<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 September 30, 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 November 12, 1999
---------------------------- --------------------------------
Common Stock, $.01 par value 25,603,512
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Public Accountants...............................................1
Condensed Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999...............................................2
Condensed Consolidated Statements of Operations -
three and nine months ended September 30, 1998 and 1999............................... 3
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 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.........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................18
Item 2. Changes in Securities.................................................................18
Item 3. Defaults Upon Senior Securities.......................................................18
Item 4. Submission of Matters to a Vote of Security Holders...................................19
Item 5. Other Information.....................................................................19
Item 6. Exhibits and Reports on Form 8-K......................................................19
Signatures.....................................................................................20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Coho Energy, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Coho Energy, Inc. and subsidiaries (debtor-in-possession) as of September 30,
1999 and the related condensed consolidated statements of operations for the
three month and nine month periods ended September 30, 1999 and the condensed
consolidated statement of cash flows for the nine month period ended September
30, 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 (debtor-in-possession).
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.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Coho Energy, Inc. and subsidiaries
(debtor-in-possession) as of December 31, 1998 (not presented herein), and, in
our report dated March 24, 1999, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1998, is fairly stated,
in all material respects, in relation to the balance sheet from which it has
been derived.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced recurring
losses from operations, has received notice of default from its lenders under
its existing bank credit facility and is in default under the terms of its
8 7/8% Senior Subordinated Notes, and projects negative cash flow from
operations in 1999. In addition, as described in Note 2 to the accompanying
financial statements, in August 1999 the Company filed a voluntary petition for
relief under Chapter 11 of the U.S. Bankruptcy Code. These matters, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters, including its
intent to file a plan of reorganization that will be acceptable to the Court and
the Company's creditors, are also described in Note 2. In the event a plan of
reorganization is accepted, continuation of the business thereafter is dependent
on the Company's ability to achieve successful future operations. The
accompanying 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
November 12, 1999
1
<PAGE> 4
COHO ENERGY, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31 SEPTEMBER 30
1998 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ........................................... $ 6,901 $ 10,138
Cash in escrow ...................................................... 1,505 77
Accounts receivable, principally trade .............................. 9,960 10,200
Other current assets ................................................ 948 1,684
--------- ---------
19,314 22,099
PROPERTY AND EQUIPMENT, at cost net of accumulated depletion and
depreciation, based on full cost accounting method (note 3) ......... 324,574 313,924
OTHER ASSETS ......................................................... 6,180 5,543
--------- ---------
$ 350,068 $ 341,566
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES
Accounts payable, principally trade ............................... $ 5,577 $ 549
Accrued liabilities and other payables ............................ 6,656 2,592
Accrued interest .................................................. 7,302 3,139
Accrued state income taxes payable ................................ 4,045 --
Current portion of long term debt (note 4) ........................ 384,031 --
--------- ---------
Total current liabilities ...................................... 407,611 6,280
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable, principally trade ............................... -- 4,235
Accrued liabilities and other payables ............................ -- 4,216
Accrued interest .................................................. -- 21,379
Accrued state income taxes payable ................................ -- 4,136
Current portion of long term debt (note 4) ........................ -- 388,685
--------- ---------
Total liabilities subject to compromise ........................ -- 422,651
407,611 428,931
--------- ---------
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 50,000,000 shares
Issued and outstanding 25,603,512 shares ......................... 256 256
Additional paid-in capital .......................................... 137,812 137,812
Retained deficit .................................................... (199,311) (229,133)
--------- ---------
Total shareholders' equity ..................................... (61,243) (91,065)
--------- ---------
$ 350,068 $ 341,566
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE> 5
COHO ENERGY, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Net crude oil and natural gas production ............. $ 16,539 $ 16,829 $ 55,829 $ 37,957
--------- --------- --------- ---------
OPERATING EXPENSES
Crude oil and natural gas production ................. 5,698 5,456 18,282 13,200
Taxes on oil and gas production ...................... 844 940 2,728 1,863
General and administrative (note 3) .................. 1,437 2,188 4,752 7,574
State income tax penalties ........................... -- 46 -- 1,048
Depletion and depreciation ........................... 7,216 3,441 22,235 10,213
Writedown of crude oil and natural gas properties .... -- 5,433 73,000 5,433
--------- --------- --------- ---------
Total operating expenses ......................... 15,195 17,504 120,997 39,331
--------- --------- --------- ---------
OPERATING INCOME (LOSS) ............................... 1,344 (675) (65,168) (1,374)
--------- --------- --------- ---------
OTHER INCOME AND EXPENSES
Interest and other income ............................ 50 55 168 241
Interest expense (note 4) ............................ (8,548) (9,229) (24,512) (26,030)
--------- --------- --------- ---------
(8,498) (9,174) (24,344) (25,789)
--------- --------- --------- ---------
LOSS FROM OPERATIONS BEFORE REORGANIZATION COSTS AND
INCOME TAXES ......................................... (7,154) (9,849) (89,512) (27,163)
REORGANIZATION COSTS .................................. -- 910 -- 2,685
--------- --------- --------- ---------
LOSS FROM OPERATIONS BEFORE INCOME TAXES .............. (7,154) (10,759) (89,512) (29,848)
INCOME TAX EXPENSE (BENEFIT) .......................... 14 (26) (18,432) (26)
--------- --------- --------- ---------
NET LOSS .............................................. $ (7,168) $ (10,733) $ (71,080) $ (29,822)
========= ========= ========= =========
BASIC LOSS PER COMMON SHARE (note 5) .................. $ (0.28) $ (0.41) $ (2.78) $ (1.16)
========= ========= ========= =========
DILUTED LOSS PER COMMON SHARE (note 5) ................ $ (0.28) $ (0.41) $ (2.78) $ (1.16)
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 6
COHO ENERGY, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................................... $(71,080) $(29,822)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depletion and depreciation ....................................................... 22,235 10,213
Writedown of crude oil and natural gas properties ................................ 73,000 5,433
Deferred income tax benefit ...................................................... (18,488) --
Amortization of debt issuance costs and other .................................... 633 679
Changes in operating assets and liabilities:
Accounts receivable and other assets ............................................. (6,855) 483
Accounts payable and accrued liabilities ......................................... 7,902 17,697
-------- --------
Net cash provided by operating activities ........................................... 7,347 4,683
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment ............................................................. (62,464) (4,995)
Changes in accounts payable and accrued liabilities related to
exploration and development ...................................................... (1,363) (1,031)
-------- --------
Net cash used in investing activities ............................................... (63,827) (6,026)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long term debt ......................................................... 54,585 4,600
Repayment of long term debt ........................................................ (33) (20)
-------- --------
Net cash provided by financing activities ........................................... 54,552 4,580
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ (1,928) 3,237
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................... 3,817 6,901
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................................... $ 1,889 $ 10,138
======== ========
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest ......................................................................... $ 16,364 $ 8,058
Income taxes ..................................................................... $ -- $ 33
Reorganization costs (includes prepayments) ...................................... $ -- $ 3,320
Reorganization receipts (interest income) ........................................ $ -- $ (30)
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 7
COHO ENERGY, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 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") and subsidiaries 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
with the exception of the adjustments to writedown the carrying value of the
crude oil and natural gas properties discussed in Note 3 below, 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 nine
month period ended September 30, 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. CHAPTER 11 BANKRUPTCY
On August 23, 1999 (the "Petition Date"), the Company and its wholly-owned
subsidiaries, Coho Resources, Inc., Coho Oil & Gas, Inc., Coho Exploration,
Inc., Coho Louisiana Production Company and Interstate Natural Gas Company,
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code (the "Chapter 11 filing") in the U.S. District Court for the Northern
District of Texas (the "Bankruptcy Court"). The Company is currently operating
as a debtor-in-possession subject to the Bankruptcy Court's supervision and
orders. Schedules were filed by the Company on September 21, 1999 with the
Bankruptcy Court setting forth the unaudited, and in some cases estimated,
assets and liabilities of the Company as of the date of the Chapter 11 filing,
as shown by the Company's accounting records.
The bankruptcy petitions were filed in order to facilitate the
restructuring of the Company's long term debt and to protect the Company while
it develops a solution to its capital needs with the banks, bondholders and
potential investors. See Note 4. The Company anticipates proposing a plan of
reorganization (the "Plan") in accordance with federal bankruptcy laws as
administered by the Bankruptcy Court. The Plan is expected to set forth the
means for satisfying claims, including liabilities subject to compromise, and
interests in the Company. The Plan may include the issuance of common stock in
exchange for debt of the Company, which could materially dilute the current
equity interests. The Company is currently negotiating with its secured and
unsecured creditors in an effort to reach a mutually acceptable Plan. The Plan
is expected to be voted on by the Company's creditors and shareholders entitled
to vote and will require approval of the Bankruptcy Court.
The ability of the Company to effect a successful reorganization will
depend, in significant part, upon the Company's ability to formulate a Plan that
is approved by the Bankruptcy Court and meets the standards for plan
confirmation under the U.S. Bankruptcy Code. At this time, it is not possible to
predict the outcome of the bankruptcy proceedings, in general, or the effect on
the business of the Company or on the interests of creditors or stockholders.
The Company believes, however, that it may not be possible to satisfy in full
all of the claims against the Company. As a result of the bankruptcy filing, all
of the Company's liabilities incurred prior to the Petition Date, including
secured debt, are subject to compromise. Pursuant to the Bankruptcy Code,
payment of these liabilities may not be made except pursuant to a Plan or
Bankruptcy Court approval.
5
<PAGE> 8
COHO ENERGY, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts (including $313.9
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 confirmation of a plan of reorganization, adequate sources of
capital and the ability to sustain positive results of operations and cash flows
sufficient to continue to explore for and develop oil and gas reserves. These
factors, among others, raise substantial doubt concerning the ability of the
Company to continue as a going concern.
As a result of the Chapter 11 filing, the Company has incurred and will
continue to incur significant costs for professional fees as the Plan is
developed. The Company has incurred approximately $2.7 million in reorganization
costs during the first nine months of 1999 which relate to professional fees for
consultants and attorneys assisting in the negotiations associated with
financing and reorganization alternatives, partially offset by interest income
earned since August 23, 1999 on accumulated cash.
The Chapter 11 filing included the Company's wholly-owned subsidiaries Coho
Resources, Inc., Coho Oil & Gas, Inc., Coho Exploration, Inc., Coho Louisiana
Production Company and Interstate Natural Gas Company. The following information
summarizes the combined results of operations for the Company and these
subsidiaries. This information has been prepared on the same basis as the
consolidated financial statements.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
------------------
<S> <C>
Current assets ................................... $ 21,439
Accounts receivable from affiliates .............. 3,017
Property and equipment ........................... 311,495
Other assets ..................................... 5,515
---------
Total assets ..................................... $ 341,466
=========
Current liabilities not subject to compromise .... $ 6,180
Liabilities subject to compromise ................ 422,651
Commitments and contingencies .................... 3,700
Shareholder's equity ............................. (91,065)
---------
$ 341,466
=========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Operating revenues .... $ 16,829 $ 37,957
Operating expenses .... $ 12,064 $ 33,888
Net loss .............. $(10,733) $(29,822)
</TABLE>
6
<PAGE> 9
COHO ENERGY, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31 September 30
1998 1999
------------- -------------
<S> <C> <C>
Crude oil and natural gas leases and rights including exploration,
development and equipment thereon, at cost ....................... $ 678,547 $ 683,542
Accumulated depletion and depreciation ............................... (353,973) (369,618)
------------- -------------
$ 324,574 $ 313,924
============= =============
</TABLE>
Overhead expenditures capitalized totaled $4,227,000 and $-0- for the nine
month periods ended September 30, 1998 and 1999, respectively. Such charges are
capitalized in accordance with the accounting policies of the Company. Due to
the cessation of exploration and development of crude oil and natural gas
reserves in 1998, all overhead expenditures incurred during 1999 have been
charged to general and administrative expense.
During the nine months ended September 30, 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
$56,193,000 at December 31, 1998 and September 30, 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.
In June 1999, the Company commenced drilling an exploratory well on its
Anaguid permit in Tunisia, North Africa pursuant to its obligation under the
permit. In September 1999, the Company tested the well and determined that the
well would not produce sufficient quantities of crude oil to justify further
completion work on the well. As a result, the Company has provided a writedown
of its Tunisian properties of $5.4 million during the third quarter of 1999.
Anadarko Tunisia Anaguid Company, one of the working interest owners in this
permit, will be assuming responsibility as operator and plans to continue
exploration of this permit. The Company's remaining carrying cost in this permit
is $2.3 million associated with geological and geophysical costs that will be
used for this continued exploration.
4. LONG-TERM DEBT
On February 22, 1999, the Company was informed by the lenders under the
Company's 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. The Company has received written notice from the lenders under the
Revolving Credit Facility that it is 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 was unable to pay the
second, third, fourth and fifth installments, which were due at the beginning of
April, May, June and July 1999, respectively, and has been unable to make
interest payments when due, although the Company has made aggregate interest
payments of $3.4 million during March, April, May and July 1999. As a result of
the payment defaults the lenders accelerated the full amount outstanding under
the Revolving Credit Facility. Advances under the Revolving Credit Facility and
the past due interest payments bear interest at the default interest rate of
prime plus 4%. On July
7
<PAGE> 10
COHO ENERGY, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
30, 1999, the lenders under the Revolving Credit Facility notified the Company
of an increase in the Company's borrowing base from $150 million to $170
million, thereby reducing the over advance position to $69.6 million. The
outstanding advances of $239.6 million as of September 30, 1999 have been
included in Liabilities Subject to Compromise as of September 30, 1999. The
total arrearage related to the installment payments due on the over advance and
past due interest was approximately $81.8 million as of September 30, 1999,
including approximately $12.2 million of past due interest ($3.1 million
included in Liabilities Not Subject to Compromise) and $69.6 million related to
installments due on the over advance.
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 September 30, 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 and currently is in default under the terms of the
Senior Notes Indenture (the "Indenture"). Under the Indenture, the trustee under
the Indenture by written notice to the Company, or the holders of at least 25%
in principal amount of the outstanding Senior Notes by written notice to the
trustee and the Company, 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. On May 19, 1999, the Company received a
written notice of acceleration from two holders of the Senior Notes, which own
in excess of 25% in principal amount of the outstanding Senior Notes. Both the
accelerated principal and the past due interest payment bore interest at the
default rate of 9.875% (1% in excess of the stated rate for the Senior Notes)
from the date of acceleration to the Petition Date. As a result of the Chapter
11 filing the Company has ceased accruing interest on unsecured debt, including
the Senior Notes. An additional $1.6 million of Senior Note interest expense
that would have been due on October 15, 1999 would have been recognized in the
third quarter of 1999 if the Company had not made its Chapter 11 filing. All
amounts outstanding under the Senior Notes as of September 30, 1999 have been
included in Liabilities Subject to Compromise.
5. EARNINGS PER SHARE
Basic earnings per share ("EPS") have been calculated based on the weighted
average number of shares outstanding for the three and nine month periods ended
September 30, 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 and nine month periods ended
September 30, 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. See Note 2 for further discussion on the potential
dilution of current equity interests.
8
<PAGE> 11
COHO ENERGY, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
On April 15, 1999, the Company was unable to make the $6.7 million interest
payment due to the holders of the Senior Notes, as discussed in Note 4. As a
result, on May 19, 1999 two of the holders of the Senior Notes filed a lawsuit
against the Company and each subsidiary of the Company that is a guarantor of
the Senior Notes.
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 and results of
operations.
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 the current year financial position and
results of operations.
On May 27, 1999, the Company filed a lawsuit against HM4 Coho L.P.("HM4")
and affiliated persons. The lawsuit alleges (1) breach of the written contract
terminated by HM4 in December 1998, (2) breach of the oral agreements reached
with HM4 on the restructured transaction in February 1999 and (3) promissory
estoppel. In the lawsuit, the Company seeks monetary damages of approximately
$500 million. The lawsuit is currently in the discovery stages. While the
Company believes that the lawsuit has merit and that the actions of HM4 in
December 1998 and February 1999 were the primary cause of the Company's current
liquidity crisis, there can be no assurance as to the outcome of this
litigation.
During June 1999, the Company extended its Anaguid permit in Tunisia, North
Africa through June 2001. The Company has a commitment to drill one additional
well during this two year period.
9
<PAGE> 12
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 88% of production revenues and natural gas sales
representing approximately 12% of production revenues during the nine months
ended September 30, 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
nine 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 10,311 BOE for
the nine months ended September 30, 1999 as compared to 18,495 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.
BANKRUPTCY PROCEEDINGS
On August 23, 1999 (the "Petition Date"), the Company and its wholly-owned
subsidiaries, Coho Resources, Inc., Coho Oil & Gas, Inc., Coho Exploration,
Inc., Coho Louisiana Production Company and Interstate Natural Gas Company,
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code (the "Chapter 11 filing") in the U.S. District Court for the Northern
District of Texas (the "Bankruptcy Court"). The Company is currently operating
as a debtor-in-possession subject to the Bankruptcy Court's supervision and
orders. Schedules were filed by the Company on September 21, 1999 with the
Bankruptcy Court setting forth the unaudited, and in some cases estimated,
assets and liabilities of the Company as of the date of the Chapter 11 filing,
as shown by the Company's accounting records.
The bankruptcy petitions were filed in order to facilitate the
restructuring of the Company's long term debt and to protect the Company while
it develops a solution to its capital needs with the banks, bondholders and
potential investors. The Company anticipates proposing a plan of reorganization
(the "Plan") in accordance with the federal bankruptcy laws as administered by
the Bankruptcy Court. The Plan is expected to set forth the means for satisfying
claims, including liabilities subject to compromise, and interests in the
Company. The Plan may include the issuance of common stock in exchange for debt
of the Company which could materially dilute the current equity interests. The
Company is currently negotiating with its secured and unsecured creditors in an
effort to reach a mutually acceptable Plan. The Plan is expected to be voted on
by the Company's creditors and shareholders entitled to vote and will require
approval of the Bankruptcy Court.
The ability of the Company to effect a successful reorganization will
depend, in significant part, upon the Company's ability to formulate a Plan that
is approved by the Bankruptcy Court and meets the standards for plan
confirmation under the U.S. Bankruptcy Code. At this time, it is not possible to
predict the outcome of the bankruptcy proceedings, in general, or the effect on
the business of the Company or on the interests of creditors or stockholders.
The Company believes, however, that it may not be possible to satisfy in full
all of the claims against the Company. As a result of the bankruptcy filing, all
of the Company's liabilities incurred prior to the Petition Date, including
secured debt, are subject to compromise. Pursuant to the Bankruptcy Code,
payment of these liabilities may not be made except pursuant to a Plan or
Bankruptcy Court approval.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts (including $313.9
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
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<PAGE> 13
to continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop oil and gas reserves. These factors, among others, raise substantial
doubt concerning the ability of the Company to continue as a going concern.
As a result of the Chapter 11 filing, the Company has incurred and will
continue to incur significant costs for professional fees as the Plan is
developed. The Company has incurred approximately $2.7 million in reorganization
costs during the first nine months of 1999 which relate to professional fees for
consultants and attorneys assisting in the negotiations associated with
financing and reorganization alternatives, partially offset by interest income
earned since August 23, 1999 on accumulated cash.
LIQUIDITY AND CAPITAL RESOURCES
Capital Sources. For the nine months ended September 30, 1999, cash flow
provided by operating activities was $4.7 million compared with cash flow
provided by operating activities of $7.3 million for the same period in 1998.
Operating revenues, net of lease operating expenses, production taxes and
general and administrative expenses, decreased $14.8 million during the first
nine months of 1999 from the first nine months of 1998, primarily due to a 44%
decline in production on a BOE basis between comparable periods, partially
offset by price increases between such comparable periods of 26% and 7% for
crude oil and natural gas, respectively. In addition, due to the cessation of
exploration and development of crude oil and natural gas reserves, no overhead
expenditures were capitalized during the first nine months of 1999 compared to
$4.2 million of capitalized overhead during the comparable period in 1998. The
Company also incurred costs totalling $3.7 million in 1999 related to state
income tax penalties and reorganization costs and additional interest expense of
$1.4 million in 1999 over 1998. Changes in operating assets and liabilities
provided $18.2 million of cash for operating activities for the nine months
ended September 30, 1999, compared to $1.0 million provided for the same period
in 1998, primarily due to increases in accrued interest payable, partially
offset by decreases in accrued capital expenditures and trade payables. See
"Results of Operations" for a discussion of operating results.
As discussed more fully under "Results of Operations," operating revenues
declined during 1998 and the first half 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 18,495 BOE per day during the first nine months
of 1998 to 10,311 BOE per day during the first nine months of 1999. This decline
is due to the sale of the Monroe field gas properties in December 1998, which
contributed approximately 2,776 BOE per day during the first nine months of
1998. Further, the Company experienced 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 and drilling activity during
the last five months of 1998 and the first four months of 1999 and the halting
of production on wells which were uneconomical due to depressed crude oil
prices. Due to the improvement in crude oil prices during the second and third
quarters of 1999, the Company started performing well repair work in May 1999 to
return some of the shut-in wells to production. During the period May 1999
through September 1999, the Company utilized $2.4 million of working capital to
perform such well repair work. The Company intends, subject to Bankruptcy Court
approval, to continue to use available working capital, if any, generated from
improved prices and improved production to fund further well repairs and some
well recompletions to stabilize production. Despite the recent rises in prices
and the recent repair work, the Company does not anticipate a significant
improvement in production over the production in the first nine months of 1999
until substantial additional funds are available for well repairs and additional
development activity.
Based on the September 1999 production level of approximately 11,000 BOE
per day and the average price received in September 1999 of approximately $19.93
per barrel of crude oil and $2.83 per Mcf of natural gas, the Company's
operating revenues are adequate to cover lease operating expenses, production
taxes, general and administrative expenses and current interest accruing on the
borrowings under the Revolving Credit Facility but are not sufficient to cover
past due interest on the Senior Notes or on the borrowings under the Revolving
Credit Facility.
Working capital, before Liabilities Subject to Compromise, was $15.8
million at September 30, 1999 compared to a working capital deficit of $383.3
million at December 31, 1998. The increase in working capital relates to several
factors. Cash balances on hand increased from $6.9 million at December 31, 1998
to $10.1 million at September 30, 1999. The increase in cash occurred as a
result of the Chapter 11 filing and reductions in spending pursuant to
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<PAGE> 14
limitations imposed by the Bankruptcy Court. Accounts receivable balances
increased as a result of higher crude oil and natural gas sales receivable,
partially offset by decreases in working interest receivables. Other current
assets increased primarily due to the payment of retainer fees to professionals
in association with the Company's Chapter 11 filing. Current liabilities
decreased from $407.6 million at December 31, 1998 to $6.3 million at September
30, 1999 primarily due to the reclassification of $422.7 million of prepetition
liabilities to Liabilities Subject to Compromise as a result of the Chapter 11
filing.
Subsequent to the Petition Date, the Company has filed three motions with
the Bankruptcy Court to seek the use of the bank group's cash collateral in
on-going operations. Since August 26, 1999, the Company has been operating under
three interim orders authorizing the use of cash collateral as approved by the
Bankruptcy Court. The Company is currently operating under the Third Interim
Cash Collateral Order Authorizing the Use of Cash Collateral which was approved
by the Bankruptcy Court on November 9, 1999. Pursuant to these orders, the
Company may pay for ordinary course of business goods and services incurred
after August 23, 1999 that are within the court approved budgets attached to
each order. Any expenditure that is outside the ordinary course of business or
that is not reflected in the approved budgets must be specifically authorized by
the Bankruptcy Court. The Company has accumulated, as of September 30, 1999,
$4.1 million in cash since the Petition Date that can be used for operations
pursuant to the terms of the cash collateral orders.
On February 22, 1999, the Company was informed by the lenders under the
Revolving Credit Facility that the Company's 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 and has received written notice from the lenders that
it is 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 was unable to pay the second, third, fourth
and fifth installments which were due at the beginning of April, May, June and
July 1999, respectively, and has been unable to make interest payments when due,
although the Company has made aggregate interest payments of approximately $3.4
million during March, April, May and July 1999. As a result of the payment
defaults, the lenders accelerated the full amount outstanding under the
Revolving Credit Facility. Advances under the Revolving Credit Facility and the
past due interest payments bear interest at the default interest rate of prime
plus 4%. On July 30, 1999, the lenders under the Revolving Credit Facility
notified the Company of an increase in the Company's borrowing base from $150
million to $170 million, thereby reducing the over advance position to $69.6
million. Due to the default, the outstanding advances of $239.6 million have
been included in Liabilities Subject to Compromise as of September 30, 1999. The
total arrearage related to the installment payments due on the over advance and
past due interest was approximately $81.8 million as of September 30, 1999,
including approximately $12.2 million of past due interest ($3.1 million
included in Liabilities Not Subject to Compromise) and $69.6 million related to
installments due on the over advance.
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 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 September 30, 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 and currently is in default
under the terms of the Senior Notes Indenture. Under the Indenture, the trustee
under the Indenture by written notice to the Company, or the holders of at least
25% in principal amount of the outstanding Senior Notes by written notice to the
trustee and the Company, 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. On May 19, 1999, the Company received a
written notice of acceleration from two
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<PAGE> 15
holders of the Senior Notes, which own in excess of 25% in principal amount of
the outstanding Senior Notes. Both the accelerated principal and the past due
interest payment bore interest at the default rate of 9.875% (1% in excess of
the stated rate for the Senior Notes) from the date of acceleration to the
Petition Date. As a result of the Chapter 11 filing the Company has ceased
accruing interest on unsecured debt, including the Senior Notes. An additional
$1.6 million of Senior Note interest expense that would have been due on October
15, 1999 would have been recognized in the third quarter of 1999 if the Company
had not made its Chapter 11 filing. All amounts outstanding under the Senior
Notes as of September 30, 1999 have been included in Liabilities Subject to
Compromise.
The Company did not pay approximately $4 million in Louisiana state income
taxes which were due on April 15, 1999, related to the gain on the December 1998
sale of the Monroe gas field. The past due taxes accrue a monthly penalty of 10%
not to exceed 25% of the taxes due. The maximum penalty of $1.0 million was
expensed during the second and third quarters of 1999.
Capital Expenditures. During the first nine months of 1999, the Company
incurred capital expenditures of $5.0 million compared with $62.5 million for
the first nine months of 1998. The Company has ceased substantially all of its
capital projects in 1999 due to its liquidity problems and the Chapter 11 filing
as discussed above. No general and administrative costs associated with the
Company's exploration and development activities were capitalized for the first
nine months of 1999, compared with $4.2 million of capitalized costs for the
first nine months of 1998.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Selected Operating Data
Production
Crude Oil (Bbl/day) .................. 14,271 9,190 14,501 9,054
Natural Gas (Mcf/day) ................ 23,310 6,744 23,966 7,547
BOE (Bbl/day) ........................ 18,156 10,314 18,495 10,311
Average Sales Prices
Crude Oil per Bbl .................... $ 9.67 $ 18.00 $ 10.81 $ 13.59
Natural Gas per Mcf .................. $ 1.79 $ 2.60 $ 1.99 $ 2.12
Other
Production costs per BOE (1) ......... $ 3.92 $ 6.74 $ 4.16 $ 5.35
Depletion per BOE .................... $ 4.32 $ 3.63 $ 4.40 $ 3.63
Production revenues (in thousands)
Crude Oil ............................ $12,690 $15,219 $42,785 $33,586
Natural Gas .......................... 3,849 1,610 13,044 4,370
------- ------- ------- -------
$16,539 $16,829 $55,829 $37,957
======= ======= ======= =======
</TABLE>
- ------------------------------
(1) Includes lease operating expenses and production taxes.
Operating Revenues. During the first nine months of 1999, production
revenues decreased 32% to $38.0 million as compared to $55.8 million for the
same period in 1998. This decrease was due to a 38% decrease in crude oil
production and a 69% decrease in natural gas production, partially offset by
increases in the prices received for crude oil and natural gas (including
hedging gains and losses discussed below) of 26% and 7%, respectively. For the
three
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<PAGE> 16
months ended September 30, 1999, production revenue increased 2% to $16.8
million as compared to $16.5 million for the same period in 1998. This increase
was principally due to increases in the prices received for crude oil and
natural gas (including hedging gains and losses discussed below) of 86% and 45%,
respectively, partially offset by a 36% decrease in crude oil production and a
71% decrease in natural gas production.
The 69% decrease in daily natural gas production during the first nine
months of 1999 is primarily due to the December 1998 sale of the Monroe field
gas properties which accounted for 69% of the Company's natural gas production
during the first nine months of 1998. The 38% decrease in daily crude oil
production during the first nine 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 during 1998, the Company significantly reduced both minor and major well
repairs and drilling activity on its operated properties during the last five
months of 1998, ceased all well repairs and drilling activity in December 1998
and halted production on wells which were uneconomical due to depressed crude
oil prices, all of which contributed to overall production declines. In response
to improved crude oil prices in the second quarter of 1999, since May 1999 the
Company has been utilizing working capital provided by operations to perform
well repair work to return some of the shut-in wells to production. The Company
intends, subject to Bankruptcy Court approval, to continue to use available
working capital, if any, generated from improved prices and improved production
to fund further well repairs and some well recompletions to stabilize
production. Despite the recent rises in prices and the recent repair work, the
Company does not anticipate a significant improvement in production over the
production in the first nine months of 1999 until substantial additional funds
are available for well repairs and additional development activity.
Average crude oil prices, including hedging gains and losses, increased 26%
during the first nine months of 1999 compared to the same period in 1998. Crude
oil prices increased 86% in the third quarter of 1999 as compared to the third
quarter of 1998, which offset the lower crude oil prices received in the first
quarter of 1999 as compared to the first quarter of 1998. During the first
quarter of 1999, substantially all of the Company's crude oil was sold under
contracts which were keyed off of posted crude oil prices. Beginning in April
1999, the Company entered into a new crude oil contract for substantially all of
its Oklahoma crude oil which is now keyed off of the New York Mercantile
Exchange ("NYMEX") price, which should result in a net increase in the Company's
realized price. The posted price for the Company's crude oil averaged $14.80 per
Bbl for the nine months ended September 30, 1999, a 24% increase from the
average posted price of $11.92 per Bbl experienced in the first nine months of
1998. The price per Bbl received by the Company is adjusted for the quality and
gravity of the crude oil and is generally lower than the posted price. The
Company's overall average crude oil prices per Bbl were $8.81, $14.21 and
$18.00, in the first, second and third quarters of 1999, respectively, which
represented discounts of 33%, 20% and 18% to the average NYMEX prices for such
quarters.
The realized price for the Company's natural gas, including hedging gains
and losses, increased 7% from $1.99 per Mcf in the first nine months of 1998 to
$2.12 per Mcf in the first nine months of 1999, due to an increase in demand.
Natural gas prices increased 45% in the third quarter of 1999 as compared to the
third quarter of 1998, which offset the lower gas prices received in the first
quarter of 1999 as compared to the first quarter of 1998.
Production revenues for the nine months ended September 30, 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 $488,000 ($0.10 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 West Texas
Intermediate ("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 September 30, 1999, the Company had 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 $15.1
million for the first nine months of 1999 compared to $21.0 million for the
first nine months of 1998 and $6.4 million for the third quarter of 1999
compared to $6.5 million for the same period in 1998. The decrease in expenses
for the comparable nine month periods is primarily due to decreased production
and decreased production taxes. The decrease in expenses for the comparable
three month periods is due to decreased production, partially offset by
increased production taxes. On a BOE basis, production costs
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<PAGE> 17
increased 29% to $5.35 per BOE in 1999 compared to $4.16 per BOE in 1998 for the
nine month periods and increased 72% to $6.74 per BOE in 1999 compared to $3.92
per BOE in 1998 for the three month periods. On a BOE basis, the 72% increase in
production costs over the third quarter of 1998 is primarily due to $2.4 million
of well repair work performed to return shut-in wells to production.
Additionally, on a BOE basis during the third quarter of 1999, severance taxes
increased 94% over the same period last year due to higher price realization.
The current well repair work represents an accumulation of projects because the
Company had ceased substantially all well repair work in December 1998 due to
depressed oil prices. Under normal operating conditions these costs would be
spread throughout the year and would not normally impact quarterly results as
significantly as when the costs are concentrated in a short period of time. The
Company intends, subject to Bankruptcy Court approval, to continue well repair
work in the fourth quarter of 1999 to stabilize production. In addition,
operating expenses are expected to remain high until all shut-in production has
been restored.
General and administrative costs increased $2.8 million or 59% between the
comparable nine month periods and increased $751,000 or 52% between the
comparable three month periods. These increases are primarily due to the
expensing of all salaries and other general and administrative costs associated
with exploration and development activities during the first nine months of 1999
as compared to the capitalization of $4.2 million of such costs in the first
nine months of 1998. General and administrative costs, excluding capitalization
of administrative costs associated with exploration and development activities,
decreased $1.4 million or 16% between the comparable nine month periods and
decreased $708,000 or 24% between the comparable three month periods. These
decreases are primarily due to cost reductions associated with the Monroe field
sale, reductions in estimated franchise tax accruals as a result of the
Company's losses in 1998, and reductions in professional fees and general
corporate costs, partially offset by decreases in cost recoveries from working
interest owners due to a decrease in well activity.
State income tax penalties of $1.0 million for the nine months ended
September 30, 1999 relate to approximately $4 million in Louisiana state income
taxes which were due on April 15, 1999, related to the gain on the December 1998
sale of the Monroe gas field. The past due taxes accrued the maximum penalty of
25% of the taxes due during the second and third quarters of 1999.
Reorganization costs of $2.7 million for the nine months ended September
30, 1999 relate to professional fees for consultants and attorneys assisting in
the negotiations associated with financing and reorganization alternatives and
are partially offset by interest income earned since the Petition Date on
accumulated cash.
Interest expense increased 6% for the nine month period ended September 30,
1999 compared to the same period in 1998 primarily as a result of higher
interest rates due to payment defaults and debt acceleration, partially offset
by the discontinuance of interest expense accruals on the Company's unsecured
debt. On August 24, 1999, the Company discontinued the accrual of interest on
unsecured debt as a result of the Chapter 11 filing. Approximately $1.7 million
of additional interest expense, including $1.6 million of Senior Note interest
that would have been due on October 15, 1999, would have been recognized by the
Company for the third quarter of 1999 if not for the discontinuation of such
interest expense accruals.
Depletion and depreciation expense decreased 54% to $10.2 million for the
nine months ended September 30, 1999 from $22.2 million for the comparable
period in 1998 and decreased 52% to $3.4 million for the three months ended
September 30, 1999 from $7.2 million for the comparable period in 1998. These
decreases are the result of decreased production volumes and decreased rates per
BOE, which decreased to $3.63 in 1999 from $4.40 for the comparable nine month
period in 1998 and decreased to $3.63 in 1999 from $4.32 for the comparable
three month period in 1998. The rates per BOE decreased substantially due to the
writedowns 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 and
June 30, 1998, the carrying values related to the United States properties
exceeded the cost center ceilings, resulting in non-cash writedowns of the crude
oil and natural gas properties of $32 million and $41 million, respectively.
These writedowns resulted from the declines in crude oil prices in the first and
second quarters of 1998. No such writedowns were required on the United States
properties at September 30, 1998, March 31, 1999, June 30, 1999 or September 30,
1999.
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<PAGE> 18
In June 1999, the Company commenced drilling an exploratory well on its
Anaguid permit in Tunisia, North Africa pursuant to its obligation under the
permit. In September 1999, the Company tested the well and determined that the
well would not produce sufficient quantities of crude oil to justify further
completion work on the well. As a result, the Company has provided a writedown
of its Tunisian properties of $5.4 million during the third quarter of 1999.
Anadarko Tunisia Anaguid Company, one of the working interest owners in this
permit, will be assuming responsibility as operator and plans to continue
exploration of this permit. The Company's remaining carrying cost in this permit
is $2.3 million associated with geological and geophysical costs that will be
used for this continued exploration.
Due to the factors discussed above, the Company's net losses for the three
and nine months ended September 30, 1999 were $10.7 million and $29.8 million,
respectively, as compared to net losses of $7.2 million and $71.1 million,
respectively, for the same periods in 1998. The 1999 losses include a third
quarter writedown of the Tunisian oil and natural gas properties of $5.4 million
and the 1998 losses include first and second quarter writedowns of the United
States crude oil and natural gas properties of $32 million and $41 million,
respectively.
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 implementation is in its final phase. Desktop computers in the
field are 100% compliant; however the field monitoring equipment in the
Company's Oklahoma division was found to be non-compliant. The program to update
the field monitoring equipment is currently in its implementation phase and the
Oklahoma division is expected to be compliant during the fourth quarter of 1999.
The Company estimates that it is 100% complete with its review and is 90%
complete with its remediation of field operational systems and expects to have
complete Year 2000 certification in this element during the fourth quarter of
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 70% complete with 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
during the fourth 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 during the fourth 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 issue 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
16
<PAGE> 19
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
the 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 DISCLOSURES 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 September 30, 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 September 30, 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 bank credit facility
borrowings 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 80 basis points) would be
approximately $1.9 million assuming outstanding debt of $239.6 million
throughout the year.
Total debt as of September 30, 1999, also included $149 million (net of
$900,000 of unamortized original issue discount) of fixed rate Senior Notes with
an estimated fair market value of $76.5 million based on quoted prices from
market sources.
The Company is in default under its bank credit facility and is in default
under its Senior Notes Indenture. See "Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations".
17
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 23, 1999, the Company and its wholly-owned subsidiaries, Coho
Resources, Inc., Coho Oil & Gas, Inc., Coho Exploration, Inc., Coho Louisiana
Production Company and Interstate Natural Gas Company, filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
District Court for the Northern District of Texas. The Company is currently
operating as a debtor-in-possession subject to the Bankruptcy Court's
supervision and orders. Schedules were filed by the Company on September 21,
1999 with the Bankruptcy Court setting forth the unaudited, and in some cases
estimated, assets and liabilities of the Company as of the date of the Chapter
11 filing, as shown by the Company's accounting records.
The bankruptcy petitions were filed in order to facilitate the
restructuring of the Company's long term debt and to protect the Company while
it develops a solution to its capital needs with the banks, bondholders and
potential investors. The Company anticipates proposing a Plan in accordance with
the federal bankruptcy laws as administered by the Bankruptcy Court. The Plan is
expected to set forth the means for satisfying claims, including liabilities
subject to compromise, and interests in the Company. The Plan may include the
issuance of common stock in exchange for debt of the Company which could
materially dilute the current equity interests. The Company is currently
negotiating with its secured and unsecured creditors in an effort to reach a
mutually acceptable Plan. The Plan is expected to be voted on by the Company's
creditors and shareholders entitled to vote and will require approval of the
Bankruptcy Court. See "Part I. Financial Information - Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
Bankruptcy Proceeding" and "Liquidity and Capital Resources."
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 Company's 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 and has received written notice from the lenders that
it is 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 was unable to pay the second, third, fourth
and fifth installments which were due at the beginning of April, May, June and
July 1999, respectively, and has been unable to make interest payments when due,
although the Company has made aggregate interest payments of approximately $3.4
million during March, April, May and July 1999. As a result of the payment
defaults, the lenders accelerated the full amount outstanding under the
Revolving Credit Facility. Advances under the Revolving Credit Facility and the
past due interest payments bear interest at the default interest rate of prime
lus 4%. On July 30, 1999, the lenders under the Revolving Credit Facility
notified the Company of an increase in the Company's borrowing base from $150
million to $170 million, thereby reducing the over advance position to $69.6
million. Due to the default, the outstanding advances of $239.6 million have
been included in Liabilities Subject to Compromise as of September 30, 1999. The
total arrearage related to the installment payments due on the over advance and
past due interest was approximately $81.8 million as of September 30, 1999,
including approximately $12.2 million of past due interest ($3.1 million
included in Liabilities Not Subject to Compromise) and $69.6 million related to
installments due on the over advance.
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 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.
18
<PAGE> 21
At September 30, 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 and currently is in default
under the terms of the Senior Notes Indenture. Under the Indenture, the trustee
under the Indenture by written notice to the Company, or the holders of at least
25% in principal amount of the outstanding Senior Notes by written notice to the
trustee and the Company, 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. On May 19, 1999, the Company received a
written notice of acceleration from two holders of the Senior Notes, which own
in excess of 25% in principal amount of the outstanding Senior Notes. Both the
accelerated principal and the past due interest payment bore interest at the
default rate of 9.875% (1% in excess of the stated rate for the Senior Notes)
from the date of acceleration to the Petition Date. As a result of the Chapter
11 filing the Company has ceased accruing interest on unsecured debt, including
the Senior Notes. An additional $1.6 million of Senior Note interest expense
that would have been due on October 15, 1999 would have been recognized in the
third quarter of 1999 if the Company had not made its Chapter 11 filing. All
amounts outstanding under the Senior Notes as of September 30, 1999 have been
included in Liabilities Subject to Compromise.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company has filed with the Securities and Exchange Commission a
Current Report on From 8-K dated October 5, 1999, related to the Company and its
wholly-owned subsidiaries, Coho Resources, Inc., Coho Oil & Gas, Inc., Coho
Exploration, Inc., Coho Louisiana Production Company and Interstate Natural Gas
Company filing a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code.
19
<PAGE> 22
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: November 12, 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)
20
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,215
<SECURITIES> 0
<RECEIVABLES> 10,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,099
<PP&E> 683,542
<DEPRECIATION> 369,618
<TOTAL-ASSETS> 341,566
<CURRENT-LIABILITIES> 6,280
<BONDS> 149,081
0
0
<COMMON> 256
<OTHER-SE> (91,321)
<TOTAL-LIABILITY-AND-EQUITY> 341,566
<SALES> 37,957
<TOTAL-REVENUES> 37,957
<CGS> 15,063
<TOTAL-COSTS> 33,898
<OTHER-EXPENSES> 8,118
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,789
<INCOME-PRETAX> (29,848)
<INCOME-TAX> (26)
<INCOME-CONTINUING> (29,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,822)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
