of shares outstanding for the three months ended March
31, 1998 and 1999 of 25,603,512. Diluted EPS have been calculated based on the
weighted average number of shares outstanding (including common shares plus,
when their effect is dilutive, common stock equivalents consisting of stock
options and warrants) for the three months ended March 31, 1998 and 1999 of
25,603,512. In 1998 and 1999, conversion of stock options and warrants would
have been anti-dilutive and, therefore, was not considered in diluted EPS.
6. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various legal proceedings and claims which
arise in the normal course of business. Based on discussions with legal
counsel, the Company does not believe that the ultimate resolution of such
actions will have a significant effect on the Company's financial position.
Like other crude oil and natural gas producers, the Company's operations
are subject to extensive and rapidly changing federal and state environmental
regulations governing emissions into the atmosphere, waste water discharges,
solid and hazardous waste management activities and site restoration and
abandonment activities. The Company does not believe that any potential
liability, in excess of amounts already provided for, would have a significant
effect on the Company's financial position; however, an unfavorable outcome
could have a material adverse effect on a given period's results.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and notes thereto included
elsewhere herein.
GENERAL
The Company seeks to acquire controlling interests in underdeveloped crude
oil and natural gas properties and attempts to maximize reserves and production
from such properties through relatively low-risk activities such as development
drilling, multiple completions, recompletions, workovers, enhancement of
production facilities and secondary recovery projects. The Company's only
operating revenues are crude oil and natural gas sales with crude oil sales
representing approximately 86% of production revenues and natural gas sales
representing approximately 14% of production revenues during the three months
ended March 31, 1999 compared to 77% from crude oil sales and 23% from natural
gas sales during the same period in 1998.
The Company's crude oil and natural gas production decreased in the first
three months of 1999 due to the sale of the Monroe field gas properties in
December 1998 and due to overall production declines on the Company's operated
properties as discussed under "Results of Operations - Operating Revenues."
Average net daily barrel of oil equivalent ("BOE") production was 11,047 BOE
for the three months ended March 31, 1999 as compared to 18,805 BOE for the
same period in 1998. For purposes of determining BOE herein, natural gas is
converted to barrels ("Bbl") on a 6 thousand cubic feet ("Mcf") to 1 Bbl basis.
LIQUIDITY AND CAPITAL RESOURCES
Capital Sources. For the three months ended March 31, 1999, cash flow used
in operating activities was $4.5 million compared with cash flow provided by
operating activities of $7.6 million for the same period in 1998. Operating
revenues, net of lease operating expenses, production taxes and general and
administrative expenses, decreased $9.1 million during the first quarter of
1999 from the first quarter of 1998, primarily due to a 41% decline in
production on a BOE basis between comparable periods and price decreases
between such comparable periods of 29% and 18% for crude oil and natural gas,
respectively. Changes in operating assets and liabilities provided $680,000 of
cash for operating activities for the three months ended March 31, 1999,
primarily due to a decrease in working interest receivables as a result of the
decline in capital expenditures. See "Results of Operations" for a discussion
of operating results.
As discussed more fully under "Results of Operations", operating revenues
have been declining during 1998 and the first quarter of 1999 due to crude oil
and natural gas price declines. Additionally, the Company's crude oil and
natural gas production has declined from an average of 18,805 BOE per day
during the first quarter of 1998 to approximately 11,047 BOE per day during the
first quarter of 1999 due to the sale of the Monroe field gas properties in
December 1998, which contributed approximately 2,725 BOE per day during the
first quarter of 1998, and due to overall production declines on the Company's
operated properties in Oklahoma and Mississippi as a result of the decrease and
ultimate cessation of well repair work during the last five months of 1998 and
due to the Company halting production on wells which are uneconomical due to
depressed crude oil prices. Despite the recent rises in prices, the Company
does not anticipate any improvement in production and will experience further
production declines until funds are available for well repairs and additional
development activity.
Based on the March 1999 production level of approximately 10,400 BOE per
day and the average price received in March 1999 of approximately $10.23 per
barrel of crude oil and $1.68 per Mcf of natural gas, the Company's operating
revenues are adequate to cover lease operating expenses, production taxes and
general and administrative expenses but are not sufficient to cover past due
interest or interest accruing on the Senior Notes or on the borrowings under
the Revolving Credit Facility. See "-Future Operations".
At March 31, 1999, the Company had a working capital deficit of $393.2
million primarily due to the reclassification of all long term debt to current
maturities as discussed below. See "-Future Operations".
8
<PAGE> 11
On February 22, 1999, the Company was informed by the lenders under the
Revolving Credit Facility that the borrowing base was reduced to $150 million
effective January 31, 1999 creating an over advance of $89.6 million under the
new borrowing base. Under the terms of the Revolving Credit Facility, the
Company was required to cure the over advance amount by March 2, 1999 by either
(a) providing collateral with value and quantity in amounts equal to such
excess, (b) prepaying, without premium or penalty, such excess plus accrued
interest or (c) paying the first of five equal monthly installments to repay
the over advance. The Company was unable to cure the over advance as required
by the Revolving Credit Facility by March 2, 1999. On March 8, 1999 and April
5, 1999, the Company received two separate written notices from the lenders
under the Revolving Credit Facility that it was in default under the terms of
the Revolving Credit Facility and the lenders reserved all rights, remedies and
privileges as a result of the payment default. Additionally, the Company did
not pay the April 6, 1999 interest payment of approximately $4 million or the
May 3, 1999 interest payment of approximately $1 million due on its bank
borrowings. On May 7, 1999, the Company paid $2 million as a partial payment on
past due interest. As a result of the payment defaults, the past due
installments to repay the over advance and the past due interest payments will
bear interest at the default interest rate of prime plus 4%. Although the
lenders have not accelerated the full amount outstanding under the Revolving
Credit Facility, the outstanding advances of $239.6 million as of March 31, 1999
have been reclassified to current maturities because the Company is currently
unable to cure the default within the required terms. As of May 4, 1999, the
Company has obtained a forbearance letter from its bank group whereby the bank
group will forbear from exercising its remedies under the bank credit facility
through May 14, 1999. The Company is continuing its discussions with the lenders
under the Revolving Credit Facility in an attempt to restructure this repayment
schedule so that the Company can continue to pursue alternative arrangements.
See "-Future Operations".
The Restated Credit Agreement contains certain financial and other
covenants including (i) the maintenance of minimum amounts of shareholders'
equity ($108 million plus 50% of the accumulated consolidated net income
beginning in 1998 for the cumulative period excluding adjustments for any
writedown of property, plant and equipment, plus 75% of the cash proceeds of
any sales of capital stock of the Company), (ii) maintenance of minimum ratios
of cash flow to interest expense (1.5 : 1) as well as current assets (including
unused Borrowing Base) to current liabilities (1 : 1), (iii) limitations on the
Company's ability to incur additional debt and (iv) restrictions on the payment
of dividends. At March 31, 1999, the Company was not in compliance with the
minimum shareholders' equity, cash flow to interest expense and current asset
to current liability covenants.
The Company did not pay the April 15, 1999 interest payment of
approximately $6.7 million due on its Senior Notes. The Company has until May
15, 1999 to make its interest payment before being considered in default under
the Senior Notes Indenture. Under an event of default of the Senior Notes, the
Trustee by written notice to the Company, or the holders of at least 25% in
principal amount of the outstanding Senior Notes, may declare the principal and
accrued interest on all the Senior Notes due and payable immediately. However,
the Company may not pay the principal of, premium (if any) or interest on the
Senior Notes so long as any required payments due on the Revolving Credit
Facility remain outstanding and have not been cured or waived. All amounts
outstanding under the Senior Notes as of March 31, 1999 have been classified as
current maturities because the Company is currently unable to cure the pending
default within the required terms of the Indenture.
The Company did not pay approximately $4 million in Louisiana state income
taxes which was due on April 15, 1999 related to the gain on the December 1998
sale of the Monroe gas field. The past due taxes will bear interest at 1.25%
per month and accrue a monthly penalty of 10% not to exceed 25% of the taxes
due.
Future Operations. The Company is exploring its alternatives to resolve
its current liquidity problems, including (a) the current default under the
Revolving Credit Facility, (b) the potential acceleration of all amounts due
under the Revolving Credit Facility and the Senior Notes, and (c) inadequate
cash flow from operations to support past due and accruing interests due on the
Revolving Credit Facility and on the Senior Notes or to meet other accrued
liabilities as they become due. The alternatives available to the Company
include, but are not limited to, the conversion of a portion or all of the $150
million of the Senior Notes to equity, raising additional equity and/or
refinancing the Company's Revolving Credit Facility to make overdue principal
and interest payments on its indebtedness and to provide additional capital to
fund repairs on and the continued development of the Company's properties. The
Company is also evaluating cost reduction programs to enhance cash flow from
operations. There can be no assurance that the Company will be
9
<PAGE> 12
successful in resolving its liquidity problems through the alternatives set
forth above and may seek protection under Chapter 11 of the United States
Bankruptcy Code while it is pursuing other financing and/or reorganization
alternatives. These factors, among others, raise substantial doubt concerning
the ability of the Company to continue as a going concern.
Capital Expenditures. During the first three months of 1999, the Company
had a net reduction in property and equipment of $325,000 compared with capital
additions of $22.6 million for the first three months of 1998. The Company had a
net reduction in property and equipment during the first quarter of 1999 because
actual capital costs paid during the quarter were less than the estimated
capital costs accrued at year end. The Company has ceased substantially all of
its capital projects in 1999 due to its liquidity problems discussed above. No
general and administrative costs associated with the Company's exploration and
development activities were capitalized for the first three months of 1999,
compared with $1,245,000 of capitalized costs for the first three months of
1998.
The Company has finalized the location for an exploratory well on its
Anaguid permit in Tunisia, North Africa. The Company must commence operations
to drill this well by June 1999 or the acreage concession will expire. The
Company's estimated net cost to drill is approximately $2.5 million and the
Company's net carrying cost for its investment in the Anaguid permit is
approximately $5.7 million as of December 31, 1998. If the Company has not
commenced operations to drill this well by June 1999 and the acreage concession
expires, the Company will incur a liability of approximately $4.0 million for
unfulfilled commitments, of which $3.7 million is due to the Tunisian
government. Although the Company intends to drill this well, the Company cannot
currently predict whether it will have the financial resources to make these
expenditures. The Company has not entered into any other capital commitments in
1999 due to its liquidity problems discussed above.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Selected Operating Data
Production
Crude Oil (Bbl/day) ............................ 14,667 9,740
Natural Gas (Mcf/day) .......................... 24,824 7,839
BOE (Bbl/day) .................................. 18,805 11,047
Average Sales Prices
Crude Oil per Bbl .............................. $ 12.33 $ 8.81
Natural Gas per Mcf ............................ $ 2.17 $ 1.77
Other
Production costs per BOE (1) ................... $ 4.38 $ 3.80
Depletion per BOE .............................. $ 4.60 $ 3.62
Revenues (in thousands)
Production revenues
Crude Oil .................................. $ 16,282 $ 7,719
Natural Gas ................................ 4,861 1,248
------------ ------------
$ 21,143 $ 8,967
============ ============
</TABLE>
- ------------------
(1) Includes lease operating expenses and production taxes.
10
<PAGE> 13
Operating Revenues. During the first three months of 1999, production
revenues decreased 58% to $9 million as compared to $21.1 million for the same
period in 1998. This decrease was due to a 34% decrease in crude oil production
and a 68% decrease in natural gas production, and decreases in the prices
received for crude oil and natural gas (including hedging gains and losses
discussed below) of 29% and 18%, respectively.
The 68% decrease in daily natural gas production during the first three
months of 1999 is primarily due to the December 1998 sale of the Monroe field
gas properties which accounted for 66% of the natural gas production during the
first quarter of 1998. The 34% decrease in daily crude oil production during
the first three months of 1999 is due to overall production declines in the
operated Mississippi and Oklahoma properties. Due to the Company's capital
constraints in conjunction with the decline in crude oil prices, the Company
significantly reduced both minor and major well repairs on its operated
properties during the last five months of 1998, ceased all well repairs in
December 1998 and halted production on wells which are uneconomical due to
depressed crude oil prices, all of which contributed to overall production
declines. The Company does not anticipate any improvement in production and
will experience further production declines until funds are available for well
repairs and additional development activity.
Average crude oil prices received by the Company, including hedging gains
and losses, decreased during the first three months of 1999 compared to the
same period in 1998 due to declining oil prices which can be attributed to
several factors, including: lack of cold weather in the 1998 winter months,
increased storage inventories and perceptions of the effects of increased
quotas or lack of adherence to quotas from the Organization of Petroleum
Exporting Countries. The posted price for the Company's crude oil averaged
$10.39 per Bbl for the three months ended March 31, 1999, a 21% decrease from
the average posted price of $13.18 per Bbl experienced in the first three
months of 1998. The price per barrel received by the Company is adjusted for
the quality and gravity of the crude oil and is generally lower than the posted
price.
Crude oil prices began to improve in March 1999 and have continued to
improve in April 1999 with an average posted price of $14.61 in April.
Additionally, the Company entered into a new crude oil marketing contract
effective April 1, 1999 for the majority of its Oklahoma crude oil production
which will substantially improve the Company's crude oil price as compared to
the price received under its previous contract. The Company is also in the
process of renegotiating its marketing contract for substantially all of its
Mississippi crude oil.
The realized price for the Company's natural gas, including hedging gains
and losses, decreased 18% from $2.17 per Mcf in the first three months of 1998
to $1.77 per Mcf in the first three months of 1999, due to a lack of cold
weather and market volatility.
Production revenues for the three months ended March 31, 1998 and 1999
included no crude oil hedging gains or losses. Production revenues in 1999
included no natural gas hedging gains or losses compared to natural gas hedging
gains of $466,000 ($0.21 per Mcf) for the same period in 1998. Any gain or loss
on the Company's crude oil hedging transactions is determined as the difference
between the contract price and the average closing price for WTI on the NYMEX
for the contract period. Any gain or loss on the Company's natural gas hedging
transactions is generally determined as the difference between the contract
price and the average settlement price for the last three days during the month
in which the hedge is in place. Consequently, hedging activities do not affect
the actual sales price received for the Company's crude oil and natural gas. At
March 31, 1999, the Company has no natural gas or crude oil production hedged
and there were no deferred or unrealized hedging gains or losses.
Expenses. Production expenses (including production taxes) were $3.8
million for the first three months of 1999 compared to $7.4 million for the
first three months of 1998. On a BOE basis, production costs decreased 13% to
$3.80 per BOE in 1999 compared to $4.38 per BOE in 1998. The decrease in
expenses for the comparable three month periods is primarily due to decreased
production, decreased production taxes and improved operating efficiencies.
General and administrative costs increased 27% in the first three months
of 1999 as compared to the first three months of 1998. The increase is
primarily due to the expensing of all salaries and other general and
administrative costs associated with exploration and development activities
during 1999 as compared to the capitalization of $1.2 million of such costs in
the first quarter of 1998. General and administrative costs decreased by 18%
between comparable three
11
<PAGE> 14
month periods before capitalized costs. This decrease is primarily due to cost
reductions associated with the Monroe field sale and reductions in estimated
franchise tax accruals as a result of the Company's losses in 1998. Although
the Company has made additional cost reductions, such reductions have been
offset by decreases in cost recoveries from working interest owners due to a
decrease in well activity.
Reorganization costs of $297,000 for the three months ended March 31, 1999
relate to professional fees for consultants and attorneys assisting in the
negotiations associated with financing and/or reorganization alternatives.
Interest expense decreased 2% for the three month period ended March 31,
1999 compared to the same period in 1998, due to lower borrowing levels during
1999 as compared to 1998 and due to the repayment of borrowings in December
1998 from the proceeds of the Monroe field sale.
Depletion and depreciation expense decreased 54% to $3.6 million for the
three months ended March 31, 1999 from $7.8 million for the comparable period
in 1998. This decrease is primarily the result of decreased production volume
and a decreased rate per BOE, which decreased to $3.62 in 1999 from $4.60 for
the comparable period in 1998. The rate per BOE decreased substantially due to
the writedown of crude oil and natural gas properties during 1998.
In accordance with generally accepted accounting principles, at a point in
time coinciding with the quarterly and annual reporting periods, the Company
must test the carrying value of its crude oil and natural gas properties, net
of related deferred taxes, against a calculated amount based on estimated
reserve volumes valued at then current realized prices held flat for the life
of the properties discounted at 10% per annum plus the lower of cost or
estimated fair value of unproved properties (the "cost center ceiling"). At
March 31, 1998, the carrying value exceeded the cost center ceiling, resulting
in a non-cash writedown of the crude oil and natural gas properties of $32
million ($19.8 million net of deferred income taxes). No such writedown was
required at March 31, 1999.
Due to the factors discussed above, the Company's net loss for the three
months ended March 31, 1999 was $9 million as compared to net loss of $22.3
million for the same period in 1998. The 1998 loss includes the writedown of
the crude oil and natural gas properties of $19.8 million, net of deferred
income taxes.
YEAR 2000 ISSUE
The Company, like other businesses, is facing the Year 2000 issue. Many
computer systems and equipment with embedded chips or processors use only two
digits to represent the calendar year. This could result in computational or
operational errors because date sensitive systems will recognize the year 2000
as 1900 or not at all. This inability to recognize or properly treat the year
2000 may cause systems to process critical financial and operational
information incorrectly.
State of Readiness. The Company has divided its Year 2000 review into five
separate elements: accounting computer systems, network infrastructure, desktop
computers at corporate headquarters, field operational systems and major
suppliers and purchasers. The Company has completed its Year 2000 review and
remediation with respect to the first three elements and has determined that
accounting computer systems, network infrastructure and desktop computers at
the corporate headquarters are Year 2000 compliant.
The Company is continuing its review of field operational systems. All
networks and communications systems and infrastructure in the field are now
compliant. Upgrades on the production reporting system for Year 2000 compliance
are completed and testing is in its final phase. Desktop computers in the field
are 80% compliant with full compliance projected in the second quarter of 1999.
The field automation equipment in the Company's Oklahoma division was found to
be non-compliant. Quotes for all needed upgrades have been received, and the
Oklahoma division is expected to be compliant by mid-1999. The Company
estimates that it is 100% complete with its review, and is 75% complete with
its remediation of field operational systems and expects to have complete Year
2000 certification in this element by mid-year 1999.
The Company is concurrently reviewing Year 2000 compliance of major
suppliers and purchasers. The Company has contacted its major suppliers and
purchasers by letter and has asked for a written response from them describing
their Year 2000 readiness efforts. To date, the Company has not identified any
material problems associated with the Year 2000 readiness efforts of its major
suppliers and purchasers. The Company estimates that it is 40% complete with
12
<PAGE> 15
its review of major suppliers and purchasers. Though some suppliers and
purchasers have not yet completed their Year 2000 readiness efforts, the
Company expects to be substantially complete with its Year 2000 certification
for this element by the third quarter of 1999.
In addition, the Company is currently working on a contingency plan that
addresses potential Year 2000 problems both within the Company and with major
suppliers and purchasers of the Company. The Company anticipates that the
contingency plan will be in place by the third quarter of 1999.
Cost. The Company began its Year 2000 Program in 1997, and has
incorporated its preparations into its normal equipment upgrade cycle. As a
result, the historical cost of the Company's Year 2000 efforts to date has not
been material. Management does not estimate future expenditures related to the
Year 2000 to be material.
Risks. The Company believes that it is taking all reasonable steps to
ensure Year 2000 readiness. Its ability to meet the projected goals, including
the costs of addressing the Year 2000 issue and the dates upon which compliance
will be attained, depends on the Year 2000 readiness of its key suppliers and
customers and the successful development and implementation of contingency
plans. Although these and other unanticipated Year 2000 issues could have an
adverse effect on the results of operations or financial condition of the
Company, it is not possible to estimate the extent of impact at this time,
since the contingency plans are still under development.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS QUARTERLY
REPORT ON FORM 10-Q ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF
THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company utilizes financial instruments which inherently have some
degree of market risk. The primary sources of market risk include fluctuations
in commodity prices and interest rate fluctuations.
PRICE FLUCTUATIONS
The Company's result of operations are highly dependent upon the prices
received for crude oil and natural gas production. The Company has entered, and
expects to continue to enter, into forward sale agreements or other
arrangements for a portion of its crude oil and natural gas production to hedge
its exposure to price fluctuations. At March 31, 1999, the Company was not a
party to any forward sale agreements or other arrangements. It is unlikely that
the Company will be able to enter into any forward sales agreements or other
similar arrangements until it remedies its current liquidity problems because
of the associated credit risks of the counterparty to such agreements. See
"Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations".
INTEREST RATE RISK
Total debt as of March 31, 1999, included $239.6 million of floating-rate
debt attributed to bank credit facility borrowings. As a result, the Company's
annual interest cost in 1999 will fluctuate based on short-term interest rates.
Additionally, due to the current payment defaults under the bank credit
facility discussed under "Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations", the past due installments to
repay the $89.6 million over advance and the past due interest payments will
bear interest at the default interest rate of prime plus 4%. The impact on
annual cash flow of a ten percent change in the floating interest rate
(approximately 73 basis points) would be approximately $1.7 million assuming
outstanding debt of $239.6 million throughout the year.
Total debt as of March 31, 1999, also included $149 million (net of $1
million of unamortized original issue discount) of fixed rate Senior Notes with
an estimated fair market value of $72 million based on quoted prices from
market sources.
The Company is in default under its bank credit facility and has a pending
default under its Senior Notes. See "Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations".
13
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On February 22, 1999, the Company was informed by the lenders
under the Revolving Credit Facility that the borrowing base was reduced to $150
million effective January 31, 1999 creating an over advance of $89.6 million
under the new borrowing base. Under the terms of the Revolving Credit Facility,
the Company was required to cure the over advance amount by March 2, 1999 by
either (a) providing collateral with value and quantity in amounts equal to
such excess, (b) prepaying, without premium or penalty, such excess plus
accrued interest or (c) paying the first of five equal monthly installments to
repay the over advance. The Company was unable to cure the over advance as
required by the Revolving Credit Facility by March 2, 1999. On March 8, 1999
and April 5, 1999, the Company received two separate written notices from the
lenders under the Revolving Credit Facility that it was in default under the
terms of the Revolving Credit Facility and the lenders reserved all rights,
remedies and privileges as a result of the payment default. Additionally, the
Company did not pay the April 6, 1999 interest payment of approximately $4
million or the May 3, 1999 interest payment of approximately $1 million due on
its bank borrowings. On May 7, 1999, the Company paid $2 million as a partial
payment on past due interest. As a result of the payment defaults, the past due
installments to repay the over advance and the past due interest payments will
bear interest at the default interest rate of prime plus 4%. Although the
lenders have not accelerated the full amount outstanding under the Revolving
Credit Facility, the outstanding advances of $239.6 million as of March 31,
1999, have been reclassified to current maturities because the Company is
currently unable to cure the default within the required terms. As of May 4,
1999, the Company has obtained a forbearance letter from its bank group whereby
the bank group will forbear from exercising its remedies under the bank credit
facility through May 14, 1999. The Company is continuing its discussions with
the lenders under the Revolving Credit Facility in an attempt to restructure
this repayment schedule so that the Company can continue to pursue alternative
arrangements. The March 8, 1999 and April 5, 1999 defaults related to the
installment payments due on the over advance were approximately $17.9 million
each. The total arrearage related to the installment payments due on the over
advance and past due interest was approximately $56.7 million as of May 10,
1999, including approximately $3 million of past due interest and $17.9 million
related to the May 1999 installment due on the over advance.
The Company's bank credit facility contains certain financial
and other covenants including (i) the maintenance of minimum amounts of
shareholders' equity ($108 million plus 50% of the accumulated consolidated net
income beginning in 1998 for the cumulative period excluding adjustments for
any writedown of property, plant and equipment, plus 75% of the cash proceeds
of any sales of capital stock of the Company), (ii) maintenance of minimum
ratios of cash flow to interest expense (1.5 : 1) as well as current assets
(including unused Borrowing Base) to current liabilities (1 : 1), (iii)
limitations on the Company's ability to incur additional debt and (iv)
restrictions on the payment of dividends. At March 31, 1999, the Company was
not in compliance with the minimum shareholders' equity, cash flow to interest
expense and current asset to current liability covenants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
14
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K filed March 4, 1999 covering Item 5 - Other Events
and Item 7 - Financial Statements and Exhibits regarding the status of various
agreements with Hicks, Muse & Co. Partners, L.P. and affiliates.
15
<PAGE> 18
COHO ENERGY, INC.
SIGNATURES
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 thereunto duly authorized.
COHO ENERGY, INC.
(Registrant)
Date: May 14, 1999
By: /s/ Jeffrey Clarke
----------------------------------------------
Jeffrey Clarke
(Chairman, President, and Chief Executive Officer)
By: /s/ Eddie M. LeBlanc,III
----------------------------------------------
Eddie M. LeBlanc, III
(Sr. Vice President and Chief Financial Officer)
16
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,582
<SECURITIES> 0
<RECEIVABLES> 9,133
<ALLOWANCES> (929)
<INVENTORY> 0
<CURRENT-ASSETS> 16,430
<PP&E> 678,221
<DEPRECIATION> (357,566)
<TOTAL-ASSETS> 343,056
<CURRENT-LIABILITIES> 409,586
<BONDS> 0
0
0
<COMMON> 256
<OTHER-SE> (70,486)
<TOTAL-LIABILITY-AND-EQUITY> 343,056
<SALES> 8,967
<TOTAL-REVENUES> 8,967
<CGS> 3,773
<TOTAL-COSTS> 10,391
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,652
<INCOME-PRETAX> (8,987)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,987)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,987)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
