<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH , 2000
REGISTRATION STATEMENT NO. 333-96331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
COHO ENERGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
TEXAS 1311 75-2488635
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>
<TABLE>
<S> <C>
14785 PRESTON ROAD, SUITE 860 JEFFREY CLARKE,
DALLAS, TEXAS 75240 PRESIDENT AND CHIEF EXECUTIVE OFFICER
(972) 774-8300 14785 PRESTON ROAD, SUITE 860
(Address, Including Zip Code, and DALLAS, TEXAS 75240
Telephone Number, Including Area Code, (972) 774-8300
of Registrant's Principal Executive Offices) (Name, Address, Including Zip Code, and
Telephone Number, Including Area Code,
of Agent for Service)
</TABLE>
With a Copy to:
HARVA R. DOCKERY, ESQ.
FULBRIGHT & JAWORSKI L.L.P.
2200 ROSS AVENUE, SUITE 2800
DALLAS, TEXAS 75201
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE AMOUNT OF REGISTRATION FEE(2)
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<S> <C> <C>
Rights(1)............................ N/A None
Common Stock......................... $90,103,998 $23,788.00(3)
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</TABLE>
(1) Evidencing the rights to subscribe for Common Stock of the Registrant.
Pursuant to Rule 457(g), no separate registration fee is required for the
rights since they are being registered in the same registration statement as
the Common Stock underlying the rights.
(2) Calculated in accordance with Rule 457(o) based on the estimated maximum
offering price of the Common Stock.
(3) Of the total registration fee, $23,760.00 was paid with the filing of the
original registration statement. The balance accompanies the filing of this
Amendment No. 1.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS SUBJECT TO COMPLETION. DATED MARCH 24, 2000.
UP TO 8,663,846 SHARES
[COHO LOGO]
ENERGY, INC.
COMMON STOCK
---------------------
We are distributing to the holders of our existing common stock rights to
purchase up to an aggregate of 8,663,846 shares of our new common stock. The
total purchase price of the shares offered will be $90,103,998 if this offering
is fully subscribed. The rights are not transferable and will not be listed for
trading on any stock exchange.
If you owned common stock on March 6, 2000, the record date for this
offering, you will receive, at no cost, a right to buy 0.338 shares of new
common stock at a price of $10.40 per share for each share of common stock that
you owned on the record date. This right is called the basic subscription
privilege. If you decide to purchase all of the shares that you are eligible to
purchase under the basic subscription privilege, you may also offer to buy
additional shares of new common stock at the same subscription price per share.
This right is called the over-subscription privilege. We will round the number
of rights you receive to the nearest whole number.
The rights are exercisable beginning on the date of this prospectus. The
rights will expire if they are not exercised by 5:00 p.m., New York City time,
on April , 2000, the expected expiration date of the rights. If you wish to
participate in this offering, we recommend that you follow the instructions set
forth in this prospectus and that you submit all subscription documents and
payments to the subscription agent at least 10 days before the deadline. All
subscriptions will be held in escrow by our subscription agent, ChaseMellon
Shareholder Services, L.L.C., until accepted by us. We, in our sole discretion,
may extend the period for exercising the rights.
If the shares available under the rights are not fully subscribed by the
expiration date of the rights, we may offer the remaining available shares to
others for $10.40 per share.
This offering is an integral part of our plan of reorganization under
Chapter 11 of the Bankruptcy Code and is conditioned on the consummation of that
plan.
Our existing common stock is traded on Nasdaq's OTC Bulletin Board under the
symbol "COHO." On March 23, 2000, the closing price for the existing common
stock as quoted on the OTC Bulletin Board was $ 7/32 per share. We anticipate
that the new common stock will be quoted on the OTC Bulletin Board under the
symbol "COHO."
---------------------
INVESTING IN COHO NEW COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 7 BEFORE
PURCHASING ANY OF THE NEW COMMON STOCK.
---------------------
SUBSCRIPTION PRICE: $10.40 PER SHARE
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price....................................... $10.40 $90,103,998
Estimated Expenses.......................................... $ 0.06 $ 550,000
Net Proceeds to Coho........................................ $10.34 $89,553,998
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS PROSPECTUS IS MARCH , 2000.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE OFFERING.................... 1
PROSPECTUS SUMMARY.......................................... 4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.................. 5
SUMMARY HISTORICAL RESERVES AND OPERATING DATA.............. 7
RISK FACTORS................................................ 8
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 13
GLOSSARY.................................................... 14
THE OFFERING AND PLAN OF DISTRIBUTION....................... 16
USE OF PROCEEDS............................................. 23
DIVIDEND POLICY............................................. 23
PRICE RANGE OF EXISTING COMMON STOCK........................ 23
CAPITALIZATION.............................................. 25
SELECTED FINANCIAL DATA..................................... 27
THE PLAN OF REORGANIZATION.................................. 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 35
BUSINESS.................................................... 49
OIL AND GAS OPERATIONS...................................... 53
MANAGEMENT.................................................. 72
EXECUTIVE COMPENSATION...................................... 75
SECURITY OWNERSHIP OF PRINCIPAL BENEFICIAL OWNERS AND
MANAGEMENT................................................ 80
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 82
DESCRIPTION OF EXISTING INDEBTEDNESS........................ 83
DESCRIPTION OF OUR CAPITAL STOCK............................ 86
DILUTION.................................................... 89
LEGAL MATTERS............................................... 90
INDEPENDENT AUDITORS........................................ 90
ENGINEERS................................................... 90
WHERE YOU CAN FIND MORE INFORMATION......................... 91
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
i
<PAGE> 4
QUESTIONS AND ANSWERS ABOUT THE OFFERING
WHY ARE WE CONDUCTING THIS OFFERING?
We are conducting this offering to raise capital as part of a comprehensive
plan of reorganization under Chapter 11 of the Bankruptcy Code. Our plan of
reorganization is designed to provide us with additional financial flexibility
and to allow us to continue as a going concern. The offering is made to
shareholders as of the record date.
WHAT IS A RIGHTS OFFERING?
The rights offering is a distribution of rights on a pro rata basis to all
of our shareholders who hold shares of our common stock on March 6, 2000, the
record date. "Pro rata" means in proportion to the number of shares of our
existing common stock that you and the other shareholders hold on the record
date. We are distributing 0.338 rights for each share of our existing common
stock held on the record date. We will not issue any fractional rights, but
rather will round any fractional rights to the nearest whole number.
WHAT IS A RIGHT?
Each right entitles the shareholder to purchase one share of our new common
stock at a subscription price of $10.40 per share. Each right carries with it a
basic subscription privilege and an over-subscription privilege.
WHAT IS THE NEW COMMON STOCK?
Upon the effective date of confirmation of our plan of reorganization, we
will cancel our existing common stock and issue new common stock. Generally, the
new common stock will carry the same rights as the existing common stock, except
that holders of the new common stock will not have cumulative voting rights. See
the sections of this prospectus called "The Plan of Reorganization" and
"Description of Our Capital Stock" for more information regarding the new common
stock.
WHAT IS THE BASIC SUBSCRIPTION PRIVILEGE?
The basic subscription privilege of each right entitles you to purchase one
share of our new common stock for the subscription price.
WHAT IS THE OVER-SUBSCRIPTION PRIVILEGE?
The over-subscription privilege of each right entitles you, if you fully
exercise your basic subscription privilege, to subscribe to purchase additional
shares of new common stock at the same subscription price per share.
WHAT ARE THE LIMITATIONS ON THE OVER-SUBSCRIPTION PRIVILEGE?
We will be able to satisfy your exercise of the over-subscription privilege
only if other rights holders do not fully exercise their basic subscription
privileges. If sufficient shares of our new common stock are available, we will
honor the over-subscription requests in full. If over-subscription requests
exceed the number of shares which are available, we will allocate the available
shares pro rata among those rights holders who over-subscribed, based on the
number of shares purchased under the basic subscription privilege.
WHAT IS THE STANDBY LOAN?
If this offering is not fully subscribed, we will enter into a loan with
our bondholders and possibly others to borrow the balance of the proceeds not
received in this offering up to $70 million. This loan is also called the
standby loan, and the lenders are called the standby lenders, in this
prospectus.
1
<PAGE> 5
ARE THERE ANY ANTI-DILUTION PROTECTIONS?
Yes, there is limited anti-dilution protection for shares subscribed in
this offering. If this offering is not fully subscribed and we borrow funds
under the standby loan, we will issue additional shares of new common stock to
the lenders. The number of shares issued to those lenders will depend on the
amount borrowed under the standby loan. Shares issued under this offering will
not be diluted by shares issued under the standby loan. If the standby loan is
used, persons who receive shares under this offering will receive additional
shares to ensure that their percentage ownership of our new common stock issued
under this offering remains constant after taking into account shares issued
under the standby loan. Shares purchased in this offering will carry no other
anti-dilution protection if and when we issue more new common stock or other
securities in the future. For more information regarding anti-dilution
protection, see the section of this prospectus called "Dilution."
WHAT HAPPENS IF THE PLAN OF REORGANIZATION IS NOT CONSUMMATED?
If our plan of reorganization is not consummated, we may cancel the
offering or amend it, depending on the outcome of our Chapter 11 bankruptcy
proceedings.
WHEN WILL THE RIGHTS EXPIRE?
The rights will expire at 5:00 p.m., New York City time, on April , 2000,
unless we extend the time for exercise of the rights.
WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE OFFERING BUT MY SHARES ARE HELD
IN THE NAME OF MY BROKER OR A CUSTODIAN BANK?
If you hold shares of our existing common stock through a broker, dealer or
other nominee, we will ask your broker, dealer or nominee to notify you of the
offering. If you wish to exercise your rights, you will need to have your
broker, dealer or nominee act for you. To indicate your decision with respect to
your rights, you should complete and return to your broker, dealer or nominee
the form entitled "Beneficial Owner Election Form," together with your check for
the subscription price of the rights you wish to exercise. You should receive
this form from your broker, dealer or nominee with the other offering materials.
WILL I BE CHARGED A COMMISSION OR FEE IF I EXERCISE MY RIGHTS?
No. We will not charge a brokerage commission or a fee to rights holders
for exercising their rights. However, if you exercise your rights through a
broker or nominee, you will be responsible for any fees charged by your broker
or nominee.
ARE THERE ANY CONDITIONS TO EXERCISING MY RIGHTS?
Yes. The exercise of your rights is subject to the conditions described
under the heading "The Offering and Plan of Distribution -- Conditions to the
Offering" in this prospectus.
MAY I SELL OR TRANSFER MY RIGHTS IF I DO NOT WANT TO PURCHASE ANY SHARES?
No. The rights are not transferable and may not be sold.
WILL I BE ABLE TO TRADE MY RIGHTS ON NASDAQ?
No. The rights will not be listed for trading on Nasdaq or any other stock
exchange.
AM I REQUIRED TO SUBSCRIBE IN THE OFFERING?
No.
2
<PAGE> 6
IF I EXERCISE RIGHTS IN THE OFFERING, MAY I CANCEL OR CHANGE MY DECISION?
No. All exercises of rights are irrevocable unless the conditions to
completion of this offering are not satisfied or waived before the subscription
period ends. In that case, we may extend the subscription period and you will be
able to change your decision.
IF THE OFFERING IS NOT COMPLETED, WILL MY SUBSCRIPTION PAYMENT BE REFUNDED TO
ME?
Yes. The subscription agent will hold all funds it receives in escrow until
the offering is completed or terminated. If the offering is not completed, the
subscription agent will return all subscription payments promptly, without
interest or deduction.
IS PARTICIPATION IN THE OFFERING RECOMMENDED?
We and the subscription agent are not making any recommendations as to
whether or not you should exercise your rights or participate in the offering.
You should decide whether to subscribe for our new common stock based on your
own assessment of your best interests in consultation with your financial and
legal advisors.
WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS?
If you have questions or need assistance, please contact ChaseMellon
Shareholder Services, L.L.C., the subscription agent for the offering,
at .
Banks and brokerage firms please call (800) .
For a more complete description of this offering, see the section of this
prospectus called "The Offering and Plan of Distribution".
3
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus. This
summary does not contain all of the important information that you should
consider before exercising the rights and investing in our new common stock. You
should read the entire prospectus carefully, including the section called "Risk
Factors" and the financial data and related notes, before making an investment
decision. The terms "Coho," "our," "us" and "we" as used in this prospectus
refer to Coho Energy, Inc. and its consolidated subsidiaries, unless we indicate
otherwise or the context otherwise requires. Additional definitions related to
oil and gas terms are located in the section of this prospectus called
"Glossary."
COHO ENERGY, INC.
We are an independent energy company engaged, through our wholly owned
subsidiaries, in the development and production of, and exploration for, crude
oil and natural gas. Our operations are concentrated principally in the U.S.
Gulf Coast and Mid-Continent regions, including Mississippi, Oklahoma and Texas.
At December 31, 1999, our total proved reserves were 113.9 MMBOE, of which
approximately 94% were comprised of crude oil and approximately 69% were proved
developed. The present value of estimated future net cash flows, before income
taxes, of proved crude oil and natural gas reserves, discounted at an assumed
rate of 10%, was $790.2 million. We also have substantial exploitation reserve
growth opportunities, including recompletions, drilling and waterflood projects.
Additionally, we have exploration and exploitation reserve growth opportunities
associated with our 3-D seismic databases in Mississippi and Oklahoma within the
geographical confines of our existing fields. Of the 21 major producing
properties in which operations are conducted, we operate 17 and own an average
working interest of approximately 77% in these operated properties. Our
significant control of operations and geographic focus have resulted in
substantial operating economies of scale that have enabled us to maintain a low
cost structure.
Our strategy is to maximize production and increase reserves through
- relatively low-risk activities such as development and delineation
drilling, multi-zone completions, recompletions, enhancement of
production facilities and secondary recovery projects;
- use of 3-D seismic and other technologies to identify exploration
projects and to identify reserves;
- acquisition of controlling interests in underdeveloped crude oil and
natural gas properties; and
- significant control of operations.
Our executive offices are located at 14785 Preston Road, Suite 860, Dallas,
Texas 75240, and our telephone number is (972) 774-8300.
RECENT DEVELOPMENTS
On November 30, 1999, we filed our plan of reorganization with the United
States Bankruptcy Court for the Northern District of Texas. At a hearing on
February 4, 2000, the bankruptcy court approved our disclosure statement with
respect to the plan of reorganization. In that hearing, the bankruptcy court
also scheduled a confirmation hearing to consider the plan of reorganization for
March 15, 2000. On February 14, 2000, we and the Official Committee of Unsecured
Creditors jointly filed the Debtors' and Creditors Committee's First Amended and
Restated Chapter 11 Plan of Reorganization to reflect the matters contained in
the approved disclosure statement. On February 15, 2000, we filed the approved
disclosure statement with the bankruptcy court and on February 14, 2000, we
began mailing it to holders of claims and equity interests for voting on our
plan of reorganization.
Following the February 4 hearing, we began the process of soliciting
acceptances and rejections to our plan of reorganization by means of our
disclosure statement. In response to those solicitation efforts, we obtained
approval of our plan of reorganization by a majority of our creditors in each
class entitled to submit a ballot to accept or reject our plan of
reorganization. We proceeded to seek confirmation of our plan of reorganization
by the bankruptcy court on March 15, 2000, and on March 20, 2000, the bankruptcy
court entered a confirmation order confirming our plan of reorganization. If no
objections are filed, the effective date of confirmation of our plan of
reorganization will be March 31, 2000.
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Our summary historical consolidated financial information presented below
has been derived from our audited consolidated financial statements for each of
the years in the three-year period ended December 31, 1999. Additionally, the
December 31, 1999 balance sheet data has been adjusted for the following
circumstances.
- to give pro forma effect for projected operating results through March
31, 2000, the assumed effective date of our plan of reorganization;
- to give pro forma effect to the effectiveness of our plan of
reorganization assuming that all of the rights are exercised in the
offering, excluding the additional 10,000 shares of new common stock we
are registering in this prospectus to account for the effects of the
rounding of rights being granted to the shareholders;
- to give pro forma effect to the effectiveness of our plan of
reorganization assuming 50% of the rights are exercised in the offering,
excluding the additional 10,000 shares of new common stock we are
registering in this prospectus to account for the effects of the rounding
of rights being granted to the shareholders, and assuming $45 million is
borrowed under the standby loan; and
- to give pro forma effect to the effectiveness of the plan of
reorganization assuming that none of the rights are exercised in the
offering and $70 million is borrowed under the standby loan.
This information should be read in conjunction with the other information
contained under the captions "Capitalization," "Selected Financial Data," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in conjunction with our consolidated financial statements and
related notes to those financial statements included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
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<S> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Operating revenues........................................ $63,130 $ 68,759 $ 57,323
Operating expenses........................................ 15,970 26,859 21,155
General and administrative expenses....................... 7,163 7,750 9,905(1)
Reorganization costs...................................... -- -- 3,123
Depletion and depreciation................................ 19,214 28,135 13,702
Writedown of crude oil and natural gas properties......... -- 188,000 5,433
Net interest expense...................................... 10,474 32,721 33,698
Other expense............................................. -- 3,023 1,048
Income tax expense (benefit).............................. 4,021 (14,383) (26)
Net earnings (loss)....................................... 6,288 (203,346) (30,715)
Basic earnings (loss) per common share.................... 0.29 (7.94) (1.20)
Diluted earnings (loss) per common share.................. 0.28 (7.94) (1.20)
OTHER FINANCIAL DATA:
Capital expenditures...................................... $72,667 $ 70,143 $ 6,349
EBITDA(2)................................................. 39,997 31,127 22,093
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA PRO FORMA PURCHASE OF PURCHASE OF
IMMEDIATELY PURCHASE OF 50% OF SHARES NO SHARES IN
AS OF PRIOR TO ALL SHARES IN OFFERING AND OFFERING AND
DECEMBER 31, EFFECTIVENESS PURSUANT $45 MILLION $70 MILLION
1999 OF THE PLAN TO OFFERING STANDBY LOAN STANDBY LOAN
------------ ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(3)............ $(407,490) $(407,237) $ 8,415 $ 5,640 $ 5,965
Net property and equipment.............. 311,788 311,436 311,436 311,436 311,436
Total assets............................ 348,801 347,078 336,118 354,146 359,617
Long-term debt, excluding current
portion............................... -- -- 172,000 220,208 265,208
Total shareholders' equity.............. (91,958) (92,058) 146,755 120,783 81,254
</TABLE>
5
<PAGE> 9
- ---------------
(1) General and administrative expenses for the year ended December 31, 1999
were substantially higher than those expenses for 1998 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 $5.7 million of those costs in the year
ended December 31, 1998.
(2) "EBITDA" refers to earnings before interest, taxes, depreciation, depletion
and amortization. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flow as determined in accordance
with generally accepted accounting principles as an indicator of our
operating performance or liquidity.
(3) Working capital (deficit) amounts for 1998 and 1999 include $384,031 and
$388,685, respectively, related to the current portion of long-term debt.
6
<PAGE> 10
SUMMARY HISTORICAL RESERVES AND OPERATING DATA
The following table sets forth summary information with respect to our
estimated proved crude oil and natural gas reserves and our operations as of the
dates or for the periods indicated. For more information regarding our reserves
and our operations, see the section of this prospectus called "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes to those financial
statements included in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1997 1998 1999
---------- -------- ----------
<S> <C> <C> <C>
PROVED RESERVES:
Crude oil and condensate (Mbbls)............................ 95,084 100,004 107,113
Natural gas (Mmcf).......................................... 147,505 66,328 40,638
Total (MBOE)...................................... 119,668 111,059 113,886
Estimated future net cash flows (before income tax, in
thousands)................................................ $1,043,516 $549,018 $1,784,368
Present value of proved reserves (in thousands)............. $ 526,277 $269,298 $ 790,154
Proved developed reserves as a percent of total reserves.... 70% 67% 69%
</TABLE>
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
PRODUCTION VOLUMES:
Crude oil and condensate (Mbbls)............................ 2,820 5,069 3,343
Natural gas (Mmcf).......................................... 7,666 8,124 2,608
Total (MBOE)...................................... 4,098 6,424 3,778
AVERAGE SALES PRICE PER UNIT:
Crude oil and condensate (per Bbl).......................... $16.31 $10.40 $15.40
Natural gas (per Mcf)....................................... 2.23 1.98 2.24
PER BOE DATA:
Average sales price......................................... $15.41 $10.70 $15.17
Production expenses......................................... 3.90 4.18 5.60
</TABLE>
7
<PAGE> 11
RISK FACTORS
An investment in our new common stock is extremely risky. You should
carefully consider the following factors, together with the other information
contained in this prospectus, before deciding to exercise your rights. An
investment in our new common stock involves a high degree of risk and may not be
appropriate for investors who cannot afford to lose their entire investment.
RISK FACTORS RELATING TO OUR BUSINESS
THE BANKRUPTCY COURT MAY NOT ALLOW US TO EMERGE FROM BANKRUPTCY UNDER OUR
CURRENT PLAN OF REORGANIZATION.
We filed for reorganization under Chapter 11 of the United States
Bankruptcy Code on August 23, 1999. Our plan of reorganization was confirmed by
the bankruptcy court on March 20, 2000. If no objections are filed, the
effective date of confirmation of our plan of reorganization will be March 31,
2000. While we believe that our plan of reorganization offers the best
alternative currently available to the holders of our equity and claims, there
can be no assurance that there will be no objections to confirmation or that our
plan of reorganization will become effective on March 31, 2000.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
The independent auditor's report on our financial statements is qualified
with respect to our ability to continue as a going concern. Specifically, the
report notes that we have had recurring losses, we have defaulted on our
existing bank credit facility, and that we have had negative cash flow from
operations in 1999. The financial statements included in this prospectus have
been prepared assuming we will continue as a going concern, though that
assumption may not necessarily be true. See the section of this prospectus
called "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 2 to our consolidated financial statements included in
this prospectus for more information regarding our ability to continue as a
going concern.
THE BANKRUPTCY MAY HAVE CREATED A NEGATIVE IMAGE OF US.
The effect, if any, which our plan of reorganization may have on our
operations after it is confirmed and consummated cannot be accurately predicted
or quantified. We believe that the consummation of our plan of reorganization
will have a minimal future effect on our relationships with our customers,
employees and suppliers. Our plan of reorganization was confirmed by the order
of the bankruptcy court entered on March 20, 2000, but if consummation of our
plan of reorganization does not occur expeditiously, our relationships with our
customers, employees and suppliers could be adversely effected. Even an
expedited consummation of our plan of reorganization could have a detrimental
impact on future sales and patronage because of the negative image of us that
may have been created by the bankruptcy.
OUR LEVEL OF DEBT MAY NOT ALLOW US PROPERLY TO PLAN FOR FUTURE OPPORTUNITIES
OR TO COMPETE EFFECTIVELY.
After the consummation of our plan of reorganization, we will have a
significant amount of indebtedness. Assuming the completion of the purchase of
all shares of new common stock under the offering, our total consolidated
indebtedness would be $172 million and the ratio of total consolidated
indebtedness to total capitalization would be 54%. Our high level of
indebtedness will have several important effects on our future operations,
including:
- requiring us to devote a substantial portion of our cash flow from
operations to pay interest on our indebtedness and not for other uses,
such as funding working capital or capital expenditures;
- limiting our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes;
- putting us at a competitive disadvantage to our competitors who have less
debt than us; and
- limiting our flexibility to plan for, or to react to, changes in our
business and the industry in which we operate.
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In addition, to the extent the offering is not successful or only partially
successful, the standby loan or other alternative means of financing may
increase our level of debt even further.
Please refer to the section of this prospectus called "The Plan of
Reorganization -- The New Debt and Equity" for a description of our new
indebtedness after consummation of our plan of reorganization and to the section
of this prospectus called "Use of Proceeds" for information regarding the
refinancing of our current indebtedness.
LIQUIDITY CONSTRAINTS MAY HINDER OUR CONTINUED OIL AND GAS OPERATIONS.
We have historically funded our operations primarily through our cash flow
from operations and borrowings under an existing credit facility and other
credit sources. Due to our need to conserve capital, we have reduced maintenance
of our wells, which has substantially reduced our cash flow from operations.
Upon consummation of our plan of reorganization, we anticipate our principal
sources of liquidity during the next 12 months will be cash on hand, including
the net proceeds of the offering and the standby loan, and cash generated by
operations. For more information regarding our liquidity constraints, see the
sections of this prospectus called "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Description of Existing Indebtedness" and our consolidated
financial statements and the related notes included in this prospectus.
If our plan of reorganization is consummated, our ability to raise funds
through additional indebtedness could be limited by the terms of our plan of
reorganization. Additionally, substantially all of our crude oil and natural gas
properties will be subject to a lien for the benefit of the lenders under the
new credit facility, further limiting our ability to incur additional
indebtedness. We may also choose to issue equity securities or sell assets to
fund our operations, although the terms of our new indebtedness could limit our
use of the proceeds of any sale of assets. For a description of these
limitations, see the section of this prospectus called "The Plan of
Reorganization -- The New Debt and Equity." If we elect to raise additional
capital by issuing equity securities, there can be no assurance that we will be
able to obtain equity financing on satisfactory terms.
PAST SUBSTANTIAL NET LOSSES MAY AFFECT FUTURE OPERATIONS.
We experienced a substantial loss for the year ended December 31, 1998 of
$203.3 million and for the year ended December 31, 1999 of $30.7 million. There
can be no assurances that we will become profitable in the future. For more
information regarding our losses, see the section of this prospectus called
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
included in this prospectus.
WE MAY NOT BE ABLE TO REPLACE DEPLETED RESERVES THAT ARE NECESSARY TO CONTINUE
OUR PRODUCTION.
The rate of production from crude oil and natural gas properties declines
as reserves are depleted. Except to the extent we acquire additional properties
containing proved reserves, or conduct successful exploration and development
activities or, through engineering studies, identify additional formations with
primary or secondary reserve opportunities on our own properties, our proved
reserves will decline as reserves are produced. Future crude oil and natural gas
production is therefore highly dependent on our level of success in finding and
acquiring additional reserves. Our ability to continue acquiring producing
properties or companies that own producing properties assumes that major
integrated oil companies and independent oil companies will continue to divest
many of their crude oil and natural gas properties. There can be no assurance
that these divestitures will continue or that we will be able to acquire
producing properties at acceptable prices. Our ability to develop additional
reserves in the future will be limited by the terms of the new credit facility
and the standby loan, each of which limits our ability to obtain additional
financing in the future for acquisitions and capital expenditures.
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OUR PROFITABILITY IS HIGHLY DEPENDENT ON INDUSTRY CONDITIONS THAT HAVE, IN THE
PAST, CAUSED US TO IMPLEMENT SIGNIFICANT WRITEDOWNS OF OUR ASSETS.
Our revenue, profitability and future rate of growth substantially depend
on prevailing prices for crude oil and natural gas. Crude oil and natural gas
prices can be extremely volatile and in recent times have been depressed by
excess total domestic and imported supplies. Prices are also affected by actions
of state and local agencies, the United States and foreign governments and
international cartels. Prices for crude oil and natural gas have recently
rebounded from historic lows on an inflation-adjusted basis. There can be no
assurance that commodity prices will rise or will not return to historic lows.
These external factors and the volatile nature of the energy markets make it
difficult to estimate future prices of crude oil and natural gas. The
substantial and extended decline in the prices of crude oil and natural gas,
until recently, adversely affected our financial condition and the results of
our operations, including reduced cash flow and borrowing capacity, which has
not been overcome by the most recent price rebound. All of these factors are
beyond our control.
We periodically review the carrying value of our crude oil and natural gas
properties under the full cost accounting rules of the Commission. Under these
rules, capitalized costs of proved oil and natural gas properties may not exceed
a present value, based on flat prices at a single point in time, of estimated
future net revenues from proved reserves, discounted at 10%. Application of the
ceiling test generally requires pricing future revenue at the unescalated prices
in effect as of the end of each fiscal quarter and requires a write-down for
accounting purposes if the ceiling is exceeded. We were required to write down
the carrying value of our crude oil and natural gas properties during 1998 by an
aggregate of $188 million. We took a write-down of our Tunisian properties of
$5.4 million during the third quarter of 1999 once it was determined that an
exploratory well drilled in Tunisia, North Africa would not produce sufficient
quantities of crude oil to justify further completion work on the well. When a
write-down is required, it results in a charge to earnings, but does not affect
cash flow from operating activities. Once incurred, a write-down of crude oil
and natural gas properties is not reversible at a later date.
WE RELY ON ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUE INFORMATION
THAT ARE SUBJECT TO MANY FACTORS AND ANY NEGATIVE VARIANCE IN THESE ESTIMATES
COULD AFFECT OUR REPORTED ASSETS AND OUR ABILITY TO BORROW FUNDS.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond our control. The reserve
data included in this prospectus represent only estimates. In addition, the
estimates of future net revenue from proved reserves and their present value are
based on assumptions about future production levels, prices and costs that may
not prove to be correct over time. In particular, estimates of crude oil and
natural gas reserves, future net revenue from proved reserves and the present
value of proved reserves for the crude oil and natural gas properties described
in this prospectus are based on the assumption that future crude oil and natural
gas prices remain the same as crude oil and natural gas prices at December 31,
1999. The NYMEX prices as of December 31, 1999, used for purposes of our
estimates were $25.60 per Bbl of crude oil and $2.33 per Mcf of natural gas. Any
significant variance in actual results from these assumptions could also
materially affect the estimated quantity and value of our reserves.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST MAJOR OIL COMPANIES AND OTHER
INDEPENDENT OPERATORS, WE MAY BE UNABLE TO OBTAIN NECESSARY MATERIALS AND
RESOURCES AND MAY EXPERIENCE A SIGNIFICANT DISRUPTION OF OUR OPERATIONS.
We encounter strong competition from major oil companies and independent
operators in acquiring properties and leases for the exploration for, and
production of, crude oil and natural gas. Competition is particularly intense
with respect to the acquisition of desirable undeveloped crude oil and natural
gas properties. Many of our competitors have financial resources, staff and
facilities substantially greater than ours. Although we believe our current
operating and financial resources will be adequate to preclude any
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significant disruption of our operations in the immediate future if our plan of
reorganization is consummated, the continued availability of these materials and
resources to us cannot be assured.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION THAT MAY HINDER OUR
ABILITY TO CONDUCT OUR BUSINESS.
Our business is subject to federal, state, provincial and local laws and
regulations relating to the exploration for and development, production and
marketing of crude oil and natural gas, as well as environmental and safety
matters. These laws and regulations have generally become more stringent in
recent years, often imposing greater liability on a larger number of potentially
responsible parties. Because the requirements imposed by these laws and
regulations are frequently changed, we are unable to predict the ultimate cost
of compliance with these requirements. There is no assurance that laws and
regulations enacted in the future will not hinder our ability to conduct our
business. For more information regarding regulations that affect us, see the
sections of this prospectus called "Oil and Gas Operations -- Governmental
Regulations" and "Oil and Gas Operations -- Environmental Regulations."
WE HAVE A HIGH LEVEL OF DEPENDENCE ON TWO CUSTOMERS THAT CAN DIRECTLY AFFECT
OUR INCOME STATEMENT.
During 1999, two purchasers of our crude oil and natural gas, EOTT Energy
Operating Limited Partnership and Amoco Production Company, accounted for 39%
and 41%, respectively, of our revenues. While we believe that our relationships
with EOTT and Amoco are good, any loss of revenue from these customers due to
nonpayment by the customer would have an adverse effect on our net income and
earnings per share on our income statement and, ultimately, may affect our share
price. In addition, any significant late payment may adversely affect our short
term liquidity position.
RISK FACTORS RELATING TO THE OFFERING AND OUR NEW COMMON STOCK
SHAREHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS WILL EXPERIENCE DILUTION.
The offering may result in our issuance of up to an additional 8,663,846
shares of our new common stock, assuming full exercise of the rights. If you
choose not to fully exercise your rights, your relative ownership interests will
be diluted. If you do not exercise your rights, you will relinquish any value
inherent in the rights.
YOU MAY NOT REVOKE YOUR EXERCISE OF RIGHTS AND THE OFFERING MAY NOT BE
COMPLETED.
Once you exercise your rights, you may not revoke the exercise unless the
conditions to our obligations to complete the offering are not satisfied or
waived before the subscription period ends. In that case, we may extend the date
the rights expire. If we extend the termination date of the rights, you will be
able to change your decision. If we elect to withdraw or terminate the offering,
neither we nor the subscription agent will have any obligation with respect to
the rights except to return to you any subscription payments, without interest
or deduction.
THE SUBSCRIPTION PRICE MAY NOT REFLECT THE VALUE OF OUR SHARES.
The subscription price does not necessarily bear any relationship to the
book value of our assets, historic or future cash flows, financial condition,
recent or historic prices for our existing common stock or other established
criteria for valuation. You should not consider the subscription price as an
indication of the value of our shares. See the section of this prospectus called
"The Offering and Plan of Distribution -- Determination of Subscription Price"
for further detail regarding the way in which the subscription price was
determined.
THE ANTITAKEOVER EFFECTS OF SOME OF THE PROVISIONS OF OUR GOVERNING DOCUMENTS
MAY PREVENT SOME TRANSACTIONS.
If our plan of reorganization is consummated, some of the provisions of our
amended and restated articles of incorporation and amended and restated bylaws
may tend to deter potential unsolicited offers or
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other efforts to obtain control that are not approved by our board of directors.
These provisions include the right of our board of directors, without any action
by our shareholders, to fix the rights and preferences of undesignated preferred
stock, including dividend, liquidation and voting rights. All of these
provisions will apply to the new common stock, and may have the effect of
delaying, deferring or preventing a change of control.
IF OUR NEW COMMON STOCK IS NOT LISTED ON NASDAQ OR ANY OTHER STOCK EXCHANGE,
THE PRICE OF THE NEW COMMON STOCK MAY BE DEPRESSED AND YOU MAY HAVE
DIFFICULTIES RESELLING THE STOCK.
We intend to explore the possibility of listing the new common stock on
Nasdaq or on one or more other national securities exchanges upon the effective
date of confirmation of our plan of reorganization. However, there can be no
assurance that we will determine that it is feasible, practicable or advisable
to list the new common stock or that, if an application is made, that the new
common stock would be approved for listing. Our inability to secure the listing
of the new common stock or the decision not to list the new common stock will
affect the liquidity and marketability of the new common stock. Whether or not
the new common stock is approved for listing on Nasdaq or any other national
securities exchange, the new common stock may trade in the over-the-counter
market. Even if the new common stock is approved for listing on Nasdaq or any
other national securities exchange, there can be no assurance as to the price as
to which any shares of the new common stock may be traded when issued or that an
established market for those securities will develop.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of historical facts, included in this
prospectus that address activities, events or developments that we expect,
project, believe or anticipate will or may occur in the future, including:
- the progression of our bankruptcy proceedings,
- crude oil and natural gas reserves,
- future acquisitions,
- future drilling and operations,
- future capital expenditures,
- future production of crude oil and natural gas, and
- future net cash flow
are forward-looking statements. These statements are based on assumptions and
analyses made by us in light of our experience and our perception of historical
trends, current conditions, expected future developments and other factors we
believe are appropriate in the circumstances. These types of statements are
subject to a number of assumptions, risks and uncertainties, including those
related to:
- our bankruptcy proceedings,
- competition,
- general economic and business conditions,
- prices of crude oil and natural gas,
- the business opportunities, or lack thereof, that may be presented to and
pursued by us,
- changes in laws or regulations, and
- the other factors discussed above under the heading "Risk Factors" in
this prospectus.
These types of statements are not guarantees of future performance and
actual results or developments may differ materially from those projected in the
forward-looking statements. You should not rely on this information as an
estimate or prediction of future performance.
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GLOSSARY
Unless otherwise indicated, natural gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located at 60
degrees Fahrenheit. The following definitions apply to the technical terms used
in this prospectus:
"2-D seismic" means an interpretive data set that allows a view of a
vertical cross-section beneath a prospective area.
"3-D seismic" means an interpretive data set that allows a view of a
vertical cross-section as well as a horizontal cross-section beneath a
prospective area.
"Bbls" means barrels of crude oil, condensate or natural gas liquids, and
its equivalent to 42 U.S. gallons.
"Bcf" means billions of cubic feet.
"BOE" means barrel of oil equivalent, assuming a ratio of six Mcf to one
Bbl.
"BOPD" means Bbls per day.
"Developed acreage" means acreage which consists of acres spaced or
assignable to productive wells.
"Dry hole" means a well found to be incapable of producing either crude oil
or natural gas in sufficient quantities to justify completion as a crude oil or
natural gas well.
"Gravity" means the Standard American Petroleum Institute method for
specifying the density of crude petroleum.
"Gross" means the number of wells or acres in which we have an interest.
"MBbls" means thousands of Bbls.
"MBOE" means thousands of BOE.
"Mcf" means thousands of cubic feet.
"MMBbls" means millions of Bbls.
"MMBOE" means millions of BOE.
"MMbtu" means millions of British Thermal Units.
"MMcf" means millions of cubic feet.
"Net" is determined by multiplying gross wells or acres by our working
interest in those wells or acres.
"Present value of proved reserves" means the present value discounted at
10% of estimated future net cash flows before income taxes of proved crude oil
and natural gas reserves.
"Productive well" means a well that is not a dry hole.
"Proved developed reserves" means only those proved reserves expected to be
recovered from existing completion intervals in existing wells and those
reserves that exist behind the casing of existing wells when the cost of making
those reserves available for production is relatively small relative to the cost
of a new well.
"Proved reserves" means natural gas, crude oil, condensate and natural gas
liquids on a net revenue interest basis, found to be commercially recoverable.
"Proved undeveloped reserves" means those reserves expected to be recovered
from new wells on undrilled acreage or from existing wells where a relatively
major expenditure is required for recompletion.
"Recompletion" means leaving one formation for another formation within a
well bore.
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"Secondary recovery" means a method of oil and natural gas extraction in
which energy sources extrinsic to the reservoir are used.
"Undeveloped acreage" means leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of crude oil and natural gas, regardless of whether or not that
acreage contains proved reserves.
"Unitized" means the royalty and working interests are pooled within a
given geological and/or geographical area.
"Waterflood" means the injection of water into oil bearing formations to
displace the oil.
"Workover" means the performing of work within a well bore associated with
the currently producing formation.
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THE OFFERING AND PLAN OF DISTRIBUTION
BEFORE EXERCISING OR SELLING ANY RIGHTS, YOU SHOULD READ CAREFULLY THE
INFORMATION CONTAINED UNDER THE CAPTION "RISK FACTORS" IN THIS PROSPECTUS.
The following describes the offering and plan of distribution in general
and assumes, unless specifically provided otherwise, that you are a record
holder of our existing common stock. If you hold your shares in a brokerage
account or through a dealer or other nominee, please see "-- Beneficial Owners"
below.
THE RIGHTS
If you are a record holder of our existing common stock on the record date,
which is March 6, 2000, we are distributing to you, at no charge, 0.338 rights
for each share of our existing common stock owned. Each right will allow you to
purchase one share of our new common stock at a price of $10.40. If you elect to
exercise your basic subscription privilege in full, you may also subscribe for
additional shares of our new common stock under your over-subscription
privilege, if there are enough shares available. The shares that you may
purchase under your basic subscription privilege or your over-subscription
privilege are in addition to the shares that are to be distributed to our
shareholders in exchange for our existing common stock when our plan of
reorganization is consummated.
NO FRACTIONAL RIGHTS
We will not issue fractional rights, but rather will round any fractional
rights to the nearest whole number. When any calculation of rights would
otherwise result in an allocation of rights that is not a whole number, the
actual allocation of rights will be adjusted by rounding fractions of 1/2 or
greater to the next higher whole number and by rounding fractions of less than
1/2 to the next lower whole number. Regardless of the number of shares owned,
each shareholder will receive at least one right. We are registering an
additional 10,000 shares of new common stock in this prospectus to account for
the effects of rounding.
EXPIRATION OF THE RIGHTS
You may exercise your rights at any time before 5:00 p.m., New York City
time, on April , 2000, the expiration date for the rights. We may, in our sole
discretion, extend the time for exercising the rights. If you do not exercise
your rights before the expiration date, your unexercised rights will be null and
void. We will not be obligated to honor your exercise of rights if the
subscription agent receives the documents relating to your exercise after the
expiration date of the rights, regardless of when you transmitted the documents.
We may extend the expiration date by giving oral or written notice to the
subscription agent on or before the scheduled expiration date. If we elect to
extend the expiration date of the rights, we will issue a press release
announcing the extension no later than 9:00 a.m., New York City time, on the
next business day after the most recently announced expiration date.
SUBSCRIPTION PRIVILEGES
Your rights entitle you to the basic subscription privilege and the
over-subscription privilege.
Basic Subscription Privilege. With your basic subscription privilege, you
may purchase one share of our new common stock per right, upon delivery of the
required documents and payment of the subscription price of $10.40 per share.
You are not required to exercise all of your rights unless you wish to purchase
shares under your over-subscription privilege. We will deliver to you
certificates representing the shares that you purchase with your basic
subscription privilege as soon as practicable after the offering has been
completed and our plan of reorganization has been consummated.
Over-Subscription Privilege. In addition to your basic subscription
privilege, you may subscribe for additional shares of our new common stock, upon
delivery of the required documents and payment of the subscription price of
$10.40 per share, before the expiration of the rights. You may only exercise
your over-subscription privilege if you exercised your basic subscription
privilege in full and other holders of
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rights do not exercise their basic subscription privileges in full. There is no
maximum or minimum number of shares that you may subscribe for under the
over-subscription privilege.
Pro Rata Allocation. If there are not enough shares to satisfy all
subscriptions made under the over-subscription privilege, we will allocate the
remaining shares pro rata, after eliminating all fractional shares, among those
over-subscribing rights holders. "Pro rata" means in proportion to the number of
shares of our new common stock that you and the other rights holders have
purchased by exercising your basic subscription privilege. If there is a pro
rata distribution of the remaining shares and you receive a pro rata allocation
of a greater number of shares than you subscribed for under your
over-subscription privilege, then we will allocate to you only the number of
shares for which you subscribed. We will allocate the remaining shares among all
other holders exercising their over-subscription privileges.
Full Exercise of Basic Subscription Privilege. You may exercise your
over-subscription privilege only if you exercise your basic subscription
privilege in full. To determine if you have fully exercised your basic
subscription privilege, we will consider only the basic subscription privileges
held by you in the same capacity. For example, suppose that you were granted
rights for shares of our existing common stock that you own individually and
shares of our existing common stock that you own collectively with your spouse.
If you wish to exercise your over-subscription privilege with respect to the
rights you own individually, but not with respect to the rights you own
collectively with your spouse, you only need to fully exercise your basic
subscription privilege with respect to your individually owned rights. You do
not have to subscribe for any shares under the basic subscription privilege
owned collectively with your spouse to exercise your individual
over-subscription privilege.
When you exercise your over-subscription privilege, you will be
representing and certifying that you have fully exercised your basic
subscription privilege as to shares of our existing common stock which you hold
in that capacity. You must exercise your over-subscription privilege at the same
time you exercise your basic subscription privilege in full.
If you own shares of our common stock through your bank, broker or other
nominee holder who will exercise your subscription privilege on your behalf, the
bank, broker or other nominee holder will be required to certify to us and the
subscription agent the following information:
- the number of shares held on your behalf on the record date;
- the number of rights exercised under your basic subscription privilege;
- that your basic subscription privilege held in the same capacity has been
exercised in full; and
- the number of shares subscribed for under your over-subscription
privilege.
Your bank, broker or other nominee holder may also disclose to us other
information received from you.
Return of Excess Payment. If you exercise your over-subscription privilege
and are allocated less than all of the shares for which you wish to subscribe,
your excess payment for shares that were not allocated to you will be returned
by mail without interest or deduction as soon as practicable after the
expiration date. We will deliver to you certificates representing the shares
that you purchase as soon as practicable after the expiration date, after all
pro rata allocations and adjustments have been completed and after consummation
of our plan of reorganization.
CONDITIONS TO THE OFFERING
We may terminate the offering at any time in our sole discretion. We may
terminate the offering if our plan of reorganization is not consummated. We may
terminate the offering if at any time before completion of the offering there is
any judgment, order, decree, injunction, statute, law or regulation entered,
enacted, amended or held to be applicable to the offering that in the sole
judgment of our board of directors would or might make the offering or its
completion illegal or otherwise restrict or prohibit completion of the offering.
We may waive any of these conditions and choose to proceed with the offering
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even if one or more of these events occur. If we terminate the offering, all
rights will expire without value and all subscription payments received by the
subscription agent will be returned promptly, without interest or deduction.
This offering is not conditioned on any minimum number of shares being
purchased.
METHOD OF SUBSCRIPTION -- EXERCISE OF RIGHTS
You may exercise your rights by delivering the following to the
subscription agent, at or before 5:00 p.m., New York City time, on April ,
2000, the date on which the rights expire:
- Your properly completed and executed notice of exercise of rights with
any required signature guarantees or other supplemental documentation;
and
- Your full subscription price payment for each share subscribed for under
your subscription privileges.
METHOD OF PAYMENT
Your payment of the subscription price must be made in U.S. dollars for the
full number of shares of new common stock you are subscribing for by either:
- Check or bank draft drawn upon a U.S. bank or postal, telegraphic or
express money order payable to the subscription agent; or
- Wire transfer of immediately available funds, to the subscription account
maintained by the subscription agent at ABA
No. , further credit to , Attention: .
RECEIPT OF PAYMENT
Your payment will be considered received by the subscription agent only
upon:
- Clearance of any uncertified check;
- Receipt by the subscription agent of any certified check or bank draft
drawn on a U.S. bank or of any postal, telegraphic or express money
order; or
- Receipt of collected funds in the subscription account designated above.
CLEARANCE OF UNCERTIFIED CHECKS
If you are paying by uncertified personal check, please note that
uncertified checks may take at least five business days to clear. If you wish to
pay the subscription price by uncertified personal check, we urge you to make
payment sufficiently in advance of the time the rights expire to ensure that
your payment is received and cleared by that time. We urge you to consider using
a certified or cashier's check, money order or wire transfer of funds to avoid
missing the opportunity to exercise your rights.
DELIVERY OF SUBSCRIPTION MATERIALS AND PAYMENT
You should deliver your notice of exercise of rights and payment of the
subscription price to the subscription agent by one of the methods described
below:
- If by mail to:
- If by hand delivery or by overnight courier to:
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You may call the subscription agent at .
Your delivery to an address other than the address set forth above will not
constitute valid delivery.
CALCULATION OF RIGHTS EXERCISED
If you do not indicate the number of rights being exercised, or do not
forward full payment of the total subscription price payment for the number of
rights that you indicate are being exercised, then you will be deemed to have
exercised your basic subscription privilege with respect to the maximum number
of rights that may be exercised with the aggregate subscription price payment
you deliver to the subscription agent. If your aggregate subscription price
payment is greater than the amount you owe for your subscription, you will be
deemed to have exercised your over-subscription privilege for the maximum number
of shares with your overpayment at a price of $10.40 per share. If we do not
apply your full subscription price payment to your purchase of shares of our new
common stock, we will return the excess amount to you by mail without interest
or deduction as soon as practicable after the offering is completed.
YOUR FUNDS WILL BE HELD BY THE SUBSCRIPTION AGENT UNTIL SHARES OF NEW COMMON
STOCK ARE ISSUED
The subscription agent will hold your payment of the subscription price in
a segregated account with other payments received from other rights holders
until we issue your shares to you.
SIGNATURE GUARANTEE MAY BE REQUIRED
Your signature on the notice of exercise of rights must be guaranteed by an
eligible institution such as a member firm of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., or
from a commercial bank or trust company having an office or correspondent in the
United States, subject to standards and procedures adopted by the subscription
agent, unless:
- Your notice of exercise of rights provides that shares are to be
delivered to you as record holder of those rights; or
- You are an eligible institution.
NOTICE TO BENEFICIAL HOLDERS
If you are a broker, a trustee or a depositary for securities who holds
shares of our existing common stock for the account of others on March 6, 2000,
the record date for the issuance of rights under this offering, you should
notify the beneficial owners of those shares of the offering as soon as possible
to find out their intentions with respect to exercising their rights. You should
obtain instructions from the beneficial owners with respect to the rights, as
set forth in the instructions we have provided to you for your distribution to
beneficial owners. If a beneficial owner so instructs, you should complete the
appropriate notice of exercise of rights and submit it to the subscription agent
with the proper payment. If you hold shares of our existing common stock for the
account of more than one beneficial owner, you may exercise the number of rights
to which all beneficial owners in the aggregate otherwise would have been
entitled had they been direct record holders of our existing common stock on the
record date for the issuance of rights under this offering, if you, as a nominee
record holder, make a proper showing to the subscription agent by submitting the
form entitled "Nominee Holder Certification," which we will provide to you with
your offering materials.
BENEFICIAL OWNERS
If you are a beneficial owner of shares of our existing common stock or
will receive your rights through a broker, custodian bank or other nominee, we
will ask your broker, custodian bank or other nominee to notify you of this
offering. If you wish to exercise your rights, you will need to have your
broker, custodian bank or other nominee act for you. If you hold certificates of
our existing common stock directly and would prefer to have your broker,
custodian bank or other nominee exercise your rights, you should contact your
nominee and request it to effect the transactions for you. To indicate your
decision
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with respect to your rights, you should complete and return to your broker,
custodian bank or other nominee the form entitled "Beneficial Owners Election
Form," together with your check for the subscription price of the rights you
wish to exercise. You should receive this form from your broker, custodian bank
or other nominee with the other offering materials. If you wish to obtain a
separate notice of exercise of rights, you should contact the nominee as soon as
possible and request that a separate notice of exercise of rights be provided to
you.
INSTRUCTIONS FOR COMPLETING YOUR NOTICE OF EXERCISE OF RIGHTS
You should read and follow the instructions accompanying the notice of
exercise of rights carefully.
If you want to exercise your rights, you should send your notice of
exercise of rights with your subscription price payment to the subscription
agent. Do not send your notice of exercise of rights and subscription price
payment to us.
You are responsible for the method of delivery of your notice of exercise
of rights with your subscription price payment to the subscription agent. If you
send your notice of exercise of rights and subscription price payment by mail,
we recommend that you send them by registered mail, properly insured, with
return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent before the time the rights expire. Because
uncertified personal checks may take at least five business days to clear, you
are strongly urged to pay, or arrange for payment, by means of certified or
cashier's check, money order or wire transfer of funds.
DETERMINATIONS REGARDING THE EXERCISE OF YOUR RIGHTS
We will decide all questions concerning the timeliness, validity, form and
eligibility of your exercise of your rights and our determinations will be final
and binding. We, in our sole discretion, may waive any defect or irregularity,
or permit a defect or irregularity to be corrected within a period of time as we
may determine. We may reject the exercise of any of your rights because of any
defect or irregularity. We will not receive or accept any subscription until all
irregularities have been waived by us or cured by you within a period of time as
we decide, in our sole discretion.
Neither we nor the subscription agent will be under any duty to notify you
of any defect or irregularity in connection with your submission of notice of
exercise of rights and we will not be liable for any failure to notify you of
any defect or irregularity. We reserve the right to reject your exercise of
rights if your exercise is not in accordance with the terms of the offering or
in proper form. We will also not accept your exercise of rights if our issuance
of shares of our new common stock to you could be deemed unlawful under
applicable law or is materially burdensome to us.
QUESTIONS ABOUT EXERCISING RIGHTS -- SUBSCRIPTION AGENT
We have appointed ChaseMellon Shareholder Services, L.L.C. as subscription
agent for the offering. We will pay its fees and expenses related to the
offering. We also have agreed to indemnify the subscription agent for some of
the liabilities that it may incur in connection with the offering. You may
direct any questions or requests for assistance concerning the method of
exercising your rights, additional copies of this prospectus, the instructions,
the nominee holder certification or other subscription documents referred to in
this prospectus, to the subscription agent, at the following telephone number
and address:
Banks and Brokerage Firms, please call .
NO REVOCATION
Once you have exercised your subscription privileges, you may not revoke
your exercise. Rights not exercised before the expiration date of the rights
will expire.
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<PAGE> 24
PROCEDURES FOR DTC PARTICIPANTS
We expect that your exercise of your basic subscription privilege and your
over-subscription privilege may be made through the facilities of the Depository
Trust Company, or the DTC. If your rights are held of record through DTC, you
may exercise your basic subscription privilege and your over-subscription
privilege by instructing DTC to transfer your rights from your account to the
account of the subscription agent, together with certification as to the
aggregate number of rights you are exercising and the number of shares of our
new common stock you are subscribing for under your basic subscription privilege
and your over-subscription privilege, if any, and your subscription price
payment for each share you subscribed for under your basic subscription
privilege and your over-subscription privilege.
SHARES OFFERED TO OTHERS
If the shareholders as of the record date do not exercise their rights to
all of the shares available, we will offer the remaining shares to others at
$10.40 per share. After the rights expire, we will determine the number of
remaining shares. An investment bank approved by the bankruptcy court will
assist us in placing the remaining shares with others.
SUBSCRIPTION PRICE
The subscription price is $10.40 per share.
DETERMINATION OF THE SUBSCRIPTION PRICE
The subscription price was determined through negotiations between us and
the holders of a majority of the existing bonds. Under our plan of
reorganization, our bondholders will receive 96% of the outstanding shares of
the new common stock, before giving effect to any shares issued under this
offering or under the standby loan. The original subscription price of $0.26 was
derived based on the value of the bondholder claim ($161,635,870) divided by the
total number of shares to be issued to the bondholders under our plan of
reorganization (614,484,288). Because we have decreased the number of shares to
be issued under the plan of reorganization by a factor of 40, we have multiplied
the original subscription price by 40 to arrive at the $10.40 subscription
price. If we issue additional shares to those who purchase shares in the
offering because of the limited anti-dilution feature, the effective purchase
price per share to those purchases will be less than $10.40. See the section of
this prospectus called "Dilution" for more information about the limited
anti-dilution feature.
EXTENSIONS AND TERMINATION
We may extend the offering and the period for exercising your rights, in
our sole discretion. In addition, we may terminate the offering at any time
before the time the rights expire.
NO RECOMMENDATION TO HOLDERS OF RIGHTS OR OTHERS
We are not making any recommendations as to whether or not you should
subscribe for shares of our new common stock. You should decide whether to
subscribe for shares based upon your own assessment of your best interests in
consultation with your legal and financial advisors.
FOREIGN AND OTHER SHAREHOLDERS
A notice of exercise of rights will be mailed to rights holders whose
addresses are outside the United States or who have an Army Post Office or Fleet
Post Office address. To exercise those rights, you must notify the subscription
agent, and take all other steps that are necessary to exercise your rights on or
before the expiration date of the rights. If the procedures set forth in the
preceding sentence are not followed before the expiration date your rights will
expire.
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<PAGE> 25
SHARES OF NEW COMMON STOCK OUTSTANDING AFTER THE OFFERING
If our plan of reorganization is consummated, and assuming we issue all of
the shares offered in this offering excluding the additional 10,000 shares of
new common stock we are registering in this prospectus to account for the
effects of rounding of the rights being granted to the shareholders, 24,656,041
shares of our new common stock will be issued and outstanding after the offering
expires. Based on the 16,002,195 shares of our new common stock that will be
issued and outstanding after the effective date of confirmation of our plan of
reorganization, before taking into account shares sold in this offering and, if
applicable, issued under the standby loan, our issuance of all shares in this
offering would result on a pro forma basis in a 54% increase in the number of
outstanding shares of our new common stock. See the section of this prospectus
called "Dilution" for additional information concerning the new common stock
outstanding after this offering.
REGULATORY LIMITATION
We will not be required to issue to you shares of our new common stock in
the offering if, in our opinion, you would be required to obtain prior clearance
or approval from any state or federal regulatory authorities to own or control
the shares and if, at the time the rights expire, you have not obtained that
clearance or approval.
ISSUANCE OF COMMON STOCK
The subscription agent will issue to you certificates representing shares
of our new common stock you purchase under the offering as soon as practicable
after the time the rights expire and our plan of reorganization has been
consummated.
Your payment of the aggregate subscription price will be retained by the
subscription agent and will not be delivered to us until your subscription is
accepted and you are issued your share certificates. We will not pay you any
interest on funds paid to the subscription agent, regardless of whether the
funds are applied to the subscription price or returned to you. You will have no
rights as a shareholder of Coho, with respect to shares of our new common stock
subscribed for, until certificates representing the shares are issued to you.
Upon our issuance of the certificates, you will be deemed the owner of the
shares you purchased by exercise of your rights. Unless otherwise instructed in
the notice of exercise of rights, your certificates for shares issued as a
result of your exercise of rights will be registered in your name.
If the offering is not completed for any reason, the subscription agent
will promptly return, without interest or deduction, all funds received by it.
We will retain any interest earned on the funds held by the subscription
agent.
COMPLIANCE WITH STATE REGULATIONS PERTAINING TO THE OFFERING
We are not making the offering in any state or other jurisdiction in which
it is unlawful to do so. We will not sell or accept an offer to purchase our new
common stock from you if you are a resident of any state or other jurisdiction
in which the sale or offer of the rights would be unlawful. We may delay the
commencement of the offering in these states or other jurisdictions to comply
with their laws. We do not expect that there will be any changes in the terms of
the offering. However, we may decide, in our sole discretion, not to modify the
terms of the offering as may be requested by some of these states or other
jurisdictions. If that happens and you are a resident of the state or
jurisdiction that requests the modification, you will not be eligible to
participate in the offering.
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<PAGE> 26
USE OF PROCEEDS
There is no minimum number of shares of new common stock that must be
subscribed for in this offering. If all the rights are exercised, we will
receive approximately $90 million upon completion of this offering, before
deducting the offering expenses. The offering expenses are estimated to be
$550,000. We will use the net proceeds from the offering for working capital and
general corporate purposes.
DIVIDEND POLICY
We have never paid cash dividends on our existing common stock and we do
not intend to pay cash dividends on our new common stock. Because Coho Energy,
Inc. is a holding company, our ability to pay dividends depends on the ability
of our subsidiaries to pay cash dividends or make other cash distributions. Our
debt agreements generally prohibit the subsidiaries from paying dividends or
making cash distributions. Our board of directors has sole discretion over the
declaration and payment of future dividends. Any future dividends will depend on
our:
- profitability,
- financial condition,
- cash requirements,
- future prospects,
- general business conditions,
- the terms of our debt agreements, and
- other factors our board of directors believes relevant.
PRICE RANGE OF EXISTING COMMON STOCK
Our existing common stock was, until June 7, 1999, listed on the Nasdaq
Stock Market under the symbol "COHO." Our existing common stock is currently
traded on Nasdaq's OTC Bulletin Board under the symbol "COHO." The following
table shows the high and low sales prices of our existing common stock over
recent periods.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
1st Quarter............................................... $ 9 5/8 $ 6 1/4
2nd Quarter............................................... 9 1/4 6 1/4
3rd Quarter............................................... 7 1/8 4 1/2
4th Quarter............................................... 5 1/8 2 5/16
1999
1st Quarter............................................... $ 3 1/8 $ 1/2
2nd Quarter............................................... 1 1/32
3rd Quarter............................................... 1 5/8 7/32
4th Quarter............................................... 3/4 5/32
2000
1st Quarter (through March 23, 2000)...................... 51/64 3/16
</TABLE>
As a result of our financial condition and decreases in the market value of
our existing common stock, the Nasdaq Stock Market on March 8, 1999, suspended
trading of our existing common stock. Subsequently, effective as of the close of
business on June 4, 1999, our existing common stock was delisted from Nasdaq. As
a result of those actions, our existing common stock is not currently listed on
any stock exchange but is trading over the counter. At December 1, 1999, there
were 425 holders of
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<PAGE> 27
record of the common stock. We believe we have in excess of 8,000 beneficial
holders of our existing common stock.
The closing price for our existing common stock on Nasdaq's OTC Bulletin
Board was $ 7/32 on March 23, 2000.
If our plan of reorganization is consummated, we anticipate that our new
common stock will be quoted on Nasdaq's OTC Bulletin Board.
24
<PAGE> 28
CAPITALIZATION
The following table sets forth our consolidated capitalization at December
31, 1999, and as adjusted for the following circumstances:
- to give pro forma effect for projected operating results through March
31, 2000, the assumed effective date of our plan of reorganization,
- to give pro forma effect to the effectiveness of the plan of
reorganization assuming that all of the rights are exercised in the
offering, excluding the additional 10,000 shares of new common stock we
are registering in this prospectus to account for the effects of the
rounding of rights being granted to the shareholders,
- to give pro forma effect to the effectiveness of the plan of
reorganization assuming that 50% of the rights are exercised in the
offering, excluding the additional 10,000 shares of new common stock we
are registering in this prospectus to account for the effects of the
rounding of rights being granted to the shareholders, and $45 million is
borrowed under the standby loan, and
- to give pro forma effect to the effectiveness of the plan of
reorganization assuming that none of the rights are exercised in the
offering and $70 million is borrowed under the standby loan.
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and our consolidated
financial statements and related notes to those statements included in this
prospectus.
<TABLE>
<CAPTION>
PRO FORMA
PURCHASE OF PRO FORMA
PRO FORMA 50% OF PURCHASE OF
IMMEDIATELY SHARES NO SHARES
BEFORE PRO FORMA IN OFFERING AND IN OFFERING AND
DECEMBER 31, EFFECTIVENESS PURCHASE OF $45 MILLION $70 MILLION
1999 OF THE ALL SHARES STANDBY STANDBY
HISTORICAL PLAN(3) IN OFFERING(4) LOAN(4) LOAN(4)
------------ ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Current Liabilities:
Existing Bank Group Loan(1)...... $ 258,836 $ 260,150 $ -- $ -- $ --
Existing Bonds(1)................ 161,094 161,094 -- -- --
Other............................ 19,029 16,092 9,455 9,455 9,455
--------- --------- --------- --------- ---------
Total Current
Liabilities............ $ 438,959 $ 437,336 $ 9,455 $ 9,455 $ 9,455
--------- --------- --------- --------- ---------
Long-Term Liabilities:
Credit Facility.................. $ -- $ -- $ 172,000 $ 171,000 $ 191,000
Standby Loan..................... -- -- -- 45,000 70,000
Promissory Notes................. -- -- 4,208 4,208 4,208
--------- --------- --------- --------- ---------
Total Long-Term
Liabilities............ -- -- 176,208 220,208 265,208
--------- --------- --------- --------- ---------
Shareholders' Equity:
Preferred stock, par value $0.01
per share.....................
Existing common stock and new
common stock, par value $0.01
per share; authorized
50,000,000 shares(2).......... 256 256 247 230 186
Additional paid-in capital....... 137,812 137,812 387,037 342,815 298,580
Retained deficit................. (230,026) (230,126) (240,529) (222,262) (217,512)
--------- --------- --------- --------- ---------
Total Shareholders'
Equity................. (91,958) (92,058) 146,755 120,783 81,254
--------- --------- --------- --------- ---------
Total Capitalization,
excluding current
liabilities............ $ (91,958) $ (92,058) $ 322,963 $ 340,991 $ 346,462
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) All amounts outstanding under the existing bank group loan agreement and the
existing bonds and the related accrued interest are classified as current
liabilities as of December 31, 1999 due to accelerations by the lenders.
(2) Shares of existing common stock outstanding were 25,603,512 at December 31,
1999 and Pro Forma Immediately Before Effectiveness of the plan of
reorganization. Shares of new common stock outstanding were 24,656,041 under
Pro Forma Purchase of All Shares in Offering; 22,953,523 under
25
<PAGE> 29
Pro Forma Purchase of 50% of Shares in Offering and $45 million standby
loan; and 18,607,203 under Pro Forma Purchase of No Shares in Offering and
$70 million standby loan.
(3) Current liabilities and retained deficit have been adjusted to reflect the
effect of projected operating results for the period from January 1, 2000
through March 31, 2000, the assumed effective date of the plan of
reorganization.
(4) The pro forma columns that present the purchase of shares in the offering
assuming all shares are purchased, 50% of the shares are purchased and no
shares are purchased reflect pro forma adjustments to record the following
transactions:
- Repayment of borrowings outstanding under the existing bank group loan
agreement together with accrued interest totaling $260.2 million from
borrowings under the credit facility together with proceeds of the
offering and borrowings under the credit facility and standby loan, as
applicable, and the write-off of $1.6 million related to unamortized debt
issue costs.
- Conversion of the existing bonds into: 15,362,107 shares of new common
stock at an assumed fair market value of $10.40 per share for a total of
$159.8 million and the recognition of a loss on extinguishment of debt of
$2.3 million related to unamortized debt issue costs under the "Purchase
of All Shares" column; 15,362,107 shares of new common stock at an
assumed fair market value of approximately $9.21 per share for a total of
$141.5 million and the recognition of a gain on extinguishment of debt of
$16.0 million due to the dilution in the assumed fair market value of the
shares issued as a result of the additional shares issued for the standby
loan under the "Purchase of 50% of Shares" column; and 15,362,107 shares
of new common stock at an assumed fair market value of $8.94 per share
for a total of $137.4 million and the recognition of a gain on the
extinguishment of debt of $20.1 million due to the dilution in the
assumed fair market value of the shares, as discussed above, under the
"Purchase of No Shares" column.
- Payment of $529,000 of accrued reorganization costs and the recognition
of additional reorganization expenses totaling $5.5 million, including
$1.5 million for estimated severance payments. The break-up fee of $1.0
million associated with the standby loan is an additional expense under
the "Purchase of All Shares" column.
- The $4.2 million reclassification of the long-term portion of the
five-year promissory notes to be issued in settlement of the priority tax
claims from current liabilities.
- The borrowings of $172.0 million, 171.0 million and $191.0 million under
the credit facility on the effective date under the "Purchase of All
Shares," "Purchase of 50% of Shares" and "Purchase of No Shares" columns,
respectively.
- The borrowings of $45 million under the standby loan and the related
issuance of 2,065,817 shares of new common stock at an assumed fair
market value of approximately $9.21 per share for a total of $19.0
million under the "Purchase of 50% of Shares" column and borrowings of
$70 million under the standby loan and the related issuance of 2,605,008
shares of new common stock at an assumed fair market value of
approximately $8.94 per share for a total of $23.3 million under the
"Purchase of No Shares" column.
- Issuance of 8,653,846 shares of new common stock at $10.40 per share for
total net proceeds of $87.6 million after estimated offering costs of
$550,000, under the "Purchase All Shares" column and issuance of
4,885,511 shares of new common stock at an assumed fair market value of
approximately $9.21 per share for total net proceeds of $43.7 million
after estimated offering costs of $550,000 under the "Purchase of 50% of
Shares" column.
- Issuance of 640,088 shares of new common stock in exchange for 25,603,512
shares of existing common stock.
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<PAGE> 30
SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1999 are derived from, and qualified by
reference to, our audited consolidated financial statements included in this
prospectus. The information presented below should be read in conjunction with
our consolidated financial statements and the related notes included in this
prospectus and the section of this prospectus called "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
consolidated financial data presented below is not necessarily indicative of the
future results of our operations or financial performance.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Operating revenues........................................ $ 40,903 $ 54,272 $ 63,130 $ 68,759 $ 57,323
Operating costs........................................... 12,457 13,875 15,970 26,859 21,155
General and administrative expenses(1).................... 5,400 7,264 7,163 7,750 9,905
Reorganization costs...................................... -- -- -- -- 3,123
Depletion and depreciation................................ 14,717 16,280 19,214 28,135 13,702
Writedown of crude oil and natural gas properties......... -- -- -- 188,000 5,433
Net interest expense...................................... 8,048 7,464 10,474 32,721 33,698
Other expense............................................. -- -- -- 3,023 1,048
Income tax expense (benefit).............................. 112 3,483 4,021 (14,383) (26)
Earnings (loss) from continuing operations................ 169 5,906 6,288 (203,346) (30,715)
Net earnings (loss)....................................... 1,780 5,906 6,288 (203,346) (30,715)
Basic earnings (loss) from continuing operations per
common share............................................ (0.02) 0.29 0.29 (7.94) (1.20)
Diluted earnings (loss) from continuing operations per
common share............................................ (0.02) 0.29 0.28 (7.94) (1.20)
Basic earnings (loss) per common share(2)................. 0.05 0.29 0.29 (7.94) (1.20)
Diluted earnings (loss) per common share(3)............... 0.05 0.29 0.28 (7.94) (1.20)
OTHER FINANCIAL DATA:
Capital expenditures...................................... $ 29,970 $ 52,384 $ 72,667 $ 70,143 $ 6,349
EBITDA(4)................................................. 23,046 33,133 39,997 31,127 22,093
BALANCE SHEET DATA:
Working capital (deficit)(5).............................. $ 14,433 $ 6,662 $ (2,021) $(388,297) $(407,490)
Net property and equipment................................ 175,899 210,212 531,409 324,574 311,788
Total assets.............................................. 204,042 230,041 555,128 350,068 348,801
Long-term debt, excluding current portion................. 107,403 122,777 369,924 -- --
Total shareholders' equity................................ 74,321 81,466 142,103 (61,243) (91,958)
</TABLE>
- ---------------
(1) General and administrative expenses for 1999 are substantially higher than
those expenses for the same period in 1998 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 $5.7 million of those costs in 1998.
(2) Basic per share amounts have been computed by dividing net earnings after
preferred dividends by the weighted average number of shares outstanding:
17,392 in 1995; 20,179 in 1996; 21,693 in 1997; 25,604 in 1998; and 25,604
in 1999.
(3) Diluted per share amounts have been computed by dividing net earnings after
preferred dividends by the weighted average number of shares outstanding
including common stock equivalents, consisting of stock options and
warrants, when their effect is dilutive: 17,392 in 1995; 20,342 in 1996;
22,334 in 1997; 25,604 in 1998; and 25,604 in 1999.
(4) "EBITDA" refers to earnings before interest, taxes, depreciation, depletion
and amortization. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flow as determined in accordance
with generally accepted accounting principles as an indicator of our
operating performance or liquidity.
(5) Amounts for 1998 and 1999 include $384,031 and $388,685, respectively,
related to the current portion of long-term debt. The working capital
deficit as of December 31, 1999 includes liabilities subject to compromise
as a result of the bankruptcy filing.
27
<PAGE> 31
THE PLAN OF REORGANIZATION
INTRODUCTION
A summary of the principal provisions of the plan of reorganization and the
treatment of classes of claims and equity interests is set forth below. This
summary is qualified by reference to the plan of reorganization. You may obtain
a copy of the plan of reorganization and related disclosure statement by sending
us a written request at 14785 Preston Road, Suite 860, Dallas, Texas 75240 to
the attention of Ms. Anne Marie O'Gorman.
We conceived the plan of reorganization as an alternative to the more
drastic measures available to us for restructuring our debt, such as a
liquidation of our properties. The terms of the plan of reorganization were
arrived at after a diligent search for, and extensive evaluation of, numerous
financing and liquidation proposals by us, and consultation with our financial
advisors as to what type of plan of reorganization might be feasible after
lengthy negotiations with our creditors. We believe that the plan of
reorganization provides our creditors and our shareholders with distributions of
property in the form of new securities having a value not less than the amount
that those holders would receive if we were to be liquidated under Chapter 7 of
the Bankruptcy Code. We believe that reorganization under the plan of
reorganization is feasible and that the plan of reorganization provides for the
greatest and earliest possible recoveries for our creditors and our
shareholders. After the effective date of confirmation of the plan of
reorganization, we, as reorganized under the plan of reorganization, may operate
our businesses and buy, use and otherwise acquire and dispose of our property
free of any restrictions contained in the Bankruptcy Code.
1. Existing Bank Group.
We and some of our subsidiaries are parties to an existing bank group loan
agreement. The lenders under the existing bank group loan are MeesPierson
Capital Corp.; Paribas, Houston Agency; Christiania Bank OG Kreditkasse, ASA;
Den Norske Bank ASA; Bank of Scotland; Bank One, Texas, N.A.; Credit Lyonnais
New York Branch; and Toronto Dominion (Texas), Inc. Approximately $240 million
of principal, plus accrued interest and reasonable fees, owed to the bank group
in connection with the existing bank group loan agreement is treated as fully
secured under the plan of reorganization. The bank group asserts that accrued
interest and reasonable fees aggregate approximately $22.4 million. The exact
amount of the bank group claim, including interest at a reasonable rate and
reasonable fees, is subject to allowance. The allowed amount of the bank group
claim has been fixed by the bankruptcy court at approximately $260 million.
The bank group claim is to be paid in full in cash on the effective date.
We will obtain the funds necessary for the payment of the allowed bank group
claim through the combination of:
- a new senior revolving credit facility, from a syndicate of lenders led
by Chase Manhattan Bank, as agent for the lenders,
- the offering described in this prospectus,
- cash on hand from our operations and
- if necessary, the sale of senior subordinated notes to the standby
lenders, including:
- PPM America, Inc. and their assignees
- Oaktree Capital Management, L.L.C. and their assignees
- Pacholder Associates, Inc. and their assignees
- Appaloosa Management, L.P. and their assignees
- other holders of existing bonds who opt to participate, and
- other parties who may participate.
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<PAGE> 32
2. Existing Bond Holders.
We are the issuer of $150 million principal amount of 8 7/8% senior
subordinated notes due 2007. These existing bonds were issued under an indenture
dated October 1, 1997, which some of our subsidiaries guaranteed. Approximately
$162 million is owed to the holders of the existing bonds in connection with the
existing bond indenture. Under the plan of reorganization, the existing bond
indenture and the existing bonds will be extinguished on the effective date.
Holders of existing bonds will receive on the effective date their pro rata
share of 96% of our new common stock. This 96% of new common stock would be
diluted by shares of new common stock issued in connection with this offering
and, if applicable, the standby loan.
3. Existing Shareholders.
We currently have issued and outstanding 25,603,512 shares of existing
common stock, $0.01 par value. The existing common stock is held by
approximately 425 shareholders of record. On the effective date the existing
common stock will be extinguished and the shareholders will receive their pro
rata share of 4% of the new common stock, except that we will pay cash in lieu
of distributing fractional shares of new common stock. This 4% of new common
stock will be diluted by shares of new common stock issued in connection with
this offering and, if applicable, the standby loan. The shareholders will also
receive the exclusive first priority right to purchase their pro rata portions
of additional shares of the new common stock in this offering for a purchase
price of $10.40 per share, up to a total amount of approximately $90 million.
Additionally, shareholders as of February 7, 2000, will receive their pro
rata share of the following:
- 20% of the proceeds available from the Hicks Muse lawsuit after payment
of all fees and expenses, including any contingent fee paid in connection
with these proceeds, and
- 40% of the proceeds of the disposition of our interest in Coho Anaguid,
Inc. or the disposition of substantial assets of Coho Anaguid, Inc.
For more information about the Hicks Muse lawsuit, see the section of this
prospectus called "Oil and Gas Operations -- Legal Matters." For more
information about the assets of Coho Anaguid, Inc., see the section of this
prospectus called "Oil and Gas Operations -- Tunisia, North Africa."
4. New Capitalization.
Originally, our plan of reorganization anticipated that we would issue one
new share of stock for each share of existing stock, and that the shares of
stock offered pursuant to this prospectus would be offered for a purchase price
of $0.26 per share. In the plan of reorganization, we noted that we may effect a
reverse stock split after the effective date of the plan to proportionately
reduce the number of our authorized and outstanding shares. As we noted, we
believed that this measure would help us to satisfy Nasdaq listing requirements.
After the plan of reorganization was approved by the bankruptcy court, we
determined that it would be in the best interests of us and our shareholders to
make the effect of that reverse stock split applicable as of the effective date
of the plan of reorganization, so that we would not have to take any actions
after the effective date of the plan of reorganization to adjust the number of
shares authorized and outstanding. Therefore, we have amended the plan of
reorganization so that on the effective date of the plan, we will issue one
share of our new common stock for each forty shares of our existing common
stock, and so that the purchase price for shares of stock offered pursuant to
this prospectus will be $10.40 per share. This amendment has the effect of
decreasing the number of our outstanding shares of new common stock and
increasing the per-share price. The amendment does not affect the relative
percentage ownership interests among various groups of shareholders after the
effective date. The bankruptcy court has approved this amendment.
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<PAGE> 33
CLASSIFICATION AND TREATMENT SUMMARY
The following is a summary of the classification of claims and interests,
and their treatment under the plan of reorganization.
<TABLE>
<CAPTION>
CLASSIFICATION TREATMENT
- -------------- ---------
<S> <C>
Class 1 Unimpaired
Administrative expense claims Will be paid in full, in cash including any
Total estimated amount of Class 1 retainers on hand, on the later of the
claims: effective date, the due date or court
$2,329,000 approval (if required by law), or paid on
other agreed terms.
Estimated recovery: Full recovery.
Class 2 Impaired
Priority tax claims Will receive five-year promissory notes
Total estimated amount of Class 2 bearing interest at a rate of 6% per annum
claims: unless a different rate is chosen by the
$5,260,000 bankruptcy court, or paid on other agreed
terms.
Estimated recovery: Full recovery over time.
Class 3 Impaired
Bank group claim Will receive payment in full, in cash on the
Total estimated amount of Class 3 effective date from advances made under the
claims: new credit facility and proceeds of the
$260,000,000 offering and, if applicable, the standby
loan.
Estimated recovery: Full recovery.
Class 4 Impaired
Senior miscellaneous secured claims Will receive cash payment of 100% of allowed
Total estimated amount of Class 4 claims on the effective date, or paid on
claims: other agreed terms.
$300,000
Estimated recovery: Full recovery.
Class 5 Impaired
Unsecured bond claims Will receive shares representing 96% of the
Total estimated amount of Class 5 new common stock as of the effective date
claims: (without giving effect to dilution from
$161,635,870 shares issued under the offering and, if
applicable, the standby loan).
Estimated recovery: Approximately full
recovery over time.
Class 6 Impaired
General unsecured claims Will receive cash payment of 100% of allowed
Total estimated amount of Class 6 claims, payable in four equal quarterly
claims: $4,700,000 (Estimate assumes installments without interest.
no
significant adverse result to us in Estimated recovery: Full recovery over one
the year.
bankruptcy court's allowance and
estimation process. See "Oil and Gas
Operations-Legal Matters.")
Class 7 Unimpaired
Administrative convenience claims Will receive payment in full, in cash 30 days
Total estimated amount of Class 7 from the effective date, up to a maximum of
claims: $1,000 per claim.
$72,000
Estimated recovery: Full recovery.
</TABLE>
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<PAGE> 34
<TABLE>
<CAPTION>
CLASSIFICATION TREATMENT
- -------------- ---------
<S> <C>
Class 8 Impaired
Holders of our existing common stock Will receive shares representing 4% of the
25,603,512 shares outstanding new common stock as of the effective date,
without giving effect to dilution from
shares issued under the offering and, if
applicable, the Standby Loan; and rights to
purchase additional shares of the new
common stock at $10.40 per share. Will
receive cash in lieu of any fractional
shares of new common stock to be issued in
exchange for existing common stock. Will
receive 20% of any proceeds of the Hicks
Muse lawsuit after fees and expenses. Will
receive 40% of any proceeds from the
disposition of our interests in, or the
assets of, Coho Anaguid, Inc.
Estimated recovery: 3% to 38% of our new
outstanding common stock, depending on the
degree of participation in the offering and
other variables.
</TABLE>
THE NEW DEBT AND EQUITY
The Credit Facility.
On the effective date, we will establish a new credit facility with a group
of lenders and Chase, as agent for the new lenders, for a principal amount of up
to $250 million. The new credit facility will limit advances to the amount of
the borrowing base, which has been set initially at $205 million. Additionally,
$15 million must be available on the effective date in cash and undrawn
borrowing capacity. The borrowing base will be the loan value to be assigned to
the proved reserves attributable to our oil and gas properties. The borrowing
base will be subject to semiannual review based on reserve reports. The initial
borrowing base was subject to Chase's review of the January 1, 2000 reserve
report, which was prepared and audited by an independent petroleum engineering
firm acceptable to the new lenders.
The new credit facility will be subject to semiannual borrowing base
redeterminations, each April 1 and October 1, and will be made in the sole
discretion of the lenders. We will deliver to the lenders by March 1 of each
year a reserve report prepared as of the immediately preceding January 1 and by
September 1 of each year a reserve report prepared as of the immediately
preceding July 1. The January 1 reserve report will be prepared internally by us
and audited by an independent petroleum engineering firm, acceptable to Chase,
and the July 1 reserve report will be prepared internally by us, in a form
acceptable to Chase. Based in part on the reserve report, the lenders will
redetermine the borrowing base in their sole discretion. For an increase in the
borrowing base, consent of 100% of the lenders will be required. To maintain the
borrowing base, or to reduce the borrowing base, consent of 75% of the lenders
of outstanding loans or, if no loans are outstanding, the lenders of 75% of the
current loan commitments under the new credit facility, will be required. We or
Chase may request one additional borrowing base determination during any
calendar year.
Interest on advances under the new credit facility will be payable on the
earlier of the expiration of any interest period under the new credit facility
or quarterly, beginning the first quarter after the effective date. Amounts
outstanding under the new credit facility will accrue interest at our option at
either the Eurodollar rate, which is the annual interest rate equal to the
London interbank offered rate for deposits in United States dollars that is
offered to Chase plus an applicable margin, or the base rate, which is the
floating annual interest rate established by Chase from time to time as its base
rate of interest and which may not be the lowest or best interest rate charged
by Chase on loans similar to the new credit facility, plus an applicable margin.
All outstanding advances under the new credit facility are due and payable in
full three years from the effective date.
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<PAGE> 35
The new credit facility will be secured by granting Chase the following
collateral for the benefit of the lenders:
- first and prior security interests in our issued and outstanding capital
stock and other equity interests of our subsidiaries,
- first and prior mortgage liens and security interests covering proved
mineral interests selected by Chase having a present value, as determined
by Chase, of not less than 85% of the present value of all of our proved
mineral interests evaluated by the lenders for purposes of determining
the borrowing base, and
- security interests in our other tangible and intangible assets.
The rights and responsibilities of Chase, the lenders and us will be governed by
a new senior revolving credit agreement and related documents, which, in part,
will permit the lenders to enforce their rights to the collateral on the
occurrence of an event of default under the new credit agreement. There are
conditions we must satisfy before the effective date for Chase to be obligated
to enter into the new credit facility.
The new credit agreement will contain financial and other covenants
including,
- maintenance of minimum ratios of cash flow to interest expense, senior
debt to cash flow, and current assets to current liabilities as of the
end of the initial fiscal quarter to commence after the effective date,
- restrictions on the payment of dividends and
- limitations on the incurrence of additional indebtedness, the creation of
liens and the incurrence of capital expenditures.
Fees for the lenders contained in the Chase commitment letter to us dated
December 9, 1999 were approved by the bankruptcy court at a hearing on the fees
held on January 27, 2000. These fees include an initial due diligence fee of
$200,000. If the lenders fund under the new credit facility on the effective
date, then they will be entitled to an additional aggregate $6.5 million of
closing fees. All fees paid by us in connection with the new credit facility are
non-refundable and are in addition to reimbursements to be paid for expenses
incurred by Chase in connection with the preparation of the new credit
agreement.
The Chase commitment letter provides that there are a number of conditions
which must be met before the lenders will be committed to fund the new credit
facility on the effective date, including agreement concerning definitive
documents, completion of economic due diligence and approval by Chase of our
management team and capital structure after reorganization. We expect all
conditions to be met by the effective date, but there is no assurance that this
will be the case. If all conditions have been met, the lenders will be committed
to fund on the effective date. If the lenders fund on the effective date, they
will be entitled to $6.5 million in closing fees.
The Offering.
To implement the plan of reorganization, we will raise up to $90 million of
new investment by the offering made under this prospectus and if applicable, up
to $90 million in a standby loan to be made by the standby lenders.
Under this offering, our shareholders as of the record date have the
exclusive first opportunity to buy additional shares of the new common stock for
a price of $10.40 per share, up to an aggregate of $90 million. Shareholders who
wish to purchase more than their allocable portion of the shares offered to them
in this offering may do so, to the extent that other shareholders do not elect
to participate in the offering.
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<PAGE> 36
The Standby Loan.
The majority of the funds necessary for the payment of the allowed bank
group claim will be obtained through an advance under the new credit facility of
the full amount of the initial borrowing base. The remaining amount of the
allowed bank group claim will be paid with the proceeds of this offering and, if
necessary, the standby loan. The standby loan is to be made under a senior
subordinated note facility under which we will issue, and PPM America, Inc.,
Appaloosa Management, L.P., Oaktree Capital Management, L.L.C. and Pacholder
Associates, Inc. and their assignees and any other holders of existing bonds who
opt to participate in the standby loan, will purchase, an amount of senior
subordinated notes to be determined by us. This amount will be a maximum of $70
million given the current level of commitment under the standby loan and a
maximum of $90 million if more standby loan commitments are obtained and made
available before the effective date. Our rights and responsibilities and those
of the standby lenders will be governed by a standby loan agreement which will
allow the holders of existing bonds to participate in the standby loan.
Debt under the standby loan agreement will be evidenced by notes, maturing
seven years after the effective date, and bearing interest at a minimum annual
rate of 15% and payable in cash semiannually. After the first anniversary of the
effective date, additional semiannual interest payments will be payable in an
amount equal to 1/2% for every $0.25 that the "actual price" for our oil and
gas production exceeds $15 per barrel of oil equivalent during the applicable
semiannual interest period, up to a maximum of 10% additional interest per year.
The "actual price" for our oil and gas production is the weighted average price
received by us for all of our oil and gas production, including hedged and
unhedged production, net of hedging costs, in dollars per barrel of oil
equivalent using a 6:1 conversion ratio for natural gas. The actual price will
be calculated over a six-month measurement period ending on the date two months
before the applicable interest payment date. Additionally, upon an event of
default occurring under the standby loan, interest will be payable in cash,
unless otherwise required to be paid-in-kind, at a rate equal to 2% per year
over the applicable interest rate. Interest payments under the standby loan may
be paid-in-kind subject to the requirements of the new credit agreement.
"Paid-in-kind" refers to the payment of interest owed under the standby loan by
increasing the amount of principal outstanding under the standby loan notes,
rather than paying the interest in cash.
Payment of the standby loan notes will be expressly subordinate to payments
in full in cash of all obligations arising in connection with the new credit
facility. Subject to a final agreement between Chase and the standby lenders,
after the initial 12-month period, cash interest payments may be made only to
the extent by which EBITDAX, or earnings before interest, tax, depreciation and
amortization expense, on a trailing four-quarter basis exceed $65 million. The
new credit agreement may also prohibit us from making any cash interest payments
on the standby loan indebtedness if the outstanding indebtedness under both the
new credit facility and the standby loan exceeds 3.75 times the EBITDAX for the
trailing four quarters. We may prepay the standby loan notes at the face amount,
in whole or in part, in minimum denominations of $1,000,000, plus either a
standard make-whole payment at 300 basis points over the "treasury rate" for the
first four years, or beginning in the fifth year, a premium equal to one-half
the 15% base interest rate declining annually, and ratably to par. The "treasury
rate" is the yield of U.S. Treasury securities with a term equal to the
then-remaining term of the standby loan notes that has become publicly available
on the third business day before the date fixed for repayment. The standby loan
notes may only be paid if either all obligations under the new credit facility
have been paid in full in cash, or if the lenders of 75% of the outstanding
loans or, if none are outstanding, the lenders of 75% of the current loan
commitments under the new credit facility consent to payment.
If the standby loan notes are issued, the standby lenders will receive a
percentage of our fully diluted new common stock as of the effective date. If
$70 million in principal amount of the standby loan notes are issued, the
standby lenders will receive 14% of the fully diluted new common stock as of the
effective date. The amount of new common shares issued to the standby lenders
will be adjusted ratably according to the actual principal amount of standby
loan notes issued. The shares of new common stock issued to the standby lenders
will be in addition to the shares of new common stock issued to holders of the
existing
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<PAGE> 37
bonds, to our shareholders prior to reorganization and to persons participating
in this offering. See the section of this prospectus called "Dilution" for an
illustration of the dilution of the new common stock.
Fees for the standby lenders contained in the standby lender fee letter to
us dated January 24, 2000 were approved by the bankruptcy court at a hearing on
the fees held on January 27, 2000. These fees include a due diligence fee of
$200,000, payable immediately, and a break up fee of $1.0 million, to be paid if
the standby lenders give us written notice that all conditions to closing have
been met and if a plan of reorganization that does not use the standby loan is
subsequently confirmed and consummated. If, after receiving a written notice
from the standby lenders that they have completed their due diligence and all
conditions to closing have been met except entry of a plan confirmation order,
we confirm a plan of reorganization without an alternative financing proposal,
we will owe the standby lenders a closing fee in an amount equal to the greater
of $1.0 million or 3 1/2% of the aggregate principal amount of the standby loan
notes purchased. Our obligation to pay either the break up fee or closing fee
will be an administrative expense claim having priority over all administrative
expenses in accordance with Section 364(c)(1) of the bankruptcy code. We will
pay either the closing fee or the break up fee, not both.
The standby lender fee letter provides that there are only two essential
kinds of conditions which must be met before the standby lenders will be
committed to fund the standby loan on the effective date. These are agreement on
definitive documents and completion of economic due diligence. We expect all
conditions to be met by the effective date, but there is no assurance that this
will be the case. If all conditions have been met, the standby lenders will be
committed to fund on the effective date and the standby lenders will then be
entitled to a minimum fee of $1.0 million, either as a closing fee or break up
fee. If the standby lenders fund the standby loan on the effective date, they
will be entitled to the closing fee and will not be entitled to the break up
fee.
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<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements included in this prospectus. Some information
contained in this prospectus, including information with respect to our plans
and strategy for its business, are forward-looking statements. For more
information about the limitations associated with these types of statements, see
the section of this prospectus called "Cautionary Statement Regarding
Forward-Looking Statements."
SUBSEQUENT EVENTS
See the subsections below called "Bankruptcy Proceedings" and "Liquidity
and Capital Resources" for a description of certain events affecting our current
liquidity.
OUR HISTORY
We were incorporated in June 1993 under the laws of the State of Texas and
currently conduct a majority of our operations through Coho Resources, Inc.
In December 1994, we acquired all of the capital stock of Interstate
Natural Gas Company. Interstate Natural Gas, through its subsidiaries, was a
privately-held natural gas producer, gatherer and pipeline company operating in
Louisiana and Mississippi. To acquire Interstate Natural Gas, we:
- paid $20 million cash,
- assumed net liabilities of $3.3 million, excluding deferred taxes, and
- issued 2,775,000 shares of our common stock and 161,250 shares of
redeemable preferred stock having an aggregate stated value of $16.1
million.
The preferred shares were exchanged on August 30, 1998 for 3,225,000 shares of
our common stock. We accounted for the acquisition of Interstate Natural Gas
with the purchase method.
In April 1996, Interstate Natural Gas sold all of the stock of three
wholly-owned subsidiaries comprising its natural gas marketing and
transportation segment to an unrelated third party in exchange for:
- cash of $19.5 million,
- the assumption of net liabilities of approximately $2.3 million, and
- the payment of taxes of up to $1.2 million generated as a result of the
tax treatment of the transaction.
The marketing and transportation segment is accounted for as discontinued
operations in this prospectus.
On October 3, 1997, we issued 5,000,000 shares of common stock at $10.50
per share and $150 million of 8 7/8% senior subordinated notes due 2007, which
are our existing bonds. The combined $193.7 million in proceeds from these
offerings were used to repay $144.8 million of indebtedness outstanding under
our existing bank group loan, to fund general corporate purposes and to fund a
portion of the December 1997 Oklahoma property acquisition discussed in the next
paragraph.
Effective December 31, 1997, we acquired from Amoco Production Company
interests in crude oil and natural gas properties located primarily in southern
Oklahoma for approximately $257.5 million in cash and for warrants valued at
$3.4 million to purchase one million shares of our common stock at $10.425 per
share for a period of five years. The Oklahoma properties comprise more than
25,000 gross acres in southern Oklahoma, and include 14 major producing oil
fields. Of the 14 major producing fields, we operate eleven fields. At December
31, 1999, we had an average working interest of approximately 78% in these
eleven fields we operate.
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<PAGE> 39
On December 2, 1998, we sold our natural gas assets, including our natural
gas properties and the related gas gathering systems, located in Monroe,
Louisiana, to an unaffiliated third party for net proceeds of approximately
$61.5 million. The proved reserves attributable to these natural gas properties
represented approximately 14% of our year end 1997 proved reserves. The sale of
these assets represented substantially all of the remaining assets of Interstate
Natural Gas.
GENERAL
Our operating revenues result solely from crude oil and natural gas sales,
with crude oil sales representing approximately 75% of production revenues for
1997, 77% of production revenues for 1998 and 90% of production revenues for
1999. Natural gas sales represented approximately 25% of production revenues for
1997, 23% of production revenues for 1998 and 10% of production revenues for
1999. Approximately 60% of natural gas sales revenues during 1998 were
attributable to the gas properties located in Monroe, Louisiana, which we sold
in December 1998.
Operating revenues increased from $26.5 million in 1994 to $68.8 million in
1998 primarily due to an increase in production volumes from successful
development and exploration activities in our existing Mississippi fields and
due to the following acquisitions:
- the December 1994 acquisition of the Monroe natural gas field,
- the August 1995 acquisition of the Brookhaven field, and
- the December 1997 acquisition of the Oklahoma properties.
Operating revenues were $57.3 million for 1999, representing a 17% decrease
from the same period in 1998. This decrease is attributable to:
- our sale of our natural gas assets in Monroe, Louisiana in December 1998,
which contributed approximately 2,452 BOE per day during 1998,
- overall production declines on our operated properties in Oklahoma and
Mississippi as a result of natural decline and 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
- our halting of production on wells that we considered uneconomical
because of depressed crude oil prices.
We also strive to maintain a low cost structure through asset
concentration, such as in the interior salt basin of Mississippi and the
Oklahoma properties. Asset concentration permits operating economies of scale
and leverages operational, technical and marketing capabilities.
The price we receive for crude oil and natural gas may vary significantly
during the year due to the volatility of the crude oil and natural gas market,
particularly during the cold winter and hot summer months. As a result, we have
entered, and expect to continue to enter, into forward sale agreements or other
arrangements for a portion of our crude oil and natural gas production to hedge
our exposure to price fluctuations, though at December 31, 1999, we were not a
party to any forward sale agreements or other arrangements. It is unlikely that
we will be able to enter into any forward sales agreements or other similar
arrangements until we remedy our current liquidity problems because of the
associated credit risks of the counterparty to these agreements. See the
subsection of this prospectus called "Liquidity and Capital Resources" for more
information. While our hedging program is intended to stabilize cash flow and
thus allow us to plan our capital expenditure program with greater certainty,
any hedging transactions may limit our potential gains if crude oil and natural
gas prices rise substantially over the price established by the hedge. Because
all hedging transactions are tied directly to our crude oil and natural gas
production and natural gas marketing operations, we do not believe that these
transactions are of a speculative nature. Gains and losses on these hedging
transactions are reflected in crude oil and natural gas revenues at the time of
sale of the hedged production. Any gain or loss on our crude oil hedging
transactions is determined
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<PAGE> 40
as the difference between the contract price and the average closing price for
West Texas Intermediate crude oil on NYMEX for the contract period. Any gain or
loss on our natural gas hedging transactions is generally determined as the
difference between the contract price and the average settlement price on NYMEX
for the last three days during the month in which the hedge is in place.
Consequently, hedging activities do not affect the actual price received for our
crude oil and natural gas.
We also control the magnitude and timing of our capital expenditures by
obtaining high working interests in and operating our properties. At December
31, 1999, we owned an average working interest of 77% in the fields we operate.
BANKRUPTCY PROCEEDINGS
On August 23, 1999, we and our 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 United States
Bankruptcy Court for the Northern District of Texas. We are currently operating
as a debtor-in-possession subject to the bankruptcy court's supervision and
orders. We filed schedules with the bankruptcy court on September 21, 1999, and
amended these schedules on December 14, 1999. These schedules contain our
unaudited, and in some cases estimated, assets and liabilities as of August 23,
1999, as shown by our accounting records.
The bankruptcy petitions were filed to facilitate the restructuring of our
long term debt and to protect us while we develop a solution to our capital
needs with the banks, bondholders and potential investors. The following list
contains some important dates in our bankruptcy process:
<TABLE>
<S> <C>
- - August 23, 1999 -- We filed a voluntary Chapter 11 bankruptcy petition;
- - November 30, 1999 -- We filed our plan of reorganization;
- - February 4, 2000 -- At a hearing, the bankruptcy court approved our
disclosure statement with respect to our plan of
reorganization;
-- At a hearing, the bankruptcy court scheduled a
confirmation hearing for March 15, 2000, to consider our
plan of reorganization;
- - February 14, 2000 -- We and the Committee of Unsecured Creditors jointly filed
the Debtors' and Creditors Committee's First Amended and
Restated Chapter 11 Plan of Reorganization to reflect the
matters contained in the approved disclosure statement;
-- We began mailing our approved disclosure statement to
holders of claims and equity interests for voting on our
plan of reorganization;
- - February 15, 2000 -- We filed our approved disclosure statement with the
bankruptcy court;
- - March 10, 2000 -- Deadline for submitting votes on our plan of
reorganization;
- - March 15, 2000 -- Scheduled date for the confirmation hearing to consider
our plan of reorganization;
- - March 20, 2000 -- The bankruptcy court entered an order confirming our plan
of reorganization; and
- - March 31, 2000 -- Expected effective date of confirmation of our plan of
reorganization.
</TABLE>
Our plan of reorganization describes the means for satisfying claims,
including liabilities subject to compromise, and interests in Coho. Our plan of
reorganization includes the cancellation of our existing common stock and the
issuance of a new class of common stock in exchange for our existing common
stock and our existing bonds. The issuance of our new class of common stock will
materially dilute the current equity interests.
Our ability to effect a successful reorganization through our bankruptcy
proceedings depended upon our ability to obtain approval for the plan of
reorganization. As of March 3, 2000, the date the financial
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<PAGE> 41
statements were finalized, it was not possible to predict the outcome of the
bankruptcy proceedings, in general, or their effect on our business or on the
interests of our creditors or shareholders. We believed, however, that it would
not be possible to satisfy in full all of the claims against us if the plan of
reorganization was not approved. As a result of the bankruptcy filing, all of
our liabilities incurred before August 23, 1999, including secured debt, are
subject to compromise. Under the Bankruptcy Code, payment of these liabilities
may not be made except under a plan of reorganization or bankruptcy court
approval.
The December 31, 1999 financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts,
including $311.8 million in net property, plant and equipment, or the amount and
classification of liabilities that might result should we be unable to continue
as a going concern. Our ability 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 our ability to continue as a going
concern.
As a result of the Chapter 11 filing, we have incurred and will continue to
incur significant costs for professional fees as the plan of reorganization is
developed. We have incurred approximately $3.1 million in reorganization costs
during 1999, relating to the professional fees for consultants and attorneys who
are assisting in the negotiations associated with the financing and
reorganization alternatives, partially offset by interest income earned since
August 23, 1999, on accumulated cash.
On the effective date of our plan of reorganization we anticipate
significant adjustments will be made to our first quarter 2000 financial
statements to effect the reorganization.
RESULTS OF OPERATIONS
Selected Operating Data
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
PRODUCTION:
Crude oil (Bbl/day)....................................... 7,726 13,889 9,159
Natural gas (Mcf/day)..................................... 21,003 22,260 7,146
BOE (Bbl/day).......................................... 11,227 17,599 10,350
AVERAGE SALES PRICES:
Crude oil (per Bbl)....................................... $ 16.31 $ 10.40 $ 15.40
Natural gas (per Mcf)(a).................................. 2.23 1.98 2.24
PER BOE DATA:
Production costs(b)....................................... $ 3.90 $ 4.18 $ 5.60
Depletion................................................. 4.69 4.38 3.63
PRODUCTION REVENUES (IN THOUSANDS):
Crude oil................................................. $45,991 $52,689 $51,469
Natural gas............................................... 17,139 16,070 5,854
------- ------- -------
Total production revenues......................... $63,130 $68,759 $57,323
======= ======= =======
</TABLE>
- ---------------
(a) Natural gas prices are net of fuel costs used in gas gathering.
(b) Includes lease operating expenses and production taxes, exclusive of
general and administrative costs.
1999 COMPARED WITH 1998
Operating Revenues. During 1999, production revenues decreased 17% to $57.3
million as compared to $68.8 million in 1998. This decrease was principally due
to a 34% decrease in crude oil production and a 68% decrease in natural gas
production, substantially offset by increases of 48% in the price received for
crude oil and 13% in the price received for natural gas, including hedging gains
and losses discussed below.
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<PAGE> 42
The 68% decrease in daily natural gas production during 1999 is primarily
due to the December 1998 sale of the Monroe field gas properties which accounted
for 67% of our natural gas production during 1998. The 34% decrease in daily
crude oil production during 1999 is due to overall production declines in the
Mississippi and Oklahoma properties that we operate. Due to our capital
constraints caused by the decline in crude oil prices during 1998, we:
- significantly reduced both minor and major well repairs and drilling
activity on our 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 these actions contributed to our overall production declines. Since May
1999, we have been using working capital provided by operations to perform well
repair work to return some of our shut-in wells to production in response to the
improved crude oil prices in the second quarter of 1999. We intend 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 increases in price and the recent
repair work, we do not anticipate a significant improvement in production over
the production in 1999 until substantial additional funds are available for well
repairs and additional development activity.
Average crude oil prices increased 48% during 1999 compared to the same
period in 1998. During 1998 and the first quarter of 1999, substantially all of
our crude oil was sold under contracts which were keyed off of posted crude oil
prices. Beginning in April 1999, we entered into a new crude oil contract for
substantially all of our Oklahoma crude oil, now keyed off of the NYMEX price,
which should result in a net increase in our realized price. Our overall average
crude oil price per Bbl was $15.40, which represented a discount of 20% to the
average NYMEX price in 1999.
Our realized price for our natural gas, including hedging gains and losses
discussed below, increased 13% from $1.98 per Mcf in 1998 to $2.24 per Mcf in
1999 due to an increase in demand for natural gas during 1999.
Production revenues for 1999 and 1998 did not include any crude oil hedging
gains or losses. Production revenues in 1999 did not include any natural gas
hedging gains or losses compared to natural gas hedging gains of $488,000 ($0.06
per Mcf) for 1998.
Expenses. Production expenses, including production taxes, were $21.2
million for 1999 compared to $26.9 million for 1998. The decrease in expenses
between years is primarily due to:
- decreased production,
- decreased production taxes, and
- the December 1998 sale of the Monroe properties.
On a BOE basis, production costs increased 34% to $5.60 per BOE in 1999 compared
to $4.18 per BOE in 1998. On a BOE basis, the increase in production costs is
primarily due to a decrease in production volumes, which resulted in a higher
fixed cost per BOE, and $3.3 million of well repair work performed during the
last half of 1999 to return shut-in wells to production. Additionally, severance
taxes increased $0.25 per BOE over the same period last year due to higher price
realization. The current well repair work represents an accumulation of projects
because we had reduced both minor and major well repairs during the last five
months of 1998 and ceased substantially all well repair work in December 1998
due to depressed oil prices.
General and administrative costs increased $2.2 million or 28% between the
comparable periods. This 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
39
<PAGE> 43
$5.7 million of these costs in 1998. Total general and administrative costs,
excluding capitalization of administrative costs associated with exploration and
development activities, decreased $3.6 million or 27% between the comparable
periods. This decrease is primarily due to:
- cost reductions associated with the Monroe field sale,
- reductions in employee-related costs due to staff attrition,
- reductions in estimated franchise tax accruals as a result of our losses
in 1998, and
- reductions in professional fees and general corporate costs.
These decreases were partially offset by lower cost recoveries from working
interest owners due to a decrease in well activity.
State income tax penalties of $1.0 million for 1999 result from
approximately $4 million in Louisiana state income taxes which were due on April
15, 1999, resulting from the gain on the December 1998 sale of the Monroe gas
field. The past due taxes include the accrual of the maximum penalty of 25% of
the taxes due.
Interest expense increased 3% in 1999 compared to 1998 primarily as a
result of higher interest rates from payment defaults and debt acceleration, but
partially offset by the discontinuance of interest expense accruals on our
unsecured debt. On August 24, 1999, we discontinued the accrual of interest on
our unsecured debt as a result of our Chapter 11 filing. We would have
recognized approximately $5.7 million of additional interest expense in 1999,
including $2.2 million of interest on our existing bonds that would have been
due on October 15, 1999, if not for the discontinuation of these interest
expense accruals. The average interest rate on outstanding indebtedness was
8.55% in 1999, compared to 8.07% in 1998.
Depletion and depreciation expense decreased 51% to $13.7 million in 1999
from $28.1 million in 1998. This decrease is primarily the result of decreased
production volumes and a decreased depletion and depreciation rate per BOE,
which was $3.63 in 1999, compared with $4.38 in 1998. The depletion and
depreciation rate per BOE decreased between 1998 and 1999 due to the writedowns
of oil and gas properties in 1998 as discussed in the next paragraph.
In accordance with generally accepted accounting principles, at a point in
time coinciding with the quarterly and annual reporting periods, we must test
the carrying value of our crude oil and natural gas properties, net of related
deferred taxes, against the "cost center ceiling." The "cost center ceiling" is
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. If
the carrying value exceeds the cost center ceiling, the excess must be expensed
in that period and the carrying value of the oil and gas reserves lowered
accordingly. Amounts required to be written off may not be reinstated for any
subsequent increase in the cost center ceiling. During 1998, the carrying values
related to our United States properties exceeded the cost center ceilings,
resulting in non-cash writedowns of our crude oil and natural gas properties of
$188 million. These writedowns resulted from the declines in crude oil prices in
1998. No writedowns of this kind were required on our United States properties
in 1999.
In June 1999, we commenced drilling an exploratory well on our Anaguid
permit in Tunisia, North Africa, due to our obligation under the permit. In
September 1999, we tested the well and determined that the well would not
produce sufficient quantities of crude oil to justify further completion work on
it. As a result, we took a writedown of our 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, assumed responsibility as operator in
December 1999 and plans to continue exploration of this permit. Our remaining
carrying cost in this permit is $2.4 million associated with geological and
geophysical costs that will be used for this continued exploration.
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<PAGE> 44
Reorganization costs of $3.1 million in 1999 relate to professional fees
for consultants and attorneys assisting us in the negotiations associated with
our financing and reorganization alternatives and are partially offset by
interest income earned since August 23, 1999, on accumulated cash.
Our net operating loss carryforwards for United States and Canadian federal
income tax purposes were approximately $124.0 million at December 31, 1999 and
expire between 2000 and 2019. Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," requires that the tax benefit of those net
operating loss carryforwards be recorded as an asset to the extent that
management assesses the utilization of those net operating loss carryforwards to
be more likely than not. A valuation allowance has been established for the
entire net deferred tax asset balance of these net operating loss carryforwards
as it is uncertain whether they will be used before they expire.
Due to the factors discussed above, our net loss for 1999 was $30.7
million, as compared to a net loss of $203.3 million for 1998. The 1999 loss
includes a writedown of our Tunisian oil and gas properties of $5.4 million and
the 1998 loss includes writedowns of our United States crude oil and natural gas
properties of $188.0 million.
1998 COMPARED WITH 1997
Operating Revenues. During 1998, production revenues increased 9% to $68.8
million as compared to $63.1 million in 1997. This increase was principally due
to an 80% increase in crude oil production and a 6% increase in natural gas
production, substantially offset by decreases of 36% in the prices received for
crude oil and decreases of 11% in the prices received for natural gas including
hedging gains and losses discussed below.
The 6% increase in daily natural gas production is primarily due to a 26%
increase in production as a result of the December 1997 acquisition of the
Oklahoma properties, substantially offset by production declines on our
Brookhaven, Martinville, North Padre and Monroe fields. Additionally, the Monroe
field was sold to an unaffiliated third party on December 2, 1998, resulting in
lower gas production for 1998 as compared to 1997. The Monroe field represented
85% of our gas production in 1997 and 67% of our gas production in 1998. The 80%
increase in daily crude oil production during 1998 is primarily due to a 76%
increase in production as a result of the acquisition of the Oklahoma
properties. Although we increased crude oil production during the first three
quarters of 1998 as compared to the same period in 1997 in the Martinville and
Brookhaven fields, these increases were substantially offset by fourth quarter
1998 crude oil production declines of 21% on our Mississippi fields as compared
to the fourth quarter of 1997 and overall crude oil production declines in the
Soso and Summerland fields throughout 1998 as compared to 1997.
Crude oil and natural gas production declined in the fourth quarter of 1998
from an average of 18,495 BOE per day during the first nine months of 1998 to
14,939 BOE per day during the fourth quarter of 1998 due to the December 1998
sale of the Monroe field natural gas properties and to overall production
declines in the operated Mississippi and Oklahoma properties. Due to our capital
restraints caused by the decline in crude oil prices, we significantly reduced
both minor and major well repairs on our operated properties during the last
five months of 1998 and ceased all well repairs in December 1998, resulting in
overall production declines.
Average crude oil prices realized in 1998, including hedging gains and
losses discussed below, decreased from 1997 due to declining oil prices which
can be attributed to several factors, including:
- a 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.
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<PAGE> 45
The posted price for our crude oil averaged $11.32 per Bbl in 1998, a 38%
decrease over the average posted price of $18.34 per Bbl experienced in 1997.
The price per Bbl we received is adjusted for the quality and gravity of the
crude oil and is generally lower than the posted price.
The realized price for our natural gas, including hedging gains and losses
discussed below, decreased 11% from $2.23 per Mcf in 1997 to $1.98 per Mcf in
1998 due to a lack of cold weather and market volatility.
Production revenues for 1998 did not include crude oil hedging gains or
losses compared to crude oil hedging losses of $0.3 million ($0.11 per Bbl) in
1997. Production revenues in 1998 included natural gas hedging gains of $0.5
million ($0.06 per Mcf) compared with natural gas hedging gains of $0.1 million
($0.01 per Mcf) for 1997.
Interest and other income decreased to $214,000 in 1998 from $646,000 in
1997 primarily due to a decline of interest received on cash investments in
1998. In 1997, we received $137,000 of interest in the first quarter on a
federal tax refund and earned $465,000 of interest in the fourth quarter on cash
investments.
Expenses. Production expenses, including production taxes, were $26.9
million for 1998 compared to $16 million for 1997. On a BOE basis, production
costs increased to $4.18 per BOE in 1998 compared to $3.90 per BOE in 1997. The
increase in expenses between years is primarily due to an increase of
approximately $11.8 million relating to the December 1997 acquisition of the
Oklahoma properties. This increase was partially offset by reduced operating
costs on our Mississippi properties due to the improved operating efficiencies
and due to our reduction of repairs during the last half of 1998 because of the
decline in crude oil prices.
General and administrative costs increased 8% from $7.2 million in 1997 to
$7.8 million in 1998. This increase resulted primarily from increased personnel
costs due to staff additions to handle the increased capital activities in
Mississippi during the first half of 1998 and the December 1997 acquisition of
the Oklahoma properties. In addition, this increase resulted from the accrual of
a $0.4 million fee related to the termination of a drilling contract which
extended through mid-year 1999, partially offset by an increase in
capitalization of salaries and other general and administrative costs directly
associated with our exploration and development activities.
Allowance for bad debt in 1998 represents an allowance for uncollectible
accounts receivable from working interest owners and an allowance for director
and employee receivables as discussed in Note 11 to the consolidated financial
statements contained elsewhere in this prospectus.
Unsuccessful transaction costs of $2.1 million incurred in 1998 relate to
the termination of an agreement in which we were to issue $250 million of
equity. These costs are comprised of $1.2 million for financial advisory
services in conjunction with this transaction, $0.5 million for an outside
financial advisor regarding the fairness of the agreement and $0.4 million for
legal, accounting and other services.
Interest expense increased 296% in 1998 compared to 1997, due to higher
borrowing levels during 1998 as compared to 1997 and to the sale of $150 million
of senior notes on October 3, 1997, which bear a higher interest rate than our
revolving credit facility. The average interest rate paid on outstanding
indebtedness was 8.07% in 1998, compared to 7.84% in 1997. Our borrowing levels
increased throughout 1997 and 1998 due to additional borrowings to fund our
capital expenditure program and the December 1997 acquisition of the Oklahoma
properties.
Depletion and depreciation expense increased 46% to $28.1 million in 1998
from $19.2 million in 1997. These increases are primarily the result of
increased production volumes partially offset by a decreased rate per BOE, which
decreased to $4.38 in 1998, compared with $4.69 in 1997. The depletion and
depreciation rate per BOE decreased between 1997 and 1998 because of the
writedowns of oil and gas properties in 1998 as discussed below.
During 1998, the carrying values of our crude oil and natural gas
properties exceeded the cost center ceilings, resulting in non-cash writedowns
of the crude oil and natural gas properties, aggregating
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<PAGE> 46
$188 million, including $32 million recognized in the first quarter of 1998, $41
million recognized in the second quarter of 1998 and $115 million recognized in
the fourth quarter of 1998.
Current tax expense of $4.1 million in 1998 primarily relates to state
income taxes due on the December 1998 sale of the Monroe field natural gas
properties and related gas gathering systems.
Our net loss for 1998 was $203.3 million, as compared to net earnings of
$6.3 million for 1997, for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Capital Sources. During 1999, cash flow provided by operating activities
was $14.9 million compared with $1.0 million during 1998. Operating revenues,
net of lease operating expenses, production taxes and general and administrative
expenses, decreased $7.9 million during 1999 as compared to 1998. This decrease
resulted primarily from a 42% decline in production on a BOE basis between
comparable periods, partially offset by price increases between comparable
periods of 48% for crude oil and 13% for natural gas. In addition, due to the
cessation of exploration and development of crude oil and natural gas reserves,
no overhead expenditures were capitalized during 1999 as compared to $5.7
million of capitalized overhead during 1998. We also incurred costs totaling
$4.2 million in 1999 related to state income tax penalties and reorganization
costs and additional interest expense of $1.0 million in 1999 over 1998. Changes
in operating assets and liabilities provided $25.8 million of cash for operating
activities for 1999, compared to $4.6 million provided for 1998, primarily due
to an increase in accrued interest payable. See the subsection called "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, our crude oil and natural gas production declined
from an average of 17,599 BOE per day during 1998 to 10,350 BOE per day during
1999. We do not anticipate a significant improvement in production over the
production in 1999 until substantial additional funds are available for well
repairs and additional development activity. See "Results of Operations -- 1999
Compared to 1998" for a discussion of production declines.
Based on the December 1999 production level of approximately 10,320 BOE per
day and the average price received in December 1999 of approximately $21.78 per
barrel of crude oil and $2.25 per Mcf of natural gas, our operating revenues are
adequate to cover lease operating expenses, production taxes, general and
administrative expenses and current interest accruing on the borrowings under
the existing bank group loan but are not sufficient to cover past due interest
on our existing bonds or on the borrowings under the existing bank group loan.
Our working capital deficit, including $423.7 million of liabilities
subject to compromise, was $407.5 million at December 31, 1999 compared to a
working capital deficit of $388.3 million at December 31, 1998. The increase in
the working capital deficit relates to several factors. Accrued interest
increased by $24.2 million primarily because we were unable to make interest
payments when due prior to filing bankruptcy on August 23, 1999 and because
interest has been accruing on the existing bank group loan at the default rate
of prime plus 4% since August 23, 1999. We also borrowed an additional $4.6
million under the existing bank group loan in January 1999 that is reflected in
the current portion of long term debt. Cash balances on hand increased from $6.9
million at December 31, 1998 to $18.8 million at December 31, 1999, partially
offsetting the increase in current liabilities. The increase in cash occurred as
a result of our Chapter 11 filing and reductions in spending under limitations
imposed by the bankruptcy court.
Subsequent to August 23, 1999 we 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, we have been operating under three interim
orders authorizing the use of cash collateral as approved by the bankruptcy
court. We are 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. Under these orders, we may pay for ordinary course of
business goods and services incurred after August 23, 1999 that are within the
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<PAGE> 47
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. We have accumulated, as
of December 31, 1999, $18.8 million in cash, an increase of $12.8 million since
August 23, 1999, that can be used for operations under the terms of the cash
collateral orders.
The current interim cash collateral order of the bankruptcy court expired
on January 30, 2000. We and the bank group agreed to an extension of the cash
collateral order through March 31, 2000. We paid additional interest payments of
$1.8 million on February 1, 2000 and March 1, 2000.
On February 22, 1999, we were informed by the bank group that our borrowing
base was reduced from $242 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 existing bank group loan, we were required to cure the over advance
amount by March 2, 1999 by either:
- providing collateral with value and quantity in amounts equal to the
excess,
- prepaying, without premium or penalty, the excess plus accrued interest,
or
- paying the first of five equal monthly installments to repay the over
advance.
We were unable to cure the over advance as required by the existing bank group
loan and received written notice from the bank group on March 8, 1999, that we
were in default under the terms of the existing bank group loan and the bank
group reserved all rights, remedies and privileges as a result of the payment
default. Additionally, we were unable to pay the second installment due at the
beginning of April, the third installment due at the beginning of May, the
fourth installment due at the beginning of June and the fifth installment due at
the beginning of July, 1999. We have made aggregate interest payments of
approximately $3.4 million during the period between March and July 1999. As a
result of the payment defaults, advances under the existing bank group loan bear
interest at the prime rate, and the loan agreement provides that past due
installments to repay the over advance and past due interest bear interest at
the default interest rate of prime plus 4%. On August 19, 1999, the bank group
accelerated the full amount outstanding under the existing bank group loan. The
bank group contends that the default rate of interest is owed on all amounts,
not only the over advance, since the date of acceleration. Under a cash
collateral order approved by the bankruptcy court in November 1999, we made an
interest payment of $878,000 to the bank group in December 1999 and are required
to make monthly interest payments of approximately $1.8 million. Due to the
default, the outstanding advances of $239.6 million have been included in
liabilities subject to compromise as of December 31, 1999. The total amounts
related to the installment payments due on the over advance and past due
interest were approximately $108.8 million as of December 31, 1999, including
approximately $19.2 million of past due interest, $10.2 million included in
liabilities not subject to compromise, and $89.6 million related to installments
due on the over advance.
The existing bank group loan contains financial and other covenants
including:
- 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 our capital stock,
- maintenance of minimum ratios of cash flow to interest expense of 1.5 to
1.0 as well as current assets including unused borrowing base to current
liabilities of 1.0 to 1.0,
- limitations on our ability to incur additional debt, and
- restrictions on the payment of dividends.
At December 31, 1999, we were not in compliance with the minimum shareholders'
equity, cash flow to interest expense and current asset to current liability
covenants.
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We did not pay the April 15, 1999 interest payment of approximately $6.7
million due on our existing bonds and are currently in default under the terms
of the existing bond indenture. Under the existing bond indenture, the trustee
under the existing bond indenture by written notice to us, or the holders of at
least 25% in principal amount of the outstanding existing bonds by written
notice to the trustee and us, may declare the principal and accrued interest on
all the existing bonds due and payable immediately. However, we may not pay the
principal of, any premium or interest on the existing bonds so long as any
required payments due on the existing bank group loan remain outstanding and
have not been cured or waived. On May 19, 1999, we received a written notice of
acceleration from two holders of the existing bonds, which own in excess of 25%
in principal amount of the outstanding existing bonds. Both the accelerated
principal and the past due interest payment bore interest at the default rate of
9.875%, which is 1% in excess of the stated rate for the existing bonds, from
the date of acceleration to the August 23, 1999. As a result of our bankruptcy
filing we have ceased accruing interest on unsecured debt, including the
existing bonds. Approximately $5.7 million of additional existing bond interest
expense, including $2.2 million of existing bond interest expense that would
have been due on October 15, 1999, would have been recognized by us in 1999 if
not for the discontinuance of the interest expense accruals. All amounts
outstanding under the existing bonds as of December 31, 1999 have been included
in liabilities subject to compromise.
We 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.
On December 2, 1998, we sold our natural gas assets, including our natural
gas properties and the related gas gathering systems, located in Monroe,
Louisiana for approximately $61.5 million. Proceeds from the sale were used to
reduce borrowings under the existing bank group loan.
Plan of Reorganization. We filed our plan of reorganization with the
bankruptcy court on November 30, 1999 and a confirmation hearing was held
beginning on March 15, 2000 for final approval of the plan of reorganization. On
March 20, 2000, the bankruptcy court entered a confirmation order confirming our
plan of reorganization. For more information about our plan or reorganization,
see the section of this prospectus called "The Plan of Reorganization."
Under the plan of reorganization, we expect to establish a new senior
revolving credit facility from a syndicate of new lenders led by Chase Manhattan
Bank, as agent for the new lenders, for a principal amount of up to $250
million. Additionally, we are expected to raise up to $90 million of new
investment by the offering of rights to acquire shares of a new class of our
common stock and, if necessary, up to $90 million in a standby loan. For more
information, see the section of this prospectus called "The Plan of
Reorganization -- The New Debt and Equity."
Proceeds from the rights offering together with cash on hand as of the
effective date, borrowings under the new credit facility and, if necessary,
borrowings under the standby loan will be used to:
- repay amounts due under the existing bank group loan, including accrued
interest and reasonable fees and expenses,
- pay administrative expenses associated with the bankruptcy proceeding,
and
- provide working capital for future operations.
General unsecured creditors will be paid in full in four equal quarterly
installments from working capital during the year following the effective date
and tax claims will receive five-year promissory notes bearing interest at a
rate of 6% per annum, unless a different rate is chosen by the bankruptcy court,
or paid on other agreed terms. For more information, see the section of this
prospectus called "The Plan of Reorganization -- Classification Treatment
Summary."
The holders of the our existing bonds will receive shares representing 96%
of our new common stock as of the effective date without giving effect to
dilution from shares issued under the rights offering or the
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<PAGE> 49
standby loan. For more information, see the section of this prospectus called
"The Plan of Reorganization -- 2. Existing Bondholders."
Existing shareholders will receive shares representing 4% of our new common
stock on a basis of one share of new common stock for 40 shares of existing
common stock as of the effective date without giving effect to dilution from
shares issued under the rights offering or the standby loan and rights to
purchase additional shares of our new common stock at $10.40 per share.
Additionally, existing shareholders will receive 20% of any proceeds from the
Hicks Muse lawsuit after fees and expenses, and 40% of any proceeds from the
disposition of our interest in, or the assets of, Coho Anaguid, Inc. For more
information, see the section of this prospectus called "The Plan of
Reorganization -- 3. Existing Shareholders."
Dividends. While we are restricted on the payment of dividends under the
existing bank group loan, dividends are permitted on our equity securities
provided:
- we are not in default under the existing bank group loan; and
- (a) the aggregate sum of the proposed dividend, plus all other dividends
or distributions made since February 8, 1994 do not exceed 50% of
cumulative consolidated net income during the period from January 1,
1994 to the date of the proposed dividend, or
(b) the ratio of total consolidated indebtedness, excluding accounts
payable and accrued liabilities to shareholders' equity does not
exceed 1.6 to 1.0 after giving effect to the proposed dividend or
(c) the aggregate amount of the proposed dividend, plus all other
dividends or distributions made since February 8, 1994, do not
exceed 100% of cumulative consolidated net income for the three
fiscal years immediately preceding the date of payment of the
proposed dividend.
The existing bond indenture limits our ability to pay dividends, based on our
ability to incur additional indebtedness and primarily limited to 50% of
consolidated net income earned, excluding any write down of property, plant and
equipment after the date the existing bonds were issued plus the net proceeds
from any future sales of our capital stock. Due to our default under the
existing bank group loan and due to our current and expected capital needs as
discussed above, it is unlikely that we will pay dividends in the foreseeable
future. Additionally, the terms of the new credit facility and the standby loan
will restrict our paying dividends.
Capital Expenditures. During 1999, we incurred capital expenditures of $6.3
million, which includes $2.1 million spent on the Tunisian well drilled in
mid-1999, compared with $70.1 million for 1998. We have ceased substantially all
of our capital projects in 1999 due to our liquidity problems and our bankruptcy
filing. No general and administrative costs associated with our exploration and
development activities were capitalized for 1999, compared with $5.7 million of
capitalized costs for 1998.
During 1998, we incurred capital expenditures of $70.1 million compared
with $72.7 million in 1997. The capital expenditures incurred during 1998 were
largely in connection with the continuing development efforts, including
recompletions, workovers and waterfloods, on existing wells in the following
fields:
<TABLE>
<S> <C>
- - Brookhaven - Tatums
- - Laurel - East Fitts
- - Martinville - North Alma Deese and
- - Summerland - Sholem Alechem.
- - Bumpass
</TABLE>
In addition, during 1998, we drilled 42 wells which include the following:
<TABLE>
<S> <C> <C>
- - Mississippi fields - Oklahoma fields - Louisiana fields
-- 16 producing oil wells, -- 11 producing oil wells -- 2 producing gas wells, and
-- 1 producing gas well, -- 5 producing gas wells, -- 3 dry holes.
-- 3 dry holes; -- 1 dry hole;
</TABLE>
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<PAGE> 50
General and administrative costs directly associated with our exploration
and development activities were $4.1 million and $5.7 million for the years
ended December 31, 1997 and 1998, respectively, and were included in total
capital expenditures.
Hedging Activities. Crude oil and natural gas prices are subject to
significant seasonal, political and other variables which are beyond our
control. In an effort to reduce the effect of the volatility of the prices
received for crude oil and natural gas, we have entered, and expect to continue
to enter, into crude oil and natural gas hedging transactions. It is unlikely
that we will be able to enter into any forward sales agreements or other similar
arrangements until we remedy our current liquidity problems because of the
associated credit risks of the counterparty to these agreements. Our hedging
program is intended to stabilize cash flow and thus allow us to minimize our
exposure to price fluctuations. Because all hedging transactions are tied
directly to our crude oil and natural gas production, we do not believe that
these transactions are of a speculative nature. Gains and losses on these
hedging transactions are reflected in crude oil and natural gas revenues at the
time of sale of the hedged production. We had no natural gas or crude oil
production hedges during 1999.
We will be required to adopt Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" for the
fiscal year ended 2001. If we had adopted this standard during 1999, there would
be no effect as we had no hedges outstanding at December 31, 1999. Although the
future impact of adopting this standard has not yet been determined, we believe
that the impact will not be material.
YEAR 2000 ISSUE
We, like other businesses, faced 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. We divided our 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. We completed our Year 2000 review and remediation in December 1999.
We concurrently reviewed Year 2000 compliance of major suppliers and
purchasers. We have contacted our major suppliers and purchasers by letter and
have asked for a written response from them describing their Year 2000 readiness
efforts. To date, we have not identified any material problems associated with
the Year 2000 readiness efforts of our major suppliers and purchasers.
In addition, we created a contingency plan to mitigate potential Year 2000
problems both within Coho and with our major suppliers and purchasers.
Cost. We began our Year 2000 Program in 1997, and have incorporated our
preparations into our normal equipment upgrade cycle. As a result, the
historical cost of our Year 2000 efforts to date has not been material. We do
not estimate future expenditures related to the Year 2000 to be material.
Risks. We believe that we have taken and are taking all reasonable steps to
ensure Year 2000 readiness. Although other unanticipated Year 2000 issues could
yet have an adverse effect on our results of operations or our financial
condition, it is not possible to estimate the extent of impact at this time,
though it is unlikely that any effect will be material.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS PROSPECTUS ARE
"YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR 2000
INFORMATION AND READINESS DISCLOSURE ACT.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We use 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. Our results of operations are highly dependent upon the
prices received for crude oil and natural gas production. We have entered, and
expect to continue to enter, into forward sale agreements or other arrangements
for a portion of our crude oil and natural gas production to hedge our exposure
to price fluctuations. At December 31, 1999, we were not a party to any forward
sale agreements or other arrangements. It is unlikely that we will be able to
enter into any forward sales agreements or other similar arrangements until we
remedy our current liquidity problems because of the associated credit risks of
the counterparty to these agreements. For more information see the section of
this prospectus called "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Interest Rate Risk. Total debt as of December 31, 1999, included $239.6
million of floating-rate debt attributed to the existing bank group loan. As a
result, our annual interest cost in 2000 will fluctuate based on short-term
interest rates. Additionally, due to the current payment defaults under the
existing bank group loan discussed under the section of this prospectus called
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the existing bank group loan borrowings and the past due interest
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 125 basis points) would be approximately $3.0 million assuming
outstanding debt of $239.6 million throughout the year.
Total debt as of December 31, 1999, also included $149 million, net of
$900,000 of unamortized original issue discount, of fixed rate existing bonds
with an estimated fair market value of $83 million based on quoted prices from
market sources.
We are in default under our existing bank group loan and our existing
bonds. For more information see the section of this prospectus called
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On the effective date of the plan of reorganization, the existing bank
group loan is expected to be paid in full in cash and the existing bonds will be
converted to our new common stock. A new line of credit will be established with
the new lenders and Chase, as agent for the new lenders. If necessary, we may
also obtain additional funds under the standby loan with a maximum commitment of
$90 million. The establishment of the new debt instruments, as discussed above,
is expected to change our interest rate risk.
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BUSINESS
GENERAL
Coho Energy, Inc. is an independent energy company engaged, through its
wholly owned subsidiaries, in the development and production of, and exploration
for, crude oil and natural gas. Our crude oil activities are concentrated
principally in Mississippi and Oklahoma. At December 31, 1999, our total proved
reserves were 113.9 MMBOE with a present value of proved reserves of $790.2
million, approximately 69% of which were proved developed reserves. At December
31, 1999, approximately 94% of our total proved reserves were comprised of crude
oil. At December 31, 1999, our operations were conducted in 21 major producing
fields, 17 of which we operated. Our average working interest in the fields we
operate was approximately 77%.
We were incorporated in June 1993 under the laws of the State of Texas and
conduct a majority of our operations through our subsidiary Coho Resources, Inc.
References in this Prospectus to "Coho," "we," "our," or "us," except as
otherwise indicated, refer to Coho Energy, Inc. and our subsidiaries. Our
principal executive office is located at 14785 Preston Road, Suite 860, Dallas,
Texas 75240, and our telephone number is (972) 774-8300.
BANKRUPTCY PROCEEDINGS
Our ability to effect a successful reorganization through our bankruptcy
proceedings will depend upon our ability to consummate our plan of
reorganization, which was confirmed by the bankruptcy court on March 20, 2000.
At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on our business or on the interests of
our creditors or shareholders. For more information regarding the bankruptcy
proceedings, see the sections of this prospectus called "Oil and Gas
Operations -- Legal Matters" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
OUR HISTORY
We commenced operations in Mississippi in the early 1980s and have focused
most of our development efforts in that area. We believe that the salt basin in
central Mississippi offers significant long-term potential due to the basin's
large number of mature fields with multiple oil and gas producing sands. The
application of proven technology to these underexploited and underexplored
fields yields attractive, lower-risk exploitation and exploration opportunities.
As a result of the attractive geology and our experience in exploiting fields in
the area, we have accumulated a large inventory of potential development
drilling, secondary recovery and exploration projects in this basin.
Our focus in the onshore Gulf Coast and Mid-Continent regions has resulted
in significant growth in production, reserves and earnings before interest,
taxes, depreciation and amortization. Our average net daily production has
increased over the last six years from 5,203 BOE in 1993 to 10,350 BOE in 1999,
representing a compound annual growth rate of 12.1%; however, our crude oil and
natural gas production has declined from the average of 17,599 BOE per day
produced during 1998. This decline was due in part to the sale of the Monroe
field gas properties in December 1998, which contributed approximately 2,452 BOE
per day during 1998. Further, we experienced overall production declines on our
operated properties in Oklahoma and Mississippi as a result of:
- the natural production decline,
- 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.
Over the five-year period ended December 31, 1999, we discovered or
acquired approximately 90.9 MMBOE of proved reserves at an average finding cost
of $4.83 per BOE. Over the same period,
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we have replaced over 428% of our production. This increase in reserves from
44.2 MMBOE at year-end 1994 to 113.9 MMBOE at year-end 1999 represents a
five-year compound annual growth rate of 21.0%.
Effective December 31, 1997, we acquired from Amoco Production Company:
- approximately 50 MMBbls of crude oil and natural gas liquid reserves,
- approximately 33 Bcf of natural gas reserves, and
- interests in more than 40,000 gross acres, concentrated primarily in
southern Oklahoma, including 14 principal producing fields.
Daily net production from these properties during December 1997 was
approximately 7,300 BOE. To acquire these properties, we paid $257.5 million in
cash and issued warrants to purchase one million of our common shares at $10.425
per share for a period of five years.
In August 1998, we announced an agreement to issue $250 million of our
common stock at $6.00 per share, approximately 41.7 million shares, to HM4 Coho
L.P., a limited partnership managed by Hicks, Muse, Tate & Furst Incorporated,
giving HM4 an ownership interest in Coho of approximately 62%. On December 15,
1998, we announced that HM4 was terminating the agreement reached in August
1998, which had received shareholder approval, and that we were working on
revising the HM4 agreement to lower the $6.00 price per share to $4.00 on the
$250 million purchase price. After working through all of the issues and
reaching a verbal agreement with all of the interested parties regarding the
proposed restructuring, HM4 informed us on February 12, 1999 that they were no
longer interested in the investment.
On May 27, 1999, we filed a lawsuit against HM4 in the District Court of
Dallas County, Texas. The lawsuit alleges:
- breach of the written contract terminated by HM4 in December 1998,
- breach of the oral agreements reached with HM4 on the restructured
transaction in February 1999, and
- promissory estoppel.
In the lawsuit, we seek monetary damages of approximately $500 million. The
lawsuit is currently in the discovery phase. While we believe that the lawsuit
has merit and that the actions of HM4 in December 1998 and February 1999 were
the primary cause of our current liquidity crisis, there can be no assurances as
to the outcome of this litigation.
On February 22, 1999, the bank group under our existing bank credit
facility notified us that they had decided to reduce our borrowing capacity at
January 31, 1999, from $242 million to $150 million, creating an $89.6 million
over advance. The bank group's decision to change our borrowing capacity was
based on the then-current decline in crude oil prices. We were unable to cure
the over advance, and on March 8, 1999, we received written notice from the bank
group that we were in default under the existing credit facility, and the bank
group reserved all rights, remedies and privileges as a result of the payment
default. On August 19, 1999, the bank group accelerated the full amount
outstanding under the existing bank group loan. For more information about the
default under the existing credit facility, see the section of this prospectus
called "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Additionally, our $150 million 8 7/8% bond indenture includes cross-default
provisions, which would effect a default under the terms of our $150 million
8 7/8% bonds if indebtedness under the existing bank group loan was not repaid
within the applicable grace period after final maturity. We were unable to make
the $6.7 million interest payment to the holders of our existing bonds which was
due on April 15, 1999. On May 19, 1999, we received a written notice of
acceleration from two holders of existing bonds, which own in excess of 25% in
principal amount of the outstanding existing bonds. As a result, on May 19,
1999,
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one of the holders of existing bonds filed a lawsuit against us and each of our
subsidiaries who is a guarantor of existing bonds in the Supreme Court of the
State of New York. On January 5, 2000, this lawsuit was dismissed without
prejudice to the plaintiff's ability to refile the lawsuit in the future, if
appropriate. For more information about the default under the existing bonds,
see the section of this prospectus called "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
We explored our alternatives to resolve the problems created by the bank
group's actions, including:
- the conversion of a portion or all of our existing bonds to equity,
- raising additional equity,
- cost reduction programs to enhance cash flow from operations, and
- refinancing our existing bank credit facility to:
- make overdue principal and interest payments on our indebtedness,
- provide additional capital to fund well repairs, and
- provide additional capital to fund the continued development of our
properties.
However, on August 23, 1999, we made the Chapter 11 filing since we believed
that the resolution of our restructuring could not be completed without the
protection and assistance of the bankruptcy court.
BUSINESS STRATEGY
While we remain committed in the long term to our multifaceted growth
strategy, as discussed below, oil prices and cash flow estimates dictate our
near-term business strategy. Most of our near-term capital expenditures are
expected to be made in Oklahoma and Mississippi. Our Oklahoma properties offer
numerous shallow oil and gas recompletion and drilling opportunities with
favorable economics.
In the past we have pursued a multifaceted growth strategy, as follows:
Relatively Low-Risk Field Development. We maximize production and increase
reserves through relatively low-risk activities such as:
- development/delineation drilling, including high-angle and horizontal
drilling,
- multi-zone completions,
- recompletions,
- enhancement of production facilities, and
- secondary recovery projects.
Since 1994, we have drilled 94 development wells, of which 87% were completed
successfully.
Use of Technology. We identify exploration prospects and develop reserves
in the vicinity of our existing fields using technologies that include 3-D
seismic technology. 3-D seismic technology is a tool that allows us to look at
vertical cross-sections as well as horizontal cross-sections beneath the
prospective area of our properties on a very small grid pattern. We first began
using 3-D seismic technology in the Laurel field in Mississippi in 1983, and
have shot two large 3-D seismic programs in and around our existing properties
in Mississippi within the last four years. At the time of purchase, we acquired
four 3-D seismic programs in and around our Oklahoma properties. These programs
have produced an attractive inventory of exploration projects that can be
pursued in the future.
Acquire Properties with Underdeveloped Reserves. We acquire underdeveloped
crude oil and natural gas properties which have geological complexity and
multiple producing horizons. We believe that our extensive experience in
Mississippi developed over the past 15 years should enable us to efficiently
increase
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reserves and improve production rates in similar geologically complex
environments. Additionally, we believe that this experience gives us a
competitive advantage in evaluating similarly situated acquisition prospects.
For more information about our experience in Mississippi, see "Oil and Gas
Operations -- Principal Areas of Activity -- Mid-Continent Area."
Significant Control of Operations. Our long-term strategy of increasing
production and reserves through acquiring and developing multiple-zone fields
requires us to develop a thorough understanding of the complex geological
structures and to maintain operational control of field development. Therefore,
we strive to operate and obtain high working interests in all of our properties.
As of December 31, 1999, we operated 17 of the 21 major fields in which we have
production. Of the operated properties, our average working interest is
approximately 77%. Operating control, combined with our significant technical
and geological expertise, enables us to control the magnitude and timing of our
capital expenditures and field development.
Geographic Focus. We have been able to maintain a low cost structure
through asset concentration. At December 31, 1999, approximately 89% of our Gulf
Coast reserves were concentrated in five fields, and 80% of our Mid-Continent
reserves were concentrated in six fields. Asset concentration permits operating
economies of scale and leverages operational, technical and marketing
capabilities.
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OIL AND GAS OPERATIONS
General. We have focused our operations on three main activities:
conventional exploitation, secondary recovery and exploration. Each of these
interrelated activities plays an important role in our continuing production and
reserve growth. Our 1998 and 1999 operations have been conducted primarily in
the following fields:
- Mississippi
- Brookhaven,
- Laurel,
- Martinville,
- Soso,
- Summerland, and
- Oklahoma
- Bumpass,
- Sholem Alechem,
- East Fitts.
Our capital expenditures totaled $70.1 million in 1998 and $6.3 million in 1999.
The substantial reduction in 1999 capital expenditures was due to budget
constraints resulting from the substantial decline in crude oil prices in 1998
and early 1999, as well as expenditure constraints imposed by the bankruptcy
court subsequent to August 23, 1999.
Conventional Exploitation. Our properties are characterized by the large
number of formations that have been productive, as well as by the large number
of wells that have been drilled over the past 50 years. These well histories
provide considerable geological and reservoir information for use in further
exploration and exploitation.
Acquisition of mature underdeveloped and underexplored fields has been one
of the key elements of our strategy of building reserves and creating
shareholder value. By capitalizing on our operating knowledge and technical
expertise, we have been able to acquire properties and develop substantial
additional low-cost reserves through conventional development drilling and
exploration opportunities. This strategy is illustrated by our 1995 acquisition
of the Brookhaven field in Mississippi. Since acquiring this property in 1995,
we increased total daily field production, by successful exploitation and
exploration, to approximately 1,123 net BOE by year end 1998 from approximately
230 net BOE at the time of acquisition. However, due to natural reservoir
decline and limited well activity, production in the Brookhaven field declined
to 560 BOE per day in 1999. In addition, we increased the proved reserves
associated with our Mid Continent properties to 74.6 MMBOE at December 31, 1999
from 55.5 MMBOE at the time of their acquisition in December 1997, due to our
acquisition of additional working interest in the Mid Continent properties and
the successful exploitation of the Springer, Deese, Viola, Hunton and Bromide
reservoirs in 1998 and 1999.
Secondary Recovery. Over the last five years, we have evaluated 20
secondary recovery projects in the Mississippi salt basin. Six of these projects
have been successfully developed and 14 are undergoing further evaluation or are
in the pilot phase. Since the acquisition of our Oklahoma properties, we have
identified 11 new secondary recovery projects to be developed. These projects
are currently in the study or planning phases. Facilities and wellbores are
being evaluated to begin pilot waterfloods in three of these projects. The
current waterflood operations have been part of our efforts to lower operating
expenses and improve production enhancement opportunities through low cost
waterflood conformance work. These projects have demonstrated strong production
response and meaningful reserve additions. In addition, these projects incur low
production costs due to existing field infrastructures and the ability to
reinject produced water from current operations. We believe opportunities exist
for adding secondary recovery projects throughout our current field inventory.
Exploration. The many productive formations located within our producing
properties substantially reduce dry hole risks, which improves exploration
economics. We have drilled several successful exploration wells in the
Brookhaven, Laurel, Martinville and Eola fields. In 1995, we completed a
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24 square mile 3-D seismic survey on the Martinville field. Based on this data,
two successful exploratory wells were completed, one in 1996 and one in 1997. We
have identified additional opportunities in the Martinville field; however,
lower oil prices and budget constraints did not allow us to pursue these
opportunities in 1998 and 1999. We may pursue these drilling opportunities as
oil prices and cash flow allow. In 1996, we completed a 37 square mile 3-D
seismic survey encompassing the Laurel field, our largest crude oil producing
field, which currently has producing properties covering less than one square
mile within the survey area. Based on initial interpretations, several
exploration wells are planned in the future, and a prospect which has similar
geological properties west of the Laurel field has been identified. We believe
each of these fields has significant exploration reserve potential relative to
our reserve base.
Along with the producing properties acquired in Oklahoma in 1997, we
acquired approximately 95 square miles of 3-D seismic data and 2,750 miles of
2-D seismic data. 2-D seismic data is a tool that allows us to look at vertical
cross-sections beneath the prospective area of our properties typically on a
much wider grid pattern. A large portion of the 3-D seismic data is over areas
of future reserve potential. The 3-D data will be useful in enhancing waterflood
development and exploration of the deeper objectives.
PRINCIPAL AREAS OF ACTIVITY
The following table sets forth, for our major producing areas, average net
daily production of crude oil and natural gas on a BOE basis for each of the
years in the three-year period ended December 31, 1999, and the number of
productive wells producing at December 31, 1999. The Oklahoma properties were
acquired effective December 31, 1997, with no production being recorded in 1997.
The Louisiana properties were sold December 2, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AT DECEMBER 31, 1999
------------------------ -----------------------------------
1997 1998 1999 NET
------ ------ ------ PRODUCTIVE
WELLS AVERAGE
BOE/ BOE/ BOE/ ----------- PERCENTAGE WORKING
STATE DAY DAY DAY(A) OIL GAS OPERATED INTEREST
- ----- ------ ------ ------ ---- ---- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Mississippi......................... 8,178 8,202 4,621 116 1 95% 91%
Oklahoma............................ -- 6,345 5,414 572 51 50% 41%
Louisiana........................... 2,848 2,452 -- -- -- -- --
Other............................... 201 600 315 1 3 8% 14%
------ ------ ------ --- --
Total.......................... 11,227 17,599 10,350 689 55
====== ====== ====== === ==
</TABLE>
- ---------------
(a) In response to depressed crude oil prices during 1998 and early 1999, we
significantly reduced minor and major repairs and drilling activity on our
operated properties beginning in August 1998, ceased all repair work and
drilling activity in December 1998 and halted production on wells which
were uneconomical. We restarted repairs and maintenance on the properties
we operate and began doing limited recompletion and workover activity in
the second half of 1999.
Gulf Coast Area
Brookhaven Field, Mississippi. In 1995, we purchased a 93% working interest
in the unitized Brookhaven field covering more than 13,000 acres. Unitized means
that the royalty and working interests are pooled within a given geological
and/or geographical area. At the time of acquisition, there were 11 active wells
and 159 inactive wells. Proved reserves were 1.2 MMBOE and net production
averaged approximately 230 BOE per day, producing only from the Tuscaloosa
formation at 10,500 feet.
As with other fields, we acquired the Brookhaven field in anticipation of
additional field-wide recoveries through development drilling, recompletions,
secondary recovery and exploration. During our first year of ownership, we
focused our efforts on expanding our understanding of the Tuscaloosa reservoir.
Our mapping suggested less than 25% of the oil in place from the Tuscaloosa
reservoir had been recovered. As a result of our study, we identified and have
drilled six new Tuscaloosa well bores in the field to date. The six penetrations
found remaining crude oil reserves due to structural and stratigraphic
complexity. Four of these penetrations have been completed as commercial
producers and two wells will
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be used as injectors to aid our secondary recovery operations. In 1998 and 1999,
we continued our detailed study and mapping of the stratigraphically complex
Tuscaloosa reservoirs and initiated several waterflood pilot areas.
In addition to our exploitation success, we have had significant
exploration success. In 1997 and early 1998, we had successful deep exploratory
results in the Washita Fredricksburg, Paluxy and Rodessa formations, with
initial production from these horizons in excess of 1,600 gross BOE per day. Due
to deep structural complexity realized with the 1997 and early 1998 drilling,
additional drilling was halted until new seismic data was acquired. In 1998, 35
miles of 2-D seismic data was acquired and interpreted. This 2-D seismic data
has improved the structural definition of the deep drilling potential in these
formations which assists us in selecting drilling locations.
Production in Brookhaven in 1999 averaged 560 BOE per day and proved
reserves at December 31, 1999 were 6.4 MMBOE. Daily production was 50% below
1998 levels and reserves were 10% below 1998 levels as a result of the reduced
capital activity and natural reservoir decline.
Cranfield Field, Mississippi. As a result of the exploration success at
Brookhaven, we leased approximately 7,900 net acres on a similar geologic
structure near the Brookhaven field in the Cranfield field. In 1998, detailed
mapping using subsurface data from existing well bores and existing 2-D seismic
data was performed. Drilling prospects were generated at depths from 6,000 feet
to 11,000 feet in four different horizons:
- the Wilcox formations,
- the Eutaw formations,
- the Tuscaloosa formations, and
- the Washita Fredricksburg formations.
Two existing wellbores were reentered during the second half of 1998. The
Hosston and Mooringsport formations were tested unsuccessfully in one deep
existing wellbore; however, excellent reservoir quality rock was found in the
Mooringsport formation, which we believe remains a future exploitation
opportunity. A re-entry of an existing shallow wellbore proved successful in
both the Washita Fredricksburg and Wilcox formations. The Washita Fredricksburg
formation tested at a rate of 700 Mcf per day and turned to sales in early 1999.
Production in Cranfield in 1999 averaged 378 Mcf per day and proved reserves at
December 31, 1999 were 0.6 MMBOE.
Laurel Field, Mississippi. The Laurel field is a multi-pay geological
setting with producing horizons from the Eutaw formation at approximately 7,500
feet, to the Hosston formation at approximately 13,500 feet. It is our largest
oil producing property and represented approximately 50% of our total
Mississippi production on a BOE basis in 1999. At December 31, 1999, the field
contained 47 wells producing from the Stanley, Christmas, Tuscaloosa, Washita
Fredricksburg, Paluxy, Mooringsport, Rodessa, Sligo and Hosston reservoirs.
We consider the Laurel field both an exploration and exploitation success.
In 1983, at the time of the initial acquisition, the only then-existing well in
what is now the Laurel field had been operating for 24 years and was producing
only 47 BOPD. We employed 3-D seismic technology to assist in defining the
multi-pay zones in the field and began an extensive drilling program to increase
primary production, using a combination of vertical, high-angle and horizontal
drilling techniques.
We have also implemented successful secondary recovery programs in a number
of Laurel's producing reservoirs. In recent years, secondary recovery programs
were started in the Mooringsport, Rodessa, Sligo and Tuscaloosa Stringer
reservoirs. The production response from the secondary recovery projects has
been strong.
In addition to the continued exploitation program, we have continued an
active exploration program at Laurel. In 1996 and 1997, much of our focus at
Laurel was directed toward a mineral leasing program and
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the permitting and surveying associated with shooting a 37 square mile 3-D
seismic program. In 1998 and 1999, we evaluated the 3-D seismic data to better
understand the exploration potential within the Laurel field as it is currently
defined, as well as to define exploration possibilities in the acreage
surrounding the field.
The average net daily production in 1999 from Laurel was 2,300 BOE, down
35% from 1998 levels due to our scaled back operating and capital program. These
programs were scaled back because of the substantial decline in commodity prices
in 1998 and early 1999 and the resulting budget constraints. At December 31,
1999, proved reserves were 12.5 MMBOE, up approximately 33% over year end 1998.
The reserve increase is attributable primarily to improved crude oil prices
experienced at year end 1999 relative to year end 1998.
Martinville Field, Mississippi. We acquired the Martinville field in April
1989; it was originally discovered in 1957. At the time of acquisition,
Martinville was producing only 80 net BOE per day; the average production for
1999 was 776 net BOE per day. The field covers more than 7,400 acres and
currently has 17 producing wells. Like Laurel, the field is characterized by
highly complex faulting and produces from multiple horizons. We currently have
an average working interest of 98% in the field.
In late 1995, we conducted a 3-D seismic shoot over a 24 square mile area
to enhance our ability to exploit primary reserves through continued reservoir
delineation and to develop secondary recovery projects in the Mooringsport,
Rodessa and Sligo formations.
Since 1996, we have successfully drilled wells to the Hosston, Sligo,
Rodessa, Mooringsport and Washita Fredricksburg formations, including two
successful development wells drilled and completed in 1998 in the Sligo and
Washita Fredricksburg reservoirs.
Because declining oil prices in 1998 and early 1999 made property
development less economical, we spent much of the year refining our
interpretation of the 3-D seismic data of Martinville. We currently have defined
six exploration prospects along with numerous development drilling
opportunities. Proved reserves at year end 1999 totaled 5.4 MMBOE, a 13% decline
from year end 1998. This decline is due to the lack of development of the
Martinville properties in 1999 due to low oil prices during the first half of
1999, reduced capital activity and the natural reservoir decline.
Soso Field, Mississippi. In mid-1990, we acquired a 90% working interest in
the Soso field, which was originally discovered in 1945 and covers approximately
6,500 acres. At the time we acquired it, the field produced 225 BOPD. For 1999,
the average daily production was 354 BOE, a decrease of 56% from 1998 average
daily production. Reserves at December 31, 1999 totaled 5.6 MMBOE, a 12%
increase over year end 1998. The decline in average daily production is due to
reduced development activity on the properties as a result of capital budget
constraints, while the increase in reserves is due to improved crude oil prices
experienced at year end 1999 relative to year end 1998.
Soso is a large, geologically complex field which had already produced over
75 MMBOE at the time we acquired it in 1990. Also, like Brookhaven, our detailed
mapping of the field suggested that less than 25% of the total crude oil had
been recovered. We acquired Soso primarily to increase total recoverable
reserves by another 5% to 15% through recompletions in existing wellbores,
development drilling and secondary recovery projects.
Most of our early production growth at Soso was associated with workovers
and recompletions on existing wells, with some development drilling taking
place. Because of the success of secondary recovery projects at Laurel and
Martinville, we took a fresh look at the field in 1997, and since then,
secondary recovery projects have been initiated in the Cotton Valley, Sligo and
Rodessa formations.
In 1998, we acquired 35 miles of new 2-D seismic data across the Soso
field. This 2-D seismic data should enhance our development of the Hosston and
Cotton Valley formations. We believe many more exploitation opportunities exist
for primary as well as secondary reserves in the multi-reservoir field.
Summerland Field, Mississippi. The Summerland field, discovered in 1959, is
a broad, elongated, fault bounded anticline with productive intervals from the
Tuscaloosa formation at approximately
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6,000 feet to the Mooringsport formation at 12,500 feet. At December 31, 1999,
we operated 18 producing wells and had an average working interest of 90% in
this unitized field.
We assumed operating control of the Summerland field in November 1989. At
the date of acquisition, net crude oil production was 415 BOE per day, of which
only 200 BOE per day were economic. Recompletions, development drilling and the
installation of higher volume artificial lift equipment increased net crude oil
production to 1,019 BOE per day in 1998. For 1999, however, daily production
averaged 494 BOE, down from 1998 as a result of the natural decline of the
reservoirs, low oil prices during the first half of 1999 and reduced capital
activity.
At December 31, 1999, the Summerland field had proved reserves of 5.6
MMBOE, up approximately 6% over year end 1998 due to improved crude oil prices.
Mid-Continent Area
In December 1997, we acquired interests in approximately 40,000 gross acres
concentrated primarily in southern Oklahoma, including 14 principal producing
fields. Of the 14 principal producing fields, we are the operator of eleven
fields. At December 31, 1999, we had an average working interest in the eleven
fields we operate of approximately 74%.
These properties are very similar to our Mississippi salt basin operations
and we believe that our substantial knowledge base should benefit in the
development of these properties. In 1998, we began an exploration and
exploitation program which resulted in the drilling of 19 gross wells, 18 of
which were completed successfully. Additionally, we began interpreting 3-D
seismic information on two fields in 1998 and have identified several drilling
opportunities as a direct result of this seismic information. In 1999, activity
on these properties was very limited due to capital budget constraints.
Bumpass Unit, Oklahoma. The Bumpass Unit, located in Carter County,
Oklahoma, was discovered in 1924. Production is primarily from both structural
and stratigraphic traps within the Deese and Springer reservoirs. The Deese
reservoirs are typically encountered at depths between 3,500 and 4,500 feet with
the Springer reservoirs located from 4,500 to 6,700 feet.
Currently, our primary focus at Bumpass is to exploit the Flattop and
Goodwin sands located in the Springer formation, which we believe to be
underdeveloped. In 1998 and 1999, we drilled one well, deepened one well and
recompleted two wells in these lower Springer sands. All four of these jobs were
successful and resulted in a combined initial production rate in excess of 3,000
net Mcf per day. We intend to continue this exploitation program in 2000.
Additionally, we are studying the Humphrey sands, which are in the upper portion
of the Springer formation, to determine their waterflood potential. We plan to
initiate a waterflood program in the near future. At December 31, 1999, we had
an average working interest of approximately 65% in the Bumpass field.
Average net daily production in 1999 was 451 BOE compared with 623 BOE per
day in 1998. Proved reserves at December 31, 1999 totaled 4.5 MMBOE, a decrease
of 10% from the 5.0 MMBOE at the end of 1998. The decrease in both production
and reserves is due to the reduced development activity on the property as a
result of capital budget constraints experienced during 1999.
Sholem Alechem Fault Block "A" Unit, Oklahoma. Located in Stephens County,
Oklahoma, the Sholem Alechem Fault Block "A" Unit was discovered in 1947. As
with the Bumpass Unit, production at Sholem Alechem originates primarily from
the Deese and Springer reservoirs.
In 1998 and 1999, we deepened eight wells and recompleted one well into the
Flattop and Goodwin sands located in the Springer formation. Six of these nine
jobs were successful and resulted in a combined initial production rate of 240
net BOE per day and 1,630 net Mcf per day. Exploitation of the Springer
formation will continue into 2000. At December 31, 1999, we had an average
working interest in Sholem Alechem of approximately 89%.
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Net production in 1999 averaged 705 BOE per day, down from the 843 BOE per
day in 1998 as a result of our limited development activity during the year.
Proved reserves at December 31, 1999 totaled 7.0 MMBOE, basically unchanged from
year end 1998.
East Fitts Unit, Oklahoma, The East Fitts Unit was discovered in 1933, with
production originating from the Cromwell, Hunton and Viola reservoirs, at depths
ranging from 2,400 to 5,000 feet.
Our current emphasis at East Fitts is to take the Viola reservoir from ten
acre spacing to five acre spacing. We believe that this development will not
only increase existing production but prove up additional reserves. In 1998, we
drilled five wells to the Viola reservoir, all of which were successful,
increasing production by 200 BOE per day and adding approximately 600 MBOE in
reserves. No significant activity occurred in the East Fitts Unit in 1999 due to
capital budget constraints. However, additional wells to the Viola reservoir are
planned in 2000, and we are planning to initiate pilot waterflood projects in
the Chimney Hill formation, a lower member of the Hunton reservoir, and the
Bromide formation. At December 31, 1999, our average working interest in East
Fitts was approximately 83%.
Average net daily production in 1999 was 997 BOE and proved reserves at
December 31, 1999 totaled 23.7 MMBOE. This is down marginally from the average
1998 production of 1,174 BOE per day and 1998 proved reserves of 24.6 MMBOE.
Other Oklahoma. We operate eight other fields in Oklahoma:
- East Velma Middle Block,
- North Alma Deese,
- Tatums,
- Jennings Deese,
- Graham Deese,
- Eola S.E.,
- Eola N.W., and
- Cox Penn.
Total average net daily production in 1999 from these fields was 2,169 BOE. East
Velma Middle Block has significant upside potential through secondary recovery.
Similar reservoirs have been successfully waterflooded along the Velma complex.
East Velma Middle Block is the remaining block along this complex which has not
been enhanced through secondary recovery. Tatums is a shallow Deese producing
unit which has been evaluated to have significant upside potential through down
spacing. Currently the unit is developed on a ten acre spacing with some areas
of the field underexploited. A five acre drilling program and adjustments to
current waterflood injection could provide substantial upside potential. At year
end, net proved reserves from these properties totaled 33.6 MMBOE, essentially
unchanged from year end 1998.
We also have non-operating working interests in three fields in Oklahoma.
At December 31, 1999, year-end proved reserves in these three fields were
estimated at 3.0 MMBOE.
Since the acquisition of the Oklahoma properties, we have identified 11 new
secondary recovery projects to be developed. These projects are currently in the
study or planning phases. Facilities and wellbores are being evaluated to begin
pilot waterfloods. In addition, these projects should incur low capital and
production costs due to existing field infrastructures. We believe opportunities
exist for adding secondary recovery projects throughout our current field
inventory. Additionally, we believe that substantial Springer through Simpson
gas potential exists in and around our currently operated properties. This
potential will be a focal point of low-risk exploration through the deepening of
existing wellbores or through recompletions, both of which require less capital
as compared to drilling for these objectives. Historically in these areas, gas
has not been the primary focus of exploitation; however, improved technology has
now allowed commercial development of these deeper, tighter objectives.
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<PAGE> 62
Other Domestic Properties
We also have working interests in other producing properties in Mississippi
and Texas. We operate the Bentonia and Frio properties in Mississippi and own
non-operated working interests in the Glazier property in Mississippi, the
Clarksville field in Texas and a field in state waters offshore North Padre
Island, Texas. As of December 31, 1999, these fields had combined net proved
reserves of 4.9 MMBOE.
Tunisia, North Africa
We have a 45.8% interest in a permit covering 1.1 million gross acres in
Tunisia, North Africa that we acquired from our former Canadian parent company.
During 1994, we and our joint interest partners conducted a seismic survey on
the Anaguid permit in Tunisia. In October 1995, we and our partners drilled an
unsuccessful exploratory well on the Anaguid permit in southern Tunisia. In
early 1997, we and our partners conducted a 465 kilometer 2-D seismic program in
a new area of the Anaguid permit. In June 1999, we commenced drilling an
exploratory well on this permit. In September 1999, we 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, we wrote down our
Tunisian properties by $5.4 million during the third quarter of 1999. Anadarko
Tunisia Anaguid Company, one of the working interest partners in this permit,
has assumed responsibility as operator and plans to continue exploration of this
permit.
In June 1999, we extended our Anaguid permit in Tunisia through June 2001.
We have a commitment to drill two additional wells during that two-year period.
PRODUCTION
The following table contains information regarding our production volumes,
average prices received and average production costs associated with our sales
of crude oil and natural gas for each of the years in the three-year period
ended December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
CRUDE OIL:
Volumes (MBbls).......................................... 2,820 5,069 3,343
Average sales price (per Bbl)(a)......................... $16.31 $10.40 $15.40
NATURAL GAS:
Volumes (MMcf)........................................... 7,666 8,124 2,608
Average sales price (per Mcf)(b)......................... $ 2.23 $ 1.98 $ 2.24
AVERAGE PRODUCTION COST (PER BOE)(c)....................... $ 3.90 $ 4.18 $ 5.60
</TABLE>
- ---------------
(a) Includes the effects of crude oil price hedging contracts. Price per Bbl
before the effect of hedging was $16.42 for the year ended December 31,
1997, $10.40 for the year ended December 31, 1998 and $15.40 for the year
ended December 31, 1999.
(b) Includes the effects of natural gas price hedging contracts. Price per Mcf
before the effect of hedging was $2.22 for the year ended December 31,
1997, $1.92 for the year ended December 31, 1998 and $2.24 for the year
ended December 31, 1999.
(c) Includes lease operating expenses and production taxes.
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DRILLING ACTIVITIES
During the periods indicated, we drilled or participated in the drilling of
the following wells:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
------------ ------------ -----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY:
Crude oil................................... 3 2.8 1 1.0 -- --
Natural gas................................. 1 .8 -- -- -- --
Dry holes(1)................................ 1 1.0 2 2.0 1 0.5
DEVELOPMENT:(2)
Crude oil................................... 10 9.3 26 21.7 -- --
Natural gas................................. 11 9.8 8 6.5 3 3.0
Dry holes................................... 2 2.0 5 4.9 2 1.5
Service wells............................... -- -- 2 1.0 -- --
-- ---- -- ---- --- ---
Total............................... 28 25.7 44 37.1 6 5.0
== ==== == ==== === ===
</TABLE>
- ---------------
(1) 1999 well was drilled in Tunisia, North Africa.
(2) Included in drilling activities are wells deepened to a lower reservoir
through existing well bores. In 1999, all wells under "Development" were
deepenings within existing well bores.
At December 31, 1999, we were not participating in the drilling or
completion stages of a well.
RESERVES
The following table summarizes our net proved crude oil and natural gas
reserves as of December 31, 1999, which have been reviewed by Ryder Scott
Company with regard to our Mississippi properties and Sproule Associates, Inc.
with regard to our Oklahoma properties. The other properties in the table are
related to our crude oil and natural gas reserves located in Texas which have
been audited, depending on location, by the independent engineers named in the
preceding sentence.
<TABLE>
<CAPTION>
CRUDE NATURAL NET PROVED
OIL GAS RESERVES
(MBBLS) (MMCF) (MBOE)
------- ------- ----------
<S> <C> <C> <C>
Mississippi............................................ 36,736 2,978 37,232
Oklahoma............................................... 68,533 25,863 72,844
Other.................................................. 1,844 11,797 3,810
------- ------ -------
Total........................................ 107,113 40,638 113,886
======= ====== =======
</TABLE>
At December 31, 1999, we had net proved developed reserves of 78,047 MBOE
and net proved undeveloped reserves of 35,839 MBOE. The present value of proved
reserves was $790.2 million, which represented $543.7 million for the proved
developed reserves and $246.5 million for the proved undeveloped reserves. At
December 31, 1998, we reported total proved reserves of 111,059 MBOE, and the
present value of proved reserves was $269.3 million.
There are numerous uncertainties inherent in estimating quantities of
proved crude oil and natural gas reserves, including many factors beyond our
control. The estimates of the reserve engineers are based on several
assumptions, including the following:
- actual future production,
- revenues,
- taxes,
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- production costs,
- development expenditures and
- quantities of recoverable crude oil and natural gas reserves.
Any significant variance in these assumptions could materially affect the
estimated quantity and value of reserves set forth herein. In addition, our
reserves might be subject to revision based upon:
- actual production,
- results of future development,
- prevailing crude oil and natural gas prices and
- other factors.
In general, the volumes of production from crude oil and natural gas
properties decline as reserves are depleted. Except to the extent we acquire
additional properties containing proved reserves or conduct successful
exploration and development activities, or both, our proved reserves will
decline as reserves are produced. Future crude oil and natural gas production is
therefore highly dependent upon the level of success in acquiring or finding
additional reserves.
For further information on reserves, costs relating to crude oil and
natural gas activities and results in operations from producing activities, see
"Supplementary Information Related to Oil and Gas Activities" appearing in note
14 to our consolidated financial statements included in this prospectus.
ACREAGE
The following table summarizes the developed and undeveloped acreage we
owned or leased at December 31, 1999:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------- ---------------
GROSS NET GROSS NET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Mississippi........................................ 24,126 22,881 26,901 22,640
Oklahoma........................................... 38,463 28,301 40 40
Texas.............................................. 4,276 3,428 1,691 1,691
Offshore Gulf of Mexico............................ 5,760 2,269 -- --
------ ------ ------ ------
Total.................................... 72,625 56,879 28,632 24,371
====== ====== ====== ======
</TABLE>
At December 31, 1999, we also held a 45.8% working interest in an
exploratory permit in Tunisia, North Africa, covering approximately 1,130,000
gross acres.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, in many circumstances, we make
only a limited review of title to undeveloped crude oil and natural gas leases
at the time we acquire them. However, before we acquire developed crude oil and
natural gas properties, and before drilling commences on any leases, we cause a
thorough title search to be conducted, and any material defects in title are
remedied to the extent possible. To the extent title opinions or other
investigations reflect title defects, we, rather than the seller of the
undeveloped property, are typically obligated to cure any title defects at our
expense. We could lose our entire investment in any property we drill, if we
have a title defect of a nature that makes it prudent to commence drilling upon
but which we could not remedy or cure. We believe that we have good title to our
crude oil and natural gas properties, some of which are subject to immaterial
encumbrances, easements and restrictions. The crude oil and natural gas
properties we own are also typically subject to
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royalty and other similar non-cost bearing interests customary in the industry.
We do not believe that any of these encumbrances or burdens will materially
affect our ownership or use of our properties.
COMPETITION
The crude oil and natural gas industry is highly competitive. We encounter
strong competition from major oil companies and independent operators in
acquiring properties and leases for the exploration for, and production of,
crude oil and natural gas. Competition is particularly intense with respect to
the acquisition of desirable undeveloped crude oil and natural gas properties.
The principal competitive factors in the acquisition of desirable undeveloped
crude oil and natural gas properties include the staff and data necessary to
identify, investigate and purchase these properties, and the financial resources
necessary to acquire and develop these properties. Many of our competitors have
financial resources, staff and facilities substantially greater than ours. In
addition, the producing, processing and marketing of crude oil and natural gas
is affected by a number of factors which are beyond our control, the effect of
which cannot be accurately predicted.
The principal resources necessary for the exploration and production of
crude oil and natural gas are:
- leasehold prospects under which crude oil and natural gas reserves may be
discovered,
- drilling rigs and related equipment to explore for these reserves, and
- knowledgeable personnel to conduct all phases of crude oil and natural
gas operations.
We compete for these resources with both major crude oil and natural gas
companies and independent operators. Although we believe our current operating
and financial resources will be adequate to preclude any significant disruption
of our operations in the immediate future if our plan of reorganization is
consummated, the continued availability of these materials and resources to us
cannot be assured.
CUSTOMERS AND MARKETS
Substantially all of our crude oil is sold at the wellhead at posted
prices, as is customary in the industry. In some circumstances, natural gas
liquids are removed from our natural gas production and are sold by us at posted
prices. During 1999, EOTT Energy Operating Limited Partnership accounted for 39%
of our revenues and Amoco Production Company accounted for 41% of our revenues.
While we believe our relationships with EOTT and Amoco are good, any loss of
revenue from these customers due to nonpayment would have an adverse effect on
our net income and earnings per share on our income statement and, ultimately,
may affect our share price. In addition, any significant late payment may
adversely affect our short term liquidity position.
We have a three-year crude oil purchase agreement with EOTT which was
effective March 1, 1996. Under the crude oil purchase agreement, we committed
the majority of our crude oil production in Mississippi to EOTT for a period of
three years on a pricing basis of posting plus a premium. This contract is
currently on a month-to-month basis. As part of this contract, we have agreed to
sell to EOTT approximately 50% of our heavy Mississippi crude oil with a minimum
well head price of $8.50 per barrel.
The majority of crude oil production in Oklahoma is sold to Amoco on a
NYMEX pricing basis minus a discount. Beginning January 1, 1999 and for a
nine-year period thereafter, Amoco has a right of first refusal to match, in all
respects, a competitive bid. The crude contract was a component of the original
Amoco purchase and sale agreement and provides for a competitive annual review
of the pricing mechanism.
The price we receive for crude oil and natural gas may vary significantly
during the year due to the volatility of the crude oil and natural gas market,
particularly during the cold winter and hot summer months. As a result, we
periodically enter into forward sale agreements or other arrangements for a
portion of our crude oil and natural gas production to hedge our exposure to
price fluctuations. Gains and losses on these forward sale agreements are
reflected in crude oil and natural gas revenues at the time of sale of
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the related hedged production. While intended to reduce the effects of the
volatility of the prices received for crude oil and natural gas, these hedging
transactions may limit our potential gains if crude oil and natural gas prices
were to rise substantially over the price established by the hedge. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General" and Note 1 to our consolidated financial statements for
more information related to hedging.
OFFICE AND FIELD FACILITIES
We currently lease 47,942 square feet for our executive and administrative
offices in Dallas, Texas, under a lease that continues through October 2000. We
are considering a renewal of some portion of this lease as well as other
available square footage. We also lease field offices in Laurel, Mississippi,
covering approximately 5,000 square feet under a non-cancelable lease extending
through June 2000. We are currently evaluating the renewal of the Laurel lease
as well as other alternatives. We also lease office space in Ratliff City,
Oklahoma, covering approximately 10,000 square feet through January 2003.
GOVERNMENTAL REGULATION
Regulation of Crude Oil and Natural Gas Exploration and Production. Crude
oil and natural gas exploration, development and production are subject to
various types of regulation by local, state and federal agencies. These
regulations include:
- requiring permits for the drilling of wells,
- maintaining bonding requirements in order to drill or operate wells,
- regulating the location of wells,
- regulating the method of drilling and casing wells,
- regulating the surface use and restoration of properties upon which wells
are drilled, and
- regulating the plugging and abandonment of wells.
Our operations are also subject to various conservation laws and regulations in
which our properties are located, including those of Mississippi, Oklahoma and
Texas. These laws and regulations include the regulation of :
- the size of drilling and spacing units or proration units,
- regulation of the density of wells that may be drilled,
- regulation of unitization or pooling of crude oil and natural gas
properties,
- maximum rates of production from crude oil and natural gas wells,
- restrictions on the venting or flaring of natural gas, and
- requirements regarding the ratability of production.
Some states allow the forced pooling or integration of tracts to facilitate
exploration while other states rely on voluntary pooling of land and leases. The
effect of these regulations is to limit the amount of crude oil and natural gas
we can produce from our wells and to limit the number of wells or the locations
at which we can drill.
Each state generally imposes a production or severance tax with respect to
production and sale of crude oil, natural gas and natural gas liquids within
their respective jurisdictions. For the most part, state production taxes are
applied as a percentage of production or sales. Currently, we are subject to
production tax rates of up to 6% in Mississippi and 7% in Oklahoma. In addition,
we have been active in the adoption of legislation dealing with production and
severance tax relief in Mississippi, specifically where severance tax is either
waived for a fixed period of time, as in renewed production from inactive wells,
or reduced to
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50% of regular rates for enhanced recovery projects. The state of Oklahoma has
adopted severance tax relief, adjusting tax rates to:
- 1% for posted crude oil priced less than $14.00 per barrel,
- 4% for posted crude oil priced between $14.00 and $17.00 per barrel, and
- the regular tax rate of 7% for prices over $17.00 per barrel.
Legislation affecting the crude oil and natural gas industry is under
constant review for amendment and expansion. Also, numerous departments and
agencies, both federal and state, are authorized by statute to issue and have
issued rules and regulations binding on the crude oil and natural gas industry
and its individual members. Some of these rules and regulations carry
substantial penalties for failure to comply. The regulatory burden on the crude
oil and natural gas industry increases our cost of doing business and,
consequently, affects our profitability.
Offshore Leasing. Some of our operations are located on federal crude oil
and natural gas leases, which are administered by the United States Minerals
Management Service. These leases are issued through competitive bidding, contain
relatively standardized terms and require compliance with detailed regulations
and orders, which are subject to change by the Minerals Service. For offshore
operations, lessees must obtain approval from the Minerals Service for
exploration plans and development and production plans before the commencement
of operations. In addition to permits required from other agencies, such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency, lessees must obtain a permit from the Minerals Service before the
commencement of drilling. The Minerals Service has promulgated regulations
requiring offshore production facilities located on the outer continental shelf
to meet stringent engineering and construction specifications. Similarly, the
Minerals Service has promulgated other regulations governing the plugging and
abandonment of wells located offshore and the removal of all production
facilities. Under some circumstances, the Minerals Service may require any
operations on federal leases to be suspended or terminated. To cover the various
obligations of lessees on the outer continental shelf, the Minerals Service
generally requires that lessees or operators post substantial bonds or other
acceptable assurances that these obligations will be met. The cost of these
bonds or other surety can be substantial and there is no assurance that we can
obtain bonds or other surety in all cases.
Gas Royalty Valuation Regulations. In December 1997, the Minerals Service
published a final rule amending its regulations governing valuation for royalty
purposes of gas produced from federal and Indian leases. The rule primarily
addresses allowances for transportation of gas and purports to clarify the
methods by which gas royalties and deductions for gas transportation are
calculated. The final rule became effective February 1, 1998. The rule purports
to continue the commitment of the Minerals Service to assure that lessees deduct
only the actual, reasonable costs of transportation and not any marketing costs.
The rule identifies specific allowable and nonallowable costs of transportation.
The rule is, however, under judicial review. In August 1999, the Minerals
Service published a final rule amending its regulations governing the valuation
for royalty purposes of natural gas produced from Indian leases. The changes add
alternative valuation methods to the existing regulations, to ensure that Indian
lessors receive maximum revenues from their mineral resources. The final rule
became effective January 1, 2000.
Crude Oil Sales and Transportation Rates. Sales of crude oil and condensate
can be made by us at market prices not subject at this time to price controls.
In January 1997, the Minerals Service published a proposed rule to amend the
current federal crude oil royalty valuation regulations. In July 1997, the
Minerals Service published a supplementary proposed rule concerning the proposed
regulations. In February 1998, the Minerals Service published another
supplementary proposed rule. The intent of the rule is to decrease reliance on
posted prices and to assign a value to crude oil that better reflects market
value. In general, the rule as proposed would base royalties on gross proceeds
when the oil is sold under an arm's length contract by either the producer or
the producer's marketing affiliate. Index pricing or other benchmarks would be
used when oil is not sold under an arm's length contract. On July 16, 1998, the
Minerals Service proposed additional changes to its second supplementary
proposed rule. On March 12,
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1999, the Minerals Service published a notice reopening the public comment
period on the second supplementary proposed rule until April 12, 1999. On April
13, 1999, the Minerals Service published a notice extending the comment period
until April 27, 1999. On December 30, 1999, the Minerals Service published
additional changes, inviting public comment by January 31, 2000. In February
1998, the Minerals Service also published a notice of a proposed rule to amend
the current regulations establishing a value for royalty purposes of oil
produced from Indian leases. The proposed changes would decrease reliance on oil
posted prices and use more publicly available information for oil royalty
calculation purposes under Indian leases. On January 5, 2000, the Minerals
Service published additional proposed changes to the regulations regarding
Indian leases, inviting public comment by March 6, 2000. We cannot predict what
action the Minerals Service will take on these matters, nor can we predict at
this stage of the rulemaking proceedings how we might be affected by amendments
to these regulations.
The price that we receive from the sale of these products is affected by
the cost of transporting the products to market. The Energy Policy Act of 1992
directed the Federal Energy Regulatory Commission to establish a simplified and
generally applicable rate-making methodology for crude oil pipeline rates.
Effective as of January 1, 1995, the Federal Energy Regulatory Commission
implemented regulations establishing an indexing system for transportation rates
for crude oil pipelines, which would generally index these rates to inflation.
We are not able to predict with certainty what effect, if any, these regulations
will have on us, but other factors being equal, the regulations may tend to
increase transportation costs or reduce wellhead prices for these commodities.
Future Legislation and Regulation. Our operations will be affected from
time to time in varying degrees by political developments and federal and state
laws and regulations. In particular, crude oil and natural gas production
operations and economics are affected by:
- tax and other laws relating to the petroleum industry,
- changes in these laws, and
- constantly changing administrative regulations.
For example, the price at which natural gas may lawfully be sold has
historically been regulated under the Natural Gas Act. Only since the
deregulation of the last remaining regulated price categories of natural gas on
January 1, 1993, have free market forces been allowed to control the sales price
of natural gas. There is no guarantee that new regulations, similar or
otherwise, will not be imposed on the production or sale of crude oil,
condensate or natural gas. It is impossible to predict the terms of any future
legislation or regulations that might ultimately be enacted or the effects of
any legislation or regulations on us.
ENVIRONMENTAL REGULATIONS
Numerous laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection affect our
operations. These laws and regulations may:
- require us to obtain permits before drilling,
- restrict the types, quantities and concentration of various substances
that can be released into the environment through drilling and production
activities,
- limit or prohibit drilling activities on some lands lying within
wilderness, wildlife refuges or preserves, wetlands and other protected
areas, and
- impose substantial liabilities for pollution resulting from our
operations.
Changes in environmental laws and regulations occur frequently, and any changes
that result in more stringent and costly waste handling, disposal and clean-up
requirements may significantly impact our operating costs, as well as the oil
and gas industry in general. We believe that we substantially comply with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not result in material adverse
impacts to us.
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The Oil Pollution Act of 1990 attempts to prevent crude oil spills by
imposing on "responsible parties" liability for damages resulting from crude oil
spills into or upon navigable waters, adjoining shorelines or in the exclusive
economic zone of the United States. A "responsible party" includes the owner or
operator of an onshore facility or a vessel, and the lessee or permittee of the
area in which an offshore facility is located. The Oil Pollution Act requires
the lessee or permittee to establish and maintain evidence of financial
responsibility in the amount of $35.0 million, $10.0 million if the offshore
facility is located landward of the seaward boundary of a state, to cover
liabilities that result from a crude oil spill for which that person is
statutorily responsible. The minimum amount of financial responsibility may be
increased to $150.0 million depending on the risks posed by the quantity or
quality of crude oil handled by the facility. The Minerals Service has
promulgated regulations that implement the financial responsibility requirements
of the Oil Pollution Act. The regulations use an offshore facility's worst case
oil-spill discharge volume to determine if the responsible party must maintain
increased financial responsibility. We are not presently subject to the
financial responsibility requirement because our only offshore well is a natural
gas well that does not produce oil.
The Oil Pollution Act subjects responsible parties to strict, joint and
several and potentially unlimited liability for removal costs and other damages
caused by an oil spill covered by the statute. It also imposes other
requirements on responsible parties, including the preparation of a crude oil
spill contingency plan. We maintain a crude oil spill contingency plan. A
responsible party may face civil or criminal enforcement actions if it fails to
comply with the Oil Pollution Act's ongoing requirements or inadequately
cooperates during a spill event. We are not the subject of any civil or criminal
enforcement actions under the Oil Pollution Act and we are not aware of any
basis for a civil or criminal enforcement action against us.
The Federal Water Pollution Control Act of 1972 imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and gas
wastes into navigable waters. These controls have become more stringent over the
years, and it is probable that additional restrictions will be imposed in the
future. We must obtain permits to discharge pollutants into state and federal
waters. State discharge regulations and general permits under the Federal
National Pollutant Discharge Elimination System prohibit the discharge of
produced water and sand, drilling fluids, drill cuttings and other substances
related to the oil and gas industry into coastal waters. The Federal Water
Pollution Control Act allows civil, criminal and administrative penalties for
any unauthorized discharges of oil and any other hazardous substances in
reportable quantities. The Federal Water Pollution Control Act and the Oil
Pollution Act also impose potential liability for the costs of removal,
remediation and damages. State laws for the control of water pollution also
provide civil, criminal and administrative penalties and impose liabilities in
the case of a discharge of petroleum or its derivatives, or other hazardous
substances, into state waters.
The Comprehensive Environmental Response, Compensation, and Liability Act,
also known as the "Superfund" law, imposes liability, without regard to fault or
the legality of the original conduct, on classes of persons considered to have
contributed to the release of a hazardous substance into the environment. These
persons include the owner or operator of the disposal site or sites where the
release occurred and the companies that disposed or arranged for the disposal of
the hazardous substances found at the site. Persons who are responsible for
releases of hazardous substances under Superfund may be subject to joint and
several liability for the costs of cleaning up the hazardous substances and for
damages to natural resources. In addition, it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the hazardous substances released into the
environment. We do not own or operate any Superfund-identified sites and have
not received notice that we are liable for response or remediation costs at any
Superfund site.
The Resource Conservation and Recovery Act is the principal federal statute
governing the treatment, storage and disposal of hazardous wastes. The Resource
Conservation and Recovery Act imposes stringent operating requirements, and
liability for failure to meet these requirements, on a person who is either a
generator or transporter of hazardous waste or an owner or operator of a
hazardous waste treatment, storage or disposal facility. At present, the
Resource Conservation and Recovery Act includes a statutory exemption that
allows most crude oil and natural gas exploration and production wastes to be
classified as non-hazardous waste. A similar exemption is contained in many of
the state counterparts to the Resource
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Conservation and Recovery Act. Proposals have been made to amend the Resource
Conservation and Recovery Act and the various state statutes to rescind the
exemption that excludes crude oil and natural gas exploration and production
wastes from regulation as hazardous waste. Repeal or modification of this
exemption by administrative, legislative or judicial process, or through changes
in applicable state statutes, could increase the volume of hazardous waste that
we must manage and dispose of. Hazardous wastes are subject to more rigorous and
costly disposal requirements than are non-hazardous wastes. Any change in the
applicable statutes may require us to make additional capital expenditures or
incur increased operating expenses.
A significant portion of our operations in Mississippi is conducted within
city limits. Each year we are required to meet tests of financial responsibility
to obtain permits to conduct new drilling operations. We are conducting a
voluntary program to remove inactive aboveground storage tanks from our well
sites and to replace them, as necessary, with newer aboveground storage tanks.
Some states have enacted statutes governing the handling, treatment,
storage and disposal of waste containing naturally occurring radioactive
material. Naturally occurring radioactive material is present in varying
concentrations in subsurface and hydrocarbon reservoirs around the world and may
be concentrated in scale, film and sludge in equipment that comes in contact
with crude oil and natural gas production and processing streams. Mississippi
legislation prohibits the transfer of property for residential or other
unrestricted use if the property evidences concentrations of naturally occurring
radioactive material above prescribed levels because of crude oil and natural
gas production activities. We are voluntarily remediating naturally occurring
radioactive material concentrations identified at several fields in Mississippi.
In addition, we are a defendant in several lawsuits brought by landowners
alleging personal injury and property damage from naturally occurring
radioactive material at various wellsite locations. See the subsection below
called "Legal Matters" for more information concerning these lawsuits.
Because our strategy is to acquire interests in underdeveloped crude oil
and natural gas properties, many of which have been operated by others for many
years, we may incur liability for damages or pollution caused by the former
operators of these crude oil and natural gas properties. We provide for future
site restoration charges on a unit-of-production basis by including these
charges in depletion and depreciation expense. In addition, we may continue to
be responsible for environmental contamination on properties we transferred to
others. Our operations are also subject to all the risks related to the
operation and development of crude oil and natural gas properties and the
drilling of crude oil and natural gas wells. These risks include encountering
unexpected formations or pressures, blowouts, cratering and fires, any of which
could result in personal injuries, loss of life, pollution damage and other
damage to our properties and that of others. Moreover, offshore operations are
subject to a variety of operating risks peculiar to the marine environment, such
as hurricanes or other adverse weather conditions. Offshore operations also
involve extensive governmental regulations, including regulations that may
impose strict liability for pollution damage, and interruptions or terminations
of operations by governmental authorities based on environmental or other
considerations. We maintain insurance against losses or liabilities arising from
our operations in accordance with customary industry practices and in amounts
that we believe reasonable. However, insurance is often not available against
all operational risks or is not economically feasible for us to obtain. If a
significant event occurs that imposes liability on us that is either not insured
or not fully insured, a material adverse effect on our financial condition and
results of operations could result.
EMPLOYEES
At March 1, 2000, we had 124 employees associated with our operations,
including 23 field personnel in Mississippi and 28 field personnel in Oklahoma.
None of our employees is represented by a union. We consider our employee
relations to be satisfactory.
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LEGAL MATTERS
The Bankruptcy Proceedings.
On August 23, 1999, we and our consolidated subsidiaries filed a voluntary
Chapter 11 petition with the bankruptcy court. Consistent with bankruptcy cases
involving large, publicly traded companies and their affiliates, a number of
proceedings have occurred since August 23, 1999, the most significant of which
are discussed below.
The bankruptcy court approved Fulbright & Jaworski LLP as our counsel and
Arthur Andersen LLP as our financial consultants and auditors. The bankruptcy
court also approved our retention of oil and gas reserve engineers, special
counsel for litigation, and ordinary course of business professionals. All of
these professionals are assisting us in our efforts to reorganize our
businesses.
Official committees for the unsecured creditors and equity holders have
been formed by the Office of the United States Trustee. The bankruptcy court
approved counsel for the Official Unsecured Creditors Committee and the Official
Equity Committee. The Unsecured Creditors Committee has retained its own
financial consultants. The committees have been actively involved in our
bankruptcy proceedings.
The bankruptcy court approved our use of cash collateral in the continued
operations of our business, including its use in our capital expenditure
programs. Our use of cash collateral was extended through March 31, 2000. In
December 1999, under the Third Interim Order to Use Cash Collateral, we began
paying the bank group monthly payments of $1.8 million per month as adequate
protection payments. We paid additional interest payments of $1.8 million on
February 1, 2000 and $1.8 million on March 1, 2000.
Immediately following the commencement of our bankruptcy case, we obtained
permission from the bankruptcy court to pay working and royalty interest owners
to insure that payments to them were not interrupted. As a result, working and
royalty interest owners have continued to receive all payments to which they are
entitled throughout the pendency of our bankruptcy cases.
In October, 1999, one of our shareholders filed a motion to compel our
holding an annual shareholders' meeting. Our annual shareholders' meeting is
historically held between May and August. We decided not to hold the annual
shareholders' meeting by August 23, 1999, the date we filed for bankruptcy
protection, because of extensive, ongoing negotiations between us, the bank
group and the holders of our existing bonds concerning the restructuring of our
debt and operations. Rather than incur the significant expenses associated with
holding the annual meeting, and then having to incur additional significant
expenses to hold a special shareholders' meeting to approve a restructuring of
the debt to the bank group and holders of our existing bonds, we elected to
postpone the annual meeting and combine it with a special meeting once an
agreement with the bank group and holders of our existing bonds was reached.
Although we reasonably believed that we would reach an agreement with the bank
group and the holders of our existing bonds before August 23, 1999, an agreement
was not reached and we filed for bankruptcy protection.
The bankruptcy court denied the shareholders' request to compel a
shareholders' meeting provided that we permit representatives of the Equity
Committee to attend and participate, in a non-voting capacity, at a future board
meeting to discuss our plan of reorganization. We complied with the bankruptcy
court's directive. The bankruptcy court also issued an order for us to show
cause as to why our exclusive period to file a plan of reorganization under
Section 1121 of the Bankruptcy Code should not be terminated to allow other
parties to file plans of reorganization in the case. The bank group moved for a
termination of this exclusivity period as well. Exclusivity was terminated as to
the bank group, the Equity Committee and the Unsecured Creditors Committee.
Other Proceedings.
Hicks Muse Lawsuit. We are the plaintiff in a lawsuit styled Coho Energy,
Inc. v. Hicks, Muse, et al, which was filed in the District Court of Dallas
County, Texas, 68th Judicial District. This lawsuit
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has been removed to the United States Bankruptcy Court for the Northern District
of Texas, Dallas Division, where it currently is pending.
We allege in the Hicks Muse lawsuit that Hicks Muse reneged on a commitment
to inject $250 million dollars of equity capital into our operations, which
would have given Hicks Muse control of Coho through the purchase of 41,666,666
shares of newly-issued common stock at $6 per share.
We further allege that Hicks Muse waited until after our shareholders
approved the commitment, then reneged on the commitment at the last minute to
renegotiate the price down to $4 per share to increase the number of shares that
Hicks Muse would receive for the $250 million. We also allege that Hicks Muse
reneged on this new commitment to purchase stock. We seek damages against Hicks
Muse in excess of $500 million. This description is only a general description
of the Hicks Muse lawsuit and should not be relied on as conclusively stating
all the alleged facts, claims or circumstances surrounding the lawsuit. We are
not able to evaluate the recovery we might receive in the lawsuit.
Brookhaven Lawsuits. Coho Resources, Inc., was a defendant in a number of
individual lawsuits in Mississippi, which allege environmental damage to
property and personal injury, resulting from our drilling and production
operations and those of our predecessors in the Brookhaven field, located in
Lincoln County, Mississippi. The plaintiffs alleged that their damages were
caused by naturally occurring radioactive material resulting from petroleum
exploration and production operations. Our predecessors on the Brookhaven field
were Florabama Associates, Inc., and Chevron Corp. or Chevron USA. Inc.
Florabama and Chevron alleged claims for indemnification for any liability they
may have had to the Brookhaven field plaintiffs, including claims for monetary
and punitive damages, as well as clean-up costs associated with the properties.
The Florabama claim is asserted at $3,671,953.33.
The plaintiffs have compromised and settled their $250 million claim for
the cash sum of $900,000 to be paid in installments over the 180 days following
the effective date of our confirmed plan of reorganization. The court has
approved this settlement. We have also settled the claims of Chevron Corp. and
Chevron USA, Inc. by agreeing to contribute $2.5 million over the next two years
to a fund to be used to finance the implementation of a thorough remediation
plan for the Brookhaven field. Chevron USA will contribute at least $3 million
to that fund as well, and will supervise the implementation of the remediation
plan. The remediation plan was filed with the court and circulated to numerous
parties in interest. This Coho-Chevron settlement also calls for Chevron to
withdraw its claims in the Florabama bankruptcy in Mississippi. That will have
the effect of greatly reducing the dollar amount of Florabama's claim in the
Coho bankruptcy to less than $1.3 million, subject to further negotiations and
final resolution.
Insurance Coverage Disputes with United National Insurance Company Involving
Pending Litigation.
We have notified United National Insurance Company of those claims asserted
against them in the Brookhaven lawsuit.
United National has submitted detailed reservations of rights letters to
us, outlining the grounds upon which coverage will not or may not be available
for the claims included in this lawsuit. United National has also informed us
about limitations to potential coverage, including applicable deductibles
chargeable to us.
If we pursue coverage, the disputed coverage issues raised by these
lawsuits may require judicial resolution through declaratory judgment
litigation.
(a) THE BROOKHAVEN LAWSUITS
United National has informed us that United National reserves its
rights to decline coverage on grounds that we had not adequately disclosed
the pending prior suits, including the Brookhaven litigation, during the
underwriting process before the issuance of the United National insurance
policies.
We have conducted some operations at particular locations within the
Brookhaven field since mid-1995. The primary claims in the Brookhaven
lawsuits arise out of radioactive waste material and
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alleged contamination of drinking water aquifers in and around the
Brookhaven field. Operations at the Brookhaven field date back into the
1940's.
(b) UNITED NATIONAL POLICIES
United National has issued two primary liability policies and two
umbrella liability policies in effect from June 5, 1998 through June 5,
1999, and June 5, 1999 through June 5, 2000, respectively subject to
various deductible and limits.
There are two basic coverage parts in the policies, commercial general
liability and energy industries pollution liability, both of which are
modified by various endorsements included in the policies. The energy
industries pollution liability form is issued on a claims made basis.
(c) GENERAL LIABILITY COVERAGE ISSUES
United National has informed us of its position that potential
coverage is not available for the claims in the Brookhaven lawsuit under
the general liability provisions of the policies. In particular, United
National has informed us that the lawsuits do not seek damages because of
"bodily injury" and "personal injury" defined in the policies, although the
suits include claims for "property damage." United National has also
advised that the Brookhaven lawsuit may be seeking recovery for damage
occurring before the issuance of the United National policies. United
National has also informed us that the policy exclusions would preclude
potential coverage under the general liability provisions, including, but
not limited to, pollution exclusions, health hazard exclusions, and
exclusions applicable to liability arising from waste disposal sites owned,
operated or used by an insured.
Other general liability policy provisions, exclusions and coverage
positions have been outlined and reserved by United National.
(d) ENERGY INDUSTRIES POLLUTION LIABILITY COVERAGE ISSUES
United National has also informed us of its position that the claims
in the Brookhaven lawsuit also may not be subject to potential coverage
under the energy industries pollution liability provisions. United National
has informed us that United National reserves its rights to decline
potential coverage under the energy industries pollution liability
provisions of the policies. Grounds to avoid coverage include the fact that
some of the lawsuits do not include allegations of a pollution incident,
that any pollution incidents may not have commenced before the policy
retroactive date, that property damage to waste facilities is excluded; and
that bodily injury or property damage arising out of a pollution incident
which results from a deliberate failure to comply with applicable statutes
or regulations is excluded from potential coverage. Other energy industries
pollution liability provisions, exclusions and coverage positions have been
outlined and reserved by United National.
(e) COVERAGE POSITIONS APPLICABLE TO BOTH GENERAL LIABILITY AND ENERGY
INDUSTRIES POLLUTION LIABILITY PROVISIONS
United National has also informed us of its position that the claims
in the Brookhaven lawsuit also may not be subject to potential coverage
under both the general liability and the energy industries pollution
liability provisions based on one or more of exclusions or other grounds
applicable to both coverage forms, including damage expected or intended
from the standpoint of the insured, or damage which the insured is
obligated to pay by reason of the assumption of liability in a contract or
agreement, liability arising out of the actual, alleged or threatened
properties of any "radioactive material"; and any loss, cost or expense
arising out of any request, demand or order to respond to or assess the
effects or presence of radioactive material; and property damage or
personal injury arising from known damages or an occurrence or offense
known to any insured before the inception of the policies. Other policy
provisions, exclusions and coverage positions applicable to both coverage
forms have been outlined and reserved by United National.
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United National also has maintained that:
- its policies do not extend potential coverage to punitive damages
sought in the lawsuits,
- there is a per occurrence deductible applicable to pollution claims
in the amount of $50,000 per occurrence, and
- each lawsuit is subject to a minimum of one $50,000-per-occurrence
pollution deductible for which we would be liable before policy
proceeds attaching.
We believe that there is no merit to United National's various positions
described above and we have reserved all rights with respect to these policies
and United National's conduct in connection therewith.
Unasserted Causes of Action.
We have an unasserted claim against Texaco Exploration and Production, Inc.
regarding imbalances in gas volume from wells in which we have an interest.
The Equity Committee in our bankruptcy proceedings contends that causes of
action may exist against one or more of our management team as it existed on
August 23, 1999. We contend that these claims lack merit.
We believe that we have been damaged as a result of the actions of some
members of the Equity Committee, including communications by those members on
the internet. The Equity Committee contends that these claims lack merit.
We are involved in various other legal actions arising in the ordinary
course of business. While it is not feasible to predict the ultimate outcome of
these actions or those listed above, we believe that the resolution of these
matters will not have a material adverse effect, either individually or in
aggregate, on our financial position or results of operations.
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MANAGEMENT
DIRECTORS
The names of our directors and other information with respect to each of
them are set forth below:
<TABLE>
<CAPTION>
DIRECTOR AGE SINCE*
- -------- --- ------
<S> <C> <C>
Jeffrey Clarke.............................................. 54 1982
Louis F. Crane(a)........................................... 57 1993
Alan Edgar(b)............................................... 53 1998
Kenneth H. Lambert(a)....................................... 55 1980
Douglas R. Martin(b)........................................ 54 1990
Jake Taylor(b).............................................. 54 1993
</TABLE>
- ---------------
* Represents the year each individual became a director of us or Coho
Resources, Inc.
(a) Member of the Audit Committee.
(b) Member of the Compensation Committee.
Jeffrey Clarke has served as our Chairman since October 1993 and our
President and Chief Executive Officer since September 1993. Mr. Clarke served as
Executive Vice President and Chief Operating Officer of Coho Resources, Inc.
from May 1982 until May 1990, as President and Chief Operating Officer of Coho
Resources, Inc. from May 1990 to October 1992 and as President and Chief
Executive Officer of Coho Resources, Inc. since October 1992. He served as
Senior Vice President, Chief Operating Officer and a director of Coho Resources
Limited from 1984 to October 1992 and as President and Chief Executive Officer
of Coho Resources Limited since October 1992 and has been engaged by Coho
Resources Limited in various capacities since 1980.
Louis F. Crane has served as President and Chief Executive Officer of
Orleans Capital, an investment portfolio management firm, since November 1991.
Mr. Crane is Chairman of the Board of Offshore Logistics Inc.
Alan Edgar has been an independent financial consultant since January 1999.
He served as Managing Director, Co-head Energy Group with Donaldson, Lufkin &
Jenrette Securities Corporation, an investment banking firm, from 1990 until his
retirement in December 1998.
Kenneth H. Lambert served as Chairman of the Board of Directors of Coho
Resources, Inc. from 1980 until September 1993, as Chief Executive Officer of
Coho Resources, Inc. from 1980 to 1992 and as President of Coho Resources, Inc.
from 1980 to 1990. Mr. Lambert served as President and Chief Executive Officer
of Coho Resources Limited from 1980 to June 1992, and as Chairman of the Board
of Coho Resources Limited from June 1992 until September 1993. Mr. Lambert has
served as President and Chief Executive Officer of Nugold Technology Ltd., a
private company dealing in the recovery of precious metals, since April 1993.
Mr. Lambert is chairman of the board, president, chief executive officer and
director of Edmonton International Industries Ltd., a Canadian public investment
holding company, the Chairman of the Board of Destination Resorts, Inc., a
Canadian public resort development corporation, and Chairman of the Board of Oz
New Media, a Canadian public educational network, multimedia and digital content
company.
Douglas R. Martin has served as Chairman of Pursuit Resources Corp., a
Canadian public oil and gas company, since September 1993. Mr. Martin served as
Senior Vice President and Chief Financial Officer of Coho Resources, Inc. from
May 1990 to August 1993. He served as the Senior Vice President and Chief
Financial Officer of Coho Resources Limited from April 1990 to August 1993.
Jake Taylor has been an independent financial consultant since 1989.
Under the terms of the Registration Rights and Shareholder Agreement dated
May 12, 1998, between Energy Investment Partnership No. 1, L.P. and us, we have
agreed to nominate two persons designated by
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EIP for election to our board of directors at each annual meeting of our
shareholders. Currently, no EIP designee serves on our board of directors, and
EIP has not made any nominations. If the shares of common stock owned by EIP
decreases to both less than one million shares and less than 4% of the
outstanding shares of common stock, our obligation under the registration rights
agreement to nominate any designees of EIP to our board ceases. The registration
rights agreement further provides that, if our proxy statement for any annual
meeting includes a recommendation regarding the election of any other nominees
to our board of directors, we must include a recommendation that the
shareholders also vote in favor of the nominees of EIP. So long as any designee
of EIP serves as one of our directors, we have agreed to appoint one of those
designees to be a member of the Compensation Committee of the board and, if our
board of directors establishes an Executive Committee, the Executive Committee
of the board.
Jeffrey Clarke, our Chairman, President and Chief Executive Officer, and
Keri Clarke, our Vice President, Land and Environmental/Regulatory Affairs, are
brothers. There is no other family relationship between any director, executive
officer or person nominated or chosen by the registrant to become a director or
executive officer.
EXECUTIVE OFFICERS
The names of our executive officers and other information with respect to
them are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jeffrey Clarke....................... 54 Chairman, President, Chief Executive Officer and
Director
R. M. Pearce......................... 48 Executive Vice President and Chief Operating Officer
Anne Marie O'Gorman.................. 41 Senior Vice President, Corporate Development and
Corporate Secretary
Keri Clarke.......................... 43 Vice President, Land and Environmental/Regulatory
Affairs
R. Lynn Guillory..................... 53 Vice President, Human Resources and Administration
Gary Hoge............................ 56 Vice President, Exploration
Larry L. Keller...................... 41 Vice President, Mid-Continent Division
Susan J. McAden...................... 42 Vice President & Controller
Patrick S. Wright.................... 43 Vice President, Gulf Coast Division
Joseph F. Ragusa..................... 46 Treasurer
</TABLE>
For information concerning Jeffrey Clarke, see the table under the caption
"Directors," above.
R. M. Pearce has served as our Executive Vice President and Chief Operating
Officer since August 1995 and has been an officer of us since November 1993.
From July 1991 to October 1993, Mr. Pearce served as President of GRL Production
Services Company.
Anne Marie O'Gorman was appointed as our Senior Vice President, Corporate
Development, in March 1996 and was Vice President, Corporate Development, of us
from August 1993 and for Coho Resources, Inc. before then. Ms. O'Gorman had been
employed by Coho Resources, Inc. or Coho Resources Limited in various capacities
since 1985. Ms. O'Gorman has served as our Secretary since September 1993.
Keri Clarke has served as Vice President, Land and Environmental/Regulatory
Affairs, of us from August 1993 and for Coho Resources, Inc. before then. He has
also been employed by Coho Resources Limited in various positions since 1981.
R. Lynn Guillory joined us as our Vice President, Human Resources and
Administration, when we acquired Interstate Natural Gas on December 8, 1994. Mr.
Guillory held that same position with Interstate Natural Gas since its inception
in March 1992.
Gary Hoge joined us as Vice President, Exploration in April 1998. From 1994
until he joined us, Mr. Hoge served as Vice President, Exploration for Greenhill
Petroleum. From 1992 until 1994 Mr. Hoge served in several senior positions with
Coffman Exploration and Cielo Energy.
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Larry L. Keller has served as our Vice President, Mid-Continent Division
since August 1998 and Vice President, Exploitation, of us from August 1993 and
for Coho Resources, Inc. before then. He had been employed in various
engineering positions with Coho Resources, Inc. since July 1990.
Susan J. McAden was appointed as our Vice President and Controller in
January 1998 and joined us as Controller in February 1995. From September 1993
to February 1995, Ms. McAden was Vice President and Controller of Lincoln
Property Company, a property development and management company. From November
1990 to September 1993, Ms. McAden was Chief Accounting Officer and Treasurer of
Concap Equities, Inc., the acting general partner for sixteen public real estate
partnerships.
Patrick S. Wright has served as our Vice President, Gulf Coast Division,
since August 1998 and joined us as Vice President, Operations, in January 1996.
From January 1991 until he joined us, Mr. Wright served in several managerial
positions with Snyder Oil Corporation, an international oil and gas exploration
and production company.
Joseph F. Ragusa was appointed Treasurer in January 1998 and joined us as
Assistant Treasurer when we acquired Interstate Natural Gas on December 8, 1994.
Mr. Ragusa held that same position with Interstate Natural Gas since January
1993.
In late 1999, we proposed a work force reduction. In connection with the
proposed work force reduction, Eddie M. LeBlanc, III, is no longer employed by
us. Mr. LeBlanc was our Senior Vice President and Chief Financial Officer.
On February 29, 2000 the majority holders of our existing bonds informed us
that, on the effective date of the plan of reorganization, they would cause a
new chief executive officer to be appointed. Any action to elect a new chief
executive officer has not been taken, and is not expected to be taken, by our
current board of directors, but rather will be taken by our board of directors
as it will exist after the effective date. As a result of the announcement of
the majority bondholders, on the effective date, Mr. Clarke is expected to
resign as our Chairman, President and Chief Executive Officer and as one of our
directors. The majority bondholders have named Mr. Michael McGovern as the
designated future chief executive officer. Mr. McGovern has served as Managing
Director of Pembrook Capital Corporation (an energy investment and advisory
services company) since 1998 and served as Chairman and Chief Executive Officer
for Edisto Resources Corporation (a publicly held oil and gas company) from 1993
to 1997. Mr. McGovern is a director of Greystar Corporation (a private
production management service company), Century Seismic LLC (a private seismic
data library service) and Goodrich Petroleum Corporation (a public oil and gas
company).
With the exception of Mr. Clarke, we expect the above directors and
officers to be our directors and officers after the confirmation of our plan of
reorganization, subject to the provisions of this paragraph. Under our plan of
reorganization, for the first year after the confirmation, our board of
directors will consist of seven members. Four members of the board of directors
will be selected by the principal holders of the existing bonds. One member of
the board of directors will be selected by the post-confirmation board of
directors from our post-confirmation management. Two members of the board of
directors will be selected by the entities whose funding is used after the
confirmation of our plan of reorganization, based upon their relative
contributions of capital.
The four members of the board of directors selected by the principal
holders of existing bonds are set forth below:
Michael McGovern. For information concerning Mr. McGovern, see above.
Eugene L. Davis. Mr. Davis has served as Chairman and Chief Executive
Officer of Pirinate Consulting Group, L.L.C., a consulting firm
specializing in crisis and turn-around management advisory services for
public and private businesses, since 1999. Mr. Davis served as Chief
Operating Officer of Total-Tel USA Communications, Inc., an integrated
telecommunications provider, from 1998 to 1999. He also served in various
officer positions, lastly as Vice Chairman and Director, of Emerson Radio
Corporation, an international distributor of consumer electronics products,
since 1990.
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John G. Graham. Mr. Graham has served as President and Chief Executive
Officer of Utilities Mutual Insurance Company, a mutual provider of
workers' compensation and other insurance lines, since May 1999. Mr. Graham
also served as Senior Vice President and Chief Financial Officer of GPU
Service Corporation, a domestic and international electric utility, from
1976 to April 1999.
James E. Bolin. Mr. Bolin has served as Vice President and Secretary
of Appaloosa Partners, Inc., and investment firm, since 1995. Mr. Bolin
served as a Vice President and Analyst for Goldman, Sachs & Company, an
investment banking firm, from 1989 to 1995, and as Director of Corporate
Bond Research from 1992 to 1995.
We are not currently aware of the identities of the remaining board members
for the one-year period after confirmation that will be nominated in accordance
with our plan of reorganization.
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EXECUTIVE COMPENSATION
The following tables contain information about our five most highly
compensated executive officers, including our Chief Executive Officer, in 1997,
1998 and 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)(7) COMPENSATION
- --------------------------- ---- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Jeffrey Clarke........................ 1999 $300,000 $ 0 -- $ 53,194
President and Chief 1998 300,000 0 -- 378,060
Executive Officer(1)(6) 1997 265,000 250,000 300,000 52,539
R.M. Pearce........................... 1999 $225,000 $ 0 -- $ 17,508
Executive Vice President and 1998 225,000 0 -- 17,171
Chief Operating Officer(2) 1997 195,000 140,000 160,000 13,954
Eddie M. LeBlanc, III................. 1999 $175,000 $ 0 -- $ 13,042
Senior Vice President and 1998 175,000 0 -- 12,835
Chief Financial Officer(3) 1997 161,650 85,000 150,000 11,170
Anne Marie O'Gorman................... 1999 $175,000 $ 0 -- $ 11,511
Senior Vice President 1998 175,000 0 -- 83,106
Corporate Development and 1997 161,650 85,000 100,000 10,516
Corporate Secretary(4)(6)
Larry L. Keller....................... 1999 $163,000 $ 0 -- $ 10,481
Vice President Exploitation(5)(6) 1998 163,000 0 -- 83,685
1997 143,100 65,000 45,000 10,050
</TABLE>
- ---------------
(1) Mr. Clarke's All Other Compensation includes our contributions to a 401(k)
savings plan of $8,000 in each year of 1999, 1998 and 1997; premiums paid on
a disability and life insurance policy of $33,118, $32,656 and $32,463 in
1999, 1998 and 1997, respectively; and $12,076 in each year of 1999, 1998
and 1997 of imputed interest on a loan from Coho.
(2) Mr. Pearce's All Other Compensation includes our contributions to a 401(k)
savings plan of $8,000 in each year of 1999, 1998 and 1997; and premiums
paid on a disability policy of $9,508, $9,171 and $5,954 in 1999, 1998 and
1997, respectively.
(3) Mr. LeBlanc's All Other Compensation includes our contributions to a 401(k)
savings plan of $8,000 in each year of 1999, 1998 and 1997; and premiums
paid on a disability policy of $5,042, $4,835 and $3,171 in 1999, 1998 and
1997, respectively. In late 1999, we proposed a work force reduction. In
connection with the proposed work force reduction, Mr. LeBlanc is no longer
employed by us.
(4) Ms. O'Gorman's All Other Compensation includes our contributions to a 401(k)
savings plan of $8,000, in each year of 1999, 1998 and 1997; and premiums
paid on a disability policy of $3,511, $3,429 and $2,050 in 1999, 1998 and
1997, respectively.
(5) Mr. Keller's All Other Compensation includes our contributions to a 401(k)
savings plan of $8,000 in each year of 1999, 1998 and 1997; and premiums
paid on a disability policy of $2,481, $2,345 and $2,050 in 1999, 1998 and
1997, respectively.
(6) Included in All Other Compensation for Messrs. Clarke and Keller and Ms.
O'Gorman for 1998 are $324,992, $73,331 and $71,678, respectively. The
amounts represent our payment on January 22, 1998 of the difference of the
guaranteed price of $10.50 and the strike price of stock options exercised
in October 1997. For more information, see the section of this prospectus
called "Certain Relationships and Related Transactions."
(7) Upon consummation of our plan of reorganization, all options will be
canceled.
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<PAGE> 80
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR-END(1) AT FISCAL YEAR-END(2)
ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE NON-EXERCISABLE EXERCISABLE NON-EXERCISABLE
- ---- -------- -------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey Clarke.............. -- $-- 482,023 0 $0 $0
R.M. Pearce................. -- $-- 380,000 0 $0 $0
Eddie M. LeBlanc, III(3).... -- $-- 250,000 0 $0 $0
Anne Marie O'Gorman......... -- $-- 203,432 0 $0 $0
Larry L. Keller............. -- $-- 78,333 15,000 $0 $0
</TABLE>
- ---------------
(1) Upon consummation of our plan of reorganization, all options will be
canceled.
(2) Computed based upon the difference between the market price on December 31,
1999 of $7/16 per share and the exercise price per share.
(3) In late 1999, we proposed a work force reduction. In connection with the
proposed work force reduction, Mr. LeBlanc is no longer employed by us.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of Messrs. Clarke and
Pearce and Ms. O'Gorman, which provide for minimum annual compensation in the
amount of $300,000, $225,000, and $175,000, respectively, in each case to be
reviewed annually by our board of directors for possible increases. Each
employment agreement is for a term of three years, renewable annually for a term
to extend two years from the renewal date unless either party gives notice. Each
employment agreement entitles the officer to participate in the bonus, incentive
compensation and other programs that are created by our board of directors. If
any of Messrs. Clarke or Pearce or Ms. O'Gorman terminates his or her employment
for "Good Reason" (as defined below) or is terminated by Coho for other than
"Cause" (as defined below), Coho would:
- pay that individual a cash lump sum payment equal to two times the
executive's then-current annual rate of total compensation, and
- continue, until the first anniversary of the employment termination,
health and medical benefits under our plans or the equivalent thereof.
If any of Messrs. Clarke or Pearce or Ms. O'Gorman terminates his or her
employment for Good Reason or is terminated by Coho for other than Cause within
three years of a "Change of Control" (as defined below), we will pay the
executive an additional lump sum equal to 0.99 times his or her then-current
annual rate of total compensation and continue health benefits until the third
anniversary of the employment termination. If any of Messrs. Clarke or Pearce or
Ms. O'Gorman becomes disabled or dies during the term of the respective
employment agreement, we will pay the executive or his or her estate
compensation under the employment agreement for a six-month period following
death or disability. Under the Deficit Reduction Act of 1984, severance payments
contingent upon a "change of control" that exceeded a specified amount subject
both us and the officer to adverse U.S. federal income tax consequences. Each of
the employment agreements was amended on March 17, 1997 to provide that we shall
pay the officer a "gross-up" payment to insure that the officer receives the
total benefit intended by the employment agreement.
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<PAGE> 81
The term "Good Reason" is defined in each employment agreement generally to
mean:
- the failure by Coho to elect or re-elect the executive to his or her
existing office with Coho without Cause,
- a material change by Coho of the executive's function, duties or
responsibilities that would cause his or her position with Coho to become
of less dignity, responsibility, importance or scope,
- we require the executive to relocate his or her primary office to a
location that is greater than 50 miles from our current location, or
- any other material breach of the employment agreement by Coho.
The term "Cause" is defined in each employment agreement generally to mean:
- any material failure of the executive after written notice to perform his
or her duties,
- commission of fraud by the executive against Coho, our affiliates or
customers,
- a material breach by the executive of the confidentiality or
non-competition provisions in the employment agreement, or
- conviction of the executive of a felony offense or a crime involving
moral turpitude.
Under each employment agreement, a "Change of Control" of Coho is deemed to
have occurred if:
- any person or group of persons acting in concert becomes the beneficial
owner of 20 percent or more of the outstanding shares of our common stock
or the combined voting power of our voting securities, with specified
exceptions,
- individuals who as of the date of the employment agreement constitute our
board of directors or their designated successors cease for any reason to
constitute at least a majority of our board of directors, or
- there occurs a reorganization, merger or consolidation or sale or other
disposition of all or substantially all of our assets unless, after the
transaction:
-- all or substantially all of those persons who were the beneficial
owners of our common stock before the transaction beneficially own more
than 60 percent of the then-outstanding common stock of the resulting
corporation,
-- only people who owned our common stock before the transaction
beneficially owns 40 percent or more of the then-outstanding common
stock of the resulting corporation, and
-- at least a majority of the board of directors of the corporation
resulting from the transaction were members of our board of directors
at the time of the execution of the initial agreement or of the action
by our board of directors providing for the corporate transaction.
We currently have an executive severance agreement with Larry L. Keller.
The purpose of the severance agreement is to encourage the executive officer to
continue to carry out his duties with Coho in the event of a "change of control"
of Coho. Under the severance agreement, a "change of control" of Coho is
generally deemed to have occurred if:
- any person or group of persons acting in concert becomes the beneficial
owner of 20 percent or more of the outstanding shares of our common stock
or the combined voting power of our voting securities, with specified
exceptions,
- individuals who as of the date of the severance agreement constitute our
board of directors or their designated successors cease for any reason to
constitute at least a majority of our board of directors,
- our shareholders approve a complete liquidation or dissolution of Coho,
or
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<PAGE> 82
- there occurs a reorganization, merger or consolidation or sale or other
disposition of all or substantially all of our assets unless, after the
transaction:
-- all or substantially all of those persons who were the beneficial
owners of our common stock before the transaction beneficially own more
than 60 percent of the then-outstanding common stock of the resulting
corporation, except to the extent their ownership existed before the
corporate transaction,
-- no person, with specified exceptions, beneficially owns 20 percent or
more of the then-outstanding common stock of the resulting corporation,
and
-- at least a majority of the board of directors of the corporation
resulting from the transaction were members of our board of directors
at the time of the execution of the initial agreement or of the action
by our board of directors providing for the corporate transaction.
The severance agreement provides for severance payments in the event of
termination of the executive officer's employment within two years after a
change of control of Coho, unless the executive's employment is terminated by
Coho or our successor for "cause" or because of the executive's death,
"disability" or "retirement" or by the executive's voluntary termination for
other than "good reason," in each case as these terms are defined in the
severance agreement. The benefits include:
- lump sum payment equal to 1.5 times the highest salary plus bonus paid to
the executive in any of the five years preceding the year of termination
of employment,
- salary to the date of termination, and
- immediate vesting of all stock options or restricted stock awards that
may have been granted to the executive under our employee benefit plans,
except that those options or restricted stock awards shall vest only to
the extent the total payments to the executive under the severance
agreement or otherwise would not be subject to excise taxes imposed under
Section 4999 of the Internal Revenue Code of 1986.
The employment agreements and the severance agreement described above will
be modified according to the terms of our plan of reorganization if our plan of
reorganization is consummated.
Our board of directors has proposed that our plan of reorganization provide
for a retention plan under which key employees are provided with additional
incentives to continue their employment with Coho throughout our bankruptcy
reorganization. If our plan of reorganization is confirmed and consummated, the
total amount of cash awards that will be granted under the retention plan is
$1,472,507, 33% of which is paid shortly after the confirmation of our plan of
reorganization and 67% of which is paid on the first business day following the
270th day after the effectiveness of the confirmation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At December 31, 1999 the members of our compensation committee were Douglas
R. Martin, Alan Edgar and Jake Taylor. No member of our compensation committee
was an officer of Coho at any time during 1999.
During 1999 no executive officer of Coho served as:
- a member of the compensation committee or other board committee
performing equivalent functions of another entity, one of whose executive
officers served on the compensation committee of our board of directors,
- director of another entity, one of whose executive officers served on the
compensation committee of our board of directors, or
- a member of the compensation committee or other board committee
performing equivalent functions of another entity, one of whose executive
officers served as a director of Coho.
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<PAGE> 83
COMPENSATION OF DIRECTORS
Director Fees
Directors who are not our employees receive a semi-annual retainer of
$7,000 plus a fee of $500 for each meeting of our board of directors or meeting
of a committee of our board of directors attended in person. If attendance is by
telephone, directors who are not our employees receive a fee of $250 for each
meeting in which he participated. All directors are reimbursed for expenses
incurred in attending meetings of our board of directors or meetings of
committees of our board of directors. Our employees who are also directors do
not receive a retainer or fees for attending meetings of our board of directors
or meetings of committees of our board of directors.
Non-Employee Director Stock Option Plan
Under our 1993 Non-Employee Director Stock Option Plan, for so long as
there is an adequate number of shares available for grant, each person who
becomes a non-employee director of Coho is entitled to receive an option to
purchase 5,000 shares of our common stock at a price per share equal to the
closing sale price of our common stock on the date of his appointment or
election. In addition, and for so long as there is then an adequate number of
shares available for grant under the Non-Employee Director Plan, each
non-employee director is entitled to receive, on the date of each annual meeting
of our shareholders at which he is re-elected as a director, an option to
purchase an additional 1,000 shares of our common stock at the closing sale
price on the date of grant. However, until a non-employee director has received
options under the Non-Employee Director Plan for an aggregate of 15,000 shares
of our common stock, he shall receive an option to purchase 5,000 shares on the
date of each annual meeting of our shareholders at which he is re-elected as
director.
Options granted under the Non-Employee Director Plan are exercisable one
year after the date of grant and must be exercised within five years from the
date the option becomes exercisable. The options terminate on the earlier of the
date of the expiration of the option or one day less than one month after the
date the optionee ceases to serve as a director of Coho for any reason other
than death, disability or retirement of the director. If an optionee retires
from our board of directors or dies while serving as a director of Coho, the
option terminates on the earlier of the date of expiration of the option or one
year following the date of retirement or death.
During the year ended December 31, 1999, no director was granted options
under the Non-Employee Director Plan. Upon consummation of our plan of
reorganization, we anticipate that the Non-Employee Director Plan will be
terminated.
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<PAGE> 84
SECURITY OWNERSHIP OF PRINCIPAL BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to persons or entities who,
to our knowledge based on information received from those persons or entities,
were the beneficial owners of more than 5% of the outstanding shares of common
stock as of March 23, 2000. Unless otherwise specified, these persons have sole
voting power and sole dispositive power with respect to all shares attributable
to them.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
- ------------------- -------------------- -------------------
<S> <C> <C>
President and Fellows of Harvard College................. 3,245,000(2) 12.70%
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, Massachusetts 02210
Energy Investment Partnership No. 1...................... 2,182,084(3) 8.52%
200 Crescent Court, Suite 1600
Dallas, Texas 75201
</TABLE>
- ---------------
(1) Based on 25,603,512 shares issued and outstanding as of March 1, 2000.
(2) Based solely on information contained in a Schedule 13G dated February 14,
2000 filed with the Commission. President and Fellows of Harvard College is
an employee benefit plan or endowment fund in accordance with Rule
13d-1(6)(l)(ii)(F) and has sole voting and dispositive power with respect to
3,245,000 shares of common stock that are owned by it.
(3) Based solely on information contained in a Schedule 13G dated May 20, 1998
filed with the Commission. Energy Investment Partnership No. 1 is a general
partnership and has shared voting and dispositive power with respect to
2,182,084 shares of common stock that are owned by the partnership.
The following table sets forth information with respect to common stock
beneficially owned as of December 31, 1999 by each of our directors, by each
executive officer named in the Summary Compensation Table and by all directors
and officers as a group. Unless otherwise specified, these persons have sole
voting power and sole dispositive power with respect to all shares attributable
to him or her.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT
OWNERSHIP(1) OF CLASS
-------------------- --------
<S> <C> <C>
Jeffrey Clarke.............................................. 551,811 2.2%
Louis F. Crane.............................................. 27,000 *
Alan E. Edgar............................................... 480,000 1.9%
Larry L. Keller............................................. 93,505 *
Eddie M. LeBlanc, III**..................................... 251,000 *
Kenneth H. Lambert.......................................... 398,191(2) 1.6%
Douglas R. Martin........................................... 6,000 *
Anne Marie O'Gorman......................................... 219,766 *
R. M. Pearce................................................ 385,000 1.5%
Jake Taylor................................................. 67,400 *
All directors and executive officers as a group (16
persons).................................................. 2,738,315 10.7%
</TABLE>
- ---------------
* Less than 1%
** In late 1999, we proposed a work force reduction. In connection with the
proposed work force reduction, Mr. LeBlanc's employment relationship with us
was severed effective December 31, 1999.
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<PAGE> 85
(1) Includes 482,023; 13,000; 78,333; 250,000; 5,000; 380,000; 13,000; 203,432
and 1,699,453 shares that may be acquired within 60 days upon the exercise
of stock options held by Messrs. Clarke, Crane, Keller, LeBlanc, Martin,
Pearce and Taylor, Ms. O'Gorman and all directors and executive officers as
a group, respectively. If our plan of reorganization is confirmed, all
options will be canceled.
(2) Mr. Lambert is the beneficial owner of the shares held by Lambert Management
Ltd., Lambert Holdings, Ltd., Edmonton International Industries Ltd., 372268
Alberta Ltd., 249172 Alberta Ltd. and 297139 Alberta Ltd. The number of
shares shown as beneficially owned by Mr. Lambert include the shares owned
by these entities and also include 17,523 shares that may be acquired by Mr.
Lambert within 60 days upon the exercise of stock options. Included in Mr.
Lambert's total shares are 31,984 which are held by family members; Mr.
Lambert claims no beneficial interest in these shares.
In addition to the foregoing options, Mr. Keller and all executive officers
and directors as a group held options to acquire 15,000 and 58,498 shares of
existing common stock, respectively, which options were not exercisable within
60 days. If our plan of reorganization is consummated, all options will be
canceled.
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<PAGE> 86
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of a Financial Advisory Agreement entered into between us
and Hicks, Muse & Co. Partners, L.P., on August 21, 1998, we paid Hicks, Muse &
Co. Partners $1,250,000 as compensation for its services as our financial
advisor in connection with an agreement to issue shares of our common stock to
HM4 Coho L.P., an affiliate of Hicks, Muse & Co. Partners. John R. Muse and
Lawrence D. Stuart, Jr., are limited partners in Hicks, Muse & Co. Partners and
limited partners of a limited partner in HM4, and at the time of the payment to
Hicks, Muse & Co. Partners, were two of our directors under an agreement with
EIP. For more information regarding EIP, see the section of this prospectus
called "Management." On March 18, 1999, Messrs. Muse and Stuart resigned from
our board of directors.
In May 1990 we made a non-interest bearing loan in the amount of $205,000
to Mr. Jeffrey Clarke, our Chairman, President and Chief Executive Officer, to
assist him in the purchase of a house in Dallas, Texas. The loan is unsecured
and repayable when Mr. Clarke ceases to be employed by us, unless Mr. Clarke's
employment is terminated as a result of our current restructuring process, at
which time the loan will be forgiven.
In October 1997 we made non-interest bearing sole recourse loans to Jeffrey
Clarke, our Chairman, President and Chief Executive Officer; Anne Marie
O'Gorman, our Senior Vice President, Corporate Development; Larry Keller, our
Vice President Exploitation; and Kenneth Lambert, one or our directors, in the
amounts of $383,064; $84,006; $66,665 and $88,375, respectively, to assist them
in the exercise of expiring options. At the time of the expiration of these
options all of our officers and directors were subject to a 90-day lock up
agreement with the underwriters of our 1997 equity offering. Under the terms of
this agreement, the officers and directors were not able to sell any of their
shares and would not have had the funds necessary to purchase the stock without
the loan. In addition to the loan, we also provided a guaranteed price of
$10.50, which was the price of the common stock in the 1997 equity offering, to
be received by Messrs. Clarke, Keller and Lambert and Ms. O'Gorman.
In 1999, we entered into an agreement with Alan Edgar, one of our
directors, that provides for Mr. Edgar to receive a percentage of the net
proceeds received by us from the lawsuit we commenced against Hicks Muse up to a
maximum of $5.75 million, in consideration of Mr. Edgar's extensive and ongoing
involvement in working with our special litigation counsel in prosecuting the
lawsuit. If the plan of reorganization is consummated, this contract will be
rejected.
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<PAGE> 87
DESCRIPTION OF EXISTING INDEBTEDNESS
EXISTING BANK GROUP LOAN
We have a revolving credit facility with the following institutions:
- Banque Paribas, Houston Agency;
- Bank One Texas, N.A.;
- MeesPierson Capital Corp.;
- Bank of Scotland;
- Credit Lyonnais;
- Christiana Bank;
- Den Norske Bank; and
- Toronto Dominion Bank.
Our total credit commitment and borrowing base under the revolving credit
facility at December 31, 1998 was $300 million and $242 million, respectively.
The revolving credit facility is secured by our crude oil and natural gas
properties and guaranteed by all of our material subsidiaries, excluding the
revolving credit facility co-borrowers. The guarantees are secured by all of the
crude oil and natural gas properties of the subsidiaries and the stock of all
guaranteeing subsidiaries. The revolving credit facility is subject to borrowing
base availability as determined from time to time by our bank group at their
sole discretion, and in accordance with customary practices and standards in
effect from time to time for crude oil and natural gas loans to borrowers
similar to us. The borrowing base may be affected from time to time by the
performance of our crude oil and natural gas properties and changes in crude oil
and natural gas prices. We incur a commitment fee of 3/8% per annum on the
unused portion of the borrowing base.
Loans under the revolving credit facility up to $220 million bear interest,
at our option, at the bank prime rate or a Eurodollar rate plus a maximum of
1.5%, with amounts outstanding in excess of $220 million bearing interest, at
our option, at either the prime rate plus 1.0% or LIBOR plus 2.50%. Loans under
the revolving credit facility are secured by a lien on substantially all of our
crude oil and natural gas properties and the capital stock of our wholly owned
subsidiaries. If the outstanding amount of the loan exceeds the borrowing base
at any time, we are required to
- provide collateral with value equal to the excess,
- prepay, without premium or penalty, the excess plus accrued interest or
- prepay the principal amount of the notes equal to the excess in five
equal monthly installments provided the entire excess shall be paid
before the immediately succeeding redetermination date.
The fee on the portion of the unused credit facility is 0.375% per annum. The
commitment fee applicable to increases from time to time in the borrowing base
is 0.375% of the incremental borrowing base amount. The revolving credit
facility terminates January 2, 2003, though as described below, all amounts due
under the revolving credit facility have been accelerated.
On February 22, 1999, we were informed by our bank group that our borrowing
base was reduced from $242 million to $150 million effective January 31, 1999
creating an over advance of $89.6 million under the new borrowing base. We were
unable to cure the over advance as required by the revolving credit facility by
March 2, 1999 by taking one of the actions described above. On March 8, 1999, we
received written notice from our bank group that we were in default under the
terms of the revolving credit facility and the bank group reserved all rights,
remedies and privileges as a result of the payment default. Additionally, we
were 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 have
been unable to make interest payments when due, although we have made aggregate
interest payments of $3.4 million during
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<PAGE> 88
the period between March and July 1999. As a result of the payment defaults,
advances under the revolving credit facility bear interest at the prime rate.
The revolving credit facility provides that past due installments to repay the
over advance and the past due interest payments bear interest at the default
interest rate of prime plus 4%. On August 19, 1999, our bank group accelerated
the full amount outstanding under the revolving credit facility. The bank group
contends that the default rate of interest is owed on all amounts, not only on
the overadvance, since the date of acceleration. Under a cash collateral order
approved by the bankruptcy court in November 1999, we made an interest payment
of $878,000 to the bank group in December 1999 and are required to make monthly
interest payments of approximately $1.8 million. The current Cash Collateral
Order of the bankruptcy court expires on March 31, 2000. We paid additional
interest payments on February 1, 2000 and March 1, 2000. The outstanding
advances of $239.6 million as of December 31, 1999 have been included in
Liabilities Subject to Compromise in our consolidated balance sheet of December
31, 1999. The total arrearage related to the installment payments due on the
over advance and past due interest was approximately $108.8 million as of
December 31, 1999, including approximately $19.2 million of past due interest
and $89.6 million related to installments due on the over advance.
The revolving credit facility contains financial and other covenants
including:
- the maintenance of minimum amounts of shareholders' equity,
- maintenance of minimum ratios of cash flow to interest expense as well as
current assets to current liabilities,
- limitations on our ability to incur additional debt, and
- restrictions on the payment of dividends.
At December 31, 1999, we were not in compliance with the minimum shareholders'
equity, cash flow to interest expense and current assets to current liabilities
covenants.
EXISTING BONDS
The $150 million of our existing bonds are unsecured senior subordinated
obligations and rank pari passu in right of payment to all of our existing and
future senior subordinated indebtedness. The existing bonds mature on October
15, 2007 and bear interest from October 3, 1997 at the rate of 8 7/8% per annum
payable semi-annually, commencing on April 15, 1998. Most of our subsidiaries
issued guarantees of the existing bonds on a senior subordinated basis. The
indenture issued in conjunction with the existing bonds contains covenants,
including covenants that limit
- indebtedness,
- restricted payments,
- distributions from restricted subsidiaries,
- transactions with affiliates,
- sales of assets and subsidiary stock, including sale and leaseback
transactions,
- dividends and other payment restrictions affecting restricted
subsidiaries and
- mergers or consolidations.
We did not pay the April 15, 1999 interest payment of $6.7 million due on
our existing bonds and currently are in default under the terms of the bond
indenture. Under the bond indenture, the trustee by written notice to us, or the
holders of at least 25% in principal amount of the outstanding existing bonds by
written notice to the trustee and us, may declare the principal and accrued
interest on all the existing bonds due and payable immediately. However, we may
not pay the principal of, any premium or interest on the existing bonds so long
as any required payments due on our revolving credit facility remain outstanding
and have not been cured or waived. On May 19, 1999, we received a written notice
of acceleration from two holders of the existing bonds, which own in excess of
25% in principal amount of
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<PAGE> 89
the outstanding existing bonds. Both the accelerated principal and the past due
interest payment bore interest at the default rate of 9.875% from the date of
acceleration to August 23, 1999, which is 1% in excess of the stated rate for
the existing bonds. As a result of our Chapter 11 filing, we have ceased
accruing interest on unsecured debt, including the existing bonds. An additional
$5.7 million of existing bond interest expense, including $2.2 million that
would have been due on October 15, 1999, would have been recognized in 1999 if
we had not made our Chapter 11 filing. For more information regarding our
discontinuance of interest on the existing bonds, see the section of this
prospectus called "Management's Discussion and Analysis of Financial Position
and Results of Operations -- Liquidity and Capital Resources."
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<PAGE> 90
DESCRIPTION OF OUR CAPITAL STOCK
OUR AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of existing
common stock, par value $0.01 per share, and 10,000,000 shares of preferred
stock, par value $0.01 per share. At March 1, 2000, 25,603,512 shares of
existing common stock were outstanding and no shares of preferred stock were
outstanding. Any shares of existing common stock reserved for issuance upon the
exercise of options granted under our stock option plans are of no effect since
these plans will be canceled and no shares will be reserved on the effective
date of the confirmation of our plan of reorganization.
DESCRIPTION OF OUR COMMON STOCK
Holders of shares of existing common stock
- are entitled to one vote per share in the election of directors and on
all other matters submitted to a vote of shareholders;
- have the right to cumulate their votes in the election of directors;
- have no redemption or conversion rights and no preemptive or other rights
to subscribe for our other securities in the event of our liquidation,
dissolution or winding up;
- upon our liquidation, dissolution or winding up, are entitled to share
equally and ratably in all of the assets remaining, if any, after
satisfaction of all of our debts and liabilities and the preferential
rights of any series of preferred stock then outstanding; and
- have an equal and ratable right to receive dividends, when, as and if
declared by the board of directors out of funds legally available
therefor and only after payment of, or provision for, full dividends on
all outstanding shares of any series of preferred stock and after we have
made provision for any required sinking or purchase funds for series of
preferred stock.
The shares of existing common stock outstanding are fully paid and
non-assessable.
DESCRIPTION OF OUR PREFERRED STOCK
The preferred stock may be issued, from time to time, in one or more
series, and our board of directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, redemption
rights and terms, liquidation preferences, conversion rights, voting rights and
sinking fund provisions applicable to each series of preferred stock. If we
issue a series of preferred stock in the future that has voting rights or
preferences over the existing common stock with respect to the payment of
dividends and upon our liquidation, dissolution or winding up, the rights of the
holders of the new common stock offered may be adversely affected. The issuance
of shares of preferred stock could be used in an attempt to prevent an
acquisition of us. We have no present intention to issue any shares of preferred
stock.
LIMITATION OF DIRECTOR LIABILITY
Our articles of incorporation contain a provision that limits the liability
of our directors as permitted under Texas law. The provision eliminates the
liability of a director to us or our shareholders for monetary damages for
negligent or grossly negligent acts or omissions in the director's capacity as a
director. The provision does not affect the liability of a director
- for breach of his duty of loyalty to us or to our shareholders,
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
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<PAGE> 91
- for acts or omissions for which the liability of a director is expressly
provided by an applicable statute, or
- in respect of any transaction from which a director received an improper
personal benefit.
Under the articles of incorporation, the liability of directors will be further
limited or eliminated without action by shareholders if Texas law is amended to
further limit or eliminate the personal liability of directors.
Upon consummation of our plan of reorganization, the articles of
incorporation will be amended and restated, and the amended and restated
articles of incorporation will include the same provisions.
DIVIDENDS
Our bond indenture limits our ability to pay dividends, based on our
ability to incur additional indebtedness and primarily limited to 50% of
consolidated net income earned, excluding any write down of property, plant and
equipment after the date the existing bonds were issued plus the net proceeds
from any future sales of our capital stock. If our plan of reorganization is
consummated, we will enter into new agreements, in which similar restrictions on
our payment of dividends will be imposed.
RIGHTS PLAN
In September 1994, we adopted a rights plan which, as amended, provided for
the distribution by us of one common share purchase right for each outstanding
share of existing common stock to holders of record of the existing common stock
at the close of business on September 28, 1994, and for the issuance of one plan
right for each share of existing common stock thereafter issued before the
earlier of the date the plan rights first become exercisable, the date of
redemption of the plan rights and September 13, 2004, the expiration date of the
plan rights. The plan rights are currently evidenced by the certificates
representing the shares of existing common stock with respect to which the plan
rights were issued and may only be traded with shares of the existing common
stock.
If our plan of reorganization is consummated, the rights plan will be
terminated.
REGISTRATION AND NOMINATION RIGHTS
We are a party to two agreements giving registration and nomination rights
to specified shareholders. First, we and Kenneth H. Lambert, one of our
directors, are parties to an Amended and Restated Registration Rights Agreement,
providing him with the right to make one request that we register his shares of
the existing common stock and to participate in a registration by us, also
called a piggyback registration. Second, we and EIP are parties to a Shareholder
Agreement under which EIP has registration rights as well as the right to
nominate two of our directors.
If our plan of reorganization is consummated, these two agreements will be
terminated.
Under our plan of reorganization we will enter into a registration rights
agreement with the principal holders of our existing bonds under which the
shares of new common stock issued to them under our plan of reorganization will
be registered under federal securities laws under prescribed circumstances.
TRANSFER AGENT AND REGISTRAR
The transfer agents for the existing common stock are Chase Mellon
Shareholder Services L.L.C. and Montreal Trust Company of Canada and the
registrar is Chase Mellon Shareholder Services L.L.C.
THE NEW COMMON STOCK
Upon consummation of our plan of reorganization, we will cancel our
existing common stock and issue new common stock. Generally, the new common
stock will carry the same rights as the existing common stock, except that
holders of new common stock will not have cumulative voting rights. Under
88
<PAGE> 92
our plan of reorganization, our articles of incorporation will be amended to
authorize the new common stock. Our plan of reorganization provides for
amendments to our existing articles of incorporation. Those amendments will be
effected by filing with the Secretary of State of the State of Texas amended and
restated articles of incorporation. Currently, our articles of incorporation
permit the holders of the existing common stock to cumulate their votes at each
election of directors by giving one candidate for director as many votes as the
number of directors to be elected multiplied by the voting shareholder's number
of shares, or by distributing the voting shareholder's votes on the same
principle among any number of those candidates. Under our plan of reorganization
our articles of incorporation will be amended to expressly prohibit cumulative
voting by the shareholders at elections of directors. In addition, in accordance
with Section 1123(a)(6) of the United States Bankruptcy Code, our amended and
restated articles of incorporation will prohibit the issuance of any shares of
non-voting equity securities. The shares of common stock resulting after the
effectiveness of our amended and restated articles of incorporation are referred
to in this prospectus as the new common stock.
89
<PAGE> 93
DILUTION
Under our plan of reorganization, as of February 7, 2000, the date the
bankruptcy court entered its order approving our disclosure statement, our
shareholders will receive 640,088 shares of the new common stock and the holders
of existing bonds will receive 15,362,107 shares of the new common stock. Some
of the holders of existing bonds may also receive additional shares, as
described below. Before taking into account shares issued under this offering or
the standby loan, the bondholder group will receive 96%, and the shareholders
will receive 4%, of the total number of outstanding shares of new common stock.
These percentages may not be exact, as cash will be distributed in lieu of
fractional shares upon the exchange of existing common stock for new common
stock. THESE PERCENTAGES ARE SUBJECT TO DILUTION UNDER SOME FEATURES OF OUR PLAN
OF REORGANIZATION, AS DISCUSSED BELOW.
Under this offering, each of our shareholders as of the record date of the
offering is being given the opportunity to purchase additional new common stock
at an initial purchase price of $10.40 per share. For each share of existing
common stock held as of the record date of this offering, a shareholder will
have the right to buy initially 0.338 shares of new common stock. To the extent
the shareholders do not purchase their allocable portion of these offered
shares, those shareholders who do purchase their allocable portion of these
offered shares may elect to purchase any number of additional shares of the new
common stock, up to the maximum number of shares offered under this offering,
for $10.40 per share. To the extent some shares of the new common stock were
allocated for purchase by the shareholders but were not purchased by them, those
unsubscribed shares will be distributed to the fully-subscribed shareholders who
have elected to purchase the unsubscribed shares on a pro rata basis. To the
extent any shares offered under this offering are not purchased by the
shareholders, including those accepting their basic subscription privilege and
those purchasing shares under the over-subscription privilege, we may offer
those remaining shares to other parties at $10.40 per share.
The total number of shares offered under this offering is 8,663,846; if all
of these shares are sold under this offering, then, before taking into account
the shares to be issued under the standby loan, the shareholders will receive a
total of 9,303,934 shares of the new common stock, constituting 37.7% of the
total number of shares outstanding, and the bondholder group will receive
15,362,107 shares of the new common stock, constituting 62.3% of the total
number of shares outstanding.
We do not know whether we will be able to sell all of the shares offered
under this offering. To the extent that we do not sell all of those shares, we
will borrow funds in an amount to be determined by us under the standby loan.
Under the terms of the standby loan, we must issue to the standby lenders a
number of shares sufficient to give them a specified percentage of the total
outstanding shares of the new common stock as of the effective date of the
confirmation of our plan of reorganization. If $70 million is borrowed, that
percentage will be 14%. This percentage will be adjusted ratably according to
the amount actually borrowed under the standby loan; if no amount is borrowed,
no shares will be issued to the standby lenders.
Also under the terms of the standby loan, any shares issued to the standby
lenders will dilute the percentage ownership but not the actual number of shares
issued to the bondholder group and the shareholders in exchange for their shares
of the existing common stock. However, shares issued to the standby lenders may
not dilute the percentage ownership issued to the shareholders or other third
parties for shares purchased under this offering. To assure that these results
are achieved, we will issue additional shares of the new common stock to the
purchasers under this offering sufficient to assure those purchasers that they
will maintain their relative percentage ownership interests before taking into
account the shares to be issued under the standby loan. This "gross-up" feature
will have the effect of further diluting the percentage ownership interests
represented by shares issued to the shareholders in exchange for their existing
common stock and of the bondholder group in exchange for their claims. It will
also have the effect of reducing the per-share purchase price under this
offering because the gross-up feature will not require those purchasing shares
under this offering to make any additional payments for the additional gross-up
shares.
90
<PAGE> 94
Because the number of shares that will be purchased under this offering
cannot be predicted, it is not possible to state accurately the relative
percentage ownership interests that ultimately will be held by the shareholders
who elect not to participate in the offering, the bondholder group, the
purchasers under this offering and the standby lenders. However, for
illustrative purposes, the following table indicates what those percentages
would be under the stated assumptions.
<TABLE>
<CAPTION>
ASSUMING 50% OF THE
SHARES OF NEW ASSUMING NO SHARES
COMMON STOCK OF NEW COMMON STOCK
OFFERED IN THIS OFFERING ARE PURCHASED UNDER
ASSUMING ALL SHARES ARE PURCHASED AND THIS OFFERING AND
OF NEW COMMON STOCK $45,000,000 IS $70 MILLION IS
OFFERED IN THIS OFFERING BORROWED UNDER THE BORROWED UNDER THE
ARE PURCHASED STANDBY LOAN STANDBY LOAN
------------------------ ------------------------ -------------------
<S> <C> <C> <C>
Shareholders (solely in exchange
for their shares of the existing
common stock).................... 2.6% 2.8% 3.4%
Bondholder group................... 62.3% 66.9% 82.6%
Purchasers under this offering..... 35.1% 21.3% N/A
Standby lenders.................... N/A 9.0% 14.0%
</TABLE>
LEGAL MATTERS
Legal matters related to the rights offered by this prospectus are being
passed upon for us by Fulbright & Jaworski L.L.P., Dallas, Texas.
INDEPENDENT AUDITORS
Our consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been audited by Arthur Andersen LLP, independent auditors,
as set forth in their reports appearing in this prospectus.
ENGINEERS
The historical reserve information prepared by Ryder Scott Company and
Sproule Associates, Inc. included in this prospectus has been included in
reliance upon the authority of each firm as experts with respect to matters
contained in their respective reserve reports.
91
<PAGE> 95
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read, or copy,
any document we file at the public reference room maintained by the Commission
at 450 Fifth Street, N. W., Washington, D.C. 20549, and at the following
regional offices of the Commission: New York Regional Office, Seven World Trade
Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
Citicorp Center, 5000 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of this information can be obtained by mail from the Commission's Public
Reference Branch at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
our filings with the Commission are also available to the public on the
Commission's internet website at http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-1
under the Securities Act of 1933 with respect to the rights offered in this
offering and the shares of our new common stock to be issued upon exercise of
the rights or otherwise under this offering. This prospectus does not contain
all of the information set forth in the registration statement and its exhibits
and schedules. Statements made by us in this prospectus as to the contents of
any contract, agreement or other document referred to in this prospectus are not
necessarily complete. For a more complete description of these contacts,
agreements or other documents, you should carefully read the exhibits to the
registration statement.
The registration statement, together with its exhibits and schedules, which
we filed with the Commission, may also be reviewed and copied at the public
reference facilities of the Commission located at the addresses set forth above.
Please call the Commission at 1-800-SEC-0330 for further information on its
public reference facilities.
92
<PAGE> 96
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets, December 31, 1998 and 1999..... F-3
Consolidated Statements of Operations, Years Ended December
31, 1997, 1998 and 1999................................... F-4
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1997, 1998
and 1999.................................................. F-5
Consolidated Statements of Cash Flows, Years Ended December
31, 1997, 1998 and 1999................................... F-6
Notes to Consolidated Financial Statements, Years Ended
December 31, 1997, 1998 and 1999.......................... F-7
</TABLE>
F-1
<PAGE> 97
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Coho Energy, Inc. (debtor-in-possession)
We have audited the accompanying consolidated balance sheets of Coho
Energy, Inc. (a Texas corporation debtor-in-possession) and subsidiaries as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, shareholders' investments and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Coho Energy, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of our operations
and our cash flows for each of the three years in the period ended December 31,
1999 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 and negative
cash flows from operations, has received a 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, that raise substantial doubt about the
Company's ability to continue as a going concern. On August 23, 1999, the
Company, together with certain of its wholly owned subsidiaries, filed a
voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code and
is currently operating as a debtor-in-possession subject to the bankruptcy
court's supervision and orders. As discussed in Note 2 to the financial
statements, management believes that it may not be possible to satisfy all
claims against the Company if the reorganization plan filed with the Bankruptcy
Court is not approved. 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
March 3, 2000 (Except with respect to
the matters discussed in Note 15, as to
which the date is March 20, 2000.)
F-2
<PAGE> 98
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 6,901 $ 18,805
Cash in escrow............................................ 1,505 78
Accounts receivable, principally trade.................... 9,960 11,158
Other current assets...................................... 948 1,428
--------- ---------
19,314 31,469
Property and equipment, at cost net of accumulated depletion
and depreciation, based on full cost accounting method
(note 3).................................................. 324,574 311,788
Other assets................................................ 6,180 5,544
--------- ---------
$ 350,068 $ 348,801
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities not subject to compromise:
Current liabilities
Accounts payable, principally trade.................... $ 5,577 $ 1,294
Accrued liabilities and other payables................. 6,656 3,751
Accrued interest....................................... 7,302 10,175
Accrued state income taxes payable..................... 4,045 --
Current portion of long term debt (note 4)............. 384,031 --
--------- ---------
Total current liabilities......................... 407,611 15,220
Liabilities subject to compromise:
Accounts payable, principally trade....................... -- 4,166
Accrued liabilities and other payables.................... -- 5,373
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........... -- 423,739
--------- ---------
407,611 438,959
--------- ---------
Commitments and contingencies (note 9)...................... 3,700 1,800
Shareholders' deficit (note 7)
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) (230,026)
--------- ---------
Total shareholders' deficit....................... (61,243) (91,958)
--------- ---------
$ 350,068 $ 348,801
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE> 99
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Operating revenues
Net crude oil and natural gas production.................. $ 63,130 $ 68,759 $ 57,323
-------- --------- --------
Operating expenses
Crude oil and natural gas production...................... 13,747 23,475 18,218
Taxes on oil and gas production........................... 2,223 3,384 2,937
General and administrative (note 3)....................... 7,163 7,750 9,905
State income tax penalties................................ -- -- 1,048
Allowance for bad debt.................................... -- 894 --
Unsuccessful transaction costs............................ -- 2,129 --
Depletion and depreciation................................ 19,214 28,135 13,702
Writedown of crude oil and gas properties................. -- 188,000 5,433
-------- --------- --------
Total operating expenses.......................... 42,347 253,767 51,243
-------- --------- --------
Operating income (loss)..................................... 20,783 (185,008) 6,080
-------- --------- --------
Other income and expenses
Interest and other income................................. 646 214 246
Interest expense (note 4)................................. (11,120) (32,935) (33,944)
-------- --------- --------
(10,474) (32,721) (33,698)
-------- --------- --------
Earnings (loss) from operations before reorganization costs
and income taxes.......................................... 10,309 (217,729) (27,618)
-------- --------- --------
Reorganization costs
Professional fees......................................... -- -- 3,319
Interest income........................................... -- -- (210)
Other..................................................... -- -- 14
-------- --------- --------
-- -- 3,123
-------- --------- --------
Earnings (loss) from operations before income taxes......... 10,309 (217,729) (30,741)
-------- --------- --------
Income taxes (note 5)
Current (benefit) expense................................. 163 4,111 (26)
Deferred (benefit) expense................................ 3,858 (18,494) --
-------- --------- --------
4,021 (14,383) (26)
-------- --------- --------
Net earnings (loss)......................................... $ 6,288 $(203,346) $(30,715)
======== ========= ========
Basic earnings (loss) per common share (note 1)............. $ .29 $ (7.94) $ (1.20)
======== ========= ========
Diluted earnings (loss) loss per common share (note 1)...... $ .28 $ (7.94) $ (1.20)
======== ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 100
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NUMBER OF
COMMON ADDITIONAL RETAINED
SHARES COMMON PAID-IN EARNINGS
OUTSTANDING STOCK CAPITAL (DEFICIT) TOTAL
----------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996................. 20,347,126 $203 $ 83,516 $ (2,253) $ 81,466
Issued on
(i) Exercise of Employee Stock
Options............................... 256,386 3 1,733 -- 1,736
(ii) Public offering of common stock.... 5,000,000 50 49,173 -- 49,223
(iii) Warrants.......................... -- -- 3,390 -- 3,390
Net earnings............................... -- -- -- 6,288 6,288
---------- ---- -------- --------- ---------
Balance at December 31, 1997................. 25,603,512 256 137,812 4,035 142,103
Net loss................................... -- -- -- (203,346) (203,346)
---------- ---- -------- --------- ---------
Balance at December 31, 1998................. 25,603,512 256 137,812 (199,311) (61,243)
Net loss................................... -- -- -- (30,715) (30,715)
---------- ---- -------- --------- ---------
Balance at December 31, 1999................. 25,603,512 $256 $137,812 $(230,026) $ (91,958)
========== ==== ======== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 101
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss)...................................... $ 6,288 $(203,346) $(30,715)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depletion and depreciation............................... 19,214 28,135 13,702
Writedown of crude oil and natural gas properties........ -- 188,000 5,433
Deferred income taxes.................................... 3,858 (18,488) --
Amortization of debt issue costs and other............... 591 1,756 679
Changes in:
Cash in escrow........................................... -- (1,505) 1,427
Accounts receivable...................................... 1,160 (1,150) (1,194)
Other assets............................................. (351) (628) (454)
Accounts payable and accrued liabilities................. 4,346 7,917 25,981
Investment in marketable securities...................... 1,962 -- --
--------- --------- --------
Net cash provided by operating activities.................. 37,068 691 14,859
--------- --------- --------
Cash flows from investing activities
Acquisitions............................................. (259,355) -- --
Property and equipment................................... (72,667) (70,143) (6,349)
Changes in accounts payable and accrued liabilities
related to exploration and development................ 3,559 (2,986) (1,186)
Proceeds on sale of property and equipment............... -- 61,452 --
--------- --------- --------
Net cash used in investing activities...................... (328,463) (11,677) (7,535)
--------- --------- --------
Cash flows from financing activities
Increase in long term debt............................... 402,894 76,113 4,600
Debt issuance costs...................................... (4,275) -- --
Repayment of long term debt.............................. (155,989) (62,043) (20)
Proceeds from exercised stock options.................... 1,495 -- --
Issuance of common stock................................. 49,223 -- --
--------- --------- --------
Net cash provided by financing activities.................. 293,348 14,070 4,580
--------- --------- --------
Net increase in cash and cash equivalents.................. 1,953 3,084 11,904
Cash and cash equivalents at beginning of year............. 1,864 3,817 6,901
--------- --------- --------
Cash and cash equivalents at end of year................... $ 3,817 $ 6,901 $ 18,805
========= ========= ========
Cash paid (received) during the period for:
Interest................................................. $ 7,774 $ 28,426 $ 8,936
Income taxes............................................. $ 603 $ (256) $ 33
Reorganization costs (including prepayments)............. $ -- $ -- $ 3,352
Reorganization costs (interest income)................... $ -- $ -- $ (210)
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 102
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Coho Energy, Inc. ("CEI") was incorporated in June 1993 as a Texas
corporation and conducts a majority of its operations through its subsidiary,
Coho Resources, Inc. ("CRI"), and its subsidiaries (collectively the "Company").
Principles of Presentation
These consolidated financial statements have been prepared in conformity
with generally accepted accounting principles as presently established in the
United States and include the accounts of CEI as successor to CRI, and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the prior year
statements to conform with the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Substantially all of the Company's exploration, development and production
activities are conducted in the United States and Tunisia jointly with others
and, accordingly, the financial statements reflect only the Company's
proportionate interest in such activities.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and highly liquid debt instruments purchased with an original maturity of
three months or less.
Cash in Escrow
Substantially all of the cash at December 31, 1998 was held pending
completion of the April 1999 post closing review by the buyer of the Monroe
field natural gas properties, as discussed in Note 6.
Accounts Receivable
The Company performs ongoing reviews with respect to accounts receivable
and maintains an allowance for doubtful accounts receivable ($929,000 and
$885,000 at December 31, 1998 and 1999, respectively) based on expected
collectibility.
Crude Oil and Natural Gas Properties
The Company's crude oil and natural gas producing activities, substantially
all of which are in the United States, are accounted for using the full cost
method of accounting. Accordingly, the Company capitalizes all costs incurred in
connection with the acquisition of crude oil and natural gas properties and with
the exploration for and development of crude oil and natural gas reserves,
including related gathering facilities. All internal corporate costs relating to
crude oil and natural gas producing activities are expensed as incurred.
Proceeds from disposition of crude oil and natural gas properties are accounted
for as a
F-7
<PAGE> 103
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reduction in capitalized costs, with no gain or loss recognized unless such
dispositions involve a significant alteration in the depletion rate in which
case the gain or loss is recognized.
Depletion of crude oil and natural gas properties is provided using the
equivalent unit-of-production method based upon estimates of proved crude oil
and natural gas reserves and production which are converted to a common unit of
measure based upon their relative energy content. Unproved crude oil and natural
gas properties are not amortized but are individually assessed for impairment.
The costs of any impaired properties are transferred to the balance of crude oil
and natural gas properties being depleted. Estimated future site restoration and
abandonment costs are charged to earnings at the rate of depletion of proved
crude oil and natural gas reserves and are included in accumulated depletion and
depreciation.
In accordance with the full cost method of accounting, the net capitalized
costs of crude oil and natural gas properties as well as estimated future
development, site restoration and abandonment costs are not to exceed their
related estimated future net revenues discounted at 10%, net of tax
considerations, plus the lower of cost or estimated fair value of unproved
properties.
Impairment of Long-Lived Assets
During fiscal year 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived-Assets To Be Disposed Of." The Company has
no long-lived assets which are subject to the impairment test requirements of
SFAS No. 121. The Company's only long-lived assets are oil and gas properties
which are subject to the full cost ceiling test in accordance with the full cost
method of accounting, as discussed above.
Other Assets
Other assets generally include deferred financing charges which are
amortized over the term of the related financing under the straight line method.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for stock-based compensation.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Earnings Per Common Share
The Company accounts for earnings per share ("EPS") in accordance with SFAS
No. 128, "Earnings Per Share." Under SFAS No. 128, no dilution for any
potentially dilutive securities is included for basic EPS. Diluted EPS are based
upon the weighted average number of common shares outstanding including
F-8
<PAGE> 104
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common shares plus, when their effect is dilutive, common stock equivalents
consisting of stock options and warrants.
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------- ------------------------------------ ---------------------------
COMMON COMMON COMMON
INCOME SHARES EPS LOSS SHARES EPS LOSS SHARES
-------------- ---------- ---- -------------- ---------- ------ -------------- ----------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings per
Share................... $6,288 21,692,804 $.29 $(203,346) 25,603,512 $(7.94) $(30,715) 25,603,512
==== ======
Stock Options............. 641,099 -- --
------ ---------- --------- ---------- -------- ----------
Diluted Earnings Per
Share................... $6,288 22,333,903 $.28 $(203,346) 25,603,512 $(7.94) $(30,715) 25,603,512
====== ========== ==== ========= ========== ====== ======== ==========
<CAPTION>
1999
------
EPS
------
<S> <C>
Basic Earnings per
Share................... $(1.20)
======
Stock Options.............
Diluted Earnings Per
Share................... $(1.20)
======
</TABLE>
Basic EPS were computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. Diluted EPS were
calculated based upon the weighted average number of common shares outstanding
during the year including common stock equivalents, consisting of stock options
and warrants, when their effect is dilutive. In 1998 and 1999, conversion of the
stock equivalents would have been anti-dilutive and, therefore, was not
considered in diluted EPS.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Hedging Activities
Periodically, the Company enters into futures contracts which are traded on
the stock exchanges in order to fix the price on a portion of its crude oil and
natural gas production. Changes in the market value of crude oil and natural gas
futures contracts are reported as an adjustment to revenues in the period in
which the hedged production or inventory is sold. The gain or loss on the
Company's hedging transactions is determined as the difference between the
contract price and a reference price, generally closing prices on the New York
Mercantile Exchange.
The Company will be required to adopt SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" for fiscal year ended 2000. If
the Company had adopted SFAS No. 133 during 1999, there would be no effect on
the Company's financial statements as the Company had no hedges outstanding at
December 31, 1999. Although the future impact of adopting SFAS No. 133 has not
been determined yet, the Company believes that the impact will not be material.
Revenue Recognition Policy
Revenues generally are recorded when products have been delivered and
services have been performed.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures which improve the condition of a
property as compared to the condition when
F-9
<PAGE> 105
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
originally constructed or acquired or prevent environmental contamination are
capitalized. Expenditures which relate to an existing condition caused by past
operations, and do not contribute to future operations, are expensed. The
Company accrues remediation costs when environmental assessments and/or remedial
efforts are probable and the cost can be reasonably estimated.
Business Segments
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information", which
requires information to be reported in segments. The Company currently operates
in a single reportable segment; therefore, no additional disclosure will be
required.
2. 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, which were subsequently amended on December 14, 1999, 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. On November 30, 1999, the Company filed a plan of
reorganization with the Bankruptcy Court. On February 15, 2000, the Company and
the Official Unsecured Creditors Committee filed the First Amended and Restated
Joint Plan of Reorganization (which, as amended, is referred to as the "Plan of
Reorganization") with the Bankruptcy Court. At a hearing on February 4, 2000,
the Bankruptcy Court approved the Company's disclosure statement (which, as
amended is referred to as the "Disclosure Statement"). In that hearing, the
Bankruptcy Court also scheduled the confirmation hearing to consider the Plan of
Reorganization for March 15, 2000 ("Confirmation Hearing"). The Disclosure
Statement and Plan of Reorganization were mailed to holders of interests in the
Chapter 11 filing for a vote on February 14, 2000. The Company has requested
that all votes be submitted by March 10, 2000. The Plan of Reorganization sets
forth the means for satisfying claims, including liabilities subject to
compromise, and interests in the Company. The Plan of Reorganization includes
the cancellation of the existing common stock of the Company and the issuance of
a new class of common stock in exchange for such existing common stock and debt
of the Company which materially dilutes the current equity interests.
The ability of the Company to effect a successful reorganization will
depend upon the Company's ability to obtain approval for the Plan of
Reorganization. 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 shareholders. The Company believes, however,
that it may not be possible to satisfy in full all of the claims against the
Company if the Plan of Reorganization is not approved. As a result of the
bankruptcy filing, all of the Company's liabilities incurred before the Petition
Date, including secured debt, are subject to compromise. Under the Bankruptcy
Code, payment of these liabilities may not be made except under a Plan of
Reorganization or Bankruptcy Court approval.
F-10
<PAGE> 106
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The December 31, 1999 financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts
(including $311.8 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 of
Reorganization is developed. The Company has incurred approximately $3.1 million
in reorganization costs during 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 the Petition Date 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>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Current assets.............................................. $ 30,929
Accounts receivable from affiliates......................... 3,023
Property and equipment...................................... 309,262
Other assets................................................ 5,515
--------
Total assets................................................ $348,729
========
Current liabilities not subject to compromise............... $ 15,149
Liabilities subject to compromise........................... 423,739
Commitments and contingencies............................... 1,800
Shareholder's equity........................................ (91,959)
--------
$348,729
========
Operating revenues.......................................... $ 57,323
Operating expenses.......................................... $ 48,923
Net loss.................................................... $(30,716)
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1999
--------- ---------
<S> <C> <C>
Crude oil and natural gas leases and rights including
exploration, development and equipment thereon, at cost... $ 678,547 $ 684,896
Accumulated depletion and depreciation...................... (353,973) (373,108)
--------- ---------
$ 324,574 $ 311,788
========= =========
</TABLE>
Overhead expenditures directly associated with exploration for and
development of crude oil and natural gas reserves have been capitalized in
accordance with the accounting policies of the Company.
F-11
<PAGE> 107
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such charges totaled $4,081,000, $5,749,000 and $-0- in 1997, 1998 and 1999,
respectively. Due to the cessation of exploration and development of crude oil
and natural gas reserves in 1998, all overhead expenditures during 1999 have
been charged to general and administrative expense.
During 1997, 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 totaling $58,854,000 and
$56,296,000 at December 31, 1998 and 1999, respectively, have been excluded from
costs subject to depletion. These costs are anticipated to be included in costs
subject to depletion within the next five years.
Depletion and depreciation expense per equivalent barrel of production was
$4.69, $4.38 and $3.63 in 1997, 1998 and 1999, respectively.
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Revolving credit facility................................... $ 235,000 $ 239,600
8 7/8% Senior Subordinated Notes Due 2007................... 150,000 150,000
Other....................................................... 24 3
--------- ---------
385,024 389,603
Unamortized original issue discount on senior subordinated
notes..................................................... (993) (918)
Current maturities on long term debt........................ (384,031) (388,685)
--------- ---------
$ -- $ --
========= =========
</TABLE>
Revolving Credit Facility
In August 1992, the Company established a revolving credit and term loan
facility with a group of international and domestic financial institutions. The
agreement, as amended and restated (the "Existing Bank Group Loan Agreement"),
provided a maximum commitment amount available to the Company ("Borrowing Base")
of $242 million for general corporate purposes at December 31, 1998. Outstanding
advances as of December 31, 1998, were $235 million, and increased to $239.6
million as of January 5, 1999. The average effective interest rates for 1998 and
1999 were 7.38% and 9.91%, respectively. The Existing Bank Group Loan Agreement,
which permits advances and repayments, terminates January 2, 2003. The repayment
of all advances is guaranteed by Coho Energy, Inc. and outstanding advances are
secured by substantially all of the assets of the Company.
Loans under the Existing Bank Group Loan Agreement up to $220 million bear
interest, at the option of the Company, at the bank prime rate or a Eurodollar
rate plus a maximum of 1.5% (currently 1.5%), with amounts outstanding in excess
of $220 million bearing interest, at the option of the Company at (i) the prime
rate plus 1.0% or (ii) LIBOR plus 2.50%. Loans under the Existing Bank Group
Loan Agreement are secured by a lien on substantially all of the Company's crude
oil and natural gas properties and the capital stock of the Company's wholly
owned subsidiaries. If the outstanding amount of the loan exceeds the Borrowing
Base at any time, the Company is required to either (a) provide collateral with
value equal to such excess, (b) prepay, without premium or penalty, such excess
plus accrued interest or (c) prepay the principal amount of the notes equal to
such excess in five (5) equal monthly installments provided the entire excess
shall be paid prior to the immediately succeeding redetermination date. The fee
on the portion of the unused credit facility is .375% per annum. The commitment
fee applicable to increases from time to time in the Borrowing Base is .375% of
the incremental Borrowing Base amount.
F-12
<PAGE> 108
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 22, 1999, the Company was informed by the lenders under the
Company's Existing Bank Group Loan Agreement 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 Existing Bank Group Loan Agreement 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
Existing Bank Group Loan Agreement that it is in default under the terms of the
Existing Bank Group Loan Agreement 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 $4.3 million during March, April, May, July and
December 1999. As a result of the payment defaults, the lenders accelerated the
full amount outstanding under the Existing Bank Group Loan Agreement. Advances
under the Existing Bank Group Loan Agreement and the past due interest payments
bear interest at the default interest rate of prime plus 4%. The outstanding
advances of $239.6 million as of December 31, 1999 have been included in
Liabilities Subject to Compromise as of December 31, 1999. The total arrearage
related to the installment payments due on the over advance and past due
interest was approximately $108.8 million as of December 31, 1999, including
approximately $19.2 million of past due interest ($10.2 million included in
Liabilities Not Subject to Compromise) and $89.6 million related to installments
due on the over advance.
The Existing Bank Group Loan Agreement contains certain financial and other
covenants including, among other covenants, (i) the maintenance of minimum
amounts of shareholder's 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 and CRI's ability to incur additional debt, and
(iv) restrictions on the payment of dividends. At December 31, 1999, the Company
was not in compliance with the shareholder's equity, cash flow to interest
expense and current assets to current liabilities covenants.
8 7/8% Senior Subordinated Notes
On October 3, 1997, the Company completed a sale to the public of $150
million of 8 7/8% Senior Subordinated Notes due 2007 ("Existing Bonds").
Proceeds of the offering, net of offering costs, were approximately $144.5
million. The proceeds from this offering, together with the proceeds from the
common stock offering discussed in Note 7, were used to repay indebtedness
outstanding under the Existing Bank Group Loan Agreement and for general
corporate purposes.
The Existing Bonds are unsecured senior subordinated obligations of the
Company and rank pari passu in right of payment with all existing and future
senior subordinated indebtedness of the Company. The Existing Bonds mature on
October 15, 2007 and bear interest from October 3, 1997 at the rate of 8 7/8%
per annum payable semi-annually, commencing on April 15, 1998. Certain
subsidiaries of the Company issued guarantees of the Existing Bonds on a senior
subordinated basis.
The indenture issued in conjunction with the Existing Bonds (the
"Indenture") contains certain covenants, including, among other covenants,
covenants that limit (i) indebtedness, (ii) restricted payments, (iii)
distributions from restricted subsidiaries, (iv) transactions with affiliates,
(v) sales of assets and subsidiary stock (including sale and leaseback
transactions), (vi) dividends and other payment restrictions affecting
restricted subsidiaries and (vii) mergers or consolidations.
F-13
<PAGE> 109
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company did not pay the April 15, 1999 interest payment of $6.7 million
due on its Existing Bonds and currently is in default under the terms of 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 Existing Bonds by written notice to the trustee and the Company, may
declare the principal and accrued interest on all the Existing Bonds due and
payable immediately. However, the Company may not pay the principal of, premium
(if any) or interest on the Existing Bonds so long as any required payments due
on the Existing Bank Group Loan Agreement 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 Existing Bonds, which own in excess of 25%
in principal amount of the outstanding Existing Bonds. 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 Existing Bonds) 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 Existing
Bonds. Approximately $5.7 million of additional Existing Bond interest expense,
including $2.2 million of Existing Bond interest expense that would have been
due on October 15, 1999, would have been recognized by the Company in 1999 if
not for the discontinuation of such interest expense accruals. All amounts
outstanding under the Existing Bonds as of December 31, 1999 have been included
in Liabilities Subject to Compromise.
Debt Repayments
Based on the balances outstanding and current default under the Existing
Bank Group Loan Agreement and the Existing Bonds indenture, estimated aggregate
principal repayments for each of the next five years are as follows:
2000 -- $389,603,000 and $0 thereafter.
5. INCOME TAXES
Deferred income taxes are recorded based upon differences between financial
statement and income tax basis of assets and liabilities. The tax effects of
these differences which give rise to deferred income tax assets and liabilities
at December 31, 1998 and 1999, were as follows:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforwards.......................... $ 25,283 $46,614
Property and equipment, due to differences in depletion,
depreciation, amortization and writedowns.............. 35,442 20,822
Alternative minimum tax credit carryforwards.............. 1,467 1,466
Employee benefits......................................... 58 61
Reorganization costs...................................... -- 1,062
Other..................................................... 182 502
-------- -------
Total gross deferred tax assets........................... 62,432 70,527
Less valuation allowance.................................. (62,432) (70,527)
-------- -------
Net deferred tax assets................................... -- --
-------- -------
DEFERRED TAX LIABILITIES
Property and equipment, due to differences in depletion,
depreciation, amortization and writedowns.............. -- --
-------- -------
NET DEFERRED TAX LIABILITY.................................. $ -- $ --
======== =======
</TABLE>
F-14
<PAGE> 110
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance for deferred tax assets as of December 31, 1998 and
1999 includes $2,051,000 and $248,314, respectively, related to Canadian
deferred tax assets.
To determine the amount of net deferred tax liability it is assumed no
future capital expenditures will be incurred other than the estimated
expenditures to develop the Company's proved undeveloped reserves.
The following table reconciles the differences between recorded income tax
expense and the expected income tax expense obtained by applying the basic tax
rate to earnings (loss) before income taxes:
<TABLE>
<CAPTION>
1997 1998 1999
------- --------- --------
<S> <C> <C> <C>
Earnings (loss) before income taxes................. $10,309 $(217,729) $(30,742)
======= ========= ========
Expected income tax expense (recovery)
(statutory rate - 34%)............................ $ 3,505 $ (74,028) $(10,452)
State taxes -- deferred............................. 552 (6,242) (913)
Federal benefit of state taxes...................... (188) 2,122 310
Permanent differences............................... -- -- 367
Expiring NOLs....................................... -- 1,043 2,390
Change in valuation allowance....................... 444 57,838 8,095
Other............................................... (293) 4,884 177
------- --------- --------
$ 4,020 $ (14,383) $ (26)
======= ========= ========
</TABLE>
At December 31, 1999, the Company had the following income tax
carryforwards available to reduce future years' income for tax purposes:
<TABLE>
<CAPTION>
EXPIRES AMOUNT
--------- --------
<S> <C> <C>
Net operating loss carryforwards for federal income tax
purposes.................................................. 2000 $ 4,253
2001 3,015
2002 211
2003 4,697
2004-2019 111,540
--------
$123,716
========
Operating loss carryforwards for Canadian income tax
purposes.................................................. 2000-2003 $ 653
========
Operating loss carryforwards for federal alternative minimum
tax purposes.............................................. 2010-2019 $ 71,973
========
Federal alternative minimum tax credit carryforwards........ -- $ 1,466
========
Operating loss carryforwards for Mississippi income tax
purposes.................................................. 2010-2014 $ 85,081
========
Operating loss carryforwards for Oklahoma income tax
purposes.................................................. 2012-2013 $ 45,290
========
</TABLE>
6. ACQUISITIONS AND DISPOSITIONS
Effective December 31, 1997, the Company acquired from Amoco Production
Company ("Amoco") interests in certain crude oil and natural gas properties
("Oklahoma Properties") located primarily in southern Oklahoma for cash
consideration of approximately $257.5 million and warrants to purchase one
million shares of common stock at $10.425 per share for a period of five years
valued at $3.4 million. The Oklahoma Properties are in more than 25,000 gross
acres concentrated in southern Oklahoma, including 14 major producing oil
fields. The aggregate purchase price was $267.8 million, including transaction
costs
F-15
<PAGE> 111
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of approximately $1.9 million and assumed liabilities of $5 million. Investing
activities in the cash flow statement for the year ended December 31, 1997
related to this acquisition, exclude the noncash portions of the purchase price
of $3.4 million attributable to the warrants and $5 million for assumed
liabilities.
On December 2, 1998, the Company sold its natural gas assets, including its
natural gas properties and the related gas gathering systems, located in Monroe,
Louisiana to an unaffiliated third party for net proceeds of approximately $61.5
million. The proved reserves attributable to such natural gas properties were
approximately 94 billion cubic feet of natural gas and represented approximately
14% of the Company's year end 1997 proved reserves.
7. SHAREHOLDERS' EQUITY
On October 3, 1997, the Company completed the sale to the public of
5,000,000 shares of common stock at $10.50 per share. Proceeds of the offering,
net of offering costs, were approximately $49.2 million. The proceeds from this
offering, together with the proceeds from the Existing Bond offering discussed
in Note 4, were used to repay indebtedness outstanding under the Company's
Existing Bank Group Loan Agreement and for general corporate purposes.
In December 1997, the Company issued warrants, valued at $3,390,000, to
purchase one million shares of common stock at $10.425 per share for a period of
five years to Amoco Production Company as partial consideration for the purchase
of certain crude oil and natural gas properties discussed in Note 6.
8. STOCK-BASED COMPENSATION
Options to purchase the Company's common stock have been granted to
officers, directors and key employees pursuant to the Company's 1993 Stock
Option Plan and 1993 Non Employee Director Stock Option Plan, or assumed from
the reorganization of the Company's subsidiaries in 1993. The stock option plans
provide for the issuance of five year options with a three-year vesting period
and a grant price equal to or above market value. Some exceptions have been made
to provide immediate or shortened vesting periods as approved by the Company's
board of directors. All options outstanding available for grant pursuant to the
Company's existing stock option plans will be terminated according to the Plan
of Reorganization if the Plan of Reorganization is confirmed. A summary of the
status of the Company's stock option plans at December 31, 1997, 1998 and 1999
and changes during the years then ended follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1... 1,815,784 $5.55 2,823,815 $6.96 2,631,260 $6.98
Granted.................. 1,286,000 8.73 14,000 6.88 -- --
Exercised................ (256,386) 5.82 -- -- -- --
Canceled................. (21,583) 6.50 (75,000) 8.90 (30,000) 8.42
Expired.................. -- -- (131,555) 5.40 (363,159) 5.97
--------- ----- --------- ----- --------- -----
Outstanding at December
31....................... 2,823,815 6.96 2,631,260 6.98 2,238,101 7.13
--------- ----- --------- ----- --------- -----
Exercisable at December
31....................... 2,250,903 6.31 2,310,438 6.60 2,112,445 6.94
Available for grant at
December 31.............. 36,419 189,919 437,668
</TABLE>
F-16
<PAGE> 112
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant option groups outstanding at December 31, 1999 and related
weighted average price and life information follows:
<TABLE>
<CAPTION>
WTD
AVG
OPTIONS OPTIONS EXERCISE REMAINING
GRANT DATE OUTSTANDING EXERCISABLE PRICE LIFE (YEARS)
- ---------- ----------- ----------- -------- ------------
<S> <C> <C> <C> <C>
May 12, 1998.............................. 4,000 4,000 $ 6.88 4
December 2, 1997.......................... 361,000 240,677 10.50 5
August 22, 1997........................... 16,000 10,667 9.38 5
May 12, 1997.............................. 8,000 8,000 8.13 3
March 3, 1997............................. 799,000 799,000 7.88 2
June 13, 1996............................. 12,000 12,000 6.63 2
February 22, 1996......................... 150,000 150,000 5.13 3
January 8, 1996........................... 40,000 40,000 5.00 3
September 25, 1995........................ 50,000 50,000 5.00 2
September 12 ,1995........................ 29,666 29,666 5.00 3
August 3, 1995............................ 24,000 24,000 4.88 2
April 14, 1995............................ 32,500 32,500 5.00 2
December 4, 1994.......................... 105,000 105,000 5.01 3
November 10, 1994......................... 240,000 240,000 5.00 2
June 7, 1994.............................. 63,167 63,167 5.49 1
October 22, 1993.......................... 252,056 252,056 6.00 1
September 29, 1993........................ 11,689 11,689 6.52 1
October 19, 1992.......................... 40,023 40,023 6.52 1
</TABLE>
The weighted average fair value of options at date of grant for options
granted during 1997 and 1998 was $4.02 and $3.12 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ----
<S> <C> <C> <C>
Expected life (years)....................................... 5 5 --
Interest rate............................................... 6.44% 5.67% --
Volatility.................................................. 43.76% 42.01% --
Dividend yield.............................................. -- -- --
</TABLE>
Had compensation cost for these plans been determined consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's pro forma net
income and earnings per share from continuing operations would have been as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ --------- --------
<S> <C> <C> <C> <C>
Net income (loss) As reported......... $6,288 $(203,346) $(30,715)
Pro forma........... $4,385 $(204,108) $(31,321)
Basic earnings (loss) per share As reported......... $ 0.29 $ (7.94) $ (1.20)
Pro forma........... $ 0.20 $ (7.97) $ (1.22)
Diluted earnings (loss) per share As reported......... $ 0.28 $ (7.94) $ (1.20)
Pro forma........... $ 0.20 $ (7.97) $ (1.22)
</TABLE>
F-17
<PAGE> 113
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
(a) Coho Resources, Inc., is a defendant in a number of individual lawsuits
in Mississippi, which allege environmental damage to property, and personal
injury, in connection with drilling and production operations of the Company and
its predecessors in Lincoln County, Mississippi (the "Brookhaven Field"). The
plaintiffs allege that their damages were caused by "naturally occurring
radioactive materials" resulting from petroleum exploration and production
operations. The Company's predecessors on the Brookhaven Field were Florabama
Associates, Inc. ("Florabama"), and Chevron Corp. or Chevron USA. Inc.
("Chevron"). The Company is vigorously defending against these claims. Florabama
and Chevron allege claims for indemnification for any liability they may have to
the Brookhaven Field plaintiffs (the "Plaintiffs"), including claims for
monetary and punitive damages, as well as clean-up costs associated with the
properties. The Company is also vigorously defending against the indemnity
claims of Florabama and Chevron. The Plaintiffs, Florabama and Chevron have
filed proofs of claim in the Company's bankruptcy cases. The Company has
objected to these claims and has requested that they be disallowed. The Company
has also requested that these claims be estimated pursuant to Section 502 of the
Bankruptcy Code. The claims of Chevron are unliquidated, except for a contingent
claim in the amount of $2,349,275 which is subject to a pending appeal, and
cannot be quantified at this time. The Florabama claim is asserted at
$3,671,953.33. The Plaintiffs' claim is alleged at a combined amount of $250
million.
The Plaintiffs have compromised and settled their $250,000,000 claim for
the cash sum of $900,000 to be paid in installments over the 180 days following
the effective date of a confirmed chapter 11 plan of reorganization. We have
agreed to that settlement subject to court approval. The court will take up the
question of approval of this settlement on March 15, 2000. We have also settled
the claims of Chevron Corp. and Chevron USA, Inc., subject to court approval, by
agreeing to contribute $2.5 million over the next two years to a fund to be used
to finance the implementation of a thorough remediation plan for the Brookhaven
Field. Chevron USA will contribute at least $3 million to that fund as well, and
will supervise the implementation of the remediation plan. The remediation plan
has been filed with the court and circulated to numerous parties in interest.
This Coho-Chevron settlement arrangement is opposed by the Plaintiffs, and the
court will take up the question of approval of the Coho-Chevron settlement on
March 10, 2000. The Coho-Chevron settlement also calls for Chevron to withdraw
its claims in the Florabama bankruptcy in Mississippi. That will have the effect
of greatly reducing the dollar amount of Florabama's claim in the bankruptcy to
less than $1.3 million, subject to further negotiations and final resolution.
The feasibility of the Plan of Reorganization is dependent upon the court's
approval of these settlements.
The Company is involved in various other legal actions arising in the
ordinary course of business. While it is not feasible to predict the ultimate
outcome of these actions or those listed above, management believes that the
resolution of these matters will not have a material adverse effect, either
individually or in the aggregate, on the Company's financial position or results
of operations. The Company has accrued $4.0 million, including $2.2 million
which has been reflected in current accrued liabilities, for the proposed
settlements discussed in the preceding paragraph and for future remediation
costs.
On May 27, 1999, the Company filed a lawsuit (the "Hicks Muse 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.
F-18
<PAGE> 114
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) During June 1999, the Company extended its Anaguid permit in Tunisia,
North Africa through June 2001. The Company has a commitment to drill two
additional wells during this two year period.
(c) The Company has leased (i) 47,942 square feet of office space in
Dallas, Texas under a non-cancellable lease extending through October 2000, (ii)
5,000 square feet of office space in Laurel, Mississippi under a non-cancellable
lease extending through June 2000, (iii) various vehicles under non-cancellable
leases extending through February 2000, and (iv) surface leases in Laurel,
Mississippi with expiration dates extending through the year 2018. Rental
expense totaled $1,196,000, $1,668,000 and $1,798,000 in 1997, 1998 and 1999,
respectively. Minimum rentals payable under these leases for each of the next
five years are as follows: 2000 -- $1,225,000; 2001 -- $441,000; 2002 -$437,000;
2003 -- $418,000 and 2004 -$416,000. Total rentals payable over the remaining
terms of the leases are $8,765,000.
(d) Like other crude oil and natural gas producers, the Company's
operations are subject to extensive and rapidly changing federal, state and
local environmental regulations governing emissions into the atmosphere, waste
water discharges, solid and hazardous waste management activities, noise levels
and site restoration and abandonment activities. The Company's policy is to make
a provision for future site restoration charges on a unit-of-production basis.
Total future site restoration costs are estimated to be $6,000,000, including
the Oklahoma Properties. A total of $1,589,000 has been included in depletion
and depreciation expense with respect to such costs as of December 31, 1998.
(e) The Company has entered into employment agreements with certain of its
officers. In addition to base salary and participation in employee benefit plans
offered by the Company, these employment agreements generally provide for a
severance payment in an amount equal to two times the rate of total annual
compensation of the officer in the event the officer's employment is terminated
for other than cause. If the officer's employment is terminated for other than
cause following a change in control in the Company, the officer generally is
entitled to a severance payment in the amount of 2.99 times the rate of total
annual compensation of the officer. The above described employment agreements
will be modified according to the terms of the Plan of Reorganization if the
Plan of Reorganization is confirmed.
The officers' aggregate base salary and bonus portion of total annual
compensation covered under such employment agreements is approximately $1.4
million.
(f) The Company has entered into executive severance agreements with its
other officers which are designed to encourage executive officers to continue to
carry out their duties with the Company in the event of a change in control of
the Company. In the event the officer's employment is terminated for other than
cause following a change of control, these severance agreements generally
provide for a severance payment in an amount equal to 1.5 times the highest
salary plus bonus paid to such officer in any of the five years preceding the
year of termination. These severance rights will be terminated according to the
terms of the Plan of Reorganization if the Plan of Reorganization is confirmed.
The highest salary plus bonus paid to the officers covered under such
severance agreements during the preceding five year period would aggregate
approximately $1.2 million.
(g) In conjunction with the acquisition of the Oklahoma Properties, the
acquisition of ING and the 1993 reorganization of the Company, the Company has
granted certain persons the right to require the Company, at its expense, to
register their shares under the Securities Act of 1933. These registration
rights may be exercised on up to 4 occasions. The number of shares of Common
Stock subject to registration rights as of December 31, 1999, is approximately
3,324,000. These registration rights will be terminated according to the terms
of the Plan of Reorganization if the Plan of Reorganization is confirmed.
F-19
<PAGE> 115
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
Financial instruments which are potentially subject to concentrations of
credit risk consist principally of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are placed with high credit quality
financial institutions to minimize risk. The carrying amounts of these
instruments approximate fair value because of their short maturities. The
Company has entered into certain financial arrangements which act as a hedge
against price fluctuations in future crude oil and natural gas production.
Included in operating revenues are gains (losses) of $(232,000), $488,000 and
$-0- for 1997, 1998 and 1999, respectively, resulting from these hedging
programs. At December 31, 1998 and 1999, the Company had no deferred hedging
gains or losses. As of December 31, 1999, the Company had no crude oil or
natural gas hedged.
Fair values of the Company's financial instruments are estimated through a
combination of management's estimates and by reference to quoted prices from
market sources and financial institutions, if available. As of December 31,
1999, the fair market value of the Company's Existing Bonds was $83 million
compared to the related carrying value of $149 million. The fair value of the
Existing Bonds at December 31, 1998 was $57 million compared to the related
carrying value of $149 million. The carrying value of the Existing Bank Group
Loan Agreement approximated fair market value at December 31, 1998 and 1999
since the applicable interest rate approximated the market rate. On the
effective date of the Plan of Reorganization, the Existing Bonds will be
converted to new common stock of the reorganized company and the Existing Group
Loan Agreement will be paid in full in cash.
During 1998, three purchasers of our crude oil and natural gas, EOTT Energy
Corp. ("EOTT"), Amoco Production Company, and Mid Louisiana Marketing Company,
accounted for 42%, 28% and 14%, respectively, of the Company's revenues. During
1999, EOTT and Amoco Production Company accounted for 39% and 41%, respectively,
of the Company's revenue. Included in accounts receivable is $2,969,000,
$1,965,000 and $114,000 from these customers at December 31, 1997, 1998 and
1999, respectively.
11. RELATED PARTY TRANSACTIONS
(a) In 1990, the Company made a non-interest bearing loan in the amount of
$205,000 to Jeffrey Clarke, President, Chief Executive Officer and Director of
the Company, to assist him in the purchase of a house in Dallas. The loan is
unsecured and is repayable on the date Mr. Clarke ceases employment with the
Company, unless Mr. Clarke's employment is terminated as a result of the
Company's current restructuring process, at which time the loan will be
forgiven, and is included in other assets at December 31, 1998 and December 31,
1999.
(b) Pursuant to the equity offering, the Company's officers and directors
were precluded from selling stock for a 90-day period beginning October 3, 1997
(the "Lock Up Period"). On October 6, 1997, the Company made sole recourse,
non-interest bearing loans of $622,111, payable on demand, secured by the
related Company's common stock to certain officers and a director. The loans
were made to provide assistance in acquiring stock upon exercise of expiring
stock options during the Lock Up Period. During 1998, the Company has provided
an allowance for bad debt for the entire amount of such loans due to the
decrease in the share price of the Company's common stock provided by such
officers and directors as collateral.
(c) During 1997, certain of the Company's hedging agreements were with an
affiliate of the Company, Morgan Stanley Capital Group, which owned over 10% of
the Company's outstanding common stock until October 3, 1997, when its ownership
dropped to 5.3% as a result of the equity offering discussed in Note 7.
Management of the Company believes that such transactions are on similar terms
as could be obtained from unrelated third parties.
F-20
<PAGE> 116
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Under the terms of a Financial Advisory Agreement entered into between
the Company and Hicks, Muse & Co. Partners, L.P. ("HMCo"), on August 21, 1998,
the Company paid HMCo $1,250,000 as compensation for HMCo's services as a
financial advisor to the Company and its subsidiaries in connection with an
agreement to issue common stock of the Company to HM4. John R. Muse and Lawrence
D. Stuart, Jr., are each limited partners in HMCo and limited partners of a
limited partner in HM4, and at the time of the payment to HMCo, were directors
of the Company under an agreement with Energy Investment Partnership No. 1, L.P.
On March 18, 1999, Messrs, Muse and Stuart resigned from the board of directors
of the Company.
(e) In 1999, the Company entered into a contract with Alan Edgar, a
director of the Company, that provides for Mr. Edgar to receive a percentage of
the net proceeds received by the Company from the Hicks Muse Lawsuit up to a
maximum of $5.75 million, in consideration of Mr. Edgar's extensive and ongoing
involvement in working with the special litigation counsel for the Company in
prosecuting the Hicks Muse Lawsuit.
12. CANADIAN ACCOUNTING PRINCIPLES
These financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") as presently established in the United
States. These principles differ in certain respects from those applicable in
Canada. These differences would have affected net earnings (loss) as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1997 1998 1999
------ --------- --------
<S> <C> <C> <C>
Net earnings (loss) based on US GAAP.................. $6,288 $(203,346) $(30,715)
Canadian writedown of oil and natural gas
properties(i)....................................... -- (109,000) --
Adjustment to depletion based on difference in
carrying value of oil and gas properties related to:
ING acquisition (ii)................................ 562 483 358
Business combination with Odyssey Exploration, Inc.
in 1990.......................................... (168) (135) (94)
Application of Canadian full cost ceiling test...... (455) (364) 4,410
Deferred tax effect of differences in US GAAP and
Canadian GAAP....................................... 21 (4,790) --
------ --------- --------
Net earnings (loss) based on Canadian GAAP............ $6,248 $(317,152) $(26,041)
====== ========= ========
Net earnings (loss) per common share based on Canadian
GAAP................................................ $ 0.29 $ (12.39) $ (1.02)
====== ========= ========
</TABLE>
- ---------------
(i) Canadian GAAP requires a ceiling test to ensure that capitalized costs
relating to oil and gas properties are recoverable in the future. The net
book value of capitalized costs, less related deferred income taxes, is
compared to the future net revenue plus the cost of major development
projects and unproved properties, less future expenditures, which include
removal and site restoration costs, income taxes, general and
administrative costs and interest expense. General and administrative costs
were calculated on a per barrel basis and calculated over the life of the
reserves. Interest expense was calculated through the year 2013 based on
the Company's current debt at December 31, 1998, assuming all future
positive cash flow from future net revenue, net of general and
administrative costs, income taxes and interest expense, was used for
retirement of existing debt.
F-21
<PAGE> 117
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) Under SFAS No. 109 in the United States, the Company was required to
increase deferred income taxes and property and equipment by $8,355,000 for
the deferred tax effect of the excess of the Company's tax basis of the
stock acquired in the ING acquisition over the tax basis of the net assets
of ING acquired. Under Canadian GAAP this adjustment is not required.
The effect on the consolidated balance sheets of the differences between
United States GAAP and Canadian GAAP is as follows:
<TABLE>
<CAPTION>
UNDER
AS INCREASE CANADIAN
REPORTED (DECREASE) GAAP
-------- ---------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1999
Property and Equipment................................... $311,788 $(102,211) $ 209,577
Shareholder's Equity..................................... (91,958) (102,211) (194,169)
DECEMBER 31, 1998
Property and Equipment................................... $324,574 $(106,885) $ 217,689
Shareholder's Equity..................................... (61,243) $(106,885) (168,128)
</TABLE>
13. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
1999
Operating revenues................. $ 8,967 $ 12,161 $ 16,829 $ 19,366 $ 57,323
Operating income (loss)............ (1,127) 428 (675) 7,454 6,080
Net loss........................... (8,987) (10,102) (10,733) (893) (30,715)
Basic loss per share............... $ (0.35) $ (0.40) $ (0.41) $ (0.04) $ (1.20)
Diluted loss per share............. $ (0.35) $ (0.40) $ (0.41) $ (0.04) $ (1.20)
1998
Operating revenues................. $ 21,143 $ 18,147 $ 16,539 $ 12,930 $ 68,759
Operating income (loss)............ $(28,206) (38,306) 1,344 (119,840) (185,008)
Net loss........................... (22,301) (41,611) (7,168) (132,266) (203,346)
Basic loss per share............... $ (0.87) $ (1.63) $ (0.28) $ (5.16) $ (7.94)
Diluted loss per share............. $ (0.87) $ (1.63) $ (0.28) $ (5.16) $ (7.94)
1997
Operating revenues................. $ 15,536 $ 13,985 $ 15,985 $ 17,624 $ 63,130
Operating income................... 5,604 4,151 4,990 6,038 20,783
Net earnings....................... 2,104 1,081 1,401 1,702 6,288
Basic earnings per share........... $ 0.10 $ 0.05 $ 0.07 $ 0.07 $ 0.29
Diluted earnings per share......... $ 0.10 $ 0.05 $ 0.07 $ 0.06 $ 0.28
</TABLE>
Basic per share figures are computed based on the weighted average number
of shares outstanding for each period shown. Diluted per share figures are
computed based on the weighted average number of shares outstanding including
common stock equivalents, consisting of stock options and warrants, when their
effect is dilutive.
F-22
<PAGE> 118
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS ACTIVITIES
(a) Costs Incurred
Costs incurred for property acquisition, exploration and development
activities were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Property acquisitions
Proved............................................. $199,485 $ 8,432 $ --
Unproved........................................... 73,281 4,646 --
Exploration.......................................... 13,374 5,061 2,198
Development.......................................... 53,542 51,049 4,101
Other................................................ 729 955 50
-------- -------- --------
$340,411 $ 70,143 $ 6,349
======== ======== ========
Property and equipment, net of accumulated
depletion.......................................... $531,409 $324,574 $311,788
======== ======== ========
</TABLE>
(b) Quantities of Oil and Gas Reserves (Unaudited)
The following table presents estimates of the Company's proved reserves,
all of which have been prepared by the Company's engineers and evaluated by
independent petroleum consultants. Substantially all of the Company's crude oil
and natural gas activities are conducted in the United States.
<TABLE>
<CAPTION>
RESERVE QUANTITIES
-------------------
OIL GAS
(MBBLS) (MMCF)
-------- --------
<S> <C> <C>
Estimated reserves at December 31, 1996..................... 34,822 113,132
Revisions of previous estimates............................. 1,601 8,556
Purchase of reserves in place............................... 49,723 32,581
Extensions and discoveries.................................. 11,758 902
Production.................................................. (2,820) (7,666)
------- -------
Estimated reserves at December 31, 1997..................... 95,084 147,505
Revisions of previous estimates............................. (7,645) 4,459
Purchase of reserves in place............................... 6,842 480
Sales of reserves in place.................................. -- (94,106)
Extensions and discoveries.................................. 10,792 16,114
Production.................................................. (5,069) (8,124)
------- -------
Estimated reserves at December 31, 1998..................... 100,004 66,328
Revisions of previous estimates............................. 9,718 (25,257)
Purchase of reserves in place............................... -- --
Sales of reserves in place.................................. -- --
Extensions and discoveries.................................. 734 2,175
Production.................................................. (3,343) (2,608)
------- -------
Estimated reserves at December 31, 1999..................... 107,113 40,638
======= =======
Proved developed reserves at December 31,
1997...................................................... 62,663 129,392
1998...................................................... 66,869 48,176
1999...................................................... 73,748 25,794
</TABLE>
F-23
<PAGE> 119
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Standardized Measure of Oil and Gas Reserves (unaudited)
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Reserves.
The following standardized measure of discounted future net cash flows was
computed in accordance with the rules and regulations of the Securities and
Exchange Commission and SFAS No. 69 using year end prices and costs, and year
end statutory tax rates. Royalty deductions were based on laws, regulations and
contracts existing at the end of each period. No values are given to unproved
properties or to probable reserves that may be recovered from proved properties.
The inexactness associated with estimating reserve quantities, future
production and revenue streams and future development and production
expenditures, together with the assumptions applied in valuing future
production, substantially diminishes the reliability of this data. The values so
derived are not considered to be an estimate of fair market value. The Company
therefore cautions against this use.
The following tabulation reflects the Company's estimated discounted future
cash flows from crude oil and natural gas production:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows.............................. $1,764,924 $1,081,003 $2,562,981
Future production costs.......................... (607,114) (419,820) (642,024)
Future development costs......................... (114,294) (112,165) (136,589)
Future income taxes.............................. (233,945) (55,008) (435,311)
---------- ---------- ----------
Future net cash flows............................ 809,571 494,010 1,349,057
Annual discount at 10%........................... (341,378) (224,712) (656,182)
---------- ---------- ----------
Standardized measure of discounted future net
cash flows..................................... $ 468,193 $ 269,298 $ 692,875
========== ========== ==========
Crude oil posted reference price ($ per
Bbl)(a)........................................ $ 16.17 $ 12.05 $ 25.60
Estimated December 31 Company average realized
price
$/Bbl.......................................... $ 15.06 $ 9.36 $ 21.78
$/Mcf.......................................... $ 2.26 $ 2.10 $ 2.25
</TABLE>
- ---------------
(a) 1997 and 1998 prices were based on West Texas Intermediate posted prices and
1999 was based on the NYMEX posted price.
F-24
<PAGE> 120
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are the significant sources of changes in discounted future
net cash flows relating to proved reserves:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Crude oil and natural gas sales, net of production
costs............................................ $ (47,392) $ (41,412) $(36,168)
Net changes in anticipated prices and production
costs............................................ (176,309) (184,445) 582,297
Extensions and discoveries, less related costs..... 73,565 39,510 7,683
Changes in estimated future development costs...... (6,393) (905) (19,335)
Development costs incurred during the period....... 10,817 22,040 2,212
Net change due to sales and purchase of reserves in
place............................................ 224,579 (53,534) --
Accretion of discount.............................. 41,708 52,628 26,930
Revision of previous quantity estimates............ 11,737 (20,178) 45,605
Net changes in income taxes........................ 21,780 58,084 (97,279)
Changes in timing of production and other.......... (23,118) (70,683) (88,368)
--------- --------- --------
Net increase (decrease)............................ 130,974 (198,895) 423,577
Beginning of year.................................. 337,219 468,193 269,298
--------- --------- --------
Standardized measure of discounted future net cash
flows............................................ $ 468,193 $ 269,298 $692,875
========= ========= ========
</TABLE>
15. SUBSEQUENT EVENTS
The confirmation hearing for the bankruptcy court to consider the plan of
reorganization commenced on March 15, 2000. On March 20, 2000, the bankruptcy
court entered a confirmation order confirming our plan of reorganization. If no
objections are filed, the effective date of confirmation of our plan of
reorganization will be March 31, 2000.
On the effective date of our plan of reorganization we anticipate
significant adjustments will be made to our first quarter 2000 financial
statements to effect the reorganization.
F-25
<PAGE> 121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy these securities in any state where the offer or sale is not
permitted. This prospectus is not an offer to sell or a solicitation of an offer
to buy these securities in any circumstance under which the offer or
solicitation is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
---------------------
UP TO 8,663,846 SHARES
COHO ENERGY, INC.
NEW COMMON STOCK
---------------------
PROSPECTUS
---------------------
MARCH , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering are:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 23,788
Blue Sky Registration Fees.................................. 4,025
--------
Legal Fees and Expenses..................................... 200,000
--------
Accounting Fees and Expenses................................ 30,000
--------
Printing Expenses........................................... 200,000
--------
Subscription Agent Fees..................................... 30,000
--------
Miscellaneous............................................... 62,187
--------
TOTAL............................................. $550,000
--------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act provides that any
director or officer of a Texas corporation may be indemnified against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by him
in connection with or in defending any action, suit or proceeding in which he is
a party by reason of his position. With respect to any proceeding arising from
actions taken in his official capacity as a director or officer, he may be
indemnified so long as it shall be determined that he conducted himself in good
faith and that he reasonably believed that his conduct was in the corporation's
best interests. In cases not concerning conduct in his official capacity as a
director or officer, a director may be indemnified as long as he reasonably
believed that his conduct was not opposed to the corporation's best interests.
In the case of any criminal proceeding, a director or officer may be indemnified
if he had no reasonable cause to believe his conduct was unlawful. If a director
or officer is wholly successful, on the merits or otherwise, in connection with
this type of proceeding, indemnification is mandatory. The Bylaws of Coho
Energy, Inc. provide for indemnification of its present and former directors and
officers to the fullest extent provided by Article 2.02-1, and although Coho's
bylaws will be amended to satisfy the provisions of the Plan of Reorganization
and Section 1123(a)(6) of the Bankruptcy Code, the amended bylaws will include
the same indemnification provisions.
Coho's articles of incorporation contain a provision that limits the
liability of Coho's directors as permitted under Texas law. Although the Plan of
Reorganization provides for amendments to Coho's existing articles of
incorporation, the amended and restated articles of incorporation includes the
same provision. The provision eliminates the liability of a director to Coho or
its shareholders for monetary damages for negligent or grossly negligent acts or
omissions in the director's capacity as a director. The provision does not
affect the liability of a director (i) for breach of his duty of loyalty to Coho
or to shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for acts or
omissions for which the liability of a director is expressly provided by an
applicable statute, or (iv) in respect of any transaction from which a director
received an improper personal benefit. Under the articles of incorporation, as
amended, the liability of directors will be further limited or eliminated
without action by shareholders if Texas law is amended to further limit or
eliminate the personal liability of directors.
The above discussion of Texas law and the Articles of Incorporation is not
intended to be exhaustive and is qualified in its entirety by Texas law and the
Articles of Incorporation.
Texas corporations are also authorized to obtain insurance to protect
officers and directors from specified liabilities, including liabilities against
which the corporation cannot indemnify its directors and
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<PAGE> 123
officers. Coho Energy, Inc. currently has in effect a director's and officer's
liability insurance policy, which provides coverage in the maximum amount of
$15,000,000, subject to a $150,000 deductible.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Coho under the
foregoing provisions, Coho has been informed that in the opinion of the
Commission this type of indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1997, Coho issued warrants, valued at $3.4 million, to purchase
one million shares of Coho existing common stock at $10.425 per share for a
period of five years to Amoco Production Company as partial consideration for
the purchase of crude oil and natural gas properties. This transaction was
exempt from registration under Section 4(2) of the Securities Act of 1933, as no
public offering was involved.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
Exhibits designated by the symbol ** are filed with this Amendment No. 1 to
Registration Statement. Exhibits designated by the symbol * were filed with the
original Registration Statement. Exhibits designated by the symbol *** will be
filed in a later amendment. All exhibits not so designated are incorporated by
reference to a prior filing as indicated.
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2.1** -- Debtor's First Amended and Restated Chapter 11 Plan of
Reorganization as filed with the United States Bankruptcy
Court for the Northern District of Texas on February 14,
2000 (included as Exhibit A to Exhibit 2.2 below).
2.2** -- Debtor's First Amended and Restated Disclosure Statement
with Respect to the Joint Plan of Reorganization under
Chapter 11 of the United States Bankruptcy Code as filed
with the United States Bankruptcy Court for the Northern
District of Texas on February 14, 2000.
2.3*** -- Findings of Fact, Conclusions of Law, and Order
Confirming Debtors' First Amended and Restated Chapter 11
Plan of Reorganization dated March 20, 2000.
3.1 -- Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (Registration No. 33-65620)).
3.2 -- Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-4 (Registration No. 33-65620)).
3.3** -- Form of Amended and Restated Articles of Incorporation of
the Company.
3.4** -- Form of Amended and Restated Bylaws of the Company.
4.1 -- Articles of Incorporation (included as Exhibit 3.1
above).
4.2 -- Bylaws of the Company (included as Exhibit 3.2 above).
4.3 -- Rights Agreement dated September 13, 1994 between Coho
Energy, Inc. and Chemical Bank (incorporated by reference
to Exhibit 1 to the Company's Form 8-A dated September
13, 1994).
4.4 -- First Amendment to Rights Agreement made as of December
8, 1994 between Coho Energy, Inc. and Chemical Bank
(incorporated by reference to Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
</TABLE>
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4.5 -- Second Amendment to Rights Agreement as of August 30, 1995 between Coho Energy, Inc.
and Chemical Bank (incorporated by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995).
4.6 -- Third Amendment to Rights Agreement as of August 19, 1998 between Coho Energy, Inc. and
Chase Manhattan Bank (incorporated by reference to Exhibit 4.6 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
4.7 -- Indenture dated as of October 1, 1997 for the 8 7/8% Senior Subordinated Notes due 2007
(incorporated by reference to Exhibit 4.7 to the Company's Second Amendment dated
September 9, 1997 to its Registration Statement on Form S-3 (Registration No.
333-33979)).
4.8 -- First Supplemental Indenture dated as of September 2, 1998 for the 8 7/8% Senior
Subordinated Notes due 2007 (incorporated by reference to Exhibit 4.8 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
4.9** -- Form of Amended and Restated Articles of Incorporation of the Company (included in
Exhibit 3.3 above).
4.10** -- Form of Amended and Restated Bylaws of the Company (included in Exhibit 3.4 above).
5.1*** -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- Amended and Restated Registration Rights Agreement dated December 8, 1994 among Coho
Energy, Inc., Kenneth H. Lambert and Frederick K. Campbell (incorporated by reference
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December
31, 1994).
10.2 -- 1993 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-4 (Reg. No. 33-65620)).
10.3 -- First Amendment to 1993 Stock Option Plan (incorporated by reference to Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).
10.4 -- Second Amendment to 1993 Stock Option Plan (incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
10.5 -- Third Amendment to 1993 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.6 -- Employment Agreement dated as of November 11, 1994 by and between Coho Energy, Inc. and
Jeffrey Clarke (incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.7 -- Employment Agreement dated as of November 11, 1994 by and between Coho Energy, Inc. and
R. M. Pearce (incorporated by reference to Exhibit 10.8 to the Company's Annual Report
Form 10-K for the year ended December 31, 1994).
10.8 -- Employment Agreement dated as of June 25, 1995 by and between Eddie M. LeBlanc, III and
Coho Energy, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995).
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10.9 -- Employment Agreement dated as of August 19, 1996 by and
between Anne Marie O'Gorman and Coho Energy, Inc.
(incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.10 -- First Amendment to Employment Agreement dated as of
August 19, 1996 by and among Jeffrey Clarke and Coho
Energy, Inc. (incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.11 -- First Amendment to Employment Agreement dated as of
August 19, 1996 by and among R. M. Pearce and Coho
Energy, Inc. (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.12 -- First Amendment to Employment Agreement dated as of
August 19, 1996 by and among Eddie M. LeBlanc and Coho
Energy, Inc. (incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.13 -- 1993 Non Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-4 (Reg. No.
33-65620)).
10.14 -- First Amendment to 1993 Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
10.15 -- Form of Executive Severance Agreement entered into with
each of Keri Clarke, R. Lynn Guillory, Larry L. Keller,
Susan J. McAden, Joseph Ragusa, Gary Hoge and Patrick S.
Wright (incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.16 -- Crude Oil Purchase Contract dated January 25, 1996, by
and between Coho Marketing and Transportation, Inc. and
EOTT Energy Operating Limited Partnership (incorporated
by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.17 -- Fourth Amended and Restated Credit Agreement among Coho
Resources, Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Acquisitions Company, Coho
Energy, Inc., Banque Paribas, Houston Agency, Bank One,
Texas, N.A., and MeesPierson N.V. dated as of December
18, 1997 (incorporated by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.18 -- First Amendment to the Fourth Amended and Restated Credit
Agreement dated July 7, 1998 among Coho Resources, Inc.,
Coho Louisiana Production Company, Coho Exploration,
Inc., Coho Oil & Gas, Inc. (formerly Coho Acquisitions
Company), Coho Energy, Inc., Banque Paribas, Houston
Agency, Bank One, Texas, N.A., and MeesPierson N.V.
(incorporated by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
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10.19 -- Second Amendment to the Fourth Amended and Restated Credit Agreement dated November 13,
1998 among Coho Resources, Inc., Coho Louisiana Production Company, Coho Exploration,
Inc., Coho Oil & Gas, Inc. (formerly Coho Acquisitions Company), Coho Energy, Inc.,
Banque Paribas, Houston Agency, Bank One, Texas, N.A., and MeesPierson N.V.
(incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998).
10.20 -- Third Amendment to the Fourth Amended and Restated Credit Agreement dated November 30,
1998 among Coho Resources, Inc., Coho Louisiana Production Company, Coho Exploration,
Inc., Coho Oil & Gas, Inc. (formerly Coho Acquisitions Company), Coho Energy, Inc.,
Banque Paribas, Houston Agency, Bank One, Texas, N.A., and MeesPierson N.V.
(incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998).
10.21 -- Fourth Amendment to the Fourth Amended and Restated Credit Agreement dated January 29,
1999 among Coho Resources, Inc., Coho Louisiana Production Company, Coho Exploration,
Inc., Coho Oil & Gas, Inc. (formerly Coho Acquisitions Company), Coho Energy, Inc.,
Banque Paribas, Houston Agency, Bank One, Texas, N.A., and MeesPierson N.V.
(incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998).
10.22 -- Crude Call Purchase Contract dated November 26, 1997 by and between Amoco Production
Company and Coho Acquisitions Company (incorporated by reference to Exhibit 2.1 to the
Company's Report on Form 8-K dated December 18, 1997).
10.23 -- Purchase and Sale Agreement dated November 26, 1997 by and between Amoco Production
Company and Coho Acquisitions Company (incorporated by reference to Exhibit 2.1 to the
Company's Report on Form 8-K dated December 31,1997).
10.24 -- Shareholder Agreement (incorporated by reference to Item 7(1) of the Exhibits to the
Schedule 13D dated May 18, 1998, relating to the Company and filed by Energy Investment
Partnership No. 1, Thomas O. Hicks, John R. Muse, Charles W. Tate, Jack D. Furst,
Lawrence D. Stuart, Jr., Michael J. Levitt, Dan H. Blanks, and David B. Deniger).
10.25 -- Amended and Restated Stock Purchase Agreement dated November 4, 1998, by and between
Coho Energy, Inc. and HM4 Coho, L.P. (incorporated by reference to Exhibit 99.1 to the
Report on Form 8-K dated November 18, 1998).
10.26 -- Adoption Agreement for Coho Resources, Inc.'s Amended and Restated 401(k) Savings Plan
dated July 1, 1995 (incorporated by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
10.27** -- Letter Agreement dated March 5, 1999, by and between Coho Marketing and Transportation,
Inc. and EOTT Energy Operating Limited Partnership, amending the Crude Oil Purchase
Contract dated January 25, 1996, by and between Coho Marketing and Transportation, Inc.
and EOTT Energy Operating Limited Partnership.
21.1* -- List of Subsidiaries of the Company.
23.1** -- Consent of Arthur Andersen LLP
23.2** -- Consent of Ryder Scott Company, L.P.
23.3** -- Consent of Sproule Associates, Inc.
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23.4*** -- Consent of Fulbright & Jaworski L.L.P. (included in
Exhibit 5.1 above).
24.1 -- Powers of Attorney (included on signature page of
Registration Statement filed on February 7, 2000).
27.1** -- Financial Data Schedule.
99.1** -- Form of Notice of Exercise of Rights and related
documents.
</TABLE>
(b) Financial Statement Schedules.
All schedules for which provision is made in applicable accounting
regulations of the Securities and Exchange Commission have been omitted as the
schedules are either not required under the related instructions, are not
applicable or the information required thereby is set forth in the Financial
Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Coho under
the foregoing provisions, or otherwise, Coho has been advised that in the
opinion of the Securities and Exchange Commission this type of indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against these
liabilities (other than the payment by Coho of expenses incurred or paid by a
director, officer or controlling person of Coho in the successful defense of any
action, suit or proceeding) is asserted by an director, officer or controlling
person in connection with the securities being registered, Coho will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether this type of
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of this issue.
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<PAGE> 128
SIGNATURES
Pursuant to the requirements of the Securities Act, Coho has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on March 24,
2000.
COHO ENERGY, INC.
By: /s/ JEFFREY CLARKE
----------------------------------
Jeffrey Clarke
Chairman of the Board, President
and Chief Executive Officer
This report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
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SIGNATURE TITLE DATE
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/s/ JEFFREY CLARKE Chairman of the Board, President, March 24, 2000
- ----------------------------------------------------- Chief Executive Officer
Jeffrey Clarke (Principal Executive Officer and
Principal Financial Officer)
* Vice President and Controller March 24, 2000
- ----------------------------------------------------- (Principal Accounting Officer)
Susan J. McAden
* Director March 24, 2000
- -----------------------------------------------------
Louis F. Crane
* Director March 24, 2000
- -----------------------------------------------------
Alan Edgar
* Director March 24, 2000
- -----------------------------------------------------
Kenneth H. Lambert
* Director March 24, 2000
- -----------------------------------------------------
Douglas R. Martin
* Director March 24, 2000
- -----------------------------------------------------
Jake Taylor
*By: /s/ JEFFREY CLARKE
------------------------------------------------
Jeffrey Clarke
Attorney-in-Fact
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<PAGE> 129
INDEX TO EXHIBITS
Exhibits designated by the symbol ** are filed with this Amendment No. 1 to
Registration Statement. Exhibits designated by the symbol * were filed with the
original Registration Statement. Exhibits designated by the symbol *** will be
filed in a later amendment. All exhibits not so designated are incorporated by
reference to a prior filing as indicated.
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2.1** -- Debtor's First Amended and Restated Chapter 11 Plan of
Reorganization as filed with the United States Bankruptcy
Court for the Northern District of Texas on February 14,
2000 (included as Exhibit A to Exhibit 2.2 below).
2.2** -- Debtor's First Amended and Restated Disclosure Statement
with Respect to the Joint Plan of Reorganization under
Chapter 11 of the United States Bankruptcy Code as filed
with the United States Bankruptcy Court for the Northern
District of Texas on February 14, 2000.
2.3*** -- Findings of Fact, Conclusions of Law, and Order
Confirming Debtors' First Amended and Restated Chapter 11
Plan of Reorganization dated March 20, 2000.
3.1 -- Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (Registration No. 33-65620)).
3.2 -- Bylaws of the Company, (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-4 (Registration No. 33-65620)).
3.3** -- Form of Amended and Restated Articles of Incorporation of
the Company.
3.4** -- Form of Amended and Restated Bylaws of the Company.
4.1 -- Articles of Incorporation (included as Exhibit 3.1
above).
4.2 -- Bylaws of the Company (included as Exhibit 3.2 above).
4.3 -- Rights Agreement dated September 13, 1994 between Coho
Energy, Inc. and Chemical Bank (incorporated by reference
to Exhibit 1 to the Company's Form 8-A dated September
13, 1994).
4.4 -- First Amendment to Rights Agreement made as of December
8, 1994 between Coho Energy, Inc. and Chemical Bank
(incorporated by reference to Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
4.5 -- Second Amendment to Rights Agreement as of August 30,
1995 between Coho Energy, Inc. and Chemical Bank
(incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).
4.6 -- Third Amendment to Rights Agreement as of August 19, 1998
between Coho Energy, Inc. and Chase Manhattan Bank
(incorporated by reference to Exhibit 4.6 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
4.7 -- Indenture dated as of October 1, 1997 for the 8 7/8%
Senior Subordinated Notes due 2007 (incorporated by
reference to Exhibit 4.7 to the Company's Second
Amendment dated September 9, 1997 to its Registration
Statement on Form S-3 (Registration No. 333-33979)).
4.8 -- First Supplemental Indenture dated as of September 2,
1998 for the 8 7/8% Senior Subordinated Notes due 2007
(incorporated by reference to Exhibit 4.8 in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
4.9** -- Form of Amended and Restated Articles of Incorporation of
the Company (included as Exhibit 3.3 above).
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<PAGE> 130
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4.10** -- Form of Amended and Restated Bylaws of the Company (included as Exhibit 3.4 above).
5.1*** -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- Amended and Restated Registration Rights Agreement dated December 8, 1994 among Coho
Energy, Inc., Kenneth H. Lambert and Frederick K. Campbell (incorporated by reference
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December
31, 1994).
10.2 -- 1993 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-4 (Reg. No. 33-65620)).
10.3 -- First Amendment to 1993 Stock Option Plan (incorporated by reference to Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).
10.4 -- Second Amendment to 1993 Stock Option Plan (incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
10.5 -- Third Amendment to 1993 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.6 -- Employment Agreement dated as of November 11, 1994 by and between Coho Energy, Inc. and
Jeffrey Clarke (incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.7 -- Employment Agreement dated as of November 11, 1994 by and between Coho Energy, Inc. and
R. M. Pearce (incorporated by reference to Exhibit 10.8 to the Company's Annual Report
Form 10-K for the year ended December 31, 1994).
10.8 -- Employment Agreement dated as of June 25, 1995 by and between Eddie M. LeBlanc, III and
Coho Energy, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995).
10.9 -- Employment Agreement dated as of August 19, 1996 by and between Anne Marie O'Gorman and
Coho Energy, Inc. (incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.10 -- First Amendment to Employment Agreement dated as of August 19, 1996 by and among
Jeffrey Clarke and Coho Energy, Inc. (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996).
10.11 -- First Amendment to Employment Agreement dated as of August 19, 1996 by and among R. M.
Pearce and Coho Energy, Inc. (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996).
10.12 -- First Amendment to Employment Agreement dated as of August 19, 1996 by and among Eddie
M. LeBlanc and Coho Energy, Inc. (incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996).
10.13 -- 1993 Non Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-4 (Reg. No. 33-65620)).
10.14 -- First Amendment to 1993 Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
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10.15 -- Form of Executive Severance Agreement entered into with
each of Keri Clarke, R. Lynn Guillory, Larry L. Keller,
Susan J. McAden, Joseph Ragusa, Gary Hoge and Patrick S.
Wright (incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.16 -- Crude Oil Purchase Contract dated January 25, 1996, by
and between Coho Marketing and Transportation, Inc. and
EOTT Energy Operating Limited Partnership (incorporated
by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.17 -- Fourth Amended and Restated Credit Agreement among Coho
Resources, Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Acquisitions Company, Coho
Energy, Inc., Banque Paribas, Houston Agency, Bank One,
Texas, N.A., and MeesPierson N.V. dated as of December
18, 1997 (incorporated by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.18 -- First Amendment to the Fourth Amended and Restated Credit
Agreement dated July 7, 1998 among Coho Resources, Inc.,
Coho Louisiana Production Company, Coho Exploration,
Inc., Coho Oil & Gas, Inc. (formerly Coho Acquisitions
Company), Coho Energy, Inc., Banque Paribas, Houston
Agency, Bank One, Texas, N.A., and MeesPierson N.V.
(incorporated by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.19 -- Second Amendment to the Fourth Amended and Restated
Credit Agreement dated November 13, 1998 among Coho
Resources, Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Oil & Gas, Inc. (formerly Coho
Acquisitions Company), Coho Energy, Inc., Banque Paribas,
Houston Agency, Bank One, Texas, N.A., and MeesPierson
N.V. (incorporated by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.20 -- Third Amendment to the Fourth Amended and Restated Credit
Agreement dated November 30, 1998 among Coho Resources,
Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Oil & Gas, Inc. (formerly Coho
Acquisitions Company), Coho Energy, Inc., Banque Paribas,
Houston Agency, Bank One, Texas, N.A., and MeesPierson
N.V. (incorporated by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.21 -- Fourth Amendment to the Fourth Amended and Restated
Credit Agreement dated January 29, 1999 among Coho
Resources, Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Oil & Gas, Inc. (formerly Coho
Acquisitions Company), Coho Energy, Inc., Banque Paribas,
Houston Agency, Bank One, Texas, N.A., and MeesPierson
N.V. (incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.22 -- Crude Call Purchase Contract dated November 26, 1997 by
and between Amoco Production Company and Coho
Acquisitions Company (incorporated by reference to
Exhibit 2.1 to the Company's Report on Form 8-K dated
December 18, 1997).
10.23 -- Purchase and Sale Agreement dated November 26, 1997 by
and between Amoco Production Company and Coho
Acquisitions Company (incorporated by reference to
Exhibit 2.1 to the Company's Report on Form 8-K dated
December 31,1997).
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<PAGE> 132
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10.24 -- Shareholder Agreement (incorporated by reference to Item 7(1) of the Exhibits to the
Schedule 13D dated May 18, 1998, relating to the Company and filed by Energy Investment
Partnership No. 1, Thomas O. Hicks, John R. Muse, Charles W. Tate, Jack D. Furst,
Lawrence D. Stuart, Jr., Michael J. Levitt, Dan H. Blanks, and David B. Deniger).
10.25 -- Amended and Restated Stock Purchase Agreement dated November 4, 1998, by and between
Coho Energy, Inc. and HM4 Coho, L.P. (incorporated by reference to Exhibit 99.1 to the
Report on Form 8-K dated November 18, 1998).
10.26 -- Adoption Agreement for Coho Resources, Inc.'s Amended and Restated 401(k) Savings Plan
dated July 1, 1995 (incorporated by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
10.27** -- Letter Agreement dated March 5, 1999, by and between Coho Marketing and Transportation,
Inc. and EOTT Energy Operating Limited Partnership, amending the Crude Oil Purchase
Contract dated January 25, 1996, by and between Coho Marketing and Transportation, Inc.
and EOTT Energy Operating Limited Partnership.
21.1* -- List of Subsidiaries of the Company.
23.1** -- Consent of Arthur Andersen LLP
23.2** -- Consent of Ryder Scott Company, L.P.
23.3** -- Consent of Sproule Associates, Inc.
23.4*** -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1).
24.1 -- Powers of Attorney (included on signature page of Registration Statement filed on
February 7, 2000).
27.1** -- Financial Data Schedule.
99.1** -- Form of Notice of Exercise of Rights and related documents.
</TABLE>
<PAGE> 1
EXHIBIT 2.2
Michael W. Anglin
State Bar No. 01260800
Louis R. Strubeck, Jr.
State Bar No. 19425600
Fulbright & Jaworski L.L.P.
2200 Ross Avenue, Suite 2800
Dallas, Texas 75201
214/855-8000
214/855-8200 Facsimile
COUNSEL FOR THE DEBTORS
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
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IN RE: SEC.
SEC.
COHO ENERGY, INC., a Texas corporation SEC.
COHO RESOURCES, INC., a Nevada corporation SEC.
COHO OIL & GAS, INC., a Delaware corporation SEC.
COHO EXPLORATION, INC., SEC. Administratively Consolidated Under
a Delaware corporation SEC.
COHO LOUISIANA PRODUCTION COMPANY, SEC. Case No. 399-35929-HCA-11
a Delaware corporation SEC.
INTERSTATE NATURAL GAS COMPANY, SEC.
a Delaware corporation SEC.
SEC.
DEBTORS
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DEBTORS' FIRST AMENDED AND RESTATED DISCLOSURE
STATEMENT WITH RESPECT TO THE JOINT PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
TRANSACTIONS DESCRIBED IN THIS DISCLOSURE STATEMENT AND HAS NOT PASSED ON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2
DEBTORS' FIRST AMENDED AND RESTATED DISCLOSURE
STATEMENT WITH RESPECT TO THE JOINT PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
TABLE OF CONTENTS
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I. NOTICE TO HOLDERS OF CLAIMS AND
EQUITY INTERESTS....................
1
II. OVERVIEW OF THE PLAN................ 2
A. New Debt and Equity............ 3
1. Existing Bank Group....... 3
2. Existing Bondholders...... 3
3. Existing Shareholders..... 4
4. Credit Facility........... 4
5. Sale of Stock Through the
Rights Offering or the
Private Placement......... 5
6. Standby Loan.............. 6
B. Classification and Treatment
Summary........................ 7
C. New Securities Table........... 9
D. New Common Stock Table......... 10
III. BACKGROUND OF
THE CASE............................ 10
A. Factors Precipitating
Commencement of the Case....... 10
B. Proceedings in the Case........ 13
1. Retention of Counsel...... 14
2. Plan and Disclosure
Statement Matters......... 14
IV. CAPITALIZATION...................... 14
V. SELECTED FINANCIAL
DATA................................ 17
VI. THE PLAN............................ 18
A. Introduction................... 18
B. Classification and Treatment of
Claims......................... 18
1. Administrative Expense
Claims (Class 1).......... 19
2. Priority Tax Claims (Class
2)........................ 19
3. Bank Group Claims (Class
3)........................ 20
4. Miscellaneous Secured
Claims (Class 4).......... 20
5. Unsecured Bond Claims
(Class 5)................. 20
6. General Unsecured Claims
(Class 6)................. 20
7. Administrative Convenience
Claims (Class 7).......... 21
8. Equity Security Holders
(Class 8)................. 21
</TABLE>
<TABLE>
<CAPTION>
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C. Credit Facility................ 21
D. Sale of Stock Through the
Rights Offering or the Private
Placement...................... 22
E. Standby Loan................... 23
F. Other Provisions of the Plan... 24
1. Relationship Between the
Rights Offering, the
Private Placement and the
Standby Loan.............. 24
2. Overview of Reorganized
Debtors................... 24
3. Executory Contracts and
Unexpired Leases.......... 27
4. Effect of Rejection by One
or More Classes
of Claims................. 28
5. Provisions for Resolution
and Treatment of
Preferences, Fraudulent
Conveyances and Disputed
Claims.................... 28
6. Claims Belonging to the
Estate and Discharge of
Claims Against
the Debtors............... 29
7. Retention of
Jurisdiction.............. 30
8. Default under the Plan.... 31
9. Miscellaneous
Provisions................ 31
G. Related Documents.............. 32
VII. FEASIBILITY OF THE PLAN............. 33
A. Business Plan, Projections and
Feasibility.................... 33
1. Projected Financing
Transactions.............. 33
2. Sufficient Funds to
Consummate the Plan....... 34
3. Projected Operating
Results................... 34
4. Principles of
Consolidation............. 35
5. Accounting Estimates...... 35
6. Oil and Gas Properties.... 35
7. Deferred Financing
Costs..................... 36
8. Operating Forecast........ 36
9. Liquidity and Capital
Resources................. 38
</TABLE>
i
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<TABLE>
<CAPTION>
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B. Statements of Operations....... 39
1. Rights Offering or Private
Placement Version......... 39
2. Standby Loan Version...... 40
C. Cash Flow Statements........... 41
1. Rights Offering or Private
Placement Version......... 41
2. Standby Loan Version...... 41
D. Projected Balance Sheets....... 42
1. Rights Offering or Private
Placement Version......... 42
2. Standby Loan Version...... 43
3. Notes to Projected Balance
Sheets.................... 43
E. Effects of Pending
Litigation..................... 46
1. Hicks Muse Lawsuit........ 46
2. "NORM" Lawsuits........... 46
3. Stratton Lawsuit.......... 47
4. Other Cases............... 47
5. Insurance Coverage
Disputes with United
National Insurance Company
Involving Pending
Litigation................ 47
F. Unasserted Causes of Action.... 48
VIII. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN............
49
A. Continuation of the Cases...... 49
B. Alternative Plans of
Reorganization................. 49
C. Liquidation under Chapter 7.... 49
IX. VOTING PROCEDURES AND
REQUIREMENTS........................ 50
A. Voting Procedures and
Requirements................... 50
B. Special Voting Procedures for
Holders of Bond Claims......... 53
C. Parties in Interest Entitled to
Vote........................... 54
D. Definition of Impairment....... 54
E. Classes Impaired Under the
Plan........................... 54
F. Vote Required for Class
Acceptance..................... 55
G. Voting Agents.................. 55
X. CONFIRMATION OF THE PLAN............ 55
A. Confirmation Hearing........... 55
B. Requirements for Confirmation
of the Plan.................... 55
C. Cramdown....................... 57
1. Secured Claims............ 57
</TABLE>
<TABLE>
<CAPTION>
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<C> <S> <C> <C> <C>
2. Unsecured Claims.......... 57
3. Interests................. 57
XI. THE NEW DEBT AND SECURITIES.........
58
A. Credit Facility................ 58
B. New Common Stock............... 59
C. Dilution....................... 60
D. Comparison of Old and New
Articles of Incorporation...... 62
E. Procedures for Exchanging
Existing Bonds for New Common
Stock.......................... 62
F. Procedures for Exchanging
Existing Common Stock for New
Common Stock................... 63
G. Standby Loan................... 64
XII. INFORMATION ABOUT THE DEBTORS.......
66
A. The Company's Business and
Operations..................... 66
B. Organization of
the Company.................... 69
C. Management of the Parent
Company........................ 69
1. Information about Existing
Management Members........ 69
2. Compensation of
Management................ 71
3. Employment Agreements..... 72
XIII. ADDITIONAL FACTORS TO BE
CONSIDERED.......................... 72
A. Securities Law Matters and
Private Placement
Exemption...................... 72
1. Availability of Section
1145 of the Bankruptcy
Code...................... 72
2. Parties Who Are
Underwriters.............. 73
3. Availability of SEC Rule
144 for Affiliate
Resales................... 73
B. Adequacy of Collateral......... 74
C. Depletion of Reserves.......... 74
D. Industry Conditions; Impact on
the Company's Profitability.... 74
E. Reliance on Estimates of Proved
Reserves and Future Net Revenue
Information.................... 75
F. Net Losses..................... 75
G. Restrictions Imposed by Terms
of the Company's Loan
Agreements..................... 75
H. Business Risks................. 76
I. Competition.................... 76
</TABLE>
ii
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<TABLE>
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J. Government Regulation.......... 76
K. Dependence on Key
Personnel...................... 76
L. Concentration of Customers..... 77
M. Antitakeover Effects of Certain
Provisions..................... 77
N. Absence of Dividends........... 77
O. Title to Properties............ 77
P. Forward-Looking Statements..... 77
Q. Year 2000 Issue................ 78
XIV. CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN............
78
A. Federal Income Tax Consequences
to the Debtors................. 79
1. Cancellation of
Indebtedness.............. 79
2. Limitation on Net
Operating Losses.......... 79
B. Federal Income Tax Consequences
to Holders of Claims and
Holders of Equity Interests....
80
1. Holders of Other Priority
Claims and Certain General
Unsecured Claims.......... 80
2. Holders of Allowed Bond
Claims.................... 81
3. Holders of Equity
Interests................. 82
C. Withholding.................... 82
XV. DESCRIPTION OF EXISTING DEBT AND
EQUITY.............................. 82
A. Existing Bank Group Loan....... 82
B. Existing Bonds................. 83
C. Stock.......................... 83
1. Existing Common Stock..... 83
2. Preferred Stock........... 83
3. Limitation of Director
Liability................. 84
</TABLE>
<TABLE>
<CAPTION>
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4. Dividends................. 84
5. Rights Plan............... 84
6. Registration and
Nomination Rights......... 84
7. Transfer Agent and
Registrar................. 84
8. Market for the Parent
Company's Existing Common
Stock..................... 85
9. Ownership of Existing
Common Stock.............. 85
XVI. CONCLUSION.......................... 87
</TABLE>
<TABLE>
<S> <C>
EXHIBIT
EXHIBIT A Plan of Reorganization
</TABLE>
<TABLE>
<S> <C>
SCHEDULES
SCHEDULE A Rejected Agreements
SCHEDULE B-1 Liquidation Value
SCHEDULE B-2 Liquidation Analysis
Illustration of
SCHEDULE B-3 Liquidation Analysis
</TABLE>
<TABLE>
<S> <C>
ANNEXES
ANNEX A Coho Energy, Inc. Annual Report
on Form 10-K for the Year Ended
December 31, 1998
ANNEX B Coho Energy, Inc. Quarterly
Reports on Form 10-Q for the
Quarters Ended March 31, 1999,
June 30, 1999 and September 30,
1999
ANNEX C Coho Energy, Inc. Amendment to
Annual Report (Form 10-K/A)
Filed with the Securities and
Exchange Commission on April 30,
1999
</TABLE>
iii
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INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
TERMS DEFINED IN THIS DISCLOSURE PAGES
STATEMENT: WHERE DEFINED
- -------------------------------- -------------
<S> <C>
Actual Price....................... 6
Administrative Convenience
Claim............................ 21
Administrative Expense Claims...... 19
Affiliate.......................... 59, 73
AICPA.............................. 34
Allowed............................ 18
Annual Report...................... 15
Annual Report Amendment............ 66
Appaloosa.......................... 6
Bank Group......................... 3
Bank Group Claim................... 3
Bankruptcy Code.................... 1
Bankruptcy Court................... 1
Bankruptcy Rules................... 1
Base Rate.......................... 4
BOE................................ 12
Bond Claims........................ 3
Bondholder Depositary.............. 62
Bondholder Group................... 60
Boot............................... 81
Borrowers.......................... 58
Break Up Fee....................... 7
Brookhaven Field................... 46
Chase.............................. 3
Chase Commitment Letter............ 5
Chesapeake......................... 47
Chevron............................ 46
Closing Fee........................ 7
COD................................ 79
COHO............................... 85
Collateral......................... 4
Company............................ 10, 66
Confirmation Date.................. 28
Confirmation Hearing............... 1
Confirmation Order................. 19
Credit Agreement................... 4
Credit Facility.................... 3
CRI................................ 70
CRL................................ 70
DD&A............................... 36
Debtors............................ 1
Debtors' Schedules................. 18
Disclosure Statement Order......... 51
Disputed Claim..................... 29
Disputed Claims Reserve............ 29
Does Not Discriminate Unfairly..... 57
EBITDAX............................ 6
Edgar Contract..................... 27
</TABLE>
<TABLE>
<CAPTION>
TERMS DEFINED IN THIS DISCLOSURE PAGES
STATEMENT: WHERE DEFINED
- -------------------------------- -------------
<S> <C>
Effective Date..................... 1
EIP................................ 11, 71
Eligible Institution............... 62
EOTT............................... 77
Eurodollar Rate.................... 4
Exchange Act....................... 66
Existing Bank Group Loan
Agreement........................ 3
Existing Bond Indenture............ 3
Existing Bonds..................... 3
Existing Common Stock.............. 4
Fair and Equitable................. 57
FAS................................ 34
Florabama.......................... 46
GAAP............................... 34
General Unsecured Claims........... 20
Hicks Muse......................... 11
Hicks Muse Lawsuit................. 46
HM4................................ 11
Indenture Trustee.................. 19
ING................................ 70
Initial Borrowing Base............. 4
IRC................................ 78
IRS................................ 79
Issuer............................. 73
Lenders............................ 3
Long-term Tax-exempt Rate.......... 79
Market Discount Bond............... 81
Mid Year Reserve Report............ 66
Miscellaneous Secured Claims....... 20
MSP................................ 62
Net Unrealized Built-in Gain....... 79
Net Unrealized Built-in Losses..... 79
New Common Stock................... 3
NOLs............................... 79
NORM............................... 46
NORM Lawsuits...................... 46
Oaktree............................ 6
Pacholder.......................... 6
Parent Company..................... 1
Petition Date...................... 13
Piggyback.......................... 84
Plaintiffs......................... 46
Plan............................... 1
Plan Participants.................. 32
Plan Right......................... 84
Plan Securities.................... 73
PPM America........................ 6
Pre-Validated Ballot............... 54
Principal Bondholders.............. 12
</TABLE>
iv
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<TABLE>
<CAPTION>
TERMS DEFINED IN THIS DISCLOSURE PAGES
STATEMENT: WHERE DEFINED
- -------------------------------- -------------
<S> <C>
Priority Tax Claims................ 19
Private Placement.................. 4
Projections........................ 33
Qualified.......................... 80
Quarterly Reports.................. 15
Recapitalization................... 81
Rejected Agreements................ 27
Reorganized Debtors................ 3
Reorganized Parent Company......... 3
Required Lenders................... 6
Retention Plan..................... 71
Rights............................. 6
Rights Offering.................... 3
Rights Offering Period............. 24
Rights Offering Record Date........ 5
Rights Offering Record Holders..... 5
SEC................................ 5
Securities......................... 81
Securities Act..................... 72
Security........................... 80, 81
SEMP............................... 62
</TABLE>
<TABLE>
<CAPTION>
TERMS DEFINED IN THIS DISCLOSURE PAGES
STATEMENT: WHERE DEFINED
- -------------------------------- -------------
<S> <C>
Shareholder Depositary............. 63
Signature Guarantee Program........ 62, 63
STAMP.............................. 62
Standby Lender Fee Letter.......... 7
Standby Lenders.................... 3
Standby Loan....................... 5
Standby Loan Agreement............. 6
Standby Loan Notes................. 6
Standby Shares..................... 6
Stratton Lawsuit................... 47
Street Name........................ 51
Treasury Rate...................... 6
Underwriter........................ 72, 73
United National.................... 47
Voting Deadline.................... 50
Voting Record Date................. 1
Voting Record Date
Shareholders..................... 60
Year 1............................. 37
Year 2............................. 37
</TABLE>
v
<PAGE> 7
Coho Energy, Inc. and its subsidiaries, Coho Resources, Inc.; Coho Oil &
Gas, Inc.; Coho Exploration, Inc.; Coho Louisiana Production Company and
Interstate Natural Gas Company, the debtors and debtors-in-possession in this
administratively consolidated Chapter 11 case (collectively, the "Debtors"),
jointly submit this Disclosure Statement in connection with the solicitation of
acceptances of the Plan of Reorganization that is attached as EXHIBIT A (the
"Plan").
I.
NOTICE TO HOLDERS OF CLAIMS AND EQUITY INTERESTS
The purpose of this Disclosure Statement is to provide you, as the holder
of a claim against one or more of the Debtors or as a shareholder of Coho
Energy, Inc. (the "Parent Company"), with information to enable you to make a
reasonably informed decision on the Plan before exercising your right to accept
or reject the Plan.
On February 7, 2000, after notice and a hearing, the United States
Bankruptcy Court for the Northern District of Texas (the "Bankruptcy Court")
entered an order approving this Disclosure Statement as containing information,
of a kind and in sufficient detail, adequate to enable the holders of claims
against the Debtors and shareholders of the Parent Company to make an informed
judgment to accept or reject the Plan. THE BANKRUPTCY COURT'S APPROVAL OF THIS
DISCLOSURE STATEMENT DOES NOT CONSTITUTE A GUARANTEE OF THE ACCURACY OR
COMPLETENESS OF THIS INFORMATION OR THE BANKRUPTCY COURT'S ENDORSEMENT OF THE
PLAN.
You should read all of this Disclosure Statement before voting on the Plan.
You are urged to consult with your own financial and other advisors in deciding
whether to approve or reject the Plan. No solicitation of votes may be made
except pursuant to this Disclosure Statement, and no person has been authorized
to use any information concerning the Debtors or their businesses other than the
information contained in this Disclosure Statement.
Under Rule 3018 of the Federal Rules of Bankruptcy Procedure (the
"Bankruptcy Rules"), the record date for determining which holders of claims and
equity interests may vote on the Plan is February 7, 2000, the date on which the
Bankruptcy Court entered its order approving this Disclosure Statement (the
"Voting Record Date"). EFFECTIVENESS OF THE PLAN UNDER SECTION 1129(a)(7) OF THE
BANKRUPTCY REFORM ACT OF 1978, AS AMENDED (THE "BANKRUPTCY CODE"), REQUIRES THE
APPROVAL OF THE PLAN BY THE HOLDERS OF AT LEAST TWO-THIRDS IN AMOUNT AND MORE
THAN HALF IN NUMBER OF ALLOWED CLAIMS VOTING ON THE PLAN FOR EACH OF THE
IMPAIRED CLASSES, OR A FINDING BY THE BANKRUPTCY COURT THAT THE PLAN IS FAIR AND
EQUITABLE AS TO THAT CLASS.
After carefully reviewing this Disclosure Statement, please indicate your
acceptance or rejection of the Plan by voting in favor of or against the Plan on
the enclosed ballot; then return the ballot to the address set forth on the
ballot, in the enclosed postage-paid return envelope by 4:00 p.m., Dallas time,
on March 10, 2000. You may also return your ballot by courier or fax by
following the instructions on the ballot. ANY BALLOTS RECEIVED AFTER 4:00 P.M.,
DALLAS TIME (5:00 P.M., NEW YORK CITY TIME), ON MARCH 10, 2000 WILL NOT BE
COUNTED, UNLESS THIS DATE IS EXTENDED BY THE BANKRUPTCY COURT.
The Bankruptcy Court has entered an order fixing March 15, 2000, at 9:30
a.m., United States Courthouse, 1100 Commerce Street, Room 12A24, Dallas, Texas
75242, as the date, time and place for a hearing on confirmation of the Plan
(the "Confirmation Hearing"), and fixing March 10, 2000, as the time by which
all objections to confirmation of the Plan must be filed with the Bankruptcy
Court and served on counsel for the Debtors. The closing of the transactions
described in the Plan will occur on a date (the "Effective Date") at least 11
days after the Bankruptcy Court enters its order confirming the Plan, unless the
confirmation is stayed.
1
<PAGE> 8
* * * * * * *
+ ABOUT THIS DISCLOSURE STATEMENT:
- The statements contained in this Disclosure Statement are made as of the
date that the Bankruptcy Court enters an order approving this Disclosure
Statement, unless another time is specified in this Disclosure Statement.
Neither the delivery of this Disclosure Statement nor any action taken in
connection with the Plan implies that the information contained in this
Disclosure Statement is correct as of any time after that date.
- Unless the context requires otherwise: (1) the gender (or lack of gender)
of all words used in this Disclosure Statement includes the masculine,
feminine and neuter; (2) references to articles and sections (other than
in connection with the Bankruptcy Code, the Bankruptcy Rules, another
specified law or regulation or another specified document) refer to the
articles and sections of this Disclosure Statement; and (3) "including"
means "including, without limitation".
- Many capitalized words used in this Disclosure Statement have been
defined in the context of the provisions in which they first or most
prominently appear within this Disclosure Statement. An index to those
defined terms is included for your convenience at the front of this
Disclosure Statement immediately after the table of contents. Any other
capitalized terms used in this Disclosure Statement are intended to have
the meanings ascribed to them in the Plan.
- You may not rely on this Disclosure Statement for any purpose other than
to determine how to vote on the Plan. Nothing contained in this
Disclosure Statement constitutes or will be deemed to be advice on the
tax or other legal effects of the Plan on holders of claims or interests.
- Certain of the information contained in this Disclosure Statement is
forward-looking. This Disclosure Statement contains estimates and
assumptions that may prove not to have been accurate and financial
projections that may be materially different from actual future
experiences.
- Acceptance or rejection of the Plan, and ownership of the new securities
to be issued pursuant to the Plan, are subject to a number of risks. See
"Additional Factors to Be Considered" beginning on page 72 of this
Disclosure Statement.
- THIS DISCLOSURE STATEMENT REFERS TO AND BRIEFLY DESCRIBES, AS AN INTEGRAL
PART OF THE PLAN, A "RIGHTS OFFERING" AND A "PRIVATE PLACEMENT." THIS
DISCLOSURE STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF ACCEPTANCE OF
RIGHTS TO BE DISTRIBUTED PURSUANT TO THE RIGHTS OFFERING, AN OFFER TO
SELL (OR A SOLICITATION OF AN OFFER TO BUY) THE RIGHTS OR THE SHARES OF
NEW COMMON STOCK TO BE OFFERED PURSUANT TO THE RIGHTS OFFERING, OR, IF
APPLICABLE, AN OFFER TO SELL (OR THE SOLICITATION OF AN OFFER TO BUY) THE
SHARES OF NEW COMMON STOCK TO BE OFFERED PURSUANT TO THE PRIVATE
PLACEMENT. THE ISSUANCE OF THE RIGHTS PURSUANT TO THE RIGHTS OFFERING AND
THE OFFER OF SHARES OF NEW COMMON STOCK PURSUANT TO THE RIGHTS OFFERING
MAY ONLY BE MADE BY MEANS OF A PROSPECTUS INCLUDED WITHIN A REGISTRATION
STATEMENT THAT HAS BEEN FILED WITH, AND THAT HAS BEEN DECLARED EFFECTIVE
BY, THE SECURITIES AND EXCHANGE COMMISSION AND AFTER COMPLIANCE WITH ANY
APPLICABLE STATE SECURITIES LAWS. THE PARENT COMPANY HAS FILED A
REGISTRATION STATEMENT WITH THE SEC. ANY OFFER OF SHARES OF NEW COMMON
STOCK PURSUANT TO THE PRIVATE PLACEMENT MAY ONLY BE MADE BY MEANS OF, AND
ON THE CONDITIONS CONTAINED IN, AN OFFERING MEMORANDUM PROVIDED BY THE
PARENT COMPANY. INFORMATION ABOUT THE RIGHTS OFFERING AND THE PRIVATE
PLACEMENT IS INCLUDED IN THIS DISCLOSURE STATEMENT AND IN THE PLAN SOLELY
FOR THE PURPOSE OF SATISFYING REQUIREMENTS OF THE BANKRUPTCY CODE TO
PROVIDE INFORMATION ADEQUATE TO ENABLE THE HOLDERS OF CLAIMS AND
INTERESTS TO MAKE AN INFORMED DECISION ABOUT THE PLAN.
II.
OVERVIEW OF THE PLAN
An overview of the Plan is set forth below. This overview is qualified by
reference to the Plan, a copy of which is attached as EXHIBIT A, and by the
additional information included in this Disclosure Statement.
2
<PAGE> 9
A. NEW DEBT AND EQUITY
The Debtors believe that the Plan provides for (1) the treatment of all
classes of claims that is in the best interests of creditors of the Debtors and
is fair and equitable to those creditors and (2) the fair and equitable
treatment of the shareholders of the Parent Company. The Debtors believe that
their enterprise value exceeds the claims against them. The Plan provides for
these claims and provides that the properties of the Debtors will revest in the
Debtors, as reorganized pursuant to the Plan (the "Reorganized Debtors"), on the
Effective Date, free and clear of all claims and interests of creditors and
equity security holders, except as provided under the Plan. After the Effective
Date, the Reorganized Debtors may operate their businesses and buy, use and
otherwise acquire and dispose of their properties free of any restrictions
contained in the Bankruptcy Code.
1. EXISTING BANK GROUP
Coho Resources, Inc.; Coho Louisiana Production Company; Coho Exploration,
Inc.; Coho Oil & Gas, Inc., Interstate Natural Gas Company and the Parent
Company are parties to a Fourth Amended and Restated Credit Agreement dated
December 18, 1997 (the "Existing Bank Group Loan Agreement"). The lenders under
the Existing Bank Group Loan Agreement (the "Bank Group") are Meespierson
Capital Corp.; Paribas, Houston Agency; Christiania Bank OG Kreditkasse, ASA;
Den Norske Bank ASA; Bank of Scotland; Bank One, Texas, N.A.; Credit Lyonnais
New York Branch; and Toronto Dominion (Texas), Inc. Approximately $240 million
of principal (plus accrued interest and reasonable fees) owed to the Bank Group
in connection with the Existing Bank Group Loan Agreement (the "Bank Group
Claim") is treated as fully secured under the Plan. The Bank Group asserts that
accrued interest and reasonable fees aggregate approximately $22.4 million. The
exact amount of the Bank Group Claim, including interest at a reasonable rate
and reasonable fees, is subject to allowance. The allowed amount of the Bank
Group Claim will be fixed and determined before the conclusion of the
Confirmation Hearing, either by agreement between the Bank Group, the Debtors
and the Official Committee of Unsecured Creditors, or as allowed by a final
order of the Bankruptcy Court after objection.
The allowed Bank Group Claim is to be paid in full in cash on the Effective
Date. The Parent Company will obtain the funds necessary for the payment of the
allowed Bank Group Claim through the combination of (a) a Senior Revolving
Credit Facility (the "Credit Facility") from a syndicate of lenders (the
"Lenders") led by The Chase Manhattan Bank, as agent for the Lenders ("Chase"),
(b) the Rights Offering or the Private Placement described in this Disclosure
Statement, (c) cash on hand from the Debtors' operations and (d) if necessary,
the sale of senior subordinated notes to PPM America, Inc., Appaloosa
Management, L.P., Oaktree Capital Management, L.L.C. and Pacholder Associates,
Inc. and their assignees, other holders of Existing Bonds who opt to
participate, and other parties who may participate (the "Standby Lenders").
2. EXISTING BONDHOLDERS
The Parent Company is the issuer of $150 million in principal amount of
8 7/8% senior subordinated notes due 2007 (the "Existing Bonds"). The Existing
Bonds were issued under an indenture dated October 1, 1997, as amended by the
First Supplemental Indenture dated September 2, 1998 (the "Existing Bond
Indenture"). Coho Resources, Inc.; Coho Louisiana Production Company; Coho
Exploration, Inc.; Interstate Natural Gas Company and Coho Oil & Gas, Inc., all
direct or indirect wholly owned subsidiaries of the Parent Company, are the
guarantors of the Parent Company's obligations under the Existing Bond
Indenture. Approximately $162 million is owed to the holders of Existing Bonds
in connection with the Existing Bond Indenture (the "Bond Claims"). Under the
Plan, the Existing Bond Indenture and the Existing Bonds will be extinguished on
the Effective Date. Holders of allowed Bond Claims will receive on the Effective
Date their pro rata share of 96% of the common stock, $0.01 par value (the "New
Common Stock"), of the Parent Company as reorganized pursuant to the Plan (the
"Reorganized Parent Company"). This 96% ownership interest of the New Common
Stock will be diluted by shares of New Common Stock issued in connection with
(a) an offering of shares of the New Common Stock to the Parent Company's
shareholders and, at the Parent Company's discretion, others (the "Rights
Offering") or if the registration statement relating to the Rights
3
<PAGE> 10
Offering is withdrawn, a private placement of shares of the New Common Stock
(the "Private Placement") and (b) if applicable, the Standby Loan described in
this Disclosure Statement.
3. EXISTING SHAREHOLDERS
The Parent Company currently has issued and outstanding 25,603,512 shares
of common stock, $0.01 par value (the "Existing Common Stock"). The Existing
Common Stock is held by approximately 425 shareholders of record. The
shareholders will receive fair and equitable treatment under the Plan. On the
Effective Date the Existing Common Stock will be extinguished and the
shareholders will receive their pro rata share of 4% of the New Common Stock.
This 4% ownership interest of the New Common Stock will be diluted by shares of
New Common Stock issued in connection with the Rights Offering or the Private
Placement and, if applicable, the Standby Loan. The shareholders will also
receive the exclusive first priority right to purchase their pro rata portions
of additional shares of the New Common Stock in the Rights Offering, which will
be made in a separate registered offering, for a purchase price of $0.26 per
share, up to a total amount of $90 million.
4. CREDIT FACILITY
On the Effective Date, the Reorganized Parent Company will establish the
Credit Facility with the Lenders and Chase, as agent for the Lenders, for a
principal amount of up to $250 million. The Credit Facility will limit advances
to the amount of the borrowing base, which is anticipated to be set initially at
$210 million, $10 million of which must remain undrawn and available on the
Effective Date (the "Initial Borrowing Base"). The borrowing base will be the
loan value to be assigned to the proved reserves attributable to the Reorganized
Parent Company's oil and gas properties. The borrowing base will be subject to
semiannual review based on reserve reports. The Initial Borrowing Base will be
subject to Chase's review of the January 1, 2000 reserve report to be prepared
by the Parent Company and audited by an independent petroleum engineering firm
acceptable to the Lenders. The Initial Borrowing Base will be determined before
the Confirmation Hearing.
Interest on advances under the Credit Facility will be payable on the
earlier of (a) the expiration of any interest period under the Credit Facility
or (b) quarterly, beginning with the first quarter after the Effective Date.
Amounts outstanding under the Credit Facility will accrue interest at the option
of the Reorganized Parent Company at (a) the Eurodollar rate, which is the
annual interest rate equal to the London interbank offered rate for deposits in
United States dollars that is offered to Chase (the "Eurodollar Rate") plus an
applicable margin or (b) the base rate, which is the floating annual interest
rate established by Chase from time to time as its base rate of interest and
which may not be the lowest or best interest rate charged by Chase on loans
similar to the Credit Facility (the "Base Rate") plus an applicable margin. All
outstanding advances under the Credit Facility are due and payable in full three
years from the Effective Date.
The Credit Facility will be secured by granting Chase for the benefit of
the Lenders (a) first and prior security interests in the issued and outstanding
capital stock and other equity interests of all direct and indirect subsidiaries
of the Reorganized Parent Company, (b) first and prior mortgage liens and
security interests covering proved mineral interests selected by Chase having a
present value, as determined by Chase, of not less than 85% of the present value
of all proved mineral interests of the Debtors evaluated by the Lenders for
purposes of determining the borrowing base, and (c) security interests in other
tangible and intangible assets of the Debtors (collectively, the "Collateral").
The rights and responsibilities of Chase, the Lenders and the Debtors will be
governed by a senior revolving credit agreement (the "Credit Agreement") and
related documents, which, in part, will permit the Lenders to enforce their
rights to the Collateral on the occurrence of an "event of default" (as defined
in the Credit Agreement). Certain conditions precedent must be met by the Parent
Company before the Effective Date for Chase to be obligated to enter into the
Credit Facility, and its commitment under the Credit Agreement will be
conditioned on the confirmation of the Plan by the Bankruptcy Court. The form of
the Credit Agreement will be filed with the Bankruptcy Court by March 1, 2000.
Thereafter, the Debtors will provide a copy of the form of Credit Agreement to
any party in interest who requests it in writing. Written requests should be
sent to the Parent Company at 14785 Preston Road, Suite 860, Dallas, Texas 75240
to the attention of Ms. Anne Marie O'Gorman.
4
<PAGE> 11
Certain fees for the Lenders contained in the Chase commitment letter to
Coho Energy, Inc. dated December 9, 1999 (the "Chase Commitment Letter") were
approved by the Bankruptcy Court at a hearing on the fees held on January 27,
2000. These fees include an initial due diligence fee of $200,000. If the
Lenders fund under the Credit Facility on the Effective Date, they will be
entitled to an additional aggregate $6.5 million of closing fees. All fees paid
by the Parent Company in connection with the Credit Facility are non-refundable
and are in addition to reimbursements to be paid for expenses incurred by Chase
in connection with the preparation of the Credit Agreement.
The Chase Commitment Letter provides that there are a number of conditions
that must be met before the Lenders will be committed to fund the Credit
Facility on the Effective Date, including: (a) agreement concerning definitive
documents, (b) completion of economic due diligence and (c) approval by Chase of
the Reorganized Parent Company's management team and capital structure. Chase
and the Debtors will come to agreement on definitive documents in keeping with
the terms of the Plan by March 1, 2000. When Chase indicates to the Debtors by
the later of March 14, 2000 or the last business day immediately preceding the
Confirmation Hearing, that all conditions have been met, the Lenders will be
committed to fund on the Effective Date. If the Lenders fund on the Effective
Date, they will be entitled to $6.5 million in closing fees.
5. SALE OF STOCK THROUGH THE RIGHTS OFFERING OR THE PRIVATE PLACEMENT
To implement the Plan, the Reorganized Debtors will raise up to $90 million
of new investment in the Reorganized Parent Company by (a) either the Rights
Offering, which will be made pursuant to a prospectus sent to the shareholders
of the Parent Company as of the Rights Offering Record Date (the "Rights
Offering Record Holders"), and, if applicable, to others, or the Private
Placement, and (b) if applicable, $70 million of loans to be made by the Standby
Lenders (the "Standby Loan"). The "Rights Offering Record Date" will be a date
to be set by the board of directors of the Parent Company in accordance with
applicable law.
Under the Rights Offering, the Rights Offering Record Holders will have the
exclusive first opportunity to buy additional shares of the New Common Stock
based on the number of shares of Existing Common Stock owned as of the Rights
Offering Record Date, for a price of $0.26 per share, up to an aggregate of $90
million. The $0.26 per share price was negotiated with the Official Unsecured
Creditors Committee and is premised on the rate at which unsecured creditors are
converting their debt (at full face amount) to equity. The Rights Offering
Record Holders who wish to purchase more than their allocable portion of the
shares offered to them in the Rights Offering may do so, to the extent that
other Rights Offering Record Holders do not elect to participate in the Rights
Offering. If the Rights Offering is not fully subscribed up to $90 million by
the Rights Offering Record Holders, then the Parent Company may offer the
remaining shares of New Common Stock to third parties pursuant to the Rights
Offering. In connection with the Rights Offering, the Parent Company has filed a
registration statement with the Securities and Exchange Commission (the "SEC")
to register the rights to purchase shares of the New Common Stock and to
register the shares of New Common Stock that will be offered under the Rights
Offering. The Parent Company paid a filing fee of $23,760 to the SEC in
conjunction with the filing of the registration statement and other associated
expenses in conjunction with the printing and mailing of the related prospectus.
If the registration statement filed with the SEC is not declared effective by a
date sufficiently early to give the Parent Company adequate time to arrange and
complete the Rights Offering, the Parent Company will, in its sole discretion,
discontinue the Rights Offering and proceed with the Private Placement for a
minimum price of $0.26 per share, up to an aggregate of $90 million. The Rights
Offering or the Private Placement will be arranged by Jefferies & Company, Inc.,
or another investment banker, subject to the approval of the Bankruptcy Court.
Jefferies & Company, Inc., or another investment banker will be retained by the
Parent Company for the limited purpose of arranging the Rights Offering or the
Private Placement and not as a general financial advisor to the Debtors. Before
the Petition Date, Jefferies & Company, Inc. acted as underwriter in connection
with the issuance of the Existing Bonds and certain issuances of the Existing
Common Stock and provided general financial advice to the Debtors. Because of
this knowledge of the Debtors and its willingness to work at a discounted rate,
the Debtors propose to use Jefferies & Company, Inc. for the limited purpose of
arranging either the Rights Offering or the Private Placement.
5
<PAGE> 12
6. STANDBY LOAN
The majority of the funds necessary for the payment of the allowed Bank
Group Claim will be obtained through an advance under the Credit Facility of the
full amount of the Initial Borrowing Base. The remaining amount of the allowed
Bank Group Claim will be paid with the proceeds of the Rights Offering or the
Private Placement, and if necessary, the Standby Loan. The Standby Loan is to be
made pursuant to a senior subordinated note facility under which the Reorganized
Debtors will issue, and PPM America, Inc. ("PPM America"), Appaloosa Management,
L.P. ("Appaloosa"), Oaktree Capital Management, L.L.C. ("Oaktree") and Pacholder
Associates, Inc. ("Pacholder") and their assignees and such other holders of
Existing Bonds who opt to participate in the Standby Loan, will purchase, an
amount of senior subordinated notes to be determined by the Reorganized Debtors.
This amount will be a maximum of $70 million given the current level of
commitment under the Standby Loan and a maximum of $90 million if more Standby
Loan commitments are obtained and made available before the conclusion of the
Confirmation Hearing, or the Effective Date if the Debtors choose to extend the
Rights Offering to that date. The rights and responsibilities of the Standby
Lenders and the Reorganized Debtors will be governed by a note purchase
agreement (the "Standby Loan Agreement"), which will allow the holders of
Existing Bonds to participate in the Standby Loan. The form of the Standby Loan
Agreement will be filed with the Bankruptcy Court by March 1, 2000. Thereafter,
the Debtors, will provide a copy of the form of Standby Loan Agreement to any
party in interest who requests it in writing. Written requests should be sent to
the Parent Company at 14785 Preston Road, Suite 860, Dallas, Texas 75240 to the
attention of Ms. Anne Marie O'Gorman.
Debt under the Standby Loan Agreement will be evidenced by notes (the
"Standby Loan Notes"), maturing seven years after the Effective Date, bearing
interest at a minimum annual rate of 15% and payable in cash semiannually. After
the first anniversary of the Effective Date, additional semiannual interest will
be payable in an amount equal to 1/2% for every $0.25 that the Actual Price (as
defined below) exceeds $15 per barrel of oil equivalent during the applicable
semiannual interest period, up to a maximum of 10% additional interest per year.
Additionally, upon an event of default occurring under the Standby Loan,
interest will be payable in cash, unless otherwise required to be paid-in-kind,
at a rate equal to 2% per year over the applicable interest rate. The "Actual
Price" is the weighted average of the price received by the Reorganized Debtors
for all of their oil and gas production, including hedged and unhedged
production (net of hedging costs), in dollars per barrel of oil equivalent using
a 6:1 conversion ratio for natural gas. The Actual Price will be calculated over
a six-month measurement period ending on the date two months before the
applicable interest payment date. Interest payments under the Standby Loan may
be paid-in-kind subject to the requirements of the Credit Agreement.
Payment of the Standby Loan Notes will be subordinate to payment in full in
cash of all obligations arising in connection with the Credit Facility. Subject
to a final agreement between the Standby Lenders and Chase, after the initial
12-month period, cash interest payments may be made only to the extent by which
earnings before income tax, depreciation and amortization expense ("EBITDAX") on
a trailing four-quarter basis exceed $65 million. The Credit Agreement may also
prohibit the Reorganized Parent Company from making any cash interest payments
on the Standby Loan indebtedness if the outstanding indebtedness, under both the
Credit Facility and the Standby Loan, exceeds 3.75 times the EBITDAX for the
trailing four quarters. The Reorganized Parent Company may prepay the Standby
Loan Notes at the face amount, in whole or in part, in minimum denominations of
$1,000,000, plus either (a) a standard make-whole payment at a discount rate of
300 basis points over Treasury Rate (as defined below) for the first four years,
or (b) beginning in the fifth year, a premium equal to one-half the 15% base
interest rate, declining annually and ratably to par. "Treasury Rate" is the
yield of U.S. Treasury securities with a term equal to the then remaining term
of Standby Loan Notes that has become publicly available on the third business
day before the date fixed for repayment. The Standby Loan Notes may only be paid
if either (a) all obligations under the Credit Facility have been paid in full
in cash or (b) if the Lenders of 75% of the outstanding loans or, if none are
outstanding, the Lenders of 75% of the current loan commitments under the Credit
Facility (the "Required Lenders") consent to the payment.
If the Standby Loan Notes are issued, the Standby Lenders will receive a
percentage of the fully diluted New Common Stock of the Reorganized Parent
Company as of the Effective Date (the "Standby Shares").
6
<PAGE> 13
If $70 million in principal amount of the Standby Loan Notes are issued, the
Standby Lenders will receive 14% of the fully diluted New Common Stock as of the
Effective Date. The amount of Standby Shares issued will be adjusted ratably
according to the actual principal amount of Standby Loan Notes issued. The
Standby Shares issued to the Standby Lenders will be in addition to the shares
of New Common Stock issued to holders of the Existing Bonds, shareholders of the
Parent Company and persons participating in the Rights Offering or Private
Placement. See "The New Debt and Securities -- Dilution" for an illustration of
the dilution of the New Common Stock.
Certain fees for the Standby Lenders contained in the Standby Lender fee
letter to the Company dated January 24, 2000 (the "Standby Lender Fee Letter")
were approved by the Bankruptcy Court at a hearing on the fees held on January
27, 2000. These fees include (a) a due diligence fee of $200,000 payable
immediately and (b) a break up fee of $1.0 million (the "Break Up Fee"), to be
paid if the Standby Lenders give the Debtors written notice that all conditions
to closing have been met and if a plan of reorganization is subsequently
confirmed and consummated that does not use the Standby Loan. If, after
receiving a written notice from the Standby Lenders that they have completed
their due diligence and all conditions to closing have been met except entry of
a plan confirmation order, the Debtors confirm a plan of reorganization without
an alternative financing proposal, the Debtors will owe the Standby Lenders a
closing fee in an amount equal to the greater of $1.0 million or 3 1/2% of the
aggregate principal amount of the Standby Loan Notes purchased (the "Closing
Fee"). The obligation of the Reorganized Debtors to pay the Break Up Fee or
Closing Fee will be an administrative expense claim having priority over all
administrative expenses in accordance with Section 364(c)(1) of the Bankruptcy
Code. The Debtors will pay either the Closing Fee or the Break Up Fee, but not
both.
The Standby Lender Fee Letter provides that there are only two essential
kinds of conditions that must be met before the Standby Lenders will be
committed to fund the Standby Loan on the Effective Date: (a) agreement to
definitive documents and (b) completion of economic due diligence. The Standby
Lenders and the Debtors will come to agreement on definitive documents in
keeping with the terms of the Plan and satisfactory to both of them by March 1,
2000, by which time the Standby Lenders will have finished their economic due
diligence. When the Standby Lenders indicate by letter to the Debtors on or
before March 14, 2000 that all conditions have been met, (a) the Standby Lenders
will be committed to fund on the Effective Date and (b) the Standby Lenders will
then be entitled to a minimum fee of $1.0 million, either as a Closing Fee or a
Break Up Fee. If the Standby Lenders do not notify the Debtors in writing by the
later of March 14, 2000 or the last business day immediately preceding the
Confirmation Hearing, that all conditions have been met, then they will be
entitled to their reasonable fees and expenses in connection with the Standby
Loan, but they will not be entitled to a Break Up Fee. If the Standby Lenders
fund the Standby Loan on the Effective Date, they will be entitled to the
Closing Fee, and will not be entitled to the Break Up Fee.
B. CLASSIFICATION AND TREATMENT SUMMARY
The following is a summary of the classification of claims and interests,
and their treatment under the Plan.
<TABLE>
<CAPTION>
CLASSIFICATION TREATMENT
-------------- ---------
<S> <C>
Class 1 Unimpaired
Administrative Expense Claims
Total Estimated Amount of Class 1 Will receive payment in full, in cash
Claims: $2,329,000 including any retainers on hand, on the later
of the Effective Date, the due date or court
approval (if required by law), or paid on
other agreed terms.
Estimated Recovery: Full recovery.
</TABLE>
7
<PAGE> 14
<TABLE>
<CAPTION>
CLASSIFICATION TREATMENT
-------------- ---------
<S> <C>
Class 2 Impaired
Priority Tax Claims
Total Estimated Amount of Class 2 Will receive five-year promissory notes
Claims: $5,260,000 bearing interest at a rate of 6% per annum
unless a different rate is chosen by the
Bankruptcy Court, or paid on other agreed
terms.
Estimated Recovery: Full recovery over time.
Class 3 Impaired
Bank Group Claim
Total Estimated Amount of Class 3 Will receive payment in full, in cash on the
Claims: $262,350,000 Effective Date from advances made under the
Credit Facility and proceeds of the Rights
Offering or the Private Placement and, if
applicable, the Standby Loan.
Estimated Recovery: Full recovery.
Class 4 Unimpaired
Senior Miscellaneous Secured Claims
Total Estimated Amount of Class 4 Will receive cash payment of 100% of allowed
Claims: $300,000 claims on the Effective Date, or paid on
other agreed terms.
Estimated Recovery: Full recovery.
Class 5 Impaired
Unsecured Bond Claims
Total Estimated Amount of Class 5 Will receive shares representing 96% of the
Claims: $161,635,870 New Common Stock as of the Effective Date
(without giving effect to dilution from
shares issued under the Rights Offering or
the Private Placement, and, if applicable,
the Standby Loan).
Estimated Recovery: Full recovery over time.
Class 6 Impaired
General Unsecured Claims
Total Estimated Amount of Class 6 Will receive cash payment of 100% of allowed
Claims: $4,700,000 (Estimate assumes no claims, payable in four equal quarterly
significant adverse result to the Debtors installments without interest.
in the Bankruptcy Court's allowance and
estimation process. See "Feasibility of the Estimated Recovery: Full recovery over one
Plan -- Effects of Pending Litigation") year.
Class 7 Unimpaired
Administrative Convenience Claims
Total Estimated Amount of Class 7 Will receive payment in full, in cash 30 days
Claims: $72,000 from the Effective Date, up to a maximum of
$1,000 per claim.
Estimated Recovery: Full recovery.
</TABLE>
8
<PAGE> 15
<TABLE>
<CAPTION>
CLASSIFICATION TREATMENT
-------------- ---------
<S> <C>
Class 8 Impaired
Interests of Holders of Existing
Common Stock 25,603,512 Will receive (1) shares representing 4% of
shares outstanding the New Common Stock as of the Effective Date
(without giving effect to dilution from
shares issued under the Rights Offering or
the Private Placement and, if applicable, the
Standby Loan) and (2) pursuant to the
prospectus delivered in connection with the
Rights Offering, rights to purchase
additional shares of the New Common Stock at
$0.26 per share.
Estimated Distribution: 3% to 38% of the
Reorganized Parent Company depending on the
degree of participation in the Rights
Offering and other variables.
</TABLE>
C. NEW SECURITIES TABLE
The following table sets forth the aggregate face amount and the estimated
aggregate allowed claims of the Bank Group, the holders of the Existing Bonds
and the holders of the Existing Common Stock and the aggregate face amount or
number of shares of the new securities to be issued under the Plan.
<TABLE>
<CAPTION>
BEFORE THE EFFECTIVE DATE IMMEDIATELY AFTER THE EFFECTIVE DATE
------------------------- ------------------------------------
<S> <C> <C>
Existing Bank Group Notes..... $239,600,000 $-0-
without interest and fees
Existing Bonds................ $161,635,870 614,484,288 shares of
New Common Stock(1)
Existing Shareholders......... 25,603,512 shares of 25,603,512 shares of
Existing Common Stock New Common Stock(2)
Credit Facility Notes......... N/A $200,000,000(3)
Standby Loan Notes............ N/A Up to $70,000,000 and 104,200,340
shares of
New Common Stock(4)
Purchasers of New Common Stock
under the Rights Offering or
the Private Placement....... N/A Up to 346,153,846 shares of
New Common Stock
</TABLE>
- ---------------
(1) Does not include additional shares of New Common Stock that certain holders
of Existing Bonds would be issued in connection with borrowings, if any,
under the Standby Loan.
(2) Does not include up to 346,153,846 shares of New Common Stock that Rights
Offering Record Holders will have the right to buy under the Rights
Offering.
(3) The Credit Facility will be for up to $250 million, but it is anticipated
that a maximum of only $210 million ($200 million of which will be funded
and $10 million of which will be undrawn and available) could be borrowed on
the Effective Date.
(4) The amount of the Standby Loan, if any, will depend on the amount of the
proceeds from the Rights Offering or the Private Placement. The number of
Standby Shares, if any, will depend on the amount of the Standby Loan. If
sufficient additional Standby Loan Commitments become available before the
conclusion of the Confirmation Hearing or, if applicable, the Effective
Date, the maximum principal
9
<PAGE> 16
amount of the Standby Loan Notes will be $90 million and the maximum number
of Standby Shares will be 140,507,078.
D. NEW COMMON STOCK TABLE.
The following table sets forth information about the number of shares of
the New Common Stock that will be outstanding: (1) as of the Effective Date
without giving effect to the Rights Offering or the Private Placement and, if
applicable, the Standby Loan; (2) assuming all shares of New Common Stock
available under either the Rights Offering or the Private Placement are
purchased and no amounts are borrowed under the Standby Loan; (3) assuming 50%
of the shares available under the Rights Offering or the Private Placement are
purchased and $45 million is borrowed under the Standby Loan; and (4) assuming
no shares of New Common Stock are purchased pursuant to the Rights Offering or
the Private Placement and $70 million is borrowed under the Standby Loan. For
further details see "Capitalization".
<TABLE>
<CAPTION>
PRO FORMA PURCHASE OF 50%
OF SHARES PURSUANT TO RIGHTS
PRO FORMA BEFORE GIVING OFFERING OR PRIVATE PLACEMENT
EFFECT TO THE RIGHTS OFFERING, PRO FORMA PURCHASE OF ALL AND BORROWING OF $45
THE PRIVATE PLACEMENT OR THE SHARES PURSUANT TO RIGHTS MILLION UNDER THE STANDBY
STANDBY LOAN OFFERING OR PRIVATE PLACEMENT LOAN
------------------------------- ----------------------------- -----------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
NO. OF SHARES OUTSTANDING NO. OF SHARES OUTSTANDING NO. OF SHARES OUTSTANDING
-------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Existing
Shareholders........ 25,603,512 4% 25,603,512 3% 25,603,512 3%
Existing
Bondholders......... 614,484,288 96% 614,484,288 62% 614,484,288 67%
Rights Offering or
Private Placement
Purchasers.......... -- -- 346,153,846(2) -- 195,420,437(2) 21%
Standby Lenders...... N/A N/A N/A N/A 82,632,683 9%
----------- --- ------------- --- ------------- ---
Total......... 640,087,800 100% 986,241,646 100% 918,140,920 100%
<CAPTION>
PRO FORMA PURCHASE OF NO
SHARES PURSUANT TO RIGHTS
OFFERING OR PRIVATE
PLACEMENT AND BORROWING OF
$70 MILLION UNDER THE
STANDBY LOAN(1)
-----------------------------
PERCENTAGE OF
NO. OF SHARES OUTSTANDING
------------- -------------
<S> <C> <C>
Existing
Shareholders........ 25,603,512 3%
Existing
Bondholders......... 614,484,288 83%
Rights Offering or
Private Placement
Purchasers.......... -- --
Standby Lenders...... 104,200,340 14%
----------- ---
Total......... 744,288,140 100%
</TABLE>
- ---------------
(1) The maximum amount of the Standby Loan may be increased, up to $90 million,
in which case the number and percentage of Standby Shares would be ratably
increased, up to a maximum of 140,507,078 shares, representing 18% of the
outstanding shares.
(2) Shareholders or other investors will be required to pay $0.26 per share to
purchase shares under the Rights Offering or, if no Rights Offering is made,
investors will be required to pay at least $0.26 per share under the Private
Placement. Assuming the purchase of all shares offered pursuant to the
Rights Offering or Private Placement the total proceeds will be $90 million.
Assuming the purchase of 50% of those shares the total proceeds will be $45
million.
III.
BACKGROUND OF THE CASE
A. FACTORS PRECIPITATING COMMENCEMENT OF THE CASE
The Parent Company was incorporated in June 1993 under Texas law. The
Parent Company's subsidiaries are organized under the laws of various
jurisdictions, including Nevada, Delaware, Alberta (Canada) and the Bahamas. The
Parent Company, together with those subsidiaries (collectively, the "Company")
is an independent energy company engaged in the development and production of,
and exploration for, crude oil and natural gas. The Parent Company's Existing
Common Stock and its Existing Bonds are publicly traded securities.
In early 1998, the Company began to explore various ways to obtain new
capital. The new capital would be used primarily for the Company's acquisition
program, allowing the Company to take advantage of anticipated favorable
purchase prices for oil and gas properties in a market in which prices for oil
and gas were
10
<PAGE> 17
declining. The Company also believed that it could use additional new capital to
reduce its indebtedness and improve its financial strength.
In August 1998, the Parent Company announced that it had reached an
agreement to issue $250 million of its Existing Common Stock at $6.00 per share
(approximately 41.7 million shares) to HM4 Coho L.P. ("HM4"), a limited
partnership managed by Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse").
This sale would have given HM4 an ownership interest in the Parent Company of
approximately 62%. An affiliate of HM4, Energy Investment Partnership ("EIP")
already owned approximately nine percent of the outstanding Existing Common
Stock, which it had purchased from other shareholders. It was believed that this
affiliation with HM4 would provide both the Parent Company and HM4 with the
mutual advantage of being able to invest in new oil and gas properties at
favorable prices. In December 1998, the Parent Company's shareholders approved
the transaction. Just days later, HM4 terminated the agreement, but the Parent
Company and HM4 continued to work on a restructured agreement, to reflect an
increase in the number of shares that the Parent Company would issue for the
$250 million purchase price based on a price per share of $4.00 instead of
$6.00. The restructured sale would have given HM4 an ownership interest in the
Parent Company of approximately 71%. After working through all of the issues and
reaching a verbal agreement with all of the interested parties with regard to
the proposed restructured agreement, in February 1999, HM4 informed the Parent
Company that it was no longer interested in the investment.
On May 27, 1999, the Parent Company filed a lawsuit against HM4 and
affiliated persons in the District Court of Dallas County, Texas. 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
Parent Company seeks monetary damages of approximately $500 million. In December
1999, the Company removed the lawsuit to federal district court. 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 Debtors' current
liquidity crisis, the Debtors are not able to evaluate the recovery it might
receive in the lawsuit and its outcome is contingent on trial or settlement.
On February 22, 1999, the Bank Group notified the Company that the Bank
Group had decided to reduce the Company's borrowing capacity at January 31,
1999, from $242 million to $150 million. The Bank Group decision to change the
Company's borrowing capacity was based on the then-current decline in crude oil
and natural gas prices. As a result of the Bank Group actions, the Company's
over-advance position became $89.6 million, based on the reduced borrowing
capacity, and under the terms of the Existing Bank Group Loan Agreement, that
amount was due in five equal monthly installments beginning March 2, 1999. The
Company was unable to cure the over-advance by the March 2, 1999 deadline. On
March 8, 1999, the Company received written notice from the Bank Group that it
was in default under the credit facility, and the Bank Group reserved all
rights, remedies and privileges as a result of the payment default. Similarly,
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. The Company
made interest payments under the Existing Bank Group Loan Agreement during the
period between March and July 1999 of approximately $3.4 million in the
aggregate. As a result of the payment defaults, advances under the Existing Bank
Group Loan Agreement bear interest at the prime rate, and the loan agreement
provides that past due installments to repay the over advance and the past due
interest payments bear interest at the default rate of prime plus 4%. On August
19, 1999, the Bank Group accelerated the full amount outstanding under the
Existing Bank Group Loan Agreement. The Bank Group contends that the default
rate of interest is owed on all amounts, not only on the overadvance, since the
date of acceleration. Pursuant to a cash collateral order approved by the
Bankruptcy Court in November 1999, the Company made an interest payment of
$878,000 to the Bank Group in December 1999 and is required to make monthly
interest payments of approximately $1.8 million. The current Cash Collateral
Order of the Bankruptcy Court expired on January 30, 2000. The Bank Group and
the Company have agreed to an extension of the Cash Collateral Order through
March 31, 2000. The Company will owe additional interest payments on February 1,
2000 and March 1, 2000.
The Existing Bond Indenture includes cross-default provisions, which would
effect a default under the terms of the Existing Bonds if certain "indebtedness"
(as defined in the Existing Bond Indenture) was not paid within the applicable
grace period after final maturity under the Existing Bank Group Loan Agreement.
11
<PAGE> 18
The Parent Company was unable to make the $6.7 million interest payment due to
the holders of the Existing Bonds on April 15, 1999. On May 19, 1999, the
Company received a written notice of acceleration from two holders of the
Existing Bonds, which own in excess of 25% in principal amount of the Existing
Bonds. As a result, on May 19, 1999, one of the holders of the Existing Bonds
filed a lawsuit against the Parent Company, and each Debtor who is the guarantor
of the Existing Bonds, in the Supreme Court of the State of New York. The Parent
Company contested that claim, which was dismissed without prejudice to the
plaintiff's ability to refile the lawsuit in the future, if appropriate.
The Company explored its alternatives to resolve the problems created by
the Bank Group actions. The alternatives considered by the Company included the
conversion of a portion or all of the Existing Bonds to equity, raising
additional equity and 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 well repairs on and the continued development of the
Company's properties. The Company also evaluated cost reduction programs to
enhance cash flow from operations.
The operating revenues of the Company declined during 1998 and the first
half of 1999 due to crude oil and natural gas price decreases. Additionally, the
Company's crude oil and natural gas production declined from an average of
18,495 barrel of oil equivalent (assuming a ratio of 6,000 cubic feet of natural
gas to one barrel of crude oil) ("BOE") per day during the first nine months of
1998 to approximately 10,311 BOE per day during the first nine months of 1999.
This decline is attributable to (1) the sale of the Company's natural gas assets
in Monroe, Louisiana in December 1998, which contributed approximately 2,776 BOE
per day during the first nine months of 1998; (2) overall production declines on
the Company's operated properties in Oklahoma and Mississippi as a result of the
natural decline and 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 (3) the Company's halting of production on wells that were
considered uneconomical because of depressed crude oil prices.
Since May 1999, the Company has used working capital provided by operations
to perform well repair work to return some of the shut-in wells to production
because crude oil prices began to improve in the second quarter of 1999. 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 rises in prices and the recent repair work, the Company
does not anticipate a significant improvement in production this year over the
production in the first nine months of 1999 until more funds are available for
well repairs and additional development activity.
At September 30, 1999, the Company had a working capital deficit of $407
million, including pre- and post-Petition Date liabilities, primarily due to the
reclassification of all long term debt to current maturities. 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, and general and
administrative expenses.
From February through September 1999, the Company had discussions with
various parties with respect to possible transactions pursuant to which the
Company's indebtedness might be repaid or restructured or pursuant to which the
Company would receive additional capital. Other than the now terminated
transaction with HM4 (discussed above), the Company has not received any
definitive offers involving (1) a merger or consolidation of the Company, (2) a
sale or transfer of all or substantially all of the Company's assets or (3) a
purchase of securities of the Company that would enable the holder of those
securities to exercise control over the Company, in each case on terms that were
satisfactory to the Company and that the board of directors of the Parent
Company believed would be in the best interest of the Company or enforceable
pursuant to the Bankruptcy Rules. Before the Petition Date, the Company also
conducted negotiations with the holders of the Existing Bonds and with the Bank
Group with respect to a possible reorganization.
The Company conducted negotiations with Appaloosa, Oaktree and PPM America
(the "Principal Bondholders") who hold approximately $135.5 million (90%) in
principal amount of the Existing Bonds. While those negotiations were
preliminary, the Company believes that the Principal Bondholders will vote for
12
<PAGE> 19
the Plan as currently proposed. There can be no assurance, however, that the
holders of the Existing Bonds will vote for the Plan.
While the Company believes the Principal Bondholders will vote to support
the Plan, the terms of the Plan have not been agreed to by all of the impaired
creditors under the Plan. The Company will continue to try to persuade the
impaired creditors as to the merits of the Plan after this Disclosure Statement
is distributed and while ballots are being solicited. However, there can be no
assurances that the Principal Bondholders, the other impaired creditors under
the Plan or the shareholders will accept the Plan and there is a possibility
that a revised Plan will be negotiated for future presentation.
The board of directors of the Parent Company has unanimously approved the
terms of the Plan and believes that the Plan is in the best interests of the
Parent Company's creditors and shareholders and will permit the maximum and
earliest recovery for all classes of claims and interests in a reorganization of
the Company under Chapter 11 of the Bankruptcy Code. In arriving at its
conclusion, the board of directors of the Parent Company considered (1) the
limited alternatives available to the Company to restructure its debt, and the
risks attendant to each of those alternatives, (2) the estimated liquidation
value of the Company's assets and the amounts that the Company's creditors would
likely receive in the liquidation of those assets, (c) the rights of payment and
security positions of the Company's creditors and (d) the present status of the
crude oil and natural gas industry and its anticipated effect on the Company's
future cash flow.
The Company believes that the Plan, by paying the Bank Group Claim in full,
converting the bond debt to equity, and raising new capital, will provide the
funds that the Company needs to commence a capital program to improve
production. See "Feasibility of the Plan" for an illustration of expected
liquidity on the Effective Date.
B. PROCEEDINGS IN THE CASE
Consistent with bankruptcy cases involving large, publicly traded companies
and their affiliates, a number of proceedings have occurred since August 23,
1999, the date on which the Debtors filed their voluntary Chapter 11 petition
(the "Petition Date") in the Debtors' cases, the most significant of which are
discussed in this section.
The Bankruptcy Court has approved Fulbright & Jaworski L.L.P. as counsel
for the Debtors and Arthur Andersen LLP as the Debtors' financial consultants
and auditors. The Bankruptcy Court also has approved the Debtors' retention of
oil and gas reserve engineers, special counsel for the Debtors in certain
litigation, and certain ordinary course of business professionals. All of these
professionals are assisting the Debtors in their efforts to reorganize their
businesses.
Official committees for the unsecured creditors and equity holders have
been formed by the Office of the United States Trustee. The Bankruptcy Court has
approved counsel for the Official Unsecured Creditors Committee and the Official
Equity Committee. The Official Unsecured Creditors Committee has retained
financial consultants. The committees have been actively involved in the
Debtors' bankruptcy cases.
Shortly after the commencement of their cases, the Debtors obtained
approval from the Bankruptcy Court to use the cash collateral in the continued
operations of their business, including certain capital expenditure programs.
The Debtors' use of cash collateral was extended through January 30, 2000.
Pursuant to the Third Interim Order to Use Cash Collateral, in December 1999,
the Debtors began paying the Bank Group monthly payments of $1.8 million per
month as adequate protection payments. The Cash Collateral Order expired on
January 30, 2000. The Bank Group and the Company have agreed to an extension of
the Cash Collateral Order through March 31, 2000. The Company will owe
additional interest payments on February 1, 2000 and March 1, 2000.
Immediately following the commencement of their cases, the Debtors obtained
permission from the Bankruptcy Court to pay working and royalty interest owners
to insure that payments to them were not interrupted. As a result, working and
royalty interest owners have continued to receive all payments to which they are
entitled throughout the pendency of the Debtors' cases.
13
<PAGE> 20
In October 1999, one of the shareholders of the Parent Company filed a
motion to compel the Parent Company to hold an annual shareholders' meeting. As
of the Petition Date, the Parent Company had not yet held its annual
shareholders' meeting which historically had been held between May and August.
The annual shareholders' meeting had not been held by the Petition Date because
of extensive, ongoing negotiations between the Parent Company, the Bank Group
and the holders of allowed Bond Claims concerning the restructuring of the
Debtors' debt and operations. Rather than incur the significant expenses
associated with holding the annual meeting, and then having to incur additional
significant expenses to hold a special shareholders' meeting to approve a
restructuring of the debt to the Bank Group and holders of allowed Bond Claims,
the Parent Company elected to postpone the annual meeting and combine it with a
special meeting once an agreement with the Bank Group and holders of allowed
Bond Claims was reached. Although the Parent Company reasonably believed that it
would reach an agreement with the Bank Group and the holders of allowed Bond
Claims before the Petition Date, unfortunately no agreement was reached and the
Debtors filed for bankruptcy protection.
The Bankruptcy Court denied the request to compel a shareholders' meeting
provided that the Parent Company permit representatives of the Official Equity
Committee to attend and participate, in a non-voting capacity, at a future board
meeting to discuss the Plan. The Debtors complied with the Bankruptcy Court's
directive. The Bankruptcy Court also issued an order for the Debtors to show
cause as to why the exclusive period for the Debtors to file a plan of
reorganization under Section 1121 of the Bankruptcy Code should not be
terminated to allow other parties to file plans of reorganization in the case.
The Bank Group moved for a termination of this exclusivity period as well.
Exclusivity has been terminated as to the Bank Group, the Official Equity
Committee and the Official Unsecured Creditors Committee.
1. RETENTION OF COUNSEL
After consideration of applications filed by the Debtors, the Bankruptcy
Court entered orders authorizing the employment and retention of Fulbright &
Jaworski L.L.P. as counsel to the Debtors.
2. PLAN AND DISCLOSURE STATEMENT MATTERS
On November 30, 1999, the Debtors filed with the Bankruptcy Court their
Joint Plan of Reorganization Under Chapter 11 of the United States Bankruptcy
Code. On February 4, 2000, the Debtors filed with the Bankruptcy Court an
amended Joint Plan of Reorganization and a Disclosure Statement with respect to
the Plan of Reorganization under Chapter 11 of the Bankruptcy Code. On February
7, 2000, the Bankruptcy Court entered an order approving the Disclosure
Statement, establishing procedures with respect to the solicitation of
acceptances and rejections of the Plan and setting a deadline by which
acceptances and rejections and objections to, the Plan must be filed and served.
In that order, the Bankruptcy Court also scheduled the Confirmation Hearing to
consider the Plan for March 15, 2000.
Following the entry of that order, the Debtors have commenced the process
of soliciting acceptances and rejections to the Plan by means of this Disclosure
Statement. In response to those solicitation efforts, the Debtors seek Plan
approval by a majority of creditors and holders of equity interests in each
class entitled to submit a ballot to accept or reject the Plan. If that approval
is obtained, the Debtors will proceed to seek confirmation of the Plan by the
Bankruptcy Court on March 15, 2000.
IV.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1999, and as adjusted (1) to give pro forma effect for
projected operating results through March 31, 2000, the assumed effective date
of the Plan, (2) to give pro forma effect to the effectiveness of the Plan and
assuming that all of the shares of New Common Stock available are purchased
pursuant to the Rights Offering or the Private Placement, (3) to give pro forma
effect to the effectiveness of the Plan and assuming that 50% of the shares of
New Common Stock available are purchased pursuant to the Rights Offering or the
Private Placement and
14
<PAGE> 21
$45 million is borrowed under the Standby Loan, and (4) to give pro forma effect
to the effectiveness of the Plan and assuming that none of the shares of New
Common Stock available are purchased pursuant to the Rights Offering or the
Private Placement and $70 million is borrowed under the Standby Loan. This
information should be read in conjunction with the Company's consolidated
financial statements (including the notes to those statements) included in the
Parent Company's Annual Report on Form 10-K filed with the SEC on March 31, 1999
(the "Annual Report") and the Parent Company's Quarterly Reports on Form 10-Q
filed with the SEC on May 17, 1999, August 16, 1999 and November 15, 1999 (the
"Quarterly Reports"), copies of which are attached as ANNEXES A AND B, and the
information set forth under the caption "Feasibility of the Plan" included in
this Disclosure Statement.
<TABLE>
<CAPTION>
PRO FORMA
PURCHASE OF
PRO FORMA NO SHARES
PURCHASE OF PURSUANT TO
50% OF SHARES RIGHTS
PURSUANT TO OFFERING OR
PRO FORMA RIGHTS OFFERING PRIVATE
PURCHASE OF ALL OR PRIVATE PLACEMENT AND
PRO FORMA SHARES PLACEMENT AND BORROWING OF
IMMEDIATELY PURSUANT TO BORROWING OF $70 MILLION
SEPTEMBER 30, PRIOR TO RIGHTS OFFERING $45 MILLION UNDER THE
1999 EFFECTIVENESS OR PRIVATE UNDER THE STANDBY
HISTORICAL OF THE PLAN(3) PLACEMENT(4) STANDBY LOAN(4) LOAN(4)
------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Current Liabilities:
Existing Bank Group Loan(1)....... $ 251,799 $ 260,150 $ -- $ -- $ --
Existing Bonds(1)................. 161,094 161,094 -- -- --
Other............................. 16,038 14,192 9,455 9,455 9,455
--------- --------- --------- --------- ---------
Total Current Liabilities... $ 428,931 $ 435,436 $ 9,455 $ 9,455 $ 9,455
--------- --------- --------- --------- ---------
Long-Term Liabilities:
Credit Facility................... $ -- $ -- $ 172,000 $ 171,000 $ 191,000
Standby Loan Notes................ -- -- -- 45,000 70,000
Promissory Notes.................. -- -- 4,208 4,208 4,208
--------- --------- --------- --------- ---------
Total Long-Term
Liabilities............... -- -- 176,208 220,208 265,208
--------- --------- --------- --------- ---------
Shareholders' Equity:
Preferred Stock, par value $0.01
per share.......................
Existing Common Stock and New
Common Stock, par value $0.01
per share(2).................... 256 256 9,862 9,181 7,443
Additional paid-in capital........ 137,812 137,812 375,522 333,089 291,323
Retained deficit.................. (229,133) (230,126) (240,529) (222,262) (217,162)
--------- --------- --------- --------- ---------
Total Shareholders'
Equity.................... (91,065) (92,058) 144,855 120,008 81,604
--------- --------- --------- --------- ---------
Total Capitalization,
excluding current
liabilities............... $ (91,065) $ (92,058) $ 321,063 $ 340,216 $ 346,812
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) All amounts outstanding under the Existing Bank Group Loan Agreement and the
Existing Bonds and the related accrued interest are classified as current
liabilities as of September 30, 1999 due to accelerations by the lenders.
(2) There are 100,000,000 shares of Existing Common Stock authorized. Shares of
Existing Common Stock outstanding were 25,603,512 at September 30, 1999 and
Pro forma Immediately Prior to Effectiveness of the Plan, shares of New
Common Stock outstanding were 986,241,646 under the Pro forma Purchase of
All Shares Pursuant to Rights Offering or Private Placement, 918,140,920
under the Pro forma Purchase of 50% of Shares Pursuant to Rights Offering or
Private Placement and Borrowing of $45 Million Under the Standby Loan, and
744,288,140 under the Pro forma Purchase of No Shares Pursuant to Rights
Offering or Private Placement and Borrowing of $70 Million Under the Standby
Loan.
(3) Current liabilities and retained deficit have been adjusted to reflect the
effect of projected operating results for the period from October 1, 1999
through March 31, 2000, the assumed effective date of the Plan.
15
<PAGE> 22
(4) The pro forma columns that present the purchase of shares pursuant to Rights
Offering or Private Placement assuming all shares are purchased, 50% of the
shares are purchased and no shares are purchased reflect pro forma
adjustments to record the following transactions:
- The repayment of borrowings outstanding under the Existing Bank Group
Loan Agreement together with assumed interest totaling $260.2 million
from borrowings under the Credit Facility together with proceeds of the
Rights Offering and borrowings under the Credit Facility and Standby
Loan, as applicable, and the write-off of $1.6 million related to
unamortized debt issue costs.
- The conversion of the Existing Bonds into: 614,484,288 shares of New
Common Stock at an assumed fair market value of $0.26 per share for a
total of $159.8 million and the recognition of a loss on extinguishment
of debt of $2.3 million related to unamortized debt issue costs under the
"Purchase of All Shares" column; 614,484,288 shares of New Common Stock
at an assumed fair market value of $0.23 per share for a total of $141.5
million and the recognition of a gain on the extinguishment of debt of
$16.0 million due to the dilution in the assumed fair market value of the
shares as a result of the additional shares issued for the Standby Loan
under the "Purchase of 50% of Shares" column; and 614,484,288 shares of
New Common Stock at an assumed fair market value of $0.22 per share for a
total of $137.4 million and the recognition of a gain on extinguishment
of debt of $20.1 million due to the dilution in the assumed fair market
value of the shares, as discussed above, under the "Purchase of No
Shares" column.
- The payment of $529,000 of accrued reorganization costs and the
recognition of additional reorganization expenses totaling $5.5 million,
including $1.5 million for estimated severance payments. The Break Up Fee
of $1.0 million associated with the Standby Loan is an additional expense
under the "Purchase All Shares" column.
- The $4.2 million reclassification of the long-term portion of the
five-year promissory notes to be issued in settlement of the priority tax
claims from current liabilities.
- The borrowings of $172.0 million, $171.0 million and $191.0 million under
the Credit Facility on the Effective Date under the "Purchase All
Shares," "Purchase 50% of Shares" and "Purchase No Shares" columns,
respectively.
- The borrowings of $45 million under the Standby Loan and the related
issuance of 82,632,683 shares of New Common Stock at an assumed fair
market value of approximately $0.23 per share for a total of $19.0
million under the "Purchase of 50% of Shares" column and borrowings of
$70 million under the Standby Loan and the related issuance of
104,200,840 shares of New Common Stock at an assumed fair market value of
approximately $0.22 per share for a total of $23.3 million under the
"Purchase of No Shares" column.
- The issuance of 346,153,846 shares of New Common Stock at $0.26 per share
for total net proceeds of $87.6 million after estimated offering costs of
$2.4 million under the "Purchase of All Shares" column and issuance of
195,420,437 shares of New Common Stock at approximately $0.23 per share
for total net proceeds of $43.7 million after estimated offering costs of
$1.3 million under the "Purchase of 50% of Shares" column.
16
<PAGE> 23
V.
SELECTED FINANCIAL DATA
The following information is selected or derived from, and is qualified by
reference to, the Company's consolidated financial statements included in the
Annual Report attached as ANNEX A and the Quarterly Reports attached as ANNEX B.
This information should be read in conjunction with those consolidated financial
statements, and the related notes, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the Annual Report and
the Quarterly Reports. The report of Arthur Andersen LLP, the Company's
independent certified public accountant, on the Company's financial statements
for the three years in the period ended December 31, 1998, is qualified as to
the Company's ability to continue as a going concern. The Company's consolidated
financial statements for the nine-month periods ended September 30, 1998, and
September 30, 1999, are unaudited. The selected consolidated financial data
presented below are not necessarily indicative of the future results of
operations or financial performance of the Company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Operating revenues.................. $ 54,272 $ 63,130 $ 68,759 $ 55,829 $ 37,957
Operating costs..................... 13,875 15,970 26,859 21,010 15,063
General and administrative
expenses......................... 7,264 7,163 7,750 4,752 7,574(1)
Reorganization costs................ -- -- -- -- 2,685
Depletion and depreciation.......... 16,280 19,214 28,135 22,235 10,213
Writedown of crude oil and natural
gas properties................... -- -- 188,000 73,000 5,433
Net interest expense................ 7,464 10,474 32,721 24,344 25,789
Other expense....................... -- -- 3,023 -- 1,048
Income tax expense (benefit)........ 3,483 4,021 (14,383) (18,432) (26)
Net earnings (loss)................. 5,906 6,288 (203,346) (71,080) (29,822)
Basic earnings (loss) per common
share(2)......................... $ 0.29 $ 0.29 $ (7.94) $ (2.78) $ (1.16)
Diluted earnings (loss) per common
share(3)......................... $ 0.29 $ 0.28 $ (7.94) $ (2.78) $ (1.16)
OTHER FINANCIAL DATA:
Capital expenditures................ $ 52,384 $ 72,667 $ 70,143 $ 62,464 $ 4,995
BALANCE SHEET DATA:
Working capital (deficit)........... $ 6,662 $ (2,021) $(388,297) $(406,832)
Net property and equipment.......... 210,212 531,409 324,574 313,924
Total assets........................ 230,041 555,128 350,068 341,566
Long-term debt, excluding current
portion(4)....................... 122,777 369,924 -- --
Total shareholders' equity.......... 81,466 142,103 (61,243) (91,065)
</TABLE>
- ---------------
(1) General and administrative expenses for the nine months ended September 30,
1999 are substantially higher than those expenses for the same period in
1998 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 $4.2 million of those costs
in the first nine months of 1998.
(2) Basic per-share amounts have been computed by dividing net earnings after
preferred dividends by the weighted average number of shares outstanding:
20,179 in 1996; 21,693 in 1997; 25,604 in 1998; and 25,604 in 1999.
(3) Diluted per-share amounts have been computed by dividing net earnings after
preferred dividends by the weighted average number of shares outstanding
including common stock equivalents, consisting of stock options and
warrants, when their effect is dilutive: 20,342 in 1996; 22,334 in 1997;
25,604 in 1998; and 25,604 in 1999.
(4) Amounts for 1998 and 1999 include $384,031 and $388,685, respectively
related to the current portion of long-term debt.
17
<PAGE> 24
VI.
THE PLAN
A. INTRODUCTION
A summary of the principal provisions of the Plan and the treatment of
classes of claims and equity interests is set forth below. This summary is
qualified by reference to the Plan, a copy of which is attached as EXHIBIT A.
The Plan was conceived by management of the Company as an alternative to
the more drastic measures available to the Company for restructuring its debt,
such as a liquidation of its properties. The terms of the Plan were arrived at
after a diligent search for, and extensive evaluation of, numerous financing and
liquidation proposals by the Debtors and consultation with the Debtors'
financial advisors as to what type of Plan might be feasible after lengthy
negotiations with certain of the Debtors' creditors. The Debtors believe that
the Plan provides the Debtors' creditors and the Parent Company's shareholders
with distributions of property, in the form of new securities or otherwise,
having a value not less than the amount that those holders would receive if the
Debtors were to be liquidated under Chapter 7 of the Bankruptcy Code. The
Debtors believe that reorganization under the Plan is feasible and that the Plan
provides for the greatest and earliest possible recoveries for the creditors of
the Debtors and the shareholders of the Parent Company.
Beginning before the Petition Date, and continuing thereafter, the Debtors,
with the assistance of their financial consultants and advisors, implemented and
pursued a plan to attract proposals from parties to provide the Debtors with
operating capital necessary to maximize the value of their oil and gas reserves.
During the process, numerous proposals were considered from not fewer than 20
parties ranging from offers to commit to contribute additional capital to the
Debtors, to proposals to purchase assets from the Debtors and proposals to merge
the Debtors with other entities.
None of the proposals received by the Debtors is as attractive as the
commitment from Chase in connection with the Credit Facility and the commitment
from the Standby Lenders in connection with the Standby Loan. These proposals
allow the Debtors to pay the existing Bank Group debt, retain their assets and
provide necessary capital to exploit their oil and gas reserves.
B. CLASSIFICATION AND TREATMENT OF CLAIMS
Section 1123 of the Bankruptcy Code requires that a plan of reorganization
classify the claims of a debtor's creditors and equity interest holders. The
Plan divides claims and equity interests into classes and sets forth the
treatment afforded to each class. Under the Plan, each claim or equity interest
is either unimpaired or the holder of the claim or equity interest is to receive
various types of consideration, depending on the nature of the claim or equity
interest. A claim is unimpaired under the Plan if the Plan (1) leaves unaltered
the legal, equitable and contractual rights of the holder of the claim, (2)
provides for cash payment of the full amount of the claim on the Effective Date
of the Plan or (3) notwithstanding any contractual provision or law that
entitles the holder of the claim to demand or receive accelerated payment after
the occurrence of a default, cures the default, reinstates the maturity of the
claim as it existed before the default, and compensates the holder of the claim
for any damages incurred as a result of any reasonable reliance by the holder on
any provision or law that entitles the holder of the claim to demand accelerated
payment. The only claims or interests that are or may be impaired under the Plan
and therefore are or may be entitled to vote to accept or reject the Plan are
Classes 2, 3, 5, 6, and 8.
For the holder of a claim or equity interest to participate in the Plan and
receive the treatment afforded to the applicable class, the holder's claim or
equity interest must be "allowed". A claim or interest will be allowed if it is
filed or deemed filed, unless a timely objection to allowance of the claim or
interest is made. Generally, for a claim or equity interest to be filed, a proof
of claim or proof of equity interest must be timely filed on behalf of the
holder of the claim or equity interest with the Bankruptcy Court. A claim or
equity interest will also be deemed to be filed if (1) it is listed on the
Schedules of Assets and Liabilities filed with the Bankruptcy Court, as amended
(the "Debtors' Schedules"), unless it is listed as disputed, contingent or
18
<PAGE> 25
unliquidated or (2) in the case of an equity security holder, the holder's
interest is reflected on the records of the issuer. If an objection to a claim
or interest is made, the Bankruptcy Court must make a determination with respect
to allowance of that claim or interest. Only holders of allowed claims and
allowed interests are entitled to participate in and receive distributions in
accordance with the Plan.
The following is a summary of the classes of creditors and equity interest
holders of the Debtors under the Plan and the provisions made in the Plan for
each class.
1. ADMINISTRATIVE EXPENSE CLAIMS (CLASS 1)
"Administrative Expense Claims" are claims for (a) any cost or expense of
the Chapter 11 cases allowed under Section 503(b) of the Bankruptcy Code,
including all actual and necessary expenses relating to the preservation of the
Debtors' estate or the operation of the Debtors' businesses, and all allowances
of compensation or reimbursement of expenses to the extent allowed by the
Bankruptcy Code and (b) the reasonable fees and expenses of HSBC Bank USA
(formerly known as Marine Midland Bank) the indenture trustee under the Existing
Bond Indenture (the "Indenture Trustee"), including the reasonable fees and
expenses of its professionals to be paid under the terms of the Existing Bond
Indenture upon application to the Bankruptcy Court.
As of November 30, 1999, the fees and expenses incurred by counsel to the
Debtors were approximately $350,000. The Debtors anticipate these fees and
expenses through the date of confirmation of the Plan to be an additional
$650,000. Additionally, the Debtors estimate that all other administrative
expenses will be approximately $1.3 million in the aggregate, including a
reclamation claim asserted by Baker Hughes/ Centrilift in the principal amount
of $86,732.
On the later of the Effective Date or the applicable due date, each allowed
Administrative Expense Claim will be paid in full in cash or from any retainers
on hand, or on such other terms as may be agreed to in writing between the
holder of that claim and the Debtor that owes that claim. Allowed Administrative
Expense Claims are not impaired under the Plan.
2. PRIORITY TAX CLAIMS (CLASS 2)
"Priority Tax Claims" are claims that are entitled to priority in
accordance with Section 507(a)(8) of the Bankruptcy Code. These claims consist
of certain unsecured claims of governmental units for taxes. Allowed Priority
Tax Claims are impaired under the Plan.
Except to the extent that a holder of any allowed Priority Tax Claim agrees
to a different treatment, each holder of an allowed Priority Tax Claim will
receive on account of the claim a promissory note, dated as of the Effective
Date, in the principal amount of the allowed claim of the applicable creditor
calculated as of the Effective Date. Each promissory note will provide for
payment of monthly installments of principal and interest as if the note was
being amortized over a 60-month period, with payments commencing on the first
day of the second calendar month after the Effective Date. Each note will become
due and payable in full five years after the date of assessment of the
applicable claim. Each note will bear interest at an annual rate of 6% unless a
different rate is chosen by the Bankruptcy Court pursuant to Sections
1129(a)(9)(c) and 1129(b)(2)(A)(i) of the Bankruptcy Code.
The form of the note to be issued to each holder of an allowed Priority Tax
Claim will be filed with the Bankruptcy Court by March 1, 2000. Thereafter, the
Debtors will provide a copy of the form of note to any party in interest who
requests it in writing. Written requests should be sent to the Parent Company at
14785 Preston Road, Suite 860, Dallas, Texas 75240 to the attention of Ms. Anne
Marie O'Gorman.
The Debtors will litigate disputed Priority Tax Claims to determine the
extent to which the disputed Priority Tax Claim should be allowed. During the
pendency of litigation, the Debtors will place into a disputed claims reserve
such amounts as may be fixed by agreement, by provisional allowance in the
Bankruptcy Court's final order confirming the Plan (the "Confirmation Order"),
or by other order of the Bankruptcy Court, unless other depository arrangements
or terms are directed by order of the Bankruptcy Court.
19
<PAGE> 26
3. BANK GROUP CLAIMS (CLASS 3)
On the Effective Date, the allowed Bank Group Claim will be treated as a
fully secured claim and will be paid in full in cash. At such time as the Bank
Group Claim is fixed and paid in full, the Bank Group Claim will be extinguished
and all liens discharged. The entry of the Confirmation Order will be a final
and binding adjudication on the allowance of the Bank Group Claim (in an amount
agreed to by the Debtors, the Official Committee of Unsecured Creditors and the
Bank Group or as allowed by Bankruptcy Court order after objection) and will
operate as a final and conclusive compromise and settlement of any and all
claims that have been or may be asserted by or through the Debtors against the
Bank Group, its constituent members and their successors, assigns, officers,
directors, employees, attorneys, agents and representatives. The allowed Bank
Group Claim is impaired under the Plan. Payment in cash of a claim such as the
Bank Group Claim is no longer listed in Section 1124 of the Bankruptcy Code as a
form of unimpairment.
The Parent Company will obtain the funds necessary for the payment of the
allowed Bank Group Claim through the combination of (a) the Credit Facility from
the Lenders and Chase as agent for the Lenders, (b) the Rights Offering or the
Private Placement, (c) cash on hand from the Debtors' operations, and (d) if
necessary, the sale of senior subordinated notes to the Standby Lenders pursuant
to the Standby Loan Agreement.
The forms of the Credit Agreement and the Standby Loan Agreement will be
filed with the Bankruptcy Court by March 1, 2000. Thereafter, the Debtors will
provide copies of the forms of Credit Agreement and the Standby Loan Agreement
to any party in interest who requests them in writing. Written requests should
be sent to the Parent Company at 14785 Preston Road, Suite 860, Dallas, Texas
75240 to the attention of Ms. Anne Marie O'Gorman.
4. MISCELLANEOUS SECURED CLAIMS (CLASS 4)
"Miscellaneous Secured Claims" are secured claims under Section 506(g) of
the Bankruptcy Code other than the Bank Group Claim, including properly
perfected mechanic's and materialman's lien claims. The only known claims in
this class are asserted by Baker Hughes and certain affiliates including
Centrilift. Allowed Miscellaneous Secured Claims will receive cash payment in an
amount equal to 100% of those claims, including interest and reasonable
attorneys fees, on the later of the Effective Date and the date upon which the
Miscellaneous Secured Claims are allowed, or within 10 days thereafter. The
allowed Miscellaneous Secured Claims are not impaired under the Plan.
5. UNSECURED BOND CLAIMS (CLASS 5)
Under the Plan, the Existing Bond Indenture and Existing Bonds will be
extinguished on the Effective Date. Holders of allowed Bond Claims as of the
Voting Record Date will receive on the Effective Date their pro rata share of
96% of the New Common Stock, without giving effect to the shares issuable under
the Rights Offering or the Private Placement, and, if applicable, the Standby
Loan. These provisions of the Plan result in the holders of allowed Bond Claims
receiving property of a value as of the Effective Date of the Plan approximating
the amount of their allowed claims. The allowed Bond Claims are impaired under
the Plan.
6. GENERAL UNSECURED CLAIMS (CLASS 6)
"General Unsecured Claims" are claims, other than unsecured Bond Claims,
that are not secured by a valid and enforceable lien against property of a
Debtor. Allowed General Unsecured Claims are impaired under the Plan.
In full satisfaction of all allowed General Unsecured Claims, each holder
of those claims will receive cash payment of 100% of its allowed claim in four
equal quarterly installments without interest, the first of which will be paid
30 days from the Effective Date and the remainder of which will be paid on the
first day of each subsequent calendar quarter. When a disputed General Unsecured
Claim becomes an allowed General Unsecured Claim, the next quarterly payment
date will be treated as the Effective Date for that claim.
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7. ADMINISTRATIVE CONVENIENCE CLAIMS (CLASS 7)
An "Administrative Convenience Claim" is a claim in the amount of $1,000 or
less. Administrative Convenience Claims are unimpaired under the Plan.
Except to the extent that an allowed Administrative Convenience Claim has
been paid by the Debtors before the Effective Date or a holder of the claim
agrees to a different treatment, each holder of an allowed Administrative
Convenience Claim will be paid in full in cash on the later of the Effective
Date or the date that the Administrative Convenience Claim becomes allowed, or
within 10 days thereafter.
8. EQUITY SECURITY HOLDERS (CLASS 8)
On the Effective Date the Existing Common Stock will be extinguished and
holders of the Existing Common Stock as of the Voting Record Date will receive
their pro rata share of 4% of the New Common Stock, without giving effect to the
shares issuable under either the Rights Offering or the Private Placement and,
if applicable, the Standby Loan. The shareholders as of the Rights Offering
Record Date will also receive the right to purchase in the Rights Offering, to
be made pursuant to a separate prospectus, additional shares of the New Common
Stock for a purchase price of $0.26 per share, up to a total amount of $90
million. However, as described in Section VI.D. below, if the registration
statement filed with the SEC in connection with the Rights Offering is not
declared effective by a date sufficiently early to give the Parent Company
adequate time to arrange and complete the Rights Offering, the Parent Company
may, in its sole discretion, discontinue the Rights Offering and proceed with
the Private Placement. The holders of Existing Common Stock are impaired under
the Plan.
C. CREDIT FACILITY
On the Effective Date, the Reorganized Parent Company will establish the
Credit Facility with the Lenders and Chase, as agent for the Lenders, for a
principal amount of up to $250 million. The majority of the funds necessary for
the payment of the allowed Bank Group Claim will be obtained through an advance
under the Credit Facility of up to the full amount of the Initial Borrowing
Base. The Credit Facility will limit advances to the amount of the borrowing
base, which is anticipated to be set initially at $210 million, $10 million of
which must remain undrawn and available on the Effective Date. The borrowing
base will be the loan value to be assigned to the proved reserves attributable
to the Reorganized Parent Company's oil and gas properties. The borrowing base
will be subject to semiannual review based on reserve reports. The Initial
Borrowing Base will be subject to Chase's review of the January 1, 2000 reserve
report to be prepared by the Parent Company and audited by an independent
petroleum engineering firm acceptable to the Lenders. The Initial Borrowing Base
will be determined before the Confirmation Hearing.
Interest on advances under the Credit Facility will be payable on the
earlier of (1) the expiration of any interest period under the Credit Facility
or (2) quarterly, beginning with the first quarter after the Effective Date.
Amounts outstanding under the Credit Facility will accrue interest at the option
of the Reorganized Parent Company at (1) the Eurodollar Rate plus an applicable
margin, or (2) the Base Rate plus an applicable margin. All outstanding advances
under the Credit Facility are due and payable in full three years from the
Effective Date.
Outstanding advances under the Credit Facility will be secured by the
Collateral. The rights and responsibilities of Chase, the Lenders and the
Debtors will be governed by the Credit Agreement and related loan documents,
which, in part, will permit the Lenders to enforce their rights to the
Collateral on the occurrence of an "event of default" (as defined in the Credit
Agreement). The form of the Credit Agreement will be filed with the Bankruptcy
Court by March 1, 2000. Thereafter, the Debtors will provide a copy of the form
of Credit Agreement to any party in interest who requests it in writing. Written
requests should be sent to the Parent Company at 14785 Preston Road, Suite 860,
Dallas, Texas 75240 to the attention of Ms. Anne Marie O'Gorman. Although the
Debtors anticipate no conflicts among the description of the Credit Facility
contained in this Disclosure Statement, the form of the Credit Agreement filed
with the Bankruptcy Court and the Credit Agreement and related documents
ultimately executed by the Reorganized Debtors and the
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Lenders, to the extent that there is any conflict, the provisions of the
ultimately executed Credit Agreement and related documents will prevail.
D. SALE OF STOCK THROUGH THE RIGHTS OFFERING OR THE PRIVATE PLACEMENT
To implement the Plan, the Reorganized Debtors will raise up to $90 million
of new investment in the Reorganized Parent Company by (1) either the Rights
Offering, which will be made pursuant to a prospectus sent to the Rights
Offering Record Holders and, if applicable, to others, or the Private Placement,
and (2) if applicable, the Standby Loan.
Under the Rights Offering, the Rights Offering Record Holders will have the
exclusive first opportunity to buy additional shares of the New Common Stock
based on the number of shares of Existing Common Stock owned as of the Rights
Offering Record Date, for a price of $0.26 per share, up to an aggregate of $90
million. The $0.26 per share price was negotiated with the Official Unsecured
Creditors Committee and is premised on the rate at which unsecured creditors are
converting their debt (at full face amount) to equity. Rights Offering Record
Holders who wish to buy more than their allocable portion of the shares offered
to them in the Rights Offering may do so to the extent that the other Rights
Offering Record Holders do not elect to participate in the Rights Offering. If
the Rights Offering is not fully subscribed up to $90 million by the Rights
Offering Record Holders, then the Parent Company may offer the remaining shares
of New Common Stock to third parties pursuant to the Rights Offering. In
connection with the Rights Offering, the Parent Company has filed a registration
statement with the SEC to register the rights to purchase shares of New Common
Stock and to register the shares of New Common Stock that will be offered under
the Rights Offering. The Parent Company paid a filing fee of $23,760 to the SEC
in conjunction with the filing of the registration statement and other
associated expenses in conjunction with the printing and mailing of the related
prospectus. If the registration statement filed with the SEC is not declared
effective by a date sufficiently early to give the Parent Company adequate time
to arrange and complete the Rights Offering, the Parent Company may, in its sole
discretion, discontinue the Rights Offering and proceed with the Private
Placement for a minimum price of $0.26 per share, up to an aggregate of $90
million. The Rights Offering or the Private Placement will be arranged by
Jefferies & Company, Inc., or another investment banker, subject to the approval
of the Bankruptcy Court. Jefferies & Company, Inc., or another investment
banker, will be retained by the Parent Company for the limited purpose of
arranging the Rights Offering or the Private Placement and not as a general
financial advisor to the Debtors. Before the commencement of the Debtors'
bankruptcy cases, Jefferies & Company, Inc. acted as underwriter in connection
with the issuance of the Existing Bonds and certain issuances of the Existing
Common Stock and provided general financial advice to the Debtors. Because of
this knowledge of the Debtors and then willingness to work at a discounted rate,
the Debtors propose to use Jefferies & Company, Inc. for the limited purpose of
arranging either the Rights Offering or the Private Placement.
This Disclosure Statement does not constitute a solicitation of acceptance
of the rights to be distributed to the Rights Offering, an offer to sell (or a
solicitation of an offer to buy) the rights or the shares of New Common Stock to
be offered pursuant to the Rights Offering, or, if applicable, an offer to sell
(or the solicitation of an offer to buy) the shares of New Common Stock to be
offered pursuant to the Private Placement. The issuance of the rights pursuant
to the Rights Offering and the offer of shares of New Common Stock pursuant to
the Rights Offering may only be made by means of a prospectus included within a
registration statement that has been filed with, and that has been declared
effective by, the SEC and after compliance with any applicable state or other
securities laws. The Parent Company has filed a registration statement with the
SEC. Any offer of shares of New Common Stock pursuant to the Private Placement
may only be made by means of, and on the conditions contained in, an offering
memorandum provided by the Parent Company. Information about the Rights Offering
and the Private Placement is included in this Disclosure Statement and in the
Plan solely for the purpose of satisfying requirements of the Bankruptcy Code to
provide information adequate to enable the holders of claims and interests to
make an informed decision about the Plan.
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E. STANDBY LOAN
To the extent that the Rights Offering or the Private Placement yield less
than $90 million, the Reorganized Debtors will issue, and the Standby Lenders
will purchase, an amount of senior subordinated notes to be determined by the
Reorganized Debtors. This amount will be a maximum of $70 million given the
current level of commitment under the Standby Loan and a maximum of $90 million
if more Standby Loan commitments are obtained and made available before the
conclusion of the Confirmation Hearing, or the Effective Date if the Debtors
choose to extend the Rights Offering to that date. The rights and
responsibilities of the Standby Lenders and the Reorganized Debtors will be
governed by the Standby Loan Agreement which will allow the holders of Existing
Bonds to participate in the Standby Loan. The form of the Standby Loan Agreement
will be filed with the Bankruptcy Court by March 1, 2000. Thereafter, the
Debtors will provide a copy of the form of Standby Loan Agreement to any party
in interest who requests it in writing. Written requests should be sent to the
Parent Company at 14785 Preston Road, Suite 860, Dallas, Texas 75240 to the
attention of Ms. Anne Marie O'Gorman. Although the Debtors anticipate no
conflicts among the description of the Standby Loan contained in this Disclosure
Statement, the form of the Standby Loan Agreement filed with the Bankruptcy
Court and the Standby Loan Agreement and related documents ultimately executed
by the Reorganized Debtors and the Standby Lenders, to the extent that there is
any conflict the provisions of the ultimately executed Standby Loan Agreement
and related documents will prevail.
Debt under the Standby Loan Agreement will be evidenced by the Standby Loan
Notes, maturing seven years after the Effective Date and bearing interest at a
minimum annual rate of 15% and payable in cash semiannually. After the first
anniversary of the Effective Date, additional semiannual interest will be
payable in an amount equal to 1/2% for every $0.25 that the Actual Price
exceeds $15 per barrel of oil equivalent during the applicable semiannual
interest period, up to a maximum of 10% additional interest per year.
Additionally, upon an event of default occurring under the Standby Loan,
interest will be payable in cash, unless otherwise required to be paid-in-kind,
at a rate equal to 2% per year over the applicable interest rate. The Actual
Price will be calculated over a six-month measurement period ending on the date
two months before the applicable interest payment date. Interest payments under
the Standby Loan may be paid-in-kind subject to the requirements of the Credit
Agreement.
Payment of the Standby Loan Notes will be subordinate to payment in full in
cash of all obligations arising in connection with the Credit Facility. Subject
to a final agreement between the Standby Lenders and Chase, after the initial
12-month period, cash interest payments may be made only to the extent by which
EBITDAX on a trailing four-quarter basis exceed $65 million. The Credit
Agreement may also prohibit the Reorganized Parent Company from making any cash
interest payments on the Standby Loan indebtedness if the outstanding
indebtedness, under both the Credit Facility and the Standby Loan, exceeds 3.75
times the EBITDAX for the trailing four quarters. The Reorganized Parent Company
may prepay the Standby Loan Notes at the face amount, in whole or in part, in
minimum denominations of $1,000,000, plus either (1) a standard make-whole
payment with a discount rate of 300 basis points over the Treasury Rate for the
first four years, or (2) beginning in the fifth year, a premium equal to
one-half the 15% base interest rate, declining annually and ratably to par. The
Standby Loan Notes may only be paid if either (1) all obligations under the
Credit Facility have been paid in full in cash or (2) the Required Lenders under
the Credit Facility consent to the payment.
If the Standby Loan Notes are issued, the Standby Lenders will receive the
Standby Shares. If $70 million in principal amount of the Standby Loan Notes are
issued, the Standby Lenders will receive 14% of the fully diluted New Common
Stock as of the Effective Date. The amount of Standby Shares issued will be
adjusted ratably according to the actual amount of Standby Loan Notes issued.
The Standby Shares issued to the Standby Lenders will be in addition to the
shares of New Common Stock issued to holders of Existing Bonds, shareholders of
the Parent Company and persons participating in the Rights Offering or the
Private Placement. See "The New Debt and Securities -- Dilution" for an
illustration of the dilution of the New Common Stock.
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F. OTHER PROVISIONS OF THE PLAN
1. RELATIONSHIP BETWEEN THE RIGHTS OFFERING, THE PRIVATE PLACEMENT AND THE
STANDBY LOAN
a. Purposes: Although the Standby Loan has been arranged to ensure
that the Reorganized Parent Company is able to meet its obligations under
the Plan, the Reorganized Parent Company's financial position would be
improved if it does not issue the Standby Loan Notes. The Rights Offering
(or, if applicable, the Private Placement) is being made in an effort to
raise up to $90 million in new capital investment in the Reorganized Parent
Company and to avoid burdening the Reorganized Parent Company with the
interest payments and fees required under the Standby Loan.
b. Timing: Offers to Rights Offering Record Holders or third-party
investors under the Rights Offering will commence before the Confirmation
Hearing on March 15, 2000. In connection with the Rights Offering, the
Parent Company has filed a registration statement with the SEC as soon as
possible after approval of this Disclosure Statement. The purpose of the
registration statement is to register the rights to purchase shares of New
Common Stock and to register the shares of New Common Stock that will be
offered under the Rights Offering. The Parent Company paid a filing fee of
$23,760 to the SEC in conjunction with the filing of the registration
statement and other associated expenses in conjunction with the printing
and mailing of the related prospectus. If the registration statement is
declared effective by the SEC, the Rights Offering will be made pursuant to
a prospectus that will be distributed to the Rights Offering Record
Holders. The Rights Offering Record Holders will have at least five days
from the date of distribution of the prospectus (the "Rights Offering
Period") to determine whether to participate in the Rights Offering. The
Rights Offering Period will terminate before the commencement of the
Confirmation Hearing for the Plan unless extended by the Parent Company in
its sole discretion; however, the Rights Offering Period will not extend
beyond the Effective Date. Upon termination of the Rights Offering Period,
the Parent Company will be able to assess the amount of new investment
raised under the Rights Offering and whether and to what extent to offer
unsubscribed shares under the Rights Offering to other parties and to issue
Standby Loan Notes. If the SEC does not declare the registration statement
effective by a date sufficiently early to give the Parent Company, in its
sole discretion, adequate time to arrange and complete the Rights Offering,
the Parent Company will, in its sole discretion, discontinue the Rights
Offering and proceed with the Private Placement.
c. Related Risks: There can be no assurance that the registration
statement filed with the SEC in connection with the Right Offering will be
declared effective sufficiently early to permit the Parent Company to
arrange and complete the Rights Offering. Whether the Company proceeds with
the Rights Offering or the Private Placement, there can be no assurance
that the Rights Offering or the Private Placement will be successful or
that the Reorganized Parent Company will not need to issue up to $90
million in Standby Loan Notes. The financial condition of the Reorganized
Parent Company after issuing the Standby Loan Notes should be considered
when determining whether to vote to accept or reject the Plan.
2. OVERVIEW OF REORGANIZED DEBTORS
a. Reorganized Debtors: From and after the Effective Date, each of the
Reorganized Debtors will continue in existence as a separate corporate
entity, in accordance with the law applicable in the jurisdiction under
which it was incorporated and pursuant to its charter and bylaws, as
amended. No Reorganized Debtor will be liquidated as a result of the Plan,
and each will continue to engage in the businesses permitted by its charter
and bylaws.
b. Revesting of Assets: Except as otherwise provided in the Plan, the
property and assets of the Debtors' bankruptcy estate will revest in the
Reorganized Debtors on the Effective Date, free and clear of all claims and
equity interests, but subject to the obligations of the Reorganized Debtors
as set forth in the Plan. Commencing on the Effective Date, the Reorganized
Debtors may conduct and change their businesses, without any supervision by
the Bankruptcy Court or the office of the United States Trustee and free of
any restriction imposed on the Debtors by the Bankruptcy Code or by the
Bankruptcy Court during the Chapter 11 case. From and after the Effective
Date, each Reorganized Debtor may use,
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operate and deal with its assets and property without any supervision by,
or permission from, the Bankruptcy Court and free of any restrictions
imposed by the Bankruptcy Code.
c. New Common Stock: The holders of the Existing Bonds will receive
New Common Stock in exchange for allowed Bond Claims. The holders of
Existing Common Stock will receive New Common Stock in exchange for their
Existing Common Stock. Additional shares of the New Common Stock will be
issued pursuant to the Rights Offering or the Private Placement. To the
extent that the Rights Offering or the Private Placement is not fully
subscribed, the Standby Loan Notes will be issued and the Standby Lenders
will receive New Common Stock pursuant to the terms of the Standby Loan
Agreement.
Of the 640,087,800 shares of New Common Stock to be issued and
outstanding on the Effective Date, without giving effect to the Rights
Offering, the Private Placement or any Standby Loan, the holders of the
Existing Bonds will receive 614,484,288 shares and the holders of the
Existing Common Stock will receive 25,603,512 shares. Because the Debtors
cannot predict the degree of success of the Rights Offering or the Private
Placement, the number of shares to be issued as of the Effective Date
cannot be predicted. However, by way of illustration, if all of the shares
offered in the Rights Offering or Private Placement are purchased and no
amounts are borrowed under the Standby Loan, the holders of the Existing
Bonds will receive 614,484,288 shares, the holders of Existing Common Stock
will receive 25,603,512 shares and purchasers under the Rights Offering or
Private Placement will receive 346,153,846 shares. If 50% of the shares are
purchased pursuant to the Rights Offering or the Private Placement and $45
million is borrowed under the Standby Loan, the holders of the Existing
Bonds will receive 614,484,288 shares, the holders of the Existing Common
Stock will receive 25,603,512 shares, purchasers under the Rights Offering
or Private Placement will receive 195,420,437 shares and the Standby
Lenders will receive 82,632,683 shares. If no shares are purchased pursuant
to the Rights Offering or the Private Placement and Standby Notes in the
principal amount of $70 million are issued, the holders of the Existing
Bonds will receive 614,484,288 shares, the holders of the Existing Common
Stock will receive 25,603,512 shares and the Standby Lenders will receive
14% of the fully diluted New Common Stock, which will be 104,200,340
shares. See the New Common Stock Table in Section II.D.
From and after the Effective Date, the Reorganized Debtors reserve the
right to reserve additional shares for issuance, to authorize the issuance
of previously authorized but unissued shares, and to change the status of
previously reserved shares of New Common Stock. The New Common Stock will
have a par value of $0.01 per share. The New Common Stock will have rights
with respect to dividends, liquidation, voting and other matters as will be
set forth in the Amended and Restated Articles of Incorporation of the
Reorganized Parent Company and as provided under applicable law. On the
Effective Date, the Existing Common Stock will cease to exist, and any
stock certificates representing shares of the Existing Common Stock will be
void and of no effect. The Reorganized Parent Company will issue
certificates representing the New Common Stock and take all other actions
necessary to effect the issuance of the New Common Stock pursuant to the
Plan. The Reorganized Parent Company may effect a reverse stock split after
the Effective Date to proportionately reduce the number of authorized and
outstanding shares; this measure would help the Reorganized Parent Company
satisfy Nasdaq listing requirements.
d. Directors and Officers: The directors and officers of the Debtors
are identified in Section XII.C. below. The Debtors expect these to be
their directors and officers on and immediately after the Effective Date,
subject to the following provisions of this paragraph. For the first year
after the Effective Date, the board of directors of the Reorganized Parent
Company will consist of seven members. Four members of the board of
directors will be nominated by the Principal Bondholders. One member of the
board of directors will be selected by the post-Effective Date board of
directors from the Debtors' post-Effective Date management. Two members of
the board of directors will be selected by the entities whose funding is
used on the Effective Date (whether under the Standby Loan or some
alternative source of funding) based upon their relative contributions of
capital. The identities of the board members for the one-year period after
the Effective Date have not yet been determined. In compliance with Section
1125(a)(5) of the Bankruptcy Code, if the identities of the current
directors and officers of the Parent Company change, the Debtors will
supply the names of the directors and officers of the Reorganized Parent
Company at the
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Confirmation Hearing. On the Effective Date, the Reorganized Parent Company
will enter into a shareholders' agreement with the Principal Bondholders to
govern their rights to nominate directors. The form of shareholders'
agreement will be filed with the Bankruptcy Court by March 1, 2000.
Thereafter, the Debtors will provide a copy of the form of shareholders'
agreement to any party in interest who requests it in writing. Written
requests should be sent to the Parent Company at 14785 Preston Road, Suite
860, Dallas, Texas 75240 to the attention of Ms. Anne Marie O'Gorman.
e. Charter and Bylaws: The charter and bylaws of each Reorganized
Debtor will be amended as necessary to satisfy the provisions of the Plan
and Section 1123(a)(6) of the Bankruptcy Code. The forms of the amended and
restated articles of incorporation of the Reorganized Parent Company and
the amended and restated bylaws will be filed with the Bankruptcy Court by
March 1, 2000. Thereafter, the Debtors will provide copies of the forms of
amended and restated articles of incorporation and the amended and restated
bylaws to any party in interest who requests them in writing. Written
requests should be sent to the Parent Company at 14785 Preston Road, Suite
860, Dallas, Texas 75240 to the attention of Ms. Anne Marie O'Gorman.
The Plan provides for certain amendments to the Parent Company's
existing articles of incorporation. Those amendments will be effected by
filing with the Secretary of State of the State of Texas amended and
restated articles of incorporation of the Reorganized Parent Company.
Currently, the articles of incorporation of the Parent Company permit the
holders of the Existing Common Stock to cumulate their votes at each
election of directors by giving one candidate for director as many votes as
the number of directors to be elected multiplied by the voting
shareholder's number of shares, or by distributing the voting shareholder's
votes on the same principle among any number of those candidates. Under the
Plan, the articles of incorporation of the Reorganized Parent Company will
be amended to expressly prohibit cumulative voting by the shareholders at
elections of directors. In addition, in accordance with Section 1123(a)(6)
of the Bankruptcy Code, the amended and restated articles of incorporation
of the Reorganized Parent Company, as well as the amended and restated
charter documents of each of the other Reorganized Debtors, will prohibit
the issuance by each Reorganized Debtor of any shares of non-voting equity
securities. The shares of common stock resulting after the effectiveness of
the amended and restated articles of incorporation of the Reorganized
Parent Company are referred to in this Disclosure Statement as the New
Common Stock. The amended and restated articles of incorporation of the
Reorganized Parent Company and the amended and restated charters of each of
the other Reorganized Debtors will become effective on the Effective Date.
The bylaws of the Parent Company will be amended to provide that board
approval of certain transactions will require the vote of at least 5 of the
7 members of the Reorganized Parent Company's board of directors. Those
transactions include any sale of assets of the Reorganized Parent Company
having a value of more than $10 million and any merger or other combination
of the Reorganized Parent Company with another entity. All other matters
requiring board approval will require the approval of a majority of the
board members present at a meeting at which a quorum is constituted or the
unanimous written consent of the board members. The other Debtors do not
currently expect to make any substantive changes to their bylaws as a
result of the confirmation of the Plan.
f. Registration Rights: On the Effective Date, the Reorganized Parent
Company will enter into a registration rights agreement with the Principal
Bondholders and other parties under which the shares of New Common Stock
issued to them on the Effective Date would be registered under federal
securities laws under prescribed circumstances. The form of the
registration rights agreement will be filed with the Bankruptcy Court by
March 1, 2000. Thereafter, the Debtors will provide a copy of the form of
registration rights agreement to any party in interest who requests it in
writing. Written requests should be sent to the Parent Company at 14785
Preston Road, Suite 860, Dallas, Texas 75240 to the attention of Ms. Anne
Marie O'Gorman.
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3. EXECUTORY CONTRACTS AND UNEXPIRED LEASES
a. Assumption of Executory Contracts and Unexpired Leases: As of the
Effective Date, all executory contracts and unexpired leases of the Debtors
(as set forth in the Debtors' Schedules filed by the Debtors and as
specifically described in this Disclosure Statement) not listed or
otherwise described on SCHEDULE A attached to this Disclosure Statement
(the "Rejected Agreements") will be assumed by the Debtors in accordance
with Section 365 of the Bankruptcy Code. The Debtors and the Official
Committee of Unsecured Creditors will agree by March 1, 2000 on an amended
schedule of executory contracts and unexpired leases which will be assumed
pursuant to the Plan. Unless otherwise agreed by the Debtors and the other
parties to an executory contract or unexpired lease assumed by the Debtors,
(i) all cure payments that are required by Section 365(b)(1) of the
Bankruptcy Code will be made on the Effective Date or promptly after the
Effective Date, and (ii) any dispute regarding the amount or timing of any
cure payments, the ability of the Reorganized Debtors to provide adequate
assurance of future performance, or any other matter pertaining to
assumption, will be resolved by the Bankruptcy Court, and the Reorganized
Debtors will make those cure payments, if any, or provide such assurance as
may be required by the order resolving the dispute on the terms and
conditions of the order. The Debtors believe they are current with their
obligations under all executory contracts and unexpired leases and
therefore the assumption of them will not result in the payment of any cure
amounts that might otherwise be due and payable. Any rights of non-Debtor
parties to executory contracts and unexpired leases to pursue claims for
payment of cure amounts are preserved.
The agreements assumed by the Debtors include amended and restated
employment agreements for key employees of the Parent Company. These
agreements will be amended and restated as of the Effective Date. The
Debtors and the Official Unsecured Creditors Committee will agree on the
changes to be made in the amended employment agreements by March 1, 2000,
or such later date that the Debtors and the Official Unsecured Creditors
Committee agree to, and will file these amended agreements with the
Bankruptcy Court. If an employee is requested by the Official Committee of
Unsecured Creditors to execute and deliver an amended and restated
employment agreement and refuses to do so, that employee's existing
employment agreement will be rejected under the Plan. After the Effective
Date, the Debtors will undertake such a downsizing and severance plan as
their management and boards of directors then deem appropriate.
Among the executory contracts the Debtors will assume is a contract
with Alan Edgar, a director of the Parent Company (the "Edgar Contract").
The Edgar Contract provides for Mr. Edgar to receive a percentage of the
net proceeds received by the Parent Company from the Hicks Muse Lawsuit up
to a maximum of $5.75 million (see discussion of the Hicks Muse Lawsuit in
Section VII.E.1.), in consideration of Mr. Edgar's extensive and ongoing
involvement in working with special litigation counsel for the Parent
Company in prosecuting the Hicks Muse Lawsuit. The Parent Company believes
Mr. Edgar's continued active involvement in the Hicks Muse Lawsuit is
critical and therefore assuming the Edgar Contract is in the best interests
of the Debtors and their estates.
The Debtors will also assume any existing indemnity agreements with
its directors and officers.
b. Corporate Indemnification Obligations and Insurance Policies: The
obligations of the Debtors pursuant to their articles of incorporation (or
analogous documents), bylaws or applicable state law to indemnify the
directors and officers who served as directors and officers of the Debtors
before and after the Petition Date against any obligations based on conduct
or transactions that occurred while they were directors and officers before
or after the Petition Date will continue after the Confirmation Date. On
the Effective Date the Reorganized Parent Company will purchase (i) a new
director and officer insurance policy covering the post-Effective Date
directors and officers and (ii) a three-year tail insurance policy on
existing director and officer insurance policies, if it can be purchased
for no more than $300,000, or take such other action concerning the
purchase of tail insurance as the board of directors of the Reorganized
Parent Company believes is reasonable.
c. Rejection of Certain Executory Contracts and Unexpired Leases: All
executory contracts and unexpired leases of the Debtors listed on SCHEDULE
A as Rejected Agreements, unless the subject of a
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<PAGE> 34
motion to assume pending on the date of the Confirmation Order (the
"Confirmation Date"), will be rejected in accordance with Section 365 of
the Bankruptcy Code.
d. Claims Based on Rejection of Executory Contracts and Unexpired
Leases: All proofs of claim with respect to claims arising from the
rejection of an executory contract or unexpired lease will be filed with
the Bankruptcy Court within 30 days after the earlier of (i) the date of
entry of an order of the Bankruptcy Court approving the rejection or (ii)
the Effective Date. Any claims not filed within the applicable time period
will be forever barred from assertion against the Debtors, their estates or
their properties.
e. Treatment of the Existing Bond Indenture: As of the Effective Date,
except to the extent provided otherwise in the Plan, all notes held by
holders of Bond Claims, and all agreements, instruments and other documents
evidencing the Existing Bonds and the rights of the holders of Bond Claims,
will be automatically canceled, extinguished and void (all without further
action by any person); all obligations of any person under those
instruments and agreements will be fully and finally satisfied and
released; and the obligations of the Debtors under those instruments and
agreements will be discharged. On the Effective Date, except to the extent
provided otherwise in the Plan, any indenture relating to any of the
foregoing, including the Existing Bond Indenture, will be canceled, and the
obligations of the Debtors thereunder, except for the obligation to
indemnify the Indenture Trustee, will be discharged; however, the Existing
Bond Indenture and other agreements that govern the rights of a holder of a
claim that is administered by the Indenture Trustee, an agent or servicer
will continue in effect solely for the purposes of (i) allowing the
Indenture Trustee, agent or servicer to take any action necessary to effect
the Plan, including making distributions to be made on account of the
holders of Existing Bonds under the Plan and (ii) permitting the Indenture
Trustee, agent or servicer to maintain any rights or liens it may have for
reasonable fees, costs and expenses under the Exiting Bond Indenture. Upon
payment in full of the reasonable fees and expenses of the Indenture
Trustee, the rights of the Indenture Trustee will terminate.
4. EFFECT OF REJECTION BY ONE OR MORE CLASSES OF CLAIMS
a. Impaired Classes to Vote: Each impaired class of claims and
interests will be entitled to vote separately to accept or reject the Plan.
A holder of a Disputed Claim (as defined in Section VI.F.5.c. below) that
has not been temporarily allowed for purposes of voting on the Plan may
vote that claim in an amount equal to the portion, if any, of the claim
shown as fixed, liquidated and undisputed in the Debtors' Schedules.
b. Acceptance by Class of Creditors: A class will have accepted the
Plan if the Plan is accepted by at least two-thirds in amount and more than
one-half in number of the allowed claims or interests of the class actually
voting on the Plan.
c. Cramdown: If any impaired class fails to accept the Plan in
accordance with Section 1129(a) of the Bankruptcy Code, the Debtors reserve
the right to request the Bankruptcy Court to confirm the Plan in accordance
with the provisions of Section 1129(b) of the Bankruptcy Code.
5. PROVISIONS FOR RESOLUTION AND TREATMENT OF PREFERENCES, FRAUDULENT
CONVEYANCES AND DISPUTED CLAIMS
a. Preferences and Fraudulent Conveyances: Under the Plan, pursuant to
Section 1123(b)(3) of the Bankruptcy Code, the Reorganized Debtors will
retain, with the exclusive right to enforce in their sole discretion, any
and all causes of action of the Debtors, including all causes of action
that the Debtors own under Section 541 of the Bankruptcy Code or similar
state laws or that may exist under Sections 510, 544 through 550 and 553 of
the Bankruptcy Code or under similar state laws. Because the Debtors have
been balance sheet solvent at all times during the year leading up to the
Petition Date, the Debtors do not expect to bring any preference or
fraudulent conveyance causes of action.
b. Objections to Claims: The Debtors will have the sole authority to
object and contest the allowance of any claims filed with the Bankruptcy
Court within 90 days after the Effective Date. Claims listed as disputed,
contingent or unliquidated on the Debtors' Schedules are considered
contested claims,
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<PAGE> 35
except claims otherwise treated by the Plan or previously allowed or
disallowed by final order of the Bankruptcy Court.
c. Disputed Claims Reserve: The distributions reserved for the holders
of Disputed Claims will be held in trust by the Debtors for the benefit of
the holders of Disputed Claims pursuant to the Plan (the "Disputed Claims
Reserve"). The Disputed Claims Reserve will be held in trust by the Debtors
for the benefit of the holders of Disputed Claims (pending a determination
of the Disputed Claims). A "Disputed Claim" is a claim against a Debtor (i)
as to which an objection has been filed on or before the deadline for
objecting to a claim by the Debtors or any party in interest and which
objection has not been withdrawn or resolved by entry of a final order of
the Bankruptcy Court, (ii) that has been asserted in an amount greater than
that listed in the Debtors' Schedules as liquidated and not disputed or
contingent, or (iii) that the Debtors' Schedules list as contingent,
unliquidated or disputed. When a Disputed Claim becomes an allowed claim,
the distributions allowed for the allowed claim will be released from the
Disputed Claims Reserve and delivered to the holder of the allowed claim.
If a Disputed Claim is disallowed, the distributions provided for the Claim
will be released to the Reorganized Debtors for use in their business
operations.
d. Unclaimed Distributions: Distributions to be made under the Plan to
claimants holding allowed claims will be made by the Reorganized Debtors by
first class, United States mail, postage prepaid to (i) the latest mailing
address set forth in a proof of claim filed with the Bankruptcy Court by or
on behalf of the claimant or (ii) if a proof of claim has not been timely
filed, the mailing address set forth in the Debtors' Schedules filed by the
Debtors. The Reorganized Debtors will not be required to make any other
effort to locate or ascertain the address of the holder of any claim.
The Debtors have included in the Plan a provision requiring the
Bondholder Depositary and the Shareholder Depositary who are charged with
making distributions to the holders of Existing Bonds and holders of
Existing Common Stock, respectively, to advise the Reorganized Debtors from
time to time of the identity of the persons who are entitled to unclaimed
distributions in respect of the Existing Bonds or Existing Common Stock.
Based on that advice, the Reorganized Debtors will publish, on the second,
third and fourth anniversaries of the Effective Date, lists of persons,
including holders of Existing Bonds and holders of Existing Common Stock
who are entitled to unclaimed distributions.
If any person entitled to receive a distribution from the Reorganized
Debtors under the Plan does not come forward to collect a distribution, it
will be retained by the Reorganized Debtors in the Disputed Claims Reserve
for the benefit of that person. If a person communicates with the
Reorganized Debtor within five years of the Effective Date, the
distribution net of any applicable federal and state taxes, will be paid or
distributed to that person, without interest. If a person does not
communicate with the Reorganized Debtors within five years of the Effective
Date, that person's distribution and any interest thereon will become the
property of the Reorganized Debtors, and the affected claimant will have no
further rights against the Debtors or the Reorganized Debtors.
6. CLAIMS BELONGING TO THE ESTATE AND DISCHARGE OF CLAIMS AGAINST THE
DEBTORS
a. Causes of Action: All claims recoverable under Section 550 of the
Bankruptcy Code, including all claims owned by the Debtors pursuant to
Section 541 of the Bankruptcy Code or similar state laws, all claims
against third parties on account of any indebtedness, and all other claims
owed to or in favor of the Debtors, to the extent not specifically
compromised and released pursuant to the Plan or an agreement referred to
and incorporated in the Plan, will be preserved and retained for
enforcement by the Reorganized Debtors after the Effective Date.
b. Legally Binding Effect; Discharge of Claims and Interests: The
provisions of the Plan will (i) bind all creditors and equity interest
holders, whether or not they accept the Plan, and (ii) discharge the
Debtors from all debts that arose before the Petition Date. In addition,
the distributions of cash and securities provided for under the Plan will
be in exchange for and in complete satisfaction, discharge and release of
all claims against and interests in the Debtors or any of its assets or
properties, including any claim or interest accruing after the Petition
Date and before the Effective Date. On and after the
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<PAGE> 36
Effective Date, all holders of impaired claims and interests will be
precluded from asserting any claim against the Reorganized Debtors or its
assets or properties based on any transaction or other activity that
occurred before the Petition Date. The distributions provided for creditors
and equity interest holders will not be subject to any claim by another
creditor or equity interest holder by reason of an assertion of a
contractual right of subordination.
7. RETENTION OF JURISDICTION
a. Jurisdiction: Until this Chapter 11 case is closed, the Bankruptcy
Court will retain such jurisdiction as is legally permissible, including
jurisdiction necessary to insure that the purpose and intent of the Plan
are carried out and to hear and determine all claims that could have been
brought before the entry of the Confirmation Order. The Bankruptcy Court
will retain jurisdiction to hear and determine all claims against the
Debtors and to enforce all causes of action that may exist on behalf of the
Debtors. Nothing contained in the Plan will prevent the Reorganized Debtors
from taking such action as may be necessary in the enforcement of any cause
of action that may exist on behalf of the Debtors and that may not have
been enforced or prosecuted by the Debtors.
b. Examination of Claims: After the Confirmation Date, the Bankruptcy
Court will further retain jurisdiction to decide disputes concerning the
classification and allowance of the claim of any creditor and the
re-examination of claims that have been allowed for the purposes of voting,
and to determine such objections as may be filed to creditors' claims. The
failure by the Debtors to object to, or to examine, any claim for the
purposes of voting, will not be deemed a waiver of the right of the Debtors
or the Reorganized Debtors to object to, or to re-examine, the claim, in
whole or in part.
c. Determination of Disputes: The Bankruptcy Court also will retain
jurisdiction after the Confirmation Date to determine all questions and
disputes regarding title to the assets of the Debtors' estate, disputes
concerning the allowance of claims, and all causes of action,
controversies, disputes or conflicts, whether or not subject to any pending
action as of the Confirmation Date, for the Reorganized Debtors to recover
assets pursuant to the provisions of the Bankruptcy Code.
d. Additional Purposes: The Bankruptcy Court will retain jurisdiction
for the following additional purposes after the Effective Date:
(i) to modify the Plan after confirmation pursuant to the
Bankruptcy Rules and the Bankruptcy Code;
(ii) to assure the performance by the Reorganized Debtors of their
obligations to make distributions under the Plan and to issue New Common
Stock under the Plan;
(iii) to enforce and interpret the terms and conditions of the
Plan;
(iv) to adjudicate matters arising in these bankruptcy cases,
including matters relating to the formulation and consummation of the
Plan;
(v) to enter such orders, including injunctions, as are necessary
to enforce the title, rights and powers of the Reorganized Debtors and
to impose such limitations, restrictions, terms and conditions on title,
rights and powers as the Bankruptcy Court may deem necessary;
(vi) to enter an order terminating these Chapter 11 cases;
(vii) to correct any defect, cure any omission or reconcile any
inconsistency in the Plan or the order of confirmation as may be
necessary to carry out the purposes and intent of the Plan;
(viii) to allow applications for fees and expenses pursuant to
Section 503(b) of the Bankruptcy Code; and
(ix) to decide issues concerning federal tax reporting and
withholding that arise in connection with the confirmation or
consummation of the Plan.
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<PAGE> 37
8. DEFAULT UNDER THE PLAN
a. Asserting Default: If the Debtors default under the provisions of
the Plan (as opposed to default under the documentation executed in
implementing the terms of the Plan, which documents will provide
independent bases for relief), any creditor or party in interest desiring
to assert the default may provide the Debtors with written notice of the
alleged default.
b. Curing Default: The Debtors will have 20 days from receipt of the
written notice in which to cure an alleged default. The notice must be
delivered by United States certified mail, postage prepaid, return receipt
requested, addressed to the president of the Reorganized Parent Company at
14785 Preston Road, Suite 860, Dallas, Texas 75240, and to counsel for the
Debtors, Michael W. Anglin, Fulbright & Jaworski L.L.P., 2200 Ross Avenue,
Suite 2800, Dallas, Texas 75201. If the default is not cured, any creditor
or party in interest may file with the Bankruptcy Court and serve on
counsel for the Debtors a motion to compel compliance with the applicable
provision of the Plan. The Bankruptcy Court, on finding a material default,
will issue such orders as are appropriate compelling compliance with the
pertinent provisions of the Plan.
9. MISCELLANEOUS PROVISIONS
a. Termination of Committees: On the Effective Date, all committees in
the Debtors' Chapter 11 case will be terminated except to the extent needed
to participate in any appeals related to the Plan.
b. Compliance with Tax Requirements: In connection with the Plan, the
Debtors will comply with all withholding and reporting requirements imposed
by federal, state and local taxing authorities, and distributions under the
Plan will be subject to those withholding and reporting requirements.
c. Amendment of the Plan: The Plan may be amended by the Debtors
before or after the Effective Date as provided in Section 1127 of the
Bankruptcy Code.
d. Revocation of the Plan: The Debtors have reserved the right to
revoke and withdraw the Plan at any time before the Confirmation Date.
e. Effect of Withdrawal or Revocation: If the Debtors revoke or
withdraw the Plan before the Confirmation Date, or if the Confirmation Date
or the Effective Date does not occur, then the Plan will be null and void.
In that event, nothing contained in the Plan or in this Disclosure
Statement will be deemed to constitute a waiver or release of any claims by
or against the Debtors or any other person, or to prejudice in any manner
the rights of the Debtors or any person in any further proceedings
involving the Debtors.
f. Due Authorization By Creditors: Each creditor who elects to
participate in the distributions provided for in the Plan warrants that the
creditor is authorized to accept in consideration of the claim against the
Debtors the distributions provided for in the Plan and that there are no
outstanding commitments, agreements or understandings, express or implied,
that may or can in any way defeat or modify the rights conveyed or
obligations undertaken by the creditor under the Plan.
g. Filing of Additional Documentation: On or before the Effective
Date, the Debtors will file with the Bankruptcy Court such agreements and
other documents as may be necessary or appropriate to effect and further
evidence the terms and conditions of the Plan.
h. Implementation: The Debtors are authorized to take all necessary
steps and perform all necessary acts to consummate the terms and conditions
of the Plan.
i. Ratification: The Confirmation Order will ratify all transactions
effected by the Debtors during the pendency of the Chapter 11 case.
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<PAGE> 38
j. Limitation of Liability in Connection with the Plan, Disclosure
Statement and Related Documents and Related Indemnity:
(i) The Plan Participants (as defined below) will neither have nor
incur any liability to any entity for any act taken or omitted to be
taken in connection with or related to the formulation, preparation,
dissemination, implementation, confirmation or consummation of the Plan,
the Disclosure Statement, the Confirmation Order or any contract,
instrument, release or other agreement or document created or entered
into, or any other act taken or omitted to be taken in connection with
the Plan, the Disclosure Statement or the Confirmation Order, including
solicitation of acceptances of the Plan; however, the provisions of this
Section VI.F.9.j.i will have no effect on the liability of any Plan
Participant that would otherwise result from any such act or omission to
the extent that such act or omission is determined in a final order to
have constituted gross negligence or willful misconduct. "Plan
Participants" means the Debtors, the Reorganized Debtors, committees of
creditors and members thereof, the Indenture Trustee under the Existing
Bond Indenture and directors, officers, employees and advising
professionals of all of the preceding.
(ii) On and after the Effective Date, the Reorganized Parent
Company will indemnify each Plan Participant, hold each Plan Participant
harmless from, and reimburse each Plan Participant for, any and all
losses, costs, expenses (including attorneys' fees and expenses),
liabilities and damages sustained by a Plan Participant arising from any
liability described in this Section VI.F.9.j.
G. RELATED DOCUMENTS
The Debtors have reached an agreement with respect to the general terms of
a number of documents to be executed to consummate the transactions described in
the Plan. It is anticipated that the final terms and forms of those documents
will be negotiated and agreed to by March 1, 2000. These documents include:
- Promissory Note to be issued to holders of allowed Priority Tax Claims
- Credit Agreement
- Standby Loan Agreement
- Amended and restated employment agreements
- Amended and restated articles of incorporation of Coho Energy, Inc.
- Amended and restated bylaws of Coho Energy, Inc.
- Registration rights agreement
- Shareholders' agreement
Forms of these documents will be filed with the Bankruptcy Court by March 1,
2000. Thereafter, the Debtors will provide a copy of the form of any of these
documents to any party in interest who requests it in writing. Written requests
should be sent to the Parent Company at 14785 Preston Road, Suite 860, Dallas,
Texas 75240, Attention: Ms. Anne Marie O'Gorman.
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<PAGE> 39
VII.
FEASIBILITY OF THE PLAN
THE FORECASTED FINANCIAL RESULTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE
BASED ON ESTIMATES AND ASSUMPTIONS THAT ARE INHERENTLY UNCERTAIN AND, THOUGH
CONSIDERED REASONABLE BY THE DEBTORS, ARE SUBJECT TO SIGNIFICANT BUSINESS,
ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE
DIFFICULT TO PREDICT AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE DEBTORS.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE FORECASTED RESULTS WILL BE
REALIZED AND THAT ACTUAL RESULTS WILL NOT BE SIGNIFICANTLY HIGHER OR LOWER THAN
FORECASTED. THE DEBTORS MAY REVISE THESE ESTIMATES AND ASSUMPTIONS AT OR BEFORE
THE CONFIRMATION HEARING ON THE PLAN.
A. BUSINESS PLAN, PROJECTIONS AND FEASIBILITY
General. As a condition to confirmation of the Plan, Section 1129 of the
Bankruptcy Code requires that the Bankruptcy Court determine that confirmation
is not likely to be followed by the liquidation or need for further financial
reorganization of the Debtors. In connection with the development of the Plan,
the Debtors believe that they will have the ability to meet future obligations
under the Plan with sufficient liquidity and that they will have sufficient
capital resources to carry out their business strategy.
In this regard, the Debtors have prepared certain estimates and projections
of their financial position, results of operations, cash flow and certain other
items (the "Projections") for each of the two twelve-month periods following the
Effective Date. The Debtors have also prepared an analysis reflecting that
confirmation of the Plan provides a more attractive recovery for holders of
claims and equity interests than would a liquidation of the Debtors' assets
under Chapter 7 of the Bankruptcy Code. This financial information reflects the
Debtors' judgment as to the information that is significant under the
circumstances. The assumptions that the Company believes to be material are
summarized below.
1. PROJECTED FINANCING TRANSACTIONS
The Projections anticipate that the following financing transactions will
be consummated on the Effective Date of the Plan:
a. All amounts currently outstanding under the Existing Bank Group
Loan Agreement, including accrued interest will be paid.
b. The Reorganized Parent Company will issue up to 346,153,846 shares
of New Common Stock and raise up to $90 million by means of the Rights
Offering or the Private Placement.
c. To the extent that the Rights Offering or Private Placement yield
less than $90 million, the Reorganized Parent Company will borrow up to $70
million under the Standby Loan. If $70 million is borrowed under the
Standby Loan, the Standby Lenders will receive 104,200,340 shares of New
Common Stock representing 14% of the fully diluted New Common Stock.
d. The $150 million (face value) of the Existing Bonds currently
outstanding, and $12 million in pre-petition accrued interest on the
Existing Bonds will be converted into equity in the Reorganized Parent
Company in the form of approximately 614,484,288 shares of New Common
Stock.
e. Priority tax claims will receive five-year promissory notes bearing
interest at a rate of 6% per annum.
f. General unsecured creditors will receive full cash payment payable
in four quarterly installments during the year following the Effective
Date.
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2. SUFFICIENT FUNDS TO CONSUMMATE THE PLAN
The Debtors will have sufficient cash on the Effective Date to consummate
the Plan. See the balance sheets and related notes in Section VII.D. below for
an illustration of the sufficiency of funds under the Plan.
3. PROJECTED OPERATING RESULTS
The Projections were not prepared with a view toward compliance with public
disclosure guidelines of the SEC or the American Institute of Certified Public
Accountants ("AICPA") regarding prospective reporting or generally accepted
accounting principles ("GAAP"). Arthur Andersen LLP, the Parent Company's
independent auditors, has neither examined, reviewed nor compiled the
Projections and, consequently, does not express an opinion or any other form of
assurance with respect to them. The Parent Company believes, however, that the
Projections are presented on a basis consistent with GAAP as applied to the
Parent Company's historical financial statements, including adjustments as
required and an approximation of the impact of Statement of Financial Accounting
Standards ("FAS") 109, "Accounting for Income Taxes." The Projections make
numerous assumptions with respect to industry conditions, the price of crude oil
and natural gas, general business and economic conditions, taxes and other
matters, many of which are beyond the Parent Company's control. Many of the
assumptions used in the Projections are not derived from historical results and
are subject to significant economic and competitive uncertainties. The Parent
Company believes that all of the assumptions used in the Projections are
reasonable; however, the Projections and assumptions are not necessarily
indicative of current values or future performance, which may be significantly
less favorable or more favorable than as set forth below. Although the
Projections represent the Parent Company's best estimate of its future financial
position, results of operations and cash flows for which the Parent Company
believes it had a reasonable basis as of the time of the preparation of the
Projections, after giving effect to the Plan, the Projections are only estimates
and actual results may vary considerably from the Projections. HOLDERS OF CLAIMS
AND EQUITY INTERESTS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
PROJECTIONS.
The Parent Company does not generally publish or make available to the
public projections or forecasts of its anticipated financial position, results
of operations or cash flow. Accordingly, the Parent Company does not anticipate
that it will, and disclaims any obligations to, furnish updated Projections to
holders of claims or equity interests before the Effective Date, or to include
any projections, forecasts or updates in documents required to be filed with the
SEC, or otherwise make such information public in the future (other than as
required by applicable securities laws). The Projections should not be relied on
for any purpose other than in considering whether to accept or reject the Plan.
The Projections should also be read together with information contained in the
Quarterly Reports and the consolidated financial statements of the Parent
Company and related notes included in the Annual Report.
The consummation of the Plan is the primary objective of the Debtors. The
Plan sets forth the means for satisfying claims, including liabilities subject
to compromise, and equity interests in the Reorganized Parent Company. The Plan
will result in, among other things, material dilution of existing security
holders as a result of the issuance of equity securities pursuant to the Rights
Offering or the Private Placement and to the holders of allowed Bond Claims and
the Standby Lenders. The consummation of the Plan will require approval of the
Bankruptcy Court.
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 Debtors or on the
interest of creditors or shareholders. As a result of the bankruptcy filing, all
of the Debtors' liabilities, including certain secured debt, are subject to
compromise and have been classified as short-term obligations.
In the ordinary course of business, the Parent Company makes substantial
capital expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Parent Company has financed its capital
expenditures, debt service and working capital requirements with cash flow from
operations, public offerings of equity, public offerings of debt, asset sales, a
senior credit facility and other financing. Cash flow from operations is highly
sensitive to the prices the Parent Company receives for its oil and natural gas.
An
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<PAGE> 41
extended decline in oil and gas prices could result in less than anticipated
cash flow from operations and reductions in planned capital spending in the
current year and in later years, which could have an adverse effect on the
Parent Company.
Management's plans are to continue to incur capital expenditures with the
goal of increasing crude oil and natural gas production and reserves. The
ability to incur capital expenditures through confirmation of the Plan is
subject to the approval and ongoing supervision of the Bankruptcy Court. There
is no assurance that adequate funds can be obtained on a timely basis or that
the Bankruptcy Court will approve those expenditures during that period.
4. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Parent Company and its subsidiaries after elimination of all intercompany
transactions and balances.
5. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. Actual results could differ from those estimates.
6. OIL AND GAS PROPERTIES
The Parent Company follows the full cost method of accounting for oil and
gas properties. Under this method, all productive and non-productive
exploration, development and acquisition costs incurred for the purpose of
finding oil and gas reserves are capitalized. Such capitalized costs include
lease acquisition, geological and geophysical work; delay rentals; drilling,
completing and equipping oil and gas wells; and internal costs directly
attributable to property acquisition, exploration and development activities. No
gains or losses are recognized on the sale or other disposition of oil and gas
properties, except in unusually significant transactions.
Depreciation, depletion and amortization of oil and gas properties are
computed on a composite unit-of-production method based on estimated proved
reserves. All costs associated with evaluated oil and gas properties, including
an estimate of future development, restoration, dismantlement and abandonment
costs, are included in the computation base. The Parent Company evaluates all
unevaluated oil and gas properties on a quarterly basis to determine if any
impairment has occurred or if the property has been otherwise evaluated. If a
property has been evaluated, or there is determined to be impairment, costs
related to the particular unevaluated properties are reclassified as an
evaluated oil and gas property, and thus subject to amortization if there are
proved reserves associated with the related cost center. Otherwise, such
impairment will be recognized in the period in which it occurs.
Under the SEC's full cost accounting rules, the Parent Company reviews the
carrying value of its oil and gas property each quarter. Under full cost
accounting rules, capitalized costs of oil and gas properties, net of deferred
tax reserves, may not exceed the present value of estimated future net revenues
from proved reserves, discounted at 10%, plus the lower of cost or fair market
value of unproved properties, as adjusted for related tax effects. Application
of this rule generally requires pricing future production at the unescalated oil
and gas prices in effect at the end of each fiscal quarter and requires a
permanent write-down of capitalized costs if the "ceiling" is exceeded, even if
the prices declined for only a short period of time.
During the year ended December 31, 1998 and the nine months ended September
30, 1999, the Parent Company recognized non-cash impairments of recorded oil and
gas assets of $188 million and $5.4 million, respectively, pursuant to these
"ceiling test" provisions.
Substantially all of the Parent Company's producing oil and gas properties
are located in Mississippi and Oklahoma.
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<PAGE> 42
7. DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the terms of the related debt.
Unamortized deferred financing costs were $5.8 million and $5.2 million as of
December 31, 1998 and September 30, 1999, respectively. The Plan contemplates
that the credit facility under the Existing Bond Group Claim will be replaced by
a new credit facility and that the Existing Bonds will be exchanged for New
Common Stock. Consequently, the Projections contemplate the write-off of these
unamortized deferred financing costs.
8. OPERATING FORECAST
The significant operating assumptions used in forecasting the operating
results included in the Projections for the periods presented are as follows:
a. Confirmation of the Plan is effective as of March 31, 2000.
b. Forecasted oil and gas production for the two years following
confirmation is comprised of (i) estimated future production as
reflected in the Parent Company's July 1, 1999 reserve report for
proved developed producing reserves and (ii) new production derived
from the Parent Company's capital expenditure programs, as
specifically selected from identified projects currently scheduled.
c. Revenue projections for all forecasted periods reflect the
application of oil and natural gas pricing assumptions more
conservative than current strip prices as of December 15, 1999 for
oil and natural gas as quoted on the NYMEX, through 2001, adjusted
by appropriate historical regional basis differentials. The
assumption for crude oil and natural gas is a flat NYMEX price of
$18.00 and $2.50, respectively.
Regional basis differentials are applied to the NYMEX benchmark
to derive realized pricing for oil and gas for each of the Company's
two regions. The differentials represent a current average, by
region, for the Company. The differentials are as follows:
<TABLE>
<CAPTION>
MISSISSIPPI OKLAHOMA
----------- --------
<S> <C> <C>
Oil............................................. $4.50* $1.35
Gas............................................. $0.10 $0.10
</TABLE>
--------------------------
* The oil differential for Mississippi is expected to decline over
time to $3.00 as capital is spent on projects that produce light
sweet crude.
The Parent Company intends to enter into a hedge for 8,000 barrels of
oil per day for the two-year period. The forecast estimates a swap
price for the hedge of $19.75.
d. Lease operating costs and production taxes are projected to be
slightly lower than historical levels for proved reserves, and
include incremental costs projected to be incurred when new proved
reserves are brought to production. For future drilling from
existing infrastructure (i.e., specified projects), incremental
costs will be minimal. Estimated expenses to be added on newly
productive properties were based on historical data for comparable
producing properties.
e. Depletion, depreciation and amortization ("DD&A") expenses are
calculated pursuant to the guidelines and requirements of the full
cost method of accounting for oil and gas properties. The DD&A
rates per barrel used are assumed to be recalculated annually,
based on recorded historical costs and estimated quantities of
proved reserves associated with proved properties. DD&A expense
does not anticipate any ceiling test write-down for the periods
presented.
f. General and administrative expenses are forecasted to initially be
substantially comparable to current trends and reflect the
reduction in staff contemplated on the Effective Date.
g. Reorganization expenses reflected represent estimated legal fees,
financial advisory fees, consultant fees and other costs that will
be incurred through confirmation of the Plan.
36
<PAGE> 43
h. Interest expense for the periods presented is calculated based on
the assumptions that the financing transactions contemplated by the
Plan are consummated and that the Existing Bonds are converted to
New Common Stock at the Effective Date. The assumed interest rate
for the Credit Facility is 9%. The assumed interest rate for the
Standby Loan is 15% because the Actual Price assumed does not
exceed $15 per barrel of oil equivalent.
i. Income tax expense for years one and two is estimated at the Parent
Company's effective tax rate. The Parent Company's net operating
loss carryforward position, the Parent Company's high tax basis in
its assets and deductions derived from the Debtors' future capital
programs result in minimal cash taxes actually being paid for those
periods and no deferred tax expense due to the use of net operating
loss carry forwards for which valuation allowances were provided in
historical periods pursuant to FAS 109, "Accounting for Income
Taxes".
j. The Parent Company's business plan includes capital expenditures of
$49.2 million and $61.1 million for year one and year two,
respectively.
The primary source of funding for these annual capital programs is
internally generated cash flow. Limited additional funds required in years one
and two are available under the Credit Facility. Under the Rights Offering or
Private Placement Version, the Reorganized Parent Company borrows an additional
$6 million under the Credit Facility in the first 12-month period following the
Effective Date ("Year 1") and repays $12 million in the second 12-month period
following the Effective Date ("Year 2"). Under the Standby Loan Version, the
Reorganized Parent Company borrows $9 million under the Credit Facility and
increases borrowings under the Standby Loan by $10.5 million (due to the
paid-in-kind interest) in Year 1, and borrows an additional $3 million under the
Credit Facility in Year 2.
The majority of the capital projects scheduled by the Debtors over the
two-year forecast period are discretionary in nature. The Debtors could choose
to significantly reduce future capital spending and use internally generated
cash flow for the repayment of debt obligations. If the Debtors were to choose
to reduce capital spending and reduce debt, a significantly different production
profile and future cash flow profile would result.
The business plan assumes that future finding and development costs will
vary by project. All capital expenditures are based on specifically identified
projects already existing in the Parent Company's asset base.
Under SEC rules, the Parent Company is required to disclose in its Annual
Report on Form 10-K its proved oil and gas reserves, including quantities and
the present value of estimated net revenue discounted at 10% in accordance with
SEC guidelines. This reserve information is prepared by the Parent Company and
reviewed by independent experts. The Parent Company is in the process of
completing its December 31, 1999 reserve report and will disclose the
SEC-required reserve information as soon as practical. This reserve information
will be available before the Confirmation Hearing begins on March 15, 2000.
Based on the Parent Company's knowledge of its draft December 31, 1999
reserve information, the Company does not believe that this reserve information
will materially change the projections the Debtors have included in this
Disclosure Statement.
A summary of the forecasted results of operations for the two twelve-month
periods following the Effective Date is presented below in two different
versions: (a) The Rights Offering or Private Placement Version assumes the Plan
is approved and the Parent Company successfully issues $90 million in New Common
Stock pursuant to the Rights Offering or the Private Placement; (b) the Standby
Loan Version assumes the Plan is approved, no shares are issued under the Rights
Offering or the Private Placement, and the Company borrows $70 million under the
Standby Loan.
37
<PAGE> 44
9. LIQUIDITY AND CAPITAL RESOURCES
The Projections contemplate the consummation of the Credit Agreement and
Standby Loan Agreement. Key assumptions regarding prospective liquidity, capital
resources and capital reinvestment philosophy for the Reorganized Parent
Company, as incorporated in the Projections, are presented below.
a. The Reorganized Parent Company will emerge from Chapter 11 with
approximately $6.5 million and $6.3 million in working capital on
March 31, 2000, with approximately $4.3 million and $4.1 million in
cash on hand under the Rights Offering or Private Placement Version
and the Standby Loan Version, respectively. The Reorganized Parent
Company will also have an estimated $38.0 million and $19.0 million
available under the Credit Facility based on a $210 borrowing base on
the Effective Date under the Rights Offering or Private Placement
Version and the Standby Loan Version, respectively.
b. The Reorganized Parent Company will have the $250 million Credit
Facility with an initial borrowing base set at $210 million, $10
million of which must remain undrawn and available on the Effective
Date. Initial borrowings are projected to be $172.0 million and
$191.0 million under the Rights Offering or Private Placement Version
and the Standby Loan Version, respectively. The Reorganized Parent
Company will maintain a minimum cash balance in the future, with
excess funds being used to reduce borrowings outstanding under the
Credit Facility. The Credit Facility will mature three years after
the Effective Date. The Projections contemplate that the Reorganized
Parent Company will pay in full the remaining amounts outstanding on
that date with a revised Credit Facility.
c. The Reorganized Parent Company's sale of $90 million in New Common
Stock is projected to occur on the Effective Date, with a portion of
the proceeds to be used to repay prepetition amounts outstanding
under the Existing Bank Group Loan Agreement under the Rights
Offering or Private Placement Version. The Reorganized Parent Company
borrowings of $70 million is projected to occur on the Effective
Date, with a portion of the proceeds to be used to repay prepetition
amounts outstanding under the Existing Bank Group Loan Agreement
under the Standby Loan Version.
d. The Projections contemplate that the Reorganized Parent Company will
operate, including making projected capital expenditures, using its
internally generated cash flow and periodic borrowing under the
Credit Facility.
e. The Reorganized Parent Company's capital expenditures for all
post-confirmation periods may ultimately vary significantly due to a
variety of factors, including drilling results, production
performance, oil and gas prices, industry conditions and outlook and
the availability of capital.
38
<PAGE> 45
B. STATEMENTS OF OPERATIONS
The following sets forth the Parent Company's projected results of
operations for the two-year period, based on the assumptions set forth in
"Operating Forecast" above.
1. RIGHTS OFFERING OR PRIVATE PLACEMENT VERSION
<TABLE>
<CAPTION>
12 MONTHS ENDING
MARCH 31
--------------------
YEAR 1 YEAR 2
-------- --------
<S> <C> <C>
PRODUCTION/PRICES
Production (daily barrels of oil equivalent)................ 15,945 21,563
Average Sales Price
Oil ($/barrel)............................................ $ 18.00 $ 18.00
Gas ($/mcf)............................................... $ 2.50 $ 2.50
FINANCIAL RESULTS (in thousands)
Oil and Gas Revenue....................................... $ 93,381 $128,016
-------- --------
Lease Operating Expenses.................................. 21,400 25,496
Production Taxes.......................................... 5,264 7,639
Depletion, Depreciation & Amortization.................... 21,825 29,514
General and Administrative................................ 5,500 5,500
Reorganization Expenses................................... 1,400 --
-------- --------
Operating Income....................................... 37,992 59,867
Interest Expense/Other.................................... (17,917) (17,647)
-------- --------
Income before Tax...................................... 20,075 42,220
Income Tax Expense........................................ -- --
-------- --------
Net Income................................................ $ 20,075 $ 42,220
======== ========
Basic Earnings per Common Share........................... $ 0.02 $ 0.04
======== ========
Capital Expenditures (including internal capitalized
costs)................................................. $ 49,157 $ 61,053
======== ========
</TABLE>
39
<PAGE> 46
2. STANDBY LOAN VERSION
<TABLE>
<CAPTION>
12 MONTHS ENDING
MARCH 31
-------------------
YEAR 1 YEAR 2
-------- --------
<S> <C> <C>
PRODUCTION/PRICES
Production (daily barrels of oil equivalent)................ 15,945 21,563
Average Sales Price
Oil ($/barrel)............................................ $ 18.00 $ 18.00
Gas ($/mcf)............................................... $ 2.50 $ 2.50
FINANCIAL RESULTS (in thousands)
Oil and Gas Revenue....................................... $ 93,381 $128,016
-------- --------
Lease Operating Expenses.................................. $ 21,400 $ 25,496
Production Taxes.......................................... 5,264 7,639
Depletion, Depreciation & Amortization.................... 21,825 29,514
General and Administrative................................ 5,500 5,500
Reorganization Expenses................................... 1,400 --
-------- --------
Operating Income....................................... 37,992 59,867
Interest Expense/Other.................................... (34,757) (36,084)
-------- --------
Income before Tax...................................... 3,235 23,783
Income Tax Expense........................................ -- --
-------- --------
Net Income................................................ $ 3,235 $ 23,783
======== ========
Basic Earnings per Common Share........................... $ 0.00 $ 0.03
======== ========
Capital Expenditures (including internal capitalized
costs)................................................. $ 49,157 $ 61,053
======== ========
</TABLE>
40
<PAGE> 47
C. CASH FLOW STATEMENTS
The following sets forth the Parent Company's projected sources and uses of
cash for the two-year period, based on the statements of operations presented in
Section B above (in thousands):
1. RIGHTS OFFERING OR PRIVATE PLACEMENT VERSION
<TABLE>
<CAPTION>
12 MONTHS ENDING MARCH 31
--------------------------
YEAR 1 YEAR 2
---------- ----------
<S> <C> <C>
Beginning Cash.............................................. $ 4,317 $ 4,317
Sources of Funds:
Net Income.................................................. 20,075 42,220
Adjustments to reconcile net income to cash:
Depletion, Depreciation & Amortization.................... 21,825 29,514
Amortization of debt issue costs.......................... 2,167 2,167
Changes in Working Capital.................................. 142 204
-------- --------
Cash Provided by Operations................................. 44,209 74,105
Net Borrowings on Credit Facility........................... 6,000 --
-------- --------
Total Sources of Funds............................ 50,209 74,105
======== ========
Uses of Funds:
Capital Expenditures...................................... (49,157) (61,053)
Repayments on Promissory Notes............................ (1,052) (1,052)
Net Repayments on Credit Facility......................... -- (12,000)
-------- --------
Total Uses of Funds............................... (50,209) (74,105)
-------- --------
Net change in cash................................ -- --
-------- --------
Ending Cash................................................. $ 4,317 $ 4,317
======== ========
</TABLE>
2. STANDBY LOAN VERSION
<TABLE>
<CAPTION>
12 MONTHS ENDING MARCH 31
--------------------------
YEAR 1 YEAR 2
---------- ----------
<S> <C> <C>
Beginning Cash.............................................. $ 4,117 $ 4,117
Sources of Funds:
Net Income.................................................. 3,235 23,783
Adjustments to reconcile net income to cash
Depletion, Depreciation & Amortization.................... 21,825 29,514
Interest on Standby Loan Paid-In-Kind..................... 10,500 --
Amortization of debt issue costs.......................... 5,874 5,874
Changes in Working Capital.................................. (225) (66)
-------- --------
Cash Provided by Operations................................. 41,209 59,105
Net Borrowings on Credit Facility........................... 9,000 3,000
-------- --------
Total Sources of Funds............................ 50,209 62,105
-------- --------
Uses of Funds:
Capital Expenditures...................................... (49,157) (61,053)
Repayments on Promissory Notes............................ (1,052) (1,052)
-------- --------
Total Uses of Funds............................... (50,209) (62,105)
-------- --------
Net change in cash................................ -- --
-------- --------
Ending Cash................................................. $ 4,117 $ 4,117
======== ========
</TABLE>
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<PAGE> 48
D. PROJECTED BALANCE SHEETS
The following sets forth the Parent Company's projected balance sheets as
of the end of each year in the two-year period, based on the statements of
operations presented in Section B above (in millions).
1. RIGHTS OFFERING OR PRIVATE PLACEMENT VERSION
<TABLE>
<CAPTION>
PROJECTED
FORECASTED ADJUSTMENT FOR AS OF
BALANCE AS OF REFINANCING TRANSACTIONS 3/31/00 12 MONTHS
3/31/00 PRIOR TO UNDER THE PLAN AFTER THE ENDING 3/31
EFFECTIVENESS ------------------------ EFFECTIVENESS -------------------
OF THE PLAN(1) DEBIT CREDIT OF THE PLAN YEAR 1 YEAR 2
---------------- --------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash........................... $ 17,638 $253,050(2) $266,371(3) $ 4,317 $ 4,317 $ 4,317
Accounts Receivable (net)...... 10,700 10,700 12,060 15,235
Other Current Assets........... 1,761 808(4) 953 1,153
-------- -------- -------- -------- -------- --------
Total Current
Assets.............. 30,099 253,050 267,179 15,970 17,430 20,705
Property, Plant and Equipment
(net)........................ 311,436 311,436 338,768 370,307
Other Assets................... 5,543 6,500(5) 5,231(6) 6,812 4,646 2,479
-------- -------- -------- -------- -------- --------
Total Assets.......... $347,078 $259,550 $272,410 $334,218 $360,844 $393,491
======== ======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Existing Bank Group Loan....... $260,150 $260,150(7) $ -- $ -- $ --
Existing Bonds................. 161,094 161,094(8) -- -- --
Accounts Payable & Accrued
Liabilities.................. 14,192 4,737(9) 9,455 11,058 14,537
-------- -------- -------- -------- -------- --------
Total Current
Liabilities......... 435,436 425,981 9,455 11,058 14,537
Credit Facility................ -- -- 172,000(10) 172,000 178,000 166,000
Promissory Notes............... -- -- 4,208(11) 4,208 3,156 2,104
Deferred Taxes................. -- -- -- --
Commitments and
Contingencies................ 3,700 3,700 3,700 3,700
Common Equity (Deficit)........ (92,058) 10,403(12) 247,316(13) 144,855 164,930 207,150
-------- -------- -------- -------- -------- --------
Total Liabilities and
Shareholders'
Equity.............. $347,078 $436,384 $423,524 $334,218 $360,844 $393,491
======== ======== ======== ======== ======== ========
</TABLE>
42
<PAGE> 49
2. STANDBY LOAN VERSION
<TABLE>
<CAPTION>
ADJUSTMENT FOR 12 MONTHS ENDING
FORECASTED REFINANCING TRANSACTIONS PROJECTED 3/31
BALANCE AS OF ------------------------- AS OF -------------------
3/31/00(1) DEBIT CREDIT 3/31/00 YEAR 1 YEAR 2
------------- ---------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash................................ $ 17,638 $251,850(2) $265,371(3) $ 4,117 $ 4,117 $ 4,117
Accounts Receivable (net)........... 10,700 10,700 12,060 15,235
Other Current Assets................ 1,761 808(4) 953 1,053 1,153
-------- -------- -------- -------- -------- --------
Total Current Assets....... 30,099 251,850 266,179 15,770 17,230 20,505
Property, Plant and Equipment
(net)............................. 311,436 311,436 338,768 370,307
Other Assets........................ 5,543 32,449(5) 5,231(6) 32,761 26,888 21,014
-------- -------- -------- -------- -------- --------
Total Assets............... $347,078 $284,299 $271,410 $359,967 $382,886 $411,826
======== ======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Existing Bank Group Loan............ $260,150 $260,150(7) $ -- $ -- $ --
Existing Bonds...................... 161,094 161,094(8) -- -- --
Accounts Payable & Accrued
Liabilities....................... 14,192 4,737(9) 9,455 10,691 13,900
-------- -------- -------- -------- -------- --------
Total Current
Liabilities.............. 435,436 425,981 -- 9,455 10,691 13,900
Credit Facility..................... -- -- 191,000(10) 191,000 200,000 203,000
Standby Loan........................ -- -- 70,000(11) 70,000 80,500 80,500
Promissory Notes.................... -- -- 4,208(12) 4,208 3,156 2,104
Deferred Taxes...................... -- -- -- --
Commitments and Contingencies....... 3,700 3,700 3,700 3,700
Common Equity (Deficit)............. (92,058) 7,147(13) 180,809(14) 81,604 84,839 108,622
-------- -------- -------- -------- -------- --------
Total Liabilities and
Shareholders' Equity..... $347,078 $433,128 $446,017 $359,967 $382,886 $411,826
======== ======== ======== ======== ======== ========
</TABLE>
3. NOTES TO PROJECTED BALANCE SHEETS
a. Rights Offering or Private Placement
(i)
Based on the Debtors' September 30, 1999 unaudited financial
statements and forecasted activity for the months of October 1999
through March 2000.
(ii)
Represents the proceeds from the following financing transactions on
the Effective Date:
(a) $90 million Rights Offering or Private Placement net of
estimated offering costs of $2.5 million.
(b) $172.0 million of borrowings under the Credit Facility net of
estimated debt issue costs of $6.5 million.
(iii)
Represents the payment of the following amounts on the Effective
Date:
(a) $239.6 million repayment of borrowings outstanding under the
Existing Bank Group Loan Agreement.
(b) Payment of $20.6 million in pre- and post-petition accrued
interest under the Existing Bank Group Loan Agreement and an
estimated $2.2 million in administrative fees due under the
Existing Bank Group Loan Agreement.
(c) Payment of $1.5 million in administrative fees for the Debtors.
(d) Payment of $1.5 million in estimated severance payments.
(e) Payment of $1.0 million in fees related to the Standby Loan.
43
<PAGE> 50
(iv)
Represents the use of prepayments made to attorneys and financial
consultants before the petition date to satisfy administrative fees
for the Debtors.
(v)
Represents the estimated debt issue costs associated with the Credit
Facility.
(vi)
Represents the writeoff of unamortized deferred financing costs
attributable to the Bond Claims and the Existing Bank Group Loan
Agreement.
(vii)
Represents the repayment of borrowings outstanding under the
Existing Bank Group Loan Agreement and the payment of the related
pre- and post-petition accrued interest.
(viii)
Represents the conversion of the Existing Bonds, including
prepetition accrued interest, into New Common Stock.
(ix)
Represents a $529,000 reduction in accrued liabilities for
reorganization costs to be paid on the Effective Date and a $4.2
million reclassification of priority tax claims from current
liabilities to long-term promissory notes.
(x)
Represents the establishment of the Credit Facility. The net
proceeds of $87.5 million from the sale of the New Common Stock will
be used to repay a portion of the amounts outstanding under the
Existing Bank Group Loan Agreement, resulting in $172.0 million
being drawn under the Credit Facility on the Effective Date.
(xi)
Represents the long-term portion of the five-year promissory notes
issued in settlement of Priority Tax Claims.
(xii)
Represents the charge to earnings associated with:
(a) $4.0 million of administrative fees associated with the
bankruptcy cases for both the Debtors and the existing Bank
Group.
(b) The write-off of unamortized debt issue costs totaling $1.6
million attributable to the Existing Bank Group Loan Agreement.
(c) $1.5 million of estimated severance payments.
(d) The loss of $2.3 million on the conversion of the Existing Bonds
into New Common Stock related to unamortized debt issue costs.
(e) $1.0 million for the Break Up Fee related to the Standby Loan.
(xiii)
Represents the issuance of New Common Stock associated with:
(a) The conversion of the Existing Bonds, including prepetition
accrued interest, into 614,484,288 shares of the New Common
Stock at an assumed fair market value of approximately $0.26 per
share ($159.8 million).
(b) The sale of up to $90 million in the Rights Offering or the
Private Placement for 346,153,846 shares of New Common Stock at
an assumed fair market value of approximately $0.26 per share
($87.5 million, net of offering costs).
b. Standby Loan
(i)
Based on the Debtors' September 30, 1999 unaudited financial
statements plus forecasted activity for the months of October 1999
through March 2000.
(ii)
Represents the proceeds from the following financing transactions on
the Effective Date:
(a) $70 million of borrowings under the Standby Loan net of
estimated debt issue costs of $2.7 million.
(b) $191.0 million of borrowings under the Credit Facility net of
estimated debt issue costs of $6.5 million.
44
<PAGE> 51
(iii)
Represents the payment of the following amounts on the Effective
Date:
(a) $239.6 million repayment of borrowings outstanding under the
Existing Bank Group Loan Agreement.
(b) Payment of $20.6 million in pre- and post-petition accrued
interest under the Existing Bank Group Loan Agreement and an
estimated $2.2 million in administrative fees due under the
Existing Bank Group Loan Agreement.
(c) Payment of $1.5 million in administrative fees for the Debtors.
(d) Payment of $1.5 million in estimated severance payments.
(iv)
Represents the use of prepayments made to attorneys and financial
consultants before the petition date to satisfy administrative fees
for the Debtor.
(v)
Represents the estimated debt issue costs:
(a) associated with the Credit Facility of $6.5 million.
(b) associated with the Standby Loan of $2.7 million paid in cash.
(c) $23.3 million associated with the 104,200,340 shares of New
Common Stock at an assumed fair market value of approximately
$0.22 per share issued to the Standby Lenders for the Standby
Loan.
(vi)
Represents the write-off of unamortized deferred financing costs
attributable to the Bond Claims and the Existing Bank Group Loan
Agreement.
(vii)
Represents the repayment of borrowings outstanding under the
Existing Bank Group Loan Agreement and the payment of the related
pre- and post-petition accrued interest.
(viii)
Represents the conversion of the Existing Bonds, including
prepetition accrued interest, into New Common Stock.
(ix)
Represents a $529,000 reduction in accrued liabilities for
reorganization costs to be paid on the Effective Date and a $4.2
million reclassification of priority tax claims from current
liabilities to long-term promissory notes.
(x)
Represents the establishment of the Credit Facility. The borrowings,
net of debt issue costs, of $67.3 million under the Standby Loan
will be used to repay a portion of the amounts outstanding under the
Existing Bank Group Loan Agreement, resulting in $191.0 million
being drawn under the Credit Facility on the Effective Date.
(xi)
Represents borrowings under the Standby Loan on the Effective Date.
(xii)
Represents the long-term portion of the five-year promissory notes
issued in settlement of Priority Tax Claims.
(xiii)
Represents the charge to earnings associated with:
(a) $4.0 million of administrative fees associated with the
bankruptcy cases, for both the Debtors and the existing Bank
Group.
(b) The write-off of unamortized debt issue costs totaling $1.6
million under the Existing Bank Group Loan Agreement.
(c) $1.5 million of estimated severance payments.
(xiv)
Represents the issuance of New Common Stock associated with:
(a) the conversion of the Existing Bonds, including prepetition
accrued interest, into 614,484,288 shares of the New Common
Stock at an assumed fair market value of $0.22 per share ($137.4
million) and the related recognition of a gain on extinguishment
45
<PAGE> 52
of debt of $20.1 million because the net book value of the debt
exceeded the assumed fair value of shares issued.
(b) $23.3 million associated with the 104,200,340 shares of New
Common Stock at an assumed fair market value of $0.22 per share
issued to the Standby Lenders for the Standby Loan.
E. EFFECTS OF PENDING LITIGATION
On the Petition Date, the Debtors were parties to pending litigation as
described below.
1. HICKS MUSE LAWSUIT
The Parent Company is the plaintiff in a lawsuit styled Coho Energy, Inc.
v. Hicks, Muse, et al., which was filed in the District Court of Dallas County,
Texas, 68th Judicial District (the "Hicks Muse Lawsuit"). The Hicks Muse Lawsuit
has been removed to the United States Bankruptcy Court for the Northern District
of Texas, Dallas Division, where it currently is pending.
The Hicks Muse Lawsuit alleges, among other things, that Hicks Muse reneged
on a commitment to inject $250 million dollars of equity capital into the Parent
Company, which would have given Hicks Muse control of the Parent Company through
the purchase of 41,666,666 shares of newly issued common stock at $6 per share.
The Hicks Muse Lawsuit further alleges that Hicks Muse waited until after
the shareholders of the Parent Company approved the commitment, then reneged on
the commitment at the last minute to renegotiate the price down to $4 per share
to increase the number of shares that Hicks Muse would have received for the
$250 million. The Hicks Muse Lawsuit also alleges that, thereafter, Hicks Muse
reneged on the new commitment to purchase stock. The Hicks Muse Lawsuit seeks
damages against Hicks Muse in excess of $500,000,000. This description is only a
general description of the Hicks Muse Lawsuit and should not be relied on as
conclusively stating all the alleged facts, claims or circumstances surrounding
the lawsuit. The Debtors are not able to evaluate the recovery they might
receive in the lawsuit and its outcome is contingent on trial or settlement.
2. "NORM" LAWSUITS
Coho Resources, Inc., is a defendant in a number of individual law suits in
Mississippi (the "NORM Lawsuits") which allege environmental damage to property
and personal injury in connection with drilling operations of the company and
its predecessors in Lincoln County, Mississippi (the "Brookhaven Field"). The
cause of the alleged damage is portrayed by plaintiffs as "naturally occurring
radioactive materials" ("NORM") resulting from petroleum mining operations.
Coho's predecessors on the Brookhaven Field were Florabama Associates, Ltd.
("Florabama"), and Chevron Corp. or Chevron USA. Inc. ("Chevron"). Coho is
vigorously defending against these claims. Florabama and Chevron allege claims
for indemnification for any liability they may have to the Brookhaven Field
plaintiffs (the "Plaintiffs"), including claims for monetary and punitive
damages, as well as clean-up costs associated with the properties. The
Plaintiffs, Florabama and Chevron have filed proofs of claim in these bankruptcy
cases. The Debtors have objected to these claims and have requested that they be
disallowed. The Debtors also have requested that these claims be estimated
pursuant to Section 502 of the Bankruptcy Code. A status conference regarding
this objection is scheduled for February 16, 2000. The claims of Chevron are
"unliquidated" (except for a contingent claim in the amount of $2,349,275, which
is subject to a pending appeal) and cannot be quantified at this time for
purposes of assessing the objective feasibility of the Plan. The Florabama claim
is asserted at $3,671,953.33. The claim of the Plaintiffs is alleged to be in
the combined amount of $250,000,000. While the allowance of the claims in those
amounts would render the Plan infeasible, the Debtors believe that these claims
will be resolved or estimated in connection with the bankruptcy cases at a level
no greater than what can be paid out of the Debtors' cash flow under the terms
of the Plan after the Effective Date. Accordingly, these claims and any related
claims do not, in the Debtors' view, render the Plan infeasible.
46
<PAGE> 53
3. STRATTON LAWSUIT
The "Stratton Lawsuit" in Oklahoma involves three wells operated by
Chesapeake Operating Inc. ("Chesapeake"). Debtor Coho Oil & Gas, Inc. maintains
a partial working interest ownership in one well of 2.766927%. Coho Oil & Gas,
Inc. has no interest in a second well, AULD No. 1-34, but is alleged to be
liable for actions taken by Chesapeake at that well. The Stratton Lawsuit arises
out of alleged property damage and possible bodily injury from drilling
operations in and before February 1997. The Debtors believe that any liability
attributed to them in the Stratton Lawsuit is covered by insurance and therefore
will not affect the feasibility of the Plan. Alternatively, the Debtors do not
believe they are liable for the claims asserted in the Stratton Lawsuit.
Accordingly, these claims do not, in the Debtors' view, render the Plan
infeasible.
4. OTHER CASES
Currently, a number of other state court cases are pending against the
Debtors. The Debtors believe that any liabilities attributed to them in these
cases are covered by insurance and therefore, will not effect the feasibility of
the Plan.
5. INSURANCE COVERAGE DISPUTES WITH UNITED NATIONAL INSURANCE COMPANY
INVOLVING PENDING LITIGATION
The Debtors have notified United National Insurance Company ("United
National") of those claims asserted against them in the NORM Lawsuit and the
Stratton Lawsuit. United National has submitted detailed reservations of rights
letters to the Debtors, outlining the grounds upon which coverage will not or
may not be available for the claims included in these lawsuits. United National
has also informed the Debtors about limitations to potential coverage, including
applicable deductibles chargeable to the Debtors. If coverage is pursued by the
Debtors, the disputed coverage issues raised by these lawsuits may require
judicial resolution through declaratory judgment litigation.
a. THE NORM LAWSUITS (Brookhaven Fields)
United National has informed representatives of the Debtors that
United National reserves its rights to decline coverage on grounds that the
Debtors had not adequately disclosed the pending prior suits, including the
NORM litigation, during the underwriting process before the issuance of the
United National insurance policies.
The Debtors have conducted certain operations at particular locations
within the Brookhaven Field since mid-1995. The primary claims in the NORM
Lawsuits arise out of radioactive waste material and alleged contamination
of drinking water aquifers in and around the Brookhaven Field. Operations
at the Brookhaven Field date back into the 1940's.
b. THE STRATTON LAWSUIT
United National maintains that an Extended Insured Endorsement in its
policies operate to limit potential coverage for claims in the Stratton
Lawsuit (if any coverage exists) to the proportionate percentage of the
Debtors' ownership interest applied to the total amount of the Stratton
claims.
c. UNITED NATIONAL POLICIES
United National has issued two primary liability policies and two
umbrella liability policies in effect from June 5, 1998 through June 5,
1999, and June 5, 1999 through June 5, 2000, respectively, subject to
various deductibles and limits.
There are two basic coverage parts in the policies, commercial general
liability and energy industries pollution liability, both of which are
modified by various endorsements included in the policies. The energy
industries pollution liability form is issued on a claims made basis.
d. GENERAL LIABILITY COVERAGE ISSUES
United National has informed the Debtors of its position that
potential coverage is not available for the claims in the NORM Lawsuit and
the Stratton Lawsuit under the general liability provisions of the
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<PAGE> 54
policies. In particular, United National has informed the Debtors that the
lawsuits do not seek damages because of "bodily injury" and "personal
injury" defined in the policies, although the suits include claims for
"property damage". United National has also advised that the lawsuits may
be seeking recovery for damage occurring prior to the issuance of the
United National policies. United National has also informed the Debtors
that the policy exclusions would preclude potential coverage under the
general liability provisions, including, but not limited to, pollution
exclusions, health hazard exclusions, and exclusions applicable to
liability arising from waste disposal sites owned, operated or used by an
insured. Other general liability policy provisions, exclusions and coverage
positions have been outlined and reserved by United National.
e. ENERGY INDUSTRIES POLLUTION LIABILITY COVERAGE ISSUES
United National has also informed the Debtors of its position that the
claims in the NORM Lawsuit and the Stratton Lawsuit also may not be subject
to potential coverage under the energy industries pollution liability
provisions. United National has informed the Debtors that United National
reserves its rights to decline potential coverage under the energy
industries pollution liability provisions of the policies. Grounds to avoid
coverage include the fact that certain lawsuits do not include allegations
of a pollution incident, that any pollution incidents may not have
commenced before the policy retroactive date, that property damage to waste
facilities is excluded, and that bodily injury or property damage arising
out of a pollution incident which results from a deliberate failure to
comply with applicable statutes or regulations is excluded from potential
coverage. Other energy industries pollution liability provisions,
exclusions and coverage positions have been outlined and reserved by United
National.
f.COVERAGE POSITIONS APPLICABLE TO BOTH GENERAL LIABILITY AND ENERGY
INDUSTRIES POLLUTION LIABILITY PROVISIONS
United National has also informed the Debtors of its position that the
claims in the NORM Lawsuit and Stratton Lawsuit also may not be subject to
potential coverage under both the general liability and the energy
industries pollution liability provisions based on one or more exclusions
or other grounds applicable to both coverage forms, including damage
expected or intended from the standpoint of the insured, or damage which
the insured is obligated to pay by reason of the assumption of liability in
a contract or agreement; liability arising out of the actual, alleged or
threatened properties of any "radioactive material"; and any loss, cost or
expense arising out of any request, demand or order to respond to or assess
the effects or presence of radioactive material; and property damage or
personal injury arising from known damages or an occurrence or offense
known to any insured before the inception of the policies. Other policy
provisions, exclusions and coverage positions applicable to both coverage
forms have been outlined and reserved by United National.
United National also has maintained (i) that its policies do not
extend potential coverage to punitive damages sought in the lawsuits, (ii)
that there is a per occurrence deductible applicable to pollution claims in
the amount of $50,000-per-occurrence and (iii) that each lawsuit is subject
to a minimum of one $50,000-per-occurrence pollution deductible for which
the Debtors would be liable prior to policy proceeds attaching.
The Debtors believe that there is no merit to United National's various
positions described above and reserve all rights with respect to these policies
and United National's conduct in connection therewith.
F. UNASSERTED CAUSES OF ACTION
The Debtors have an unasserted claim against Texaco Exploration and
Production, Inc. regarding imbalances in gas volume from wells in which the
Debtors have an interest.
The Official Equity Committee contends that causes of action may exist
against one or more of the Debtors' management team as it existed on the
Petition Date. The Debtors contend there is no merit in such claims.
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<PAGE> 55
The Debtors believe that they have been damaged as a result of the actions
of certain members of the Official Equity Committee, including communications by
those members on the internet. The Official Equity Committee contends there is
no merit in those claims.
VIII.
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
The Debtors believe that the Plan affords holders of claims and equity
interests the potential for the greatest realization on the Debtors' assets and,
therefore, is in the best interests of those holders. If the Plan is not
confirmed, however, the theoretical alternatives include: (1) continuation of
the pending Chapter 11 cases; (2) alternative plans of reorganization; or (3)
liquidation of the Debtors under Chapter 7 of the Bankruptcy Code.
A. CONTINUATION OF THE CASES
If the Debtors remain in Chapter 11, they could continue to operate their
businesses and manage their properties as debtors in possession, but they would
remain subject to the restrictions imposed by the Bankruptcy Code and to the
stigma associated with bankruptcy proceedings.
B. ALTERNATIVE PLANS OF REORGANIZATION
If the Plan is not confirmed, the Debtors, individually or collectively,
or, subject to further determinations by the Bankruptcy Court as to extensions
of exclusivity under the Bankruptcy Code, any other party in interest in the
cases, could attempt to formulate and propose a different plan or plans. Those
plans might involve either a reorganization and continuation of the Debtors'
businesses, an orderly liquidation of their assets, or a combination of both.
Exclusivity has been terminated as to the Bank Group, the Official Equity
Committee and the Official Unsecured Creditors Committee. Both the Bank Group
and the Official Equity Committee have expressed an interest in filing a
competing plan of reorganization.
The Debtors plan to continue their business operations after confirmation
of the Plan. After a thorough review and analysis of this course of action, the
Debtors have concluded that the Plan provides the holders of claims and equity
interests with maximum value and the best possible recovery.
C. LIQUIDATION UNDER CHAPTER 7
If no plan can be confirmed, the Debtors' Chapter 11 cases may be converted
to cases under Chapter 7 of the Bankruptcy Code. In a Chapter 7 proceeding, a
trustee or trustees would be elected or appointed to liquidate the assets of
each Debtor. The proceeds of the liquidation would be distributed to the holders
of claims against the Debtors in accordance with the priorities established by
the Bankruptcy Code.
Under Chapter 7, a secured creditor whose claim is fully secured would be
entitled to full payment, including interest, from the proceeds of the sale of
its collateral. Unless its claim is nonrecourse, a secured creditor whose
collateral is insufficient to pay its claim in full would be entitled to assert
an unsecured claim for the deficiency. Claims entitled to priority under the
Bankruptcy Code would be paid in full before any distribution to general
unsecured creditors. Funds, if any remain, after payment of secured claims and
priority claims would be distributed pro rata to general unsecured creditors. If
subordination agreements were to be enforced, senior unsecured claims would be
paid in full before any distribution to subordinated creditors.
The Debtors believe that liquidation under Chapter 7 would result in
substantial diminution of the value of their estates because of additional
administrative expenses involved in the appointment of trustees and attorneys,
accountants and other professionals to assist the trustees; additional expenses
and claims, some of which would be entitled to priority, that would arise by
reason of the liquidation and from the rejection of leases and other executory
contracts in connection with a cessation of the Debtors' operations; and failure
to realize the greater going concern value of the Debtors' assets. In
particular, in a Chapter 7 scenario, it is likely,
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<PAGE> 56
and presumed for purposes of this analysis, that the Debtors' operations would
be ceased and a trustee would proceed with an orderly liquidation of each
Debtors' assets.
The Debtors believe that the value of all of the Debtors' assets, as a
going concern, exceeds the claims against them. In the context of a Chapter 7
liquidation, the liquidation of the Debtors' assets would yield far less than
the going concern value of the Debtors' assets. The Debtors believe that the
liquidation of their assets, essentially all of which are subject to a first
lien and security interest held by the Bank Group, would yield estimated
proceeds of approximately $323 million. See SCHEDULE B1 Liquidation Value
attached to this Disclosure Statement. As a result, the Debtors believe that the
holders of claims and interests will receive more under the Plan than they would
under a Chapter 7 liquidation. See SCHEDULE B2 Liquidation Analysis and SCHEDULE
B3 Illustration of Liquidation Analysis attached to this Disclosure Statement.
As of the Petition Date, the total amount of the claims held by the Bank
Group, secured by essentially all assets of the Company, totaled in excess of
$240 million. As a result, a Chapter 7 liquidation would result in any
distributions to the holders of other claims or interests, of a value less than
the value to be received by those holders of claims and equity interests under
the Plan.
IX.
VOTING PROCEDURES AND REQUIREMENTS
A. VOTING PROCEDURES AND REQUIREMENTS
The Debtors are seeking the acceptance of the Plan by (1) holders of
allowed Priority Tax Claims, (2) the Bank Group, (3) holders of the Existing
Bonds, (4) holders of General Unsecured Claims and (5) the holders of the
Existing Common Stock.
A ballot or master ballot, as applicable, to be used to accept or reject
the Plan has been enclosed with all copies of this Disclosure Statement mailed
to holders of claims whose claims are impaired by provisions of the Plan, as
follows:
<TABLE>
<CAPTION>
CLASS COLOR OF BALLOT COLOR OF MASTER BALLOT
- ----- --------------- ----------------------
<S> <C> <C>
Priority Tax Claims................................. Green N/A
Bank Group Claims................................... Yellow N/A
Bond Claims......................................... Bright Pink Pink
General Unsecured Claims............................ Cream N/A
Existing Common Stock............................... Grey Sky Blue
</TABLE>
Accordingly, this Disclosure Statement (and the annexes, exhibit and schedules
to this Disclosure Statement), together with the accompanying ballot and master
ballot and the related materials delivered together with this Disclosure
Statement, are being furnished to holders of (1) allowed Priority Tax Claims,
(2) Bank Group Claims, (3) Bond Claims, (4) General Unsecured Claims, and (5)
Existing Common Stock, and may not be relied on or used for any purpose other
than to determine whether or not to vote to accept or reject the Plan.
Ballots or master ballots with respect to the Plan will be accepted by the
Debtors until 4:00 p.m., Dallas time, on March 10, 2000 (the "Voting Deadline").
The Bankruptcy Court has directed that, to be counted for voting purposes,
ballots for the acceptance or rejection of the Plan must be received no later
than 4:00 p.m., Dallas time (5:00 p.m., New York City time) on March 10, 2000.
Ballots should be mailed to the following addresses:
For creditors:
Fulbright & Jaworski L.L.P.
Attn: Michael W. Anglin
2200 Ross Avenue, Suite 2800
Dallas, Texas 75201
For shareholders:
The Altman Group, Inc.
60 East 42nd Street, Suite 1241
New York, New York 10165
Except to the extent permitted by the Bankruptcy Court pursuant to Rule 3018 of
the Bankruptcy Rules, ballots or master ballots that are received after the
Voting Deadline will not be accepted or used by the Debtors in connection with
the Debtors' request for confirmation of the Plan.
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Consistent with the provisions of Rule 3018 of the Bankruptcy Rules, the
Bankruptcy Court has fixed the Voting Record Date (the close of business, Dallas
time, on February 7, 2000) as the time and date for the determination of holders
of record of claims and equity interests who are entitled to vote on the Plan.
If the holder of record of any claim or equity interest is not also the
beneficial owner of that claim or equity interest, the vote to accept or reject
the Plan must be cast by the beneficial owner of the claim.
In accordance with Rule 3017(e) of the Bankruptcy Rules, the Debtors have
made provisions for the transmission of ballots to beneficial owners of the
Existing Bonds and Existing Common Stock held through a brokerage firm, bank,
trust company or other nominee. Special voting instructions for holders of
Existing Bonds are set forth in Section IX.B. below.
A commercial bank, trust company, brokerage firm or other nominee that is
the registered holder of the Existing Bonds or Existing Common Stock for
beneficial owner(s) will collect and tabulate the acceptances and rejections of
the Plan on behalf of those beneficial owners by (1) distributing a copy of the
Disclosure Statement and all appropriate ballots to the owner, (2) collecting
all ballots, and (3) completing a master ballot compiling the acceptance and
rejections and other information from the ballots collected and returning the
master ballots as set forth below.
Any beneficial owner holding Existing Common Stock in "street name" through
a brokerage firm, bank, trust company or other nominee may accept or reject the
Plan by following these instructions:
1. Fill in all the applicable information on the ballot.
2. Sign the ballot (unless the ballot has already been signed by the
brokerage firm, bank, trust company, or other nominee).
3. Return the ballot to your brokerage firm, bank, trust company or
other nominee.
Any ballot submitted by a brokerage firm, bank, trust company or other
nominee will not be counted unless the nominee properly completes and delivers a
corresponding master ballot.
All votes to accept or reject the Plan must be cast by using the ballot or
master ballot. Votes cast in any manner other than by using the ballot or master
ballot will not be counted.
After carefully reviewing this Disclosure Statement and its annexes,
exhibit and schedules, please indicate your vote on the enclosed ballot or
master ballot, and return it in the envelope provided. In voting for or against
the Plan, please use only the ballot or master ballot sent to you with this
Disclosure Statement (except as set forth below). Please complete and sign your
ballot or master ballot in accordance with the instructions set forth on the
ballot or master ballot.
Any ballots or master ballots received that do not indicate either an
acceptance or a rejection of the Plan or that indicate both an acceptance and
rejection of the Plan will be deemed not to constitute a vote.
Unless otherwise directed by the Bankruptcy Court, all questions as to the
validity, form, eligibility (including time of receipt), acceptance, and
revocation or withdrawal of ballots or master ballots will be determined by the
Debtors in their sole discretion, whose determination will be final and binding.
This Disclosure Statement has been approved by order of the Bankruptcy
Court, dated February 7, 2000 (the "Disclosure Statement Order"), as containing
information of a kind and in sufficient detail to enable a hypothetical,
reasonable person, typical of a holder of a claim or interest, to make an
informed judgment whether to accept or reject the Plan. Approval of the
Disclosure Statement by the Bankruptcy Court does not constitute a ruling as to
the fairness or merits of the Plan.
Pursuant to the Disclosure Statement Order, the Bankruptcy Court
established the following voting procedures and presumptions in this Chapter 11
case. Under the order, the information pertaining to the
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<PAGE> 58
number, amount and classification of a claim that will be used to tabulate
acceptances and rejections of the Plan will be exclusively as follows:
- Each ballot mailed to a holder of a claim will include a
preprinted amount for the claim and a designation of the
appropriate class for the claim as set forth in the Plan.
- If no proof of claim has been filed, the amount of a claim set
forth by the Debtors on the ballot will be equal to the amount
listed, if any, in respect of the claim in the Debtors'
Schedules to the extent the claim is not listed as contingent,
unliquidated, undetermined or disputed, and the claims will be
placed in the appropriate class, based on the Debtors' records
and consistent with the Debtors' Schedules, the Claims Registry
of the Clerk of the Bankruptcy Court, the registry of holders
of Existing Bonds maintained by the Indenture Trustee and the
registry of holders of Existing Common Stock maintained by the
Debtors' transfer agent.
- If a proof of claim has been filed, the amount of a claim set
forth by the Debtors on the ballot will be equal to the amount
listed on the proof of claim (or, if not ascertainable from the
face of the proof of claim, one dollar for amount purposes),
unless the Debtors disagree with the amount set forth on the
proof of claim, in which case the amount set forth on the
ballot will be the amount of the claim according to the
Debtors' books and records.
- The holder must indicate on the ballot the amount of the
holder's claim and timely return the ballot. The ballot will be
counted, for voting purposes, in the amount indicated by the
holder unless objected to by the Debtors before the
Confirmation Hearing. If the amount of a claim for voting
purposes is disputed, the dispute will be determined by the
Bankruptcy Court at or before the Confirmation Hearing.
- A ballot relating to a claim that is the subject of an
objection filed pursuant to Rule 3007 of the Bankruptcy Rules
before the Voting Deadline will be disallowed, for voting
purposes, except to the extent and in the manner that the
Debtors indicate in their objection the claim should be allowed
for voting or other purposes, or as otherwise ordered by the
Bankruptcy Court. The objection may be filed even if no claim
has yet been filed, in which event the Debtors will object to
the amount or classification of the claim set forth on the
ballot.
- If a claim has been estimated or otherwise allowed for voting
purposes by order of the Bankruptcy Court, the amount and
classification will be that set by the Bankruptcy Court.
- In the event of a controversy (1) as to whether any claim or
interest or class of claims or interests is impaired under the
Plan, (2) as to whether the holder of any claim or interest is
entitled to vote with respect to the Plan, or (3) regarding the
allowed amount of any claim or interest for voting purposes,
then the controversy will be determined by the Bankruptcy Court
at the Confirmation Hearing.
The Bankruptcy Court will hold a hearing on confirmation of the Plan, at
which time the Bankruptcy Court will consider objections to confirmation, if
any, commencing at 9:30 a.m. on March 15, 2000 in the United States Bankruptcy
Court, 1100 Commerce Street, Room 12A24, Dallas, Texas 75242. The Confirmation
Hearing may be adjourned from time to time without notice other than the
announcement of an adjourned date at the Confirmation Hearing. Objections to
confirmation of the Plan, if any, must be in writing and served and filed as
described in this Disclosure Statement.
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<PAGE> 59
FOR YOUR BALLOT OR MASTER BALLOT TO BE COUNTED, YOUR BALLOT OR MASTER
BALLOT MUST BE COMPLETED AS SET FORTH ABOVE AND RECEIVED BY THE VOTING DEADLINE
(4:00 P.M., DALLAS TIME, ON MARCH 10, 2000). BALLOTS AND MASTER BALLOTS SHOULD
BE DELIVERED OR MAILED TO THE FOLLOWING ADDRESSES:
FOR CREDITORS:
FULBRIGHT & JAWORSKI L.L.P.
ATTN.: MICHAEL W. ANGLIN
2200 ROSS AVENUE, SUITE 2800
DALLAS, TEXAS 75201
FOR SHAREHOLDERS:
THE ALTMAN GROUP, INC.
60 EAST 42(ND) STREET, SUITE 1241
NEW YORK, NEW YORK, 10165.
THE FOREGOING IS A SUMMARY. THIS DISCLOSURE STATEMENT AND THE ANNEXES,
SCHEDULES AND EXHIBIT TO THIS DISCLOSURE STATEMENT SHOULD BE READ IN THEIR
ENTIRETY BY ALL HOLDERS OF CLAIMS AND EQUITY INTERESTS IN DETERMINING WHETHER TO
ACCEPT OR REJECT THE PLAN.
B. SPECIAL VOTING PROCEDURES FOR HOLDERS OF BOND CLAIMS
The record date for determining which holders of Bond Claims are entitled
to vote on the Plan is the Voting Record Date. The Indenture Trustee will not
vote on behalf of the holders of Bond Claims. Holders of Bond Claims must submit
their own ballots.
1. Beneficial Holders
(a) Any beneficial holder of a Bond Claim holding as a record holder in
its own name should vote on the Plan by completing and signing the
ballot and returning it directly to the Debtors' counsel, at the
address to be used by creditors set forth in Section IX.A. above, on
or before the Voting Deadline.
(b) Any beneficial holder of a Bond Claim in "street name" through a
nominee should vote on the Plan through the nominee by following
these instructions.
(i) Complete and sign the ballot.
(ii) Return the ballot to your nominee as promptly as possible in
sufficient time to allow the nominee to process the ballot and
return it to the Debtors' counsel, at the address to be used
by creditors set forth in Section IX.A. above, on or before
the Voting Deadline.
Any ballot returned to a nominee by a beneficial owner will not be counted
for purposes of accepting or rejecting the Plan until the nominee properly
completes and delivers to the Debtors' counsel a master ballot that reflects the
vote of the beneficial holder.
A beneficial holder holding Existing Bonds through more than one nominee
may receive more than one ballot. Each of those beneficial holders should
execute a separate ballot for each block of Existing Bonds that it holds through
any nominee and return the ballot to the nominee that holds that block of
Existing Bonds in record name.
A beneficial holder holding a portion of the Existing Bonds through a
nominee and another portion in its own name as the record holder should follow
the procedures described above in (a) to vote the portion held in its own name
and the procedures described in (b) above to vote the portion held by the
nominee or nominees.
2. Nominees
Any entity (other than a beneficial owner) which is the registered holder
of Existing Bonds should vote on behalf of the beneficial holder of the Existing
Bonds by (a) immediately distributing a copy of this Disclosure Statement and
accompanying material including the ballots to all beneficial holders for which
it holds Existing Bonds, (b) promptly collecting all ballots from the beneficial
holder, (c) compiling and
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validating the votes of all its beneficial holders on the master ballot, and (d)
transmitting the master ballot to the Debtors' counsel, at the address set forth
in Section IX.G. below, on or before the Voting Deadline.
A nominee may also pre-validate a ballot by completing all the information
to be entered on the ballot (the "Pre-Validated Ballot") and forwarding the
Pre-Validated Ballot to the beneficial holder for voting. A proxy intermediary
acting on behalf of a brokerage firm or bank may follow the procedures outlined
in the preceding sentences to vote on behalf of a party.
C. PARTIES IN INTEREST ENTITLED TO VOTE
Any holder of a claim against or equity interest in the Debtors whose claim
or equity interest is impaired under the Plan and entitled to vote under Section
15.1 of the Plan, is entitled to vote to accept or reject the Plan if either (1)
its claim or equity interest has been scheduled by the Debtors (and the claim or
equity interest is not scheduled as disputed, contingent or unliquidated), or
(2) it has filed a proof of claim or proof of equity interest on or before
December 27, 1999, the last date set by the Bankruptcy Court for those kinds of
filings. If the Debtors file an objection with respect to a claim or equity
interest that ballot will be counted in the amount declared by the Bankruptcy
Court at or before the Confirmation Hearing. A vote may be disregarded if the
Bankruptcy Court determines that it was not solicited or procured in good faith
or in accordance with the provisions of the Bankruptcy Code. IF YOU HAVE ANY
QUESTIONS REGARDING THE PROCEDURES FOR VOTING ON THE PLAN, PLEASE CONTACT:
<TABLE>
<S> <C> <C> <C>
For creditors: Fulbright & Jaworski L.L.P. For shareholders: The Altman Group, Inc.
Attn: Michael W. Anglin 60 East 42nd Street, Suite 1241
2200 Ross Avenue, Suite 2800 New York, New York 10165
Dallas, Texas 75201 (212) 681-9600
(214) 855-8200 (facsimile)
</TABLE>
D. DEFINITION OF IMPAIRMENT
A class of claims or interests is impaired under a plan of reorganization
unless, as set forth in section 1124 of the Bankruptcy Code, with respect to
each claim or interest of the class:
- the Plan leaves unaltered the legal, equitable, and contractual rights of
the holder of the claim or interest; or
- notwithstanding any contractual provisions or applicable laws that
entitles the holder of a claim or interest to demand or receive
accelerated payment of the claim or interest after the occurrence of a
default, the Plan:
-- cures any default that occurred before or after the commencement of the
case other than a default of a kind specified in Section 365(b)(2) of
the Bankruptcy Code;
-- reinstates the maturity of the claim or interest as the maturity
existed before the default;
-- compensates the holder of the claim or interest for any damages
incurred as a result of any reasonable reliance by the holder on those
contractual provisions or applicable laws; and
-- does not otherwise alter the legal, equitable or contractual rights to
which the holder is entitled with respect to the claim or interest.
E. CLASSES IMPAIRED UNDER THE PLAN
The following classes of claims and equity interests are impaired under the
Plan, and holders of claims and equity interests in these classes are entitled
to vote to accept or reject the Plan:
Class 2 -- Allowed Priority Tax Claims
Class 3 -- Allowed Bank Group Claims
Class 5 -- Allowed Bond Claims
Class 6 -- Allowed General Unsecured Claims
Class 8 -- Holders of Existing Common Stock
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<PAGE> 61
F. VOTE REQUIRED FOR CLASS ACCEPTANCE
The Bankruptcy Code defines acceptance of a plan by a class of claims as
acceptance by holders of at least two-thirds in amount, and more than one-half
in number, of the claims of that class that actually cast ballots for acceptance
or rejection of the Plan. Thus, class acceptance occurs only if two-thirds in
amount and a majority in number of the holders of claims voting cast their
ballots in favor of acceptance.
G. VOTING AGENTS
The Altman Group, Inc. has agreed to provide certain services as voting
agent for the holders of Existing Common Stock. Michael W. Anglin, counsel for
the Debtors, has agreed to provide certain services as voting agent for all
other claimants. If you are a holder of Existing Common Stock and require
assistance in voting, please contact The Altman Group, Inc. at 60 East 42nd
Street, Suite 1241, New York, New York 10165, telephone number (212) 681-9600.
All other claimants who require assistance in voting should contact Michael W.
Anglin at Fulbright & Jaworski L.L.P., 2200 Ross Avenue, Suite 2800, Dallas,
Texas 75201, or by faxing such inquiries to Michael W. Anglin at (214) 855-8200.
X.
CONFIRMATION OF THE PLAN
A. CONFIRMATION HEARING
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after
notice, to hold a hearing on confirmation of the Plan. By order of the
Bankruptcy Court, the Confirmation Hearing on the Plan has been scheduled for
March 15, 2000, at 10:00 a.m., Dallas time, in the United States Courthouse,
1100 Commerce Street, Room 12A24, Dallas, Texas 75242. The Confirmation Hearing
may be adjourned from time to time by the Bankruptcy Court without further
notice except for an announcement made at the Confirmation Hearing or any
adjournment thereof.
Section 1128(b) of the Bankruptcy Code provides that any party in interest
may object to confirmation of a plan. Any objection to confirmation of the Plan
must be made in writing and filed in the Bankruptcy Court and served upon the
parties entitled to service, together with proof of service on or before March
10, 2000.
Objections to confirmation of the Plan are governed by Rule 9014 of the
Bankruptcy Rules. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED
IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
B. REQUIREMENTS FOR CONFIRMATION OF THE PLAN
At the Confirmation Hearing, the Bankruptcy Court will determine whether
the Bankruptcy Code's requirements for confirmation of the Plan have been
satisfied. If the requirements are satisfied, the Bankruptcy Court will enter an
order confirming the Plan. As set forth in Section 1129 of the Bankruptcy Code,
these requirements are as follows:
- The plan complies with the applicable provisions of the Bankruptcy Code.
- The proponent of the plan complies with the applicable provisions of the
Bankruptcy Code.
- The plan has been proposed in good faith and not by any means forbidden
by law.
- Any payment made or to be made by the proponent, by the debtor, or by a
person issuing securities or acquiring property under the plan, for
services or for costs and expenses in or in connection with the case, or
in connection with the plan and incident to the case, has been approved
by, or is subject to the approval of, the court as reasonable.
- The proponent of the plan has disclosed (1) the identity and affiliations
of any individual proposed to serve, after confirmation of the plan, as a
director, officer, or voting trustee of the debtor, an affiliate of
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the debtor participating in a joint plan with the debtor, or a successor
to the debtor under the plan and the appointment to, or continuance in,
the office of that individual, is consistent with the interests of
creditors and equity security holders and with public policy, and (2) the
identity of and the nature of any compensation for any insider that will
be employed or retained by the reorganized debtor.
- Any governmental regulatory commission with jurisdiction, after
confirmation of the plan, over the rates of the debtor has approved any
rate change provided for in the plan, or the rate change is expressly
conditioned on that approval.
- With respect to each impaired class of claims or interests:
-- each holder of a claim or interest of the class (1) has accepted the
plan; or (2) will receive or retain under the plan on account of the
claim or interest property of a value, as of the effective date of the
plan, that is not less than the amount that the holder would so receive
or retain if the debtor were liquidated under Chapter 7 of the
Bankruptcy Code on the effective date of the plan; or
-- if Section 1111(b)(2) of the Bankruptcy Code applies to the claims of
the class, the holder of a claim of the class will receive or retain
under the plan on account of the claim property of a value, as of the
effective date of the plan, that is not less than the value of the
holder's interest in the estate's interest in the property that secures
those claims.
- With respect to each class of claims or interests:
-- the class has accepted the plan; or
-- the class is not impaired under the plan.
- Except to the extent that the holder of a particular claim has agreed to
a different treatment of the claim, the plan provides that:
-- with respect to a claim of a kind specified in Section 507(a)(1) or
507(a)(2) of the Bankruptcy Code, on the effective date of the plan,
the holder of the claim will receive on account of the claim cash equal
to the allowed amount of the claim;
-- with respect to a class of claims of a kind specified in Section
507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6) or 507(a)(7) of the
Bankruptcy Code, each holder of a claim of the class will receive (1)
if the class has accepted the plan, deferred cash payments of a value,
as of the effective date of the plan, equal to the allowed amount of
the claim; or (2) if the class has not accepted the plan, cash on the
effective date of the plan equal to the allowed amount of the claim;
and
-- with respect to a claim of a kind specified in Section 507(a)(8) of the
Bankruptcy Code, the holder of a claim will receive on account of the
claim deferred cash payments, over a period not exceeding six years
after the date of assessment of the claim, of a value, as of the
effective date of the plan, equal to the allowed amount of the claim.
- If a class of claims is impaired under the plan, at least one class of
claims that is impaired has accepted the plan, determined without
including any acceptance of the plan by any insider.
- Confirmation of the plan is not likely to be followed by the liquidation,
or the need for further financial reorganization, of the debtor or any
successor to the debtor under the plan, unless the liquidation or
reorganization is proposed in the plan.
The Debtors believe that the Plan satisfies all of the statutory
requirements of Chapter 11 of the Bankruptcy Code, that they have complied or
will have complied with all of the requirements of Chapter 11, and that the
proposal of the Plan is made in good faith.
The Debtors believe that the holders of all claims and equity interests
impaired under the Plan will receive payments or distributions under the Plan
having a present value as of the Effective Date in amounts not less than the
amounts that they would receive if the Debtors were liquidated in a case under
Chapter 7 of the Bankruptcy Code. At the confirmation hearing, the Bankruptcy
Court will determine whether holders of
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<PAGE> 63
claims and equity interests would receive greater distributions under the Plan
than they would receive in a liquidation under Chapter 7.
The Debtors also believe that confirmation of the Plan is not likely to be
followed by the liquidation or the need for further financial reorganization of
the Debtors or any successor to the Debtors under the Plan. According to the
Debtors' business projections, they will have sufficient earnings and cash flow
from continuing operations with which to perform their obligations under the
Plan, as well as to meet the ongoing financial needs of their businesses.
C. CRAMDOWN
If any impaired class of claims or equity interests does not accept the
Plan, the Bankruptcy Court may still confirm the Plan at the request of the
Debtors if, as to each impaired class that has not accepted the Plan, the Plan
"does not discriminate unfairly" and is "fair and equitable." A plan of
reorganization does not discriminate unfairly within the meaning of the
Bankruptcy Code if no class that does not accept the Plan receives less than is
being received by a class of equal rank.
"Fair and equitable" has different meanings with respect to the treatment
of secured and unsecured claims. As set forth in Section 1129(b)(2) of the
Bankruptcy Code, those meanings are as follows:
1. SECURED CLAIMS
- The plan provides that the holders of the claims retain the liens
securing the claims, whether the property subject to the liens is
retained by the debtor or transferred to another entity, to the extent
of the allowed amount of the claims, and each holder of a claim of the
class will receive on account of the claim deferred cash payments
totaling at least the allowed amount of the claim, of a value, as of the
effective date of the plan, of at least the value of the holder's
interest in the estate's interest in the property;
- The plan provides for the sale, subject to Section 363(k) of the
Bankruptcy Code, of any property that is subject to the liens securing
the claims, free and clear of those liens, with those liens to attach to
the proceeds of the sale, and the treatment of the liens on proceeds
under the previous or following bullet point of this subparagraph; or
- The plan provides for the realization by the holders of the indubitable
equivalent of the claims.
2. UNSECURED CLAIMS
- The plan provides that each holder of a claim of the class receive or
retain on account of the claim property of a value, as of the effective
date of the plan, equal to the allowed amount of the claim; or
- The holder of any claim or interest that is junior to the claims of the
class will not receive or retain under the plan on account of the junior
claim or interest any property.
3. INTERESTS
- The plan provides that each holder of an interest of the class receive
or retain on account of the interest property of a value, as of the
effective date of the plan, equal to the greatest of the allowed amount
of any fixed liquidation preference to which the holder is entitled, any
fixed redemption price to which the holder is entitled, or the value of
the interest; or
- The holder of any interest that is junior to the interests of the class
will not receive or retain under the plan on account of the junior
interest any property.
If one or more classes of impaired claims and equity interests reject the
Plan, the Bankruptcy Court will determine at the confirmation hearing whether
the Plan is fair and equitable with respect to, and does not discriminate
unfairly against, any rejecting impaired class of claims or equity interests.
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<PAGE> 64
In the Debtors' view, the Plan is confirmable under Section 1129(b) of the
Bankruptcy Code, if necessary.
XI.
THE NEW DEBT AND SECURITIES
A. CREDIT FACILITY
On the Effective Date, the Credit Agreement is to be entered into among the
Reorganized Parent Company, Coho Resources, Inc., Coho Louisiana Production
Company, Coho Exploration, Inc., Coho Oil & Gas, Inc. and Interstate Natural Gas
Company, as borrowers (collectively, the "Borrowers"), Chase, as agent for the
Lenders, and the Lenders. Under the terms of the Credit Agreement, the Lenders
will advance up to $250 million to the Borrowers. The Credit Facility will limit
advances to the amount of the borrowing base, which is anticipated to be set
initially at $210 million, $10 million of which must remain undrawn and
available on the Effective Date. The borrowing base will be the loan value to be
assigned to the proved reserves attributable to the Reorganized Parent Company's
oil and gas properties. The borrowing base will be subject to semiannual review
based on reserve reports. The Initial Borrowing Base will be subject to Chase's
review of the January 1, 2000 reserve report to be prepared by the Parent
Company and audited by an independent petroleum engineering firm acceptable to
the Lenders. The Initial Borrowing Base will be determined before the
Confirmation Hearing.
The Credit Facility will be subject to semiannual borrowing base
redeterminations, each May 1 and November 1, and will be made in the sole
discretion of the Lenders. The Reorganized Parent Company will deliver to the
Lenders by April 1 and October 1 of each year a reserve report prepared as of
the immediately preceding January 1 and July 1, respectively. The January 1
reserve report will be prepared internally by the Reorganized Parent Company and
audited by an independent petroleum engineering firm, acceptable to Chase, and
the July 1 reserve report will be prepared internally by the Reorganized Parent
Company, in a form acceptable to Chase. Based in part on the reserve report, the
Lenders will redetermine the borrowing base in their sole discretion. For an
increase in the borrowing base, consent of 100% of the Lenders will be required.
To maintain the borrowing base, or to reduce the borrowing base, consent of 75%
of the Lenders of outstanding loans or, in the event that no loans are
outstanding, the Lenders of 75% of the current loan commitments under the Credit
Facility, will be required. The Reorganized Parent Company or Chase may request
one additional borrowing base determination during any calendar year.
Interest on advances under the Credit Facility will be payable on the
earlier of (1) the expiration of any interest period under the Credit Facility
or (2) quarterly, beginning with the first quarter after the Effective Date.
Amounts outstanding under the Credit Agreement will accrue interest at the
option of the Borrowers at (1) the Eurodollar Rate, plus an applicable margin or
(2) the Base Rate, plus an applicable margin. All outstanding advances under the
Credit Facility are due and payable in full three years from the Effective Date.
Outstanding advances under the Credit Facility will be secured by the
Collateral. The rights and responsibilities of Chase, the Lenders and the
Debtors will be governed by the Credit Agreement and the related documents,
which will, in part, permit the Lenders to enforce their rights to the
Collateral on the occurrence of an "event of default" (as defined in the Credit
Agreement).
The Credit Agreement will contain certain financial and other covenants
including, (1) maintenance of minimum ratios of cash flow to interest expense
(1.0 to 1.0) as of the end of the initial fiscal quarter to commence after the
Effective Date, (2) restrictions on the payment of dividends and (3) limitations
on the incurrence of additional indebtedness, the creation of liens and the
incurrence of capital expenditures.
Certain fees for the Lenders contained in the Chase Commitment Letter were
approved by the Bankruptcy Court at a hearing on the fees held on January 27,
2000. These fees include an initial due diligence fee of $200,000. If the
Lenders fund under the Credit Facility on the Effective Date, then they will be
entitled to an additional aggregate $6.5 million of closing fees. All fees paid
by the Parent Company in connection with
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the Credit Facility are non-refundable and are in addition to reimbursements to
be paid for expenses incurred by Chase in connection with the preparation of the
Credit Agreement.
The Chase Commitment Letter provides that there are a number of conditions
which must be met before the Lenders will be committed to fund the Credit
Facility on the Effective Date, including: (1) agreement concerning definitive
documents, (2) completion of economic due diligence and (3) approval by Chase of
the Reorganized Parent Company's management team and capital structure. Chase
and the Debtors will come to agreement on definitive documents in keeping with
the terms of the Plan by March 1, 2000. When Chase indicates to the Debtors by
the later of March 14, 2000 or the last business day immediately preceding the
Confirmation Hearing, that all conditions have been met, the Lenders will be
committed to fund on the Effective Date. If the Lenders fund on the Effective
Date, they will be entitled to $6.5 million in closing fees.
The form of the Credit Agreement will be filed with the Bankruptcy Court by
March 1, 2000. Thereafter, the Debtors will provide a copy of the form of Credit
Agreement to any party in interest who requests it in writing. Written requests
should be sent to the Parent Company at 14785 Preston Road, Suite 860, Dallas,
Texas 75240 to the attention of Ms. Anne Marie O'Gorman. Although the Debtors
anticipate no conflicts among the description of the Credit Facility contained
in this Disclosure Statement, the form of Credit Agreement filed with the
Bankruptcy Court and the Credit Agreement and related documents ultimately
executed by the Reorganized Debtors and the Lenders, to the extent that there is
any conflict, the provisions of the ultimately executed Credit Agreement and
related documents will prevail.
B. NEW COMMON STOCK
The holders of the Existing Bonds will receive New Common Stock in exchange
for allowed Bond Claims. The holders of Existing Common Stock will receive New
Common Stock in exchange for their Existing Common Stock. Additional shares of
the New Common Stock will be issued pursuant to the Rights Offering or the
Private Placement. To the extent the Rights Offering or the Private Placement is
not fully subscribed, the Standby Loan Notes will be issued in an amount to be
determined by the Debtors and the Standby Lenders will receive New Common Stock
pursuant to the terms of the Standby Loan Agreement. Of the 640,087,800 shares
of New Common Stock to be issued and outstanding on the Effective Date, without
giving effect to the Rights Offering, the Private Placement or any Standby Loan,
the holders of the Existing Bonds will receive 614,484,288 shares and the
holders of the Existing Common Stock will receive 25,603,512 shares. Because the
Debtors cannot predict the degree of success of the Rights Offering or the
Private Placement, the number of shares to be issued as of the Effective Date
cannot be predicted. However, by way of illustration, if all of the shares
offered in the Rights Offering or Private Placement are purchased and no amounts
are borrowed under the Standby Loan, the holders of the Existing Bonds will
receive 614,484,288 shares, the holders of Existing Common Stock will receive
25,603,512 shares and the Rights Offering or Private Placement purchasers will
receive 346,153,846 shares. If 50% of the shares are purchased pursuant to the
Rights Offering or the Private Placement and $45 million is borrowed under the
Standby Loan, the holders of the Existing Bonds will receive 614,484,288 shares,
the holders of the Existing Common Stock will receive 25,603,512 shares, the
Rights Offering or Private Placement purchasers will receive 195,420,437 shares
and the Standby Lenders will receive 82,632,683 shares. If no shares are
purchased pursuant to the Rights Offering or the Private Placement and the
Standby Loan is fully drawn, the holders of the Existing Bonds will receive
614,484,288 shares, the holders of the Existing Common Stock will receive
25,603,512 shares and the Standby Lenders will receive up to 14% of the fully
diluted New Common Stock, which is a maximum of 104,200,340 shares.
The New Common Stock will be transferable separately from the allowed Bond
Claims and will have full voting rights and be freely tradeable in ordinary
trading transactions or, in the case of any "affiliate" of the Reorganized
Parent Company, have registration rights as set forth in the Registration Rights
Agreement. The Registration Rights Agreement will be filed with the Bankruptcy
Court by March 1, 2000. Thereafter, the Debtors will provide a copy of the form
of Registration Rights Agreement to any party in interest who requests it in
writing. Written requests should be sent to the Parent Company at 14785 Preston
Road, Suite 860, Dallas, Texas 75240 to the attention of Ms. Anne Marie
O'Gorman.
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<PAGE> 66
Generally, the New Common Stock will carry the same rights as the Existing
Common Stock, except that holders of the New Common Stock will not have
cumulative voting rights. See "Description of Existing Debt and
Equity -- Stock".
The Plan contemplates the issuance of a substantial number of shares of the
New Common Stock and rights to receive shares of the New Common Stock (pursuant
to the Rights Offering). If the Plan is confirmed, the percentage of ownership
of the Reorganized Parent Company's equity interests held by the current holders
of the Existing Common Stock, and percentage of the total voting power with
respect to that stock, will be reduced to 4%, without giving effect to (1) the
Rights Offering or the Private Placement and (2) if applicable, the Standby
Loan. Shares issued to holders of Existing Bonds and holders of Existing Common
Stock will be diluted as a result of the issuance of the shares under the Rights
Offering or Private Placement and the Standby Shares. See "Dilution" below for
an illustration of the dilution of the New Common Stock.
The shares of the New Common Stock issuable under the Rights Offering are
expected to be issued as soon as practicable after the expiration of the Rights
Offering. While the Parent Company has not currently formulated any plans to
issue additional equity interests in the Reorganized Parent Company, it will
have the right to do so, and any issuance of additional equity interests would
affect relative percentages of ownerships contained in the table included under
the caption "Overview of the Plan -- New Securities Table". In addition, that
information will be affected to the extent that some, but not all, shares
offered pursuant to the Rights Offering are purchased.
The Parent Company intends to explore the possibility of listing the New
Common Stock on Nasdaq or on one or more other national securities exchanges
upon the Effective Date. In an effort to meet the requirements for listing on
Nasdaq, the Reorganized Parent Company may decide to effect a reverse stock
split. However, there can be no assurance that the Reorganized Parent Company
will determine that it is feasible, practicable or advisable to list the New
Common Stock or that, if an application is made, that the New Common Stock would
be approved for listing. The inability of the Reorganized Parent Company to
secure the listing of the New Common Stock or the decision not to list the New
Common Stock will affect the liquidity and marketability of the New Common
Stock. In addition, the large number of shares of the New Common Stock that will
be outstanding upon confirmation of the Plan, combined with the shares issued
pursuant to the Rights Offering or Private Placement, will likely (1) depress
the prices at which some or all of the New Common Stock will trade for the
foreseeable future, (2) limit the marketability of the New Common Stock and (3)
adversely affect the ability of the Reorganized Parent Company to list the New
Common Stock on Nasdaq or any other national securities exchange. Whether or not
the New Common Stock is approved for listing on the Nasdaq or any other national
securities exchange, the New Common Stock may trade in the over-the-counter
market. Even if the New Common Stock is approved for listing on the Nasdaq or
any other national securities exchange, there can be no assurance as to the
price at which any shares of the New Common Stock may be traded when issued or
that an established market for those securities will develop.
C. DILUTION
Under the Plan, the shareholders of the Parent Company as of the Voting
Record Date (the "Voting Record Date Shareholders") will receive 25,603,512
shares of the New Common Stock and the holders of Existing Bonds (the
"Bondholder Group") will receive 614,484,288 shares of the New Common Stock
(although certain of the holders of Existing Bonds may also receive additional
shares, as described below). Before taking into account shares issued under the
Rights Offering, the Private Placement or the Standby Loan, the Bondholder Group
will receive 96%, and the Voting Record Date Shareholders will receive 4%, of
the total number of outstanding shares of the Reorganized Parent Company. THESE
PERCENTAGES ARE SUBJECT TO DILUTION PURSUANT TO SOME FEATURES OF THE PLAN, AS
DISCUSSED BELOW.
Under the Rights Offering, each Rights Offering Record Holder also will be
given the opportunity to purchase additional New Common Stock at an initial
purchase price of $0.26 per share. For each share of Existing Common Stock held
as of the Rights Offering Record Date, a Rights Offering Record Holder will
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have the right to buy initially 13.519 shares of New Common Stock. To the extent
the Rights Offering Record Holders do not purchase their allocable portion of
these offered shares, those Rights Offering Record Holders who do purchase their
allocable portion of the offered shares may elect to purchase any number of
additional shares of the New Common Stock, up to the maximum number of shares
offered under the Rights Offering, for $0.26 per share. To the extent some
shares of the New Common Stock were allocated for purchase by the Rights
Offering Record Holders but were not purchased by them, those unsubscribed
shares will be distributed to the fully subscribed Rights Offering Record
Holders who have elected to purchase the unsubscribed shares on a pro rata
basis. To the extent any shares offered under the Rights Offering are not
purchased by the Rights Offering Record Holders (including those accepting their
original allocation amount and those purchasing shares under the second tier
over-allocation process), the Parent Company may offer those remaining shares to
other parties at $0.26 per share.
The Rights Offering will be made by means of a prospectus that, in
preliminary form, is part of a registration statement filed with the SEC. The
Rights Offering prospectus will be mailed to the Rights Offering Record Holders
as soon as practicable after the registration becomes effective under SEC
regulations. If the registration statement has not become effective by a point
in time sufficiently soon to permit the Parent Company to mail the prospectuses
and to give the Rights Offering Record Holders enough time to respond to the
Rights Offering, the Parent Company will terminate the Rights Offering, withdraw
the registration statement and instead endeavor to sell the shares of New Common
Stock that would have otherwise been offered under the Rights Offering to third
parties in the Private Placement.
The total number of shares to be offered under the Rights Offering or the
Private Placement is 346,153,846; if all of these shares are sold under the
Rights Offering, then, before taking into account the Standby Shares and other
shares to be issued under the Standby Loan, the Voting Record Date Shareholders
and the Rights Offering Record Holders will receive a total of 371,757,358
shares of the New Common Stock, constituting 37.7% of the total number of shares
outstanding, and the Bondholder Group will receive 614,484,288 shares of the New
Common Stock, constituting 62.3% of the total number of shares outstanding.
The Parent Company does not know whether it will be able to sell all of the
shares offered under the Rights Offering or the Private Placement. To the extent
that the Parent Company does not sell all of those shares, the Debtors will
borrow funds in an amount to be determined by the Debtors under the Standby
Loan. This is the feature of the Plan that the Debtors believe assures
feasibility, because, even if the Rights Offering or the Private Placement is
not successful, the Debtors have been assured of being able to obtain at least
$70,000,000 under the Standby Loan commitment.
Under the terms of the Standby Loan, the Reorganized Parent Company must
issue to the Standby Lenders a number of shares sufficient to give the Standby
Lenders a certain percentage of the total outstanding shares of the New Common
Stock as of the Effective Date. If $70,000,000 is borrowed, that percentage will
be 14%. This percentage will be adjusted ratably according to the amount
actually borrowed under the Standby Loan; if no amount is borrowed, no shares
will be issued to the Standby Lenders.
Also under the terms of the Standby Loan, any shares issued to the Standby
Lenders will dilute the percentage ownership (but not the actual number of
shares) issued to the Bondholder Group and the Voting Record Date Shareholders
in exchange for their shares of the Existing Common Stock. However, shares
issued to the Standby Lenders may not dilute the percentage ownership issued to
the Rights Offering Record Holders or other third parties for shares purchased
under the Rights Offering or the Private Placement. To assure that these results
are achieved, the Reorganized Parent Company will issue additional shares of the
New Common Stock to the purchasers under the Rights Offering or the Private
Placement sufficient to assure those purchasers that they will maintain their
relative percentage ownership interests before taking into account the Standby
Shares -- i.e., so that their pre-Standby Loan percentage of shares will be the
same as their post-Standby Loan percentage of shares. This "gross-up" feature
will have the effect of further diluting the percentage ownership interests
represented by shares issued to the Voting Record Date Shareholders in exchange
for their Existing Common Stock and of the Bondholder Group in exchange for
their claims. It will also have the effect of reducing the per-share purchase
price under the Rights Offering or the Private
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Placement because the "gross-up" feature will not require those purchasing
shares under the Rights Offering or the Private Placement to make any additional
payments for the additional gross-up shares.
Because the number of shares that will be purchased under the Rights
Offering or the Private Placement cannot be predicted, it is not possible to
state accurately the relative percentage ownership interests that ultimately
will be held by the Voting Record Date Shareholders who elect not to participate
in the Rights Offering, the Bondholder Group, the purchasers under the Rights
Offering or the Private Placement and the Standby Lenders. However, for
illustrative purposes, the following table indicates what those percentages
would be under certain assumptions.
<TABLE>
<CAPTION>
ASSUMING 50% OF
THE SHARES OF ASSUMING NO SHARES
NEW COMMON STOCK OF NEW COMMON
OFFERED IN THE RIGHTS STOCK ARE PURCHASED
ASSUMING ALL SHARES OFFERING OR THE UNDER THE RIGHTS
OF NEW COMMON PRIVATE PLACEMENT OFFERING OR THE
STOCK OFFERED IN THE ARE PURCHASED AND PRIVATE PLACEMENT
RIGHTS OFFERING OR $45 MILLION IS AND $70 MILLION IS
THE PRIVATE PLACEMENT BORROWED UNDER THE BORROWED UNDER THE
ARE PURCHASED STANDBY LOAN STANDBY LOAN
--------------------- --------------------- -------------------
<S> <C> <C> <C>
Voting Record Date Shareholders (solely
in exchange for their shares of the
Existing Common Stock)................. 2.6% 2.8% 3.4%
Bondholder Group......................... 62.3% 66.9% 82.6%
Rights Offering or Private Placement
Purchasers............................. 35.1% 21.3% N/A
Standby Lenders.......................... N/A 9.0% 14%
</TABLE>
D. COMPARISON OF OLD AND NEW ARTICLES OF INCORPORATION
The Amended and Restated Articles of Incorporation of the Reorganized
Parent Company will contain some provisions affecting shareholders that are
different than the provisions under the Parent Company's existing Articles of
Incorporation. These differences are described under the caption "The
Plan -- Other Provisions of the Plan -- Overview of Reorganized Debtors".
E. PROCEDURES FOR EXCHANGING EXISTING BONDS FOR NEW COMMON STOCK
The Indenture Trustee under the Existing Bond Indenture will serve as the
depositary agent for the Reorganized Debtors with respect to the holders of the
Existing Bonds (the "Bondholder Depositary"). On the Effective Date, holders of
Existing Bonds on the Voting Record Date will receive their pro rata shares of
the equity securities, upon surrender of Existing Bonds and delivery of a letter
of transmittal to the Bondholder Depositary. The method of delivery of the
Existing Bonds and other documents to the Bondholder Depositary is at the
election and risk of the holders of the Existing Bonds, but if such delivery is
by mail, it is recommended that the holders use properly insured, registered
mail, with return receipt requested. The letters of transmittal and the Existing
Bonds should be sent to the Bondholder Depositary and should not be sent to the
Debtors. Existing Bonds and other documents should be delivered or mailed to:
HSBC Bank USA, Attn: Issuer Services, 140 Broadway, 12th Floor, New York, New
York 10005-1180.
If the new securities are to be issued in a name other than that of the
record holder of the Existing Bonds, the Existing Bonds submitted must be
properly endorsed to the person who is to receive the certificates representing
the new securities or accompanied by appropriate bond powers, properly executed
by the person whose name appears on the Existing Bonds. In either such case, the
signature on the letter of transmittal and the endorsement on the Existing Bonds
must be guaranteed by a guarantor that is a member of a "Signature Guarantee
Program" recognized by the Bondholder Depositary, i.e., the Securities Transfer
Agents Medallion Program ("STAMP"), Stock Exchanges Medallion Program ("SEMP")
or New York Stock Exchanges Medallion Signature Program ("MSP") (an "Eligible
Institution").
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Beneficial holders of Existing Bonds should not complete letters of
transmittal unless they (1) obtain and include with the letter of transmittal
the Existing Bonds either properly endorsed or accompanied by a properly
completed bond power from the record holders or (2) effect a record transfer of
the Existing Bonds from the record holder to the name of the beneficial owner
before the tender of the letter of transmittal.
All questions as to validity, form, or eligibility of the tendered Existing
Bonds will be resolved by the Bankruptcy Court. Neither the Reorganized Debtors
nor the Bondholder Depositary will be under any duty to give notification of
defects in such tenders, or will incur liabilities for failure to give
notification of such defects. Any Existing Bonds received by the Bondholder
Depositary that are not properly tendered and as to which the irregularities
have not been cured or waived will be returned by the Bondholder Depositary to
the appropriate tendering holder as soon as practicable.
The Reorganized Debtors will issue shares of New Common Stock to holders of
allowed Bond Claims as of the Voting Record Date by distributing those shares to
the Bondholder Depositary on the distribution date. As soon as practicable after
the Bondholder Depositary receives the debt instruments of a Bonds Claim holder
in accordance with the Plan, the Bondholder Depositary will issue and distribute
that holder's pro rata portion of the New Common Stock being issued in their
capacities as holders of Existing Bonds. The Existing Bond Indenture will
continue in effect to the extent necessary to allow the Indenture Trustee to
receive the cash and New Common Stock on behalf of the holders of the Existing
Bonds and make distributions pursuant to the Plan on account of the Bond Claims
as agent for the Reorganized Debtors. The Indenture Trustee providing services
related to distributions to the holders of allowed Bond Claims will receive,
from the Reorganized Debtors, reasonable compensation for those services upon
the presentation of invoices to the Reorganized Debtors and will be indemnified
by the Reorganized Debtors for all acts taken hereunder. These payments will be
made on terms agreed to with the Reorganized Debtors.
No fractional shares of New Common Stock will be issued. Fractional shares
will be rounded to the next greater or next lower number of shares as follows:
(1) fractions of 1/2 or greater will be rounded to the next greater whole
number, and (2) fractions of less than 1/2 will be rounded to the next lesser
whole number.
F. PROCEDURES FOR EXCHANGING EXISTING COMMON STOCK FOR NEW COMMON STOCK
Chase Mellon Shareholder Services L.L.C. and Montreal Trust Company of
Canada, transfer agents for the Parent Company, will serve as the depositary
agents for the Reorganized Parent Company with respect to the holders of
Existing Common Stock (each a "Shareholder Depositary"). On the Effective Date,
holders of record of Existing Common Stock on the Voting Record Date will
receive their shares of the New Common Stock, upon surrender of certificates of
Existing Common Stock and delivery of a letter of transmittal to a Shareholder
Depositary. The holders of the Existing Common Stock must deliver those
certificates, together with the letter of transmittal, properly completed and
executed by the holder of record of the Existing Common Stock, and any other
documents required by the letter of transmittal. The method of delivery of the
Existing Common Stock certificates and other documents to either Shareholder
Depositary is at the election and risk of the holders of the Existing Common
Stock, but if such delivery is by mail, it is recommended that the holders use
properly insured, registered mail, with return receipt requested. The letters of
transmittal and the Existing Common Stock certificates should be sent a
Shareholder Depositary and should not be sent to the Debtors. Existing Common
Stock Certificates and other documents should be delivered or mailed either to
Chase Mellon Shareholder Services L.L.C. at 2323 Bryan Street, Suite 2300,
Dallas, Texas 75201, Attn: David Cary, or to Montreal Trust Company of Canada at
530 8th Avenue S.W., Suite 600, Calgary, Alberta, Canada T2P 3S8, Attn: Stephen
Bandola.
If the new securities are to be issued in a name other than that of the
record holder of the Existing Common Stock, the certificates submitted must be
properly endorsed to the person who is to receive the certificates representing
the new securities or accompanied by appropriate stock powers, properly executed
by the person whose name appears on the Existing Common Stock certificates. In
either such case, the signature on the letter of transmittal and the endorsement
on the Existing Common Stock certificates must be guaranteed by a guarantor that
is a member of a "Signature Guarantee Program" recognized by the Shareholder
Depositary, i.e., STAMP, SEMP or MSP.
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Beneficial holders of Existing Common Stock should not complete letters of
transmittal unless they (1) obtain and include with the letter of transmittal
the Existing Common Stock certificates either properly endorsed or accompanied
by a properly completed stock power from the record holders or (2) effect a
record transfer of the Existing Common Stock from the record holder to the name
of the beneficial owner before the tender of the letter of transmittal.
All questions as to validity, form, or eligibility of the tendered Existing
Common Stock certificates will be resolved by the Bankruptcy Court. Neither the
Reorganized Debtors nor the Shareholder Depositary will be under any duty to
give notification of defects in such tenders, or will incur liabilities for
failure to give notification of such defects. Any Existing Common Stock
certificates received by the Shareholder Depositary that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned by the Shareholder Depositary to the appropriate tendering holder as
soon as practicable.
No fractional shares of New Common Stock will be issued pursuant to the
Plan. Fractional shares will be rounded to the next greater or next lower number
of shares as follows: (1) fractions of 1/2 or greater will be rounded to the
next greater whole number, and (2) fractions of less than 1/2 will be rounded to
the next lesser whole number. Shares issued pursuant to the Plan will carry no
other anti-dilution protection if and when the Reorganized Parent Company issues
additional New Common Stock or other securities in the future.
G. STANDBY LOAN
To the extent that the Rights Offering or the Private Placement yield less
than $90 million, the Reorganized Debtors will issue, and the Standby Lenders
will purchase, an amount of senior subordinated notes to be determined by the
Reorganized Debtors. This amount will be a maximum of $70 million given the
current level of commitment under the Standby Loan and a maximum of $90 million
if more Standby Loan commitments are obtained and made available before the
conclusion of the Confirmation Hearing, or the Effective Date if the Debtors
choose to extend the Rights Offering to that date. The rights and
responsibilities of the Standby Lenders and the Reorganized Debtors will be
governed by the Standby Loan Agreement which will allow holders of Existing
Bonds to participate in the Standby Loan. The form of the Standby Loan Agreement
will be filed with the Bankruptcy Court by March 1, 2000. Thereafter, the
Debtors will provide a copy of the form of Standby Loan Agreement to any party
in interest who requests it in writing. Written requests should be sent to the
Parent Company at 14785 Preston Road, Suite 860, Dallas, Texas 75240 to the
attention of Ms. Anne Marie O'Gorman. Although the Debtors anticipate no
conflicts among the description of the Standby Loan contained in this Disclosure
Statement, the form of the Standby Loan Agreement filed with the Bankruptcy
Court and the Standby Loan Agreement and related documents ultimately executed
by the Reorganized Debtors and the Standby Lenders, to the extent that there is
any conflict, the provisions of the ultimately executed Standby Loan Agreement
and related documents will prevail.
Debt under the Standby Loan Agreement will be evidenced by the Standby Loan
Notes, maturing seven years after the Effective Date and bearing interest at a
minimum annual rate of 15% and payable in cash semiannually. After the first
anniversary of the Effective Date, additional semiannual interest will be
payable in an amount equal to 1/2% for every $0.25 that the Actual Price exceeds
$15 per barrel of oil equivalent during the applicable semiannual interest
period, up to a maximum of 10% additional interest per year. Additionally, upon
an event of default occurring under the Standby Loan, interest will be payable
in cash, unless otherwise required to be paid-in-kind, at a rate equal to 2% per
year over the applicable interest rate. The Actual Price will be calculated over
a six-month measurement period ending on the date two months before the
applicable interest payment date. Interest payments under the Standby Loan may
be paid-in-kind subject to the requirements of the Credit Agreement. For
purposes of this Disclosure Statement, "paid-in-kind" refers to the payment of
interest owed under the Standby Loan by increasing the amount of principal
outstanding under the Standby Notes, rather than paying the interest in cash.
Payment of the Standby Loan Notes will be subordinate to payment in full in
cash of all obligations arising in connection with the Credit Facility. Subject
to a final agreement between the Standby Lenders and Chase, after the initial
12-month period, cash interest payments may be made only to the extent by which
EBITDAX on a trailing four quarter basis exceed $65 million. The Credit
Agreement may also prohibit the
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Reorganized Parent Company from making any cash interest payments on the Standby
Loan indebtedness if the outstanding indebtedness, under both the Credit
Facility and the Standby Loan, exceeds 3.75 times the EBITDAX for the trailing
four quarters. The Reorganized Parent Company may prepay the Standby Loan Notes
at the face amount, in whole or in part, in minimum denominations of $1,000,000,
plus either (1) a standard make-whole payment with a discount rate of 300 basis
points over the Treasury Rate for the first four years, or (2) beginning in the
fifth year, a premium equal to one-half the 15% base interest rate, declining
annually and ratably to par. The Standby Loan Notes may only be paid if either
(1) all obligations under the Credit Facility have been paid in full in cash or
(2) the Required Lenders consent to the payment.
If Standby Loan Notes are issued, the Standby Lenders will receive the
Standby Shares. If $70 million in principal amount of the Standby Loan Notes are
issued, the Standby Lenders will receive 14% of the fully diluted New Common
Stock as of the Effective Date. The amount of Standby Shares issued will be
adjusted ratably according to the actual amount of Standby Loan Notes issued.
The Standby Shares issued to the Standby Lenders will be in addition to the
shares of New Common Stock issued to holders of Existing Bonds, shareholders of
the Parent Company and persons participating in the Rights Offering or the
Private Placement. See "The New Debt and Securities -- Dilution" above for an
illustration of the dilution of the New Common Stock.
Certain fees for the Standby Lenders contained in the Standby Lender Fee
Letter were approved by the Bankruptcy Court at a hearing on the fees held on
January 27, 2000. These fees include (1) an initial due diligence fee of
$200,000 payable immediately and (2) the Break Up Fee, to be paid if the Standby
Lenders give the Debtors written notice that all conditions to closing have been
met and if a plan of reorganization is subsequently confirmed and consummated
that does not use the Standby Loan. If, after receiving a written notice from
the Standby Lenders that they have completed their due diligence and all
conditions to closing have been met except entry of a plan confirmation order,
the Debtors confirm a plan of reorganization without an alternative financing
proposal, the Debtors will owe the Standby Lenders the Closing Fee. The
obligation of the Reorganized Debtors to pay the Break Up Fee or the Closing Fee
will be an administrative expense claim having priority over all administrative
expenses in accordance with Section 364(c)(1) of the Bankruptcy Code. The
Debtors will pay either the Closing Fee or the Break Up Fee, but not both.
The Standby Lender Fee Letter provides that there are only two essential
kinds of conditions that must be met before the Standby Lenders will be
committed to fund the Standby Loan on the Effective Date: (1) agreement to
definitive documents and (2) completion of economic due diligence. The Standby
Lenders and the Debtors will come to agreement on definitive documents in
keeping with the terms of the Plan and satisfactory to both of them by March 1,
2000, by which time the Standby Lenders will have finished their economic due
diligence. When the Standby Lenders indicate by letter to the Debtors on or
before March 14, 2000, that all conditions have been met, (1) the Standby
Lenders will be committed to fund on the Effective Date and (2) the Standby
Lenders will then be entitled to a minimum fee of $1.0 million, either as a
Closing Fee or a Break Up Fee. If the Standby Lenders do not notify the Debtors
in writing by the later of March 14, 2000 or the last business day immediately
preceding the Confirmation Hearing, that all conditions have been met, then they
will be entitled to their reasonable fees and expenses in connection with the
Standby Loan, but they will not be entitled to the Break Up Fee. If the Standby
Lenders fund the Standby Loan on the Effective Date, they will be entitled to
the Closing Fee and will not be entitled to the Break Up Fee.
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XII.
INFORMATION ABOUT THE DEBTORS
The following information is a summary description of the Debtors'
business, operations, organization and management. More detailed information is
contained in the Annual Report, which is attached as ANNEX A, the Quarterly
Reports, which are attached as ANNEX B and the Parent Company's amendment to the
Annual Report on Form 10-K/A filed with the SEC on April 30, 1999 (the "Annual
Report Amendment"), which is attached as ANNEX C. The Annual Report Amendment
contains certain information regarding the principal shareholders of the Parent
Company. Since the date the Annual Report Amendment was filed, a new principal
shareholder, President and Fellows of Harvard College, filed a Schedule 13G with
the SEC stating that it acquired 12.6% of the outstanding shares of the Parent
Company. The Annual Report, the Quarterly Reports and the Annual Report
Amendment are part of this Disclosure Statement.
The Parent Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance with the
Exchange Act, files reports, proxy statements and other information with the
SEC. You may review and copy those reports, proxy statements and other
information at the public reference facilities of the SEC, Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well as the Regional
Offices of the SEC located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at the 7 World Trade Center, Suite 1300, New York, New York
10048 or on the Internet at http://www.sec.gov. Copies can be obtained by mail
at prescribed rates. Requests for copies should be directed to the SEC's Public
Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549.
A. THE COMPANY'S BUSINESS AND OPERATIONS
Coho Energy, Inc., is an independent energy company engaged, through its
subsidiaries, in the development and production of, and exploration for, crude
oil and natural gas. Coho Energy, Inc., together with its subsidiaries, is
referred to in this Disclosure Statement as the "Company". The Company's
operations are concentrated principally in the U.S. Gulf Coast and Mid-Continent
regions, including Mississippi, Oklahoma and Texas. The Company's principal
executive office is located at 14785 Preston Road, Suite 860, Dallas, Texas
75240, and its telephone number is (972) 774-8300.
At January 1, 1999 the Company's total proved reserves were 111 million
barrels of oil equivalent, of which approximately 90% were comprised of crude
oil and approximately 67% were proved developed. The present value of estimated
future net cash flows (before income taxes) of proved crude oil and natural gas
reserves, discounted at an assumed rate of 10%, was $269.3 million. The Company
also has substantial exploration upside, including recompletion and waterflood
opportunities, multiple seismic plays in the Mississippi Salt Basin and 3-D
based opportunities in Oklahoma within the geographical confines of the
Company's existing fields. In addition, as of January 1, 1999, the Company
operated 17 of its 21 major producing fields and owned an average working
interest of approximately 76% in the fields it operates. The Company's
significant control of operations and geographic focus have resulted in
substantial operating economies of scale that have enabled it to maintain a low
cost structure.
The January 1, 1999 reserves were updated at July 1, 1999 ("Mid Year
Reserve Report") adjusting for production for the first half of 1999 and pricing
improvements. The price of oil and gas used in this Mid Year Reserve Report was
the closing five year NYMEX oil price strip (escalated 3% per year thereafter)
and the four year NYMEX gas price strip (escalated 3% per year thereafter) on
August 20, 1999, the last NYMEX closing prices prior to the August 23, 1999
bankruptcy petition filed by the Company. The present value of estimated future
net cash flows (before income taxes) of proved crude oil and natural gas
reserves, discounted at an assumed rate of 10% was $582.4 million on 120.9
million barrels of oil equivalent for this Mid Year Reserve Report.
The Company's long-term strategy has been to maximize production and
increase reserves through (1) relatively low-risk activities such as development
and delineation drilling, multiple completions, recompletions, workovers,
enhancement of production facilities and secondary recovery projects; (2) use of
3-D seismic
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and other technologies to identify exploration projects and identify reserves;
(3) acquisition of controlling interests in underdeveloped crude oil and natural
gas properties; and (4) significant control of operations.
The Company has focused most of its development efforts in Mississippi and
Oklahoma. The Company believes that the basins in these states offer significant
long-term potential due to the large number of mature fields with multiple
hydrocarbon bearing horizons. The application of proven technology to these
underexploited and underexplored fields yields attractive, lower-risk
exploitation and exploration opportunities. As a result of the attractive
geology and the Company's experience in exploiting fields in these areas, the
Company has accumulated a large inventory of potential development drilling,
secondary recovery and exploration projects in these basins.
The Company's focus in the onshore Gulf Coast and Mid-Continent regions has
resulted in significant production, reserve and EBITDA growth. The Company's
average net daily production has increased in each of the last six years from
5,203 BOE in 1993 to 10,311 BOE in 1999, representing a compound annual growth
rate of 12.1%, however, 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
natural production decline coupled with 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. Over the five-year period ended
December 31, 1998, the Company discovered or acquired approximately 103.4 MMBOE
of proved reserves at an average finding cost of $4.87 per BOE. Over the same
period, the Company has replaced over 529% of its production. This increase in
reserves from 27.2 MMBOE at year-end 1993 to 111.1 MMBOE at year-end 1998
represents a five-year compound annual growth rate of 32.5%. Concurrent with the
increase in production, EBITDA has increased from $16.5 million in 1993 to $32.1
million in 1998.
The Company's only operating revenues are crude oil and natural gas sales
with crude oil sales representing approximately 75% of production revenues and
natural gas sales representing approximately 25% of production revenues during
1996 and 1997. For the nine months ended September 30, 1999, crude oil sales
represented approximately 88% of production revenues and natural gas sales
represented approximately 12% of production revenues compared with 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 Louisiana
which were sold in December 1998. The Monroe field gas properties had
contributed approximately 60% of the natural gas sales revenues during 1998.
Operating revenues increased from $26.5 million in 1994 to $68.8 million in
1998 primarily due to an increase in production volumes from successful
development and exploration activities in the Company's existing Mississippi
fields and due to the following acquisitions: the December 1994 acquisition of
the Monroe natural gas field; the August 1995 acquisition of the Brookhaven
field and; the December 1997 acquisition of the Oklahoma Properties. 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.
The Company also strives to maintain a low cost structure through asset
concentration, such as in the interior salt basin of Mississippi and the
Oklahoma Properties. Asset concentration permits operating economies of scale
and leverages operational, technical and marketing capabilities. Production
costs (including lease operating expenses and production taxes) per BOE had been
declining from $4.49 in 1994 to $4.18 in 1998. Recently, however, on a BOE
basis, production costs increased 29% to $5.35 per BOE in 1999 compared to $4.16
per BOE in 1998 for the nine month periods ended September 30, and increased 72%
to $6.74 per BOE in 1999 compared to $3.92 per BOE in 1998 for the three month
periods ended September 30. On a
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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.
The Company also controls the magnitude and timing of its capital
expenditures by obtaining high working interests in and operating its
properties. At December 31, 1998, the Company owned an average working interest
of 76% in the fields it operates.
At September 30, 1999, the Company had 137 employees associated with its
operations, including 26 field personnel in Mississippi and 28 field personnel
in Oklahoma.
For information on the market for the Existing Common Stock, see
"Description of Existing Debt and Equity -- Stock".
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B. ORGANIZATION OF THE COMPANY
The following chart illustrates the organizational structure of the Company
immediately before the filing of the Debtors' voluntary petition under Chapter
11 of the Bankruptcy Code. This structure is not expected to change as a result
of the confirmation of the Plan.
Chart
C. MANAGEMENT OF THE PARENT COMPANY
1. INFORMATION ABOUT EXISTING MANAGEMENT MEMBERS
The following information is a summary description of the Parent Company's
management. More detailed information is contained in the Annual Report
Amendment, which is attached as ANNEX C.
Set forth below is information on the directors and executive officers of
the Parent Company.
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ---- ------ ---
<S> <C> <C>
Jeffrey Clarke Chairman, President, Chief Executive Officer and Director 54
Louis F. Crane Director 57
Alan Edgar Director 53
Kenneth H. Lambert Director 53
Douglas R. Martin Director 53
Jake Taylor Director 52
R. M. Pearce Executive Vice President and Chief Operating Officer 48
Senior Vice President, Corporate Development and Corporate
Anne Marie O'Gorman Secretary 41
Keri Clarke Vice President, Land and Environmental/Regulatory Affairs 43
R. Lynn Guillory Vice President, Human Resources and Administration 53
Gary Hoge Vice President, Exploration 56
Larry L. Keller Vice President, Mid-Continent Division 41
Susan J. McAden Vice President & Controller 42
Patrick S. Wright Vice President, Gulf Coast Division 43
Joseph F. Ragusa Treasurer 45
</TABLE>
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Jeffrey Clarke has served as Chairman of the Parent Company since October
1993 and as President and Chief Executive Officer of the Parent Company since
September 1993. Mr. Clarke served as Executive Vice President and Chief
Operating Officer of Coho Resources, Inc. ("CRI") from May 1982 until May 1990,
as President and Chief Operating Officer of CRI from May 1990 to October 1992
and as President and Chief Executive Officer of CRI since October 1992. He
served as Senior Vice President, Chief Operating Officer and a director of Coho
Resources Limited ("CRL") from 1984 to October 1992 and as President and Chief
Executive Officer of CRL since October 1992 and has been engaged by CRI in
various capacities since 1980.
Louis F. Crane has served as President and Chief Executive Officer of
Orleans Capital (investment portfolio management firm) since November 1991. Mr.
Crane is Chairman of the Board of Offshore Logistics Inc. and a director of
Columbia Universal Corp.
Alan Edgar has been an independent financial consultant since January 1999
and prior thereto served as Managing Director, Co-head Energy Group, with
Donaldson, Lufkin & Jenrette Securities Corporation, an investment banking firm,
from 1990 until his retirement in December 1998.
Kenneth H. Lambert served as Chairman of the Board of Directors of CRI from
1980 until September 1993, as Chief Executive Officer of CRI from 1980 to 1992
and as President of CRI from 1980 to 1990. Mr. Lambert served as President and
Chief Executive Officer of CRL from 1980 to June 1992, and as Chairman of the
Board of CRL from June 1992 until the Combination. Mr. Lambert has served as
President and Chief Executive Officer of Nugold Technology Ltd. (a private
company dealing in the recovery of precious metals) since April 1993. Mr.
Lambert is chairman of the board, president, chief executive officer and
director of Edmonton International Industries Ltd. (a Canadian public investment
holding company), the Chairman of the Board of Destination Resorts, Inc. (a
Canadian public resort development corporation) and Chairman of the Board of Oz
New Media (a Canadian public educational network, multimedia, digital content
company).
Douglas R. Martin has served as Chairman of Pursuit Resources Corp. (a
Canadian public oil and gas company) since September 1993. Mr. Martin served as
Senior Vice President and Chief Financial Officer of CRI from May 1990 to August
1993. He served as CRL's Senior Vice President and Chief Financial Officer from
April 1990 to August 1993.
Jake Taylor has been an independent financial consultant since 1989.
R. M. Pearce has served as Executive Vice President and Chief Operating
Officer of the Parent Company since August 1995 and has been an officer of the
Parent Company since November 1993. From July 1991 to October 1993, Mr. Pearce
served as President of GRL Production Services Company.
Anne Marie O'Gorman was appointed Senior Vice President, Corporate
Development, in March 1996 and was Vice President, Corporate Development, of the
Company and CRI, prior to September 1993. Ms. O'Gorman had been employed by CRI
or CRL in various capacities since 1985. Ms. O'Gorman has served as Secretary of
the Parent Company since September 1993.
Keri Clarke has served as Vice President, Land and Environmental/Regulatory
Affairs, of the Parent Company (and CRI, prior to September 1993) since 1989. He
has also been employed by CRL in various positions since 1981.
R. Lynn Guillory joined the Parent Company as Vice President, Human
Resources and Administration, when the Parent Company acquired Interstate
Natural Gas Company ("ING") on December 8, 1994. Mr. Guillory held that same
position with ING since its inception in March 1992.
Gary Hoge joined the Company as Vice President, Exploration in April 1998.
From 1994 until he joined the Company, Mr. Hoge served as Vice President,
Exploration for Greenhill Petroleum. From 1992 until 1994, Mr. Hoge served in
several senior positions with Coffman Exploration and Cielo Energy.
Larry L. Keller has served as Vice President, Exploitation, of the Parent
Company and CRI, prior to September 1993, from August 1993 and had been employed
in various engineering positions with CRI since July 1990.
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Susan J. McAden was appointed Vice President and Controller in January 1998
and joined the Parent Company as Controller in February 1995. From September
1993 to February 1995, Ms. McAden was Vice President and Controller of Lincoln
Property Company (a property development and management company). From November
1990 to September 1993, Ms. McAden was Chief Accounting Officer and Treasurer of
Concap Equities, Inc. (the acting general partner for 16 public real estate
partnerships).
Patrick S. Wright joined the Parent Company as Vice President, Operations,
in January 1996. From January 1991 until he joined the Parent Company, Mr.
Wright served in several managerial positions with Snyder Oil Corporation (an
international oil and gas exploration and production company).
Joseph F. Ragusa was appointed Treasurer in January 1998 and joined the
Parent Company as Assistant Treasurer, when the Parent Company acquired ING on
December 8, 1994. Mr. Ragusa held that same position with ING since January
1993.
In late 1999, at the request of the Bank Group, the Debtors proposed a work
force reduction. In connection therewith, Eddie M. LeBlanc is no longer employed
by the Parent Company. Mr. LeBlanc was the Chief Financial Officer of the Parent
Company.
The Debtors expect the foregoing directors and officers to be their
directors and officers on the Effective Date and immediately thereafter, subject
to the following provisions of this paragraph. For the first year after the
Effective Date, the board of directors of the Reorganized Parent Company will
consist of seven members. Four members of the board of directors will be
selected by the Principal Bondholders. One member of the board of directors will
be selected by the post-Effective Date board of directors from the Debtors'
post-Effective Date management. Two members of the board of directors will be
selected by the entities whose funding is used on the Effective Date based upon
their relative contributions of capital. The Parent Company is not currently
aware of the identities of the board members for the one-year period after the
Effective Date to be nominated in accordance with the Plan since their
identities have not yet been determined. In compliance with Section 1125(a)(5)
of the Bankruptcy Code, to the extent that the current directors and officers of
the Parent Company change, the Debtors will supply the names of the directors
and officers of the Reorganized Parent Company at the Confirmation Hearing.
In May 1998, in connection with its acquisition from third parties of
approximately 8.5% of the Parent Company's Common Stock, Energy Investment
Partners ("EIP") entered into a Shareholders' Agreement with the Parent Company
under which EIP has the right to name two directors of the Parent Company.
Currently those two directorships are vacant.
2. COMPENSATION OF MANAGEMENT
The Annual Report Amendment attached as ANNEX C contains information about
current management compensation. Any management compensation terms after the
Effective Date are subject to the review and approval of the Reorganized Parent
Company's board of directors as it exists after the Effective Date.
The Board of Directors of the Parent Company has proposed that the Plan
provide for a retention bonus plan ("Retention Plan") under which certain key
employees are provided with additional incentives to continue their employment
with the Parent Company as it pursues a reorganization. If the Plan is
confirmed, the total amount of cash bonus awards that will be granted under the
Retention Plan is $1,472,507; 33% of which is paid on the Effective Date and 66%
of which is paid on the first business day following the 270th day after the
Effective Date. $600,000 of these cash bonus awards will be divided among the
following officers in the following amounts:
<TABLE>
<S> <C>
Jeffrey Clarke............................................ $150,000
R. M. Pearce.............................................. $112,500
Anne Marie O'Gorman....................................... $ 87,500
Larry L. Keller........................................... $ 81,500
Keri Clarke............................................... $ 66,000
Susan J. McAden........................................... $ 55,000
Joseph F. Ragusa.......................................... $ 47,500
</TABLE>
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The remaining $872,500 will be divided among 24 employees.
The Parent Company currently expects that the terms of management
compensation from and after the Effective Date will be as follows:
- The cash compensation reflected in the Annual Report Amendment is
expected to remain the same.
- The amended and restated employment agreements described in
"-- Employment Agreements" below are expected to become effective.
3. EMPLOYMENT AGREEMENTS
The terms of existing employment agreements between the Parent Company and
key employees are described in the Annual Report Amendment attached as ANNEX C.
Those employment agreements will be amended and restated as of the Effective
Date. The amendments will, among other things, redefine "change of control" to
provide that the confirmation of the Plan does not constitute a change of
control (so that no additional compensation is owed thereby because of
confirmation of this Plan). The Debtors and the Official Unsecured Creditors
Committee will agree on other changes to be made in the amended employment
agreements by March 1, 2000, or such later date that the Debtors and Creditors
Committee agree to, and file these amended agreements with the Bankruptcy Court.
Thereafter, the Debtors will provide a copy of the form of amended and restated
employment agreements to any party in interest who requests it in writing.
Written requests should be sent to the Parent Company at 14785 Preston Road,
Suite 860, Dallas, Texas 75240 to the attention of Ms. Anne Marie O'Gorman. Any
employee who does not sign such an amended agreement by March 1, 2000 will have
his or her existing employment agreement rejected under the Plan.
After the Effective Date, the Debtors will undertake such downsizing and
severance plans as its management and board of directors then deem appropriate.
XIII.
ADDITIONAL FACTORS TO BE CONSIDERED
You should consider carefully the following risk factors in evaluating the
Plan.
A. SECURITIES LAW MATTERS AND PRIVATE PLACEMENT EXEMPTION
1. AVAILABILITY OF SECTION 1145 OF THE BANKRUPTCY CODE
Section 1145(a)(1) of the Bankruptcy Code provides an exemption from the
registration requirements of Section 5 of the Securities Act of 1933 (the
"Securities Act") and state and local securities laws in connection with the
offer or sale under a plan of reorganization of a security of the debtor, of an
affiliate participating in a joint plan with the debtor or of a successor to the
debtor under the plan. Generally, the exemption is not available for offers or
sales that are not made principally in exchange for a claim against, an interest
in, or a claim for an administrative expense in the case concerning the debtor
or the applicable affiliate. In addition, Section 1145(a)(2) of the Bankruptcy
Code provides an exemption in connection with the offer of a security through
any warrant or other similar right that was sold in the manner specified under
Section 1145(a)(1) or the sale of a security upon exercise of such a warrant or
similar right. The exemptions provided by Sections 1145(a)(1) and (2) are not
available as to any sale of a security to any entity that is deemed to be an
"underwriter" (as that term is defined in Section 1145(b)(1) of the Bankruptcy
Code).
The Debtors believe that the New Common Stock being issued to holders of
allowed Bond Claims in exchange for their claims and to shareholders in exchange
for Existing Common Stock are governed by Section 1145(a)(1)(A) and, thus, are
exempt from registration requirements under federal securities laws.
The Debtors will register shares of the New Common Stock that will be
issued to shareholders or other purchasers pursuant to the Rights Offering by
means of a registration statement filed with the SEC under federal securities
laws. If that registration statement is withdrawn by the Debtors, the Debtors
will issue shares of the New Common Stock only to qualified investors in the
Private Placement.
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2. PARTIES WHO ARE UNDERWRITERS
Section 1145(b)(1) of the Bankruptcy Code defines a person or entity that
may be an "underwriter," and thus restricted in the resale of securities
received, as any person or entity that (a) purchases a claim or interest, with a
view towards distribution of any security received or to be received under a
plan of reorganization in exchange for such a claim or interest; (b) offers to
sell securities offered or sold under a plan of reorganization for the holders
of such securities; (c) offers to buy securities offered for sale under a plan
of reorganization from the holders of such securities, if such offer to buy is
with a view towards distribution of such securities under an agreement made
either in connection with such plan, with the consummation of such plan, or with
the offer or sale of securities under such plan; or (d) is an "issuer" of the
securities offered or sold under a plan of reorganization as that term is
defined in Section 2(11) of the Securities Act, with respect to such securities.
Under Section 2(11) of the Securities Act, an "issuer" includes any person
directly or indirectly controlling or controlled by an issuer, or any person
under direct or indirect control with an issuer.
To ensure that the distribution of the New Common Stock to holders of
Existing Bonds in exchange for their claims and to shareholders in exchange for
Existing Common Stock and of the Standby Loan Notes, if any (collectively, the
"Plan Securities") is exempt under Section 1145(a), the Debtors may require any
holder of a claim or interest to covenant and agree with the Reorganized Parent
Company, prior to the issuance of any Plan Securities to any such party, that,
if such party is an entity of the type deemed an "underwriter" pursuant to
Section 1145(b)(1) of the Bankruptcy Code, such party will engage only in
"ordinary trading transactions" within the meaning of Section 1145(b)(1) of the
Bankruptcy Code with respect to the Plan Securities that such party receives
pursuant to the Plan.
Any such party that refuses or otherwise fails to provide the Reorganized
Parent Company with the requested agreements will receive Plan Securities that
will be subject to restrictions prohibiting the sale thereof (including a legend
to such effect, if applicable) unless and until (a) such securities are
registered under the Securities Act and any applicable state law or (b) such
registration is not required.
Any party reasonably determined by the Reorganized Parent Company to be an
"affiliate" of the issuer of Plan Securities prior to the Effective Date (i.e.,
directly or indirectly controlling or controlled by the issuer of Plan
Securities) and any party receiving New Common Stock pursuant to the Private
Placement will receive Plan Securities that contain a legend to the effect that
such Plan Securities may not be sold unless and until (a) such securities are
registered under the Securities Act and any applicable state law or (b) such
registration is not required.
3. AVAILABILITY OF SEC RULE 144 FOR AFFILIATE RESALES
It is an integral part of the Plan that the issuance of the Plan Securities
pursuant to the Plan is exempt from registration under the Securities Act by
Section 1145(a) of the Bankruptcy Code. As mentioned above, however, Section
1145(a) of the Bankruptcy Code does not apply to subsequent sales of Plan
Securities by persons who are "underwriters," as that term is defined in Section
1145(b)(1). Section 1145(b)(1) provides that, for purposes of Section 2(11) of
the Securities Act, the term "underwriter" means, in addition to those persons
who perform traditional underwriting activities, any person directly or
indirectly controlling or controlled by the issuer of the securities, or any
person under direct or indirect common control with the issuer. Subsequent sales
by affiliates of securities issued under a plan of reorganization are subject to
the registration requirements of the Securities Act, unless another exemption
from registration is available to the affiliate who desires to effect the sale.
In evaluating whether a person directly or indirectly controls, is
controlled by, or is under common control with an issuer of securities, an
analysis must be made of the facts and circumstances regarding the relationship
between that person and the issuer. A detailed discussion of all the criteria
applicable to such an analysis, and of the application of such analysis to all
the persons who will receive securities under the Plan is beyond the scope of
this Disclosure Statement. Interested persons are referred to their own
professional advisors for further information regarding their possible status as
an affiliate of the Reorganized Parent Company and of the consequences of such
status.
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B. ADEQUACY OF COLLATERAL
The Credit Facility and the Standby Loan, if applicable, will be secured by
the Collateral, including crude oil and natural gas properties with a Present
Value of Proved Reserves of $582.4 million based on the Mid-Year Reserve Report
information. See "Information About the Debtors -- The Company's Business and
Operations". The reserve data with respect to such interests, however, represent
estimates only and should not be construed as exact. Moreover, the estimates of
Present Value of Proved Reserves should not be construed as the current market
value of the estimated proved reserves attributable to the Company's properties.
There can be no assurance that, following an acceleration of the Credit Facility
or the Standby Loan, if any, after an event of default (as defined herein), the
proceeds from the sale of the Collateral will be sufficient to satisfy all
amounts due under the Credit Facility and any Standby Loan. The ability of the
lenders under the Credit Agreement and the holders of the Standby Loan Notes to
realize on the Collateral will be subject to certain procedural limitations.
C. DEPLETION OF RESERVES
The rate of production from crude oil and natural gas properties declines
as reserves are depleted. Except to the extent the Company acquires additional
properties containing proved reserves, conducts successful exploration and
development activities or, through engineering studies, identifies additional
behind-pipe zones or secondary recovery reserves, the proved reserves of the
Company will decline as reserves are produced. Future crude oil and natural gas
production is therefore highly dependent on the Company's level of success in
acquiring or finding additional reserves.
The Company's ability to continue to acquire producing properties or
companies that own such properties assumes that major integrated oil companies
and independent oil companies will continue to divest many of their crude oil
and natural gas properties. There can be no assurance, however, that such
divestitures will continue or that the Company will be able to acquire such
properties at acceptable prices or develop additional reserves in the future. In
addition, under the terms of the Credit Agreement and the Standby Loan
Agreement, if necessary, the Company's ability to obtain additional financing in
the future for acquisitions and capital expenditures will be limited.
D. INDUSTRY CONDITIONS; IMPACT ON THE COMPANY'S PROFITABILITY
The Company's revenue, profitability and future rate of growth
substantially depends on prevailing prices for crude oil and natural gas. Crude
oil and natural gas prices can be extremely volatile and in recent times have
been depressed by excess total domestic and imported supplies. Prices are also
affected by actions of state and local agencies, the United States and foreign
governments and international cartels. Prices for crude oil and natural gas have
declined to historic lows on an inflation-adjusted basis. There can be no
assurance that commodity prices will rise or will not further decrease. These
external factors and the volatile nature of the energy markets make it difficult
to estimate future prices of crude oil and natural gas. The (until recent
months) substantial and extended decline in the prices of crude oil and natural
gas has had a material adverse effect on the Company's financial condition and
results of operations, including reduced cash flow and borrowing capacity, which
has not been overcome by the most recent price rebound. All of these factors are
beyond the control of the Company. Sales of crude oil and natural gas are
seasonal in nature, leading to substantial differences in cash flow at various
times throughout the year. Federal and state regulation of crude oil and natural
gas production and transportation, general economic conditions, changes in
supply and changes in demand all could adversely affect the Company's ability to
produce and market its crude oil and natural gas. If market factors were to
change dramatically, the financial effect on the Company could be substantial.
The availability of markets and the volatility of product prices are beyond the
control of the Company and thus represent a significant risk.
The Company periodically reviews the carrying value of its crude oil and
natural gas properties under the full cost accounting rules of the SEC. Under
these rules, capitalized costs of proved oil and natural gas properties may not
exceed a present value of estimated future net revenues from proved reserves,
discounted at 10%. Application of the ceiling test generally requires pricing
future revenue at the unescalated prices in effect
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as of the end of each fiscal quarter and requires a write-down for accounting
purposes if the ceiling is exceeded. The Company was required to write-down the
carrying value of its crude oil and natural gas properties during 1998 by an
aggregate of $188 million. The Company provided a write-down of its Tunisian
properties of $5.4 million during the third quarter of 1999 once it was
determined that the well in Tunisia, North Africa would not produce sufficient
quantities of crude oil to justify further completion work on the well. The
Company may be required to write-down the carrying value of its crude oil and
natural gas properties if in the future crude oil and natural gas prices are
depressed below the price used at December 31, 1998. When a write-down is
required, it results in a charge to earnings, but does not affect cash flow from
operating activities. Once incurred, a write-down of crude oil and natural gas
properties is not reversible at a later date.
To manage its exposure to price risks in the marketing of its crude oil and
natural gas, the Company from time to time has entered into fixed price delivery
contracts, financial swaps and crude oil and natural gas futures contracts as
hedging devices. To ensure a fixed price for future production, the Company may
sell a futures contract and thereafter make physical delivery of crude oil or
natural gas to comply with such contract. Such contracts may expose the Company
to the risk of financial loss in certain circumstances, including instances
where production is less than expected, the Company's customers fail to purchase
or deliver the contracted quantities of crude oil or natural gas, or a sudden,
unexpected event materially affects crude oil or natural gas prices. Such
contracts may also restrict the ability of the Company to benefit from
unexpected increases in crude oil and natural gas prices.
E. RELIANCE ON ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUE INFORMATION
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data included in the Annual Report represent only
estimates. In addition, the estimates of future net revenue from proved reserves
and their present value are based on certain assumptions about future production
levels, prices and costs that may not prove to be correct over time. In
particular, estimates of crude oil and natural gas reserves, future net revenue
from proved reserves and the Present Value of Proved Reserves for the crude oil
and natural gas properties described in the Annual Report are based on the
assumption that future crude oil and natural gas prices remain the same as crude
oil and natural gas prices at December 31, 1998. The average sales prices as of
December 31, 1998, used for purposes of those estimates of the Company were
$9.36 per Bbl of crude oil and $2.10 per Mcf of natural gas. Any significant
variance in actual results from these assumptions could also materially affect
the estimated quantity and value of reserves set forth in the Annual Report. 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.
F. NET LOSSES
The Company experienced substantial losses for the year ended December 31,
1998, and the nine months ended September 30, 1999, of $203.3 million and $29.8
million, respectively. There can be no assurances that the Company will become
profitable in the future.
G. RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S LOAN AGREEMENTS
The Credit Agreement and the Standby Loan Agreement restrict, among other
things, the Company's ability to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, merge or consolidate
with any other person or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets of the Company. A breach of
any of these covenants could result in a default under the Credit Agreement and
the Standby Loan Agreement.
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H. BUSINESS RISKS
Exploration and development for crude oil and natural gas involves many
risks. There is no assurance that commercial quantities of crude oil and natural
gas will be discovered by the Company, or that the Company will be able to
continue to acquire underdeveloped crude oil and natural gas fields and enhance
production and reserves by workovers, secondary recovery projects, recompletions
and development drilling. In addition, because the Company's strategy is to
acquire interests in underdeveloped crude oil and natural gas fields that have
been operated by others for many years, the Company may be liable for any damage
or pollution caused by the former operators of such crude oil and natural gas
fields. The Company's operations are also subject to all of the risks normally
incident to the operation and development of crude oil and natural gas
properties and the drilling of crude oil and natural gas wells, including
encountering unexpected formations or pressures, blowouts, cratering and fires,
which could result in personal injuries, loss of life, pollution damage and
other damage to the properties of the Company and others. The Company maintains
insurance against certain losses or liabilities arising from its operations in
accordance with customary industry practices and in amounts that management
believes to be reasonable. However, insurance is not available to the Company
against all operational risks, or is not economically feasible for the Company
to obtain. The occurrence of a significant event that is not fully insured could
have a material adverse effect on the Company's financial condition and results
of operations.
I. COMPETITION
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and production of, crude oil and natural gas. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas properties. The principal competitive factors in the acquisition of
such undeveloped crude oil and natural gas properties include the staff and data
necessary to identify, investigate and purchase such properties, and the
financial resources necessary to acquire and develop such properties. Many of
the Company's competitors have financial resources, staff and facilities
substantially greater than those of the Company. In addition, the producing,
processing and marketing of crude oil and natural gas is affected by a number of
factors which are beyond the control of the Company, the effect of which cannot
be accurately predicted.
The principal resources necessary for the exploration and production of
crude oil and natural gas are leasehold prospects under which crude oil and
natural gas reserves may be discovered, drilling rigs and related equipment to
explore for such reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. The Company must compete for such
resources with both major crude oil and natural gas companies and independent
operators. The continued availability of such materials and resources to the
Company cannot be assured.
J. GOVERNMENT REGULATION
The Company's business is subject to certain federal, state, provincial and
local laws and regulations relating to the exploration for and development,
production and marketing of crude oil and natural gas, as well as environmental
and safety matters. Such laws and regulations have generally become more
stringent in recent years, often imposing greater liability on a larger number
of potentially responsible parties. Because the requirements imposed by such
laws and regulations are frequently changed, the Company is unable to predict
the ultimate cost of compliance with such requirements. There is no assurance
that laws and regulations enacted in the future will not adversely affect the
Company's financial condition and results of operations.
K. DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on several members of its senior
management team for its management and business and financial contacts. The
unavailability of one of these individuals could have an adverse effect on the
Company's business.
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L. CONCENTRATION OF CUSTOMERS
During 1998, three purchasers of the Company's crude oil and natural gas,
EOTT Energy Corp. ("EOTT"), Amoco Production Company and Mid Louisiana Marketing
Company, accounted for 42%, 28% and 14%, respectively, of the Company's
revenues. The Company sold its Monroe Field properties in December of 1998 and
therefore does not currently have a relationship with Mid Louisiana Marketing
Company. While the Company believes that its relationships with EOTT and Amoco
Production Company are good, any loss of revenue from these customers due to
nonpayment or late payment by the customer would have an adverse effect on the
Company's results of operations.
M. ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS
Certain provisions of the Amended and Restated Articles of Incorporation
and Amended and Restated Bylaws of the Reorganized Parent Company may tend to
deter potential unsolicited offers or other efforts to obtain control of the
Company that are not approved by its board of directors, including the right of
the board of directors, without any action by the shareholders of the Company,
to fix the rights and preferences of undesignated preferred stock, including
dividend, liquidation and voting rights.
N. ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on its stock and does not intend
to pay cash dividends on the New Common Stock in the foreseeable future. In the
past, the Company has used its available cash flow to conduct exploration and
development activities or to make acquisitions, and expects to continue to do so
in the future. In addition, the terms of the Credit Agreement and the Standby
Loan Agreement restrict the payment of dividends by the Company. It is unlikely
that the Reorganized Parent Company will pay dividends in the foreseeable
future. Coho Energy, Inc. is currently a holding company with no independent
operations. Accordingly, any amounts available for dividends will depend on the
prior declaration of dividends by the Parent Company's subsidiaries. Any
declaration of those dividends would be subject to Canadian or U.S. withholding
tax at applicable tax rates.
O. TITLE TO PROPERTIES
As is customary in the oil and gas industry, in certain circumstances, the
Company makes only a limited review of title to undeveloped crude oil and
natural gas leases at the time they are acquired by the Company. However, before
the Company acquires developed crude oil and natural gas properties, and before
drilling commences on any leases, the Company causes a thorough title search to
be conducted, and any material defects in title are remedied to the extent
possible. To the extent title opinions or other investigations reflect title
defects, the Company, rather than the seller of the undeveloped property, is
typically obligated to cure any such title defects at its not expense. If the
Company were unable to remedy or cure any title defect of a nature such that it
would be prudent to commence drilling operations on the property, the Company
could suffer a loss of its entire investment in the property. The Company
believes that it has good title to its crude oil and natural gas properties,
some of which are subject to immaterial encumbrances, easements and
restrictions. The crude oil and natural gas properties owned by the Company are
also typically subject to royalty and other similar non-cost bearing interests
customary in the industry. The Company does not believe that any of these
encumbrances or burdens will materially affect the Company's ownership or use of
its properties.
P. FORWARD-LOOKING STATEMENTS
This Disclosure Statement includes forward-looking statements. All
statements other than statements of historical facts included in this Disclosure
Statement, including statements made under "Capitalization", "Feasibility of the
Plan" and "Information About the Debtors", regarding capital expenditures, oil
and natural gas production, anticipated wells to be drilled in the future, the
Debtors' financial position, business strategy and other plans and objectives
for future operations, are forward-looking statements. Although the Debtors
believe that the expectations reflected in those forward-looking statements are
reasonable, they can give no
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assurance that their expectations will prove to have been correct, and actual
results may differ materially from those forward-looking statements.
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves and in projecting future rates of production
and timing of expenditures, including many factors beyond the control of the
Debtors. Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates made by different engineers often vary from one another.
Further, results of drilling, testing and production derived after the date of
an estimate may justify revisions of that estimate. Those revisions, if
significant, could change the schedule of any further production and development
drilling. Accordingly, reserve estimates are generally different from quantities
of oil and natural gas that are ultimately recovered. All written and oral
forward-looking statements attributable to the Debtors or persons acting on
their behalf are expressly qualified in their entirety by these factors.
Q. YEAR 2000 ISSUE
The Company 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 completed its Year 2000 review and remediation in
December 1999.
The Company concurrently reviewed 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. The Company has not identified any material problems
associated with the Year 2000 readiness efforts of its major suppliers and
purchasers.
In addition, the Company created a contingency plan to mitigate potential
Year 2000 problems both within the Company and with major suppliers and
purchasers of the Company.
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 has not been material.
Management does not estimate future expenditures related to the Year 2000 to be
material.
The Company believes that it has taken and continues to take all reasonable
steps to ensure Year 2000 readiness. Although other unanticipated Year 2000
issues could yet 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, though it is unlikely that any effect will be material.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS DISCLOSURE
STATEMENT ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR
2000 INFORMATION AND READINESS DISCLOSURE ACT.
XIV.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following is a general summary of certain material federal income tax
consequences of the implementation of the Plan to the Debtors, creditors and
shareholders. This summary does not discuss all aspects of federal income
taxation that may be relevant to the Debtors, to a particular creditor or
shareholder in light of its individual investment circumstances or to certain
creditors or shareholders subject to special treatment under the federal income
tax laws (for example, tax-exempt organizations, financial institutions,
broker-dealers, life insurance companies, foreign corporations or individuals
who are not citizens or residents of the United States). This summary also does
not discuss any aspects of state, local or foreign taxation.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "IRC"), the Treasury regulations (including temporary regulations)
promulgated thereunder, judicial authorities and current administrative rulings,
all as in effect on the date hereof and all of which are subject to change
(possibly with retroactive effect) by legislation, administrative action or
judicial decision. Moreover, due to a lack of
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definitive judicial or administrative authority or interpretation, substantial
uncertainties exist with respect to various tax consequences of the Plan as
discussed herein. The Debtors have not requested a ruling from the Internal
Revenue Service (the "IRS") with respect to these matters and no opinion of
counsel has been sought or obtained by the Debtors with respect thereto. There
can be no assurance that the IRS will not challenge any or all of the tax
consequences of the Plan, or that such a challenge, if asserted, would not be
sustained. FOR THE FOREGOING REASONS, CREDITORS AND SHAREHOLDERS ARE URGED TO
CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES
(FOREIGN, FEDERAL, STATE AND LOCAL) TO THEM OF THE PLAN. THE DEBTORS ARE NOT
MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX CONSEQUENCES OF THE
CONFIRMATION AND CONSUMMATION OF THE PLAN AS TO ANY HOLDERS OF CLAIMS OR
SHAREHOLDERS, NOR ARE THE DEBTORS RENDERING ANY FORM OF LEGAL OPINION AS TO SUCH
TAX CONSEQUENCES.
A. FEDERAL INCOME TAX CONSEQUENCES TO THE DEBTORS
1. CANCELLATION OF INDEBTEDNESS
Under general tax principles, the Debtors would realize cancellation of
debt ("COD") income to the extent that the Debtors pay a creditor pursuant to
the Plan an amount of consideration in respect of a claim against the Debtors
that is worth less than the amount of such claim. For this purpose, the amount
of consideration paid to a creditor generally would equal the amount of cash or
the fair market value on the Effective Date of any other property paid to such
creditor. Because the Debtors will be in a bankruptcy case at the time the COD
income is realized, the Debtors will not be required to include COD income in
gross income, but rather will be required to reduce certain of their tax
attributes by the amount of COD income so excluded. Under the general rules of
IRC section 108, the required attribute reduction would be applied first to
reduce the Debtors' net operating loss carryforwards ("NOLs") to the extent of
such NOLs, with any excess excluded COD income applied to reduce certain other
tax attributes. The Debtors believe and intend to take the position that any
reduction in tax attributes generally occurs on a separate entity basis, even
though the Debtors file a consolidated federal income tax return.
IRC section 108(b)(5) provides an election pursuant to which the Debtors
can elect to apply the required attribute reduction first to reduce the basis of
their depreciable property to the extent of such basis, with any excess applied
next to reduce their NOLs and then certain other tax attributes. The Debtors
have not yet determined whether they will make the election under IRC section
108(b)(5).
2. LIMITATION ON NET OPERATING LOSSES
The Debtors will experience an "ownership change" (within the meaning of
IRC section 382) on the Effective Date as a result of the issuance of New Common
Stock to certain holders of claims. As a result, the Debtors' ability to use any
pre-Effective Date NOLs and capital loss carryovers to offset their income in
any post-Effective Date taxable year (and in the portion of the taxable year of
the ownership change following the Effective Date) to which such a carryover is
made generally (subject to various exceptions and adjustments, some of which are
described below) will be limited to the sum of (a) a regular annual limitation
(prorated for the portion of the taxable year of the ownership change following
the Effective Date), (b) the amount of the "recognized built-in gain" for the
year which does not exceed the excess of their "net unrealized built-in gain"
over previously recognized built-in gains (as the quoted terms are defined in
IRC section 382(h)), and (c) any carryforward of unused amounts described in (a)
and (b) from prior years. IRC section 382 may also limit the Debtors' ability to
use "net unrealized built-in losses," if any, to offset future taxable income.
The regular annual limitation will generally be equal to the product of (a) the
lesser of (i) the value of the stock of the Debtors immediately after the
increase in value of the Debtors resulting from the surrender of creditors'
claims in the reorganization transactions or (ii) the gross value of the
Debtors' assets immediately before the ownership change (with certain
adjustments) and (b) the "long-term tax-exempt rate" (as defined in IRC section
382(f)). In December 1999, the long-term tax-exempt rate was 5.72%; however, the
rate in effect on the Effective Date may be different from the December 1999
rate. The loss carryovers will be subject to
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further limitations if the Debtors experience additional future ownership
changes or if they do not continue their business enterprise for at least two
years following the Effective Date.
The operation and effect of IRC section 382 will be materially different
from that just described if the Debtors are subject to the special rules for
corporations in bankruptcy provided in IRC section 382(1)(5). In that case, the
Debtors' ability to utilize their pre-Effective Date NOLs would not be limited
as described in the preceding paragraph. However, several other limitations
would apply to the Debtors under IRC section 382(1)(5), including (a) the
Debtors' NOLs would be calculated without taking into account deductions for
interest paid or accrued in the portion of the current tax year ending on the
Effective Date and all other tax years ending during the three-year period prior
to the current tax year with respect to the claims that are exchanged for New
Common Stock pursuant to the Plan, and (b) if the Debtors undergo another
ownership change within two years after the Effective Date, the Debtors' IRC
section 382 limitation with respect to that ownership change will be zero.
As a general matter, the rules of IRC section 382(1)(5) apply to certain
ownership changes occurring in a Chapter 11 bankruptcy case pursuant to a
court-ordered transaction or court-approved plan. These provisions will apply to
the Debtors if the persons that are shareholders and "qualified" creditors of
the Debtors immediately before the ownership change own, after the ownership
change, at least 50% (measured by both vote and value) of the stock of the
Debtors. Certain attribution rules and other requirements apply for purposes of
determining stock ownership for this purpose. It is uncertain whether the
provisions of IRC section 382(1)(5) would apply to the ownership change
occurring as a result of the confirmation of the Plan. However, under IRC
section 382(1)(5)(H), the Debtors may elect not to have the special rules of IRC
section 382(1)(5) apply (in which case the regular IRC section 382 rules,
described above, will apply). The Debtors have not yet determined whether they
would elect to have the regular IRC section 382 rules apply to the ownership
change arising from the consummation of the Plan (assuming section 382(1)(5)
would otherwise apply).
B. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CLAIMS AND HOLDERS OF EQUITY
INTERESTS
The federal income tax consequences of the implementation of the Plan to a
holder of a claim will depend upon a number of factors, including whether such
holder is deemed to have participated in an exchange for federal income tax
purposes, and, if so, whether such exchange transaction constitutes a tax-free
recapitalization or a taxable transaction; whether such holder's present debt
claim constitutes a "security" for federal income tax purposes; the type of
consideration received by such holder in exchange for its allowed claim; and
whether such holder reports income on the accrual basis.
1. HOLDERS OF OTHER PRIORITY CLAIMS AND CERTAIN GENERAL UNSECURED CLAIMS
A holder whose claim is paid in full or otherwise discharged on the
Effective Date will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (a) the fair market value on the
Effective Date of any property received by such holder in respect of its claim
(excluding any property received in respect of a claim for accrued interest that
had not been included in income) and (b) the holder's adjusted tax basis in the
claim (other than any claim for such accrued interest). A holder's tax basis in
property received in exchange for its claim will generally be equal to the fair
market value of such property on the Effective Date. The holding period for any
such property will begin on the day after the Effective Date.
Under the Plan, some property may be distributed or deemed distributed to
certain holders of claims with respect to their claims for accrued interest.
Holders of claims for accrued interest which previously have not included such
accrued interest in taxable income will be required to recognize ordinary income
equal to the fair market value of the property received with respect to such
claims for accrued interest. Holders of claims for accrued interest which have
included such accrued interest in taxable income generally may take an ordinary
deduction to the extent that such claim is not fully satisfied under the Plan
(after allocating the distribution between principal and accrued interest), even
if the underlying claim is held as a capital asset. The tax basis of the
property received in exchange for claims for accrued interest will equal the
fair market value of such property on the Effective Date, and the holding period
for the property received in exchange for such
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claims will begin on the day after the Effective Date. The extent to which
consideration distributable under the Plan is allocable to interest is not
clear. Claimholders are advised to consult their own tax advisors to determine
the amount, if any, of consideration received under the Plan that is allocable
to interest.
The market discount provisions of the IRC may apply to holders of certain
claims. In general, a debt obligation other than a debt obligation with a fixed
maturity of one year or less that is acquired by a holder in the secondary
market (or, in certain circumstances, upon original issuance) is a "Market
Discount Bond" as to that holder if its stated redemption price at maturity (or,
in the case of a debt obligation having original issue discount, the revised
issue price) exceeds the tax basis of the debt obligation in the holder's hands
immediately after its acquisition. However, a debt obligation will not be a
"market discount bond" if such excess is less than a statutory de minimis
amount. Gain recognized by a holder of a claim with respect to a "market
discount bond" will generally be treated as ordinary interest income to the
extent of the market discount accrued on such debt obligation during such
holder's period of ownership, unless such holder elected to include accrued
market discount in taxable income currently. A holder of a "market discount
bond" that is required under the market discount rules of the IRC to defer
deduction of all or a portion of the interest on indebtedness incurred or
maintained to acquire or carry the debt obligation may be allowed to deduct such
interest, in whole or in part, on disposition of such debt obligation.
2. HOLDERS OF ALLOWED BOND CLAIMS
Pursuant to the Plan, the Debtors will issue shares of New Common Stock to
the holders of allowed Bond Claims in exchange for such claims. The federal
income tax consequences arising from the Plan to holders of allowed Bond Claims
may vary depending upon, among other things, whether such claims constitute
"securities" for federal income tax purposes. The determination of whether a
debt instrument constitutes a "security" depends upon an evaluation of the
nature of the debt instrument. Generally, corporate debt instruments with
maturities when issued of less than five years are not considered securities,
and corporate debt instruments with maturities when issued of ten years or more
are considered securities. The Debtors believe and intend to take the position
that the allowed Bond Claims should be treated as "securities" for federal
income tax purposes.
If the allowed Bond Claims do not constitute "securities" for federal
income tax purposes, a holder of an allowed Bond Claim would be subject to the
tax treatment described above under the heading "Holders of Other Priority
Claims and Certain General Unsecured Claims." If the allowed Bond Claims
constitute "securities" for federal income tax purposes, the Debtors believe
that the exchange of such allowed Bond Claims for shares of New Common Stock
should constitute a "recapitalization." In that case, except as discussed above
with respect to accrued market discount and claims for accrued interest, a
holder of allowed Bond Claims should recognize gain, but not loss, with respect
to its claim surrendered in an amount equal to the lesser of (a) the amount of
gain realized (i.e., the excess of the fair market value of any property
received by such holder in respect of its allowed Bond Claim over the tax basis
of such claim) and (b) the "boot" (as defined below), if any, received by such
holder in respect of its allowed Bond Claim. A holder will be treated as
receiving "boot" to the extent of the fair market value of property other than
shares of New Common Stock received by the holder. Any such gain recognized will
be treated as capital gain if the allowed Bond Claim is a capital asset in the
hands of the holder thereof unless the boot, if any, received has the effect of
the distribution of a dividend, in which case the gain would be treated as a
dividend to the extent of the holder's ratable share of the Debtors'
undistributed earnings and profits. In addition, a holder's aggregate tax basis
in the New Common Stock (other than the New Common Stock received for accrued
interest) should be equal to the aggregate tax basis in the allowed Bond Claims
exchanged therefor (exclusive of any basis attributable to accrued interest),
decreased by the amount of the boot, if any, received and increased by any gain
recognized, and such holder's holding period for the New Common Stock (other
than New Common Stock received for accrued interest) will include the holding
period of the allowed Bond Claims exchanged therefor, provided that such allowed
Bond Claims are held as capital assets on the Effective Date. A holder's tax
basis in boot received, if any, will equal the fair market value of such boot on
the Effective Date, and the holder's holding period in such boot will begin on
the day after the Effective Date.
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<PAGE> 88
In addition, under the market discount rules discussed above, any accrued
but unrecognized market discount with respect to the allowed Bond Claims
generally will be treated as ordinary income to the extent of the gain
recognized in connection with the recapitalization described above. Any
remaining accrued but unrecognized market discount generally will be treated as
ordinary income to the extent of the gain recognized upon the subsequent
disposition of the New Common Stock received in exchange for the allowed Bond
Claim. The treatment of accrued market discount in a nonrecognition transaction
is, however, subject to the issuance of Treasury regulations that have not yet
been promulgated. In the absence of such regulations, the application of the
market discount rules in the present transaction is uncertain. If a holder of an
allowed Bond Claim was required under the market discount rules of the IRC to
defer its deduction of all or a portion of the interest on indebtedness, if any,
incurred or maintained to acquire or carry the allowed Bond Claim, continued
deferral of the deduction for interest on such indebtedness may be required. Any
such deferred interest expense would be attributed to the New Common Stock
received in exchange for the claim, and would be treated as interest paid or
accrued in the year in which the shares of New Common Stock are disposed.
3. HOLDERS OF EQUITY INTERESTS
The receipt of shares of New Common Stock and the rights to purchase
additional shares of New Common Stock by the existing shareholders of the Parent
Company will not result in the recognition of any gain or loss by such holders.
A shareholder's tax basis in its shares of Existing Common Stock exchanged for
shares of New Common Stock and such rights will be allocated between the New
Common Stock and such rights based on the relative fair market values thereof.
Such shareholder's holding period for the New Common Stock and such rights will
include such shareholder's holding period for its existing equity interests.
C. WITHHOLDING
The Debtors will withhold all amounts required by law to be withheld from
payments to holders of claims. In addition, holders of claims may be required to
provide certain tax information to the Debtors.
XV.
DESCRIPTION OF EXISTING DEBT AND EQUITY
A. EXISTING BANK GROUP LOAN
Under the Existing Bank Group Loan Agreement, at December 31, 1998, the
amount available to the Company in borrowing capacity for general corporate
purposes was $242 million. That amount was reduced to $150 million on February
22, 1999. The Existing Bank Group Loan Agreement terminates by its own terms on
January 2, 2003 and, under the Plan, would terminate and be paid in full upon
the Effective Date. CRI and its wholly owned subsidiaries, Coho Louisiana
Production Company, Coho Exploration, Inc. and Coho Oil & Gas, Inc., are the
borrowers under the Existing Bank Group Loan Agreement, and the repayment of all
advances is guaranteed by the Parent Company. Outstanding advances under the
Existing Bank Group Loan Agreement are secured by substantially all of the
assets of the Company. The Existing Bank Group Loan Agreement lenders were
Paribas, Houston Agency; Bank One, Texas, N.A.; Meespierson Capital Corp.; Bank
of Scotland; Den Norske Bank ASA; Christiania Bank OG Kreditkasse, ASA; Credit
Lyonnais New York Branch and Toronto Dominion (Texas) Inc. At December 31, 1998,
outstanding advances under the Existing Bank Group Loan Agreement were $235
million and increased to $239.6 million as of January 5, 1999. The lenders
accelerated the full amount outstanding under the Existing Bank Group Loan
Agreement on August 19, 1999. The outstanding advances of $235 million and
$239.6 million as of December 31, 1998 and September 30, 1999, respectively,
have been reclassified to current maturities because the Company was unable to
cure the over-advance created by the February 1999 reduction in borrowing base.
See "Background of the Case".
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<PAGE> 89
B. EXISTING BONDS
The $150 million of principal amount of the Existing Bonds are unsecured
senior subordinated obligations of the Company and rank pari passu in right of
payment to all existing and future senior subordinated indebtedness of the
Company. The Existing Bonds mature on October 15, 2007, and bear interest from
October 3, 1997 at the rate of 8 7/8% per annum payable semiannually. The
Existing Bonds are guaranteed, on a senior subordinated basis, by Coho
Resources, Inc., Coho Louisiana Production Co., Coho Exploration, Inc., Coho Oil
& Gas, Inc., and Interstate Natural Gas Co., all of which are wholly owned
subsidiaries of the Parent Company and each of which is a Debtor. Under the
Plan, the Existing Bond Indenture and the Existing Bonds will be extinguished
and the Bondholder Group will receive shares of the New Common Stock.
C. STOCK
The authorized capital stock of the Parent Company consists of 100,000,000
shares of Existing Common Stock, par value $0.01 per share, and 10,000,000
shares of preferred stock, par value $0.01 per share. At December 31, 1999,
25,603,512 shares of Existing Common Stock were outstanding and no shares of
preferred stock were outstanding. Under the Plan, any shares of Existing Common
Stock reserved for issuance upon the exercise of options granted under the
Company's stock option plans will be of no effect since those plans will be
canceled and no shares will be reserved on the Effective Date. Under the Plan,
any shares of Existing Common Stock reserved for issuance upon the exercise of
warrants issued by the Parent Company on December 18, 1997 to AMOCO Corporation,
an Indiana corporation, will be of no effect since those warrants will be
canceled and no shares will be reserved on the Effective Date. Under the Plan,
the Existing Common Stock will be extinguished, the Parent Company's
shareholders will receive shares of the New Common Stock, and the preferred
stock will remain authorized but unissued.
1. EXISTING COMMON STOCK
Holders of shares of Existing Common Stock (a) are entitled to one vote per
share in the election of directors and on all other matters submitted to a vote
of shareholders; (b) have the right to cumulate their votes in the election of
directors; (c) have no redemption or conversion rights and no preemptive or
other rights to subscribe for securities of the Parent Company; (d) upon the
Parent Company's liquidation, dissolution or winding up, are entitled to share
equally and ratably in all of the assets remaining, if any, after satisfaction
of all debts and liabilities of the Parent Company and the preferential rights
of any series of preferred stock then outstanding; and (e) have an equal and
ratable right to receive dividends, when, as and if declared by the board of
directors out of funds legally available therefor and only after payment of, or
provision for, full dividends on all outstanding shares of any series of
preferred stock and after the Parent Company has made provision for any required
sinking or purchase funds for series of preferred stock. The shares of Existing
Common Stock outstanding are fully paid and nonassessable.
2. PREFERRED STOCK
The preferred stock may be issued from time to time in one or more series,
and the board of directors of the Parent Company, without further approval of
the shareholders, is authorized to fix the dividend rights and terms, redemption
rights and terms, liquidation preferences, conversion rights, voting rights and
sinking fund provisions applicable to each series of preferred stock. If the
Reorganized Parent Company issues a series of preferred stock in the future that
has voting rights or preferences over the New Common Stock with respect to the
payment of dividends and upon the Parent Company's liquidation, dissolution or
winding up, the rights of the holders of the New Common Stock may be adversely
affected. The issuance of shares of preferred stock of the Reorganized Parent
Company could be used, under certain circumstances, in an attempt to prevent an
acquisition of the Parent Company. The Parent Company has no present intention
to issue any shares of preferred stock.
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<PAGE> 90
3. LIMITATION OF DIRECTOR LIABILITY
The articles of incorporation of the Parent Company contain a provision
that limits the liability of the Company's directors as permitted under Texas
law. The provision eliminates the liability of a director to the Company or its
shareholders for monetary damages for acts or omissions in the director's
capacity as a director. The provision does not affect the liability of a
director (a) for breach of his duty of loyalty to the Parent Company or to
shareholders, (b) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (c) for acts or omissions
for which the liability of a director is expressly provided by an applicable
statute, or (d) in respect of any transaction from which a director received an
improper personal benefit. Pursuant to the articles of incorporation, the
liability of directors will be further limited or eliminated without action by
shareholders if Texas law is amended to further limit or eliminate the personal
liability of directors. The Amended and Restated Articles of Incorporation
include the same provisions.
4. DIVIDENDS
The Existing Bond Indenture limits the Parent Company's ability to pay
dividends, based on the Parent Company's ability to incur additional
indebtedness and primarily limited to 50% of consolidated net income earned,
excluding any write down of property, plant and equipment after the date the
Existing Bonds were issued plus the net proceeds from any future sales of
capital stock of the Parent Company. Under the Credit Agreement and the Standby
Loan Agreement, restrictions on the Parent Company's payment of dividends will
be imposed.
5. RIGHTS PLAN
In September 1994, the Parent Company adopted a Rights Plan which, as
amended, provided for the distribution by the Company of one common share
purchase right (a "Plan Right") for each outstanding share of Existing Common
Stock to holders of record of the Existing Common Stock at the close of business
on September 28, 1994, and for the issuance of one Plan Right for each share of
Existing Common Stock thereafter issued before the earlier of the date the Plan
Rights first become exercisable, the date of redemption of the Plan Rights and
September 13, 2004, the expiration date of the Plan Rights. The Plan Rights are
currently evidenced by the certificates representing the shares of Existing
Common Stock with respect to which the Plan Rights were issued and may only be
traded with shares of the Existing Common Stock. Under the Plan, the Rights Plan
will terminate on the Effective Date.
6. REGISTRATION AND NOMINATION RIGHTS
The Parent Company is a party to two agreements giving certain rights to
specified shareholders. First, the Parent Company and Kenneth H. Lambert, a
director of the Parent Company, are parties to an Amended and Restated
Registration Rights Agreement, providing him with the right to make one request
that the Parent Company register his shares of the Existing Common Stock and the
right to participate in a registration by the Parent Company (a "piggyback"
registration). Second, the Parent Company and EIP are parties to a Shareholder
Agreement under which EIP has certain registration rights as well as the right
to nominate two directors of the Parent Company. Under the Plan, these two
agreements will terminate on the Effective Date.
7. TRANSFER AGENT AND REGISTRAR
The transfer agents for the Common Stock are Chase Mellon Shareholder
Services L.L.C. and Montreal Trust Company of Canada and the registrar is Chase
Mellon Shareholder Services L.L.C.
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<PAGE> 91
8. MARKET FOR THE PARENT COMPANY'S EXISTING COMMON STOCK
The Existing Common Stock was, until June 4, 1999, listed on the Nasdaq
Stock Market under the symbol "COHO". The Existing Common Stock currently is
trading over the counter. The following table sets forth the range of high and
low sale prices for the Common Stock as reported on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
1st Quarter............................................... $9 5/8 $6 1/4
2nd Quarter............................................... 9 1/4 6 1/4
3rd Quarter............................................... 7 1/8 4 1/2
4th Quarter............................................... 5 1/8 2 5/16
1999
1st Quarter............................................... 3 1/8 1/2
2nd Quarter............................................... 1 1/32
3rd Quarter............................................... 1 5/8 5/32
4th Quarter............................................... 3/4 3/16
2000
1st Quarter (through February 10, 2000)................... $ 51/64 $ 11/32
</TABLE>
As a result of the Parent Company's financial condition and decreases in
the market value of the Parent Company's Existing Common Stock, the Nasdaq Stock
Market on March 8, 1999, suspended trading of the Existing Common Stock.
Subsequently, effective as of the close of business on June 4, 1999, the
Existing Common Stock was delisted from Nasdaq. As a result of those actions,
the Existing Common Stock is not currently listed on any stock exchange but is
trading over the counter. At December 1, 1999, there were 425 holders of record
of the Common Stock. The Parent Company believes it has in excess of 8,000
beneficial holders of its Common Stock.
9. OWNERSHIP OF EXISTING COMMON STOCK
The following table sets forth information on persons who, to the knowledge
of the Parent Company, were the beneficial owners of more than five percent of
the outstanding shares of Existing Common Stock as of February 10, 2000. Unless
otherwise specified, these persons have sole voting power and sole dispositive
power with respect to these shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
- ------------------- -------------------- -------------------
<S> <C> <C>
President and Fellows of Harvard College......... 3,220,000(2) 12.57%
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, Massachusetts 02210
Energy Investment Partnership No. 1.............. 2,182,084(3) 8.52%
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Wellington Management Company, LLP............... 1,529,519(4) 5.97%
75 State Street
Boston, Massachusetts 02109
</TABLE>
- ---------------
(1) Based on 25,603,512 shares issued and outstanding as of February 10, 2000.
(2) Based solely on information contained in a Schedule 13G dated December 23,
1999 filed with the SEC. President and Fellows of Harvard College is an
employee benefit plan or endowment fund in accordance
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<PAGE> 92
with Rule 13d-1(6)(l)(ii)(F) and has sole voting and dispositive power with
respect to 3,220,000 shares of the Existing Common Stock that are owned by
it.
(3) Based solely on information contained in a Schedule 13G dated May 20, 1998
filed with the SEC. Energy Investment Partnership No. 1 is a general
partnership and has shared voting and dispositive power with respect to
2,182,084 shares of the Existing Common Stock that are owned by the
partnership.
(4) Based solely on information contained in a Schedule 13G dated January 1,
1999 filed with the SEC. Wellington Management Company acts as a financial
advisor and has shared voting power with respect to 769,129 shares, and
shared dispositive power with respect to 1,529,519 shares of the Existing
Common Stock that are owned by its clients.
The following table sets forth information on the Existing Common Stock
beneficially owned as of December 31, 1999 by (a) each director of the Parent
Company, (b) the chief executive officer of the Parent Company and the four most
highly compensated executive officers of the Parent Company other than the chief
executive officer and (c) all directors and executive officers as a group.
Unless otherwise specified, these persons have sole voting power and sole
dispositive power with respect to these shares.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF OUTSTANDING EXISTING
BENEFICIAL OWNERSHIP(1) COMMON STOCK
----------------------- --------------------
<S> <C> <C>
Jeffrey Clarke................................. 69,788 *
Louis F. Crane................................. 14,000 *
Alan Edgar..................................... 480,000 *
Larry L. Keller................................ 15,172 *
Eddie L. LeBlanc, III.......................... 1,000 *
Kenneth H. Lambert............................. 380,668(2) *
Douglas R. Martin.............................. 1,000 *
Anne Marie O'Gorman............................ 16,334 *
R. M. Pearce................................... 5,000 *
Jake Taylor.................................... 54,400 *
All directors and executive officers as a group
(16 persons)................................. 1,309,707(1) 5.1%
</TABLE>
- ---------------
* Less than one percent.
(1) Excludes shares that may be acquired upon the exercise of existing stock
options and any amounts issued pursuant to stock option plans because all
stock options and stock option plans will terminate as a result of the
confirmation of the Plan by the Bankruptcy Court.
(2) Mr. Lambert is the beneficial owner of the shares held by Lambert Management
Ltd., Lambert Holdings, Ltd., Edmonton International Industries Ltd., 372268
Alberta Ltd., 249172 Alberta Ltd., and 297139 Alberta Ltd. Included in Mr.
Lambert's total shares are 31,984 which are held by family members; Mr.
Lambert claims no beneficial interest in these shares.
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<PAGE> 93
XVI.
CONCLUSION
All holders of claims against and equity interests in the Debtors are urged
to vote to accept the Plan and to evidence their acceptance by returning their
ballots so that the ballots will be received by March 10, 2000.
COHO ENERGY, INC.
By: /s/ JEFFREY CLARKE
----------------------------------
Jeffrey Clarke
President and Chief Executive
Officer
DATED: February 14, 2000.
87
<PAGE> 94
EXHIBIT A
PLAN OF REORGANIZATION
(Attached)
<PAGE> 95
Michael W. Anglin
State Bar No. 01260800
Louis R. Strubeck, Jr.
State Bar No. 19425600
Fulbright & Jaworski L.L.P.
2200 Ross Avenue, Ste. 2800
Dallas, Texas 75201
(214) 855-8000 (214) 855-8200 Facsimile
COUNSEL FOR THE DEBTORS
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
<TABLE>
<S> <C> <C>
IN RE: SEC. Case No. 399-35929-HCA-11
COHO ENERGY, INC., SEC. Case No. 399-35930-HCA-11
COHO RESOURCES, INC., SEC. Case No. 399-35934-HCA-11
COHO OIL & GAS, INC., SEC. Case No. 399-35932-HCA-11
INTERSTATE NATURAL GAS COMPANY SEC. Case No. 399-35933-HCA-11
COHO LOUISIANA PRODUCTION COMPANY SEC. Case No. 399-35935-HCA-11
COHO EXPLORATION, INC., SEC.
SEC. JOINTLY ADMINISTERED UNDER
DEBTORS IN POSSESSION CASE NO. 399-35929-HCA-11
</TABLE>
DEBTORS' FIRST AMENDED AND RESTATED
CHAPTER 11 PLAN OF REORGANIZATION
<PAGE> 96
DEBTORS' FIRST AMENDED AND RESTATED
PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE
UNITED STATES BANKRUPTCY CODE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I SUMMARY OF THIS PLAN........................................ 1
ARTICLE II DEFINITIONS, CONSTRUCTION AND INTERPRETATION................ 2
ARTICLE III CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS............... 10
ARTICLE IV IDENTIFICATION OF CLAIMS AND EQUITY INTERESTS IMPAIRED BY
THE PLAN.................................................. 11
ARTICLE V PROVISIONS FOR TREATMENT OF ALLOWED ADMINISTRATIVE EXPENSE
CLAIMS (CLASS 1).......................................... 11
ARTICLE VI PROVISIONS FOR TREATMENT OF ALLOWED PRIORITY TAX CLAIMS
(CLASS 2)................................................. 11
ARTICLE VII PROVISIONS FOR TREATMENT OF THE ALLOWED BANK GROUP CLAIM
(CLASS 3)................................................. 12
ARTICLE VIII PROVISIONS FOR TREATMENT OF MISCELLANEOUS SECURED CLAIMS
(CLASS 4)................................................. 12
ARTICLE IX PROVISIONS FOR TREATMENT OF ALLOWED BOND CLAIMS (CLASS 5)... 13
ARTICLE X PROVISIONS FOR TREATMENT OF ALLOWED GENERAL UNSECURED CLAIMS
(CLASS 6)................................................. 13
ARTICLE XI PROVISIONS FOR TREATMENT OF ALLOWED ADMINISTRATIVE
CONVENIENCE CLAIMS (CLASS 7).............................. 13
ARTICLE XII PROVISIONS FOR TREATMENT OF INTERESTS OF EQUITY SECURITY
HOLDERS OF COHO ENERGY, INC. (CLASS 8).................... 14
ARTICLE XIII MEANS FOR EXECUTION OF THE PLAN............................. 14
ARTICLE XIV EXECUTORY CONTRACTS AND UNEXPIRED LEASES.................... 20
ARTICLE XV EFFECT OF REJECTION BY ONE OR MORE CLASSES OF CLAIMS........ 22
ARTICLE XVI PROVISIONS FOR RESOLUTION AND TREATMENT OF PREFERENCES,
FRAUDULENT CONVEYANCES, AND DISPUTED CLAIMS............... 22
ARTICLE XVII PROVISIONS FOR RETENTION, ENFORCEMENT, SETTLEMENT, OR
ADJUSTMENT OF CLAIMS BELONGING TO THE ESTATE.............. 23
ARTICLE XVIII CONDITIONS PRECEDENT TO CONFIRMATION AND CONSUMMATION OF THE
PLAN...................................................... 23
ARTICLE XIX RETENTION OF JURISDICTION................................... 25
ARTICLE XX DEFAULT UNDER PLAN.......................................... 26
ARTICLE XXI MISCELLANEOUS PROVISIONS.................................... 27
</TABLE>
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<PAGE> 97
COHO ENERGY, INC.; COHO RESOURCES, INC.; COHO OIL & GAS, INC.; COHO
EXPLORATION, INC.; COHO LOUISIANA PRODUCTION COMPANY; and INTERSTATE NATURAL GAS
COMPANY (the "Debtors"), and the Official Committee of Unsecured Creditors
propose this Plan of Reorganization (the "Plan"), pursuant to section 1121(a),
title 11, United States Code, for the resolution of the Debtors' outstanding
Creditor Claims and Equity Interests.
ARTICLE I
SUMMARY OF THIS PLAN
Capitalized terms used in the following summary are as defined in Article
II, the Definitions, Construction and Interpretation portion of this Plan.
This Plan provides for the treatment of all Claims in a manner that is in
the best interests of Creditors and is fair and equitable. This Plan also
provides for fair and equitable treatment of holders of Equity Interests in the
Parent Company. This summary deals with certain major elements of this Plan.
This Plan provides for the treatment of the Allowed Bank Group Claim of
approximately $240 million of principal (plus accrued interest and reasonable
fees and expenses) as a Fully Secured Claim. On the Effective Date the Allowed
Bank Group Claim will be paid in full in Cash. The Parent Company will obtain
the funds necessary for the payment of the Allowed Bank Group Claim through the
combination of (i) the Credit Facility, (ii) either the Rights Offering or the
Private Placement, (iii) cash on hand from the Debtor's operations and (iv) the
Standby Loan, if necessary.
Under this Plan, approximately $162 million of Allowed Bond Claims will be
paid in full by issuing the holders of Existing Bonds 96% of the New Common
Stock of the Reorganized Parent Company on the Effective Date of the Plan. The
ownership percentage of the holders of Allowed Bond Claims may be diluted by (i)
the Rights Offering or the Private Placement and (ii) the Standby Loan, if
necessary.
Holders of Existing Common Stock in the Parent Company as of the Voting
Record Date will be issued 4% of the shares of the New Common Stock on the
Effective Date and holders of Existing Common Stock as of the Rights Offering
Record Date will receive rights to purchase additional shares of New Common
Stock under the Rights Offering, which will be made in a separate prospectus
sent to such holders of Existing Common Stock. The ownership percentage of the
holders of Existing Common Stock may be diluted by (i) either the Rights
Offering or the Private Placement and (ii) the Standby Loan, if necessary.
To implement this Plan, the Reorganized Debtors will raise up to $90
million of new investment in the Reorganized Parent Company by (i) either the
Rights Offering or the Private Placement, and (ii) if applicable, the Standby
Loan. Under the Rights Offering, which will be made pursuant to a separate
prospectus, holders of Existing Common Stock as of the Rights Offering Record
Date will have the exclusive first opportunity to buy additional shares of the
New Common Stock for a price of $0.26 per current share, up to an aggregate of
$90 million. Holders of Existing Common Stock as of the Rights Offering Record
Date who wish to purchase more than their allocable portion of the shares
offered to them in the Rights Offering may do so, to the extent that other
shareholders do not elect to participate in the Rights Offering. If the Rights
Offering is not fully subscribed up to $90 million by holders of Existing Common
Stock as of the Rights Offering Record Date, then the Parent Company may offer
the remaining shares of the New Common Stock to third parties pursuant to the
Rights Offering. In connection with the Rights Offering, the Parent Company
filed a registration statement with the SEC to register the Rights and to
register shares of New Common Stock under the Rights Offering. If the
registration statement filed with the SEC is not declared effective by a date
sufficiently early to give the Parent Company adequate time to arrange and
complete the Rights Offering, the Parent Company will, in its sole discretion,
discontinue the Rights Offering and proceed with the Private Placement. The
Rights Offering or Private Placement will be arranged by Jefferies & Company,
Inc., or another investment banker, subject to the approval of the Bankruptcy
Court. Jefferies & Company, Inc., or another investment banker, will be retained
by the Parent Company for the limited purpose of arranging the Rights Offering
or Private Placement and not as a general financial advisor to the Debtors.
1
<PAGE> 98
To the extent that the proceeds of the Rights Offering or the Private
Placement are less than $90 million, the Debtors will issue, and the Standby
Lenders will purchase, an amount of senior subordinated notes to be determined
by the Reorganized Parent Company. This amount will be a maximum of $70 million
given the current level of commitment under the Standby Loan and a maximum of
$90 million if more Standby Loan commitments are obtained and made available
before the conclusion of the Confirmation Hearing, or the Effective Date if the
Debtors choose to extend the Rights Offering to that date. Payment of the
Standby Loan Notes will be expressly subordinate to the full and final payment
in cash of all obligations arising in connection with the Credit Facility and
payments made under the Standby Loan will be subject to the consent of Chase.
The Standby Loan is not conditioned on any minimal Rights Offering subscription
or Private Placement sale.
If the Reorganized Parent Company draws on the Standby Loan, the Standby
Lenders will receive the Standby Shares. If $70 million in principal amount of
the Standby Loan Notes are issued, the Standby Lenders will receive 14% of the
fully diluted New Common Stock. The amount of Standby Shares issued will be
adjusted ratably according to the actual amount of Standby Loan Notes issued.
The Standby Shares issued to the Standby Lenders will be in addition to the
shares of New Common Stock issued to holders of Existing Bonds, holders of
Existing Common Stock and to persons participating in the Rights Offering or
Private Placement. The manner in which shares of New Common Stock are subject to
dilution is illustrated in the Disclosure Statement.
ARTICLE II
DEFINITIONS, CONSTRUCTION AND INTERPRETATION
As used in the Plan, the following terms shall have the meanings specified
below.
2.1 Actual Price: The weighted average of the price received by the
Reorganized Debtors for all of their oil and gas production, including hedged
and unhedged production (net of hedging costs) in dollars per barrel of oil
equivalent using a 6:1 conversion ratio for natural gas.
2.2 Administrative Convenience Claim: Any Claim in the amount of $1,000 or
less.
2.3 Administrative Expense: Any cost or expense of administration of the
Chapter 11 Case incurred on or before the Confirmation Date entitled to priority
under section 507(a)(1) and allowed under section 503(b) of the Bankruptcy Code,
including (i) any actual and necessary expenses of preserving the Debtors'
estate, including wages, salaries or commissions for services rendered after the
commencement of the Chapter 11 Case, certain taxes, fines and penalties, any
actual and necessary expenses of operating the business of the Debtors, any
indebtedness or obligations incurred by or assessed against the Debtors in
connection with the conduct of its business, or for the acquisition or lease of
property or for provision of services to the Debtors, including all allowances
of compensation or reimbursement of expenses to the extent allowed by the
Bankruptcy Court under the Bankruptcy Code, and any fees or charges assessed
against the Debtors' estate under chapter 123, title 28, United States Code and
(ii) the reasonable fees and expenses of the Indenture Trustee under the
Existing Bond Indenture, including the reasonable fees and expenses of its
professionals to be paid under the terms of the Existing Bond Indenture, upon
application to the Bankruptcy Court.
2.4 Allowed: When used in connection with a Claim, any Claim against or
Equity Interest in the Debtors, proof of which was filed on or before the last
date designated by the Bankruptcy Court as the last date for filing proofs of
Claim or Equity Interest or such other applicable date as ordered by the
Bankruptcy Court or permitted by the Bankruptcy Rules; or, if no proof of Claim
or Equity Interest is filed, any Claim against or Equity Interest in the Debtors
which has been or in the future is listed by the Debtors as liquidated in amount
and not disputed or contingent and a Claim or Equity Interest as to which no
objection to the allowance thereof has been interposed; or, in the case of
Administrative Expense Claim recognized as such by the Debtors, such Claim or
Equity Interest has been allowed in whole or in part by a Final Order. Unless
otherwise specified in the Plan, "Allowed Claim" shall not, for the purposes of
computation or Distributions under the Plan, include postpetition interest on
the amount of the Claim.
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2.5 Amended Employment Agreement: An amended and restated form of an
existing employee's employment agreement in a form acceptable to the Debtors,
the Creditors Committee and the employee which is executed by the employee and
the Debtors and filed with the Bankruptcy Court by March 1, 2000.
2.6 Amended and Restated Articles of Incorporation: The amended and
restated articles of incorporation of Coho Energy, Inc. that are approved
pursuant to this Plan and that shall go into effect on the Effective Date.
2.7 Appaloosa: Appaloosa Management, L.P.
2.8 Bank Group: MeesPierson Capital Corp.; Paribas, Houston Agency;
Christiania Bank OG Kreditkasse, ASA; Den Norske Bank ASA; Bank of Scotland;
Bank One, Texas, N.A.; Credit Lyonnais New York Branch; and Toronto Dominion
(Texas), Inc.
2.9 Bank Group Claim: The aggregate of all Claims asserted in connection
with the Existing Bank Group Loan Agreement, including, but not limited to,
approximate amount of $240 million of principal, plus accrued interest,
reasonable attorney's fees and reasonable expenses.
2.10 Bankruptcy Code: The Bankruptcy Reform Act of 1978, as amended, title
11, United States Code, as applicable to this Chapter 11 case.
2.11 Bankruptcy Court: The United States District Court for the Northern
District of Texas, Dallas Division, having jurisdiction over the Chapter 11
Case, or in the event such Court ceases to exercise jurisdiction over the
Chapter 11 Case, such court or adjunct thereof that exercises jurisdiction over
the Chapter 11 Case in lieu of the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division.
2.12 Bankruptcy Rules: The Federal Rules of Bankruptcy Procedure, as
amended, and the local rules of the Bankruptcy Court, as applicable to this
Chapter 11 Case.
2.13 Base Rate: The floating annual interest rate established by Chase
from time to time as its base rate of interest and which may not be the lowest
or best interest rate charged by Chase on loans similar to the Credit Facility.
2.14 Bond Claims: Claims asserted by the holders of Existing Bonds issued
in connection with the Existing Bond Indenture.
2.15 Cash: Cash, cash equivalents and other readily marketable securities
or instruments issued by a Person other than a Debtor, including readily
marketable direct obligations of the United States of America, certificates of
deposit issued by banks and commercial paper of any entity, including interest
accrued or earned thereon.
2.16 Chapter 11 Case: The case under Chapter 11 of the Bankruptcy Code in
which the Debtors are the Debtors-in-Possession.
2.17 Chase: The Chase Manhattan Bank, as agent for the Lenders under the
Credit Facility.
2.18 Chase Commitment Letter: Letter dated December 9, 1999 from Chase to
the Debtors containing the Lenders' fees for arranging the Credit Facility and
the terms of the Lenders' commitment.
2.19 Claim: Any right to payment from any of the Debtors arising at any
time before the Effective Date, whether or not the right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured; or any right to any
equitable remedy for future performance if the applicable breach gives rise to a
right of payment from any of the Debtors, whether or not the right to an
equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured or unsecured.
2.20 Collateral: The following property of the Debtors: (i) the issued and
outstanding capital stock and other equity interests of all existing or
hereafter created or acquired direct and indirect subsidiaries of the Parent
Company, (ii) certain proved mineral interests selected by Chase having a
present value, as
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determined by Chase, of not less than eighty-five percent (85%) of the present
value of all proved mineral interests of the Debtors evaluated by the Lenders
for purposes of determining the borrowing base, and (iii) other tangible and
intangible assets of the Debtors.
2.21 Confirmation Date: The date on which the Bankruptcy Court enters the
Confirmation Order.
2.22 Confirmation Hearing: The Bankruptcy Court hearing to confirm the
Plan, scheduled for March 15, 2000.
2.23 Confirmation Order: A Final Order of the Bankruptcy Court confirming
the Plan in accordance with the provisions of Chapter 11 of the Bankruptcy Code.
2.24 Credit Agreement: The Senior Revolving Credit Agreement to be entered
into by the Parent Company, the Lenders and Chase in connection with the Credit
Facility.
2.25 Credit Facility: A Senior Revolving Credit Facility of up to $250
million from the Lenders with Chase as agent.
2.26 Creditor: Any person that holds a Claim against a Debtor that arose
on or before the Effective Date, or a Claim against a Debtor of any kind
specified in sections 502(f), 502(g), 502(h) or 502(i) of the Bankruptcy Code.
2.27 Creditors Committee: The Official Committee of Unsecured Creditors in
Chapter 11 Case.
2.28 Debtors: Coho Energy, Inc., a Texas corporation; Coho Resources,
Inc., a Nevada corporation; Coho Oil & Gas, Inc., a Delaware corporation; Coho
Exploration, Inc., a Delaware corporation; Coho Louisiana Production Company, a
Delaware corporation; and Interstate Natural Gas Company, a Delaware
corporation.
2.29 Debtors' Schedules: The Schedules of Assets and Liabilities,
Statement of Financial Affairs and Statement of Executory Contracts, as each may
be amended, filed by the Debtors with the Bankruptcy Court in accordance with
section 521(l) of the Bankruptcy Code.
2.30 Disclosure Statement: The Disclosure Statement under 11 U.S.C.
sec. 1125, filed by the Debtor in connection with this Plan on December 21,
1999, as amended.
2.31 Disputed Claim: A Claim against a Debtor (a) as to which an objection
has been filed on or before the deadline for objecting to a Claim by the Debtors
or any party in interest and which objection has not been withdrawn or resolved
by entry of a Final Order, (b) a Claim that has been asserted in an amount
greater than that listed in the Debtors' Schedules as liquidated in an amount
and not disputed or contingent, or (c) that the Debtors' Schedules list as
contingent, unliquidated or disputed.
2.32 Disputed Claims Reserve: A segregated account to be held in trust by
the Debtors for the benefit of holders of Disputed Claims in accordance with the
provisions of Article XV of the Plan.
2.33 Distribution: The property required by the Plan to be distributed to
the holders of Allowed Claims.
2.34 Effective Date: A date eleven or more days after entry of the
Confirmation Order on which the Plan is consummated by the occurrence of the
following: (i) the Existing Common Stock is extinguished and shares of the New
Common Stock have been issued to the holders of the Existing Common Stock; (ii)
the Existing Bonds are extinguished and shares of the New Common Stock are
issued to the holders of the Existing Bonds; (iii) the Bank Group Claim is paid
in full; (iv) the Credit Agreement is executed and delivered; (v) funds are
received from the Rights Offering or Private Placement and New Common Stock is
issued to such subscribers; and (vi) the Standby Loan is funded, if necessary,
in each case, in accordance with the terms of this Plan.
2.35 Employee Benefit Plan: An employee benefit plan as defined in section
3(3) of the Employee Retirement Income Security Act of 1974, as amended from
time to time, together with all regulations issued pursuant thereto, (and
including any plan established pursuant to section 401(k) of the Internal
Revenue Code of 1986, as amended) that is now or was previously maintained,
sponsored or contributed to by a Debtor.
2.36 Equity Interest: Any equity interest in the Parent Company by
ownership of Existing Common Stock, including any warrants or options to acquire
any Existing Common Stock and any rights pertaining to
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the Existing Common Stock, including voting rights, rights to receive dividends
or other distributions, rights to request or demand any shares to be registered
under securities laws, rights to nominate directors or to otherwise determine
membership on a board of directors or any committee of a board of directors,
rights to approve or to withhold approval of any matters pertaining to the
Parent Company, rights to acquire any additional securities of the Parent
Company or to acquire any rights with respect to those securities, and any
rights to receive proceeds from any liquidation or dissolution of the Parent
Company.
2.37 Eurodollar Rate: The annual interest rate equal to the London
interbank offered rate for deposits in United States dollars that are offered to
Chase.
2.38 Existing Bank Group Loan Agreement: The Fourth Amended and Restated
Credit Agreement dated December 18, 1997, among Coho Resources, Inc.; Coho
Louisiana Production Company; Coho Exploration, Inc.; Coho Oil & Gas, Inc.; Coho
Energy, Inc., Interstate Natural Gas, a Delaware corporation; and the members of
the Bank Group; the Fourth Amended and Restated Credit Agreement dated December
18, 1997, as supplemented and amended and all related documents, by and between
the Debtors and the Bank Group.
2.39 Existing Bond Indenture: The Indenture dated October 1, 1997, as
amended by the First Supplemental Indenture dated September 2, 1998, among Coho
Energy, Inc., the subsidiary guarantors named therein and HSBC Bank USA,
formerly known as Marine Midland Bank.
2.40 Existing Bonds: The Bonds issued before the Petition Date under the
Existing Bond Indenture.
2.41 Existing Common Stock: The common stock of the Parent Company, $0.01
par value, existing before the Effective Date.
2.42 Final Order: An order that is no longer subject to appeal, certiorari
proceeding or other proceeding for review or rehearing, and as to which no
appeal, certiorari proceeding, or other proceeding for review or rehearing shall
then be pending.
2.43 Fully Secured Claim: A Claim secured by a lien on property whose
value exceeds the Allowed amount of that Claim pursuant to section 506(a) of the
Bankruptcy Code.
2.44 General Unsecured Claims: A Claim other than a Bond Claim not secured
by a charge against or interest in property in which the Debtors' estate has an
interest.
2.45 Lenders: A syndicate of lenders under the Credit Facility.
2.46 Miscellaneous Secured Claim: A secured claim under section 506 of the
Bankruptcy Code other than the Bank Group Claim, including properly perfected
mechanic's and materialman's lien claims.
2.47 New Common Stock: The common stock, $0.01 par value, of the
Reorganized Parent Company from and after the Effective Date.
2.48 Pacholder: Pacholder Associates, Inc.
2.49 Parent Company: Coho Energy, Inc., a Texas corporation.
2.50 Oaktree: Oaktree Capital Management, LLC.
2.51 Person: An individual, a corporation, a limited liability company, a
partnership, an association, a joint stock company, a joint venture, an estate,
a trust, an unincorporated association or organization, a government or any
agency or subdivision thereof or any other entity.
2.52 Petition Date: August 23, 1999, the date on which the Debtors filed
their voluntary Chapter 11 petition.
2.53 Plan: This Plan of Reorganization under Chapter 11 of the United
States Bankruptcy Code, either in its present form or as it may be altered,
amended, or modified from time to time.
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2.54 Plan Participants: Debtors, Reorganized Debtors, the Creditors
Committee and members thereof, the Indenture Trustee under the Existing Bond
Indenture, and directors, officers, employees and advising professionals of all
of the preceding.
2.55 PPM America: PPM America, Inc.
2.56 Private Placement: The private placement of New Common Stock with
third party investors pursuant to Rule 144A of the Securities Act of 1933.
2.57 Priority Tax Claim: Any Claim entitled to priority in payment under
section 507(a)(7) of the Bankruptcy Code.
2.58 Rejected Agreements: All executory contracts and unexpired leases of
the Debtors listed or otherwise described on Schedule A to the Disclosure
Statement.
2.59 Reorganized Debtors: The Debtors, as reorganized pursuant to this
Plan.
2.60 Reorganized Parent Company: The Parent Company, as reorganized
pursuant to this Plan.
2.61 Representatives: Any officer, director, financial advisor, attorney
or other professional who participated in the formulation or confirmation of the
Plan for the Debtor or the Plan Participants.
2.62 Rights: Rights to purchase shares of New Common Stock that will be
offered to the holders of Existing Common Stock pursuant to the Rights Offering.
2.63 Rights Offering: The rights offering to be made pursuant to a
prospectus distributed to the holders of Existing Common Stock of the Parent
Company as of the Rights Offering Record Date, which will give holders of
Existing Common Stock as of the exclusive first right to purchase additional
shares of the New Common Stock, and, at the Parent Company's discretion, allow
third parties the opportunity to purchase any unsubscribed shares of New Common
Stock.
2.64 Rights Offering Record Date: The date, to be set by the board of
directors of the Parent Company in accordance with applicable law, for
determination of holders of Existing Common Stock eligible to participate in the
Rights Offering.
2.65 SEC: Securities and Exchange Commission.
2.66 Secured Claim: A Claim to the extent of the value, as determined by
the Bankruptcy Court pursuant to section 506(a) of the Bankruptcy Code, of any
interest in property of the Debtor's estate securing such Claim. To the extent
that the value of such interest is less than the amount of the Claim which has
the benefit of such security, such Claim is an Unsecured Deficiency Claim
unless, in any such case, the class of which such Claim is a part makes a valid
and timely election under section 1111(b) of the Bankruptcy Code to have such
Claim treated as a Secured Claim to the extent allowed.
2.67 Standby Lenders: PPM America, Pacholder, Oaktree and Appaloosa and
their assignees, holders of Existing Bonds who participate in the Standby Loan,
and others who may participate in the Standby Loan.
2.68 Standby Lender Fee Letter: Letter dated January 24, 2000 from the
Standby Lenders to the Debtors containing the Standby Lenders' fees for
arranging the Standby Loan and the terms of their commitment.
2.69 Standby Loan: A loan currently committed of up to $70 million from
PPM America, Pacholder, Oaktree and Appaloosa and others wishing to participate
in the Standby Loan, which may increase to a total commitment of $90 million.
2.70 Standby Loan Agreement: The note purchase agreement to be entered
into by the Debtors, PPM America, Pacholder, Oaktree, Appaloosa and holders of
Existing Bonds wishing to participate in the Standby Loan in connection with the
Standby Loan.
2.71 Standby Loan Notes: Notes issued by the Debtors to evidence loans
made pursuant to the Standby Loan Agreement.
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2.72 Standby Shares: The fully diluted New Common Stock of the Reorganized
Company to be issued to the Standby Lenders if the Debtors draw on the Standby
Loan.
2.73 Treasury Rate: The yield of U.S. Treasury securities, with a term
equal to the then remaining term of the Standby Loan Notes, which has become
publicly available on the third business day before the date fixed for
repayment.
2.74 Unsecured Deficiency Claim: A Claim by a Creditor arising out of the
same transaction as a Secured Claim to the extent that the value, as determined
by the Bankruptcy Court pursuant to section 506(a) of the Bankruptcy Code, of
such Creditor's interest in property of the Debtor's estate securing such Claim
is less than the amount of the Claim which has the benefit of such security as
provided by section 506(a) of the Bankruptcy Code, unless, in any such case, the
class of which such Claim is a part makes a valid and timely election under
section 1111(b) of the Bankruptcy Code to have such Claim treated as a secured
claim to the extent allowed.
2.75 Voting Record Date: The date the Bankruptcy Court enters the order
approving the Disclosure Statement.
The words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Plan as a whole and not to any particular section,
subsection or clause contained in this Plan, unless the context requires
otherwise. Whenever from the context it appears appropriate, each term stated in
either the singular or the plural includes both the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender include each of the
masculine, feminine and the neuter genders. The section headings contained in
the Plan are for reference purposes only and shall not affect in any way the
meaning or interpretation of the Plan. In this Plan, "including" means
"including without limitation".
A term used in this Plan, not defined in this Plan and defined in the
Bankruptcy Code has the meaning assigned to it in the Bankruptcy Code. A term
used in this Plan, not defined in this Plan, not defined in the Bankruptcy Code
and defined in the Bankruptcy Rules has the meaning assigned to it in the
Bankruptcy Rules.
ARTICLE III
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
Claims and Equity Interests of COHO ENERGY, INC. are classified as follows:
3.1 Class 1: Allowed Administrative Expense Claims
3.2 Class 2: Allowed Priority Tax Claims
3.3 Class 3: Allowed Bank Group Claim
3.4 Class 4: Allowed Miscellaneous Secured Claims
3.5 Class 5: Allowed Bond Claims
3.6 Class 6: Allowed General Unsecured Claims
3.7 Class 7: Allowed Administrative Convenience Claims
3.8 Class 8: Allowed Interests of Equity Security Holders of Coho Energy,
Inc.
ARTICLE IV
IDENTIFICATION OF CLAIMS AND EQUITY INTERESTS IMPAIRED BY THE PLAN
4.1 Unimpaired Classes: Classes 1, 4 and 7 Claims are not impaired under
the Plan and are not entitled to vote to accept or reject the Plan.
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4.2 Impaired Classes to Vote on Plan: The Claims and Equity Interests
specified in Classes 2, 3, 5, 6 and 8 of the Plan are impaired and are entitled
to vote to accept or reject the Plan.
4.3 Controversy Concerning Impairment: In the event of a controversy as to
whether any Claim or Equity Interest or class of Claims or Equity Interests is
impaired under the Plan, the Bankruptcy Court will, after notice and a hearing,
determine the controversy.
ARTICLE V
PROVISIONS FOR TREATMENT OF ALLOWED ADMINISTRATIVE EXPENSE CLAIMS (CLASS 1)
5.1 Full Payment: On the Effective Date, each Allowed Administrative
Expense Claim will be paid in full in Cash or from any retainers on hand, or
upon such other terms as may be agreed by and between the holder of such Claim
and the Debtor.
5.2 Impairment: Administrative Expense Claims are not impaired under the
Plan.
ARTICLE VI
PROVISIONS FOR TREATMENT OF ALLOWED PRIORITY TAX CLAIMS (CLASS 2)
6.1 Treatment: Except to the extent that a holder of an Allowed Priority
Tax Claim agrees to a different treatment, each holder of an Allowed Priority
Tax Claim will receive on account of such Claim a promissory note, dated as of
the Effective Date, in the principal amount of the Allowed Claim of each such
Creditor calculated as of the Effective Date. Each promissory note will provide
for payment of monthly installments of principal and interest as if such note
was being amortized over a period of sixty (60) months, with payments commencing
on the first day of the second month after the Effective Date. Each note will
become due and payable in full five (5) years after the date of assessment of
such claim. Each note will bear interest at the rate of 6% per annum unless a
different rate is chosen by the Bankruptcy Court pursuant to sections
1129(a)(9)(c) and 1129(b)(2)(A)(i).
6.2 Impairment: Allowed Priority Tax Claims are impaired under the Plan.
6.3 Provision for Disputed Priority Tax Claims: The Debtors will litigate
Disputed Priority Tax Claims to determine the extent to which the Disputed
Priority Tax Claim should be allowed. During the pendency of such litigation,
the Debtor will place into the Disputed Claims Reserve such amounts as may be
fixed by agreement, by provisional allowance in the Confirmation Order, or by
other order of the Bankruptcy Court, unless other depository arrangements or
terms are directed by order of the Bankruptcy Court.
ARTICLE VII
PROVISIONS FOR TREATMENT OF THE ALLOWED BANK GROUP CLAIM (CLASS 3)
7.1 Treatment: On the Effective Date, the Allowed Bank Group Claim will be
treated as a fully secured claim and will be paid in full in cash. At such time
as the Allowed amount of the Bank Group's Claim is fixed and paid in full, the
Claim will be extinguished and all liens discharged. The entry of the
Confirmation Order will be a final and binding adjudication on the allowance of
the Bank Group Claim (in an amount agreed to by the Debtors, the Creditors
Committee and the Bank Group or as allowed by Bankruptcy Court order after
objection) and will operate as a final and conclusive compromise and settlement
of any and all claims which have or may be asserted by or through the Debtors
against the Bank Group, its constituent members, their successors, assigns,
officers, directors, employees, attorneys, agents and representatives thereof.
The Parent Company will obtain the funds necessary for the payment of the
Allowed Bank Group Claim through the combination of (i) the Credit Facility,
(ii) the Rights Offering and the Private Placement, (iii) cash on hand from the
Debtors' operations, and (iv) the Standby Loan, if necessary.
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7.2 Impairment: The Allowed Bank Group Claim is impaired under the Plan.
Payment in cash of a claim such as the Allowed Bank Group Claim is no longer
listed in section 1124 of the Bankruptcy Code as a form of unimpairment.
ARTICLE VIII
PROVISIONS FOR TREATMENT OF MISCELLANEOUS SECURED CLAIMS (CLASS 4)
8.1 Treatment: Allowed Miscellaneous Secured Claims will receive cash
payment in an amount equal to one hundred percent (100%) of such Allowed
Miscellaneous Secured Claims on the later of the Effective Date or the date upon
which the Miscellaneous Secured Claims is Allowed, or within 10 days thereafter.
8.2 Impairment: The Allowed Miscellaneous Secured Claims are unimpaired
under the Plan.
ARTICLE IX
PROVISIONS FOR TREATMENT OF ALLOWED BOND CLAIMS (CLASS 5)
9.1 Treatment: On the Effective Date, the Existing Bond Indenture and
Existing Bonds will be extinguished. Holders of Allowed Bond Claims will receive
on the Effective Date their pro rata share of 96% of the New Common Stock,
without giving effect to the shares issuable under the Rights Offering or the
Private Placement and, the Standby Loan, as necessary.
9.2 Impairment: The Allowed Bond Claims are impaired under the Plan.
ARTICLE X
PROVISIONS FOR TREATMENT OF ALLOWED GENERAL UNSECURED CLAIMS (CLASS 6)
10.1 Treatment: In full satisfaction of all Allowed General Unsecured
Claims, each holder thereof will receive cash payment of 100% of its Allowed
Claim in four equal quarterly installments, without interest, the first of which
will be paid on the Effective Date and the remainder of which will be paid on
the first day of each subsequent calendar quarter. When a Disputed General
Unsecured Claim becomes an Allowed General Unsecured Claim, that date will be
treated as the Effective Date for such Claim and the remainder of such Claim
will be paid on the first day of each of the next three calendar quarters.
10.2 Impairment: Allowed General Unsecured Claims are impaired under the
Plan.
ARTICLE XI
PROVISIONS FOR TREATMENT OF ALLOWED ADMINISTRATIVE CONVENIENCE CLAIMS (CLASS 7)
11.1 Treatment: Except to the extent that an Allowed Administrative
Convenience Claim has been paid by the Debtors before the Effective Date or a
holder of the Claim agrees to a different treatment, each holder of an Allowed
Administrative Convenience Claim will be paid in full in Cash on the later of
the Effective Date or the date such Allowed Administrative Convenience Claim
becomes an Allowed Administrative Convenience Claim, or within 10 days
thereafter.
11.2 Impairment. Allowed Administrative Convenience Claims are unimpaired
under the Plan.
ARTICLE XII
PROVISIONS FOR TREATMENT OF INTERESTS
OF EQUITY SECURITY HOLDERS OF COHO ENERGY, INC. (CLASS 8)
12.1 Treatment: The holders of Existing Common Stock will receive fair and
equitable treatment under the Plan. On the Effective Date the Existing Common
Stock will be extinguished and holders of the
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Existing Common Stock as of the Voting Record Date will receive their pro rata
share of 4% of the New Common Stock, without giving effect to the shares
issuable under either the Rights Offering or the Private Placement or any shares
of New Common Stock issued under the Standby Loan, as necessary. The holders of
Existing Common Stock as of the Rights Offering Record Date will also receive
exclusive first priority rights to purchase in the Rights Offering, to be made
pursuant to a separate prospectus, additional shares of the New Common Stock for
a purchase price of $0.26 per share, up to a total of $90 million. However, as
described in Section 13.4(b) below, if the registration statement filed with the
SEC in connection with the Rights Offering is not declared effective by a date
sufficiently early to give the Parent Company adequate time to arrange and
complete the Rights Offering, the Parent Company may, in its sole discretion,
discontinue the Rights Offering and proceed with the Private Placement.
12.2 Impairment: The holders of Existing Common Stock are impaired under
the Plan.
ARTICLE XIII
MEANS FOR EXECUTION OF THE PLAN
13.1 Substantive Consolidation: For purposes of this Plan, all the Debtors
will be treated as substantively consolidated with the Parent Company.
13.2 Reorganized Debtors: From and after the Effective Date, each of the
Reorganized Debtors will continue in existence as a separate corporate entity,
in accordance with the law applicable in the jurisdiction under which it was
incorporated and pursuant to its charter and bylaws in effect on the Effective
Date. Each of the Reorganized Debtors will not be liquidated, and will continue
to engage in the businesses permitted by its charter and bylaws. The stock in
each Reorganized Debtor other than the Reorganized Parent Company will not be
effected by this Plan.
13.3 Payment of Allowed Bank Group Claim: The Reorganized Parent Company
will obtain the funds necessary for the payment of the Allowed Bank Group Claim
through the combination of (i) the Credit Facility, (ii) the Rights Offering or
the Private Placement, (iii) cash on hand from the Debtors' operations, and (iv)
the Standby Loan, if necessary.
(a) The Credit Facility. On the Effective Date, the Reorganized Parent
Company will establish the Credit Facility with Chase, as agent for the
Lenders, for a principal amount of up to $250 million. The Credit Facility
will limit advances to the amount of the borrowing base, which is
anticipated to be set initially at $210 million, $10 million of which must
remain undrawn and available on the Effective Date. The borrowing base will
be the loan value to be assigned to the proved reserves attributable to the
Reorganized Parent Company's oil and gas properties. The initial borrowing
base will be subject to Chase's review of the January 1, 2000 reserve
report to be prepared by the Parent Company and audited by an independent
petroleum engineering firm acceptable to the Lenders. The initial borrowing
base will be determined before the Confirmation Hearing.
The Credit Facility will be subject to semiannual borrowing base
redeterminations, each May 1 and November 1, and such redeterminations will
be made in the sole discretion of the Lenders. The Reorganized Parent
Company will deliver to the Lenders by April 1 and October 1 of each year a
reserve report prepared as of the immediately preceding January 1 and July
1, respectively. The January 1 reserve report will be prepared by the
Reorganized Parent Company and audited by an independent petroleum
engineering firm, acceptable to Chase, and the July 1 reserve report will
be prepared internally by the Reorganized Parent Company, in a form
acceptable to Chase. Based in part on the reserve report, the Lenders will
redetermine the borrowing base in their sole discretion. For an increase in
the borrowing base, consent of 100% of the Lenders will be required. To
maintain the borrowing base, or to reduce the borrowing base, consent of
75% of the Lenders of outstanding loans or, in the event that no loans are
outstanding, the Lenders holding 75% of the current commitments under the
Credit Facility, will be required. The Reorganized Parent Company or Chase
may request one additional borrowing base determination during any calendar
year.
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(b) Credit Facility Interest Payments and Term. Interest on advances
under the Credit Facility will be payable on the earlier of (i) the
expiration of any interest period under the Credit Facility or (ii)
quarterly, beginning with the first quarter after the Effective Date.
Amounts outstanding under the Credit Facility will accrue interest at the
option of the Reorganized Parent Company at (i) the Eurodollar Rate, plus
an applicable margin, or (ii) the Base Rate, plus an applicable margin. All
outstanding advances under the Credit Facility are due and payable in full
three years from the Effective Date.
(c) Security. The Credit Facility will be secured by granting first
and prior security interests and mortgage liens in the Collateral to Chase
for the benefit of the Lenders. The rights and responsibilities of Chase,
the Lenders and the Debtors will be governed by the Credit Agreement and
related documents, which will permit the Lenders to enforce their rights to
the Collateral upon the occurrence of an "event of default" (as defined in
the Credit Agreement).
(d) Fees Paid in Connection with the Credit Facility. Certain fees for
the Lenders contained in the Chase Commitment Letter were approved by the
Bankruptcy Court at a hearing on the fees held on January 27, 2000. These
fees include an initial due diligence fee of $200,000. If the Lenders fund
under the Credit Facility on the Effective Date, they will be entitled to
an additional aggregate $6.5 million of closing fees. All fees paid by the
Parent Company in connection with the Credit Facility are non-refundable
and are in addition to reimbursements to be paid for expenses incurred by
Chase in connection with the preparation of the Credit Agreement.
The Chase Commitment Letter provides that there are a number of
conditions that must be met before the Lenders will be committed to fund
the Credit Facility on the Effective Date, including: (a) agreement
concerning definitive documents, (b) completion of economic due diligence
and (c) approval by Chase of the Reorganized Parent Company's management
team and capital structure. Chase and the Debtors will come to agreement on
definitive documents in keeping with the terms of the Plan by March 1,
2000. When Chase indicates to the Debtors by the later of March 14, 2000 or
the last business day immediately preceding the Confirmation Hearing, that
all conditions have been met, the Lenders will be committed to fund on the
Effective Date. If the Lenders fund on the Effective Date, they will be
entitled to $6.5 million in closing fees.
(e) Payment of Allowed Bank Group Claim. The Allowed Bank Group Claim
consists of approximately $240 million of principal (plus accrued interest
and reasonable fees and expenses). The Reorganized Parent Company will use
approximately $200 million in advances under the Credit Facility toward the
payment of the Allowed Bank Group Claim. The remaining amount of the
Allowed Bank Group Claim will be paid with the proceeds of the Rights
Offering, the Private Placement, and if necessary, the Standby Loan. The
Allowed amount of the Bank Group Claim will be fixed and determined before
the conclusion of the Confirmation Hearing, either by agreement between the
Bank Group, the Debtors and the Creditors Committee, or as allowed by
Bankruptcy Court order after objection.
13.4 New Investment: To implement this Plan, the Reorganized Debtors will
raise up to $90 million of new investment in the Reorganized Parent Company by
the Rights Offering or the Private Placement, and, if applicable, the Standby
Loan. A portion of the proceeds from the Rights Offering, the Private Placement
and the Standby Loan, if applicable, will be used to pay the balance of the Bank
Group Claim.
(a) The Rights Offering or Private Placement. Under the Rights
Offering, holders of Existing Common Stock as of the Rights Offering Record
Date will have the right to buy additional shares of the New Common Stock
based on the number of shares of Existing Common Stock owned as of the
Rights Offering Record Date, for a price of $0.26 per share, up to an
aggregate of $90 million. Holders of Existing Common Stock as of the Rights
Offering Record Date who wish to purchase more than their allocable portion
of the shares offered to them in the Rights Offering may do so, to the
extent that other shareholders do not elect to participate in the Rights
Offering. If the Rights Offering is not fully subscribed up to $90 million
by the holders of Existing Common Stock as of the Rights Offering Record
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Date, then the Parent Company may offer the remaining shares of New Common
Stock to third parties pursuant to the Rights Offering.
(b) Registration and Termination of Rights Offering; Private
Placement. In connection with the Rights Offering, the Parent Company filed
a registration statement with the SEC to register the Rights and to
register the shares of New Common Stock under the Rights Offering. If the
registration statement filed with the SEC is not declared effective by a
date sufficiently early to give the Parent Company adequate time to arrange
and complete the Rights Offering, the Parent Company may, in its sole
discretion, discontinue the Rights Offering and proceed with the Private
Placement. The Parent Company paid a filing fee of $23,760 to the SEC in
conjunction with the filing of the registration statement and other
associated expenses in conjunction with the printing and mailing of the
related prospectus. If the Rights Offering is not fully subscribed up to
$90 million by holders of Existing Common Stock as of the Rights Offering
Record Date, then the Parent Company may offer any of the remaining shares
to third-party investors. The Rights Offering or the Private Placement
would be arranged by Jefferies & Company, Inc., or another investment
banker, subject to the approval of the Bankruptcy Court. Jefferies &
Company, Inc., or another investment banker, will be retained for the
limited purpose of arranging the Rights Offering or the Private Placement
and not as a general financial advisor to the Debtors.
THIS PLAN REFERS TO AND BRIEFLY DESCRIBES, AS AN INTEGRAL PART OF THE
PLAN, A "RIGHTS OFFERING" AND A "PRIVATE PLACEMENT". THIS PLAN DOES NOT AND
THE DISCLOSURE STATEMENT WILL NOT CONSTITUTE A SOLICITATION OF ACCEPTANCE
OF RIGHTS TO BE DISTRIBUTED PURSUANT TO THE RIGHTS OFFERING, AN OFFER TO
SELL (OR A SOLICITATION OF AN OFFER TO BUY) THE RIGHTS OR THE SHARES OF NEW
COMMON STOCK TO BE OFFERED PURSUANT TO THE RIGHTS OFFERING, OR, IF
APPLICABLE, AN OFFER TO SELL (OR THE SOLICITATION OF AN OFFER TO BUY) THE
SHARES OF NEW COMMON STOCK TO BE OFFERED PURSUANT TO THE PRIVATE PLACEMENT.
THE ISSUANCE OF THE RIGHTS PURSUANT TO THE RIGHTS OFFERING AND THE OFFER OF
SHARES OF NEW COMMON STOCK PURSUANT TO THE RIGHTS OFFERING MAY ONLY BE MADE
BY MEANS OF A PROSPECTUS INCLUDED WITHIN A REGISTRATION STATEMENT THAT HAS
BEEN FILED WITH, AND THAT HAS BEEN DECLARED EFFECTIVE BY, THE SEC AND AFTER
COMPLIANCE WITH ANY APPLICABLE STATE OR OTHER SECURITIES LAWS. THE PARENT
COMPANY HAS FILED A REGISTRATION STATEMENT WITH THE SEC. ANY OFFER OF
SHARES OF NEW COMMON STOCK PURSUANT TO THE PRIVATE PLACEMENT MAY ONLY BE
MADE BY MEANS OF, AND ON THE CONDITIONS CONTAINED IN, AN OFFERING
MEMORANDUM PROVIDED BY THE PARENT COMPANY. INFORMATION ABOUT THE RIGHTS
OFFERING AND THE PRIVATE PLACEMENT IS INCLUDED IN THE DISCLOSURE STATEMENT
AND IN THIS PLAN SOLELY FOR THE PURPOSE OF SATISFYING REQUIREMENTS OF THE
BANKRUPTCY CODE TO PROVIDE INFORMATION ADEQUATE TO ENABLE THE HOLDERS OF
CLAIMS AND INTERESTS TO MAKE AN INFORMED DECISION ABOUT THE PLAN.
(c) The Standby Loan. The Standby Loan is to be made pursuant to a
senior subordinated note facility under which the Reorganized Debtors will
issue, and the Standby Lenders will purchase, an amount of senior
subordinated notes to be determined by the Reorganized Debtors. This amount
will be a maximum of $70 million given the current level of commitment
under the Standby Loan and a maximum of $90 million if more Standby Loan
commitments are obtained and made available before the conclusion of the
Confirmation Hearing, or the Effective Date, if the Debtors choose to
extend the Rights Offering to that date. The rights and responsibilities of
the Standby Lenders and the Debtors will be governed by the Standby Loan
Agreement.
(d) Terms of the Standby Loan. Debt under the Standby Loan Agreement
will be evidenced by the Standby Loan Notes, maturing seven years after the
Effective Date and bearing interest at a minimum annual rate of 15% and
payable in cash semiannually. After the first anniversary of the Effective
Date, additional semiannual interest will be payable in an amount equal to
1/2% for every $0.25 that the Actual Price exceeds $15 per barrel of oil
equivalent during the applicable semiannual interest period, up to a
maximum of 10% additional interest per year. Additionally, upon an event of
default occurring under the Standby Loan, interest will be payable in cash,
unless otherwise required to be paid-in-kind, at a rate equal to 2% per
year over the applicable interest rate. The Actual Price will be calculated
over a six-month measurement period ending on the date two months before
the applicable
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interest payment date. Interest on the Standby Loan may be paid-in-kind
subject to the requirements of the Credit Agreement.
(e) Payment of Indebtedness under the Standby Loan. Payment of the
Standby Loan Notes will be subordinate to payments in full in cash of all
obligations arising in connection with the Credit Facility. Subject to a
final agreement between the Standby Lenders and Chase, after the initial
12-month period, cash interest payments may be made only to the extent by
which earnings before income tax, depreciation and amortization expense
("EBITDAX") on a trailing four-quarter basis exceed $65 million. The Credit
Agreement may also prohibit the Reorganized Parent Company from making any
cash interest payments on the Standby Loan indebtedness if the outstanding
indebtedness under both the Credit Facility and the Standby Loan, exceeds
3.75 times the EBITDAX for the trailing four quarters. The Reorganized
Parent Company may prepay the Standby Loan Notes at the face amount, in
whole or in part, in minimum denominations of $1,000,000, plus either (i) a
standard make-whole payment with a discount rate of 300 basis points over
the Treasury Rate for the first four years, or (ii) beginning in the fifth
year, a premium equal to one-half the 15% base interest rate, declining
annually and ratably to par. The Standby Loan Notes may only be paid if
either (i) all obligations under the Credit Facility have been paid in full
in cash or (ii) if the Lenders of 75% of the outstanding loans or, if none
are outstanding, the Lenders holding 75% of the current loan commitments
under the Credit Facility consent to the payment.
(f) Standby Shares. If the Standby Loan Notes are issued, the Standby
Lenders will receive the Standby Shares. If $70 million in Standby Loan
Notes are issued, the Standby Lenders will receive 14% of the fully diluted
New Common Stock. The amount of Standby Shares issued will be adjusted
ratably according to the actual principal amount of Standby Loan Notes
issued. The Standby Shares issued to the Standby Lenders will be in
addition to the shares of New Common Stock issued to holders of the
Existing Bonds, holders of Existing Common Stock and persons participating
in the Rights Offering or Private Placement. See the Disclosure Statement
for an illustration of the dilution of the New Common Stock.
(g) Fees Paid in Connection with the Standby Loan. Certain fees for
the Standby Lenders contained in the Standby Lender Fee Letter were
approved by the Bankruptcy Court in a hearing on the fees held on January
27, 2000. This includes (1) a due diligence fee of $200,000 payable
immediately and (2) break up a fee of $1.0 million (the "Break Up Fee"), to
be paid if the Standby Lenders give the Debtors written notice that all
conditions to closing have been met and if a plan of reorganization is
subsequently confirmed and consummated that does not use the Standby Loan.
If, after receiving a letter from the Standby Lenders that all conditions
have been met, the Debtors subsequently obtain confirmation of a plan of
reorganization without an alternative financing proposal, the Debtors will
owe the Standby Lenders a closing fee in an amount equal to the greater of
$1.0 million or 3 1/2% of the aggregate principal amount of the Standby
Loan Notes purchased (the "Closing Fee"). The obligation of the Reorganized
Debtors to pay the Break Up Fee or Closing Fee, will be an administrative
expense claim having priority over all administrative expenses in
accordance with section 364(c)(1) of the Bankruptcy Code. The Debtors will
pay either the Closing Fee or the Break Up Fee, but not both.
The Standby Lender Fee Letter provides that there are only two
essential kinds of conditions which must be met before the Standby Lenders
will be committed to fund the Standby Loan on the Effective Date: (1)
agreement to definitive documents and (2) completion of economic due
diligence. The Standby Lenders and the Debtors will come to agreement on
definitive documents in keeping with the terms of the Plan and satisfactory
to both of them. When the Standby Lenders indicate by letter to the Debtors
on the later of March 14, 2000, or the last business day immediately prior
to the Confirmation Hearing, that they have completed their due diligence
and that all conditions to closing have been met except entry of an order
confirming the Plan, then (1) the Standby Lenders will be committed to fund
on the Effective Date and (2) the Standby Lenders will be entitled to a
minimum fee of $1.0 million, either as a Closing Fee or a Break Up Fee. If
the Standby Lenders do not notify the Debtors in writing by the later of
March 14, 2000, or the last business day immediately preceding the
Confirmation Hearing, that all conditions have been met, then they will be
entitled to their reasonable fees and expenses in
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connection with the Standby Loan, but they will not be entitled to the
Break Up Fee. If the Standby Lenders fund the Standby Loan on the Effective
Date, they will be entitled to the Closing Fee, and will not be entitled to
the Break Up Fee.
(h) Other Sources of Financing. Contemporaneous with the filing of
this Plan, the Debtors have supported Bankruptcy Court approval of
procedures whereby other parties interested in providing the Standby Loan
on more favorable terms to the Reorganized Debtors may offer binding
commitments by the end of the Disclosure Statement hearing.
13.5 Revesting of Assets: Except as otherwise provided in this Plan, the
property and assets of the Debtors' bankruptcy estate under section 541 of the
Bankruptcy Code, including all Claims listed in Articles XVI and XVII hereof
will revest in the Reorganized Debtors on the Effective Date free and clear of
all Claims and Equity Interests, but subject to the obligations of the
Reorganized Debtors as set forth in this Plan. Commencing on the Effective Date,
the Reorganized Debtors may deal with their assets and property and conduct
their businesses, without any supervision by, or permission from, the Bankruptcy
Court or the office of the United States Trustee and free of any restriction
imposed on the Debtors by the Bankruptcy Code or by the Bankruptcy Court during
the Chapter 11 Case.
13.6 New Common Stock: The provisions of the New Common Stock to be issued
pursuant to the Plan are summarized as follows:
(a) Authorization. The Reorganized Parent Company will be authorized
to issue the number of shares of New Common Stock set forth in the
Disclosure Statement.
(b) Par Value. The New Common Stock has a par value of $0.01 per
share.
(c) Rights. The New Common Stock has such rights with respect to
dividends, liquidation, voting and other matters as set forth in the
amended and restated articles of incorporation of the Reorganized Parent
Company and as provided under applicable law.
(d) Dilution. The New Common Stock issued to holders of Existing
Common Stock as of the Voting Record Date and holders of Existing Bonds is
subject to dilution by the Rights Offering, the Private Placement and the
Standby Shares, if necessary. The New Common Stock issued to persons
participating in the Rights Offering or the Private Placement will not be
subject to dilution by the Standby Shares. See the Disclosure Statement for
an illustration of the dilution of the New Common Stock.
13.7 Directors and Officers: Debtor's current directors and officers are
listed in the Disclosure Statement. In accordance with section 1125(a) of the
Bankruptcy Code, these will be the officers and directors on the Effective Date
and immediately thereafter, however, in keeping with the provisions of this
paragraph, as soon as practicable after the Effective Date the new board of
directors of the Reorganized Debtors will convene a meeting. Four members of the
post-Effective Date board of directors will be selected by the Principal
Bondholders. One member of the board of directors will be selected by the
post-Effective Date board of directors from the Debtors' post-Effective Date
management. Two members of the board of directors will be selected by the
entities whose new investment funding is used on the Effective Date (whether
under the Standby Loan or some alternative source of funding) based upon their
relative contributions of capital. Accordingly, certain parties have rights
under the Plan to designate new directors. Those parties have not yet made those
designations. Any such designations will be made before the commencement of the
Confirmation Hearing and will be disclosed at the Confirmation Hearing. Any
changes in officers made before the completion of the Confirmation Hearing will
be disclosed during the Confirmation Hearing. Any further changes in officers
will be made after the Effective Date by the board of directors of the
Reorganized Parent Company. Upon approval of the Plan, a retention bonus plan,
under which certain key employees are provided with additional incentives to
continue their employment with the Parent Company as it pursues a
reorganization, will be implemented as described in the Disclosure Statement.
13.8 Amended and Restated Articles of Incorporation: The amended and
restated articles of incorporation of the Reorganized Parent Company and the
charters of the other Reorganized Debtors, as amended
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pursuant to this Plan, will go into effect on the Effective Date and will
satisfy the provisions of this Plan and section 1123(a)(6) of the Bankruptcy
Code.
13.9 Implementing Documents. To implement this Plan, several documents
will be signed and delivered or otherwise made effective, including the
following documents:
- Promissory Note to be issued to holders of Allowed Priority Tax Claims
- Credit Agreement
- Standby Loan Agreement
- Amended Employment Agreements
- Amended and restated articles of incorporation of Coho Energy, Inc.
- Amended and restated bylaws of Coho Energy, Inc.
- Registration rights agreement
- Shareholders' agreement
Forms of these documents will be filed with the Bankruptcy Court by March 1,
2000. Thereafter, the Debtors will provide a copy of the form of any of these
documents to any party in interest who requests it in writing. Written requests
should be sent to the Parent Company at 14785 Preston Road, Suite 860, Dallas,
Texas 75240, Attention: Ms. Anne Marie O'Gorman.
ARTICLE XIV
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
14.1 Assumption of Executory Contracts and Unexpired Leases: As of the
Effective Date, all executory contracts and unexpired leases of the Debtors (as
set forth in the Debtors' Schedules filed by the Debtors and as specifically
referenced in the Disclosure Statement) other than the Rejected Agreements are
assumed by the Debtors in accordance with section 365 of the Bankruptcy Code.
The Debtors and the Creditors Committee will agree by March 1, 2000 on an
amended schedule of executory contracts and unexpired leases which will be
assumed pursuant to this Plan. The Debtors believe they are current with their
obligations under all executory contracts and unexpired leases and, therefore,
the assumption of same will not result in the payment of any cure amounts which
might otherwise be due and payable. Any rights of non-Debtor parties to
executory contracts and unexpired leases to pursue claims for payment of cure
amounts are preserved. In the event of a dispute regarding the amount or timing
of any cure payments, the ability of the Reorganized Debtors to provide adequate
assurance of future performance or any other matter pertaining to assumption,
the dispute will be resolved by the Bankruptcy Court in connection with the
Confirmation Hearing and the Reorganized Debtors will make such cure payments,
if any, or provide such assurance as may be required by the order resolving such
dispute on the terms and conditions of such order. Employment agreements for
certain key employees will be amended and the Amended Employment Agreements will
be filed with the Bankruptcy Court by March 1, 2000. The Amended Employment
Agreements will provide, among other things, that confirmation and consummation
of this Plan and related events do not constitute a change of control under
these contracts. These Amended Employment Agreements will be assumed under the
Plan. If an employee is requested to execute and deliver an Amended Employment
Agreement by the Creditors Committee, and refused to do so, that employee's
existing employment agreement will be added to the list of contracts to be
rejected and rejected pursuant to the Plan on the Effective Date.
14.2 Indemnification Obligations and Insurance Policies: The obligations
of the Debtors pursuant to their certificates of incorporation, bylaws or
applicable state law to indemnify the directors and officers who served as
directors and officers of the Debtors before and after the Petition Date against
any obligations based on conduct or transactions that occurred while they were
officers and directors before or after the Petition Date will continue after the
Confirmation Date. On the Effective Date the Reorganized Parent Company will
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purchase (i) a new directors and officers insurance policy covering the new
post-Effective Date directors and officers and (ii) a three-year tail insurance
policy on existing director and officer policies, if it can be purchased for no
more than $300,000, or take such other action concerning the purchase of tail
insurance as the board of directors of the Reorganized Parent Company believes
is reasonable.
14.3 Rejection of Certain Executory Contracts and Unexpired Leases: The
Plan Confirmation Order will operate as an order of rejection under section 365
of the Bankruptcy Code with respect to each of the Rejected Agreements.
14.4 Treatment of the Existing Bond Indenture: As of the Effective Date,
except to the extent provided otherwise in the Plan, all notes held by holders
of Bond Claims, and all agreements, instruments and other documents evidencing
the Existing Bonds and the rights of the holders of Bond Claims, will be
automatically canceled, extinguished and are void (all without further action by
any person); all obligations of any person under these instruments and
agreements will be fully and finally satisfied and released; and the obligations
of the Debtors under these instruments and agreements will be discharged. On the
Effective Date, except to the extent provided otherwise in the Plan, any
indenture relating to any of the foregoing, including, without limitation, the
Existing Indenture, will be canceled, and the obligations of the Debtors
thereunder, except for the obligation to indemnify the Indenture Trustee will be
discharged; however, the Existing Indenture and other agreements that govern the
rights of a holder of a claim that is administered by the Indenture Trustee, an
agent or servicer will continue in effect solely for the purposes of (i)
allowing the Indenture Trustee, agent or servicer to take any action necessary
to effect the Plan, including making distributions on account of the holders of
Bond Claims under the Plan and (ii) permitting the Indenture Trustee, agent or
servicer to maintain any rights or liens it may have for reasonable fees, costs
and expenses under the Exiting Indenture. Upon payment in full of the reasonable
fees and expenses of the Indenture Trustee, the rights of the Indenture Trustee
will terminate.
14.5 Claims Based on Rejection of Executory Contracts and Unexpired
Leases: All proofs of claim with respect to Claims arising from the rejection of
an executory contract or unexpired lease will be filed with the Bankruptcy Court
within 30 days after the earlier of (a) the date of entry of an order of the
Bankruptcy Court approving the rejection, or (b) the Effective Date. Any Claims
not filed within such times will be forever barred from assertion against the
Debtors, their estate or their property.
ARTICLE XV
EFFECT OF REJECTION BY ONE OR MORE CLASSES OF CLAIMS
15.1 Impaired Classes to Vote: Each impaired class of Claims and Equity
Interests will be entitled to vote separately to accept or reject the Plan. A
holder of a Disputed Claim that has not been temporarily allowed for purposes of
voting on the Plan may vote the Disputed Claim in an amount equal to the
portion, if any, of the Claim shown as fixed, liquidated and undisputed in the
Debtors' Schedules.
15.2 Acceptance by Class of Creditors: A class will have accepted the Plan
if the Plan is accepted by at least two-thirds in amount and more than one-half
in number of the Allowed Claims or Equity Interests of the class actually voting
that have accepted or rejected the Plan.
15.3 Cramdown: If any impaired class will fail to accept this Plan in
accordance with section 1129(a) of the Bankruptcy Code, the Debtors reserve the
right to request the Bankruptcy Court to confirm the Plan in accordance with the
provisions of section 1129(b) of the Bankruptcy Code.
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ARTICLE XVI
PROVISIONS FOR RESOLUTION AND TREATMENT OF PREFERENCES,
FRAUDULENT CONVEYANCES, AND DISPUTED CLAIMS
16.1 Preferences and Fraudulent Conveyances: The Reorganized Debtors will
be the only parties authorized to object to Claims and to pursue actions to
recover preferences and fraudulent conveyances or any other transaction voidable
under Chapter 5 of the Bankruptcy Code. Unless the Reorganized Debtors consent,
or unless otherwise ordered by the Bankruptcy Court, no other party will have
the right or obligation to pursue such actions.
16.2 Objections to Claims: The Debtors will have the sole authority to
object and contest the allowance of any Claims filed with the Bankruptcy Court
within 90 days after the Effective Date. Claims listed as disputed, contingent
or unliquidated on the Debtors' Schedules are considered contested Claims,
except Claims otherwise treated by the Plan or previously allowed or disallowed
by Final Order of the Bankruptcy Court.
16.3 Disputed Claims Reserve: Debtors will hold in trust the Distributions
for Disputed Claims (pending a determination of the Disputed Claims) for the
benefit of holders of Disputed Claims. At such time as a Disputed Claim becomes
an Allowed Claim, that will be deemed the Effective Date for purposes of such
Claim and the Distributions allowed for such Allowed Claims will be released
from the Disputed Claims Reserve and delivered to the holder of such Allowed
Claim. If a Disputed Claim is disallowed, the Distributions provided for the
Claim will be released to the Reorganized Debtors for use in their business
operations.
16.4 Unclaimed Distributions: On the second, third and fourth
anniversaries of the Effective Date, the Reorganized Debtors will publish the
names of holders of unclaimed Claims and Equity Interests. In the event any
Distributions under the Plan remain unclaimed as of five (5) years after the
Effective Date such Distributions will be released for the Reorganized Debtors
use in their ordinary business operations.
ARTICLE XVII
PROVISIONS FOR RETENTION, ENFORCEMENT, SETTLEMENT, OR
ADJUSTMENT OF CLAIMS BELONGING TO THE ESTATE
17.1 Causes of Action: All claims recoverable under Chapter 5 of the
Bankruptcy Code, including, but not limited to, all claims assertable under
sections 544, 546, 547, 548 and 550 of the Bankruptcy Code, and all claims owned
by the Debtors pursuant to section 541 of the Bankruptcy Code or similar state
law, including all claims against third parties on account of any indebtedness,
and all other claims owed to or in favor of the Debtors to the extent not
specifically compromised and released pursuant to this Plan or an agreement
referred to or incorporated herein, will be preserved and retained for
enforcement by the Reorganized Debtors after the Effective Date.
17.2 Legally Binding Effect; Discharge of Claims and Equity Interests: The
provisions of this Plan will (a) bind all Creditors and Equity Interest holders,
whether or not they accept this Plan, and (b) discharge the Debtors from all
debts that arose before the Petition Date. In addition, the distributions of
Cash and securities provided for under this Plan will be in exchange for and in
complete satisfaction, discharge and release of all Claims against and Equity
Interests in the Debtors or any of their assets or properties, including any
Claim or Equity Interest accruing after the Petition Date and before the
Effective Date. On and after the Effective Date, all holders of impaired Claims
and Equity Interests will be precluded from asserting any Claim against the
Reorganized Debtors or their assets or properties based on any transaction or
other activity of any kind that occurred before the Petition Date. The
Distributions provided for Creditors and Equity Interest holders will not be
subject to any Claim by another Creditor or Equity Interest holder by reason of
an assertion of a contractual right of subordination.
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ARTICLE XVIII
CONDITIONS PRECEDENT TO CONFIRMATION AND
CONSUMMATION OF THE PLAN
18.1 Conditions to Confirmation: The Bankruptcy Court will not enter the
Confirmation Order unless and until each of the following conditions has been
satisfied or duly waived (if waivable) pursuant to Section 18.3 below.
(a) The documents implementing the Plan listed in Section 13.9 above
and the terms and conditions embodied therein will be acceptable in form
and substance to the Debtors, the Creditors Committee, Chase, the Standby
Lenders and Bank Group; provided that no Creditor or committee will have
standing to object to the form of a document that has no material impact on
them.
(b) Entry of a Confirmation Order, acceptable in form and substance to
the Debtors and the Creditors Committee, which will, among other things,
make findings that particular sections of 1129 have been met, including,
without limitation, (i) that the Debtors, the Plan Participants and each of
their Representatives have proposed and obtained confirmation of the Plan
in good faith; (ii) that the Plan is in the best interest of Creditors and
(iii) that the Plan is fair and equitable to holders of Claims and Equity
Interests.
18.2 Conditions to Effective Date: The Plan will not be consummated and
the Effective Date will not occur unless and until each of the following
conditions has been satisfied or duly waived (if waivable) pursuant to Section
18.3 below:
(a) The Confirmation Order shall have been entered by the Bankruptcy
Court in a form satisfactory to the Debtors, the Creditors Committee,
Chase, the Standby Lenders and the Bank Group.
(b) The Confirmation Order will authorize and direct the Debtors, the
Reorganized Debtors and their subsidiaries to take all actions necessary or
appropriate to enter into, implement and consummate the contracts,
instruments, releases, leases, indentures and other agreements or documents
created in connection with the Plan, including those actions contemplated
by the provisions of the Plan set forth in Section 18.1 above.
(c) The Credit Facility, the Rights Offering, the Private Placement
and, if applicable, the Standby Loan, shall all close prior to or on the
Effective Date so that funds are available to pay the Allowed Bank Group
Claim in full on or prior to the Effective Date.
(d) The Effective Date will have occurred on or before March 31, 2000.
18.3 Waiver of Conditions: The conditions to Confirmation and the
Effective Date may be waived in whole or in part by the Debtors, with the
consent of the Creditors Committee, at any time, without notice.
18.4 Effect of Non-occurrence of Conditions to Effective Date: Each of the
conditions to consummation and the Effective Date must be satisfied or duly
waived, as provided above, within 90 days after the Confirmation Date. If each
condition to the Effective Date has not been satisfied or duly waived, pursuant
to Section 18.3 above, within 90 days after the Confirmation Date, then upon
motion by any party in interest made before the time that each condition has
been satisfied or duly waived and upon notice to such parties in interest as the
Bankruptcy Court may direct, the Confirmation Order will be vacated by the
Bankruptcy Court; provided, however, that, notwithstanding the filing of such
motion, the Confirmation Order may not be vacated if each of the conditions to
the Effective Date is either satisfied or duly waived before the Bankruptcy
Court enters an order granting the motion. If the Confirmation Order is vacated
pursuant to this Section 18.4, the Plan will be deemed null and void, including
the discharge of Claims and termination of Equity Interests pursuant to section
1141 of the Bankruptcy Code; and the assumptions, assumptions and assignments or
rejections of executory contracts and unexpired leases pursuant to Section 14.1
above, and nothing contained in the Plan will (1) constitute a waiver or release
of any Claims by or against, or any Equity Interests in, the Debtors or (2)
prejudice in any manner the rights of the Debtors.
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ARTICLE XIX
RETENTION OF JURISDICTION
19.1 Jurisdiction: Until this Chapter 11 Case is closed, the Bankruptcy
Court will retain such jurisdiction as is legally permissible, including that
necessary to ensure that the purpose and intent of this Plan are carried out and
to hear and determine all Claims set forth in Articles V through XI above that
could have been brought before the entry of the Confirmation Order. The
Bankruptcy Court will retain jurisdiction to hear and determine all Claims
against the Debtors and to enforce all causes of action that may exist on behalf
of the Debtors. Nothing contained in this Plan will prevent the Reorganized
Debtors from taking such action as may be necessary in the enforcement of any
cause of action that may exist on behalf of the Debtors and that may not have
been enforced or prosecuted by the Debtors.
19.2 Examination of Claims: Following the Confirmation Date, the
Bankruptcy Court will further retain jurisdiction to decide disputes concerning
the classification and allowance of the Claim of any Creditor and the
re-examination of Claims that have been allowed for the purposes of voting, and
the determination of such objections as may be filed to Creditors' Claims. The
failure by the Debtors to object to, or to examine, any Claims for the purposes
of voting will not be deemed a waiver of their right to object to, or to
re-examine, the Claim in whole or in part.
19.3 Determination of Disputes: The Bankruptcy Court will retain
jurisdiction after the Confirmation Date to determine all questions and disputes
regarding title to the assets of the Debtors' estate, disputes concerning the
allowance of Claims, and determination of all causes of action, controversies,
disputes, or conflicts, whether or not subject to any pending action, as of the
Confirmation Date, for the Debtors to recover assets pursuant to the provisions
of the Bankruptcy Code.
19.4 Additional Purposes: The Bankruptcy Court will retain jurisdiction
for the following additional purposes after the Effective Date:
(a) to modify this Plan after confirmation pursuant to the Bankruptcy
Rules and the Bankruptcy Code;
(b) to assure the performance by the Reorganized Debtors of their
obligations to make Distributions under this Plan and with respect to the
New Common Stock to be issued;
(c) to enforce and interpret the terms and conditions of this Plan;
(d) to adjudicate matters arising in these bankruptcy cases, including
matters relating to the formulation and consummation of this Plan;
(e) to enter such orders, including injunctions, as are necessary to
enforce the title, rights, and powers of the Reorganized Debtor and to
impose such limitations, restrictions, terms and conditions on such title,
rights, and powers as this Bankruptcy Court may deem necessary;
(f) to enter an order terminating this Chapter 11 Case;
(g) to correct any defect, cure any omission, or reconcile any
inconsistency in this Plan or the order of confirmation as may be necessary
to carry out the purposes and intent of this Plan;
(h) to allow applications for fees and expenses pursuant to section
503(b) of the Bankruptcy Code; and
(i) to decide issues concerning federal tax reporting and withholding
which arise in connection with the confirmation or consummation of this
Plan.
19
<PAGE> 116
ARTICLE XX
DEFAULT UNDER PLAN
20.1 Asserting Default: If the Debtors default under the provisions of
this Plan (as opposed to default under the documentation executed in
implementing the terms of the Plan, which documents will provide independent
bases for relief), any Creditor or party in interest desiring to assert a
default will provide the Debtors with written notice of the alleged default.
20.2 Curing Default: The Debtors will have 20 days from receipt of the
written notice in which to cure an alleged default under this Plan, including
any default under any Related Document. The notice should be delivered by United
States certified mail, postage prepaid, return receipt requested addressed to
the president of the Debtors at the following address:
Coho Energy, Inc.
Attention: President
14785 Preston Road, Suite 860
Dallas, Texas 75240
and to counsel for the Debtors at the following address:
Fulbright & Jaworski LLP
Attention: Michael W. Anglin
2200 Ross Avenue, Suite 2800
Dallas, Texas 75201
and to counsel for the Creditors Committee at the following address:
Munger, Tolles & Olson
Attention: Thomas B. Walper
355 S. Grand Avenue
35th Floor
Los Angeles, California 90071
If the default is not cured, any Creditor or party in interest may thereafter
file with the Bankruptcy Court and serve upon counsel for the Debtor a motion to
compel compliance with the applicable provision of the Plan. The Bankruptcy
Court, upon finding a material default, will issue such orders compelling
compliance with the pertinent provisions of the Plan.
ARTICLE XXI
MISCELLANEOUS PROVISIONS
21.1 Termination of Committees: On the Effective Date, all committees in
the Debtor's Chapter 11 Case will be terminated except to the extent necessary
to participate in any appeals.
21.2 Compliance with Tax Requirements: In connection with this Plan, the
Debtors will comply with all withholding and reporting requirements imposed by
federal, state, and local taxing authorities, and Distributions will be subject
to such withholding and reporting requirements.
21.3 Amendment of the Plan: This Plan may be amended by the Debtors before
or after the Effective Date as provided in section 1127 of the Bankruptcy Code.
21.4 Revocation of Plan: The Debtors reserve the right to revoke and
withdraw this Plan at any time before the Confirmation Date.
21.5 Effect of Withdrawal or Revocation: If both the Debtors and the
Creditors Committee revoke or withdraw this Plan before the Confirmation Date,
or if the Confirmation Date or the Effective Date does not
20
<PAGE> 117
occur, then this Plan will be null and void. In such event, nothing contained
herein will be deemed to constitute a waiver or release of any Claims by or
against the Debtors or any other person, or to prejudice in any manner the
rights of the Debtors or any person in any further proceedings involving the
Debtors. The withdrawal of either the Debtors or the Creditors Committee as a
proponent of this Plan will not result in the withdrawal or revocation of this
Plan and, in such event, the non-withdrawing party may proceed with its efforts
to confirm this Plan.
21.6 Due Authorization By Creditors: Each and every Creditor who elects to
participate in the Distributions provided for herein warrants that it is
authorized to accept in consideration of the Claim against the Debtors the
Distributions provided for in this Plan and that there are no outstanding
commitments, agreements, or understandings, express or implied, that may or can
in any way defeat or modify the rights conveyed or obligations undertaken by it
under this Plan.
21.7 Implementation: The Debtors will be authorized to take all necessary
steps, and perform all necessary acts, to consummate the terms and conditions of
the Plan.
21.8 Ratification: The Confirmation Order will ratify all transactions
effected by the Debtors during the pendency of this Chapter 11 Case.
21.9 Limitation of Liability in Connection with the Plan, Disclosure
Statement and Related Documents and Related Indemnity:
(a) The Plan Participants will neither have nor incur any liability to
any entity for any act taken or omitted to be taken in connection with or
related to the formulation, preparation, dissemination, implementation,
confirmation or consummation of the Plan, the Disclosure Statement, the
Confirmation Order or any contract, instrument, release or other agreement
or document created or entered into, or any other act taken or omitted to
be taken in connection with the Plan, the Disclosure Statement or the
Confirmation Order, including solicitation of acceptances of the Plan;
provided, however, that the provisions of this Section 21.9(a) shall have
no effect on the liability of any Plan Participant that would otherwise
result from any such act or omission to the extent that such act or
omission is determined in a Final Order to have constituted gross
negligence or willful misconduct.
(b) On and after the Effective Date, the Reorganized Parent Company
will indemnify each Plan Participant, hold each Plan Participant harmless
from, and reimburse each Plan Participant for, any and all losses, costs,
expenses (including attorneys' fees and expenses), liabilities and damages
sustained by a Plan Participant arising from any liability described in
this Section 21.9.
21
<PAGE> 118
21.10 Section Headings: The section headings used in this Plan are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Plan.
DATED: February 14, 2000, Dallas, Texas
COHO ENERGY, INC.
By: /s/ JEFFREY CLARKE
----------------------------------
Jeffrey Clarke
President and Chief Executive
Officer
OFFICIAL COMMITTEE OF
UNSECURED CREDITORS
By: /s/ STUART J. LISSNER
----------------------------------
Authorized representative
<TABLE>
<S> <C>
COUNSEL FOR THE DEBTORS
/s/ MICHAEL W. ANGLIN
--------------------------------------------
OF COUNSEL: Michael W. Anglin
Zack A. Clement State Bar No. 01260800
FULBRIGHT & JAWORSKI L.L.P. Louis R. Strubeck, Jr.
1301 McKinney Street State Bar No. 19425600
Suite 4100 FULBRIGHT & JAWORSKI L.L.P.
Houston, Texas 77010-3095 2200 Ross Avenue, Ste. 2800
(713) 651-5434 Dallas, Texas 75201
(713) 651-5246 (Facsimile) (214) 855-8000
(214) 855-8200 (Facsimile)
COUNSEL FOR THE
OFFICIAL COMMITTEE OF
UNSECURED CREDITORS
/s/ THOMAS B. WALPER
--------------------------------------------
OF COUNSEL: Thomas B. Walper, Esq.
Susan B. Hersh MUNGER, TOLLES & OLSON LLP
LAW OFFICE OF SUSAN B. HERSH, PC 355 South Grand Avenue, 35th Floor
12900 Preston Road, Ste. 900 Los Angeles, California 90071
Dallas, Texas 75230 (213) 683-9193
(972) 503-7070 (213) 687-3702 (Facsimile)
(972) 503-7077 (Facsimile)
</TABLE>
22
<PAGE> 119
SCHEDULE A
REJECTED AGREEMENT
Employment Agreement between Coho Energy, Inc. and Eddie LeBlanc (former
Chief Financial Officer).
<PAGE> 120
SCHEDULE B-1
LIQUIDATION VALUE
(Attached)
<PAGE> 121
SCHEDULE B-1 LIQUIDATION VALUE
COHO ENERGY, INC.
LIQUIDATION ANALYSIS
($ THOUSANDS)
<TABLE>
<CAPTION>
10/31/1999
BOOK LIQUIDATION LIQUIDATION
NOTES VALUE DISCOUNT VALUE
- ----- ---------- ----------- -----------
<C> <S> <C> <C> <C>
(1) Cash................................................. 13,341 0% 13,341
(2) Restricted Cash
CRI -- Escrow........................................ 52 100% --
LA Production -- Escrow.............................. 26 100% --
---------- -------
Total Cash........................................... 13,419 13,341
(3) Accounts Receivable
Oil and Gas Sales.................................... 7,100 10% 6,390
JIB.................................................. 2,628 25% 1,971
Officer/Employee..................................... 628 10% 565
Other................................................ 845 50% 423
Allow. For Doubt. Accts. ............................ (885) 100% --
---------- -------
Total Accounts Receivable............................ 10,316 9,349
(4) Prepaids & Other
Prepaid Insurance.................................... 513 20% 410
Prepaid G&A (Prof. Fees)............................. 829 2% 808
Prepaid G&A (Vendors)................................ 16 50% 8
Misc. Deposit........................................ 0 0% 0
Prepaid Surface Leases............................... 204 0% 204
Prepaid Seismic...................................... 23 100% --
---------- -------
Total Prepaids & Other............................... 1,584 1,430
---------- -------
Total Current Assets................................. 25,319 24,119
PP&E
(5) Oil and Gas Properties:
Book Value........................................... 310,896 --
Risk Adjusted PV11 Reserve Value..................... -- 332,188
Less: Liquidation Discount (10%)..................... -- (33,219)
---------- -------
Net Liquidation Value................................ 310,896 4% 298,969
(6) Other PP&E
Office Furniture..................................... 178 85% 27
Leasehold Improvements............................... 142 100% --
Data Processing...................................... 1,160 85% 174
Office Equipment..................................... 437 85% 66
Other Fixed Assets................................... 5 85% 1
Mobile Homes/Portable Bldgs.......................... 38 85% 6
Automobiles.......................................... 79 85% 12
---------- -------
Net Other PP&E....................................... 2,039 285
---------- -------
Total PP&E........................................... 312,935 299,254
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
10/31/1999
BOOK LIQUIDATION LIQUIDATION
NOTES VALUE DISCOUNT VALUE
- ----- ---------- ----------- -----------
<C> <S> <C> <C> <C>
(7) Other Assets
Debt Issuance Costs -- CEI........................... 3,584 100% --
Debt Issuance Costs -- CRI........................... 1,647 100% --
Refundable Deposits.................................. 39 0% 39
Country Club......................................... 68 25% 51
Long-Term Loan to J. Clarke.......................... 205 0% 205
Misc. Other.......................................... 0 0% 0
---------- -------
Total Other Assets................................... 5,544 296
---------- -------
Assets Available for Distribution.................... 343,798 323,669
</TABLE>
- ---------------
NOTES:
(1) Includes all unrestricted cash available for disbursement.
(2) Restricted cash is held in two escrow accounts, approximately $52,000 as a
reserve to service environmental liabilities in Mississippi, and
approximately $26,000 to service obligations from the sale of the Monroe
field in Louisiana. These amounts were given no value in the liquidation
analysis because they are reserves for future expenditures associated with
the properties. Property liquidation value has been estimated without a
reduction for these future expenses.
(3) Accounts receivable as of 10/31/99 is composed of approximately: $7,100,000
of accrued revenue, $2,600,000 of JIB receivables, $628,000 of
officer/employee receivables and $845,000 of other receivables before
allowances for doubtful accounts of $885,000. Accrued revenue receivables
are discounted by 10% to recognize the relatively high credit quality of
these receivables from the sale of oil and gas production. JIB receivables
are discounted by 25% to reflect an approximately 50% recovery of the
approximately $1,400,000 of JIB accounts receivable that are over 90 days
past due. The approximately $628,000 of officer/employee receivables are
discounted 10%. The approximately $845,000 of other receivables consists
mainly of disputed tax claims and amounts due from other vendors, and
accordingly, is discounted by 50%.
(4) Prepaid expenses amounts to approximately $1,584,000. Of this amount,
approximately $1,430,000 is expected to have value in liquidation. This
amount consists of approximately $513,000 of prepaid insurance discounted at
20% for estimated policy cancellation costs and other unreserved expenses.
The approximately $808,000 of professional fee retainers is given full
value. The approximately $20,000 of computer and software amortization is
given no value. Approximately $16,000 of vendor prepaids are discounted at
50%. Prepaid surface leases are not discounted because the lease payments
are associated with producing properties and a potential purchaser of the
interest would give value to this lease. Prepaid seismic is assumed to have
no value in liquidation.
(5) The book value of reserves represents the historical account for
approximately 110 million of total proved barrels of oil equivalent (BOE)
net of historical depreciation, depletion and amortization based on full
cost basis. The liquidation value is based upon the reserve reports audited
by Netherland, Sewell & Associates and Sproule & Associates as of 1/1/1999
and rolled forward by the Debtor's engineers to 1/1/2000. Reserves are
composed of approximately 40% proved developed producing (PDP), 28% proved
developed not producing (PNP), and 32% proved undeveloped (PUD). In the
liquidation analysis, adjustments to the reserves were made consistent with
Society of Petroleum Evaluation Engineers guidelines. PDP is given full
value, PNP is risked 75% and PUD is risked 58%. The liquidation pricing
scenario uses the NYMEX strip price at 12/14/99 for the first three years
then held flat. The prices are as follows: Oil: 2000 -- $22.77,
2001 -- $19.49, 2002 -- $18.81, 2003 on -- $18.00, Gas: 2000 -- $2.56,
2001 -- $2.58, 2002 -- $2.59, 2003 on -- $2.50. Based upon observations of
recent transactions in the oil and gas property market, we applied an 11%
discount rate to the risk adjusted cash flows. We further discounted this
value by 10% to reflect the forced liquidation of properties that has a
negative impact on value.
<PAGE> 123
(6) Net book value of Other PP&E is approximately $2,039,000. These assets are
discounted by 85% to reflect the liquidation value of these G&A assets which
are primarily comprised of office furniture and equipment, portable
buildings and data processing equipment. Leasehold improvements are given no
value.
(7) Net book value of Other Assets is approximately $5,500,000. This amount
consists of approximately $5,231,000 of debt issuance costs that is given no
value in liquidation, approximately $205,000 loan to J. Clarke that is not
discounted and approximately $107,000 of refundable deposits that are
discounted by 25% to reflect forced liquidation
<PAGE> 124
SCHEDULE B-2
LIQUIDATION ANALYSIS
(Attached)
<PAGE> 125
SCHEDULE B-2 LIQUIDATION ANALYSIS
COHO ENERGY, INC.
LIQUIDATION ANALYSIS
($ THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED
LIQUIDATION REORGANIZATION
NOTES VALUE VALUE
- ----- ----------- --------------
<C> <S> <C> <C>
(1) ASSETS AVAILABLE FOR DISTRIBUTION........................... 323,669 425,000
(2) Chapter 7 Administrative Expenses........................... 12,900 --
Chapter 11 Administrative Expenses
(3) Professional Fees........................................... 1,800 9,600
(4) Allowed Priority Tax Claims................................. 139 139
(5) Allowed Other Priority Claims............................... 1,158 1,158
(6) Post-Petition Trade Payables................................ 2,033 2,033
(7) Revenue Royalties Payables.................................. 866 866
(8) Accrued Interest SCF (Pre & Post Petition).................. 14,826 14,826
------- -------
NET DISTRIBUTABLE ASSETS.................................... 289,947 396,378
(9) Allowed Secured Tax Claims.................................. 5,383 5,383
(10) Revenue Royalties Payable................................... 910 910
(11) Allowed Convenience Claims.................................. 73 73
(12) Allowed Secured Claims...................................... 68 68
(13) Allowed Secured Bank Group Claim............................ 239,600 239,600
------- -------
ASSETS AVAILABLE TO UNSECURED CLAIMS........................ 43,913 150,344
(14) Accrued Interest on Subordinated Debt....................... 3,153 10,363
(15) Subordinated Debt........................................... 39,368 129,391
(16) Allowed General Unsecured Claims............................ 1,312 4,313
(17) Other Interest Payable...................................... 80 263
(18) Previous Equity Owners...................................... -- 6,014
------- -------
-- --
</TABLE>
- ---------------
NOTES:
(1) The book value of the Company's oil and gas properties are restated to
market value because book value understates the market value of the assets
and the claimants are entitled to the value in excess of book value.
(2) It is assumed that the trustee will hire a firm specializing in the sale of
oil and gas properties and a second firm to sell the remaining assets of
the Company. The total amount of Chapter 7 Administrative Expenses
includes: attorney fees to assist the trustee in its duties (8hrs./day X
$350/hr. X 83 week days), acquisition and divestiture firm fees for oil and
gas assets (1% of oil and gas property balance), acquisition and
divestiture firm fees for the remaining assets exclusive of cash (1%), and
trustee fees of up to 3% of assets available for distribution less fees and
expenses as described above.
(3) Estimate of professional fees incurred but not yet paid by the Company in
liquidation are for the period from 8/23/99 through 12/31/99 and are
currently calculated from the Company's estimate of monthly total
professional fees (approximately $425,000) times the number of months from
8/23/99 through 12/31/99 (4.25) less amounts already paid ($0). Estimate of
professional fees incurred but not yet paid under the Plan of
Reorganization is for the time period from 8/23/99 -- 3/31/00. In addition,
the Plan of Reorganization includes approximately $6,500,000 of fees and
expenses to a new bank group to establish a new senior credit facility. The
following is a table of: the professional firms involved, their
<PAGE> 126
role, the Company's estimate of amounts earned from 8/23/99 -- 11/30/99 and
will eventually be the basis for estimation through 12/31/99 and 3/31/00
respectively.
<TABLE>
<CAPTION>
AMOUNTS
FIRM/ PARTY IN INTEREST ROLE 8/23/99 -- 11/30/99
- ----------------------- ---- -------------------
<S> <C> <C>
Munsch, Hardt, Kopf, Harr & Counsel to the Bank Group....... $250,000
Dinan
Fulbright & Jaworski Counsel to the Debtor........... $350,000
Munger, Tolles & Olsen Counsel to the Unsecured
Creditors Committee............. $120,000
Susan P. Hersch Local counsel to the Unsecured
Creditors Committee............. $ 50,000
PricewaterhouseCoopers Financial Advisor to the
Bank Group...................... $250,000
Arthur Andersen Financial Advisor to the
Debtor.......................... $ 75,000
Jason R. Searcy Counsel to the Equity
Committee....................... $ 50,000
Sproule Associates Reserve Engineers............... $ 10,000
Netherland & Sewell Reserve Engineers............... $ 50,000
</TABLE>
(4) Provided by the Company.
(5) Provided by the Company.
(6) Provided by the Company.
(7) Provided by the Company.
(8) Provided by the Company. Includes both pre and post petition accrued
interest on the Senior Credit Facility (SCF).
(9) Provided by the Company. Includes approximately $4,000,000 in Louisiana
state income tax.
(10) Provided by the Company.
(11) Provided by the Company. Secured and unsecured claims less than $1,000.
(12) Taken from Schedules of Claims and Analysis. Other secured claims are
holding bonds from the Company and are secured for this portion of their
claim.
(13) Includes principal borrowed of approximately $239,600,000.
(14) Equal to estimated claim times estimated recovery percentage of 26% in the
liquidation case and 86% in the Reorganization Plan. Estimated Claim is
provided by the Company.
(15) Equal to estimated claim times estimated recovery percentage of 26% in the
liquidation case and 86% in the Reorganization Plan. Estimated Claim is
provided by the Company.
(16) Equal to estimated claim times estimated recovery percentage of 26% in the
liquidation case and 86% in the Reorganization Plan. Estimated Claim is
provided by the Company.
(17) Equal to estimated claim times estimated recovery percentage of 26% in the
liquidation case and 86% in the Reorganization Plan. Estimated Claim is
provided by the Company.
(18) Equal to 4% of the assets available for distribution to unsecured creditors
under the Reorganization Plan.
<PAGE> 127
SCHEDULE B-3
ILLUSTRATION OF LIQUIDATION ANALYSIS
(Attached)
<PAGE> 128
SCHEDULE B-3 ILLUSTRATION OF LIQUIDATION ANALYSIS
COHO ENERGY, INC.
LIQUIDATION ANALYSIS
($ THOUSANDS)
<TABLE>
<CAPTION>
LIQUIDATION ANALYSIS REORGANIZATION PLAN
--------------------------------- ---------------------------------
$ $ % $ $ %
ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED
CLAIM RECOVERY RECOVERY CLAIM RECOVERY RECOVERY
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
POST-PETITION
Chapter 7 Administrative Expenses...... 12,900 12,900 100% -- --
Chapter 11 Administrative Expenses
Professional Fees.................... 1,800 1,800 100% 9,600 9,600 100%
Allowed Priority Tax Claims.......... 139 139 100% 139 139 100%
Allowed Other Priority Claims........ 1,158 1,158 100% 1,158 1,158 100%
Post-Petition Trade Payables......... 2,033 2,033 100% 2,033 2,033 100%
Revenue Royalties Payables........... 866 866 100% 866 866 100%
Accrued Interest SCF (Pre & Post
Petition)......................... 14,826 14,826 100% 14,826 14,826 100%
PRE-PETITION
Allowed Secured Tax Claims............. 5,383 5,383 100% 5,383 5,383 100%
Revenue Royalties Payable.............. 910 910 100% 910 910 100%
Allowed Convenience Claims............. 73 73 100% 73 73 100%
Allowed Secured Claims................. 68 68 100% 68 68 100%
Allowed Secured Bank Group Claim....... 239,600 239,600 100% 239,600 239,600 100%
Accrued Interest on Subordinated
Debt................................. 12,014 3,153 26% 12,014 10,363 86%
Subordinated Debt...................... 150,000 39,368 26% 150,000 129,391 86%
Allowed General Unsecured Claims....... 5,000 1,312 26% 5,000 4,313 86%
Other Interest Payable................. 305 80 26% 305 263 86%
Previous Equity Owners................. -- -- -- 6,014
------- ------- ------- -------
447,075 323,669 441,975 425,000
======= ======= ======= =======
</TABLE>
<PAGE> 129
ANNEX A
COHO ENERGY, INC. ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
(Attached)
<PAGE> 130
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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)
<TABLE>
<S> <C>
TEXAS 75-2488635
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
<TABLE>
<S> <C>
14785 PRESTON ROAD, SUITE 860
DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code:
(972) 774-8300
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 5, 1999, 25,603,512 shares of the registrant's Common Stock were
outstanding and the aggregate market value of all voting stock held by
non-affiliates was $14 million based upon the closing price on the Nasdaq Stock
Market on such date. The officers and directors of the registrant are considered
affiliates for purposes of this calculation.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on Form
10-K certain information contained under the headings "Directors and Executive
Officers of the Registrant", "Executive Compensation", "Certain Relationships
and Related Transactions" and "Security Ownership of Certain Beneficial Owners
and Management" in the registrant's Proxy Statement for the Company's Annual
Meeting of Shareholders proposed to be held in 1999 which Proxy Statement is
expected to be filed within 120 days of the end of the Registrant's fiscal year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 131
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
Item 1. Business........................................ 3
Item 2. Properties...................................... 20
Item 3. Legal Proceedings............................... 20
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 20
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters..................... 22
Item 6. Selected Financial Data......................... 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 24
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk..................................... 34
Item 8. Consolidated Financial Statements............... 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 58
PART III
Item 10. Directors and Executive Officers of the
Registrant...................................... 58
Item 11. Executive Compensation.......................... 58
Item 12. Security Ownership and Certain Beneficial Owners
and Management.................................. 58
Item 13. Certain Relationships and Related
Transactions.................................... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 58
</TABLE>
FORWARD-LOOKING STATEMENTS
This Form 10-K includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in this Form 10-K that address
activities, events or developments that the Company expects, projects, believes
or anticipates will or may occur in the future, including such matters as crude
oil and natural gas reserves, future acquisitions, future drilling and
operations, future capital expenditures, future production of crude oil and
natural gas and future net cash flow are forward-looking statements. These
statements are based on certain assumptions and analyses made by management of
the Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including those related to competition,
general economic and business conditions, prices of crude oil and natural gas,
the business opportunities (or lack thereof) that may be presented to and
pursued by the Company, changes in laws or regulations and other factors, many
of which are beyond the control of the Company. Such statements are not
guarantees of future performance and actual results or developments may differ
materially from those projected in the forward-looking statements.
DEFINITIONS
See Page 6 for a list of definitions of certain technical terms used
herein.
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PART I
ITEM 1. BUSINESS AND PROPERTIES
GENERAL
Coho Energy, Inc. ("Coho" or the "Company") is an independent energy
company engaged, through its wholly owned subsidiaries, in the development and
production of, and exploration for, crude oil and natural gas. The Company's
crude oil activities are concentrated principally in Mississippi and Oklahoma,
where, to the Company's knowledge, it is each state's largest producer of crude
oil. At December 31, 1998, the Company's total proved reserves were 111.1 MMBOE
with a Present Value of Proved Reserves of $269.3 million, approximately 67.4%
of which were proved developed reserves. At December 31, 1998, approximately 90%
of the Company's total proved reserves were comprised of crude oil. At December
31, 1998, the Company's operations were conducted in 21 major producing fields,
17 of which were operated by the Company. The average working interest of the
Company in the fields it operates was approximately 76%.
The Company commenced operations in Mississippi in the early 1980s and has
focused most of its development efforts in that area. The Company believes that
the salt basin in central Mississippi offers significant long-term potential due
to the basin's large number of mature fields with multiple hydrocarbon bearing
horizons. The application of proven technology to these underexploited and
underexplored fields yields attractive, lower-risk exploitation and exploration
opportunities. As a result of the attractive geology and the Company's
experience in exploiting fields in the area, the Company has accumulated a large
inventory of potential development drilling, secondary recovery and exploration
projects in this basin.
In December 1997, the Company acquired interests in 14 principal producing
fields located primarily in southern Oklahoma. These properties are very similar
to the Company's Mississippi properties. The Company believes that its
concentration in the onshore Gulf Coast and Mid-Continent regions provides it
with important competitive advantages such as its extensive databases,
operational infrastructure and economies of scale.
On December 2, 1998, the Company sold its natural gas assets located in
Monroe, Louisiana, for a net sales price of $61.5 million. The assets sold
represented approximately 14% of the Company's year end 1997 proved reserves and
included two gas gathering systems.
The Company's focus in the onshore Gulf Coast and Mid-Continent regions has
resulted in significant production, reserve and EBITDA growth. The Company's
average net daily production has increased in each of the last five years from
5,203 BOE in 1993 to 17,599 BOE in 1998, representing a compound annual growth
rate of 27.6%. Over the five-year period ended December 31, 1998, the Company
discovered or acquired approximately 103.4 MMBOE of proved reserves at an
average finding cost of $4.87 per BOE. Over the same period, the Company has
replaced over 529% of its production. This increase in reserves from 27.2 MMBOE
at year end 1993 to 111.1 MMBOE at year end 1998 represents a five-year compound
annual growth rate of 32.5%. Concurrent with the increase in production, EBITDA
has increased from $16.5 million in 1993 to $32.1 million in 1998.
In August 1998, the Company announced that it had reached an agreement to
issue $250 million of common stock at $6.00 per share (approximately 41.7
million shares) to HM4 Coho L.P. ("HM4"), a limited partnership managed by
Hicks, Muse, Tate & Furst Incorporated, giving HM4 ownership interest in the
Company of approximately 62%. On December 15, 1998, the Company announced that
HM4 was terminating the prior agreement and that the Company was considering a
restructuring of the HM4 agreement, which had received shareholder approval, to
reflect an increase in the number of shares that the Company would issue for the
$250 million purchase price based on a price per share of $4.00 versus $6.00.
After working through all of the issues and reaching a verbal agreement with all
of the interested parties with regard to the proposed restructuring, the Company
was informed by HM4 on February 12, 1999 that it was no longer interested in the
investment.
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FUTURE OPERATIONS
On February 22, 1999, the Company was informed by the lenders under the
Company's existing credit facility that its borrowing capacity under such
facility at January 31, 1999 had been reduced from $242 million to $150 million
as a result of the deterioration in the valuation of the collateral of crude oil
and natural gas reserves, primarily due to crude oil and natural gas price
declines. The Company's over advance position was $89.6 million based on the
reduced borrowing capacity and, pursuant to the credit facility, such amount is
due in five equal monthly installments beginning March 2, 1999. The Company was
unable to cure the over advance by the March 2, 1999 deadline as required by the
credit facility. On March 8, 1999, the Company received written notice from the
lenders that it was in default under the credit facility and the lenders
reserved all rights, remedies and privileges as a result of the payment default.
Additionally, the Company's $150 million of 8 7/8% Senior Subordinated Notes
("Senior Notes") include certain cross default provisions which may result in a
default under the terms of the related indenture. Although the lenders under the
existing bank credit facility have not accelerated the full amount outstanding
of $235 million as of December 31, 1998 and although the Company may not be in
technical default under the Senior Notes indenture, all amounts outstanding
under these facilities as of December 31, 1998 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 facility or indenture.
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 upcoming interest payments due on the credit facility on
April 6, 1999 and on the Senior Notes due on April 15, 1999 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 well
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 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.
BUSINESS STRATEGY
While the Company remains committed in the long term to its multifaceted
growth strategy of the past, as discussed below, current low oil prices and
resulting cash flow dictates the Company's near-term business strategy is to
further reduce operating costs and to direct all capital expenditures to
low-risk projects which result in immediate and maximum cash flows. Most of the
near-term capital expenditures are expected to be spent in Oklahoma. The
Company's Oklahoma properties offer numerous shallow oil and gas recompletion
and drilling opportunities with favorable economics even in today's price
environment.
In the past the Company has pursued a multifaceted growth strategy, as
follows:
Relatively Low-Risk Field Development. The Company maximizes
production and increases reserves through relatively low-risk activities
such as development/delineation drilling, including high-angle and
horizontal drilling, multi-zone completions, recompletions, enhancement of
production facilities and secondary recovery projects. Since 1994, the
Company has drilled 92 development wells, of which 88% were completed
successfully.
Use of Technology. The Company identifies exploration prospects and
develops reserves in the vicinity of its existing fields using technologies
that include 3-D seismic technology. The Company first began using 3-D
seismic technology in the Laurel field in Mississippi in 1983, and has
recently shot two large 3-D seismic programs in and around its existing
properties in Mississippi. At the time of purchase,
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<PAGE> 134
the Company acquired four 3-D seismic programs in and around its Oklahoma
properties. These programs have produced an attractive inventory of
exploration projects that can be pursued in the future.
Acquire Properties with Underdeveloped Reserves. The Company acquires
underdeveloped crude oil and natural gas properties which have geological
complexity and multiple producing horizons. Management believes that the
Company's extensive experience in Mississippi developed over the past 15
years should enable it to efficiently increase reserves and improve
production rates in similar geologically complex environments.
Additionally, management believes that this experience gives the Company a
competitive advantage in evaluating similarly situated acquisition
prospects. See "Oil and Gas Operations -- Principal Areas of
Activity -- Mid-Continent Area".
Significant Control of Operations. The Company's long-term strategy of
increasing production and reserves through acquiring and developing
multiple-zone fields requires the Company to develop a thorough
understanding of the complex geological structures and maintain operational
control of field development. Therefore, the Company strives to operate and
obtain high working interests in all its properties. As of December 31,
1998, the Company operated 17 of the 21 major fields in which it has
production. Of the operated properties, the Company's average working
interest is approximately 76%. Operating control, combined with the
Company's significant technical and geological expertise, enables the
Company to control the magnitude and timing of capital expenditures and
field development.
Geographic Focus. The Company has been able to maintain a low cost
structure through asset concentration. At December 31, 1998, approximately
89% of the Company's Gulf Coast reserves were concentrated in five fields,
and 84% of the Company's Mid-Continent reserves were concentrated in six
fields. Asset concentration permits operating economies of scale and
leverages operational, technical and marketing capabilities. As a result,
the Company has been able to achieve favorable average production costs of
$4.18 per BOE for 1998.
Other Activities. On December 2, 1998, the Company sold its natural
gas assets located in Monroe, Louisiana, to an unrelated third party for a
net sales price of $61.5 million. These assets represented approximately
14% of the Company's year end 1997 proved reserves and included two gas
gathering systems.
Effective December 31, 1997, the Company acquired approximately 50
MMBbls of crude oil and natural gas liquid reserves and approximately 33
Bcf of natural gas reserves as well as interests in more than 25,000 gross
acres concentrated primarily in southern Oklahoma, including 14 principal
producing fields, from Amoco Production Company. Daily net production from
the properties during December 1997 was approximately 7,300 BOE.
Consideration paid by the Company for the acquisition of these properties
was $257.5 million cash and warrants to purchase one million common shares
of the Company at $10.425 per share for a period of five years.
On April 3, 1996, Interstate Natural Gas Company ("ING"), a wholly
owned subsidiary of the Company, sold all of the stock of three
wholly-owned subsidiaries that comprised its natural gas marketing and
transportation segment to an unrelated third party for cash of $19.5
million, the assumption of net liabilities of approximately $2.3 million
and the payment of taxes of $1.2 million generated as a result of the tax
treatment of the transaction. Accordingly, the marketing and transportation
segment is accounted for as discontinued operations herein.
The Company. The Company was incorporated in June 1993 under the laws
of the State of Texas and conducts a majority of its operations through its
subsidiary Coho Resources, Inc. ("CRI"). References herein to "Coho" or the
"Company", except as otherwise indicated, refer to Coho Energy, Inc. and
its subsidiaries. The Company's principal executive office is located at
14785 Preston Road, Suite 860, Dallas, Texas 75240, and its telephone
number is (972) 774-8300.
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<PAGE> 135
DEFINITIONS
Unless otherwise indicated, natural gas volumes are stated at the legal
pressure base of the State or area in which the reserves are located at 60
degrees Fahrenheit. The following definitions apply to the technical terms used
herein:
"Bbls" means barrels of crude oil, condensate or natural gas liquids, and
its equivalent to 42 U.S. gallons.
"Bcf" means billions of cubic feet.
"BOE" means barrel of oil equivalent, assuming a ratio of six Mcf to one
Bbl.
"BOPD" means Bbls per day.
"Developed acreage" means acreage which consists of acres spaced or
assignable to productive wells.
"Dry hole" means a well found to be incapable of producing either crude oil
or natural gas in sufficient quantities to justify completion as a crude oil or
natural gas well.
"Gravity" means the Standard American Petroleum Institute method for
specifying the density of crude petroleum.
"Gross" means the number of wells or acres in which the Company has an
interest.
"MBbls" means thousands of Bbls.
"MBOE" means thousands of BOE.
"Mcf" means thousands of cubic feet.
"MMBbls" means millions of Bbls.
"MMBOE" means millions of BOE.
"MMbtu" means millions of British Thermal Units.
"MMcf" means millions of cubic feet.
"Net" is determined by multiplying gross wells or acres by the Company's
working interest in such wells or acres.
"Present Value of Proved Reserves" means the present value (discounted at
10%) of estimated future net cash flows (before income taxes) of proved crude
oil and natural gas reserves.
"Productive well" means a well that is not a dry hole.
"Proved developed reserves" means only those proved reserves expected to be
recovered from existing completion intervals in existing wells and those
reserves that exist behind the casing of existing wells when the cost of making
such reserves available for production is relatively small relative to the cost
of a new well.
"Proved reserves or reserves" means natural gas, crude oil, condensate and
natural gas liquids on a net revenue interest basis, found to be commercially
recoverable.
"Proved undeveloped reserves" means those reserves expected to be recovered
from new wells on undrilled acreage or from existing wells where a relatively
major expenditure is required for recompletion.
"Secondary recovery" means a method of oil and natural gas extraction in
which energy sources extrinsic to the reservoir are utilized.
"Undeveloped acreage" means leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of crude oil and natural gas, regardless of whether or not such
acreage contains proved reserves.
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<PAGE> 136
OIL AND GAS OPERATIONS
Coho has focused its operations on three main activities: conventional
exploitation, secondary recovery and exploration. Each of these interrelated
activities plays an important role in the Company's continuing production and
reserve growth. The Company's 1998 operations have been conducted primarily in
the Brookhaven, Laurel, Martinville, Soso and Summerland fields in Mississippi,
and the Bumpass, Sholem Alechem and East Fitts Units in Oklahoma.
Conventional Exploitation. The Company's properties are characterized by
the large number of formations that have been productive, as well as by the
large number of wells that have been drilled over the past 50 years. These well
histories provide considerable geological and reservoir information for use in
further exploration and exploitation. In 1998, Coho spent approximately $48
million of its total capital expenditures of $70 million on exploitation
projects.
Acquisition of mature underdeveloped and underexplored fields has been one
of the key elements to the Company's strategy of building reserves and creating
shareholder value. By capitalizing on its operating knowledge and technical
expertise, the Company has been able to acquire properties and develop
substantial additional low-cost reserves through conventional development
drilling and exploration opportunities. This strategy is illustrated in the
Company's 1995 acquisition of the Brookhaven field in Mississippi. Since
acquiring this property, the Company has increased total daily field production
as a result of successful exploitation and exploration to approximately 1,123
net BOE at December 31, 1998, from approximately 230 net BOE at the time of
acquisition. In addition, the Company increased the proved reserves associated
with its Mid Continent properties to 73.8 MMBOE at December 31, 1998 from 55.5
MMBOE at the time of their acquisition in December 1997 due to the Company's
acquisition of additional working interest in the properties and the successful
exploitation of the Springer, Deese, Viola, Hunton and Bromide reservoirs in
1998.
Secondary Recovery. Over the last four years, the Company has evaluated 20
secondary recovery projects in the Mississippi salt basin. Six of these projects
have been successfully developed and 14 are undergoing further evaluation or are
in the pilot phase. Since the acquisition of its Oklahoma properties, the
Company has identified 11 new secondary recovery projects to be developed. These
projects are currently in the study or planning phases. Facilities and wellbores
are being evaluated to begin pilot waterfloods in three of these projects. The
current waterflood operations have been an effort by the Company to lower
operating expenses and improve production enhancement opportunities through low
cost waterflood conformance work. In 1998, the Company spent approximately $14
million of its total capital expenditure budget on secondary recovery projects.
These projects have demonstrated strong production response and meaningful
reserve additions. In addition, these projects incur low production costs due to
existing field infrastructures and the ability to reinject produced water from
current operations. The Company believes opportunities exist for adding
secondary recovery projects throughout the Company's current field inventory.
Exploration. Because of the many productive formations located within the
Company's producing properties, dry hole risks are substantially reduced,
improving exploration economics. The Company has drilled several successful
exploration wells in the currently defined Brookhaven, Laurel, Martinville and
Eola fields. In 1995, the Company completed a 24-square mile 3-D seismic survey
on the Martinville field. Based on this data, two successful exploratory wells
were completed, one in 1996 and one in 1997. The Company has identified
additional opportunities in the Martinville field; however, lower oil prices and
budget constraints did not allow the Company to pursue these opportunities in
1998. If oil prices improve to more acceptable levels, the Company may pursue
these drilling opportunities. In 1996, the Company completed a 3-square mile 3-D
seismic survey encompassing the Laurel field, the Company's largest crude oil
producing field, which currently has producing properties covering less than one
square mile within the survey area. Based on initial interpretations, several
exploration wells are planned in the future, and a "look-alike" prospect west of
the Laurel field has been identified. The Company believes each of these fields
has significant exploration reserve potential relative to the Company's reserve
base.
Along with the producing properties acquired in Oklahoma in 1997, the
Company acquired approximately 95 square miles of 3-D and 2,750 miles of 2-D
seismic data. A large portion of the 3-D data is over
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areas of future reserve potential. The 3-D data will be useful in enhancing
waterflood development and exploration of the deeper objectives.
PRINCIPAL AREAS OF ACTIVITY
The following table sets forth, for Coho's major producing areas, average
net daily production of crude oil and natural gas on a BOE basis for each of the
years in the three-year period ended December 31, 1998, and the number of
productive wells producing at December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AT DECEMBER 31, 1998
----------------------- -----------------------------------
1996 1997 1998 NET
----- ------ ------ PRODUCTIVE
WELLS AVERAGE
BOE/ BOE/ BOE/ ----------- PERCENTAGE WORKING
FIELD DAY DAY DAY OIL GAS OPERATED INTEREST
- ----- ----- ------ ------ ---- ---- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Mississippi.......................... 6,861 8,178 8,202 127 3 96% 90%
Oklahoma(a).......................... -- -- 6,345 634 36 52% 42%
Louisiana(b)......................... 2,892 2,848 2,409 -- -- -- --
Other................................ 16 201 643 2 -- 8% 10%
----- ------ ------ --- --
Total...................... 9,769 11,227 17,599 763 39
===== ====== ====== === ==
</TABLE>
- ---------------
(a) These properties were acquired effective December 31, 1997. No production
was recorded in 1997.
(b) These properties were sold December 2, 1998.
GULF COAST AREA
Brookhaven Field, Mississippi. In 1995, the Company purchased a 93% working
interest in the unitized Brookhaven field covering more than 13,000 acres. At
the time of acquisition, there were 11 active wells and 159 inactive wells.
Proved reserves were 1.2 MMBOE and net production averaged approximately 230 BOE
per day, producing only from the Tuscaloosa formation at 10,500 feet.
Like other fields, Coho made the acquisition anticipating additional
field-wide recoveries through development drilling, recompletions, secondary
recovery and exploration. During its first year of ownership, the Company
focused its efforts on expanding its understanding of the Tuscaloosa reservoir.
Company mapping suggested less than 25% of the oil in place from the Tuscaloosa
reservoir had been recovered. As a result of its study, the Company identified
and has drilled six new Tuscaloosa well bores in the field to date. The six
penetrations found unswept crude oil reserves associated with structural and
stratigraphic complexity. Four of these penetrations have been completed as
commercial producers and two wells will be used as injectors to aid the
secondary recovery operations. In 1998, the Company continued its detailed study
and mapping of the stratigraphically complex Tuscaloosa reservoirs and initiated
several waterflood pilot areas.
In addition to its exploitation success, the Company has had significant
exploration success. In 1997 and early 1998, the Company experienced successful
deep exploratory results in the Washita Fredricksburg, Paluxy and Rodessa
formations, with initial production from these horizons in excess of 1,600 gross
BOE per day. Due to deep structural complexity realized with the 1997 and early
1998 drilling, additional drilling was halted until new seismic data was
acquired. In 1998, 35 miles of 2-D seismic data was acquired and interpreted.
This 2-D seismic data has improved the structural definition of the deep
drilling potential in these formations.
Production in Brookhaven in 1998 averaged 1,123 BOE per day and proved
reserves at December 31, 1998 were 7.2 MMBOE, a 28.3% increase over 1997 proved
reserves.
Cranfield Field, Mississippi. As a result of the exploration success at
Brookhaven, the Company leased approximately 7,900 net acres on a similar
geologic structure near the Brookhaven field in the Cranfield field. In 1998,
detailed mapping using subsurface data from existing well bores and existing 2-D
seismic data was performed. Drilling prospects were generated at depths of 6,000
feet to 11,000 feet in four different horizons: the Wilcox, Eutaw, Tuscaloosa
and Washita Fredricksburg formations. Two existing wellbores were reentered
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during the second half of 1998. The Hosston and Mooringsport formations were
tested unsuccessfully in one deep existing wellbore; however, excellent
reservoir quality rock was found in the Mooringsport formation, which the
Company believes remains a future exploitation opportunity. A re-entry of an
existing shallow wellbore proved successful in both the Washita Fredricksburg
and Wilcox formations. The Washita Fredricksburg formation tested at a rate of
700 Mcf per day and is currently awaiting pipeline connection. While no
production sales occurred during 1998, the Company's successful testing and
mapping resulted in 1.0 MMBOE of proved reserves at December 31, 1998.
Laurel Field, Mississippi. The Laurel field is a multi-pay geological
setting with producing horizons from the Eutaw formation (approximately 7,500
feet) to the Hosston formation (approximately 13,500 feet). It is the Company's
largest oil producing property and represented approximately 43% of Coho's total
Mississippi production on a BOE basis during 1998. At December 31, 1998, the
field contained 45 wells producing from the Stanley, Christmas, Tuscaloosa,
Washita Fredricksburg, Paluxy, Mooringsport, Rodessa, Sligo and Hosston
reservoirs. Proved reserves at Laurel totaled 9.4 MMBbls at December 31, 1998.
The Company considers the Laurel field both an exploration and exploitation
success. In 1983, at the time of the initial acquisition, the only then existing
well in what is now the Laurel field had been operating for 24 years and was
only producing 47 BOPD. Coho then proceeded to employ 3-D seismic technology to
assist in defining the multi-pay zones in the field and commenced an extensive
drilling program to increase primary production, utilizing a combination of
vertical, high-angle and horizontal drilling techniques.
The Company has also implemented successful secondary recovery programs in
a number of Laurel's producing reservoirs. In recent years, secondary recovery
programs were started in the Mooringsport, Rodessa, Sligo and Tuscaloosa
Stringer reservoirs. The production response from the secondary recovery
projects has been strong.
In addition to the continued exploitation program, the Company had
continued an active exploration program at Laurel. In 1996 and 1997, much of the
Company's focus at Laurel was directed toward a mineral leasing program,
permitting and surveying associated with shooting a 37-square mile 3-D seismic
program. In 1998, the Company evaluated the 3-D seismic data to better
understand the exploration potential within the Laurel field as it is currently
defined, as well as to define exploration possibilities in the acreage
surrounding the field.
The average net daily production for 1998 from Laurel was 3.5 MBOE, down
from the level experienced in 1997 due to a scaled back operating and capital
program which resulted from the substantial decline in commodity prices
experienced in 1998. At December 31, 1998 proved reserves were 9.4 MMBOE, down
approximately 39% from year end 1997. The reserve decline was attributable
primarily to low year-end oil prices.
Martinville Field, Mississippi. The Martinville field was originally
discovered in 1957 and was acquired by Coho in April 1989. At the time of
acquisition, Martinville was only producing 80 BOE per day, while the average
production in 1998 was 1.5 MBOE per day. The field covers more than 7,400 acres,
and currently has 21 producing wells. Like Laurel, the field is characterized by
highly complex faulting and produces from multiple horizons. Coho currently has
an average working interest of 97% in the field.
In late 1995, the Company conducted a 3-D seismic shoot over a 24-square
mile area to enhance the Company's ability to exploit primary reserves through
continued reservoir delineation and to develop secondary recovery projects in
the Mooringsport, Rodessa and Sligo formations.
Since 1996, the Company has successfully drilled wells to the Hosston,
Sligo, Rodessa, Mooringsport and Washita Fredricksburg formations, with two
successful development wells drilled and completed in 1998 in the Sligo and
Washita Fredricksburg reservoirs.
With declining oil prices experienced in 1998, the Company spent much of
the year refining the 3-D seismic interpretation of Martinville. The Company
currently has defined six exploration prospects along with numerous development
drilling opportunities. Proved reserves at year end 1998 totaled 6.2 MMBOE, a
10% decline from year end 1997. Like Laurel this reserve decline was due to low
oil prices.
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Soso Field, Mississippi. In mid-1990, the Company acquired a 90% working
interest in the Soso field, which was originally discovered in 1945 and covers
approximately 6,461 acres. At the time of acquisition by the Company, the field
produced 225 BOPD. In 1998, the average daily production was 807 BOE, a decrease
of 33% from 1997 average daily production. Reserves at December 31, 1998 totaled
5.0 MMBOE, an 18% decrease from year end 1997. Production and reserve decreases
were attributable to low commodity prices throughout the year and resulting
minimal capital expenditures.
Soso is a large, geologically complex field which had already produced over
75 MMBOE at the time Coho acquired it. Also, like Brookhaven, Coho's detailed
mapping of the field suggested that less than 25% of the total crude oil had
been recovered. Soso was acquired by the Company primarily to increase total
recoverable reserves by another 5% to 15% through recompletions in existing
wellbores, development drilling and secondary recovery projects.
Most of the Company's early production growth at Soso was associated with
workovers and recompletions on existing wells, with some development drilling
taking place; however, with the success of secondary recovery projects at Laurel
and Martinville, the Company took a fresh look at the field, and since then
secondary recovery projects have been initiated in the Cotton Valley, Sligo and
Rodessa formations. These projects have played a significant role in the
production and reserve growth experienced since 1990.
The most significant expenditure at Soso during 1998 was the acquisition of
35 miles of new 2-D seismic data. This 2-D seismic data should enhance the
Company's development of the Hosston and Cotton Valley formations. Coho believes
many more exploitation opportunities exist for primary as well as secondary
reserves in the multi-reservoir field.
Summerland Field, Mississippi. The Summerland field, discovered in 1959, is
a broad, elongated, fault bounded anticline with productive intervals from the
Tuscaloosa formation at approximately 6,000 feet to the Mooringsport formation
at 12,500 feet. At December 31, 1998, the Company operated 21 producing wells
and has an average working interest of 90% in this unitized field.
The Company assumed operating control of the Summerland field in November
1989. Recompletions, development drilling and the installation of higher volume
artificial lift equipment increased net crude oil production from 415 BOE per
day (of which only 200 BOE per day were economic) in 1989 at the date of
acquisition, to 1,019 BOE per day in 1998. Average daily production during 1998
was down 9% from 1997 average daily production as a result of the natural
decline of the reservoirs and low capital expenditures during the year.
At December 31, 1998, the Summerland field had proved reserves of 5.3
MMBOE. This represents a 25% decrease from year end 1997 and like Laurel,
Martinville and Soso the reserve decline is due primarily to low oil prices.
MID-CONTINENT AREA
In December 1997, the Company acquired interests in more than 25,000 gross
acres concentrated primarily in southern Oklahoma, including 14 principal
producing fields. Of the 14 major producing fields, the Company is operator of
eleven fields and at December 31, 1998 had an average working interest in the
fields it operates of approximately 73%.
These properties are very similar to the Company's Mississippi salt basin
operations and the Company believes that the application of its substantial
knowledge base should benefit in the development of these properties. In 1998,
the Company began an exploration and exploitation program which resulted in the
drilling of 19 gross wells, 18 of which were completed successfully.
Additionally, the Company began interpreting 3-D seismic information on two
fields in 1998 and has identified several drilling opportunities as a direct
result of this seismic information. Capital expenditures in the Mid-Continent
area totaled approximately $18.5 million in 1998.
Bumpass Unit, Oklahoma. The Bumpass Unit, located in Carter County,
Oklahoma, was discovered in 1924. Production is primarily from both structural
and stratigraphic traps within the Deese and Springer
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reservoirs. The Deese reservoirs are typically encountered at depths between
3,500 and 4,500 feet with the Springer reservoirs located from 4,500 to 6,700
feet.
Currently, the Company's primary focus at Bumpass is to exploit the Flattop
and Goodwin sands located in the Springer formation, which it believes to be
underdeveloped. In 1998, the Company drilled one well, deepened another and
worked over a third well, increasing gas production 2,945 net Mcf per day. The
Company intends to continue this exploitation program in 1999. Additionally, the
Company is studying the Humphrey sands, which are in the upper portion of the
Springer formation, to determine their waterflood potential. The Company plans
to initiate a waterflood program in 1999. At December 31, 1998, the Company had
an average working interest of approximately 65% in the Bumpass field.
Average net daily production in 1998 was 623 BOE. Proved reserves at
December 31, 1998 totaled 5.0 MMBOE, an increase of 42% over the 3.5 MMBOE at
the end of 1997. This increase is a direct result of the Company's success in
exploiting the Springer formation in 1998.
Sholem Alechem Fault Block "A" Unit, Oklahoma. Located in Stephens County,
Oklahoma, the Sholem Alechem Fault Block "A" Unit ("SAFBAU") was discovered in
1947. As with the Bumpass Unit, production at SAFBAU originates primarily from
the Deese and Springer reservoirs.
In 1998, the Company deepened four wells into the Flattop and Goodwin sands
located in the Springer formation, all of which were successful. Initial
production from these wells totaled over 500 BOE per day. Exploitation of the
Springer formation will continue into 1999. At December 31, 1998, the Company
had an average working interest in Sholem Alechem of approximately 86%.
Net production in 1998 totaled 308 MBOE, or about 843 BOE per day. Proved
reserves at December 31, 1998 totaled 7.0 MMBOE, a 74% increase over year end
1997. This increase is a direct result of the Company's acquisition of
additional working interests and success in exploiting the Springer formation in
1998.
East Fitts Unit, Oklahoma. The East Fitts Unit ("East Fitts") was
discovered in 1933, with production originating from the Cromwell, Hunton and
Viola reservoirs, depths ranging from 2,400 to 5,000 feet.
The Company's current emphasis at East Fitts is to take the Viola reservoir
from ten acre spacing to five acre spacing. The Company believes that this
development will not only increase existing production but prove up additional
reserves. In 1998, the Company drilled five wells to the Viola reservoir, all of
which were successful, increasing production by 200 BOE per day and adding
approximately 600 MBOE in reserves. Additional wells to the Viola reservoir are
planned in 1999, depending on oil prices, and the Company is planning to
initiate pilot waterflood projects in the Chimney Hill formation, a lower member
of the Hunton reservoir, and the Bromide formation. At December 31, 1998, the
Company's average working interest in East Fitts was approximately 83%.
Average net daily production in 1998 was 1.2 MBOE. Proved reserves at
December 31, 1998 totaled 24.6 MMBOE, an increase of 51% over year end 1997.
This increase is a direct result of the Company's acquisition of additional
working interests and success in exploiting the Viola, Hunton and Bromide
reservoirs in 1998.
Other Oklahoma. The Company operates eight other fields in Oklahoma -- East
Velma Middle Block, North Alma Deese, Tatums, Jennings Deese, Graham Deese, Eola
S.E., Eola N.W. and Cox Penn. Total average net daily production in 1998 from
these fields was 2.6 MBOE. East Velma Middle Block has significant upside
potential through secondary recovery. Like reservoirs have been successfully
waterflooded along the Velma complex. East Velma Middle Block is the remaining
block along this complex which has not been enhanced through secondary recovery.
Tatums is a shallow Deese producing unit which has been evaluated to have
significant upside potential through down spacing. Currently the unit is
developed on a ten acre spacing with some areas of the field underexploited. A
five acre drilling program and adjustments to current waterflood injection could
provide substantial upside potential. At year end, net proved reserves from
these properties totaled 33.8 MMBOE, an increase of 11% from year end 1997.
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<PAGE> 141
The Company also has non-operating working interest in three fields in
Oklahoma. In 1998, total average net daily production was 1,479 BOE and year end
reserves were estimated at 3.5 MMBOE.
Since the acquisition of the Oklahoma Properties, the Company has
identified 11 new secondary recovery projects to be developed. These projects
are currently in the study or planning phases. Facilities and wellbores are
being evaluated to begin pilot waterfloods. The current waterflood operations
have been an effort by the Company to lower operating expenses and improve
production enhancement opportunities through low cost waterflood conformance
work. These projects have demonstrated strong production response. In addition,
these projects incur low production costs due to existing field infrastructures
and the ability to reinject produced water from current operations. The Company
believes opportunities exist for adding secondary recovery projects throughout
the Company's current field inventory. Additionally, the Company believes that
substantial Springer through Simpson gas potential exist in and around Coho's
currently operated properties. This potential will be a focal point of low risk
exploration through deepening of existing wellbores or recompletions which
require less capital as compared to drilling for these objectives. Historically
in these areas, gas has not been the primary focus of exploitation and
technology has now allowed commercial development of these deeper, tighter
objectives.
OTHER DOMESTIC PROPERTIES
The Company also has working interests in other producing properties in
Mississippi and Texas. The Company operates the Bentonia and Frio properties in
Mississippi and owns non-operated working interests in the Glazier property in
Mississippi, the Clarksville field in Texas and a field in state waters offshore
North Padre Island, Texas. As of December 31, 1998, these fields had combined
net proved reserves of 3.2 MMBOE.
TUNISIA, NORTH AFRICA
The Company has a 45.8% interest in a permit covering 1.4 million gross
acres in Tunisia, North Africa that it acquired from its former Canadian parent
company. During 1994, the Company and its joint interest partners conducted a
seismic survey on the Anaguid permit in Tunisia. In October 1995, the Company
and its partners drilled an unsuccessful, exploratory well on its Anaguid permit
in southern Tunisia. In early 1997, the Company and its partners conducted a 465
kilometer 2-D seismic program in a new area of the Anaguid permit. The Company
is in the process of finalizing the location for the next exploratory well which
must be drilled by June 1999 or the acreage concession will expire. The
Company's estimated net cost to drill this well 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 is unable 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.
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Production
The following table sets forth certain information regarding the Company's
production volumes, average prices received and average production costs
associated with its sales of crude oil and natural gas for each of the years in
the three-year period ended December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
CRUDE OIL:
Volumes (MBbls).......................................... 2,468 2,820 5,069
Average sales price (per Bbl)(a)......................... $16.42 $16.31 $10.40
NATURAL GAS:
Volumes (MMcf)........................................... 6,646 7,666 8,125
Average sales price (per Mcf)(b)......................... $ 2.07 $ 2.23 $ 1.98
AVERAGE PRODUCTION COST (PER BOE)(c)....................... $ 3.88 $ 3.90 $ 4.18
</TABLE>
- ---------------
(a) Includes the effects of crude oil price hedging contracts. Price per Bbl
before the effect of hedging was $18.34, $16.42 and $10.40 for the years
ended December 31, 1996, 1997 and 1998, respectively.
(b) Includes the effects of natural gas price hedging contracts. Price per Mcf
before the effect of hedging was $2.24, $2.22 and $1.92 for the years ended
December 31, 1996, 1997 and 1998, respectively.
(c) Includes lease operating expenses and production taxes.
Drilling Activities
During the periods indicated, the Company drilled or participated in the
drilling of the following wells, all of which were in the United States.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY:
Crude oil.................................. 1 1.0 3 2.8 1 1.0
Natural gas................................ -- -- 1 .8 -- --
Dry holes.................................. 1 1.0 1 1.0 2 2.0
DEVELOPMENT:
Crude oil.................................. 13 12.0 10 9.3 26 21.7
Natural gas................................ 6 6.0 11 9.8 8 6.5
Dry holes.................................. 4 3.7 2 2.0 5 4.9
Service wells.............................. 8 7.5 -- -- 2 1.0
-- ---- -- ---- -- ----
Total.............................. 33 31.2 28 25.7 44 37.1
== ==== == ==== == ====
</TABLE>
At December 31, 1998, the Company was participating in 1 gross well (.1 net)
that was in completion stage.
Reserves
The following table summarizes the Company's net proved crude oil and
natural gas reserves as of December 31, 1998, which have been reviewed by Ryder
Scott Company with regard to the Company's Mississippi properties and Sproule
Associates, Inc. with regard to the Company's Oklahoma properties. The
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<PAGE> 143
other properties in the table are related to the Company's crude oil and natural
gas reserves located in Texas which have been audited, depending on location, by
the above mentioned independent engineers.
<TABLE>
<CAPTION>
CRUDE NATURAL NET PROVED
OIL GAS RESERVES
(MBBLS) (MMCF) (MBOE)
------- ------- ----------
<S> <C> <C> <C>
Mississippi............................................. 34,505 2,980 35,002
Oklahoma................................................ 63,827 50,674 72,272
Other................................................... 1,672 12,674 3,785
------- ------ -------
Total......................................... 100,004 66,328 111,059
======= ====== =======
</TABLE>
At December 31, 1998, the Company had net proved developed reserves of
74,898 MBOE and net proved undeveloped reserves of 36,161 MBOE. The Present
Value of Proved Reserves was $269.3 million, which represented $193 million for
the proved developed and $76 million for the proved undeveloped reserves. At
December 31, 1997, the Company reported total proved reserves of 119,668 MBOE
and the Present Value of Proved Reserves was $526.3 million. When excluding 1998
production and the reserves associated with the Company's Monroe field, which
was sold in 1998, the Company increased reserves 13,514 MBOE in 1998 over 1997
or 13.9%.
There are numerous uncertainties inherent in estimating quantities of
proved crude oil and natural gas reserves, including many factors beyond the
control of the Company. The estimates of the reserve engineers are based on
several assumptions, all of which are to some degree speculative. Actual future
production, revenues, taxes, production costs, development expenditures and
quantities of recoverable crude oil and natural gas reserves might vary
substantially from those assumed in the estimates. Any significant variance in
these assumptions could materially affect the estimated quantity and value of
reserves set forth herein. In addition, the Company's reserves might be subject
to revision based upon actual production, results of future development,
prevailing crude oil and natural gas prices and other factors.
In general, the volumes of production from crude oil and natural gas
properties decline as reserves are depleted. Except to the extent Coho acquires
additional properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of Coho
will decline as reserves are produced. Future crude oil and natural gas
production is, therefore, highly dependent upon the level of success in
acquiring or finding additional reserves.
For further information on reserves, costs relating to crude oil and
natural gas activities and results in operations from producing activities, see
"Supplementary Information Related to Oil and Gas Activities" appearing in note
14 to the Consolidated Financial Statements of the Company included elsewhere
herein.
Acreage
The following table summarizes the developed and undeveloped acreage owned
or leased by Coho at December 31, 1998:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------- ---------------
GROSS NET GROSS NET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Mississippi........................................ 25,086 23,722 28,246 23,718
Oklahoma........................................... 38,463 28,376 40 40
Texas.............................................. 4,276 3,435 1,380 1,380
Offshore Gulf of Mexico............................ 5,760 2,269 -- --
------ ------ ------ ------
Total.................................... 73,585 57,802 29,666 25,138
====== ====== ====== ======
</TABLE>
At December 31, 1998, the Company also held a 45.8% working interest in an
exploratory permit in Tunisia, North Africa, covering 1,412,000 gross acres.
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<PAGE> 144
TITLE TO PROPERTIES
As is customary in the oil and gas industry, in certain circumstances, the
Company makes only a limited review of title to undeveloped crude oil and
natural gas leases at the time they are acquired by Coho. However, before the
Company acquires developed crude oil and natural gas properties, and before
drilling commences on any leases, the Company causes a thorough title search to
be conducted, and any material defects in title are remedied to the extent
possible. To the extent title opinions or other investigations reflect title
defects, the Company, rather than the seller of the undeveloped property, is
typically obligated to cure any such title defects at its expense. If Coho were
unable to remedy or cure any title defect of a nature such that it would be
prudent to commence drilling operations on the property, the Company could
suffer a loss of its entire investment in the property. The Company believes
that it has good title to its crude oil and natural gas properties, some of
which are subject to immaterial encumbrances, easements and restrictions. The
crude oil and natural gas properties owned by the Company are also typically
subject to royalty and other similar non-cost bearing interests customary in the
industry. The Company does not believe that any of these encumbrances or burdens
will materially affect Coho's ownership or use of its properties.
COMPETITION
The crude oil and natural gas industry is highly competitive. A large
number of companies and individuals engage in drilling for crude oil and natural
gas, and there is a high degree of competition for desirable crude oil and
natural gas properties suitable for drilling, for materials and third-party
services essential for their exploration and development and for attracting and
retaining quality personnel. The principal competitive factors in the
acquisition of crude oil and natural gas properties include the staff and data
necessary to identify, investigate and purchase such properties and the
financial resources necessary to acquire and develop them. Many of Coho's
competitors are substantially larger and have greater financial and other
resources than does Coho.
The principal resources necessary for the exploration for, and the
acquisition, exploitation, production and sale of, crude oil and natural gas are
leasehold or freehold prospects under which crude oil and natural gas reserves
may be discovered, drilling rigs and related equipment to explore for and
develop such reserves and capital assets required for the exploitation and
production of the reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. Coho must compete for such resources with
both major oil companies and independent operators and also with other
industries for certain personnel and materials. Although Coho believes its
current resources are adequate to preclude any significant disruption of
operations in the immediate future, the continued availability of such materials
and resources to Coho cannot be assured.
CUSTOMERS AND MARKETS
Substantially all of Coho's crude oil is sold at the wellhead at posted
prices, as is customary in the industry. In certain circumstances, natural gas
liquids are removed from the natural gas produced by Coho and are sold by Coho
at posted prices. During 1998, three purchasers of the Company's crude oil and
natural gas, EOTT Energy Corp. ("EOTT"), Amoco Production Company and Mid
Louisiana Marketing Company, accounted for 42%, 28% and 14%, respectively, of
Coho's revenues. The Company has a three-year crude oil purchase agreement with
EOTT which was effective March 1, 1996. Under the crude oil purchase agreement,
the Company committed the majority of its crude oil production in Mississippi to
EOTT for a period of three years on a pricing basis of posting plus a premium.
This contract is currently being renegotiated. The Company has entered into a
contract with EOTT for approximately 50% of its heavy Mississippi crude oil with
a well head price of $8.50 per barrel.
The majority of crude oil production in Oklahoma is sold to Amoco
Production Company on a pricing basis of posting plus a premium. Beginning
January 1, 1999 and for a nine-year period thereafter, Amoco has a right of
first refusal to match, in all respects, a competitive bid. The crude contract
was a component of the original Amoco purchase and sale agreement and provides
for a competitive annual review of the pricing mechanism.
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<PAGE> 145
The price received by the Company for crude oil and natural gas may vary
significantly during certain times of the year due to the volatility of the
crude oil and natural gas market, particularly during the cold winter and hot
summer months. As a result, the Company periodically enters 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. Gains and losses on
these forward sale agreements are reflected in crude oil and natural gas
revenues at the time of sale of the related hedged production. While intended to
reduce the effects of the volatility of the prices received for crude oil and
natural gas, such hedging transactions may limit potential gains by the Company
if crude oil and natural gas prices were to rise substantially over the price
established by the hedge. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General" and Note 1 to the Consolidated
Financial Statements of the Company included elsewhere herein.
OFFICE AND FIELD FACILITIES
The Company currently leases its executive and administrative offices in
Dallas, Texas, consisting of 47,942 square feet, under a lease that continues
through October 2000. The Company also leases field offices in Laurel,
Mississippi, covering approximately 5,000 square feet under a non-cancelable
lease extending through June 2000, and Ratliff City, Oklahoma, covering
approximately 10,000 square feet through January 2003.
GOVERNMENTAL REGULATION
Regulation of Crude Oil and Natural Gas Exploration and Production. Crude
oil and natural gas exploration, development and production are subject to
various types of regulation by local, state and federal agencies. Such
regulations include requiring permits for the drilling of wells, maintaining
bonding requirements in order to drill or operate wells, and regulating the
location of wells, the method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled, and the plugging and
abandonment of wells. The Company's operations are also subject to various
conservation laws and regulations, including those of Mississippi, Oklahoma and
Texas wherein the Company's properties are located. These laws and regulations
include the regulation of the size of drilling and spacing units or proration
units, the density of wells that may be drilled, and unitization or pooling of
crude oil and natural gas properties. In this regard, some states allow the
forced pooling or integration of tracts to facilitate exploration while other
states rely on voluntary pooling of land and leases. In addition, state
conservation laws establish maximum rates of production from crude oil and
natural gas wells, generally restrict the venting or flaring of natural gas, and
impose certain requirements regarding the ratability of production. The effect
of these regulations is to limit the amount of crude oil and natural gas the
Company can produce from its wells and to limit the number of wells or the
locations at which the Company can drill. Each state generally imposes a
production or severance tax with respect to production and sale of crude oil,
natural gas and natural gas liquids within their respective jurisdictions. For
the most part, state production taxes are applied as a percentage of production
or sales. Currently, the Company is subject to production tax rates of up to 6%
in Mississippi and 7% in Oklahoma. In addition, the Company has been active in
the adoption of legislation dealing with production and severance tax relief in
Mississippi, specifically where severance tax is either waived for a fixed
period of time, as in renewed production from inactive wells, or reduced to 50%
of regular rates for enhanced recovery projects. The state of Oklahoma has
adopted severance tax relief, where tax rates for posted crude oil priced less
than $14.00 per barrel would be 1%, between $14.00 and $17.00 per barrel would
be 4%, with a regular tax rate of 7% for prices over $17.00 per barrel.
Legislation affecting the crude oil and natural gas industry is under
constant review for amendment and expansion. Also, numerous departments and
agencies, both federal and state, are authorized by statute to issue and have
issued rules and regulations binding on the crude oil and natural gas industry
and its individual members, some of which carry substantial penalties for
failure to comply. The regulatory burden on the crude oil and natural gas
industry increases the Company's cost of doing business and, consequently,
affects its profitability.
Offshore Leasing. Certain of the Company's operations are located on
federal crude oil and natural gas leases, which are administered by the United
States Minerals Management Service (the "MMS"). Such
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<PAGE> 146
leases are issued through competitive bidding, contain relatively standardized
terms and require compliance with detailed MMS regulations and orders (which are
subject to change by the MMS). For offshore operations, lessees must obtain MMS
approval for exploration plans and development and production plans prior to the
commencement of such operations. In addition to permits required from other
agencies (such as the Coast Guard, the Army Corps of Engineers and the
Environmental Protection Agency), lessees must obtain a permit from the MMS
prior to the commencement of drilling. The MMS has promulgated regulations
requiring offshore production facilities located on the Outer Continental Shelf
("OCS") to meet stringent engineering and construction specifications.
Similarly, the MMS has promulgated other regulations governing the plugging and
abandonment of wells located offshore and the removal of all production
facilities. Under certain circumstances, the MMS may require any Company
operations of federal leases to be suspended or terminated. To cover the various
obligations of lessees on the OCS, the MMS generally requires that lessees or
operators post substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that the Company can obtain bonds or other
surety in all cases.
Gas Royalty Valuation Regulations. In December 1997, the MMS published a
final rule amending its regulations governing valuation for royalty purposes of
gas produced from federal and Indian leases. The rule primarily addresses
allowances for transportation of gas and purports to clarify the methods by
which gas royalties and deductions for gas transportation are calculated. The
final rule became effective February 1, 1998. The rule purports to continue the
commitment of the MMS to assure that lessees deduct only the actual, reasonable
costs of transportation and not any costs of marketing. The rule identifies
certain specifically allowable and certain specifically nonallowable costs of
transportation.
Crude Oil Sales and Transportation Rates. Sales of crude oil and condensate
can be made by Coho at market prices not subject at this time to price controls.
In January 1997, the MMS published a proposed rulemaking to amend the current
federal crude oil royalty valuation regulations. In July 1997, the MMS published
a supplementary proposed rulemaking concerning such regulations. In February
1998, the MMS published another supplementary proposed rulemaking. The intent of
the rule is to decrease reliance on posted prices and assign a value to crude
oil that better reflects market value. In general, the rule, as proposed, would
base royalties on gross proceeds when the oil is sold under an arm's length
contract by either the producer or the producer's marketing affiliate. Index
pricing or other benchmarks would be used when oil is not sold under an arm's
length contract. On July 16, 1998, the MMS proposed additional changes to its
second supplementary proposed rule. On March 12, 1999, the MMS published a
notice reopening the public comment period on the second supplementary proposed
rule until April 12, 1999. In February 1998, the MMS also published a notice of
proposed rulemaking to amend the current regulations establishing a value for
royalty purposes of oil produced from Indian leases. The proposed changes would
decrease reliance on oil posted prices and use more publicly available
information for oil royalty calculation purposes under Indian leases. The
Company cannot predict what action the MMS will take on these matters, nor can
it predict at this stage of the rulemaking proceedings how the Company might be
affected by amendments to these regulations.
The price that the Company receives from the sale of these products is
affected by the cost of transporting the products to market. The Energy Policy
Act of 1992 directed the FERC to establish a "simplified and generally
applicable" rate making methodology for crude oil pipeline rates. Effective as
of January 1, 1995, the FERC implemented regulations establishing an indexing
system for transportation rates for crude oil pipelines, which would generally
index such rates to inflation, subject to certain conditions and limitations.
The Company is not able to predict with certainty what effect, if any, these
regulations will have on it, but other factors being equal under certain
conditions, the regulations may tend to increase transportation costs or reduce
wellhead prices for such commodities.
Future Legislation and Regulation. The Company's operations will be
affected from time to time in varying degrees by political developments and
federal and state laws and regulations. In particular, crude oil and natural gas
production operations and economics are affected by tax and other laws relating
to the petroleum industry, by changes in such laws and by constantly changing
administrative regulations. For example, the price at which natural gas may
lawfully be sold has historically been regulated under the Natural Gas Act. Only
recently, with the deregulation of the last regulated price categories of
natural gas on January 1,
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<PAGE> 147
1993, have free market forces been allowed to control the sales price of natural
gas. Given the right set of circumstances, there is no guarantee that new
regulations, similar or otherwise, would not be imposed on the production of
sale of crude oil, condensate or natural gas. It is impossible to predict the
terms of any future legislation or regulations that might ultimately be enacted
or the effects of any such legislation or regulations on the Company.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentration of various substances that can be released into the
environment in connection with drilling and production activities, limit or
prohibit drilling activities on certain lands lying within wilderness, wildlife
refuges or preserves, wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from the Company's operations. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, disposal and clean-up requirements
could have a significant impact on the operating costs of the Company, as well
as the oil and gas industry in general. Management believes that the Company is
in substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements will not
have a material adverse impact on the Company.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose
a variety of regulations on "responsible parties" related to the prevention of
crude oil spills and liability for damages resulting from such spills into or
upon navigable waters, adjoining shorelines or in the exclusive economic zone of
the United States. A "responsible party" includes the owner or operator of an
onshore facility or a vessel, or the lessee or permittee of the area in which an
offshore facility is located. The OPA requires the lessee or permittee of the
offshore area in which a covered offshore facility is located to establish and
maintain evidence of financial responsibility in the amount of $35.0 million
($10.0 million if the offshore facility is located landward of the seaward
boundary of a state) to cover liabilities related to a crude oil spill for which
such person is statutorily responsible. The amount of required financial
responsibility may be increased above the minimum amounts to an amount not
exceeding $150.0 million depending on the risks posed by the quantity or quality
of crude oil that is handled by the facility. The MMS has promulgated
regulations that implement the financial responsibility requirements under the
OPA. The regulations use an offshore facility's worst case oil-spill discharge
volume to determine if the responsible party must demonstrate increased
financial responsibility. Because the Company's only offshore well is a natural
gas well that does not produce oil, as such term is defined in the MMS
regulations, the Company is not presently subject to the financial
responsibility requirements.
The OPA subjects responsible parties to strict, joint and several and
potentially unlimited liability for removal costs and certain other damages
caused by an oil spill covered by the statute. It also imposes other
requirements on responsible parties, such as the preparation of a crude oil
spill contingency plan. The Company has such a plan in place. Failure to comply
with the OPA's ongoing requirements or inadequate cooperation during a spill
event may subject a responsible party to civil or criminal enforcement actions.
As of this date, the Company is not the subject of any civil or criminal
enforcement actions under the OPA.
The Federal Water Pollution Control Act of 1972, as amended (the "FWPCA"),
imposes restrictions and strict controls regarding the discharge of produced
waters and other oil and gas wastes into navigable waters. These controls have
become more stringent over the years, and it is probable that additional
restrictions will be imposed in the future. Permits must be obtained to
discharge pollutants into state and federal waters. Certain state discharge
regulations and the Federal National Pollutant Discharge Elimination System
general permits prohibit the discharge of produced water and sand, drilling
fluids, drill cuttings and certain other substances related to the oil and gas
industry into coastal waters. The FWPCA provides for civil, criminal and
administrative penalties for any unauthorized discharges of oil and other
hazardous substances in reportable quantities and, along with the OPA, imposes
substantial potential liability for the costs of removal, remediation and
damages. State laws for the control of water pollution also provide varying
civil, criminal and
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<PAGE> 148
administrative penalties and impose liabilities in the case of a discharge of
petroleum or its derivatives, or other hazardous substances, into state waters.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substance
under CERCLA may be subject to joint and several liability for the costs of
cleaning up the hazardous substances and for damages to natural resources. In
addition, it is not uncommon for neighboring landowners and other third parties
to file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. Currently, the Company does
not own or operate CERCLA identified sites.
The Resource Conservation and Recovery Act ("RCRA") is the principal
federal statute governing the treatment, storage and disposal of hazardous
wastes. RCRA imposes stringent operating requirements (and liability for failure
to meet such requirements) on a person who is either a "generator" or
"transporter" of hazardous waste or an "owner" or "operator" of a hazardous
waste treatment, storage or disposal facility. At present, RCRA includes a
statutory exemption that allows most crude oil and natural gas exploration and
production wastes to be classified as non-hazardous waste. A similar exemption
is contained in many of the state counterparts to RCRA. At various times in the
past, proposals have been made to amend RCRA and various state statutes to
rescind the exemption that excludes crude oil and natural gas exploration and
production wastes from regulation as hazardous waste under such statutes. Repeal
or modification of this exemption by administrative, legislative or judicial
process, or through changes in applicable state statutes, would increase the
volume of hazardous waste to be managed and disposed of by the Company.
Hazardous wastes are subject to more rigorous and costly disposal requirements
than are non-hazardous wastes. Any such change in the applicable statutes may
require the Company to make additional capital expenditures or incur increased
operating expenses.
A sizable portion of the Company's operations in Mississippi is conducted
within city limits. On an annual basis in order to obtain permits to conduct new
drilling operations, the Company is required to meet certain tests of financial
responsibility. The Company is conducting a voluntary program to remove inactive
aboveground storage tanks from its well sites. Inactive tanks are replaced, as
necessary, with newer aboveground storage tanks.
Some states have enacted statutes governing the handling, treatment,
storage and disposal of naturally occurring radioactive material ("NORM"). NORM
is present in varying concentrations in subsurface and hydrocarbon reservoirs
around the world and may be concentrated in scale, film and sludge in equipment
that comes in contact with crude oil and natural gas production and processing
streams. Mississippi legislation prohibits the transfer of property for
residential or other unrestricted use if the property contains NORM above
prescribed levels. The Company is voluntarily remediating NORM concentrations
identified at several fields in Mississippi. In addition, the Company is a
defendant in several lawsuits brought in 1994 and 1996 by landowners alleging
personal injury and property damage from NORM at various wellsite locations.
During 1995, the Company voluntarily negotiated a remediation plan with the
governmental agencies responsible for the two wildlife refuges in the Monroe
field. Under the plan, the Company began removal of the mercury meters within
the wildlife refugees in 1996. The Company sold its interest and natural gas
assets in the Monroe field on December 2, 1998. The purchaser agreed to assume
the Company's obligations under the remediation plan.
Because the Company's strategy is to acquire interests in underdeveloped
crude oil and natural gas properties many of which have been operated by others
for many year, the Company may be liable for damage or pollution caused by the
former operators of such crude oil and natural gas properties. The Company makes
a provision for future site restoration charges on a unit-of-production basis
which is included in depletion and depreciation expense. In addition, the
Company may continue to be responsible for environmental contamination on
properties it transferred to others. The Company's operations are also subject
to all the risks normally
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<PAGE> 149
incident to the operation and development of crude oil and natural gas
properties and the drilling of crude oil and natural gas wells, including
encountering unexpected formations or pressures, blowouts, cratering and fires,
which could result in personal injuries, loss of life, pollution damage and
other damage to the properties of the Company and others. Moreover, offshore
operations are subject to a variety of operating risks peculiar to the marine
environment, such as hurricanes or other adverse weather conditions, to more
extensive governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to interruption
or termination of operations by governmental authorities based on environmental
or other considerations. The Company maintains insurance against certain losses
or liabilities arising from its operations in accordance with customary industry
practices and in amounts that management believes to be reasonable. However,
insurance is either not available to the Company against all operational risks
or is not economically feasible for the Company to obtain. The occurrence of a
significant event that would impose liability on the Company that is either not
insured or not fully insured could have a material adverse effect on the
Company's financial condition and results of operations.
EMPLOYEES
At March 1, 1999, Coho had 144 employees associated with its operations,
including 26 field personnel in Mississippi and 28 field personnel in Oklahoma.
None of the Company's employees is represented by a union. The Company considers
its employee relations to be satisfactory.
ITEM 2. PROPERTIES
For information with respect to the Company's properties, see "Business and
Properties -- Oil and Gas Operations".
ITEM 3. LEGAL PROCEEDINGS
The Company, together with several other companies, has been named as a
defendant in a number of lawsuits in which the plaintiffs claim purported
damages caused by naturally occurring radioactive materials at various wellsite
locations on land leased by the Company in Mississippi. All of the suits purport
to be based on similar factual allegations and seek damages primarily for land
damage, health hazard and mental and emotional distress. None of the suits seek
specific award amounts, but all seek punitive damages.
While the Company is not able to determine its exposure in the suits at
this time, the Company believes that the claims will have no material adverse
effect on its financial position or results of operations.
In 1998, a suit was filed against the Company by the acquirer of the
Company's natural gas pipeline properties which were sold in 1996. This suit
alleges that the Company gave false and fraudulent information with regard to
the properties sold as well as alleging that the Company has interfered in
contracts and business relations subsequent to the sale. The plaintiff is
requesting payment for actual, punitive and other damages. The Company believes
these charges are without merit.
The Company is involved in various other legal actions arising in the
ordinary course of business. While it is not feasible to predict the ultimate
outcome of these actions or those listed above, management believes that the
resolution of these matters will not have a material adverse effect, either
individually or in aggregate, on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on December 4, 1998 to vote on
an amendment to the Articles of Incorporation authorizing an increase in the
number of shares of the Company's Common Stock from 50 million to 100 million
and on the proposed sale of 41,666,666 shares of Common Stock to HM4 Coho L.P.
pursuant to a stock purchase agreement dated August 21, 1998, as amended.
At the close of business on November 6, 1998, the record date for the
determination of stockholders entitled to vote at the meeting, there were
outstanding 25,603,512 shares of common stock, of which 16,326,427 were
represented at the meeting in person or by proxy. With regard to the amendment
to increase
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<PAGE> 150
the number of authorized shares from 50 million to 100 million, 15,726,461 were
voted in favor of the proposal, 512,776 shares voted against the proposal and
87,190 shares abstained from voting. There were no broker non-votes. With regard
to the amendment to approve the sale of 41,666,666 shares of common stock to HM4
Coho L.P., 14,634,027 shares voted in favor, 473,056 shares voted against,
100,263 abstained from voting and there were 1,119,081 broker non-votes. Both
issues were approved by the voting shareholders.
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<PAGE> 151
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq Stock Market under the
symbol "COHO". The following table sets forth the range of high and low sale
prices for the Common Stock as reported on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
1st Quarter............................................... $9 1/4 $6 7/8
2nd Quarter............................................... 11 1/2 6 7/8
3rd Quarter............................................... 11 5/8 9
4th Quarter............................................... 13 8 1/4
1998
1st Quarter............................................... $9 5/8 $6 1/4
2nd Quarter............................................... 9 1/4 6 1/4
3rd Quarter............................................... 7 1/8 4 1/2
4th Quarter............................................... 5 1/8 2 5/16
</TABLE>
Prior to the opening of markets on Monday March 8, 1999, the Nasdaq Stock
Market halted trading on the Company's Common Stock based on Coho's announcement
that day of a receipt of a notice of default from the lenders under the
Company's Revolving Credit Facility. The Nasdaq Stock Market requested
additional information from the Company regarding the Company's compliance with
the continued listing requirements of the Nasdaq Stock Market. As of March 31,
1999, the Company is not able to respond because it has not formalized a
restructuring plan and trading on the Company's Common Stock on the Nasdaq Stock
Market has not resumed. On March 29, 1999, the Company received a letter from
the Nasdaq Stock Market that it has determined that the continued listing of the
Company's Common Stock on the Nasdaq Stock Market is no longer warranted. The
Company intends to request an oral hearing with the Nasdaq Stock Market, which,
pursuant to Nasdaq's Marketplace Rules, will stay any delisting action pending a
final decision by the Nasdaq Listing Qualifications Panel. The last reported
sale price of the Common Stock as reported on the Nasdaq Stock Market on March
5, 1999 was $ 5/8 per share. At March 22, 1999, there were 398 holders of record
of the Common Stock. The Company believes it has in excess of 12,000 beneficial
holders of its Common Stock.
The Company has never paid cash dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock in the foreseeable future. In
the past, the Company has used its available cash flow to conduct exploration
and development activities or to make acquisitions, and expects to continue to
do so in the future. In addition, the terms of the Company's revolving credit
facility and Senior Notes indenture restrict the payment of dividends by the
Company and CRI. Due to a current default under the Company's existing revolving
credit facility, and due to the Company's current and expected capital needs, it
is unlikely that the Company will pay dividends in the foreseeable future. Coho
Energy, Inc. currently is a holding company with no independent operations.
Accordingly, any amounts available for dividends will be dependent on the prior
declaration of dividends by the subsidiaries of Coho Energy, Inc. Any
declaration of dividends by the subsidiaries of Coho Energy, Inc. would be
subject to Canadian or U.S. withholding tax at applicable tax rates.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1998 are derived from, and qualified by
reference to, the Company's audited consolidated financial statements included
at Item 8 hereof. The information presented below should be read in conjunction
with Coho's Consolidated Financial Statements and the notes thereto and
"Management's Discussion and
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<PAGE> 152
Analysis of Financial Condition and Results of Operations" included elsewhere
herein. The selected consolidated financial data presented below are not
necessarily indicative of the future results of operations or financial
performance of the Company.
<TABLE>
<CAPTION>
1994(1)(2) 1995(2) 1996 1997 1998
---------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Operating revenues................... $ 26,464 $ 40,903 $ 54,272 $ 63,130 $ 68,759
Operating costs...................... 9,372 12,457 13,875 15,970 26,859
General and administrative
expenses.......................... 3,435 5,400 7,264 7,163 7,750
Allowance for bad debt............... -- -- -- -- 894
Depletion and depreciation........... 9,989 14,717 16,280 19,214 28,135
Writedown of crude oil and natural
gas properties.................... -- -- -- -- 188,000
Net interest expense................. 3,972 8,048 7,464 10,474 32,721
Other expense........................ 973 -- -- -- 2,129
Income tax expense (benefit)......... (303) 112 3,483 4,020 (14,383)
Earnings (loss) from continuing
operations........................ (974) 169 5,906 6,288 (203,346)
Net earnings (loss).................. (1,654) 1,780 5,906 6,288 (203,346)
Basic earnings (loss) from continuing
operations per common share(3).... $ (0.07) $ (0.02) $ 0.29 $ 0.29 $ (7.94)
Diluted earnings (loss) from
continuing operations per common
share(4).......................... $ (0.07) $ (0.02) $ 0.29 $ 0.28 $ (7.94)
Basic earnings (loss) per common
share(3).......................... $ (0.12) $ 0.05 $ 0.29 $ 0.29 $ (7.94)
Diluted earnings (loss) per common
share(4).......................... $ (0.12) $ 0.05 $ 0.29 $ 0.28 $ (7.94)
OTHER FINANCIAL DATA:
Capital expenditures................. $ 19,503 $ 29,970 $ 52,384 $ 72,667 $ 70,143
BALANCE SHEET DATA:
Working capital (deficit)(5)......... $ (2,379) $ 14,433 $ 6,662 $ (2,021) $(388,297)
Net property and equipment........... 171,524 175,899 210,212 531,409 324,574
Total assets......................... 196,970 204,042 230,041 555,128 350,068
Long-term debt, excluding current
portion........................... 86,311 107,403 122,777 369,924 --
Redeemable preferred stock........... 16,125 -- -- -- --
Total shareholders' equity........... 56,416 74,321 81,466 142,103 (61,243)
</TABLE>
- ---------------
(1) In December 1994, the Company acquired all of the outstanding common stock
of ING.
(2) Amounts for 1994 and 1995 exclude discontinued operations representing the
Company's natural gas marketing and transportation segment.
(3) Basic per share amounts have been computed by dividing net earnings after
preferred dividends by the weighted average number of shares outstanding:
14,190 in 1994; 17,932 in 1995; 20,179 in 1996; 21,693 in 1997; and 25,604
in 1998, respectively.
(4) Diluted per share amounts have been computed by dividing net earnings after
preferred dividends by the weighted average number of shares outstanding
including common stock equivalents, consisting of stock options and
warrants, when their effect is dilutive: 14,190 in 1994; 17,932 in 1995;
20,342 in 1996; 22,334 in 1997; and 25,604 in 1998, respectively.
(5) Amount for 1995 includes $17,421 related to net assets of discontinued
operations. Amount for 1998 includes $384,031 related to current portion of
long-term debt due to default under the Company's existing credit agreement.
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<PAGE> 153
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere herein. Certain information
contained herein, including information with respect to the Company's plans and
strategy for its business, are forward-looking statements. See "Forward-Looking
Statements".
SUBSEQUENT EVENTS
See "Liquidity and Capital Resources" for a description of certain events
affecting the current liquidity of the Company.
COMPANY HISTORY
The Company was incorporated in June 1993 under the laws of the State of
Texas and conducts a majority of its operations through CRI.
In December 1994, the Company acquired all of the capital stock of
Interstate Natural Gas Company ("ING"). ING, through its subsidiaries, was a
privately-held natural gas producer, gatherer and pipeline company operating in
Louisiana and Mississippi. Consideration paid by the Company for the acquisition
of ING was $20 million cash, the assumption of net liabilities of $3.3 million
(excluding deferred taxes), 2,775,000 shares of the Common Stock and 161,250
shares of redeemable preferred stock (which preferred shares were exchanged on
August 30, 1995 for 3,225,000 shares of Common Stock), having an aggregate
stated value of $16.1 million. The acquisition of ING was accounted for using
the purchase method.
In April 1996, ING sold all of the stock of three wholly-owned subsidiaries
that comprised its natural gas marketing and transportation segment to an
unrelated third party for cash of $19.5 million, the assumption of net
liabilities of approximately $2.3 million and the payment of taxes of up to $1.2
million generated as a result of the tax treatment of the transaction. The
marketing and transportation segment is accounted for as discontinued operations
herein.
On October 3, 1997, the Company issued 5,000,000 shares of common stock at
$10.50 per share and issued $150 million of 8 7/8% Senior Subordinated Notes due
2007 ("Senior Notes") pursuant to two public offerings with combined net
proceeds of $193.7 million. The proceeds from these offerings were used to repay
$144.8 million of indebtedness outstanding under the Company's Revolving Credit
Facility, for general corporate purposes and to fund a portion of the December
1997 Oklahoma property acquisition discussed below.
Effective December 31, 1997, the Company acquired from Amoco Production
Company ("Amoco") interests in certain crude oil and natural gas properties
("Oklahoma Properties") located primarily in southern Oklahoma for cash
consideration of approximately $257.5 million and warrants to purchase one
million shares of common stock at $10.425 per share for a period of five years
valued at $3.4 million. The Oklahoma Properties are in more than 25,000 gross
acres concentrated in southern Oklahoma, including 14 major producing oil
fields. Of the 14 major producing fields, the Company is operator of eleven
fields and at December 31, 1998 had an average working interest in the fields it
operates of approximately 73%.
On December 2, 1998, the Company sold its natural gas assets, including its
natural gas properties and the related gas gathering systems, located in Monroe,
Louisiana to an unaffiliated third party for net proceeds of approximately $61.5
million. The proved reserves attributable to such natural gas properties
represented approximately 14% of the Company's year end 1997 proved reserves.
The sale of these assets represented substantially all of the remaining assets
of ING.
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
24
<PAGE> 154
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 75% of production revenues and natural gas sales
representing approximately 25% of production revenues during 1996 and 1997, and
crude oil sales representing approximately 77% of production revenues and
natural gas sales representing approximately 23% of production revenues during
1998. Approximately 60% of natural gas sales revenues during 1998 were
attributable to the Monroe field gas properties which were sold in December
1998. Operating revenues increased from $26.5 million in 1994 to $68.8 million
in 1998 primarily due to an increase in production volumes from successful
development and exploration activities in the Company's existing Mississippi
fields and due to the following acquisitions: the December 1994 acquisition of
the Monroe natural gas field; the August 1995 acquisition of the Brookhaven
field and; the December 1997 acquisition of the Oklahoma Properties.
The Company also strives to maintain a low cost structure through asset
concentration, such as in the interior salt basin of Mississippi and the
Oklahoma Properties. Asset concentration permits operating economies of scale
and leverages operational, technical and marketing capabilities. Production
costs (including lease operating expenses and production taxes) per BOE have
decreased from $4.49 in 1994 to $4.18 in 1998.
The price received by the Company for crude oil and natural gas may vary
significantly during certain times of the year due to the volatility of the
crude oil and natural gas market, particularly during the cold winter and hot
summer months. As a result, 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, though at December 31, 1998, 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 "Liquidity
and Capital Resources." While the Company's hedging program is intended to
stabilize cash flow and thus allow the Company to plan its capital expenditure
program with greater certainty, such hedging transactions may limit potential
gains by the Company if crude oil and natural gas prices were to rise
substantially over the price established by the hedge. Because all hedging
transactions are tied directly to the Company's crude oil and natural gas
production and natural gas marketing operations, the Company does not believe
that such transactions are of a speculative nature. Gains and losses on these
hedging transactions are reflected in crude oil and natural gas revenues at the
time of sale of the hedged production. 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") crude
oil on the New York Mercantile Exchange ("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 on NYMEX for the last three days during the month in which the
hedge is in place. Consequently, hedging activities do not affect the actual
price received for the Company's crude oil and natural gas.
The Company also controls the magnitude and timing of its capital
expenditures by obtaining high working interests in and operating its
properties. At December 31, 1998, the Company owned an average working interest
of 76% in the fields it operates.
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<PAGE> 155
RESULTS OF OPERATIONS
Selected Operating Data
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
PRODUCTION:
Crude oil (Bbl/day)....................................... 6,742 7,726 13,889
Natural gas (Mcf/day)..................................... 18,160 21,003 22,260
BOE (Bbl/day)..................................... 9,769 11,227 17,599
AVERAGE SALES PRICES:
Crude oil (per Bbl)....................................... $ 16.42 $ 16.31 $ 10.40
Natural gas (per Mcf)(a).................................. 2.07 2.23 1.98
PER BOE DATA:
Production costs(b)....................................... $ 3.88 $ 3.90 $ 4.18
Depletion................................................. 4.55 4.69 4.38
PRODUCTION REVENUES (IN THOUSANDS):
Crude oil................................................. $40,527 $45,991 $52,689
Natural gas............................................... 13,745 17,139 16,070
------- ------- -------
Total production revenues......................... $54,272 $63,130 $68,759
======= ======= =======
</TABLE>
- ---------------
(a) Natural gas prices are net of fuel costs used in gas gathering.
(b) Includes lease operating expenses and production taxes, exclusive of
general and administrative costs.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Operating Revenues. During 1998, production revenues increased 9% to $68.8
million as compared to $63.1 million in 1997. This increase was principally due
to an 80% increase in crude oil production and a 6% increase in natural gas
production, substantially offset by decreases in the prices received for crude
oil and natural gas (including hedging gains and losses discussed below) of 36%
and 11%, respectively.
The 6% increase in daily natural gas production is primarily due to a 26%
increase in production as a result of the December 1997 acquisition of the
Oklahoma Properties, substantially offset by production declines on the
Company's Brookhaven, Martinville, North Padre and Monroe fields. Additionally,
the Monroe field was sold to an unaffiliated third party on December 2, 1998,
resulting in lower gas production for the year of 1998 as compared to the year
of 1997. The Monroe field represented 85% and 67% of the Company's gas
production in 1997 and 1998, respectively. The 80% increase in daily crude oil
production during 1998 is primarily due to a 76% increase in production as a
result of the acquisition of the Oklahoma Properties. Although the Company
increased crude oil production during the first three quarters of 1998 as
compared to the same period in 1997 in the Martinville and Brookhaven fields,
such increases were substantially offset by fourth quarter 1998 crude oil
production declines of 21% on its Mississippi fields as compared to the fourth
quarter of 1997 as well as overall crude oil production declines in the Soso and
Summerland fields throughout 1998 as compared to 1997.
Crude oil and natural gas production declined in the fourth quarter of 1998
from an average of 18,495 BOE per day during the first nine months of 1998 to
14,939 BOE per day during the fourth quarter of 1998 due to the December 1998
sale of the Monroe field natural gas properties and due to overall production
declines in the operated Mississippi and Oklahoma properties. Due to the
Company's capital restraints 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 and ceased all well
repairs in December 1998, resulting in overall production declines. The
Company's crude oil and natural gas production level was approximately 11,400
BOE per day in January 1999. 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.
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<PAGE> 156
Average crude oil prices realized in 1998, including hedging gains and
losses discussed below, decreased from 1997 due to declining oil prices which
can be attributed to several factors, including: a 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 $11.32 per Bbl in 1998, a 38% decrease over the average posted price of
$18.34 per Bbl experienced in 1997. 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 realized price for the Company's natural gas, including hedging gains
and losses discussed below, decreased 11% from $2.23 per Mcf in 1997 to $1.98
per Mcf in 1998 due to a lack of cold weather and market volatility.
Production revenues for 1998 included no crude oil hedging gains or losses
compared to crude oil hedging losses of $0.3 million ($.11 per Bbl) in 1997.
Production revenues in 1998 included natural gas hedging gains of $0.5 million
($.06 per Mcf) compared with natural gas hedging gains of $0.1 million ($.01 per
Mcf) for 1997. 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.
Interest and other income decreased to $214,000 in 1998 from $646,000 in
1997 primarily due to a decline of interest received on cash investments in
1998. In 1997, $137,000 of interest was received by the Company in the first
quarter on a federal tax refund and $465,000 of interest was earned in the
fourth quarter on cash investments.
Expenses. Production expenses (including production taxes) were $26.9
million for 1998 compared to $16 million for 1997. On a BOE basis, production
costs increased to $4.18 per BOE in 1998 compared to $3.90 per BOE in 1997. The
increase in expenses between years is primarily due to an increase of
approximately $11.8 million relating to the December 1997 acquisition of the
Oklahoma Properties, partially offset by reduced operating costs on the
Company's Mississippi properties due to the improved operating efficiencies and
due to a reduction of repairs imposed by the Company during the last half of
1998 due to the decline in crude oil prices.
General and administrative costs increased 8% from $7.2 million in 1997 to
$7.8 million in 1998 primarily due to increased personnel costs due to staff
additions to handle the increased capital activities in Mississippi during the
first half of 1998 and the December 1997 acquisition of the Oklahoma Properties
and due to the accrual of a $0.4 million fee related to the termination of a
drilling contract which extended through mid-year 1999, partially offset by an
increase in capitalization of salaries and other general and administrative
costs directly associated with the Company's exploration and development
activities.
Allowance for bad debt in 1998 represents an allowance for uncollectible
accounts receivable from working interest owners and an allowance for director
and employee receivables as discussed in Note 11 of the Notes to the
Consolidated Financial Statements contained elsewhere herein.
Unsuccessful transaction costs of $2.1 million incurred in 1998 relate to
the termination of an agreement in which the Company was to issue $250 million
of equity. Such costs are comprised of $1.2 million for financial advisory
services in conjunction with such transaction, $0.5 million for an outside
financial advisor regarding the fairness of the agreement and $0.4 million for
legal, accounting and other services.
Interest expense increased 296% in 1998 compared to 1997, due to higher
borrowing levels during 1998 as compared to 1997 and due to the sale of $150
million of Senior Notes on October 3, 1997, which bear a higher interest rate
than the Company's revolving credit facility. The average interest rate paid on
outstanding indebtedness was 8.07% in 1998, compared to 7.84% in 1997. The
borrowing levels increased throughout 1997 and 1998 due to additional borrowings
to fund the Company's capital expenditure program and the December 1997
acquisition of the Oklahoma Properties.
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<PAGE> 157
Depletion and depreciation expense increased 46% to $28.1 million in 1998
from $19.2 million in 1997. These increases are primarily the result of
increased production volumes partially offset by a decreased rate per BOE, which
decreased to $4.38 in 1998, compared with $4.69 in 1997. The depletion and
depreciation rate per BOE decreased between years due to the writedowns of oil
and gas properties in 1998 as discussed below.
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"). If the carrying value
exceeds the cost center ceiling, the excess must be expensed in such period and
the carrying value of the oil and gas reserves lowered accordingly. Amounts
required to be written off may not be reinstated for any subsequent increase in
the cost center ceiling. During 1998, the carrying values exceeded the cost
center ceilings, resulting in non-cash writedowns of the crude oil and natural
gas properties, aggregating $188 million, including $32 million, $41 million and
$115 million recognized in the first, second and fourth quarters of 1998,
respectively.
Current tax expense of $4.1 million in 1998 primarily relates to state
income taxes due on the December 1998 sale of the Monroe field natural gas
properties and related gas gathering systems.
The Company's net operating loss carryforwards ("NOLs") for United States
and Canadian federal income tax purposes were approximately $64.9 million at
December 31, 1998 and expire between 1999 and 2018. Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" requires
that the tax benefit of such NOLs be recorded as an asset to the extent that
management assesses the utilization of such NOLs to be "more likely than not." A
valuation allowance has been established for the entire balance of these NOLs as
it is uncertain whether they will be utilized before they expire.
The Company's net loss for 1998 was $203.3 million, as compared to net
earnings of $6.3 million for 1997, for the reasons discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Operating Revenues. During 1997, production revenues increased 16% to $63.1
million as compared to $54.3 million in 1996. This increase was principally due
to a 15% increase in crude oil production, a 16% increase in natural gas
production and an increase in the price received for natural gas (including
hedging gains and losses discussed below) of 8%.
The 16% increase in daily natural gas production is primarily a result of
the continued positive response from the Company's development efforts in the
North Padre, Martinville and Brookhaven fields. The 15% increase in daily crude
oil production during 1997 is due to significant production increases made in
the Martinville, Soso and Brookhaven fields, with production increasing by 125%,
51% and 87%, respectively, in such fields. These production increases were
partially offset by a production decrease in the Summerland field due to the
unusually high frequency of weather-related power outages and mechanical
problems during the first quarter of 1997 and normal production declines due to
the maturity of the field.
Average crude oil prices realized in 1997, including hedging gains and
losses discussed below, remained comparable to 1996. Even though posted crude
oil prices received in 1997 declined from 1996 prices, the average prices
realized in 1996 and 1997 were comparable due to crude oil hedging losses
experienced in 1996. The posted price for the Company's crude oil averaged
$18.34 per Bbl in 1997, a 9% decrease over the average posted price of $20.23
per Bbl experienced in 1996. 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 realized price for the Company's natural gas, including hedging gains
and losses discussed below, increased 8% from $2.07 per Mcf in 1996 to $2.23 per
Mcf in 1997. Although the average natural gas prices received, net of fuel used
in gathering, in 1996 and 1997 were comparable at $2.25 per Mcf and $2.22 per
Mcf, respectively, the natural gas hedging losses in 1996 reduced the realized
price in 1996 by $0.18 per Mcf while 1997 hedging gains increased the realized
price in 1997 by $0.01 per Mcf.
28
<PAGE> 158
Production revenues for 1997 included crude oil hedging losses of $0.3
million ($0.11 per Bbl) compared to crude oil hedging losses of $4.7 million
($1.92 per Bbl) in 1996. Production revenues in 1997 also included natural gas
hedging gains of $0.1 million ($0.01 per Mcf) compared with natural gas hedging
losses of $1.2 million ($0.18 per Mcf) for 1996.
Interest and other income decreased to $646,000 in 1997 from $1 million in
1996 primarily due to $472,000 of interest earned during 1996 on the receivable
from the sale of the marketing and pipeline segment of operations and due to an
unrealized gain of $450,000 on marketable securities in 1996, partially offset
by $137,000 of interest received in the first quarter of 1997 on a federal tax
refund and $465,000 of interest earned in the fourth quarter of 1997 on cash
investments.
Expenses. Production expenses (including production taxes) were $16 million
for 1997 compared to $13.9 million for 1996. This increase primarily reflects
additional production volumes. On a BOE basis, production costs increased to
$3.90 per BOE in 1997 compared to $3.88 per BOE in 1996.
General and administrative costs decreased 1% between years from $7.3
million in 1996 to $7.2 million in 1997. General and administrative costs
expensed in 1997 were less than such costs expensed in 1996, even though total
general and administrative costs increased, due to an increase in the
capitalization of salaries and other general and administrative costs directly
associated with the Company's increased exploration and development activities.
Total general and administrative cost increased due to higher compensation and
employee related costs attributable to staff additions and higher professional
fees.
Interest expense increased 31% in 1997 compared to 1996, due to higher
borrowing levels during 1997 as compared to 1996 and due to the sale of $150
million of 8 7/8% Senior Subordinated Notes ("Senior Notes") on October 3, 1997
which bear a higher interest rate than the Company's revolving credit facility.
The average interest rate paid on outstanding indebtedness was 7.84% in 1997,
compared to 7.6% in 1996.
Depletion and depreciation expense increased 18% to $19.2 million in 1997
from $16.3 million in 1996. These increases are primarily the result of
increased production volumes and an increased rate per BOE, which increased to
$4.69 in 1997, compared with $4.55 in 1996.
Based on the cost center ceiling test at December 31, 1997, using the year
end WTI posted reference price of $16.17 per Bbl of crude oil and a year end
price of $2.26 per Mcf of natural gas, the carrying value of the crude oil and
natural gas properties were lower than the cost center ceiling therefore no
writeoff was required.
The Company's net earnings for 1997 were $6.3 million, as compared to net
earnings of $5.9 million for 1996, for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Capital Sources. Cash flow generated from operating activities was $37.1
million and $691,000 for the years ended December 31, 1997 and 1998,
respectively. Operating revenues, net of lease operating expenses, production
taxes and general and administrative expenses decreased $5.8 million (15%)
during 1998 from 1997, despite a 57% increase in equivalent production between
years, primarily due to price decreases during 1998 from 1997 of 36% and 11% for
crude oil and natural gas, respectively. Additionally, interest expense
increased $22.2 million between periods as a result of borrowings to finance the
Company's capital expenditure program and the December 1997 acquisition of the
Oklahoma Properties. Changes in operating assets and liabilities provided $4.6
million of cash for operating activities for the year ended December 31, 1998,
primarily due to the increase in federal and state taxes payable and accrued
interest payable, partially offset by the increase in cash in escrow and the
decrease in other accrued liabilities. See "Results of Operations" for a
discussion of operating results.
On December 2, 1998, the Company sold its natural gas assets, including its
natural gas properties and the related gas gathering systems, located in Monroe,
Louisiana for approximately $61.5 million. Proceeds from the sale were used to
reduce borrowings under the Company's Revolving Credit Facility.
29
<PAGE> 159
As discussed more fully under "Results of Operations for the Year Ended
December 31, 1998 Compared with the Year Ended December 31, 1997", operating
revenues have been declining during 1998 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 approximately 11,400 BOE per day during January 1999 due to the sale of
the Monroe field gas properties in December 1998, which contributed
approximately 2,670 BOE per day during the first nine months of 1998, 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.
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 January 1999 production level of approximately 11,400 BOE per
day and the average price received in January 1999 of approximately $8.30 per
barrel of crude oil and $1.92 per mcf of natural gas, the Company's operating
revenues are adequate to cover lease operating expenses, production taxes and
general and administrative expense but are not sufficient to cover interest
accruing on the Senior Notes or on the borrowings under the Revolving Credit
Facility. See "-- Future Operations".
At December 31, 1998, the Company had a working capital deficit of $387.9
million primarily due to the reclassification of all long term debt to current
maturities as discussed below. See "-- Future Operations".
In August 1998, the Company announced that it had reached an agreement to
issue $250 million of common stock at $6.00 per share to HM4 Coho L.P. On
December 15, 1998, the Company announced that HM4 Coho L.P. was terminating the
prior agreement and that the Company was considering a restructuring of the HM4
Coho L.P. agreement, which had received shareholder approval, to reflect an
increase in the number of shares that the Company would issue for the $250
million purchase price based on a price per share of $4.00 versus $6.00. After
working through all of the issues and reaching a verbal agreement with all of
the interested parties with regard to the proposed restructuring, the Company
was informed by HM4 Coho L.P. on February 12, 1999 that it was no longer
interested in the investment.
Under the Revolving Credit Facility, at December 31, 1998, the amount
available to the Company in borrowing capacity for general corporate purposes
("Borrowing Base") was $242 million. The Revolving Credit Facility terminates on
January 2, 2003. The margin premium charged in excess of LIBOR for revolving
Eurodollar advances is based on a ratio calculated on a rolling four-quarter
basis of consolidated indebtedness to EBITDA. Amounts outstanding up to $220
million under the Revolving Credit Facility accrue interest at the option of the
Company at (i) LIBOR plus a maximum of 1.50% or (ii) the prime rate. Amounts
outstanding in excess of $220 million accrue interest at the option of the
Company at (i) LIBOR plus 2.50% or (ii) the prime rate plus 1%. CRI, and its
wholly owned subsidiaries, Coho Louisiana Production Company, Coho Exploration,
Inc. and Coho Oil & Gas, Inc., are the borrowers under the Revolving Credit
Facility and the repayment of all advances is guaranteed by Coho Energy, Inc.
Outstanding advances under the Revolving Credit Facility are secured by
substantially all of the assets of the Company. At December 31, 1998, the
Revolving Credit Facility lenders were Banque Paribas, Houston Agency; Bank One,
Texas, N.A.; MeesPierson Capital Corp.; Bank of Scotland; Den Norske Bank;
Christiania Bank; Credit Lyonnais and Toronto Dominion Bank. At December 31,
1998, outstanding advances under the Company's Revolving Credit Facility were
$235 million and increased to $239.6 million as of January 5, 1999.
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 under the new Borrowing Base
of $89.6 million. 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, the Company
received written notice from the lenders under the Revolving
30
<PAGE> 160
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, as a result of the payment default,
the past due payments under the Revolving Credit Facility 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 $235 million as of December 31, 1998 have been
reclassified to current maturities because the Company is currently unable to
cure the default within the required terms. The Company is currently in
discussions with the lenders under the Revolving Credit Facility to work with
the Company in restructuring this repayment schedule so that the Company can
continue to pursue alternative arrangements. See "-- Future Operations".
The Revolving 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 write
down 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 (2.5 to 1) as well as current assets (including
unused borrowing base) to current liabilities (1 to 1), (iii) limitations on the
Company's ability to incur additional debt and (iv) restrictions on the payment
of dividends. At December 31, 1998, the Company was not in compliance with the
cash flow to interest expense and current asset to current liability covenants.
The $150 million of Senior Notes are unsecured senior subordinated
obligations of the Company and rank pari passu in right of payment to all
existing and future senior subordinated indebtedness of the Company. The Senior
Notes mature on October 15, 2007 and bear interest from October 3, 1997 at the
rate of 8 7/8% per annum payable semi-annually, commencing on April 15, 1998.
Certain subsidiaries of the Company issued guarantees of the Senior Notes on a
senior subordinated basis. The indenture issued in conjunction with the Senior
Notes (the "Indenture") contains certain covenants, including covenants that
limit (i) indebtedness, (ii) restricted payments, (iii) distributions from
restricted subsidiaries, (iv) transactions with affiliates, (v) sales of assets
and subsidiary stock (including sale and leaseback transactions), (vi) dividends
and other payment restrictions affecting restricted subsidiaries and (vii)
mergers or consolidations.
As a result of the payment default under the Revolving Credit Facility
discussed above, the Company may be in default under the terms of the Senior
Notes specified in the Indenture. If the Company is in default of the Senior
Notes as a result of the payment default under the Revolving Credit Facility,
the Company will be required to deliver a written notice to the Trustee of the
Senior Notes within 30 days after the occurrence of the event of default in the
form of an officers' certificate indicating an event of default has occurred and
is continuing and what action the Company is taking or proposing to take with
respect to the event of default. 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 December 31, 1998 have been classified
as current maturities because the Company is currently unable to cure the
existing or pending default within the required terms of the Indenture.
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 upcoming interests payments due on the
Revolving Credit Facility on April 6, 1999 and on the Senior Notes due on April
15, 1999 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
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<PAGE> 161
assurance that the Company will be 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.
Dividends. While the Company is restricted on the payment of dividends
under the Revolving Credit Facility, dividends are permitted on Company equity
securities provided (i) the Company is not in default under the Revolving Credit
Facility; and (ii) (a) the aggregate sum of the proposed dividend, plus all
other dividends or distributions made since February 8, 1994 do not exceed 50%
of cumulative consolidated net income during the period from January 1, 1994 to
the date of the proposed dividend, or (b) the ratio of total consolidated
indebtedness (excluding accounts payable and accrued liabilities) to
shareholders' equity does not exceed 1.6 to 1 after giving effect to such
proposed dividend or (c) the aggregate amount of the proposed dividend, plus all
other dividends or distributions made since February 8, 1994, do not exceed 100%
of cumulative consolidated net income for the three fiscal years immediately
preceding the date of payment of the proposed dividend. The Indenture limits the
Company's ability to pay dividends, based on the Company's ability to incur
additional indebtedness and primarily limited to 50% of consolidated net income
earned, excluding any write down of property, plant and equipment after the date
the Senior Notes were issued plus the net proceeds from any future sales of
capital stock of the Company. Due to the Company's default under the Revolving
Credit Facility and due to the Company's current and expected capital needs as
discussed above, it is unlikely that the Company will pay dividends in the
foreseeable future.
Capital Expenditures. During 1998, the Company incurred capital
expenditures of $70.1 million compared with $72.7 million in 1997. The capital
expenditures incurred during 1998 were largely in connection with the continuing
development efforts, including recompletions, workovers and waterfloods, on
existing wells in the Company's Brookhaven, Laurel, Martinville, Summerland,
Bumpass, Tatums, East Fitts, North Alma Deese and Sholem Alechem fields. In
addition, during 1998, the Company drilled 42 wells, including sixteen producing
oil wells, one producing gas well and three dry holes in the Mississippi fields;
eleven producing oil wells, five producing gas wells and one dry hole in the
Oklahoma fields; and two producing gas wells and three dry holes in the Monroe,
Louisiana field.
General and administrative costs directly associated with the Company's
exploration and development activities were $4.1 million and $5.7 million for
the years ended December 31, 1997 and 1998, respectively, and were included in
total capital expenditures.
The Company is in the process of finalizing the location for an exploratory
well on its Anaguid permit in Tunisia, North Africa. A well must be drilled 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 is unable 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.
Hedging Activities. Crude oil and natural gas prices are subject to
significant seasonal, political and other variables which are beyond the
Company's control. In an effort to reduce the effect on the Company of the
volatility of the prices received for crude oil and natural gas, the Company has
entered, and expects to continue to enter, into crude oil and natural gas
hedging transactions. 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 "Liquidity and Capital Resources." The
Company's hedging program is intended to stabilize cash flow and thus allow the
Company to minimize its exposure to price fluctuations. Because all hedging
transactions are tied directly to the Company's crude oil and natural gas
production, the Company does not believe that such transactions are of a
speculative nature. Gains and losses on these hedging transactions are reflected
in crude oil and natural gas revenues at the time of sale of the hedged
production. Any gain or loss on the Company's
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<PAGE> 162
natural gas hedging transactions is generally determined as the difference
between the contract price and the average settlement price on NYMEX for the
last three days during the month in which the hedge is in place. At December 31,
1998, the Company has no natural gas or crude oil production hedged and there
were no deferred or unrealized hedging gains or losses.
The Company will be required to adopt SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" for fiscal year ended 2000. If
the Company had adopted SFAS No. 133 during 1998, there would be no effect as
the Company has no hedges outstanding at December 31, 1998. Although the future
impact of adopting SFAS No. 133 has not been determined yet, the Company
believes that the impact will not be material.
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 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.
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<PAGE> 163
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS ANNUAL REPORT
ON FORM 10-K ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
ITEM 7A. 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 December 31, 1998, 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 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Interest Rate Risk. Total debt as of December 31, 1998, included $235
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.
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 $235 million throughout the year.
Total debt as of December 31, 1998, 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 $57 million based on quoted prices from market
sources.
The Company is in default under its bank credit facility and may be default
under its Senior Notes. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations".
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... 35
Consolidated Balance Sheets, December 31, 1997 and 1998..... 36
Consolidated Statements of Operations, Years Ended December
31, 1996, 1997 and 1998................................... 37
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1996, 1997 and 1998.......................... 38
Consolidated Statements of Cash Flows, Years Ended December
31, 1996, 1997 and 1998................................... 39
Notes to Consolidated Financial Statements, Years Ended
December 31, 1996, 1997 and 1998.......................... 40
</TABLE>
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Coho Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Coho
Energy, Inc. (a Texas corporation) and subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of operations, shareholders'
investments and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Coho Energy, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 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 a notice 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
March 24, 1999
35
<PAGE> 165
COHO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1998
-------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 3,817 $ 6,901
Cash in escrow............................................ -- 1,505
Accounts receivable, principally trade.................... 10,724 9,960
Deferred income taxes..................................... 1,818 --
Other current assets...................................... 715 948
-------- ---------
17,074 19,314
Property and equipment, at cost net of accumulated depletion
and depreciation, based on full cost accounting method
(note 3).................................................. 531,409 324,574
Other assets................................................ 6,645 6,180
-------- ---------
$555,128 $ 350,068
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable, principally trade....................... $ 4,888 $ 5,577
Accrued liabilities and other payables.................... 7,545 5,970
Accrued interest.......................................... 3,901 7,302
Accrued compensation...................................... 1,423 --
Accrued environmental costs............................... 1,300 686
Federal and state income taxes payable.................... -- 4,045
38 384,031
-------- ---------
19,095 407,611
Long term debt, excluding current portion (note 4).......... 369,924 --
Deferred income taxes (note 5).............................. 20,306 --
-------- ---------
409,325 --
-------- ---------
Commitments and contingencies (note 9)...................... 3,700 3,700
Shareholders' equity (note 7)
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 25,603,512 shares at December
31, 1997 and 1998...................................... 256 256
Additional paid-in capital................................ 137,812 137,812
Retained earnings (deficit)............................... 4,035 (199,311)
-------- ---------
Total shareholders' equity........................ 142,103 (61,243)
-------- ---------
$555,128 $ 350,068
======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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<PAGE> 166
COHO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Operating revenues
Crude oil and natural gas production (note 10)............ $54,272 $63,130 $ 68,759
------- ------- ---------
Operating expenses
Crude oil and natural gas production...................... 11,277 13,747 23,475
Taxes on oil and gas production........................... 2,598 2,223 3,384
General and administrative................................ 7,264 7,163 7,750
Allowance for bad debt.................................... -- -- 894
Unsuccessful transaction costs............................ -- -- 2,129
Depletion and depreciation................................ 16,280 19,214 28,135
Writedown of crude oil and natural gas properties......... -- -- 188,000
------- ------- ---------
Total operating expenses.......................... 37,419 42,347 253,767
------- ------- ---------
Operating income (loss)..................................... 16,853 20,783 (185,008)
------- ------- ---------
Other income and expenses................................... 1,012 646 214
Interest and other income................................. (8,476) (11,120) (32,935)
------- ------- ---------
Interest expense.......................................... (7,464) (10,474) (32,721)
------- ------- ---------
Earnings (loss) before income taxes......................... 9,389 10,309 (217,729)
------- ------- ---------
Income taxes (note 5)
Current (benefit) expense................................. (411) 163 4,111
Deferred (reduction) expense.............................. 3,894 3,858 (18,494)
------- ------- ---------
3,483 4,021 (14,383)
------- ------- ---------
Net earnings (loss)......................................... $ 5,906 $ 6,288 $(203,346)
======= ======= =========
Basic earnings (loss) per common share...................... $ .29 $ .29 $ (7.94)
======= ======= =========
Diluted earnings (loss) per common share.................... $ .29 $ .28 $ (7.94)
======= ======= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
37
<PAGE> 167
COHO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NUMBER OF
COMMON ADDITIONAL RETAINED
SHARES COMMON PAID-IN EARNINGS
OUTSTANDING STOCK CAPITAL (DEFICIT) TOTAL
----------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995.......... 20,165,263 $202 $ 82,278 $ (8,159) $ 74,321
Issued on
(i) Exercise of Employee Stock
Options........................ 81,863 -- 414 -- 414
(ii) Acquisition of working
interest....................... 100,000 1 824 -- 825
Net earnings........................ -- -- -- 5,906 5,906
---------- ---- -------- --------- ---------
Balance at December 31, 1996.......... 20,347,126 203 83,516 (2,253) 81,466
Issued on
(i) Exercise of Employee Stock
Options........................ 256,386 3 1,733 -- 1,736
(ii) Public offering of common
stock.......................... 5,000,000 50 49,173 -- 49,223
(iii) Warrants................... -- -- 3,390 -- 3,390
Net earnings........................ -- -- -- 6,288 6,288
---------- ---- -------- --------- ---------
Balance at December 31, 1997.......... 25,603,512 256 137,812 4,035 142,103
Net loss............................ -- -- -- (203,346) (203,346)
---------- ---- -------- --------- ---------
Balance at December 31, 1998.......... 25,603,512 $256 $137,812 $(199,311) $ (61,243)
========== ==== ======== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
38
<PAGE> 168
COHO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss)...................................... $ 5,906 $ 6,288 $(203,346)
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Depletion and depreciation............................... 16,280 19,214 28,135
Writedown of crude oil and natural gas properties........ -- -- 188,000
Deferred income taxes.................................... 3,894 3,858 (18,488)
Amortization of debt issue costs and other............... 271 591 1,756
Changes in:
Cash in escrow........................................... -- -- (1,505)
Accounts receivable...................................... (6,983) 1,160 (1,150)
Other assets............................................. (489) (351) (628)
Accounts payable and accrued liabilities................. 40 4,346 7,917
Investment in marketable securities...................... (1,512) 1,962 --
Deferred income taxes and other current liabilities...... (560) -- --
-------- --------- ---------
Net cash provided by operating activities.................. 16,847 37,068 691
-------- --------- ---------
Cash flows from investing activities
Acquisitions............................................. -- (259,355) --
Property and equipment................................... (52,384) (72,667) (70,143)
Changes in accounts payable and accrued liabilities
related to exploration and development................ (902) 3,559 (2,986)
Proceeds on sale of property and equipment............... 21,476 -- 61,452
-------- --------- ---------
Net cash used in investing activities...................... (31,810) (328,463) (11,677)
-------- --------- ---------
Cash flows from financing activities
Increase in long term debt............................... 52,600 402,894 76,113
Debt issuance costs...................................... -- (4,275) --
Repayment of long term debt.............................. (37,617) (155,989) (62,043)
Proceeds from exercised stock options.................... 414 1,495 --
Issuance of common stock................................. -- 49,223 --
-------- --------- ---------
Net cash provided by financing activities.................. 15,397 293,348 14,070
-------- --------- ---------
Net increase in cash and cash equivalents.................. 434 1,953 3,084
Cash and cash equivalents at beginning of year............. 1,430 1,864 3,817
-------- --------- ---------
Cash and cash equivalents at end of year................... $ 1,864 $ 3,817 $ 6,901
======== ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 8,259 $ 7,774 $ 28,426
Cash paid (received) for income taxes.................... $ 478 $ 603 $ (256)
</TABLE>
See accompanying Notes to Consolidated Financial Statements
39
<PAGE> 169
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Coho Energy, Inc. ("CEI") was incorporated in June 1993 as a Texas
corporation and conducts a majority of its operations through its subsidiary,
Coho Resources, Inc. ("CRI"), and its subsidiaries (collectively the "Company").
Principles of Presentation
These consolidated financial statements have been prepared in conformity
with generally accepted accounting principles as presently established in the
United States and include the accounts of CEI as successor to CRI, and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the prior year
statements to conform with the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Substantially all of the Company's exploration, development and production
activities are conducted in the United States and Tunisia jointly with others
and, accordingly, the financial statements reflect only the Company's
proportionate interest in such activities.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and highly liquid debt instruments purchased with an original maturity of
three months or less.
Cash in Escrow
The cash in escrow will be released to the Company no later than April
1999. The amount released to the Company is subject to reduction pending
completion of the post closing review by the buyer of the Monroe field natural
gas properties, as discussed in Note 6. The Company does not anticipate any
significant reductions from this review.
Accounts Receivable
The Company performs ongoing reviews with respect to accounts receivable
and maintains an allowance for doubtful accounts receivable ($43,000 and
$929,000 at December 31, 1997 and 1998, respectively) based on expected
collectibility.
Crude Oil and Natural Gas Properties
The Company's crude oil and natural gas producing activities, substantially
all of which are in the United States, are accounted for using the full cost
method of accounting. Accordingly, the Company capitalizes all costs incurred in
connection with the acquisition of crude oil and natural gas properties and with
the exploration for and development of crude oil and natural gas reserves,
including related gathering facilities. All internal corporate costs relating to
crude oil and natural gas producing activities are expensed as incurred.
Proceeds from disposition of crude oil and natural gas properties are accounted
for as a reduction in capitalized
40
<PAGE> 170
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs, with no gain or loss recognized unless such dispositions involve a
significant alteration in the depletion rate in which case the gain or loss is
recognized.
Depletion of crude oil and natural gas properties is provided using the
equivalent unit-of-production method based upon estimates of proved crude oil
and natural gas reserves and production which are converted to a common unit of
measure based upon their relative energy content. Unproved crude oil and natural
gas properties are not amortized but are individually assessed for impairment.
The costs of any impaired properties are transferred to the balance of crude oil
and natural gas properties being depleted. Estimated future site restoration and
abandonment costs are charged to earnings at the rate of depletion of proved
crude oil and natural gas reserves and are included in accumulated depletion and
depreciation.
In accordance with the full cost method of accounting, the net capitalized
costs of crude oil and natural gas properties as well as estimated future
development, site restoration and abandonment costs are not to exceed their
related estimated future net revenues discounted at 10%, net of tax
considerations, plus the lower of cost or estimated fair value of unproved
properties.
Impairment of Long-Lived Assets
During fiscal year 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived-Assets To Be Disposed Of." The Company has
no long-lived assets which are subject to the impairment test requirements of
SFAS No. 121. The Company's only long-lived assets are oil and gas properties
which are subject to the full cost ceiling test in accordance with the full cost
method of accounting, as discussed above.
Other Assets
Other assets generally include deferred financing charges which are
amortized over the term of the related financing under the straight line method.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for stock-based compensation.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Earnings Per Common Share
The Company accounts for earnings per share ("EPS") in accordance with SFAS
No. 128 "Earnings Per Share." Under SFAS No. 128, no dilution for any
potentially dilutive securities is included for basic EPS. Diluted EPS are based
upon the weighted average number of common shares outstanding including common
41
<PAGE> 171
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares plus, when their effect is dilutive, common stock equivalents consisting
of stock options and warrants. Previously reported EPS were equivalent to the
diluted EPS calculated under SFAS No. 128.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------- ------------------------------- -------------------------------
COMMON COMMON COMMON
INCOME SHARES EPS INCOME SHARES EPS LOSS SHARES EPS
----------- ---------- ---- ----------- ---------- ---- --------- ---------- ------
(IN 000'S) (IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE.... $5,906 20,178,917 $.29 $6,288 21,692,804 $.29 $(203,346) 25,603,512 $(7.94)
==== ==== ======
Stock Options............... 162,651 641,099 --
------ ---------- ------ ---------- --------- ----------
DILUTED EARNINGS PER
SHARE..................... $5,906 20,341,568 $.29 $6,288 22,333,903 $.28 $(203,346) 25,603,512 $(7.94)
====== ========== ==== ====== ========== ==== ========= ========== ======
</TABLE>
Basic EPS were computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. Diluted EPS were
calculated based upon the weighted number of common shares outstanding during
the year including common stock equivalents, consisting of stock options for the
three years and warrants for 1997 and 1998, when their effect is dilutive. In
1998, conversion of the stock options would have been anti-dilutive and,
therefore, was not considered in diluted EPS. In 1997 and 1998, conversion of
the warrants would have been anti-dilutive and, therefore, was not considered in
diluted EPS.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Hedging Activities
Periodically, the Company enters into futures contracts which are traded on
the stock exchanges in order to fix the price on a portion of its crude oil and
natural gas production. Changes in the market value of crude oil and natural gas
futures contracts are reported as an adjustment to revenues in the period in
which the hedged production or inventory is sold. The gain or loss on the
Company's hedging transactions is determined as the difference between the
contract price and a reference price, generally closing prices on the New York
Mercantile Exchange.
Revenue Recognition Policy
Revenues generally are recorded when products have been delivered and
services have been performed.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures which improve the condition of a
property as compared to the condition when originally constructed or acquired or
prevent environmental contamination are capitalized. Expenditures which relate
to an existing condition caused by past operations, and do not contribute to
future operations, are expensed. The Company accrues remediation costs when
environmental assessments and/or remedial efforts are probable and the cost can
be reasonably estimated.
42
<PAGE> 172
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Business Segments
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information", which
requires information to be reported in segments. The Company currently operates
in a single reportable segment; therefore, no additional disclosure will be
required.
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, 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.
Although unaudited information subsequent to December 31, 1998 indicates that
the Company should generate operating income during 1999, assuming the Company
does not experience further price or production deterioration, the level of such
operating income will not be sufficient to cover interest accruing on its
indebtedness or to meet other accrued liabilities as they become due.
Additionally, as discussed in Note 4, the Company received a notice of
default in March 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. As a result of this bank default, the Company may be
in default under the terms of its 8 7/8% Senior Subordinated Notes ("Senior
Notes") due to cross default provisions in the indenture related to the Senior
Notes. Although the lenders under the existing bank credit facility have not
accelerated the full amount outstanding of $235 million as of December 31, 1998
and although the Company may not be in default under the Senior Notes indenture,
all amounts outstanding under these facilities as of December 31, 1998 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.
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 upcoming interest payments due on the bank credit facility
on April 6, 1999 and on the Senior Notes due on April 15, 1999 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 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 $324.6
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.
43
<PAGE> 173
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Crude oil and natural gas leases and rights including
exploration, development and equipment thereon, at cost... $ 669,247 $ 678,547
Accumulated depletion and depreciation...................... (137,838) (353,973)
--------- ---------
$ 531,409 $ 324,574
========= =========
</TABLE>
Overhead expenditures directly associated with exploration for and
development of crude oil and natural gas reserves have been capitalized in
accordance with the accounting policies of the Company. Such charges totaled
$2,452,000, $4,081,000 and $5,749,000 in 1996, 1997 and 1998, respectively.
During 1996, 1997 and 1998, 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 totaling $82,872,000 and
$58,854,000 at December 31, 1997 and 1998, respectively, have been excluded from
costs subject to depletion. These costs are anticipated to be included in costs
subject to depletion within the next five years.
Depletion and depreciation expense per equivalent barrel of production was
$4.55, $4.69 and $4.38 in 1996, 1997 and 1998, respectively.
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Revolving credit facility................................... $221,000 $ 235,000
8 7/8% Senior Subordinated Notes Due 2007................... 150,000 150,000
Other....................................................... 68 24
-------- ---------
371,068 385,024
Unamortized original issue discount on senior subordinated
notes..................................................... (1,106) (993)
Current maturities on long term debt........................ (38) (384,031)
-------- ---------
$369,924 $ --
======== =========
</TABLE>
Revolving Credit Facility
In August 1992, the Company established a revolving credit and term loan
facility with a group of international and domestic financial institutions. The
agreement, as amended and restated ("the Restated Credit Agreement"), provided a
maximum commitment amount available to the Company ("Borrowing Base") of $242
million for general corporate purposes at December 31, 1998. Outstanding
advances as of December 31, 1998, were $235 million, and increased to $239.6
million as of January 5, 1999. The average effective interest rates for 1997 and
1998 were 7.37% and 7.38%, respectively. The Restated Credit Agreement, which
permits advances and repayments, terminates January 2, 2003. The repayment of
all advances is guaranteed by Coho Energy, Inc. and outstanding advances are
secured by substantially all of the assets of the Company.
Loans under the Restated Credit Agreement up to $220 million bear interest,
at the option of the Company, at the bank prime rate or a Eurodollar rate plus a
maximum of 1.5% (currently 1.5%), with amounts outstanding in excess of $220
million bearing interest, at the option of the Company at (i) the prime rate
plus 1.0% or (ii) LIBOR plus 2.50%. Loans under the Restated Credit Agreement
are secured by a lien on substantially all of the Company's crude oil and
natural gas properties and the capital stock of the
44
<PAGE> 174
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's wholly owned subsidiaries. If the outstanding amount of the loan
exceeds the Borrowing Base at any time, the Company is required to either (a)
provide collateral with value equal to such excess, (b) prepay, without premium
or penalty, such excess plus accrued interest or (c) prepay the principal amount
of the notes equal to such excess in five (5) equal monthly installments
provided the entire excess shall be paid prior to the immediately succeeding
redetermination date. The fee on the portion of the unused credit facility is
.375% per annum. The commitment fee applicable to increases from time to time in
the Borrowing Base is .375% of the incremental Borrowing Base amount.
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 under the new Borrowing Base
of $89.6 million. The Company was unable to cure the over advance as required by
the Revolving Credit Facility by March 2, 1999. On March 8, 1999, the Company
received written notice 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, as a result of the payment default, the past due balance
under the Revolving Credit Facility 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
$235 million as of December 31, 1998 have been reclassed to current maturities
because the Company is currently unable to cure the default within the required
terms. The Company is currently in discussions with the lenders under the
Revolving Credit Facility to work with the Company in restructuring 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 shareholder's 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 and CRI's ability to incur additional debt, and
(iv) restrictions on the payment of dividends. At December 31, 1998, the Company
was not in compliance with the cash flow to interest expense and current assets
to current liabilities covenants.
8 7/8% Senior Subordinated Notes
On October 3, 1997, the Company completed a sale to the public of $150
million of 8 7/8% Senior Subordinated Notes due 2007 ("Senior Notes"). Proceeds
of the offering, net of offering costs, were approximately $144.5 million. The
proceeds from this offering, together with the proceeds from the common stock
offering discussed in Note 7, were used to repay indebtedness outstanding under
the Revolving Credit Facility and for general corporate purposes.
The Senior Notes are unsecured senior subordinated obligations of the
Company and rank pari passu in right of payment with all existing and future
senior subordinated indebtedness of the Company. The Senior Notes mature on
October 15, 2007 and bear interest from October 3, 1997 at the rate of 8 7/8%
per annum payable semi-annually, commencing on April 15, 1998. Certain
subsidiaries of the Company issued guarantees of the Senior Notes on a senior
subordinated basis.
The indenture issued in conjunction with the Senior Notes (the "Indenture")
contains certain covenants, including, among other covenants, covenants that
limit (i) indebtedness, (ii) restricted payments, (iii) distributions from
restricted subsidiaries, (iv) transactions with affiliates, (v) sales of assets
and subsidiary stock (including sale and leaseback transactions), (vi) dividends
and other payment restrictions affecting restricted subsidiaries and (vii)
mergers or consolidations.
As a result of the payment default under the Revolving Credit Facility
discussed above, the Company may be in default under the terms of the Senior
Notes specified in the Indenture. If the Company is in default of the Senior
Notes as a result of the payment default under the Revolving Credit Facility,
the Company is
45
<PAGE> 175
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required to deliver a written notice to the Trustee of the Senior Notes within
30 days after the occurrence of the event of default in the form of an officers'
certificate indicating an event of default has occurred and is continuing and
what action the Company is taking or proposing to take with respect to the event
of default. 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 December 31, 1998 have been classified as current
maturities because the Company is currently unable to cure the existing or
pending default within the required terms of the Indenture.
Debt Repayments
Based on the balances outstanding and current default under the Revolving
Credit Facility and the Senior Notes indenture, estimated aggregate principal
repayments for each of the next five years are as follows: 1999 -- $385,016,000;
2000 -- $8,000 and $0 thereafter.
5. INCOME TAXES
Deferred income taxes are recorded based upon differences between financial
statement and income tax basis of assets and liabilities. The tax effects of
these differences which give rise to deferred income tax assets and liabilities
at December 31, 1997 and 1998, were as follows:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforwards.......................... $25,176 $ 25,283
Property and equipment, due to differences in depletion,
depreciation, amortization and writedowns.............. -- 35,442
Alternative minimum tax credit carryforwards.............. 1,095 1,467
Employee benefits......................................... 565 58
Other..................................................... 165 182
------- --------
Total gross deferred tax assets........................ 27,001 62,432
Less valuation allowance............................... (4,594) (62,432)
------- --------
Net deferred tax assets................................ 22,407 --
------- --------
DEFERRED TAX LIABILITIES
Property and equipment, due to differences in depletion,
depreciation, amortization and writedowns.............. 40,895 --
------- --------
NET DEFERRED TAX LIABILITY.................................. $18,488 $ --
======= ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997 and
1998 includes $2,051,000 related to Canadian deferred tax assets.
To determine the amount of net deferred tax liability it is assumed no
future capital expenditures will be incurred other than the estimated
expenditures to develop the Company's proved undeveloped reserves.
46
<PAGE> 176
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the differences between recorded income tax
expense and the expected income tax expense obtained by applying the basic tax
rate to earnings (loss) before income taxes:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- ---------
<S> <C> <C> <C>
Earnings (loss) before income taxes.................... $9,389 $10,309 $(217,729)
====== ======= =========
Expected income tax expense (recovery) (statutory
rate -- 34%)......................................... $3,192 $ 3,505 $ (74,028)
State taxes -- deferred................................ (353) 552 (6,242)
Federal benefit of state taxes......................... 120 (188) 2,122
Expiring NOLs.......................................... -- -- 1,043
Change in valuation allowance.......................... 471 444 57,838
Other.................................................. 53 (293) 4,884
------ ------- ---------
$3,483 $ 4,020 $ (14,383)
====== ======= =========
</TABLE>
At December 31, 1998, the Company had the following income tax
carryforwards available to reduce future years' income for tax purposes:
<TABLE>
<CAPTION>
EXPIRES AMOUNT
--------- -------
<S> <C> <C>
Net operating loss carryforwards for federal income tax
purposes.................................................. 1999 $ 1,727
2000 4,253
2001 3,015
2002 211
2003-2018 52,090
$61,296
Operating loss carryforwards for Canadian income tax
purposes.................................................. 1999-2003 $ 3,573
=======
Operating loss carryforwards for federal alternative minimum
tax purposes.............................................. 2009-2010 $10,265
=======
Federal alternative minimum tax credit carryforwards........ -- $ 1,467
=======
Operating loss carryforwards for Mississippi income tax
purposes.................................................. 2010-2013 $50,938
=======
Operating loss carryforwards for Oklahoma income tax
purposes.................................................. 2012-2013 $16,652
=======
</TABLE>
6. ACQUISITIONS AND DISPOSITIONS
Effective December 31, 1997, the Company acquired from Amoco Production
Company ("Amoco") interests in certain crude oil and natural gas properties
("Oklahoma Properties") located primarily in southern Oklahoma for cash
consideration of approximately $257.5 million and warrants to purchase one
million shares of common stock at $10.425 per share for a period of five years
valued at $3.4 million. The Oklahoma Properties are in more than 25,000 gross
acres concentrated in southern Oklahoma, including 14 major producing oil
fields. The aggregate purchase price was $267.8 million, including transaction
costs of approximately $1.9 million and assumed liabilities of $5 million.
Investing activities in the cash flow statement for the year ended December 31,
1997 related to this acquisition, exclude the noncash portions of the purchase
price of $3.4 million attributable to the warrants and $5 million for assumed
liabilities.
The following unaudited proforma information of the Company for the year
ended December 31, 1997 has been prepared assuming the acquisition of the
Oklahoma Properties occurred on January 1, 1997. Such
47
<PAGE> 177
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proforma information is not necessarily indicative of what actually could have
occurred had the acquisition taken place on January 1, 1997.
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Revenues.................................................. $109,428
Net earnings.............................................. 6,422
Basic earnings per share.................................. $ 0.30
Diluted earnings per share................................ $ 0.29
</TABLE>
On December 2, 1998, the Company sold its natural gas assets, including its
natural gas properties and the related gas gathering systems, located in Monroe,
Louisiana to an unaffiliated third party for net proceeds of approximately $61.5
million. The proved reserves attributable to such natural gas properties were
approximately 94 billion cubic feet of natural gas and represented approximately
14% of the Company's year end 1997 proved reserves.
7. SHAREHOLDERS' EQUITY
On October 3, 1997, the Company completed the sale to the public of
5,000,000 shares of common stock at $10.50 per share. Proceeds of the offering,
net of offering costs, were approximately $49.2 million. The proceeds from this
offering, together with the proceeds from the Senior Notes offering discussed in
Note 4, were used to repay indebtedness outstanding under the Company's
Revolving Credit Facility and for general corporate purposes.
In December 1997, the Company issued warrants, valued at $3,390,000, to
purchase one million shares of common stock at $10.425 per share for a period of
five years to Amoco Production Company as partial consideration for the purchase
of certain crude oil and natural gas properties discussed in Note 6.
In December 1996, the Company issued 100,000 shares of common stock, valued
at approximately $825,000, to Churchill Resource Investments Inc. as
consideration for the purchase of interest in certain crude oil properties.
8. STOCK-BASED COMPENSATION
Options to purchase the Company's common stock have been granted to
officers, directors and key employees pursuant to the Company's 1993 Stock
Option Plan and 1993 Non Employee Director Stock Option Plan, or assumed from
the Company's subsidiaries in the 1993 Reorganization. The stock option plans
provide for the issuance of five year options with a three-year vesting period
and a grant price equal to or above market value. Some exceptions have been made
to provide immediate or shortened vesting periods as
48
<PAGE> 178
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approved by the Company's board of directors. A summary of the status of the
Company's stock option plans at December 31, 1996, 1997 and 1998 and changes
during the years then ended follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- ---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1.......... 1,700,313 $5.56 1,815,784 $5.55 2,823,815 $6.96
Granted............ 202,000 5.19 1,286,000 8.73 14,000 6.88
Exercised.......... (81,863) 5.05 (256,386) 5.82 -- --
Canceled........... (4,666) 5.43 (21,583) 6.50 (75,000) 8.90
Expired............ -- -- -- -- (131,555) 5.40
--------- ----- --------- ----- --------- -----
Outstanding at
December 31........ 1,815,784 5.55 2,823,815 6.96 2,631,260 6.98
--------- ----- --------- ----- --------- -----
Exercisable at
December 31........ 1,390,118 5.69 2,250,903 6.31 2,310,438 6.60
Available for grant
at December 31..... 118,836 36,419 189,919
</TABLE>
Significant option groups outstanding at December 31, 1998 and related
weighted average price and life information follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS OPTIONS EXERCISE REMAINING
GRANT DATE OUTSTANDING EXERCISABLE PRICE LIFE (YEARS)
- ---------- ----------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
May 12, 1998....................... 14,000 -- 6.88 4
December 2, 1997................... 371,000 123,679 10.50 6
August 22, 1997.................... 16,000 5,334 9.38 6
May 12, 1997....................... 8,000 8,000 8.13 4
March 3, 1997...................... 809,000 773,500 7.88 3
June 13, 1996...................... 12,000 12,000 6.63 3
February 22, 1996.................. 150,000 150,000 5.13 4
January 8, 1996.................... 40,000 26,666 5.00 4
September 25, 1995................. 50,000 50,000 5.00 3
September 12 ,1995................. 29,666 29,666 5.00 4
August 3, 1995..................... 24,000 24,000 4.88 3
April 14, 1995..................... 32,500 32,500 5.00 3
December 4, 1994................... 105,000 105,000 5.01 4
November 10, 1994.................. 240,000 240,000 5.00 3
June 7, 1994....................... 79,883 79,883 5.49 2
March 28, 1994..................... 5,000 5,000 4.50 1
October 22, 1993................... 378,089 378,089 6.00 2
September 29, 1993................. 93,378 93,378 6.88 1
November 18, 1992.................. 3,333 3,333 5.25 1
October 19, 1992................... 170,410 170,410 5.67 1
</TABLE>
49
<PAGE> 179
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value of grant at date for options granted during
1996, 1997 and 1998 was $2.21, $4.02 and $3.12 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Expected life (years)............................... 5 5 5
Interest rate....................................... 5.37% 6.44% 5.67%
Volatility.......................................... 38.79% 43.76% 42.01%
Dividend yield...................................... -- -- --
</TABLE>
Had compensation cost for these plans been determined consistent with SFAS
No. 123 "Accounting for Stock-Based Compensation", the Company's pro forma net
income and earnings per share from continuing operations would have been as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ---------
<S> <C> <C> <C>
Net income (loss)
As reported........................................... $5,906 $6,288 $(203,346)
Pro forma............................................. 5,625 4,385 (204,108)
Basic earnings (loss) per share
As reported........................................... 0.29 0.29 (7.94)
Pro forma............................................. 0.27 0.20 (7.97)
Diluted earnings (loss) per share
As reported........................................... 0.29 0.28 (7.94)
Pro forma............................................. 0.27 0.20 (7.97)
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
(a) The Company, together with several other companies, has been named as a
defendant in a number of lawsuits in which the plaintiffs claim purported
damages caused by naturally occurring radioactive materials at various wellsite
locations on land leased by the Company in Mississippi. All of the suits are
principally identical and seek damages for land damage, health hazard, mental
and emotional distress, etc. None of the suits seek specific award amounts, but
all seek punitive damages.
In 1998, a suit was filed against the Company by the acquirer of the
Company's natural gas pipeline properties which were sold in 1996. This suit
alleges that the Company gave false and fraudulent information with regard to
the properties sold as well as alleging that the Company has interfered in
contracts and business relations subsequent to the sale. The plaintiff is
requesting payment for actual, punitive and other damages. The Company believes
these charges are without merit.
In connection with the acquisition of the Oklahoma Properties on December
18, 1997, the Company assumed the responsibility for costs and expenses
associated with the assessment, remediation, removal, transportation and
disposal of the asbestos or NORM associated with the Oklahoma Properties.
Additionally, the Company is responsible for all other environmental claims up
to approximately $10.3 million and all environmental claims not identified and
presented to Amoco by December 18, 1998. The Company is not currently aware of
any such claims and has concluded due diligence on environmental matters
associated with the acquisition.
While the Company is not able to determine its exposure in the remaining
suits at this time, the Company believes that the claims will have no material
adverse effect on its financial position or results of operations.
50
<PAGE> 180
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is involved in various other legal actions arising in the
ordinary course of business. While it is not feasible to predict the ultimate
outcome of these actions or those listed above, management believes that the
resolution of these matters will not have a material adverse effect, either
individually or in the aggregate, on the Company's financial position or results
of operations. The Company has accrued $4.4 million, including $686,000 which
has been reflected in current accrued liabilities, for future remediation costs.
(b) The Company has leased (i) 38,568 square feet of office space in
Dallas, Texas under a non-cancellable lease extending through October 2000, (ii)
5,000 square feet of office space in Laurel, Mississippi under a non-cancellable
lease extending through June 2000, (iii) various vehicles under non-cancellable
leases extending through February 2000, and (iv) surface leases in Laurel,
Mississippi with expiration dates extending through the year 2018. Rental
expense totaled $1,081,000, $1,196,000 and $1,668,000 in 1996, 1997 and 1998,
respectively. Minimum rentals payable under these leases for each of the next
five years are as follows: 1999 -- $1,243,000; 2000 -- $945,000;
2001 -- $162,000; 2002 -- $158,000 and 2003 -- $139,000. Total rentals payable
over the remaining terms of the leases are $4,711,000.
(c) Like other crude oil and natural gas producers, the Company's
operations are subject to extensive and rapidly changing federal, state and
local environmental regulations governing emissions into the atmosphere, waste
water discharges, solid and hazardous waste management activities, noise levels
and site restoration and abandonment activities. The Company's policy is to make
a provision for future site restoration charges on a unit-of-production basis.
Total future site restoration costs are estimated to be $6,000,000, including
the Oklahoma Properties. A total of $1,384,000 has been included in depletion
and depreciation expense with respect to such costs as of December 31, 1998.
(d) The Company has entered into employment agreements with certain of its
officers. In addition to base salary and participation in employee benefit plans
offered by the Company, these employment agreements generally provide for a
severance payment in an amount equal to two times the rate of total annual
compensation of the officer in the event the officer's employment is terminated
for other than cause. If the officer's employment is terminated for other than
cause following a change in control in the Company, the officer generally is
entitled to a severance payment in the amount of 2.99 times the rate of total
annual compensation of the officer.
The officers' aggregate base salary and bonus portion of total annual
compensation covered under such employment agreements is approximately $1.4
million.
(e) The Company has entered into executive severance agreements with its
other officers which are designed to encourage executive officers to continue to
carry out their duties with the Company in the event of a change in control of
the Company. In the event of the officer's employment is terminated for other
than cause following a change of control, these severance agreements generally
provide for a severance payment in an amount equal to 1.5 times the highest
salary plus bonus paid to such officer in any of the five years preceding the
year of termination.
The highest salary plus bonus paid to the officers covered under such
severance agreements during the preceding five year period would aggregate
approximately $1.2 million.
(f) In conjunction with the acquisition of the Oklahoma Properties, the
acquisition of ING and the 1993 reorganization, the Company has granted certain
persons the right to require the Company, at its expense, to register their
shares under the Securities Act of 1933. These registration rights may be
exercised on up to 4 occasions. The number of shares of Common Stock subject to
registration rights as of December 31, 1998, is approximately 3,324,000.
(g) The Company is in the process of finalizing the location for an
exploratory well on its Anaguid permit in Tunisia, North Africa. A well must be
drilled 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
51
<PAGE> 181
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for its investment in the Anaguid permit is approximately $5.7 million as of
December 31, 1998. If the Company is unable 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.
10. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
Financial instruments which are potentially subject to concentrations of
credit risk consist principally of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are placed with high credit quality
financial institutions to minimize risk. The carrying amounts of these
instruments approximate fair value because of their short maturities. The
Company has entered into certain financial arrangements which act as a hedge
against price fluctuations in future crude oil and natural gas production.
Included in operating revenues are gains (losses) of $(5,908,000), $(232,000)
and $488,000 for 1996, 1997 and 1998, respectively, resulting from these hedging
programs. At December 31, 1997 and 1998, the Company had no deferred hedging
gains or losses. As of December 31, 1998, the Company had no crude oil or
natural gas hedged.
Fair values of the Company's financial instruments are estimated through a
combination of management's estimates and by reference to quoted prices from
market sources and financial institutions, if available. As of December 31,
1998, the fair market value of the Company's Senior Notes was $57 million
compared to the related carrying value of $149 million. The fair value of the
Senior Notes approximated the related carrying value at December 31, 1997. The
carrying value of the Revolving Credit Facility approximated fair market value
at December 31, 1997 and 1998 since the applicable interest rate approximated
the market rate.
During the years ended December 31, 1996 and 1997, EOTT Energy Corp.
("EOTT") accounted for 66% and 75%, respectively, of Coho's receipt of operating
revenues, and Mid Louisiana Marketing Company ("Midla Marketing"), accounted for
15% and 21%, respectively, of Coho's receipt of operating revenues. During the
year ended December 31, 1998, EOTT, Midla Marketing and Amoco Production Company
accounted for 42%, 14% and 28%, respectively, of Coho's receipt of operating
revenues. Included in accounts receivable is $7,222,491, $2,969,000 and
$1,965,000 due from these customers at December 31, 1996, 1997 and 1998,
respectively.
11. RELATED PARTY TRANSACTIONS
(a) Corporations controlled by certain directors and shareholders of the
Company have participated with the Company in certain crude oil and natural gas
joint ventures on the same terms and conditions as other industry partners.
These transactions are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Campco International Capital Ltd.(i)
Net crude oil and natural gas revenues.................... $243 $255
Capital expenditures...................................... 101 173
Payable to (receivable from) CRI at the balance sheet
date................................................... (22) 16
</TABLE>
- ---------------
(i) Campco International Capital Ltd. is a private company controlled by
Frederick K. Campbell, a former director of the Company. Mr. Campbell
resigned as a director in 1998.
(b) In 1990, the Company made a non-interest bearing loan in the amount of
$205,000 to Jeffrey Clarke, President, Chief Executive Officer and Director of
the Company, to assist him in the purchase of a house in Dallas. The loan is
unsecured, is repayable on the date Mr. Clarke ceases employment with the
Company and is included in other assets at December 31, 1998.
52
<PAGE> 182
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Pursuant to the equity offering, the Company's officers and directors
were precluded from selling stock for a 90-day period beginning October 3, 1997
(the "Lock Up Period"). On October 6, 1997, the Company made sole recourse,
non-interest bearing loans of $622,111, payable on demand, secured by the
related Company's common stock to certain officers and a director. The loans
were made to provide assistance in acquiring stock upon exercise of expiring
stock options during the Lock Up Period. During 1998, the Company has provided
an allowance for bad debt for the entire amount of such loans due to the
decrease in the share price of the collateral Company's common stock.
(d) During 1996 and 1997, certain of the Company's hedging agreements were
with an affiliate of the Company, Morgan Stanley Capital Group, which owned over
10% of the Company's outstanding common stock until October 3, 1997, when its
ownership dropped to 5.3% as a result of the equity offering discussed in Note
6. Management of the Company believes that such transactions are on similar
terms as could be obtained from unrelated third parties.
12. CANADIAN ACCOUNTING PRINCIPLES
These financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") as presently established in the United
States. These principles differ in certain respects from those applicable in
Canada. These differences would have affected net earnings (loss) as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1996 1997 1998
------ ------ ---------
<S> <C> <C> <C>
Net earnings (loss) based on US GAAP.................... $5,096 $6,288 $(203,346)
Canadian writedown of oil and natural gas
properties(ii)........................................ -- -- (109,000)
Adjustment to depletion based on difference in carrying
value of oil and gas properties related to:
ING acquisition(i).................................... 556 562 483
Business combination with Odyssey Exploration, Inc. in
1990............................................... (178) (168) (135)
Application of Canadian full cost ceiling test........ (482) (455) (364)
Deferred tax effect of differences in US and Canadian
GAAP.................................................. 35 21 (4,790)
------ ------ ---------
Net earnings (loss) based on Canadian GAAP.............. $5,027 $6,248 $(317,152)
====== ====== =========
Net earnings (loss) per common share based on Canadian
GAAP.................................................. $ 0.25 $ 0.29 $ (12.39)
====== ====== =========
</TABLE>
- ---------------
(i) Under SFAS No. 109 in the United States, the Company was required to
increase deferred income taxes and property and equipment by $8,355,000
for the deferred tax effect of the excess of the Company's tax basis of
the stock acquired in the ING acquisition over the tax basis of the net
assets of ING acquired. Under Canadian GAAP this adjustment is not
required.
(ii) Canadian GAAP requires a ceiling test to ensure that capitalized costs
relating to oil and gas properties are recoverable in the future. The net
book value of capitalized costs, less related deferred income taxes, is
compared to the future net revenue plus the cost of major development
projects and unproved properties, less future expenditures, which include
removal and site restoration costs, income taxes, general and
administrative costs and interest expense. General and administrative
costs were calculated on a per barrel basis and calculated over the life
of the reserves. Interest expense was calculated through the year 2013
based on the Company's current debt at December 31, 1998, assuming all
future positive cash flow from future net revenue, net of general and
administrative costs, income taxes and interest expense, was used for
retirement of existing debt.
53
<PAGE> 183
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect on the consolidated balance sheets of the differences between
United States and Canadian GAAP is as follows:
<TABLE>
<CAPTION>
UNDER
AS INCREASE CANADIAN
REPORTED (DECREASE) GAAP
-------- ---------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1998
Property and Equipment........................... $324,574 $(106,885) $ 217,689
Shareholder's Equity............................. (61,243) $(106,885) (168,128)
DECEMBER 31, 1997
Property and Equipment........................... $531,409 $ 2,131 $ 533,540
Deferred Income Taxes............................ 20,306 (4,790) 15,516
Long Term Debt................................... 369,924 (1,106) 368,818
Deferred Charges................................. -- 1,106 1,106
Shareholder's Equity............................. 142,103 6,921 149,024
</TABLE>
13. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
1998
Operating revenues................... $ 21,143 $ 18,147 $16,539 $ 12,930 $ 68,759
Operating income..................... (28,206) (38,306) 1,344 (119,840) (185,008)
Net earnings (loss).................. (22,301) (41,611) (7,168) (132,266) (203,346)
Basic earnings (loss) per share...... $ (0.87) $ (1.63) $ (0.28) $ (5.16) $ (7.94)
Diluted earnings (loss) per share.... $ (0.87) $ (1.63) $ (0.28) $ (5.16) $ (7.94)
1997
Operating revenues................... $ 15,536 $ 13,985 $15,985 $ 17,624 $ 63,130
Operating income..................... 5,604 4,151 4,990 6,038 20,783
Net earnings......................... 2,104 1,081 1,401 1,702 6,288
Basic earnings per share............. $ 0.10 $ 0.05 $ 0.07 $ 0.07 $ 0.29
Diluted earnings per share........... $ 0.10 $ 0.05 $ 0.07 $ 0.06 $ 0.28
1996
Operating revenues................... $ 12,367 $ 12,938 $13,552 $ 15,415 $ 54,272
Operating income..................... 3,576 3,738 4,182 5,357 16,853
Net earnings......................... 1,035 1,103 1,326 2,442 5,906
Basic earnings per share............. $ 0.05 $ 0.06 $ 0.06 $ 0.12 $ 0.29
Diluted earnings per share........... $ 0.05 $ 0.06 $ 0.06 $ 0.12 $ 0.29
</TABLE>
Basic per share figures are computed based on the weighted average number
of shares outstanding for each period shown. Diluted per share figures are
computed based on the weighted average number of shares outstanding including
common stock equivalents, consisting of stock options and warrants, when their
effect is dilutive.
54
<PAGE> 184
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS ACTIVITIES
(a) Costs Incurred
Costs incurred for property acquisition, exploration and development
activities were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Property acquisitions
Proved............................................. $ 1,139 $199,485 $ 8,432
Unproved........................................... 986 73,281 4,646
Exploration.......................................... 6,528 13,374 5,061
Development.......................................... 41,091 53,542 51,049
Other................................................ 894 729 955
-------- -------- --------
Property and equipment, net of accumulated
depletion.......................................... $ 50,638 $340,411 $ 70,143
======== ======== ========
$210,212 $531,409 $324,574
======== ======== ========
</TABLE>
(b) Quantities of Oil and Gas Reserves (Unaudited)
The following table presents estimates of the Company's proved reserves,
all of which have been prepared by the Company's engineers and evaluated by
independent petroleum consultants. Substantially all of the Company's crude oil
and natural gas activities are conducted in the United States.
<TABLE>
<CAPTION>
RESERVE QUANTITIES
-------------------
OIL GAS
(MBBLS) (MMCF)
-------- --------
<S> <C> <C>
Estimated reserves at December 31, 1995..................... 30,798 107,872
Revisions of previous estimates............................. (1,913) 10,335
Purchase of reserves in place............................... 218 --
Extensions and discoveries.................................. 8,186 1,571
Production.................................................. (2,467) (6,646)
------- -------
Estimated reserves at December 31, 1996..................... 34,822 113,132
Revisions of previous estimates............................. 1,601 8,556
Purchase of reserves in place............................... 49,723 32,581
Extensions and discoveries.................................. 11,758 902
Production.................................................. (2,820) (7,666)
------- -------
Estimated reserves at December 31, 1997..................... 95,084 147,505
Revisions of previous estimates............................. (7,645) 4,459
Purchase of reserves in place............................... 6,842 480
Sales of reserves in place.................................. -- (94,106)
Extensions and discoveries.................................. 10,792 16,114
Production.................................................. (5,069) (8,124)
------- -------
Estimated reserves at December 31, 1998..................... 100,004 66,328
Proved developed reserves at December 31,
1996...................................................... 24,089 98,936
1997...................................................... 62,663 129,392
1998...................................................... 66,869 48,176
</TABLE>
55
<PAGE> 185
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Costs Incurred
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Reserves.
The following standardized measure of discounted future net cash flows was
computed in accordance with the rules and regulations of the Securities and
Exchange Commission and SFAS No. 69 using year end prices and costs, and year
end statutory tax rates. Royalty deductions were based on laws, regulations and
contracts existing at the end of each period. No values are given to unproved
properties or to probable reserves that may be recovered from proved properties.
The inexactness associated with estimating reserve quantities, future
production and revenue streams and future development and production
expenditures, together with the assumptions applied in valuing future
production, substantially diminishes the reliability of this data. The values so
derived are not considered to be an estimate of fair market value. The Company
therefore cautions against its simplistic use.
The following tabulation reflects the Company's estimated discounted future
cash flows from crude oil and natural gas production:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows.............................. $1,174,356 $1,764,924 $1,081,003
Future production costs.......................... (301,619) (607,114) (419,820)
Future development costs......................... (52,769) (114,294) (112,165)
---------- ---------- ----------
Future net cash flows before income taxes........ 819,968 1,043,516 549,018
Annual discount at 10%........................... (402,885) (517,239) (279,720)
---------- ---------- ----------
Present value of future net cash flows before
income taxes ("Present Value of Proved
Reserves")..................................... 417,083 526,277 269,298
Future income taxes discounted at 10%............ (79,864) (58,084) --
---------- ---------- ----------
Standardized measure of discounted future net
cash flows..................................... $ 337,219 $ 468,193 $ 269,298
========== ========== ==========
West Texas Intermediate posted reference price ($
per Bbl)....................................... $ 25.25 $ 16.17 $ 9.50
Estimated December 31 Company average realized
price
$/Bbl.......................................... $ 22.02 $ 15.06 $ 9.36
$/Mcf.......................................... $ 3.53 $ 2.26 $ 2.10
</TABLE>
56
<PAGE> 186
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are the significant sources of changes in discounted future
net cash flows relating to proved reserves:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Crude oil and natural gas sales, net of production
costs............................................ $(46,305) $ (47,392) $ (41,412)
Net changes in anticipated prices and production
costs............................................ 128,960 (176,309) (184,445)
Extensions and discoveries, less related costs..... 74,560 73,565 39,510
Changes in estimated future development costs...... (2,580) (6,393) (905)
Development costs incurred during the period....... 6,321 10,817 22,040
Net change due to sales and purchase of reserves in
place............................................ 1,108 224,579 (53,534)
Accretion of discount.............................. 26,862 41,708 52,628
Revision of previous quantity estimates............ (1,643) 11,737 (20,178)
Net changes in income taxes........................ (36,185) 21,780 58,084
Changes in timing of production and other.......... (38,818) (23,118) (70,683)
-------- --------- ---------
Net increase (decrease)............................ 112,280 130,974 (198,895)
Beginning of year.................................. 224,939 337,219 468,193
-------- --------- ---------
Standardized measure of discounted future net cash
flows............................................ $337,219 $ 468,193 $ 269,298
======== ========= =========
</TABLE>
57
<PAGE> 187
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is expected to appear under the
captions "Election of Directors" and "Executive Officers" in the Company's proxy
statement for the Annual Meeting of Shareholders to be held in 1999 to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is expected to appear under the
caption "Executive Compensation" set forth in the Company's proxy statement for
the Annual Meeting of Shareholders to be held in 1999 to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is expected to appear under the
caption "Security Ownership of Certain Beneficial Owners and Management" set
forth in the Company's proxy statement for the Annual Meeting of Shareholders to
be held in 1999 to be filed with the Securities Commission pursuant to
Regulation 14A, which information is incorporated herein by references.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is expected to appear under the
caption "Certain Relationships and Related Transactions" set forth in the
Company's proxy statement for the Annual Meeting of Shareholders to be held in
1999 to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report
1. Financial Statements
Reference is made to the Index to Financial Statements under Item 8 on page
34.
2. Financial Statement Schedules
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 63
Schedule III -- Condensed Financial Information -- Parent
Only...................................................... 67
</TABLE>
All other schedules and financial statements are omitted because they are
not applicable or the required information is shown in the financial statements
or notes thereto listed above in Item 14(a)1.
58
<PAGE> 188
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3(i).1 -- Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (Registration No. 33-65620)).
3(ii).1 -- Bylaws of the Company, (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-4 (Registration No. 33-65620)).
4.1 -- Articles of Incorporation (included as Exhibit 3(i).1
above).
4.2 -- Bylaws of the Company (included as Exhibit 3(ii).1
above).
4.3 -- Rights Agreement dated September 13, 1994 between Coho
Energy, Inc. and Chemical Bank (incorporated by reference
to Exhibit 1 to the Company's Form 8-A dated September
13, 1994).
4.4 -- First Amendment to Rights Agreement made as of December
8, 1994 between Coho Energy, Inc. and Chemical Bank
(incorporated by reference to Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
4.5 -- Second Amendment to Rights Agreement as of August 30,
1995 between Coho Energy, Inc. and Chemical Bank
(incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).
4.6 -- Third Amendment to Rights Agreement as of August 19, 1998
between Coho Energy, Inc. and Chase Manhattan Bank.
4.7 -- Indenture dated as of October 1, 1997 for the 8 7/8%
Senior Subordinated Notes due 2007 (incorporated by
reference to Exhibit 4.7 to the Company's Second
Amendment dated September 9, 1997 to its Registration
Statement on Form S-3 (Registration No. 333-33979)).
4.8 -- First Supplemental Indenture dated as of September 2,
1998 for the 8 7/8% Senior Subordinated Notes due 2007.
10.1 -- Amended and Restated Registration Rights Agreement dated
December 8, 1994 among Coho Energy, Inc., Kenneth H.
Lambert and Frederick K. Campbell (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994).
*10.2 -- 1993 Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on
Form S-4 (Reg. No. 33-65620)).
*10.3 -- First Amendment to 1993 Stock Option Plan (incorporated
by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1993).
*10.4 -- Second Amendment and Third Amendment to 1993 Stock Option
Plan (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
*10.5 -- Third Amendment to 1993 Stock Option Plan (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
*10.6 -- Employment Agreement dated as of November 11, 1994 by and
between Coho Energy, Inc. and Jeffrey Clarke
(incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
</TABLE>
59
<PAGE> 189
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*10.7 -- Employment Agreement dated as of November 11, 1994 by and
between Coho Energy, Inc. and R. M. Pearce (incorporated
by reference to Exhibit 10.8 to the Company's Annual
Report Form 10-K for the year ended December 31, 1994).
*10.8 -- Employment Agreement dated as of June 25, 1995 by and
between Eddie M. LeBlanc, III and Coho Energy, Inc.
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).
*10.9 -- Employment Agreement dated as of August 19, 1996 by and
between Anne Marie O'Gorman and Coho Energy, Inc.
(incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
*10.10 -- First Amendment to Employment Agreement dated as of
August 19, 1996 by and among Jeffrey Clarke and Coho
Energy, Inc. (incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
*10.11 -- First Amendment to Employment Agreement dated as of
August 19, 1996 by and among R. M. Pearce and Coho
Energy, Inc. (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
*10.12 -- First Amendment to Employment Agreement dated as of
August 19, 1996 by and among Eddie M. LeBlanc and Coho
Energy, Inc. (incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
*10.13 -- 1993 Non Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-4 (Reg. No.
33-65620)).
*10.14 -- First Amendment to 1993 Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
*10.15 -- Form of Executive Severance Agreement entered into with
each of Keri Clarke, R. Lynn Guillory, Larry L. Keller,
Susan J. McAden, Joseph Ragusa, Gary Hoge and Patrick S.
Wright (incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
*10.16 -- Stock Purchase Agreement dated March 4, 1996 among Coho
Energy, Inc., Interstate Natural Gas Company, and
Republic Gas Partners, L.L.C. (incorporated by reference
to the Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
10.17 -- Crude Oil Purchase Contract dated January 25, 1996, by
and between Coho Marketing and Transportation, Inc. and
EOTT Energy Operating Limited Partnership (incorporated
by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.18 -- Fourth Amended and Restated Credit Agreement among Coho
Resources, Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Acquisitions Company, Coho
Energy, Inc., Banque Paribas, Houston Agency, Bank One,
Texas, N.A., and MeesPierson N.V. dated as of December
18, 1997 (incorporated by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
</TABLE>
60
<PAGE> 190
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.19 -- First Amendment to the Fourth Amended and Restated Credit
Agreement dated July 7, 1998 among Coho Resources, Inc.,
Coho Louisiana Production Company, Coho Exploration,
Inc., Coho Oil & Gas, Inc. (formerly Coho Acquisitions
Company), Coho Energy, Inc., Banque Paribas, Houston
Agency, Bank One, Texas, N.A., and MeesPierson N.V.
10.20 -- Second Amendment to the Fourth Amended and Restated
Credit Agreement dated November 13, 1998 among Coho
Resources, Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Oil & Gas, Inc. (formerly Coho
Acquisitions Company), Coho Energy, Inc., Banque Paribas,
Houston Agency, Bank One, Texas, N.A., and MeesPierson
N.V.
10.21 -- Third Amendment to the Fourth Amended and Restated Credit
Agreement dated November 30, 1998 among Coho Resources,
Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Oil & Gas, Inc. (formerly Coho
Acquisitions Company), Coho Energy, Inc., Banque Paribas,
Houston Agency, Bank One, Texas, N.A., and MeesPierson
N.V.
10.22 -- Fourth Amendment to the Fourth Amended and Restated
Credit Agreement dated January 29, 1999 among Coho
Resources, Inc., Coho Louisiana Production Company, Coho
Exploration, Inc., Coho Oil & Gas, Inc. (formerly Coho
Acquisitions Company), Coho Energy, Inc., Banque Paribas,
Houston Agency, Bank One, Texas, N.A., and MeesPierson
N.V.
10.23 -- Crude Call Purchase Contract dated November 26, 1997 by
and between Amoco Production Company and Coho
Acquisitions Company (incorporated by reference to
Exhibit 2.1 to the Company's Report on Form 8-K dated
December 18, 1997).
10.24 -- Purchase and Sale Agreement dated November 26, 1997 by
and between Amoco Production Company and Coho
Acquisitions Company (incorporated by reference to
Exhibit 2.1 to the Company's Report on Form 8-K dated
December 31, 1997).
10.25 -- Shareholder Agreement (incorporated by reference to Item
7(1) of the Exhibits to the Schedule 13D dated May 18,
1998, relating to the Company and filed by Energy
Investment Partnership No. 1, Thomas O. Hicks, John R.
Muse, Charles W. Tate, Jack D. Furst, Lawrence D. Stuart,
Jr., Michael J. Levitt, Dan H. Blanks, and David B.
Deniger).
10.26 -- Amended and Restated Stock Purchase Agreement dated
November 4, 1998, by and between Coho Energy, Inc. and
HM4 Coho, L.P. (incorporated by reference to Exhibit 99.1
to the Report on Form 8-K dated November 18, 1998).
*10.27 -- Adoption Agreement for Coho Resources, Inc.'s Amended and
Restated 401(k) Savings Plan dated July 1, 1995.
11.1 -- Statement re-computation of per share earnings.
21.1 -- List of Subsidiaries of the Company.
27 -- Financial Data Schedule
</TABLE>
- ---------------
* Represents management contract or compensatory plan or arrangement.
The Company will furnish a copy of any exhibit described above to any
beneficial holder of its securities upon receipt of a written request therefor,
provided that such request sets forth a good faith representation that as of the
record date for the Company's 1999 Annual Meeting of Shareholders, such
beneficial holder is entitled to vote at such meeting, and upon payment to the
Company of a fee compensating the Company for its reasonable expenses in
furnishing such exhibits.
61
<PAGE> 191
(b) Reports on Form 8-K
Form 8-K dated November 18, 1998 regarding changes of control of the
registrant related to the issuance of shares of Common Stock to HM4 Coho L.P.
62
<PAGE> 192
REPORT FOR INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Coho Energy, Inc.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information contained in Schedule III
is not a required part of the basic financial statements but is supplementary
information required by the Securities and Exchange Commission. This information
has been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
The basic financial statements have been prepared assuming that Coho
Energy, Inc. and subsidiaries will continue as a going concern. As discussed in
Note 2 to the basic financial statements, Coho Energy, Inc. and subsidiaries
have suffered recurring losses, have received a notice of default from their
lenders under the existing bank credit facility and may be in default under the
terms of the 8 7/8% Senior Subordinated notes, and project 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
March 24, 1999
63
<PAGE> 193
COHO ENERGY, INC. AND SUBSIDIARIES
SCHEDULE III
CONDENSED FINANCIAL INFORMATION -- PARENT ONLY
The following presents the condensed balance sheets as of December 31, 1997
and 1998 and statements of operations and statements of cash flows for Coho
Energy, Inc., the parent company, for the years ended December 31, 1996, 1997
and 1998.
COHO ENERGY, INC.
(PARENT)
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 27 $ 6
Due from subsidiaries..................................... 180,743 158,913
-------- ---------
180,770 158,919
Investments in subsidiaries, at equity...................... 109,247 (72,179)
Other assets................................................ 4,297 3,871
-------- ---------
$294,314 $ 90,611
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 3,317 $ 2,847
Current portion of long-term debt......................... 148,894 149,007
-------- ---------
152,211 151,854
-------- ---------
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 25,603,512 shares at December 31, 1997 and
1998..................................................
Additional paid-in capital................................ 256 256
Retained earnings (deficit)................................. 137,812 137,812
Total shareholders' equity........................ 4,035 (199,311)
-------- ---------
142,103 (61,243)
-------- ---------
$294,314 $ 90,611
======== =========
</TABLE>
See accompanying Notes to Condensed Financial Information
64
<PAGE> 194
SCHEDULE III
COHO ENERGY, INC.
(PARENT)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Operating expenses
General and administrative................................ $ 423 $ 471 $ 666
------- ------- ---------
Other (income) expenses
Interest income from subsidiaries......................... -- (4,320) (14,519)
Interest expense.......................................... -- 3,389 13,864
Equity in (income) loss of subsidiaries................... (6,329) (5,828) 203,326
------- ------- ---------
(6,329) (6,759) 202,671
------- ------- ---------
Earnings (loss) before income taxes......................... 5,906 6,288 (203,337)
Income taxes
Deferred expense.......................................... -- -- 9
------- ------- ---------
Net earnings (loss)......................................... $ 5,906 $ 6,288 $(203,346)
======= ======= =========
Basic earnings (loss) per common share...................... $ .29 $ .29 $ (7.94)
======= ======= =========
Diluted earnings (loss) per common share.................... $ .29 $ .28 $ (7.94)
======= ======= =========
</TABLE>
See accompanying Notes to Condensed Financial Information
65
<PAGE> 195
SCHEDULE III
COHO ENERGY, INC.
(PARENT)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1997 1998
------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss)....................................... $ 5,906 $ 6,288 $(203,346)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Equity in loss (income) of subsidiaries................... (6,329) (5,828) 203,346
Amortization of debt issue costs and other................ -- -- 552
Deferred income taxes..................................... -- -- 9
Changes in:
Other assets.............................................. -- (22) (12)
Accounts payable.......................................... (15) 3,312 (480)
------- --------- ---------
Net cash provided by (used in) operating activities......... (438) 3,750 49
------- --------- ---------
Cash flows from investing activities
Investments in subsidiaries............................... -- (26,397) (21,900)
Advances from (to) subsidiaries........................... 325 (172,967) 21,830
------- --------- ---------
Net cash provided by (used in) investing activities......... 325 (199,364) (70)
------- --------- ---------
Cash flows from financing activities
Increase in long term debt................................ -- 148,894 --
Debt issuance cost........................................ -- (4,275) --
Issuance of common stock.................................. -- 49,223 --
Proceeds from stock options exercised..................... 414 1,495 --
------- --------- ---------
Net cash provided by (used in) financing activities......... 414 195,337 --
------- --------- ---------
Increase (decrease) in cash................................. 301 (277) (21)
Cash and cash equivalents at beginning of period............ 3 304 27
------- --------- ---------
Cash and cash equivalents at end of period.................. $ 304 $ 27 $ 6
======= ========= =========
</TABLE>
See accompanying Notes to Condensed Financial Information
66
<PAGE> 196
SCHEDULE III
COHO ENERGY, INC.
(PARENT)
NOTES TO CONDENSED FINANCIAL INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. GENERAL
The accompanying condensed financial information of Coho Energy, Inc. (the
"Company") should be read in conjunction with the consolidated financial
statements of the Company and its subsidiaries included in 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, the
Company generated a loss before income taxes of $203.3 million for the year
ended December 31, 1998 primarily due to the equity in loss of subsidiaries of
$203.3 million.
As discussed in Note 3, the Company has guaranteed $235 million of debt
related to unconsolidated subsidiaries under the Revolving Credit Facility. In
March 1999, such subsidiaries received a notice of default from the lenders
under the Revolving Credit Facility because they were 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. As a result of this
bank default, the Company may be in default under the terms of its 8 7/8% Senior
Subordinated Notes ("Senior Notes") due to cross default provisions in the
indenture. Although the Company may not be in default under the Senior Notes
indenture, all amounts outstanding under the Senior Notes as of December 31,
1998 have been classified as current maturities because the Company and its
unconsolidated subsidiaries are currently unable to cure the existing or pending
defaults within the required terms of the indenture.
The Company is exploring its alternatives to resolve its current liquidity
problems and the liquidity problems of its unconsolidated subsidiaries,
including (a) the current default under the existing bank credit facility, (b)
the potential acceleration of all amounts due under the existing bank credit
facility and the Senior Notes, (c) inadequate cash flow from operations to
support upcoming interest payments due on the credit facility on April 6, 1999
and on the Senior Notes due on April 15, 1999 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 of
its unconsolidated subsidiaries. There can be no assurance that the Company will
be 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 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 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.
67
<PAGE> 197
3. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed $235 million of debt related to unconsolidated
subsidiaries under the Revolving Credit Facility. Currently, the subsidiaries
are in default on such debt as discussed in Note 4 to the Consolidated Financial
Statements of the Company.
The Restated Credit Agreement contains certain financial and other
covenants including (i) the maintenance of minimum amounts of shareholder's
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 December 31, 1998, the Company was not in compliance with the
cash flow to interest expense and current assets to current liabilities
covenants.
4. LONG TERM DEBT
On October 3, 1997, the Company completed a sale to the public of $150
million of 8 7/8% Senior Subordinated Notes due 2007 ("Senior Notes"). Proceeds
of the offering, net of offering costs, were approximately $144.5 million. The
proceeds from this offering, together with the proceeds from the common stock
offering discussed in Note 5, were used to repay indebtedness outstanding under
the Revolving Credit Facility and for general corporate purposes.
The Senior Notes are unsecured senior subordinated obligations of the
Company and rank pari passu in right of payment with all existing and future
senior subordinated indebtedness of the Company. The Senior Notes mature on
October 15, 2007 and bear interest at the rate of 8 7/8% per annum payable
semi-annually. Certain subsidiaries of the Company issued guarantees of the
Senior Notes on a senior subordinated basis.
The indenture issued in conjunction with the Senior Notes (the "Indenture")
contains certain covenants, including covenants that limit (i) indebtedness,
(ii) restricted payments, (iii) distributions from restricted subsidiaries, (iv)
transactions with affiliates, (v) sales of assets and subsidiary stock
(including sale and leaseback transactions), (vi) dividends and other payment
restrictions affecting restricted subsidiaries and (vii) mergers or
consolidations.
As a result of the payment default under the Revolving Credit Facility as
discussed in Note 4 to the Consolidated Financial Statements of the Company, the
Company may be in default under the terms of the Senior Notes specified in the
Indenture. If the Company is in default of the Senior Notes as a result of the
payment default under the Revolving Credit Facility, the Company is required to
deliver a written notice to the Trustee of the Senior Notes within 30 days after
the occurrence of the event of default in the form of an officers' certificate
indicating an event of default has occurred and is continuing and what action
the Company is taking or proposing to take with respect to the event of default.
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 December 31, 1998 have been classified as current maturities because
the Company is currently unable to cure the existing or pending default within
the required terms of the Indenture.
5. SHAREHOLDERS' EQUITY
On October 3, 1997, the Company completed the sale to the public of
5,000,000 shares of common stock at $10.50 per share. Proceeds of the offering,
net of offering costs, were approximately $49.2 million. The proceeds from this
offering, together with the proceeds from the Senior Notes offering discussed in
Note 3, were used to repay indebtedness outstanding under the Company's
Revolving Credit Facility and for general corporate purposes.
In December 1997, the Company issued warrants, valued at $3.4 million, to
purchase one million shares of common stock at $10.425 per share for a period of
five years to Amoco Production Company as partial consideration for the purchase
of certain crude oil and natural gas properties. This noncash transaction is not
reflected in the statement of cash flows for the year ended December 31, 1998.
68
<PAGE> 198
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
By: /s/ JEFFREY CLARKE
----------------------------------
Jeffrey Clarke
Chairman, President and Chief
Executive Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JEFFREY CLARKE Chairman, President Chief March 31, 1999
- ----------------------------------------------------- Executive Officer and
Jeffrey Clarke Director
/s/ EDDIE M. LEBLANC, III Sr. Vice President and Chief March 31, 1999
- ----------------------------------------------------- Financial Officer (principal
Eddie M. Leblanc, III financial and accounting
officer)
/s/ LOUIS F. CRANE Director March 31, 1999
- -----------------------------------------------------
Louis F. Crane
/s/ ALAN EDGAR Director March 31, 1999
- -----------------------------------------------------
Alan Edgar
/s/ KENNETH H. LAMBERT Director March 31, 1999
- -----------------------------------------------------
Kenneth H. Lambert
/s/ DOUGLAS R. MARTIN Director March 31, 1999
- -----------------------------------------------------
Douglas R. Martin
/s/ JAKE TAYLOR Director March 31, 1999
- -----------------------------------------------------
Jake Taylor
</TABLE>
69
<PAGE> 199
ANNEX B
COHO ENERGY, INC. QUARTERLY REPORTS ON FORM 10-Q
FOR THE QUARTERS ENDED MARCH 31, 1999, JUNE 30, 1999 AND SEPTEMBER 30, 1999
(Attached)
<PAGE> 200
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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)
<TABLE>
<S> <C>
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)
</TABLE>
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.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS MAY 10, 1999
----- --------------
<S> <C>
Common Stock, $.01 par value 25,603,512
</TABLE>
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<PAGE> 201
INDEX
<TABLE>
<CAPTION>
PAGE
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<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................................................ 15
Item 5. Other Information................................. 15
Item 6. Exhibits and Reports on Form 8-K.................. 15
Signatures................................................ 16
</TABLE>
<PAGE> 202
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> 203
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COHO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1998 1999
----------- -----------
<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
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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
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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
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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 through the
alternatives set forth above and may seek protection under Chapter 11 of the
United States Bankruptcy Code
5
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COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
6
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COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 209
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".
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
8
<PAGE> 210
$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
9
<PAGE> 211
to enhance cash flow from operations. There can be no assurance that the Company
will be 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.
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.
10
<PAGE> 212
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
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
11
<PAGE> 213
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
12
<PAGE> 214
problems associated with the Year 2000 readiness efforts of its major suppliers
and purchasers. The Company estimates that it is 40% 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 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> 215
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
14
<PAGE> 216
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
27 -- Financial Data Schedule
</TABLE>
(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> 217
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)
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)
Date: May 14, 1999
16
<PAGE> 218
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 JUNE 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)
<TABLE>
<CAPTION>
TEXAS 75-2488635
<S> <C>
(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)
</TABLE>
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.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS AUGUST 16, 1999
----- ---------------
<S> <C>
Common Stock, $.01 par value 25,603,512
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 219
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item Financial Statements
1.
Report of Independent Public Accountants.................... 1
Condensed Consolidated Balance Sheets -- December 31, 1998
and June 30, 1999........................................... 2
Condensed Consolidated Statements of Operations -- three and
six months ended June 30, 1998 and 1999..................... 3
Condensed Consolidated Statements of Cash Flows -- six
months ended June 30, 1998 and 1999......................... 4
Notes to Condensed Consolidated Financial Statements........ 5
Item Management's Discussion and Analysis of Financial Condition
2. and Results of Operations................................... 9
Item Quantitative and Qualitative Disclosures About Market
3. Risk........................................................ 15
PART II OTHER INFORMATION
Item Legal Proceedings........................................... 16
1.
Item Changes in Securities....................................... 16
2.
Item Defaults Upon Senior Securities............................. 16
3.
Item Submission of Matters to a Vote of Security Holders......... 17
4.
Item Other Information........................................... 17
5.
Item Exhibits and Reports on Form 8-K............................ 17
6.
............................................................ 18
Signatures
</TABLE>
<PAGE> 220
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 as of June 30, 1999 and the related condensed
consolidated statements of operations for the three month and six month periods
ended June 30, 1999 and the condensed statement of cash flows for the six month
period ended June 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.
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 balance sheet of Coho Energy, Inc. 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 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. As discussed in Note 2 to the
financial statements, the Company has suffered 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 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
August 16, 1999
1
<PAGE> 221
COHO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 6,901 $ 5,152
Cash in escrow............................................ 1,505 1,350
Accounts receivable, principally trade.................... 9,960 7,931
Other current assets...................................... 948 1,885
--------- ---------
19,314 16,318
PROPERTY AND EQUIPMENT, at cost net of accumulated depletion
and depreciation, based on full cost accounting method
(note 3).................................................. 324,574 318,404
OTHER ASSETS................................................ 6,180 5,706
--------- ---------
$ 350,068 $ 340,428
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, principally trade....................... $ 5,577 $ 1,862
Accrued liabilities and other payables.................... 6,656 6,053
Accrued interest.......................................... 7,302 16,461
Accrued state income taxes payable........................ 4,045 4,012
Current portion of long term debt (note 4)................ 384,031 388,672
--------- ---------
407,611 417,060
LONG TERM DEBT, excluding current portion................... -- --
DEFERRED INCOME TAXES....................................... -- --
--------- ---------
407,611 417,060
--------- ---------
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) (218,400)
--------- ---------
Total shareholders' equity........................ (61,243) (80,332)
--------- ---------
$ 350,068 $ 340,428
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
2
<PAGE> 222
COHO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Net crude oil and natural gas production......... $ 39,290 $ 21,128 $ 18,147 $ 12,161
-------- -------- -------- --------
OPERATING EXPENSES
Crude oil and natural gas production............. 12,584 7,744 6,171 4,257
Taxes on oil and gas production.................. 1,884 923 882 637
General and administrative (note 3).............. 3,315 5,386 1,175 2,659
State income tax penalties....................... -- 1,002 -- 1,002
Reorganization costs............................. -- 1,775 -- 1,478
Depletion and depreciation....................... 15,019 6,772 7,225 3,178
Writedown of crude oil and natural gas
properties.................................... 73,000 -- 41,000 --
-------- -------- -------- --------
Total operating expenses................. 105,802 23,602 56,453 13,211
-------- -------- -------- --------
OPERATING LOSS..................................... (66,512) (2,474) (38,306) (1,050)
-------- -------- -------- --------
OTHER INCOME AND EXPENSES
Interest and other income........................ 118 186 72 97
Interest expense................................. (15,964) (16,801) (8,155) (9,149)
-------- -------- -------- --------
(15,846) (16,615) (8,083) (9,052)
-------- -------- -------- --------
LOSS FROM OPERATIONS BEFORE INCOME TAXES........... (82,358) (19,089) (46,389) (10,102)
INCOME TAX BENEFIT................................. (18,446) -- (4,778) --
-------- -------- -------- --------
NET LOSS........................................... $(63,912) $(19,089) $(41,611) $(10,102)
======== ======== ======== ========
BASIC LOSS PER COMMON SHARE (note 5)............... $ (2.50) $ (.75) $ (1.63) $ (.40)
======== ======== ======== ========
DILUTED LOSS PER COMMON SHARE (note 5)............. $ (2.50) $ (.75) $ (1.63) $ (.40)
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE> 223
COHO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(63,912) $(19,089)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depletion and depreciation............................. 15,019 6,772
Writedown of crude oil and natural gas properties...... 73,000 --
Deferred income taxes benefit.......................... (18,488) --
Amortization of debt issue costs and other............. 417 520
Changes in operating assets and liabilities:
Accounts receivable and other assets................... (6,230) 1,257
Accounts payable and accrued liabilities............... 187 6,425
-------- --------
Net cash used in operating activities....................... (7) (4,115)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment.................................... (41,046) (602)
Changes in accounts payable and accrued liabilities
related to exploration and development................. 630 (1,616)
-------- --------
Net cash used in investing activities....................... (40,416) (2,218)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long term debt................................ 38,056 4,600
Repayment of long term debt............................... (21) (16)
-------- --------
Net cash provided by financing activities................... 38,035 4,584
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (2,388) (1,749)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 3,817 6,901
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,429 $ 5,152
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest............................................... $ 16,016 $ 7,058
Income taxes........................................... $ 19 $ 33
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE> 224
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 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") 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 six month
period ended June 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. 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 production declines and a continued period of depressed prices
from December 1997 through the first quarter of 1999, 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 $2.5 million for the six months ended June 30, 1999.
Additionally, as discussed in Note 4, the Company received notice of
default in March 1999 from its lenders under its existing bank credit facility
(the "Revolving 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 15, 1999 interest payment of approximately $6.7
million due on its 8 7/8% Senior Subordinated Notes ("Senior Notes") and has
received written notice of acceleration from certain Senior Note holders due to
the default. Although the lenders under the existing bank credit facility have
not accelerated the full principal amount outstanding of $239.6 million as of
June 30, 1999, all amounts outstanding under these facilities as of June 30,
1999 have been classified as current maturities because the Company is currently
unable to cure the defaults within the required terms of the related agreements.
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.
The Company is exploring its alternatives to resolve its current liquidity
problems, including (a) the current defaults under the existing bank credit
facility and Senior Notes, (b) the potential acceleration of all amounts due
under its existing bank credit facility, (c) the acceleration of the Senior
Notes, and (d) 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 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
5
<PAGE> 225
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reorganization alternatives. These factors, among others, raise substantial
doubt concerning the ability of the Company to continue as a going concern.
The Company has incurred approximately $1.8 million in reorganization costs
during the first six months of 1999 which relate to professional fees for
consultants and attorneys assisting in the negotiations associated with
financing and/or reorganization alternatives.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts (including $318.4
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 JUNE 30
1998 1999
----------- ---------
<S> <C> <C>
Crude oil and natural gas leases and rights including
exploration, development and equipment thereon, at cost... $ 678,547 $ 679,148
Accumulated depletion and depreciation...................... (353,973) (360,744)
--------- ---------
$ 324,574 $ 318,404
========= =========
</TABLE>
Overhead expenditures capitalized totaled $2,768,000 and $-0- for the six
month periods ended June 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 six months ended June 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
$60,136,000 at December 31, 1998 and June 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.
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 $2.4 million during March, April and May 1999. As a result of the
payment defaults, advances under the Revolving Credit Facility bear interest at
the prime rate and the past due installments to repay the over advance and the
past due interest payments 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,
6
<PAGE> 226
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the outstanding advances of $239.6 million as of June 30, 1999 have been
reclassified to current maturities because the Company is currently unable to
cure the default within the required terms. 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 total arrearage related to the installment
payments due on the over advance and past due interest was approximately $76.5
million as of June 30, 1999, including approximately $4.8 million of past due
interest and $71.7 million related to installments due on the over advance. 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.
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 June 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 now bear interest at the
default rate of 9.875% (1% in excess of the stated rate for the Senior Notes).
All amounts outstanding under the Senior Notes as of June 30, 1999 have been
classified as current maturities.
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 six month periods ended
June 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 six month periods ended June 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.
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 currently contesting that claim because certain
procedures for seeking remedies under the Indenture were not followed.
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.
7
<PAGE> 227
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During June 1999, the Company extended its Anaguid permit in Tunisia, North
Africa through June 2001. The Company has committed to drill two wells during
this two year period.
8
<PAGE> 228
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 87% of production revenues and natural gas sales
representing approximately 13% of production revenues during the six months
ended June 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
six 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 10,310 BOE for
the six months ended June 30, 1999 as compared to 18,667 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 six months ended June 30, 1999, cash flow used in
operating activities was $4.1 million compared with cash flow used in operating
activities of $7,000 for the same period in 1998. Operating revenues, net of
lease operating expenses, production taxes and general and administrative
expenses, decreased $14.4 million during the first six months of 1999 from the
first six months of 1998, primarily due to a 45% decline in production on a BOE
basis between comparable periods and price decreases between such comparable
periods of 1% and 8% 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 six months
of 1999 compared to $2.8 million of capitalized overhead during the comparable
period in 1998. The company also incurred costs totaling $2.8 million in 1999
related to state income tax penalties and reorganization costs. Changes in
operating assets and liabilities provided $7.7 million of cash for operating
activities for the six months ended June 30, 1999, primarily due to increases in
accrued interest payable and accrued tax penalties payable and due to decreases
in working interest receivables, 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 18,667 BOE per day during the first six months
of 1998 to 10,310 BOE per day during the first six months of 1999. This decline
is due to the sale of the Monroe field gas properties in December 1998, which
contributed approximately 2,800 BOE per day during the first six months 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 and drilling activity during the last five months of 1998 and
the first four months of 1999 and the Company halting production on wells which
were uneconomical due to depressed crude oil prices. The Company utilized
$883,000 of working capital provided by operations to perform well repair work
in May, June and July 1999 to return some of the shut-in wells to production
because crude oil prices began to improve in the second quarter of 1999. The
Company intends 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 and improve 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 six
months of 1999 until substantial additional funds are available for well repairs
and additional development activity.
9
<PAGE> 229
Based on the June 1999 production level of approximately 10,000 BOE per day
and the average price received in June 1999 of approximately $14.63 per barrel
of crude oil and $2.03 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 June 30, 1999, the Company had a working capital deficit of $400.7
million primarily due to the reclassification of all long term debt to current
maturities as discussed below. See "-- Future Operations".
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 $2.4
million during March, April and May 1999. As a result of the payment defaults,
advances under the Revolving Credit Facility bear interest at the prime rate and
the past due installments to repay the over advance and the past due interest
payments 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 June 30, 1999
have been reclassified to current maturities because the Company is currently
unable to cure the default within the required terms. 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 total arrearage related to the
installment payments due on the over advance and past due interest was
approximately $76.5 million as of June 30, 1999, including approximately $4.8
million of past due interest and $71.7 million related to installments due on
the over advance. 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. 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 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 June 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 now bear interest at the
default rate of 9.875% (1% in excess of the
10
<PAGE> 230
stated rate for the Senior Notes). All amounts outstanding under the Senior
Notes as of June 30, 1999 have been classified as current maturities.
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 bear interest at 1.25% per
month and accrue a monthly penalty of 10% not to exceed 25% of the taxes due.
The maximum penalty of $1.0 million has been expensed during the second quarter
of 1999.
Future Operations. The Company is exploring its alternatives to resolve its
current liquidity problems, including (a) the current defaults under the
Revolving Credit Facility and Senior Notes, (b) the potential acceleration of
all amounts due under the Revolving Credit Facility, (c) the acceleration of the
Senior Notes, and (d) inadequate cash flow from operations to support past due
and accruing interest 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 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 six months of 1999, the Company
incurred capital expenditures of $602,000 compared with $41.0 million for the
first six months of 1998. 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 half of 1999, compared
with $2.8 million of capitalized costs for the first half of 1998.
The Company has commenced drilling an exploratory well on its Anaguid
permit in Tunisia, North Africa. Pursuant to the Anaguid permit, the Company was
obligated to drill this well by June 1999 or it would incur a liability of
approximately $4 million for the unfulfilled drilling commitments. The Company's
estimated net cost to drill is approximately $2.0 million and the Company's net
carrying cost for its investment in the Anaguid permit, which is carried in a
separate full cost pool from the Company's properties located in the United
States, was approximately $5.8 million as of March 31, 1999. The Company has not
entered into any other capital commitments in 1999 due to its liquidity problems
discussed above.
11
<PAGE> 231
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
----------------- -------------------
1998 1999 1998 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA
Production
Crude Oil (Bbl/day).................................. 14,617 8,984 14,568 8,236
Natural Gas (Mcf/day)................................ 24,300 7,954 23,782 8,069
BOE (Bbl/day)........................................ 18,667 10,310 18,532 9,581
Average Sales Prices
Crude Oil per Bbl.................................... $ 11.38 $ 11.30 $ 10.42 $ 14.21
Natural Gas per Mcf.................................. 2.09 1.92 2.00 2.07
Other
Production costs per BOE(1).......................... 4.28 4.64 4.18 5.61
Depletion per BOE.................................... 4.45 3.63 4.28 3.65
Production revenues (in thousands)
Crude Oil............................................ 30,095 18,367 13,813 10,648
Natural Gas.......................................... 9,195 2,761 4,334 1,513
------- ------- ------- -------
$39,290 $21,128 $18,147 $12,161
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes lease operating expenses and production taxes.
Operating Revenues. During the first six months of 1999, production
revenues decreased 46% to $21.1 million as compared to $39.3 million for the
same period in 1998. This decrease was due to a 39% decrease in crude oil
production and a 67% 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 1% and 8%, respectively. For the three months ended
June 30, 1999, production revenue decreased 33% to $12.1 million as compared to
$18.1 million for the same period in 1998. This decrease was principally due to
a 43% decrease in crude oil production and a 66% 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 36% and
4%, respectively.
The 67% decrease in daily natural gas production during the first six
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 half of 1998. The 39% decrease in daily crude oil production
during the first six 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. The Company utilized working capital
provided by operations to perform well repair work in May, June and July 1999 to
return some of the shut-in wells to production because crude oil prices began to
improve in the second quarter of 1999. The Company intends 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 and
improve 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 six 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, decreased 1%
during the first six months of 1999 compared to the same period in 1998. Crude
oil prices increased 36% in the second quarter of 1999 as compared to the second
quarter of 1998, which substantially offset the lower crude oil prices received
in the
12
<PAGE> 232
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 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 $12.71 per Bbl for the six months ended June
30, 1999, a 3% increase from the average posted price of $12.36 per Bbl
experienced in the first six 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 and $14.21 in the first and second quarters of 1999,
respectively, which represented discounts of 33% and 20% to the average New York
Mercantile Exchange ("NYMEX") prices for such quarters.
The realized price for the Company's natural gas, including hedging gains
and losses, decreased 8% from $2.09 per Mcf in the first six months of 1998 to
$1.92 per Mcf in the first six months of 1999, due to a lack of cold weather and
market volatility. Natural gas prices increased 4% in the second quarter of 1999
as compared to the second quarter of 1998, which partially offset the lower gas
prices received in the first quarter of 1999 as compared to the first quarter of
1998.
Production revenues for the six months ended June 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 $466,000 ($0.11 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 June 30, 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 $8.7
million for the first six months of 1999 compared to $14.5 million for the first
six months of 1998 and $4.9 million for the second quarter of 1999 compared to
$7.1 million for the same period in 1998. The decrease in expenses for the
comparable six month and three month periods is primarily due to decreased
production, decreased production taxes and improved operating efficiencies. On a
BOE basis, production costs increased 8% to $4.64 per BOE in 1999 compared to
$4.28 per BOE in 1998 for the six month periods and increased 34% to $5.61 per
BOE in 1999 compared to $4.18 per BOE in 1998 for the three month periods. On a
BOE basis, the 34% increase in production costs over the second quarter of 1998
is primarily due to $883,000 of well repair work performed to return shut-in
wells to production. Additionally, on a BOE basis during the second quarter of
1999, severance taxes increased 38% 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 to continue well repair work in the third
quarter of 1999 to stabilize production and operating expenses are expected to
remain high until all shut in production is brought back on stream.
General and administrative costs increased $2.1 million or 62% between the
comparable six month periods and increased $1.5 million or 126% 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 half of 1999 as
compared to the capitalization of $2.8 million of such cost in the first half of
1998 partially offset by 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. The increase for the comparable three month periods is
significantly larger than the increase for the comparable six month periods
because approximately $1.8 million of operator overhead charges related to the
Oklahoma properties for the first and second quarters of 1998 were all recorded
as a reduction in general and administrative costs in the second quarter of 1998
when such billing information became available. Although
13
<PAGE> 233
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.
State income tax penalties of $1.0 million for the six month and three
month periods ended June 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 quarter of
1999.
Reorganization costs of $1.8 million for the six months ended June 30, 1999
relate to professional fees for consultants and attorneys assisting in the
negotiations associated with financing and/or reorganization alternatives.
Interest expense increased 5% for the six month period ended June 30, 1999
compared to the same period in 1998 primarily as a result of past due
installments and past due interest payments relating to the Revolving Credit
Facility bearing a higher interest rate of prime plus 4% and the accelerated
principal outstanding under the Senior Notes and the past due interest payment
bearing a higher interest rate of 1% over the stated rate.
Depletion and depreciation expense decreased 55% to $6.8 million for the
six months ended June 30, 1999 from $15.0 million for the comparable period in
1998 and decreased 56% to $3.2 million for the three months ended June 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 $4.45 for the comparable six month period in
1998 and decreased to $3.65 in 1999 from $4.28 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 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 at March 31, 1999 or June 30, 1999.
Due to the factors discussed above, the Company's net losses for the three
and six months ended June 30, 1999 were $10.1 million and $19.1 million,
respectively, as compared to net losses of $41.6 million and $63.9 million,
respectively, for the same periods in 1998. The 1998 losses include first and
second quarter writedowns of the 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
14
<PAGE> 234
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.
Quotes for all needed upgrades have been received and are being analyzed, and
the Oklahoma division is expected to be compliant by the fourth quarter of 1999.
The Company estimates that it is 100% complete with its review and is 85%
complete with its remediation of field operational systems and expects to have
complete Year 2000 certification in this element by 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 40% 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 by 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 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 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 June 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 June 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
15
<PAGE> 235
"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 78 basis points)
would be approximately $1.9 million assuming outstanding debt of $239.6 million
throughout the year.
Total debt as of June 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".
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 19, 1999 PPM America Special Investments CBO II, L.P., and PPM
America Special Investments Fund, L.P., two 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 in the Supreme Court of the State of New York
alleging breach of contract, for failure to make the April 15, 1999 interest
payment due on the Senior Notes. The plaintiffs are asking for payment of the
principal amount of their notes, plus interest and attorneys fees, in accordance
with a notice of acceleration sent to the Company on May 19, 1999. The Company
is currently contesting that claim because certain procedures for seeking
remedies under the Senior Note Indenture were not followed.
On May 27, 1999, the Company filed a lawsuit against HM4 Coho L.P. ("HM4")
and affiliated persons in the District Court of Dallas County, Texas. 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
assurances as to the outcome of this litigation.
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 by March 2, 1999. 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 $2.4 million during March,
April and May 1999. As a result of the
16
<PAGE> 236
payment defaults, advances under the Revolving Credit Facility will bear
interest at the prime rate and 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 June 30, 1999 have been reclassified to current
maturities because the Company is currently unable to cure the default within
the required terms. 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 total arrearage related to the installment payments due on the over advance
and past due interest was approximately $76.5 million as of June 30, 1999,
including approximately $4.8 million of past due interest and $71.7 million
related to installments due on the over advance. 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.
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 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 June 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 now bear interest at the
default rate of 9.875% (1% in excess of the stated rate for the Senior Notes).
All amounts outstanding under the Senior Notes as of June 30, 1999 have been
classified as current maturities.
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
<TABLE>
<C> <S>
27 -- Financial Data Schedule
99.1 -- Amoco and Coho Resources Crude Call Agreement
</TABLE>
(b) Reports on Form 8-K
None
17
<PAGE> 237
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)
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)
Date: August 16, 1999
18
<PAGE> 238
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)
<TABLE>
<S> <C>
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)
</TABLE>
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.
<TABLE>
<S> <C>
OUTSTANDING AT
CLASS NOVEMBER 12, 1999
----- --------------------
Common Stock, $.01 par value 25,603,512
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 239
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 2
31, 1998 and September 30, 1999...................
Condensed Consolidated Statements of 3
Operations -- three and nine months ended
September 30, 1998 and 1999.......................
Condensed Consolidated Statements of Cash 4
Flows -- nine months ended September 30, 1998 and
1999..............................................
Notes to Condensed Consolidated Financial 5
Statements.............................................
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations...............
Item 3. Quantitative and Qualitative Disclosures About 17
Market Risk............................................
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................. 19
Item 2. Changes in Securities............................. 19
Item 3. Defaults Upon Senior Securities................... 19
Item 4. Submission of Matters to a Vote of Security 20
Holders................................................
Item 5. Other Information................................. 20
Item 6. Exhibits and Reports on Form 8-K.................. 20
Signatures................................................ 21
</TABLE>
<PAGE> 240
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> 241
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
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> 242
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> 243
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> 244
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.
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
5
<PAGE> 245
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
6
<PAGE> 246
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
7
<PAGE> 247
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
8
<PAGE> 248
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 249
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 to continue as a going concern is
dependent upon confirmation of a plan of
10
<PAGE> 250
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.
11
<PAGE> 251
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
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
12
<PAGE> 252
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.
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.
13
<PAGE> 253
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 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
14
<PAGE> 254
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 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
15
<PAGE> 255
$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.
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.
16
<PAGE> 256
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 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.
17
<PAGE> 257
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".
18
<PAGE> 258
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
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.
19
<PAGE> 259
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 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
<TABLE>
<C> <S>
27 -- Financial Data Schedule
</TABLE>
(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.
20
<PAGE> 260
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)
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)
Date: November 12, 1999
21
<PAGE> 261
ANNEX C
COHO ENERGY, INC. AMENDMENT TO ANNUAL REPORT (FORM 10-K/A)
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
(Attached)
<PAGE> 262
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM 10-K/A
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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)
<TABLE>
<CAPTION>
TEXAS 75-2488635
<S> <C>
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
<TABLE>
<CAPTION>
14785 PRESTON ROAD, SUITE 860
DALLAS, TEXAS 75240
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code:
(972) 774-8300
---------------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 5, 1999, 25,603,512 shares of the registrant's Common Stock
were outstanding and the aggregate market value of all voting stock held by
non-affiliates was $14 million based upon the closing price on the Nasdaq Stock
Market on such date. The officers and directors of the registrant are considered
affiliates for purposes of this calculation.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 263
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the directors of the Company and certain information with
respect to each of them are set forth below:
<TABLE>
<CAPTION>
DIRECTOR AGE SINCE*
- -------- --- ------
<S> <C> <C>
Jeffrey Clarke.............................................. 53 1982
Louis F. Crane(a)........................................... 57 1993
Alan Edgar(b)............................................... 53 1998
Kenneth H. Lambert(a)....................................... 53 1980
Douglas R. Martin(b)........................................ 53 1990
Jake Taylor(b).............................................. 52 1993
</TABLE>
- ---------------
* Represents the year each individual became a director of the Company or its
predecessor Coho Resources, Inc. ("CRI")
(a) Member of the Audit Committee
(b) Member of the Compensation Committee
Jeffrey Clarke has served as Chairman of the Company since October 1993 and
as President and Chief Executive Officer of the Company since September 1993.
Mr. Clarke served as Executive Vice President and Chief Operating Officer of CRI
from May 1982 until May 1990, as President and Chief Operating Officer of CRI
from May 1990 to October 1992 and as President and Chief Executive Officer of
CRI since October 1992. He served as Senior Vice President, Chief Operating
Officer and a director of Coho Resources Limited ("CRL") from 1984 to October
1992 and as President and Chief Executive Officer of CRL since October 1992 and
has been engaged by CRL in various capacities since 1980.
Louis F. Crane has served as President and Chief Executive Officer of
Orleans Capital (investment portfolio management firm) since November 1991. Mr.
Crane is Chairman of the Board of Offshore Logistics Inc. and a director of
Columbia Universal Corp.
Alan Edgar has been an independent financial consultant since January 1999
and prior thereto served as Managing Director, Co-head Energy Group with
Donaldson, Lufkin & Jenrette Securities Corporation, an investment banking firm,
from 1990 until his retirement in December, 1998.
Kenneth H. Lambert served as Chairman of the Board of Directors of CRI from
1980 until September 1993, as Chief Executive Officer of CRI from 1980 to 1992
and as President of CRI from 1980 to 1990. Mr. Lambert served as President and
Chief Executive Officer of CRL from 1980 to June 1992, and as Chairman of the
Board of CRL from June 1992 until September 1993. Mr. Lambert has served as
President and Chief Executive Officer of Nugold Technology Ltd. (a private
company dealing in the recovery of precious metals) since April 1993. Mr.
Lambert is chairman of the board, president, chief executive officer and
director of Edmonton International Industries Ltd. (a Canadian public investment
holding company), the Chairman of the Board of Destination Resorts, Inc. (a
Canadian public resort development corporation) and Chairman of the Board of Oz
New Media (a Canadian public educational network, multimedia and digital content
company).
Douglas R. Martin has served as Chairman of Pursuit Resources Corp. (a
Canadian public oil and gas company) since September 1993. Mr. Martin served as
Senior Vice President and Chief Financial Officer of CRI from May 1990 to August
1993. He served as CRL's Senior Vice President and Chief Financial Officer from
April 1990 to August 1993.
Jake Taylor has been an independent financial consultant since 1989.
Pursuant to the terms of the Registration Rights and Shareholder Agreement
dated May 12, 1998 (the "Agreement") among Energy Investment Partnership No. 1,
L.P. ("EIP") and the Company, the Company
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<PAGE> 264
has agreed to nominate the number of designees to which EIP are entitled for
election to the Board of Directors of the Company at each annual meeting of the
Company's shareholders. To date, EIP has not made any nominations for the
Company's 1999 Annual Meeting of Shareholders. In the event the shares of Common
Stock owned by EIP shall be both less than one million shares and less than 4%
of the outstanding shares of Common Stock, the Company's obligation under the
Agreement to nominate any designees of EIP to the Board ceases. The Agreement
further provides that, if the Company's proxy statement for any annual meeting
includes a recommendation regarding the election of any other nominees to the
Company's Board of Directors, the Company must include a recommendation that the
shareholders also vote in favor of the nominees of EIP. So long as any designee
of EIP serves as a director of the Company, the Company agreed to appoint one of
such designees to be a member of the Compensation Committee of the Board and, in
the event the Board of Directors establishes an Executive Committee, the
Executive Committee of the Board.
Jeffrey Clarke, Chairman, President and Chief Executive Officer of the
Company, and Keri Clarke, Vice President, Land and Environmental/Regulatory
Affairs of the Company, are brothers. There is no other family relationship
between any director, executive officer or person nominated or chosen by the
registrant to become a director or executive officer.
The names of the executive officers of the Company and certain information
with respect to them are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jeffrey Clarke........................ 53 Chairman, President, Chief Executive
Officer and Director
R. M. Pearce.......................... 47 Executive Vice President and Chief
Operating Officer
Eddie M. LeBlanc, III................. 50 Senior Vice President and Chief
Financial Officer
Anne Marie O'Gorman................... 40 Senior Vice President, Corporate
Development and Corporate Secretary
Keri Clarke........................... 43 Vice President, Land and
Environmental/Regulatory Affairs
R. Lynn Guillory...................... 51 Vice President, Human Resources and
Administration
Gary Hoge............................. 55 Vice President, Exploration
Larry L. Keller....................... 40 Vice President, Mid-Continent Division
Susan J. McAden....................... 41 Vice President & Controller
Patrick S. Wright..................... 42 Vice President, Gulf Coast Division
Joseph Ragusa......................... 45 Treasurer
</TABLE>
For information concerning Jeffrey Clarke, see above.
R. M. Pearce has served as Executive Vice President and Chief Operating
Officer of the Company since August 1995 and has been an officer of the Company
since November 1993. From July 1991 to October 1993, Mr. Pearce served as
President of GRL Production Services Company.
Eddie M. LeBlanc, III joined the Company as Senior Vice President and Chief
Financial Officer when the Company acquired Interstate Natural Gas Company
("ING") on December 8, 1994. From the inception of ING in March 1992 through its
acquisition by the Company, Mr. LeBlanc was Senior Vice President and Chief
Financial Officer of ING.
Anne Marie O'Gorman was appointed Senior Vice President, Corporate
Development, in March 1996 and was Vice President, Corporate Development, of the
Company (and CRI, prior to September 1993) from August 1993. Ms. O'Gorman had
been employed by CRI or CRL in various capacities since 1985. Ms. O'Gorman has
served as Secretary of the Company since September 1993.
2
<PAGE> 265
Keri Clarke has served as Vice President, Land and Environmental/Regulatory
Affairs, of the Company (and CRI, prior to September 1993) since 1989. He has
also been employed by CRL in various positions since 1981.
R. Lynn Guillory joined the Company as Vice President, Human Resources and
Administration, when the Company acquired ING on December 8, 1994. Mr. Guillory
held that same position with ING since its inception in March 1992.
Gary Hoge joined the Company as Vice President, Exploration in April 1998.
From 1994 until he joined the Company, Mr. Hoge served as Vice President,
Exploration for Greenhill Petroleum. From 1992 until 1994 Mr. Hoge served in
several senior positions with Coffman Exploration and Cielo Energy.
Larry L. Keller has served as Vice President, Mid-Continent Division since
August 1998 and Vice President, Exploitation, of the Company (and CRI, prior to
September 1993) from August 1993 and had been employed in various engineering
positions with CRI since July 1990.
Susan J. McAden was appointed Vice President and Controller in January 1998
and joined the Company as Controller in February 1995. From September 1993 to
February 1995, Ms. McAden was Vice President and Controller of Lincoln Property
Company (a property development and management company). From November 1990 to
September 1993, Ms. McAden was Chief Accounting Officer and Treasurer of Concap
Equities, Inc. (the acting general partner for sixteen public real estate
partnerships).
Patrick S. Wright has served as Vice President, Gulf Coast Division since
August 1998 and joined the Company as Vice President, Operations, in January
1996. From January 1991 until he joined the Company, Mr. Wright served in
several managerial positions with Snyder Oil Corporation (an international oil
and gas exploration and production company).
Joseph Ragusa was appointed Treasurer in January 1998 and joined the
Company as Assistant Treasurer when the Company acquired ING on December 8,
1994. Mr. Ragusa held that same position with ING since January 1993.
3
<PAGE> 266
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth information with respect to the five most
highly compensated executive officers, including the Chief Executive Officer, in
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jeffrey Clarke......................... 1998 $300,000 $ 0 -- $378,060
President and Chief 1997 $265,000 $250,000 300,000 $ 52,539
Executive Officer (1)(6) 1996 $258,333 $350,000 -- $ 47,811
R. M. Pearce........................... 1998 $225,000 $ 0 -- $ 17,171
Executive Vice President and 1997 $195,000 $140,000 160,000 $ 13,954
Chief Operating Officer(2) 1996 $192,250 $212,000 100,000 $ 7,768
Eddie M. LeBlanc, III.................. 1998 $175,000 $ 0 -- $ 12,835
Senior Vice President and 1997 $161,650 $ 85,000 150,000 $ 11,170
Chief Financial Officer(3) 1996 $160,125 $136,000 -- $ 7,014
Anne Marie O'Gorman.................... 1998 $175,000 $ 0 -- $ 83,106
Senior Vice President 1997 $161,650 $ 85,000 100,000 $ 10,516
Corporate Development and 1996 $153,875 $148,620 50,000 $ 6,112
Corporate Secretary(4)(6)
Larry L. Keller........................ 1998 $163,000 $ 0 -- $ 83,685
Vice President Exploitation(5)(6) 1997 $143,100 $ 65,000 45,000 $ 10,050
1996 $141,750 $103,000 -- $ 5,813
</TABLE>
- ---------------
(1) Mr. Clarke's All Other Compensation includes the Company's contributions to
a 401(k) savings plan of $8,000, $8,000, and $4,750 in 1998, 1997 and 1996,
respectively; premiums paid on a disability and life insurance policy of
$32,656, $32,463, and $31,910 in 1998, 1997 and 1996, respectively; and
$12,076, $12,076 and $11,152 in 1998, 1997 and 1996, respectively, of
imputed interest on a loan from the Company.
(2) Mr. Pearce's All Other Compensation includes the Company's contribution to a
401(k) savings plan of $8,000, $8,000 and $4,750 in 1998, 1997 and 1996,
respectively; and premiums paid on a disability policy of $9,171, $5,954 and
$3,018 in 1998, 1997 and 1996, respectively .
(3) Mr. LeBlanc's All Other Compensation includes the Company's contributions to
a 401(k) savings plan of $8,000, $8,000, and $4,750 in 1998, 1997 and 1996,
respectively; and premiums paid on a disability policy of $4,835, $3,171,
and $2,264 in 1998, 1997 and 1996, respectively.
(4) Ms. O'Gorman's All Other Compensation includes the Company's contributions
to a 401(k) savings plan of $8,000, $8,000 and $4,750 in 1998, 1997 and
1996, respectively; and premiums paid on a disability policy of $3,429,
$2,050, and $1,363 in 1998, 1997 and 1996, respectively. Ms. O'Gorman's
bonus in 1996 included a $12,620 reimbursement of certain relocation
expenses.
(5) Mr. Keller's All Other Compensation includes the Company's contribution to a
401(k) savings plan of $8,000, $8,000 and $4,597 in 1998, 1997 and 1996,
respectively; and premiums paid on a disability policy of $2,345, $2,050 and
$1,216 in 1998, 1997 and 1996, respectively.
(6) Included in Other Compensation for Messrs. Clarke and Keller and Ms.
O'Gorman for 1998 are $324,992, $73,331 and $71,678, respectively. The
amounts represent the payment by the Company on January 22, 1998 of the
difference of the guaranteed price of $10.50 and the strike price of stock
options exercised in October 1997 (see "Certain Relationships and Related
Transactions").
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AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE NON-EXERCISABLE EXERCISABLE NON-EXERCISABLE
- ---- -------- -------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey Clarke.......... -- $-- 579,373 0 $0 $0
R. M. Pearce............ -- $-- 420,000 0 $0 $0
Eddie M. LeBlanc, III... -- $-- 250,000 0 $0 $0
Anne Marie O'Gorman..... -- $-- 225,983 0 $0 $0
Larry L. Keller......... -- $-- 88,334 30,000 $0 $0
</TABLE>
- ---------------
(1) Computed based upon the difference between the market price on December 31,
1998 of $2.81 per share and the exercise price per share.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (each an "Employment
Agreement") with each of Messrs. Clarke, Pearce and LeBlanc and Ms. O'Gorman,
which provide for minimum annual compensation in the amount of $300,000,
$225,000, $175,000 and $175,000, respectively, in each case to be reviewed
annually by the Board of Directors for possible increases. Each Employment
Agreement is for a term of three years, renewable annually for a term to extend
two years from such renewal date unless either party gives notice. Each
Employment Agreement entitles the officer to participate in such bonus,
incentive compensation and other programs as are created by the Board. In the
event any of Messrs. Clarke, Pearce or LeBlanc or Ms. O'Gorman terminates his or
her employment for "Good Reason" (as defined below) or is terminated by the
Company for other than "Cause" (as defined below), the Company would: (i) pay
such individual a cash lump sum payment equal to two times the executive's then
current annual rate of total compensation; and (ii) continue, until the first
anniversary of the employment termination, health and medical benefits under the
Company's plans (or the equivalent thereof). In the event any of Messrs. Clarke,
Pearce or LeBlanc or Ms. O'Gorman terminates his or her employment for Good
Reason or is terminated by the Company for other than Cause within three years
of a "Change of Control" (as defined below), the Company will pay the executive
an additional lump sum equal to .99 times his or her then current annual rate of
total compensation and continue health benefits until the third anniversary of
the employment termination. In the event any of Messrs. Clarke, Pearce or
LeBlanc or Ms. O'Gorman becomes disabled or dies during the term of the
respective Employment Agreement, the Company will pay the executive or his or
her estate compensation under the Agreement for a six month period following
such death or disability. Under the Deficit Reduction Act of 1984, severance
payments contingent upon a "Change of Control" that exceeded a certain amount
subject both the Company and the officer to adverse U.S. Federal income tax
consequences. Each of the Employment Agreement was amended on March 17, 1997 to
provide that the Company shall pay the officer a "gross-up" payment to insure
that the officer receives the total benefit intended by the Employment
Agreement.
The term "Good Reason" is defined in each Employment Agreement generally to
mean: (i) the failure by the Company to elect or re-elect such executive to his
or her existing office with the Company without Cause; (ii) a material change by
the Company of the executive's function, duties or responsibilities that would
cause his or her position with the Company to become of less dignity,
responsibility, importance or scope; (iii) the Company requires the executive to
relocate his or her primary office to a location that is greater than 50 miles
from the current location of the Company; or (iv) any other material breach of
the Agreement by the Company. The term "Cause" is defined in each Employment
Agreement generally to mean: (i) any material failure of the executive after
written notice to perform his or her duties; (ii) commission of fraud by the
executive against the Company, its affiliates or customers; (iii) a material
breach by the executive of the confidentiality or non-competition provisions in
the Employment Agreement; or (iv) conviction of the executive of a felony
offense or a crime involving moral turpitude. Under each Employment Agreement, a
5
<PAGE> 268
"Change of Control" of the Company is deemed to have occurred if: (i) any person
or group of persons acting in concert becomes the beneficial owner of 20 percent
or more of the outstanding shares of Common Stock or the combined voting power
of the Company's voting securities, with certain exceptions; (ii) individuals
who as of the date of such agreement constitute the Board of Directors of the
Company (or their designated successors) cease for any reason to constitute at
least a majority thereof; or (iii) there occurs a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
Company's assets unless, after the transaction, all or substantially all of
those persons who were the beneficial owners of Common Stock prior to the
transaction beneficially own more than 60 percent of the then outstanding common
stock of the resulting corporation, no person who did not own Common Stock prior
to the transaction beneficially owns 40 percent or more of the then outstanding
common stock of the resulting corporation, and at least a majority of the Board
of Directors of the corporation resulting from such transaction were members of
the Board of Directors of the Company at the time of the execution of the
initial agreement or of the action by the Board of Directors providing for the
corporate transaction.
The Company currently has an Executive Severance Agreement (the "Severance
Agreement") with Larry L. Keller. The purpose of the Severance Agreement is to
encourage the executive officer to continue to carry out his duties with the
Company in the event of a "change of control" of the Company. Under the
Severance Agreement, a "change of control" of the Company is generally deemed to
have occurred if: (i) any person or group of persons acting in concert becomes
the beneficial owner of 20 percent or more of the outstanding shares of Common
Stock or the combined voting power of the Company's voting securities, with
certain exceptions; (ii) individuals who as of the date of such agreement
constitute the Board of Directors of the Company (or their designated
successors) cease for any reason to constitute at least a majority thereof;
(iii) there occurs a reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the Company's assets unless, after
the transaction, all or substantially all of those persons who were the
beneficial owners of Common Stock prior to the transaction beneficially own more
than 60 percent of the then outstanding common stock of the resulting
corporation, except to the extent such ownership existed prior to the corporate
transaction, no person (with certain exceptions) beneficially owns 20 percent or
more of the then outstanding common stock of the resulting corporation, and at
least a majority of the board of directors of the corporation resulting from
such transaction were members of the Board of Directors of the Company at the
time of the execution of the initial agreement or of the action by the Board of
Directors providing for the corporate transaction; or (iv) the shareholders of
the Company approve a complete liquidation or dissolution of the Company.
The Severance Agreement provides for severance payments in the event of
termination of the executive officer's employment within two years after a
change of control of the Company, unless the executive's employment is
terminated by the Company or its successor for "cause" or because of the
executive's death, "disability" or "retirement" or by the executive's voluntary
termination for other than "good reason", in each case as such terms are defined
in the Severance Agreement. The benefits include (a) a lump sum payment equal to
1.5 times the highest salary plus bonus paid to the executive in any of the five
years preceding the year of termination of employment; (b) salary to the date of
termination; and (c) immediate vesting of all stock options or restricted stock
awards that may have been granted to the executive under the Company's employee
benefit plans; provided that, such options or restricted stock awards shall vest
only to the extent the total payments to the executive under the Severance
Agreement or otherwise would not be subject to excise taxes imposed under
Section 4999 of the Internal Revenue Code of 1986, as amended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At March 31, 1999 the members of the Compensation Committee were Douglas R.
Martin, Alan Edgar and Jake Taylor. No member of the Compensation Committee was
an officer of the Company at any time during 1998.
During 1998 no executive officer of the Company served as (i) a member of
the compensation committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers served on the
Compensation Committee of the Board of Directors; (ii) a director of another
entity, one of whose executive officers served on the Compensation Committee of
the Board of Directors; or (iii) a member
6
<PAGE> 269
of the compensation committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers served as a
director of The Company.
COMPENSATION OF DIRECTORS
Director Fees
Directors who are not employees of the Company receive a semi-annual
retainer of $7,000 plus a fee of $500 for each Board or Board committee meeting
attended or, if attendance is by telephone, a fee of $250 for each such meeting
in which he participated. All directors are reimbursed for expenses incurred in
attending Board or committee meetings. Employees of the Company who are also
directors do not receive a retainer or fees for Board or committee meetings
attended.
Non-Employee Director Stock Option Plan
Under the 1993 Non-Employee Director Stock Option Plan (the "Director
Plan"), for so long as there is an adequate number of shares available for grant
thereunder, each person who becomes a non-employee director of the Company is
entitled to receive an option to purchase 5,000 shares of Common Stock at a
price per share equal to the closing sale price of such stock on the date of his
appointment or election. In addition, and for so long as there is then an
adequate number of shares available for grant under the Director Plan, each
non-employee director is entitled to receive, on the date of each annual meeting
of the Company's shareholders at which he is re-elected as director, an option
to purchase an additional 1,000 shares of Common Stock at the closing sale price
on the date of grant; provided that, until a non-employee director shall have
received options under the Director Plan for an aggregate of 15,000 shares of
Common Stock, he shall receive an option to purchase 5,000 shares on the date of
each annual meeting of the Company's shareholders at which he shall be
re-elected as director.
Options granted under the Director Plan are exercisable one year after the
date of grant and must be exercised within five years from the date the option
becomes exercisable. Such options terminate on the earlier of the date of the
expiration of the option or one day less than one month after the date the
optionee ceases to serve as a director of the Company for any reason other than
death, disability or retirement of the director. If an optionee retires from the
Board or dies while serving as a director of the Company, the option terminates
on the earlier of the date of expiration of the option or one year following the
date of retirement or death.
During the year ended December 31, 1998, Messrs. Crane, Lambert, Martin and
Taylor were each granted options under the Director Plan to acquire 1,000 shares
of Common Stock, at an exercise price of $6.875 per share.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to persons or entities who,
to the knowledge of the Company based on information received from or on behalf
of such persons, were the beneficial owners of more than 5% of the outstanding
shares of Common Stock as of March 31, 1999. Unless otherwise specified, such
persons have sole voting power and sole dispositive power with respect to all
shares attributable to it.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
- ------------------------------------ -------------------- -------------------
<S> <C> <C>
Energy Investment Partnership No. 1...................... 2,182,084(2) 8.5%
200 Crescent Court, Suite 1600
Dallas, TX 75201
Dimensional Fund Advisors................................ 1,672,500(3) 6.5%
1299 Ocean Avenue, 11th floor
Santa Monica, CA 90401
Wellington Management Company............................ 1,529,519(4) 5.9%
75 State Street
Boston, Massachusetts 02109
</TABLE>
7
<PAGE> 270
- ---------------
(1) Based on 25,603,512 shares issued and outstanding as of March 31, 1999.
(2) Based solely on information contained in a Schedule 13G dated May 20, 1998
filed with the Commission. Energy Investment Partnership No. 1 is a general
partnership and has shared voting and dispositive power with respect to
2,182,084 shares of Common Stock that are owned by the partnership.
(3) Based solely on information contained in a Schedule 13G dated January 1,
1999 filed with the Commission. Dimensional Fund Advisors Inc. acts as an
investment advisor and has sole voting and dispositive power with respect to
1,672,500 shares of Common Stock that are owned by its clients.
(4) Based solely on information contained in a Schedule 13G dated January 1,
1999 filed with the Commission. Wellington Management Company acts as a
financial advisor and has shared voting power with respect to 769,129
shares, and shared dispositive power with respect to 1,529,519 shares of
Common Stock that are owned by its clients.
The following table sets forth certain information with respect to Common
Stock beneficially owned as of March 31, 1999 by each director of the Company,
by each executive officer named in the Summary Compensation Table and by all
directors and officers as a group. Unless otherwise specified, such persons have
sole voting power and sole dispositive power with respect to all shares
attributable to him or her.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------------ ----------------
<S> <C> <C>
Jeffrey Clarke.................................... 649,161 2.5%
Louis F. Crane.................................... 31,000 *
Alan E. Edgar..................................... 480,000 1.9%
Larry L. Keller................................... 103,506 *
Eddie L. LeBlanc, III............................. 251,000 *
Kenneth H. Lambert................................ 428,714(2) 1.7%
Douglas R. Martin................................. 20,000 *
Anne Marie O'Gorman............................... 242,317 *
R. M. Pearce...................................... 425,000 1.6%
Jake Taylor....................................... 71,400 *
All directors and executive officers as a group
(16 persons).................................... 2,941,896 11.5%
</TABLE>
- ---------------
* Less than 1%
(1) Includes 579,373, 17,000, 88,334, 250,000, 19,000, 420,000, 17,000, 225,983
and 1,903,034 shares that may be acquired within 60 days upon the exercise
of stock options held by Messrs. Clarke, Crane, Keller, LeBlanc, Martin,
Pearce and Taylor, Ms. O'Gorman and all directors and executive officers as
a group, respectively.
(2) Mr. Lambert is the beneficial owner of the shares held by Lambert Management
Ltd., Lambert Holdings, Ltd., Edmonton International Industries Ltd., 372268
Alberta Ltd., 249172 Alberta Ltd. and 297139 Alberta Ltd. The number of
shares shown as beneficially owned by Mr. Lambert include the shares owned
by such entities and also include 48,046 shares that may be acquired by Mr.
Lambert within 60 days upon the exercise of stock options. Included in Mr.
Lambert's total shares are 31,984 which are held by family members; Mr.
Lambert claims no beneficial interest in these shares.
In addition to the foregoing options, Messrs. Crane, Keller, Lambert,
Martin and Taylor, and all executive officers and directors as a group held
options to acquire 1,000, 30,000, 1,000, 1,000, 1,000 and 120,997 shares of
Common Stock, respectively, which options were not exercisable within 60 days.
8
<PAGE> 271
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of a Financial Advisory Agreement entered in to between the
Company and Hicks, Muse & Co. Partners, L.P. ("HMCo"), on August 21, 1998, the
Company paid HMCo $1,250,000 as compensation for HMCo's services as a financial
advisor to the Company and its subsidiaries in connection with an agreement to
issue common stock of the Company to HM4 Coho L.P. ("HM4"). John R. Muse and
Lawrence D. Stuart, Jr., are each limited partners in HMCo and limited partners
of a limited partner in HM4, and at the time of the payment to HMCo, were
directors of the Company pursuant to an agreement with EIP. See "Item 10.
Directors and Executive Officers of the Registrant". On March 18, 1999, Messrs.
Muse and Stuart resigned from the board of directors of the Company.
Mr. Frederick Campbell, a director of the Company until the annual meeting
date of May 12, 1998, through a corporation he controls, owns an approximate
2.5% working interest in certain of the properties in the Laurel field in which
the Company has an interest and owns an approximate 5% working interest in
substantially all of the properties in the Glazier field in which CRI has an
interest.
In May 1990 the Company made a non-interest bearing loan in the amount of
$205,000 to Mr. Jeffrey Clarke, Chairman, President and Chief Executive Officer
of the Company, to assist him in the purchase of a house in Dallas, Texas. The
loan is unsecured and repayable when Mr. Clarke ceases to be employed by the
Company or its subsidiaries.
In October 1997 the Company made non-interest bearing sole recourse loans
to Jeffrey Clarke, Chairman, President and Chief Executive Officer, Anne Marie
O'Gorman, Senior Vice President Corporate Development, Larry Keller, Vice
President Exploitation and Kenneth Lambert, a Director, in the amounts of
$383,064, $84,006, $66,665 and $88,375, respectively, to assist them in the
exercise of expiring options. At the time of the expiration of such options all
of the officers and directors of the Company were subject to a ninety day lock
up agreement with the underwriters of the Company's 1997 equity offering. Under
the terms of this agreement the officers and directors were not able to sell any
shares of the Company and would not have had the funds necessary to purchase the
stock without the loan. In addition to the loan, the Company also provided a
guaranteed price of $10.50 (the price of the Common Stock in the 1997 equity
offering) to be received by Messrs. Clarke, Keller and Lambert and Ms. O'Gorman.
9
<PAGE> 272
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 hereunto duly authorized.
COHO ENERGY, INC.
(Registrant)
/s/ EDDIE M. LEBLANC, III
------------------------------------
Eddie M. LeBlanc, III
Senior Vice President and
Chief Financial Officer
Date: April 30, 1999
10
<PAGE> 1
EXHIBIT 3.3
FORM OF AMENDED AND RESTATED
ARTICLES OF INCORPORATION
(MARCH 1, 2000)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
COHO ENERGY, INC.
Pursuant to the provisions of Articles 4.07 and 4.14 of the Texas
Business Corporation Act, Coho Energy, Inc., a Texas corporation (the
"Corporation"), adopts the following Amended and Restated Articles of
Incorporation:
FIRST: On March ___, 2000, the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court"), pursuant
to the provisions of Chapter 11 of the Bankruptcy Code, 11 U.S.C. Sections 1101
et. seq., confirmed the Amended and Restated Chapter 11 Plan of Reorganization
of the Corporation (the "Plan") in In Re: Coho Energy, Inc., Coho Resources,
Inc., Coho Oil & Gas, Inc., Coho Exploration, Inc., Coho Louisiana Production
Company and Interstate Natural Gas Company, administratively consolidated under
Case No. 399-35929-HCA-11.
SECOND: The Plan provides that the Articles of Incorporation of the
Corporation are to be amended and restated in their entirety to read as follows:
ARTICLE I
The name of the Corporation is Coho Energy, Inc.
ARTICLE II
The period of the Corporation's duration is perpetual.
ARTICLE III
The purpose for which the Corporation is organized is to transact any
or all lawful business for which corporations may be organized under the Texas
Business Corporation Act.
ARTICLE IV
The total number of shares of all classes of stock which the
Corporation shall be authorized to issue is [60,000,000] shares, divided into
the following: (i) [10,000,000] shares of Preferred Stock, of the par value of
$.01 per share (hereinafter called "Preferred Stock"), and (ii) [50,000,000]
shares of common stock, of the par value of $.01 per share (hereinafter called
"Common Stock").
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A description of the respective classes of stock and a statement of the
designations, preferences, limitations and relative rights of such classes of
stock and the limitations on or denial of the voting rights of the shares of
such classes of stock are as follows:
A. PREFERRED STOCK
1. Authority of Board of Directors. The Preferred Stock may be divided
into and issued in one or more series. The board of directors is hereby vested
with authority from time to time to establish and designate such series and,
within the limitations prescribed by law or set forth herein, to fix and
determine the preferences, limitations and relative rights of the shares of any
series so established, but all shares of Preferred Stocks shall be identical
except as to the following preferences, limitations and relative rights as to
which there may be variations between different series: (a) the rate and form of
dividend; (b) the price at and the terms and conditions on which shares may be
redeemed; (c) the amount payable upon shares in event of involuntary
liquidation; (d) the amount payable upon shares in event of liquidation; (e)
sinking fund provisions for the redemption or purchase or shares; (f) the terms
and conditions in which shares may be exchanged, if the shares of any series are
issued with an exchangeable privilege; (g) the terms and conditions on which
shares may be converted if the shares of any series are issued with a conversion
privilege; and (h) voting rights. The board of directors shall exercise such
authority by the adoption of a resolution or resolutions as prescribed by law.
2. Restriction on Non-Voting Securities. Notwithstanding the provisions
of paragraph A.1 above relating to the authority of the board of directors of
the Corporation to fix the preferences, limitations and relative rights of the
shares of Preferred Stock, and to establish and fix variations in the relative
rights as between series of Preferred Stock, the board of directors of the
Corporation (a) may not authorize the issuance of any class or series of
Preferred Stock without voting rights and (b) shall provide with respect to each
class or series of Preferred Stock for an appropriate distribution of the voting
power of the Corporation, including, in the case of any class or series of
Preferred Stock having a preference over the Common Stock or any other class or
series of Preferred Stock with respect to dividends, adequate provision for the
election of directors representing such class or series of Preferred Stock in
the event of default in the payment of such dividends.
B. COMMON STOCK
1. Dividends. Subject to all the rights of the Preferred Stock or any
series thereof, and on the conditions set forth in any resolution of the board
of directors providing for the issuance of any series of Preferred Stock, the
holders of Common Stock shall be entitled to receive, when, as and if declared
by the board of directors, out of funds legally available therefor, dividends
payable in cash, stock or otherwise.
2. Voting Rights. Each holder of Common Stock shall be entitled to one
vote for each share held.
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C. PROVISIONS APPLICABLE TO ALL CLASSES
1. Preemptive Rights. No holder of securities of the Corporation shall
be entitled as a matter of right, preemptive or otherwise, to subscribe for or
purchase any securities of the Corporation now or hereafter authorized to be
issued, or securities held in the treasury of the Corporation, whether issued or
sold for cash or other consideration or as a share dividend or otherwise. Any
such securities may be issued or disposed of by the board of directors to such
persons and on such terms as in its discretion it shall deem advisable.
2. Cumulative Voting. No shareholder shall be entitled to cumulate his
votes in the election of directors of the Corporation, but each share shall be
entitled to one vote in the election of each director.
ARTICLE V
If, with respect to any matter for which the affirmative vote or
concurrence of the shareholders of the corporation is required, any provision of
the Texas Business Corporation Act would, but for this Article V, require the
affirmative vote or concurrence of the holders of shares having more than a
majority of the votes entitled to vote on such matter, or any class or series
thereof, the affirmative vote or concurrence of the greater of (i) the holders
of two-thirds (2/3) of shares that are represented at the meeting in person or
by proxy, to vote on such matter, or any class or series thereof, or (ii) the
holders of a majority of the shares issued and outstanding and entitled to vote
on such matter, or any class or series thereof, shall be required with respect
to any such matter.
ARTICLE VI
A quorum shall be present at a meeting of shareholders of the
Corporation if the holders of a majority of the shares entitled to vote are
represented at the meeting in person or by proxy.
ARTICLE VII
Any action required or permitted to be taken by the shareholders of the
Corporation must be effected at a duly called annual or special meeting of
shareholders of the Corporation any may not be effected by any consent in
writing by such shareholders. Special meetings of shareholders of the
Corporation may be called by the President, the board of directors, or such
other person or persons as may be authorized in the bylaws or by the holders of
at least fifty percent of all the shares entitled to vote at the proposed
meeting.
ARTICLE VIII
The corporation will not commence business until it has received for
the issuance of its shares consideration of the value of not less than One
Thousand Dollars ($1,000), consisting of money, labor done or property actually
received.
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ARTICLE IX
A. No director of the Corporation shall be liable to the Corporation or
any of its shareholders for monetary damages for an act or omission in the
director's capacity as a director, except that this Article IX shall not
authorize the elimination or limitation of liability of a director of the
Corporation to the extent the director is found liable for: (i) a breach of such
director's duty of loyalty to the corporation or its shareholders; (ii) an act
or omission not in good faith that constitutes a breach of duty of such director
to the Corporation or an act or omission that involves intentional misconduct or
a knowing violation of the law; (iii) a transaction from which such director
received an improper benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office; or (iv) an act or omission for
which the liability of a director is expressly provided;
B. If the Texas Business Corporation Act, the Texas Miscellaneous
Corporation Laws Act or any other applicable Texas statute hereafter is amended
to authorize the further elimination or limitation of the liability of directors
of the Corporation, then the liability of a director of the Corporation shall be
limited to the fullest extent permitted by the Texas Business Corporation Act,
the Texas Miscellaneous Corporation Laws Act and such other applicable Texas
statute, as so amended, and such limitation of liability shall be in addition
to, and not in lieu of, the limitation on the liability of a director of the
Corporation provided by the foregoing provisions of this Article IX.
C. Any repeal of or amendment to this Article IX shall be prospective
only and shall not adversely affect any limitation on the liability of a
director of the Corporation existing at the time of such repeal or amendment.
ARTICLE X
The post office address of the Corporation's registered office is 811
Dallas Street, Houston, Texas 77002, and the name of its initial registered
agent is CT Corporation System.
ARTICLE XI
The number of directors constituting the current board of directors is
seven, and the names and addresses of the persons currently serving as directors
of the Corporation, to serve until the next annual meeting of the shareholders
or until their successors are elected and qualified, are:
<TABLE>
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Name: Address:
---- --------
<S> <C>
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</TABLE>
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FOURTH: The filing of these Amended and Restated Articles of
Incorporation of the Corporation is provided for in the Plan and in the order of
the Bankruptcy Court confirming the Plan.
IN WITNESS WHEREOF, the Corporation, as authorized and directed by
order of the Bankruptcy Court confirming the Plan, has caused these Amended and
Restated Articles of Incorporation of the Corporation to be signed by its Chief
Executive Officer, on ______________, 2000.
COHO ENERGY, INC.
By:
--------------------------------------------
Chief Executive Officer
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<PAGE> 1
EXHIBIT 3.4
FORM OF AMENDED AND
RESTATED BYLAWS
(MARCH 1, 2000)
EFFECTIVE AS OF ____________, 2000
COHO ENERGY, INC.
AMENDED AND RESTATED BYLAWS
ARTICLE I
OFFICES
SECTION 1.01. PRINCIPAL PLACE OF BUSINESS. The principal place of business
of the corporation and the office of its transfer agent or registrar may be
located outside the State of Texas.
SECTION 1.02. OTHER OFFICES. The corporation may also have offices at such
other places both within and without the State of Texas as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 2.01. TIME AND PLACE OF MEETINGS. Meetings of shareholders for any
purpose may be held at such time and place within or without the State of Texas
as shall be stated in the notice of the meeting or in a duly executed waiver of
notice thereof.
SECTION 2.02. ANNUAL MEETING. The annual meeting of shareholders shall be
held annually at such date and time as shall be designated from time to time by
the board of directors and stated in the notice of meeting.
SECTION 2.03. SPECIAL MEETINGS. Special meetings of the shareholders for
any purpose or purposes may be called by the president and shall be called by
the president, the chief executive officer or the chairman of the board, or by
the secretary at the request in writing of a majority of the board of directors,
or at the request in writing of shareholders owning at least ten percent of all
the shares entitled to vote at the meetings. A request for a special meeting
shall state the purpose or purposes of the proposed meeting, and business
transacted at any special meeting of shareholders shall be limited to the
purposes stated in the notice.
SECTION 2.04. NOTICE OF MEETING. Written notice stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
nor more than sixty days before the date of the meeting, either personally or by
mail, by or at the direction of the president, the secretary, or the officer or
persons calling the meeting, to each shareholder entitled to vote at such
meeting.
<PAGE> 2
If mailed, such notice shall be deemed to be delivered when deposited in
the United States mail addressed to the shareholder at his address as it appears
on the stock transfer books of the corporation.
SECTION 2.05. QUORUM. The holders of a majority of the shares issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise provided by statute or by the
articles of incorporation. If, however, a quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. After an
adjournment, at any reconvened meeting any business may be transacted that might
have been transacted if the meeting had been held in accordance with the
original notice thereof, provided a quorum shall be present or represented
thereat.
SECTION 2.06. VOTE REQUIRED. With respect to any matter, other than the
election of directors, the affirmative vote of the holders of a majority of the
shares entitled to vote on that matter and represented in person or by proxy at
a meeting of shareholders at which a quorum is present, shall decide such
matter, unless the matter is one upon which a different vote is required by law
or by the articles of incorporation. Unless otherwise required by law or by the
articles of incorporation, directors shall be elected by a plurality of the
votes cast by the holders of shares entitled to vote in the election of
directors at a meeting of shareholders at which a quorum is present.
SECTION 2.07. VOTING; PROXIES. Each outstanding share having voting power
shall be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders. Any shareholder may vote either in person or by proxy executed in
writing by the shareholder. A telegram, telex, cablegram or similar transmission
by the shareholder, or a photographic, photostatic, facsimile or similar
reproduction of a writing executed by the shareholder shall be treated as an
execution in writing for purposes of this Section 2.07.
ARTICLE III
DIRECTORS
SECTION 3.01. POWERS. The powers of the corporation shall be exercised by
or under the authority of, and the business and affairs of the corporation shall
be managed under the direction of, the board of directors.
SECTION 3.02. NUMBER, ELECTION AND TERM. The number of directors that shall
constitute the whole board of directors shall be not less than one. Such number
of directors shall from time to time be fixed and determined by the directors
and shall be set forth in the notice of any meeting of shareholders held for the
purpose of electing directors. The directors shall be elected at the annual
meeting of shareholders, except as provided in Section 3.03 of these bylaws, and
each director elected shall hold office until his successor shall be elected and
qualify. Directors need not be residents of Texas or shareholders of the
corporation.
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SECTION 3.03. VACANCIES. Any vacancy occurring in the board of directors
may be filled by a majority of the remaining directors though less than a quorum
of the board of directors. A director elected to fill a vacancy shall be elected
for the unexpired term of his predecessor in office.
SECTION 3.04. CHANGE IN NUMBER. The number of directors may be increased or
decreased from time to time as provided in these bylaws but no decrease shall
have the effect of shortening the term of any incumbent director. Any
directorship to be filled by reason of an increase in the number of directors
may be filled by election at an annual or special meeting of shareholders or may
be filled by the board of directors for a term of office continuing only until
the next election of one or more directors by the shareholders; provided that
the board of directors may not fill more than two such directorships during the
period between any two successive annual meetings of shareholders. When the
number of directors is changed, any newly created directorship or any decrease
in directorships shall be so assigned among the classes by a majority of the
directors then in office, though less than a quorum, as to make all classes as
equal in number as may be feasible.
SECTION 3.05. REMOVAL. Any director may be removed either for or without
cause by the holders of either (i) a majority of the shares of common stock
outstanding or (ii) 66 2/3% of the shares present and entitled to vote at a
meeting of shareholders called for such purpose. This Section 3.05 may not be
amended except upon the affirmative vote of the holders of a majority of the
shares of common stock outstanding.
SECTION 3.06. PLACE OF MEETINGS. Meetings of the board of directors,
regular or special, may be held either within or without the State of Texas.
SECTION 3.07. REGULAR MEETINGS. The first meeting of each newly elected
board of directors shall be held at such time and place as shall be fixed by the
vote of the shareholders at the annual meeting and no notice of such meeting
shall be necessary to the newly elected directors in order legally to constitute
the meeting, provided a quorum shall be present. In the event that the
shareholders fail to fix the time and place of such first meeting, it shall be
held without notice immediately following the annual meeting of shareholders,
and at the same place, unless by the unanimous consent of the directors then
elected and serving such time or place shall be changed.
SECTION 3.08. NOTICE OF REGULAR MEETINGS. Regular meetings of the board of
directors may be held upon such notice, or without notice, and at such time and
at such place as shall from time to time be determined by the board.
SECTION 3.09. SPECIAL MEETINGS. Special meetings of the board of directors
may be called by the chairman of the board of directors or the president and
shall be called by the secretary on the written request of a majority of the
directors. Notice of each special meeting of the board of directors shall be
given to each director at least two days before the date of the meeting.
SECTION 3.10. WAIVER AND REQUIREMENTS OF NOTICE. Attendance of a director
at any meeting shall constitute a waiver of notice of such meeting, except where
a director attends for the express purpose of objecting to the transaction of
any business on the ground that the meeting is not lawfully
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called or convened. Except as may be otherwise provided by law or by the
articles of incorporation or by these bylaws, neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the board
of directors need be specified in the notice or waiver of notice of such
meeting.
SECTION 3.11. QUORUM; VOTE REQUIRED. At all meetings of the board of
directors a majority of the directors shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors, unless otherwise specifically provided by law, the articles of
incorporation or these bylaws. If a quorum shall not be present at any meeting
of directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present. Until __________, 2001 [one year after the Effective Date],
the following transactions will require the vote of at least five of the members
of the board of directors: (a) any sale of assets of the corporation in any one
transaction, or group of related transactions, whose value is more than $10
million; and (b) any merger or other combination of the corporation with another
entity.
SECTION 3.12. COMMITTEES. The board of directors, by resolution passed by a
majority of the full board, may from time to time designate a member or members
of the board to constitute committees that shall in each case consist of one or
more directors and may designate one or more of its members as alternate members
of any committee, who may, subject to any limitations imposed by the board of
directors, replace absent or disqualified members at any meeting of that
committee. Any such committee shall have and may exercise such powers, as the
board may determine and specify in the respective resolutions appointing them. A
majority of all the members of any such committee may determine its action and
fix the time and place of its meetings, unless the board of directors shall
otherwise provide. The board of directors shall have power at any time to change
the number, subject as aforesaid, and members of any such committee, to fill
vacancies and to discharge any such committee.
SECTION 3.13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at a meeting of the board of directors or any committee may be taken
without a meeting if a consent in writing, setting forth the action so taken, is
signed by all the members of the board of directors or committee, as the case
may be.
SECTION 3.14. COMPENSATION. By resolution of the board of directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the board of directors, or a meeting of a committee thereof, and may be paid a
fixed sum for attendance at each meeting of the board of directors, or a meeting
of a committee thereof, or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor.
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ARTICLE IV
NOTICES
SECTION 4.01. FORM OF NOTICE, DELIVERY. Any notice to directors or
shareholders shall be in writing and shall be delivered personally or mailed to
the directors or shareholders at their respective addresses appearing on the
books of the corporation. Notice by mail shall be deemed to be given at the time
when the same shall be deposited in the United States mail, postage prepaid.
Notice to directors may also be given by telegram, telex, cablegram, facsimile
or other similar transmission.
SECTION 4.02. WAIVER. Whenever any notice is required to be given under the
provisions of the statutes or of the articles of incorporation or of these
bylaws, a waiver thereof in writing signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
ARTICLE V
OFFICERS
SECTION 5.01. OFFICERS. The officers of the corporation shall be elected by
the board of directors and shall consist of a president and a secretary, neither
of whom need be a member of the board of directors. Two or more offices may be
held by the same person.
SECTION 5.02. ADDITIONAL OFFICERS. The board of directors may also elect a
chairman of the board, a chief executive officer who may, but need not be,
either the chairman of the board or president, a treasurer, and one or more vice
presidents, assistant secretaries and assistant treasurers. The board of
directors may appoint such other officers and assistant officers and agents as
it shall deem necessary, who shall hold their offices for such terms and shall
have such authority and exercise such powers and perform such duties as shall be
determined from time to time by the board by resolution not inconsistent with
these bylaws.
SECTION 5.03. COMPENSATION. The salaries of all officers and agents of the
corporation shall be fixed by the board of directors. The board of directors
shall have the power to enter into contracts for the employment and compensation
of officers for such terms as the board deems advisable.
SECTION 5.04. TERM; REMOVAL; VACANCIES. The officers of the corporation
shall hold office until their successors are elected or appointed and qualify,
or until their death or until their resignation or removal from office. Any
officer elected or appointed by the board of directors may be removed at any
time by the board, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights. Any vacancy occurring in
any office of the corporation by death, resignation, removal or otherwise shall
be filled by the board of directors.
SECTION 5.05. CHAIRMAN OF THE BOARD. The chairman of the board, if one is
elected, shall preside at all meetings of the board of directors and shall have
such other powers and duties as may
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<PAGE> 6
from time to time be prescribed by the board of directors, upon written
directions given to him pursuant to resolutions duly adopted by the board of
directors.
SECTION 5.06. CHIEF EXECUTIVE OFFICER. The chief executive officer, if one
is elected, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the board of
directors are carried into effect. He shall preside at all meetings of the
shareholders.
SECTION 5.07. PRESIDENT. If a chief executive shall not have been elected,
the president shall be the chief executive officer of the corporation and shall
perform the duties and have the authority and exercise the powers of such
office. If, a chief executive shall have been elected or the board of directors
shall have designated the chairman of the board as the chief executive officer,
the president shall perform such duties and have such authority and powers as
the board of directors may from time to time prescribe or as the chief executive
officer may from time to time delegate.
SECTION 5.08. VICE PRESIDENTS. The vice presidents in the order of their
seniority, unless otherwise determined by the board of directors, shall, in the
absence or disability of the president, perform the duties and have the
authority and exercise the powers of the president. They shall perform such
other duties and have such other authority and powers as the board of directors
may from time to time prescribe or as the president may from time to time
delegate.
SECTION 5.09. SECRETARY. The secretary shall attend all meetings of the
board of directors and all meetings of shareholders and record all of the
proceedings of the meetings of the board of directors and of the shareholders in
a minute book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the shareholders and special meetings of the board of
directors, and shall perform such other duties as may be prescribed by the board
of directors or president, under whose supervision he shall be. He shall keep in
safe custody the seal of the corporation and, when authorized by the board of
directors, shall affix the same to any instrument requiring it and, when so
affixed, it shall be attested by his signature or by the signature of an
assistant secretary or of the treasurer. The secretary shall perform such other
duties and have such other powers as the board of directors may from time to
time prescribe or as the president may from time to time delegate.
SECTION 5.10. ASSISTANT SECRETARIES. The assistant secretaries in the order
of their seniority, unless otherwise determined by the board of directors,
shall, in the absence or disability of the secretary, perform the duties and
exercise the powers of the secretary. They shall perform such other duties and
have such other powers as the board of directors may from time to time prescribe
or as the president may from time to time delegate.
SECTION 5.11. TREASURER. The treasurer, if one is elected, shall have
custody of the corporate funds and securities and shall keep full and accurate
accounts and records of receipts, disbursements and other transactions in books
belonging to the corporation, and shall deposit all moneys and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated from time to time by the board of directors. The treasurer
shall disburse the funds of the corporation as may be ordered by the board of
directors, taking proper vouchers for such
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<PAGE> 7
disbursements, and shall render the president and the board of directors, when
so directed, an account of all his transactions as treasurer and of the
financial condition of the corporation. The treasurer shall perform such other
duties and have such other powers as the board of directors may from time to
time prescribe or as the president may from time to time delegate. If required
by the board of directors, the treasurer shall give the corporation a bond of
such type, character and amount as the board of directors may require.
SECTION 5.12. ASSISTANT TREASURERS. The assistant treasurers in the order
of their seniority, unless otherwise determined by the board of directors,
shall, in the absence or disability of the treasurer, perform the duties and
exercise the powers of the treasurer. They shall perform such other duties and
have such other powers as the board of directors may from time to time prescribe
or the president may from time to time delegate.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
SECTION 6.01. CERTIFICATES. The shares of the corporation shall be
represented by certificates signed by the president or a vice president and the
secretary or an assistant secretary of the corporation, and may be sealed with
the seal of the corporation or a facsimile thereof.
SECTION 6.02. FACSIMILE SIGNATURES. The signatures of the president or a
vice president and the secretary or an assistant secretary upon a certificate
may be facsimiles. In case any officer who has signed or whose facsimile
signature has been placed upon such certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the corporation
with the same effect as if he were such officer at the date of its issue.
SECTION 6.03. LOST CERTIFICATES. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
corporation alleged to have been lost or destroyed. When authorizing such issue
of a new certificate, the board of directors, in its discretion and as a
condition precedent to the issuance thereof, may prescribe such terms and
conditions as it deems expedient and may require such indemnities as it deems
adequate to protect the corporation from any claim that may be made against it
with respect to any such certificate alleged to have been lost or destroyed.
SECTION 6.04. TRANSFERS. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person entitled thereto and
the old certificate canceled and the transaction recorded upon the transfer
records of the corporation.
SECTION 6.05. FIXING RECORD DATES. For the purpose of determining
shareholders (i) entitled to notice of or to vote at any meeting of
shareholders, or, after an adjournment thereof, at any reconvened meeting, (ii)
entitled to receive a distribution (other than a distribution involving a
purchase or redemption by the corporation of any of its own shares) or a share
dividend or (iii) for
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any other proper purpose (other than determining shareholders entitled to
consent to action by shareholders proposed to be taken without a meeting of
shareholders), the board of directors may provide that the share transfer
records shall be closed for a stated period but not to exceed, in any case,
sixty days. If the share transfer records shall be closed for the purpose of
determining shareholders entitled to notice of or to vote at a meeting of
shareholders, such records shall be closed for at least ten days immediately
preceding such meeting. In lieu of closing the share transfer records, the board
of directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than sixty
days and, in the case of a meeting of shareholders, not less than ten days,
prior to the date on which the particular action requiring such determination of
shareholders, is to be taken. If the share transfer records are not closed and
no record date is fixed for the determination of shareholders entitled to notice
of or to vote at a meeting of shareholders, or shareholders entitled to receive
a distribution (other than a distribution involving a purchase or redemption by
the corporation of any of its own shares) or a share dividend, the date on which
notice of the meeting is mailed or the date on which the resolution of the board
of directors declaring such distribution or share dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section 6.05, such determination
shall apply to any adjournment thereof. The stock transfer books shall not be
closed for the foregoing or any other purpose.
SECTION 6.06. REGISTERED SHAREHOLDERS. Except as otherwise required by law,
the corporation shall be entitled to regard the person in whose name any shares
are registered in the share transfer records at any particular time as the owner
of those shares at that time for purposes of voting those shares, receiving
distributions, share dividends or notices in respect thereof, transferring those
shares, exercising rights of dissent with respect to those shares, exercising or
waiving any preemptive right with respect to those shares, entering into
agreements with respect to those shares or giving proxies with respect to those
shares. Except as otherwise required by law, neither the corporation nor any of
its officers, directors, employees or agents shall be liable for regarding that
person as the owner of those shares at that time for those purposes, regardless
of whether that person does not possess a certificate for those shares.
SECTION 6.07. LIST OF SHAREHOLDERS. The officer or agent having charge of
the transfer books for shares shall make, at least ten days before each meeting
of shareholders, a complete list of the shareholders entitled to vote at such
meeting, arranged in alphabetical order, with the address of each and the number
of shares held by each, which list, for a period of ten days prior to such
meeting, shall be kept on file at the registered office or principal place of
business of the corporation and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting. The
original share ledger or transfer book, or a duplicate thereof, shall be prima
facie evidence as to who are the shareholders entitled to examine such list or
share ledger or transfer book or to vote at any meeting of the shareholders.
-8-
<PAGE> 9
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.01. DISTRIBUTIONS AND SHARE DIVIDENDS. Subject to the provisions
of the articles of incorporation relating thereto, if any, distributions and
share dividends may be declared by the board of directors, in its discretion, at
any regular or special meeting, pursuant to law. Subject to any provisions of
the articles of incorporation, distributions may be made by the transfer of
money or other property (except the corporation's own shares or rights to
acquire such shares) or by the issuance of indebtedness of the corporation, and
share dividends may be paid in the corporation's own authorized but unissued
shares or in treasury shares.
SECTION 7.02. RESERVE FUNDS. Before payment of any distribution or share
dividend, there may be set aside out of any funds of the corporation available
for distributions or share dividends such sum or sums as the directors from time
to time, in their absolute discretion, think proper as a reserve fund for
meeting contingencies, or for equalizing distributions or share dividends, or
for repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
SECTION 7.03. CHECKS. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
SECTION 7.04. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the board of directors; provided, that if such fiscal
year is not fixed by the board of directors it shall be the calendar year.
SECTION 7.05. SEAL. The corporate seal shall be in such form as may be
prescribed by the board of directors. The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any manner reproduced.
SECTION 7.06. BOOKS AND RECORDS. The corporation shall keep books and
records of account and shall keep minutes of the proceedings of its
shareholders, its board of directors and each committee of its board of
directors. The corporation shall keep at its registered office or principal
place of business, or at the office of its transfer agent or registrar, a record
of the original issuance of shares issued by the corporation and a record of
each transfer of those shares that have been presented to the corporation for
registration of transfer. Such records shall contain the names and addresses of
all past and current shareholders of the corporation and the number and class or
series of shares issued by the corporation held by each of them. Any books,
records and minutes may be in written form or in any other form capable of being
converted into written form within a reasonable time.
SECTION 7.07. INVALID PROVISIONS. If any provision of these bylaws is held
to be illegal, invalid, or unenforceable under present or future laws, such
provision shall be fully severable; these
-9-
<PAGE> 10
bylaws shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there shall be added automatically as a part of these bylaws a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid, and enforceable.
SECTION 7.08. HEADINGS. The headings used in these bylaws are for reference
purposes only and do not affect in any way the meaning or interpretation of
these bylaws.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act (the "Article")
permits the corporation to indemnify its present and former directors and
officers to the extent and under the circumstances set forth therein. In
addition, in some instances, indemnification is required by the Article. The
corporation hereby elects to and does hereby indemnify all such persons to the
fullest extent permitted or required by the Article promptly upon request of any
such person making a request for indemnity hereunder. Such obligation to so
indemnify and to so make such determinations may be specifically enforced by
resort to any court of competent jurisdiction. Further, the corporation shall
pay or reimburse the reasonable expenses of such persons covered hereby in
advance of the final disposition of any proceeding to the fullest extent
permitted by the Article and subject to the conditions thereof. A person's right
to request, or entitlement to claim, indemnification, payment or reimbursement
pursuant to this Article VIII shall not be deemed exclusive of any other right
to request, or entitlement to claim, indemnification, payment or reimbursement
pursuant to any contract of insurance or any other law, contract, arrangement or
understanding.
ARTICLE IX
AMENDMENTS
Except as otherwise provided herein, these bylaws may be altered, amended,
or repealed or new bylaws may be adopted by the affirmative vote of a majority
of the whole board of directors at any regular or special meeting; provided,
that these bylaws may not be altered, amended, or repealed so as to be
inconsistent with law or any provision of the articles of incorporation;
provided further, that the last sentence of Section 3.11 of these bylaws may not
be altered, amended or repealed without the affirmative vote of at least five of
the members of the board of directors of the corporation.
-10-
<PAGE> 1
EXHIBIT 10.27
[EOTT ENERGY OPERATING LIMITED PARTNERSHIP LETTERHEAD]
CRUDE OIL PURCHASE CONTRACT
March 5, 1999
Coho Marketing & Transportation, Inc.
Attn: Ms. Anne Marie O'Gorman
14785 Preston Road, Suite 865
Dallas, Texas 75240
Re: EOTT Contract No. 52826
Coho Contract No.____________
Gentlemen:
When accepted by you in the manner hereinafter indicated, this shall evidence
the agreement ("Agreement") between COHO MARKETING & TRANSPORTATION, INC.,
hereinafter referred to as "Coho" and EOTT ENERGY OPERATING LIMITED PARTNERSHIP,
hereinafter referred to as "EOTT", under the terms of which, and for and in
consideration of the promises made hereunder, such parties shall sell and buy
the hereinafter described crude oil and/or condensate as follows:
I. TERM:
Commencing at 7:00 a.m. C.T. on March 1, 1999 through December 31, 1999,
and continuing annually thereafter, until terminated by either party
giving the other party written notice of such cancellation prior to
September 30 for each term.
If at any time during 1999, or any subsequent renewal period, the floor
pricing plan is in effect (meaning the price paid under the Agreement is
the floor price, even if the market did not automatically trigger the floor
price), EOTT, at its option, may extend the Agreement for an additional one
year term at the same terms and conditions.
II. TYPE OF OIL:
Coho shall deliver to EOTT Mississippi Heavy Sour type of crude oil from
leases identified on Exhibit "A" or new lease production acceptable to
EOTT.
III. QUANTITY:
Coho shall deliver to EOTT a mutually agreed minimum quantity of crude oil,
with a total calculated monthly from the expected minimum volumes from each
field, estimated to be approximately 1,185 BPD at 3/1/99. This minimum
monthly volume will be increased by 5% on April 1, 1999, May 1, 1999, June
1, 1999 and July 1, 1999 (1,244 BPD for April 1999, 1,306 BPD for May 1999,
1,371 BPD for June 1999 and 1,440 BPD for July 1999 through end of term).
Coho may revise the minimum quantity of crude oil to be delivered On a
monthly basis for any renewal term by providing data to support a volume
reduction.
<PAGE> 2
IV. DELIVERY:
Coho shall deliver at the leases through meters and/or tank gauges into
EOTT's designated trucks.
V. PRICE:
For each barrel of crude oil purchased by EOTT, EOTT shall pay the higher
of (A) a mutually agreed floor price of $8.50 per barrel or (B) EOTT's
posted price for West Texas Sour crude oil, gravity delivered, plus $.50
per barrel ("Posted Price"). For pricing purposes, all crude oil delivered
hereunder during any calendar month will be considered to have been
delivered in equal daily quantities during such month.
The floor price will be an option for payment for each barrel purchased by
EOTT in any month in which any field reaches its minimum expected volume
(as set forth on Exhibit "B" attached hereto and made a part hereof). The
monthly volume will be calculated by EOTT based on the total barrels
purchased by EOTT from that field by the number of calendar days in the
month.
For any month in which the floor price is an option for payment and the
minimum monthly volumes have not been met by Coho, before determining which
price is higher, the floor price will be reduced by the percentage of the
under delivery. For example, if the minimum monthly volume is 1,000
barrels, but actual deliveries from that field total 900 barrels, the price
to be paid per barrel shall be the higher of (A) 90% of the floor price or
(B) the Posted Price.
If, for any subsequent renewal period, Coho does not elect to renew the
floor price option of the pricing provision, all crude oil will be paid at
the Posted Price.
VI. PAYMENT:
Payment shall be made pursuant to open division orders, executed by each
party, less taxes, payable by check on the twentieth (20th) day of the
month following the month of delivery. In the event the payment due date
falls on a Saturday or a bank/Federal holiday other than a Monday, payment
shall be due on the last preceding business day. Should the payment due
date fall on a Sunday or a Monday bank/Federal holiday, payment shall be
due on the following business day.
VII. DIVISION ORDERS:
All division orders, division order documents and division order matters
shall be sent to the following addresses:
<TABLE>
<CAPTION>
<S> <C>
EOTT Energy Operating Limited Partnership Coho Marketing & Transportation, Inc.
ATTN: Division Order Department ATTN; Division Order Department
P.O. BOX 4666 14785 Preston Road, Suite 860
HOUSTON. TX 77210-4666 Dallas, Texas 75240
</TABLE>
If any division orders are executed pursuant to this Agreement, and in the
event of any irreconcilable conflict between the terms of any such division
orders and this Agreement, the terms of this Agreement shall be deemed
controlling, even if the division orders are dated subsequent to this
Agreement.
<PAGE> 3
VIII. INVOICES:
Invoices and any other invoicing matters/documents shall be mailed to the
following addresses:
<TABLE>
<CAPTION>
<S> <C>
EOTT Energy Operating Limited Partnership Coho Marketing & Transportation, Inc.
ATTN: Crude Oil Accounting ATTN:________________________
P.O. Box 4666 14875 Preston Road, Suite 860
Houston, TX 77210-4666 Dallas, Texas 75240
</TABLE>
IV. SPECIAL PROVISIONS:
A. All crude oil delivered to EOTT hereunder will be crude oil delivered
in accordance with the quality standards set forth herein [NOTE: We
either have to attach the General Provisions from the first contract
or insert quality standards], and Coho shall fully indemnify EOTT
against and hold EOTT harmless from any loss, damage, harm,
liability, claim, action, suit, demand or complaint of any nature
whatsoever, which EOTT may suffer as a result of receiving
non-standard crude oil from Coho at the point of title transfer set
forth herein as a consequence of Coho's intentional addition in any
such crude oil of any contaminant.
B. Coho represents and warrants to EOTT that it has full right and
authority to enter into this Agreement for all of the crude oil
committed by Coho hereunder and that Coho is violating no duty or
obligation which it may have with any third party by entering into
this Agreement.
C. Coho shall fully defend and indemnify EOTT against, and hold EOTT
fully harmless from, any claim, action, suit, demand or complaint (of
any nature whatsoever) which any governmental entity or any interest
owner in any well or lease from which the crude oil delivered to EOTT
was produced may bring in connection with (i) Coho's ability to enter
into this Agreement with EOTT, or (ii) any production proceeds out by
EOTT pursuant to this Agreement.
D. Neither party shall assign this Agreement to any person or firm
except upon written consent by the other party, including credit
approval, which consent shall not be unreasonably withheld. This
Agreement shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, representatives, successors
and assigns.
Please confirm your acceptance of, and agreement with, this transaction
by signing below in the space provided and return facsimile to 601-969-6516
within the next 48 hours, followed by return by regular mail. If we have not
heard from you to the contrary within the foregoing time frame, your acceptance
will be presumed.
Very truly yours,
EOTT ENERGY OPERATING LIMITED PARTNERSHIP
By: EOTT Energy Corp., its General Partner
By: /s/ DAN E. COLE
-------------------------------
Name: Dan E. Cole
-----------------------------
Title: Regional Business Manager
----------------------------
Fax: (601) 969-6516
------------------------------
<PAGE> 4
AGREED TO AND ACCEPTED THIS 1 DAY OF APRIL, 1999 BY:
COHO MARKETING & TRANSPORTATION, INC.
By: /s/ ANNE MARIE O'GORMAN
-----------------------------
Name: Anne Marie O'Gorman
---------------------------
Title: Sr. Vice President
--------------------------
Fax:
----------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 20, 2000
<PAGE> 1
EXHIBIT 23.2
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the incorporation in this Registration Statement
on Form S-1 of our reserve report regarding the interests of Coho Energy, Inc.
(the Company) dated February 16, 2000, relating to estimated quantities of
certain of the Company's proved reserves of oil and gas. We also consent to the
references to us under the headings "Reserves" and "Engineers" in such
Registration Statement.
/s/ RYDER SCOTT COMPANY, L.P.
RYDER SCOTT COMPANY, L.P.
Houston, Texas
March 16, 2000
<PAGE> 1
EXHIBIT 23.3
[SPROULE ASSOCIATES INC. LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the incorporation in this Registration Statement on Form
S-1 of our reserve report regarding the interests of Coho Energy, Inc. (the
Company) dated February 3, 2000, relating to estimated quantities of certain of
the Company's proved reserves of oil and gas. We also consent to the references
to us under the headings "Reserves" and "Engineers" in such Registration
Statement.
/s/ SPROULE ASSOCIATES INC.
SPROULE ASSOCIATES INC.
Geological and Petroleum Engineering Consultants
Denver, Colorado
March 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000908797
<NAME> COHO ENERGY, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 18,883
<SECURITIES> 0
<RECEIVABLES> 12,043
<ALLOWANCES> (885)
<INVENTORY> 0
<CURRENT-ASSETS> 31,469
<PP&E> 684,896
<DEPRECIATION> (373,108)
<TOTAL-ASSETS> 348,801
<CURRENT-LIABILITIES> 15,220
<BONDS> 149,080
0
0
<COMMON> 256
<OTHER-SE> (92,214)
<TOTAL-LIABILITY-AND-EQUITY> 348,801
<SALES> 57,323
<TOTAL-REVENUES> 57,323
<CGS> 21,155
<TOTAL-COSTS> 45,810
<OTHER-EXPENSES> 8,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,698
<INCOME-PRETAX> (30,741)
<INCOME-TAX> (26)
<INCOME-CONTINUING> (30,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,715)
<EPS-BASIC> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
NOTICE OF EXERCISE OF RIGHTS
To Purchase a Portion of the New Common Stock
Offered in the Offering Being Made Pursuant to
The First Amended and Restated Plan of Reorganization of
COHO ENERGY, INC.
Under Chapter 11 of the United States Bankruptcy Code
================================================================================
THE OPPORTUNITY TO PURCHASE SHARES OF NEW COMMON STOCK UPON
EXERCISE OF THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
MARCH ___, 2000.
================================================================================
The Subscription Agent for the Offering is:
[ChaseMellon Shareholder Services LLC]
Telephone number:
---------------
By Mail: By Hand or Overnight Courier:
[ChaseMellon Shareholder Services LLC] [ChaseMellon Shareholder Services LLC]
[Mailing address] [Physical address]
Dallas, Texas 75 Dallas, Texas 75
--- ---
In order for Rights to be validly exercised, a properly completed and
duly executed original of this Notice of Exercise of Rights (or a properly
completed and duly executed photocopy hereof) must be received by the
Subscription Agent at one of the addresses set forth above prior to 5:00 p.m.,
New York City time, on March ___, 2000. The instructions accompanying this
Notice of Exercise of Rights should be read carefully and followed precisely.
Questions and requests for assistance should be directed to the Subscription
Agent at the address or telephone number set forth above.
The terms and conditions of the Rights are set forth in the enclosed
prospectus and are incorporated herein by reference. The Prospectus also
contains important information regarding the New Common Stock, including certain
material risks that are inherent in an investment in such securities. You are
encouraged to read and consider carefully the contents of the Prospectus before
deciding whether to exercise or refrain from exercising Rights. Additional
copies of this Notice of Exercise of Rights, the Prospectus, the Debtors' and
Creditors Committee's First Amended and Restated Chapter 11 Plan of
Reorganization or the accompanying Disclosure Statement are available by sending
a written request to the Subscription Agent at the address set forth above or to
Coho Energy, Inc., 14785 Preston Road, Suite 860, Dallas, Texas 75240 to the
attention of Ms. Anne Marie O'Gorman. No recommendation is made regarding your
decision to exercise or refrain from exercising Rights.
-1-
<PAGE> 2
Your name and address should be hand printed below (if it is not
already preprinted below).
<TABLE>
<CAPTION>
========================================================================================
Aggregate Number of
Shares Held of Record Aggregate Number of
Name(s) and Address of Eligible Holder(s) on February 29, 2000 Rights Issued
- ----------------------------------------- --------------------- -------------------
<S> <C> <C>
========================================================================================
</TABLE>
This Notice of Exercise of Rights is dated March __, 2000.
-2-
<PAGE> 3
TO HOLDERS OF COMMON STOCK OF COHO ENERGY, INC.
AS OF FEBRUARY 29, 2000:
On February 7, 2000, the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (the "Bankruptcy Court"), in the
chapter 11 reorganization cases filed by Coho Energy, Inc., Coho Resources,
Inc., Coho Oil & Gas, Inc., Coho Exploration, Inc., Coho Louisiana Production
Company and Interstate Natural Gas Company (collectively, the "Debtors"), issued
an order approving the Debtors' First Amended and Restated Disclosure Statement
dated February 14, 2000 (the "Disclosure Statement") with respect to the First
Amended and Restated Chapter 11 Plan of Reorganization dated February 14, 2000
(the "Plan") jointly proposed by the Debtors and the Official Committee of
Unsecured Creditors (collectively, the "Proponents"). As a part of the Plan,
Coho Energy, Inc. (the "Company") is offering rights (the "Rights") to acquire
shares of a new class of common stock (the "New Common Stock") of the Company to
be issued after confirmation of the Plan by the Bankruptcy Court. In connection
with the offering of Rights and the offering and sale of the New Common Stock,
the Company has filed with the Securities and Exchange Commission a registration
statement (the "Registration Statement") to register the Rights and the New
Common Stock. The Prospectus constituting a part of the Registration Statement
is enclosed herewith. All capitalized terms not otherwise defined herein have
the respective meanings ascribed thereto in the Prospectus.
AS DESCRIBED IN THE PROSPECTUS, EACH PERSON (EACH, AN "ELIGIBLE
HOLDER") WHO HOLDS SHARES OF COMMON STOCK, $0.01 PAR VALUE (THE "EXISTING COMMON
STOCK"), OF THE COMPANY AS OF THE CLOSE OF BUSINESS ON MARCH 6, 2000 (THE
"RECORD DATE") SHALL RECEIVE RIGHTS IN ACCORDANCE WITH THE TERMS SET FORTH IN
THE PROSPECTUS.
Each Eligible Holder shall receive the right to buy 0.338 shares of the
New Common Stock for each share of Existing Common Stock held as of the Record
Date (the "Basic Subscription Privilege"). Fractional Rights will not be issued;
rather, the number of Rights issued to an Eligible Holder will be rounded to the
nearest whole number. Each Right in the Basic Subscription Privilege shall
represent the right to purchase one share of New Common Stock for a purchase
price equal to $10.40 per share (the "Rights Exercise Price").
Each Eligible Holder who exercises its Basic Subscription Privilege in
full will also be able to subscribe for additional shares of New Common Stock at
the Rights Exercise Price, to the extent that other Eligible Holders do not
exercise their Basic Subscription Privilege in full (the "Over- Subscription
Privilege"). There is no maximum or minimum number of shares that an Eligible
Holder may subscribe for under the Over-Subscription Privilege. If there are not
enough shares to satisfy all subscriptions made under the Over-Subscription
Privilege of all Eligible Holders, the Company will allocate the remaining
shares available in the Rights offering pro rata, after eliminating all
fractional shares, among those holders exercising their Over-Subscription
Privilege. If an Eligible Holder exercises its Over-Subscription Privilege, such
Eligible Holder will be representing and certifying that such Eligible Holder is
exercising its Basic Subscription Privilege in full. If an Eligible Holder
exercises its Over-Subscription Privilege and is allocated less than all of the
shares for which such Eligible Holder wishes to subscribe, any excess payment
will be returned by mail without interest or deduction as soon as practicable.
-3-
<PAGE> 4
In the aggregate, 8,661,846 shares of New Common Stock will be
available under the Basic Subscription Privilege and Over-Subscription Privilege
of all of the Eligible Holders. The Rights will not be evidenced by certificates
and will not be transferable.
The Rights will be exercisable at any time during the period commencing
with the Company's mailing of the Prospectus and this Notice of Exercise of
Rights and concluding at 5:00 p.m., New York City time, on March ___, 2000,
unless extended (the "Exercise Deadline").
In order for an exercise of Rights to be valid and effective, an
Eligible Holder must deliver to the Subscription Agent at one of the addresses
set forth above a properly completed and duly executed Notice of Exercise of
Rights (including the Eligible Holder's tax identification number). In addition,
such Eligible Holder must either (x) deliver a check to the Subscription Agent
at one of the addresses specified above or (y) cause a wire transfer of
immediately available funds to be made to the Company's account specified in the
instructions to this Notice of Exercise of Rights, in each case in an amount
equal for the Rights Exercise Price times the number of shares of New Common
Stock subscribed for by such Eligible Holder for the Basic Subscription
Privilege and the Over- Subscription Privilege (the "Payment"). The Notice of
Exercise of Rights and the Payment must be received at the specified address or
account by no later than 5:00 p.m., New York City time, on the Exercise Deadline
for an exercise of Rights to be valid and effective. After the Company's receipt
of the foregoing, the Company, in its reasonable discretion in accordance with
the procedures set forth herein and in the Prospectus, shall determine how many
shares of New Common Stock each such Eligible Holder is entitled to receive.
In the event the Bankruptcy Court does not confirm the Plan or the
effective date specified in the Plan does not occur, the offering of Rights and
the offering and sale of shares of New Common Stock may be rescinded without
notice and shall be of no further force and effect, and any monies received by
the Company in connection with the offering shall promptly be returned to the
applicable Eligible Holders, without interest or deduction.
Neither the Debtors nor the Creditors' Committee is making any
recommendation as to whether the Rights should be exercised or the New Common
Stock should be purchased. Each Eligible Holder should decide whether to
exercise the Rights and purchase the shares of New Common Stock based upon its
own assessment of its best interests in consultation with its legal and
financial advisors.
-4-
<PAGE> 5
NOTE: SIGNATURE(S) MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
The undersigned hereby irrevocably elects to exercise Rights of the
number of shares of New Common Stock indicated below on the terms and subject to
the conditions set forth in the Prospectus. Upon the effective date of the Plan
in accordance with the distribution procedures set forth in the Prospectus,
please issue a certificate representing shares of New Common Stock as
contemplated above in the name(s) of the undersigned and mail the same to the
address of the Eligible Holder(s) appearing below. The number of Rights that the
Eligible Holder(s) wish(es) to exercise and the Payment payable in respect
thereof must be indicated in the appropriate boxes below.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Number of shares of New Common Stock to be purchased
under the Basic Subscription Privilege:
--------------
Number of shares of New Common Stock to be purchased
under the Over-Subscription Privilege (available only if
the Basic Subscription Privilege is exercised in full):
--------------
Total number of shares of New Common Stock to be
purchased (sum of the above two amounts):
--------------
Payment (the product of the total number of shares of
New Common Stock to be purchased and $10.40): $
--------------
</TABLE>
If the total number of shares of New Common Stock to be purchased has not been
indicated, or if the Payment delivered to the Subscription Agent is not
sufficient for the total number of shares of New Common Stock indicated above,
the Eligible Holder(s) will be deemed to have elected to purchase the maximum
number of shares of New Common Stock for which Payment was made (the Payment
divided by $10.40 rounded down to the nearest whole share of New Common Stock).
- --------------------------------------------------------------------------------
-5-
<PAGE> 6
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(See Instructions 4 and 5)
X
- --------------------------------------------------------------------------------
Signature of Eligible Holder Fed. Tax ID No. Date
X
- --------------------------------------------------------------------------------
Signature of Eligible Holder Fed. Tax ID No. Date
Telephone Number: ( )
------- ----------------------
If signed by a trustee, executor, administrator, guardian, officer or
other person acting in a fiduciary or representative capacity, please set forth
the following information.
(Please Type or Print)
Name(s):
--------------------------- ---------------------------
Capacity:
---------------------------
Address:
---------------------------
(Include Zip Code)
---------------------------
THE ABOVE SIGNATURE MAY NEED TO BE GUARANTEED. SEE INSTRUCTION 4.
- --------------------------------------------------------------------------------
-6-
<PAGE> 7
INSTRUCTIONS
1. GENERAL. For the Rights to be validly exercised, a properly completed
and duly executed Notice of Exercise of Rights (or a properly completed and duly
executed photocopy thereof) must be received by the Subscription Agent prior to
5:00 p.m., New York City time, on the Exercise Deadline at one of the addresses
set forth in this Notice of Exercise of Rights, together with the Payment in
accordance with paragraph 2 below. All Rights that are to be exercised by the
Eligible Holder named herein must be exercised concurrently pursuant to this
Notice of Exercise of Rights. Rights may not be exercised by you unless you held
shares of Existing Common Stock as of the close of business on March 6, 2000,
the Record Date. Do not send this Notice of Exercise of Rights directly to the
Company.
2. METHOD OF PAYMENT OF PURCHASE PRICE. Concurrently with the execution
and delivery of the Notice of Exercise of Rights, each Eligible Holder must pay
the Payment by either wire transfer of immediately available funds to the
Company's account identified below or by check payable to the Company delivered
to the Subscription Agent at one of the addresses set forth above, in each case
so as to be received by no later than 5:00 p.m., New York City time, on the
Exercise Deadline. If an Eligible Holder makes Payment by uncertified personal
check, the Payment must be made sufficiently in advance of the Exercise Deadline
to ensure that the Payment is received and cleared by that time. It is
recommended that Payment be made using a certified check or wire transfer of
funds. The Company's account into which the Payment may be made is identified as
follows:
Coho Energy Rights Offering Account
Account No.
---------------
[Bank Name]
[Bank Address]
ABA No.
----------------
3. METHOD OF DELIVERY. The method of delivery of this Notice of Exercise
of Rights and the Payment will be at the election and risk of the Eligible
Holder, but if sent by mail, it is recommended that this Notice of Exercise of
Rights and the Payment be sent by registered mail, with return receipt
requested, and that a sufficient number of days be allowed to ensure timely
receipt.
4. SIGNATURE(S). Each of the signatures on this Notice of Exercise of
Rights must be that of an Eligible Holder. If any shares of Existing Common
Stock were held of record as of the close of business on the Record Date by two
or more persons, all such persons must sign this Notice of Exercise of Rights.
In all other cases, it will be necessary for each Eligible Holder to complete,
sign and submit a separate Notice of Exercise of Rights. If this Notice of
Exercise is signed by a trustee, executor, administrator, guardian, officer or
other person acting in a fiduciary or representative capacity, such person
should so indicate when signing, and proper evidence satisfactory to the Company
of the authority of such person to so act must be submitted with this Notice of
Exercise of Rights.
The signature of the Eligible Holder(s) contained in this Notice of
Exercise of Rights must be guaranteed by an eligible institution such as a
member firm of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc., or from a commercial
-7-
<PAGE> 8
bank or trust company having an office or correspondent in the United States.
The signature of the Eligible Holder(s) will not need to be guaranteed if this
Notice of Exercise of Rights provides that shares are to be delivered to you as
record holder of the Rights or the Eligible Holder is itself an eligible
institution as described in the prior sentence.
5. EXISTING COMMON STOCK HELD BY NOMINEES. Only holders of shares of
Existing Common Stock of record as of the close of business on the Record Date
may exercise the Rights. Therefore, brokers, dealers, commercial banks, trust
companies and other persons that as of the close of business on the Record Date
held shares of Existing Common Stock for the account of others, should notify
the respective beneficial owners of such shares of Existing Common Stock as soon
as possible to ascertain such beneficial owners' intentions and to obtain
instructions with respect to the exercise of the Rights. Beneficial owners of
shares of Existing Common Stock held through such a nominee holder should
contact such nominee holder and request such nominee holder to effect
transactions in accordance with the beneficial owner's instructions. If the
beneficial owner so instructs, such nominee holder should complete a Notice of
Exercise of Rights. Each broker, dealer, commercial bank, trust company or other
nominee holder that held shares of Existing Common Stock as of the close of
business on the Record Date for one or more beneficial owners must certify to
the Company the number of Rights exercised on behalf of each beneficial owner on
a Nominee Holder Certification form provided separately. The Notice of Exercise
of Rights, together with the Nominee Holder Certification and the Payment,
should be submitted to the Subscription Agent.
6. DETERMINATIONS. All determinations as to proper completion, due
execution, timeliness, eligibility, prorating and other matters affecting the
validity or effectiveness of any attempted exercise of any Rights will be made
by the Company in its reasonable discretion in accordance with the procedures
set forth herein and in the Prospectus, whose determination will be final and
binding. The Company, in its sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine or reject the purported exercise of any Right that is
subject to any such defect or irregularity. Deliveries required to be received
by the Subscription Agent in connection with a purported exercise of Rights will
not be deemed to have been so received or accepted until actual receipt thereof
by the Subscription Agent in accordance with the instructions set forth herein
shall have occurred and any defects or irregularities shall have been waived or
cured within such time as the Company may determine in its sole discretion.
Neither the Company nor any other person will have an obligation to give notice
to any holder of a Right of any defect or irregularity in connection with any
attempted exercise thereof or incur any liability as a result of any failure to
give any such notice.
7. REQUESTS FOR ADDITIONAL COPIES. Additional copies of this Notice of
Exercise of Rights, the Prospectus, the Debtors' and Creditors Committee's First
Amended and Restated Chapter 11 Plan of Reorganization or the accompanying
Disclosure Statement are available by sending a written request to the
Subscription Agent at the address set forth above or to the Company at 14785
Preston Road, Suite 860, Dallas, Texas 75240 to the attention of Ms. Anne Marie
O'Gorman.
8. REQUESTS FOR INFORMATION. Any questions or requests for assistance may
be directed to the Subscription Agent at the address or telephone number set
forth above. You may also contact your broker, dealer, commercial bank, trust
company or other nominee for assistance.
-8-
<PAGE> 9
NOMINEE HOLDER CERTIFICATION
Reference is made to the Notice of Exercise of Rights dated March ___,
2000, delivered by Coho Energy, Inc. (the "Company") to each person (an
"Eligible Holder") who holds shares of common stock, $0.01 par value (the
"Existing Common Stock"), of the Company as of the close of business on March 6,
2000 (the "Record Date"). Capitalized terms used but not defined herein shall
have the respective meanings assigned to such terms in the Notice of Exercise.
NOTE: THE FOLLOWING SHOULD ONLY BE COMPLETED AND SIGNED IF THE ELIGIBLE
HOLDER IS A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE
HOLDER THAT HELD SHARES OF EXISTING COMMON STOCK FOR ONE OR MORE BENEFICIAL
OWNERS ON THE RECORD DATE.
The undersigned is a broker, dealer, commercial bank, trust company or
other nominee which held shares of Existing Common Stock of record as of the
Record Date for the account of one or more beneficial owners (indicated below by
number without identifying any such beneficial owner), and hereby certifies to
the Company that the undersigned has exercised, on behalf of the beneficial
owners thereof (which may include the undersigned), the number of Rights
specified below:
ATTACH ADDITIONAL LISTS AS NECESSARY
<TABLE>
<CAPTION>
Number of shares of New Common Number of shares of New Common
Beneficial Stock Purchased on Behalf of Such Stock Purchased on Behalf of Such
Owner Beneficial Owner under the Beneficial Owner under the
Number Basic Subscription Privilege Over-Subscription Privilege
<S> <C> <C>
1
----------------------------- -----------------------------
2
----------------------------- -----------------------------
3
----------------------------- -----------------------------
4
----------------------------- -----------------------------
5
----------------------------- -----------------------------
6
----------------------------- -----------------------------
7
----------------------------- -----------------------------
8
----------------------------- -----------------------------
9
----------------------------- -----------------------------
10
----------------------------- -----------------------------
</TABLE>
- --------------------------------------------------------------------------------
PLEASE SIGN AND DATE HERE
<TABLE>
<CAPTION>
Name of Nominee Holder Fed. Tax ID No. Dated:
---------------------- --------------- -----
<S> <C> <C>
- ------------------------------------
By:
-------------------------------- ----------------- --------------------
Name:
------------------------------
Title:
-----------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 10
COHO ENERGY, INC.
Offering Being Made Pursuant to
the First Amended and Restated Plan of Reorganization
of
COHO ENERGY, INC.
Under Chapter 11 of the United States Bankruptcy Code
================================================================================
THE OPPORTUNITY TO PURCHASE SHARES OF NEW COMMON STOCK UPON
EXERCISE OF THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
MARCH ___, 2000.
================================================================================
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Coho Energy, Inc. (the "Company") is conducting an offering of rights (the
"Rights") to purchase shares of a new class of common stock (the "New Common
Stock") of the Company to be issued after confirmation of the Debtors' and
Creditors Committee's First Amended and Restated Chapter 11 Plan of
Reorganization dated February 14, 2000, upon the terms and subject to the
conditions set forth in a Notice of Exercise of Rights dated March ___, 2000
(the "Notice of Exercise") and a related prospectus (the "Prospectus").
Capitalized terms used but not defined herein shall have the respective meanings
assigned to such terms in the Notice of Exercise.
Enclosed herewith are copies of the following documents:
1. The Notice of Exercise for your use and for the information of
your clients;
2. The Prospectus;
3. A form of letter which may be sent to your clients for whose
account you hold shares of Existing Common Stock in your name
or in the name of a nominee, with space provided for obtaining
such clients' instructions with regard to their exercise of
Rights; and
4. A Nominee Holder Certification for your use.
Please note that the Exercise Deadline for the Rights is at 5:00 P.M.,
New York City time, on March ___, 2000, unless extended. We urge you to contact
your clients as promptly as possible.
The Company will not pay any fees or commissions to any broker or
dealer or other person for soliciting instructions with respect to the exercise
of Rights (other than to the Subscription Agent). You will be reimbursed for
customary mailing and handling expenses incurred by you in forwarding the
enclosed materials to your clients.
<PAGE> 11
Additional copies of the enclosed materials may be obtained from the
Subscription Agent at its address and telephone number set forth on the front
page of the Notice of Exercise.
Very truly yours,
COHO ENERGY, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL BE DEEMED TO MAKE
YOU OR ANY OTHER PERSON AN AGENT OF THE COMPANY OR THE SUBSCRIPTION AGENT, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO THE OFFERING OF RIGHTS
OR THE OFFERING OR SALE OF THE NEW COMMON STOCK NOT CONTAINED IN THE NOTICE OF
EXERCISE OR THE PROSPECTUS.
-2-
<PAGE> 12
COHO ENERGY, INC.
Offering Being Made Pursuant to
the First Amended and Restated Plan of Reorganization of
COHO ENERGY, INC.
Under Chapter 11 of the United States Bankruptcy Code
================================================================================
THE OPPORTUNITY TO PURCHASE SHARES OF NEW COMMON STOCK UPON
EXERCISE OF THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
MARCH ___, 2000.
================================================================================
TO OUR CLIENTS:
Enclosed for your consideration is a Notice of Exercise of Rights dated
March ___, 2000 (the "Notice of Exercise"), of Coho Energy, Inc. (the "Company")
and a related prospectus (the "Prospectus") relating to the Company's offering
of rights (the "Rights") to purchase shares of a new class of common stock (the
"New Common Stock") of the Company to be issued after confirmation of the
Debtors' and Creditors Committee's First Amended and Restated Chapter 11 Plan of
Reorganization dated February 14, 2000. Capitalized terms used but not defined
herein shall have the respective meanings assigned to such terms in the Notice
of Exercise.
WE ARE THE REGISTERED HOLDER OF SHARES OF THE COMPANY'S EXISTING COMMON
STOCK, $0.01 PAR VALUE (THE "EXISTING COMMON STOCK"), HELD BY US FOR YOUR
ACCOUNT. DELIVERY OF THE NOTICE OF EXERCISE WITH RESPECT TO THE EXERCISE OF
RIGHTS RELATING TO SUCH SHARES OF EXISTING COMMON STOCK CAN BE MADE ONLY BY US
AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE NOTICE OF
EXERCISE AND THE RELATED PROSPECTUS ARE FURNISHED TO YOU FOR YOUR INFORMATION
ONLY AND CANNOT BE USED BY YOU TO DELIVER A NOTICE OF EXERCISE WITH RESPECT TO
RIGHTS RELATING TO THE SHARES OF EXISTING COMMON STOCK HELD BY US FOR YOUR
ACCOUNT.
Accordingly, we request instructions as to whether you wish us to
deliver the Notice of Exercise with respect to the Rights relating to such
shares of Existing Common Stock, pursuant to the terms and conditions set forth
in the Notice of Exercise and the related Prospectus. We urge you to read the
Notice of Exercise, the Prospectus and the other enclosed materials carefully
before instructing us to deliver a Notice of Exercise with respect to the Rights
relating to such shares of Existing Common Stock.
Your instructions to us and any Payment for shares of New Common Stock
should be forwarded as promptly as possible in order to permit us to deliver the
Notice of Exercise on your behalf. The Exercise Deadline is at 5:00 P.M., New
York City time, on March ___, 2000, unless extended.
If you wish to have us exercise your Rights to purchase shares of New
Common Stock, please so instruct us by completing, executing and returning to us
the instructions contained on the reverse side of this letter.
<PAGE> 13
BENEFICIAL OWNER ELECTION FORM
with Respect to the
Offering Being Made Pursuant to
the First Amended and Restated Plan of Reorganization of
COHO ENERGY, INC.
Under Chapter 11 of the United States Bankruptcy Code
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the exercise of Rights to purchase New
Common Stock of Coho Energy, Inc.
This will instruct you to exercise my Rights to purchase shares of New
Common Stock indicated below pursuant to the terms and conditions set forth in
the Notice of Exercise and the Prospectus. I have transmitted to you
concurrently with these instructions my Payment for the shares of New Common
Stock being purchased.
Date: ____________________, 2000
<TABLE>
<S> <C> <C>
Number of shares of
New Common Stock ------------------------------------------
to be purchased under
the Basic Subscription ------------------------------------------
Privilege: Signature(s)
----------------------
Number of shares of ------------------------------------------
New Common Stock
to be purchased under ------------------------------------------
the Over-Subscription Please print name(s) here
Privilege (available only
if the Basic Subscription ------------------------------------------
Privilege is exercised ------------------------------------------
in full): ------------------------------------------
---------------------- ------------------------------------------
Please type or print address
Total number of shares
of New Common Stock ------------------------------------------
to be purchased (sum of Area Code and Telephone Number
the above two amounts):
---------------------- ------------------------------------------
Payment (the product of Taxpayer Identification or Social Security
the total number of shares Number
of New Common Stock
to be purchased and $10.40): $
---------------------- ------------------------------------------
My Account Number with You
</TABLE>
