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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2000
REGISTRATION STATEMENT NO. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
COHO ENERGY, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 1311 75-2488635
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(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
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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)
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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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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE AMOUNT OF REGISTRATION FEE(2)
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Rights(1)............................ N/A None
Common Stock......................... $90,000,000 $23,760.00
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(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.
---------------------
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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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 FEBRUARY 7, 2000.
UP TO 346,153,846 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 346,153,846 shares of our new common stock at a
cash subscription price of $0.26 per share. The total purchase price of the
shares offered will be $90,000,000 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 February , 2000, the record date for this
offering, you will receive, at no cost, a right to buy 13.519 shares of new
common stock at a price of $0.26 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 elect 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 are not issuing
fractional rights and we will not pay cash in lieu of fractional rights.
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 March , 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, , until
accepted by us. We, in our sole discretion, may extend the period for exercising
the rights. Rights not exercised by the expiration date of the rights will
expire and will have no value. You should carefully consider whether or not to
exercise your rights before the expiration date of 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 $0.26 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 confirmation of that
plan. If our plan of reorganization is confirmed and this offering is not fully
subscribed, some of our bondholders and possibly others will lend us up to $90
million. The lenders under this loan (the "Standby Loan") will receive shares of
our new common stock, based on the amount we borrow. Shares purchased under this
offering will not be diluted by the shares issued under the Standby Loan. If the
Standby Loan is used, persons who purchase shares under this offering will
receive additional shares for no additional cost to ensure that their percentage
ownership of our new common stock issued under this offering remains constant
after taking into account the shares issued under the Standby Loan.
There is no minimum number of shares that we must sell to complete this
offering. Shareholders that do not exercise their rights will own a smaller
percentage of the total number of shares of new common stock outstanding if the
plan of reorganization is confirmed. The exact amount of this share dilution
will depend on the number of shares of new common stock sold in the offering and
the number of shares issued under the Standby Loan.
Our existing common stock is traded on Nasdaq's OTC Bulletin Board under the
symbol "COHO." On February 4, 2000, the closing price for the existing common
stock as quoted on the OTC Bulletin Board was $0.49 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 10 BEFORE
PURCHASING ANY OF THE NEW COMMON STOCK.
---------------------
SUBSCRIPTION PRICE: $0.26 PER SHARE
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PER SHARE TOTAL
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Public Offering Price....................................... $0.26 $90,000,000
Estimated Expenses.......................................... $0.007 $ 2,400,000
Net Proceeds to Coho........................................ $0.253 $87,600,000
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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 FEBRUARY , 2000.
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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.................. 8
SUMMARY HISTORICAL RESERVES AND OPERATING DATA.............. 9
RISK FACTORS................................................ 10
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 17
THE OFFERING AND PLAN OF DISTRIBUTION....................... 18
USE OF PROCEEDS............................................. 25
DIVIDEND POLICY............................................. 25
PRICE RANGE OF EXISTING COMMON STOCK........................ 25
CAPITALIZATION.............................................. 26
SELECTED FINANCIAL DATA..................................... 28
THE PLAN OF REORGANIZATION.................................. 29
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 CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 79
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 81
DESCRIPTION OF EXISTING INDEBTEDNESS........................ 82
DESCRIPTION OF OUR CAPITAL STOCK............................ 84
DILUTION.................................................... 86
LEGAL MATTERS............................................... 87
INDEPENDENT AUDITORS........................................ 87
ENGINEERS................................................... 87
WHERE YOU CAN FIND MORE INFORMATION......................... 88
INDEX TO FINANCIAL STATEMENTS............................... F-1
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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
reorganization plan under Chapter 11 of the Bankruptcy Code (the "Plan of
Reorganization"). The 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 initially to shareholders as of the record date. If the
shareholders do not exercise their rights to all of the shares available, we
will offer the remaining shares to others at $0.26 per share.
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 February , 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 13.519 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 $0.26 per share. Each right carries with it a
basic subscription privilege and an over-subscription privilege.
WHAT IS THE NEW COMMON STOCK?
Upon confirmation of the 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
Plan of Reorganization" and "Description of Our Capital 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.
HOW MAY THIRD PARTIES PARTICIPATE IN THE OFFERING?
Non-shareholders may participate in the offering only if shareholders do
not fully subscribe for all the shares available in the offering. After the
rights expire and we have determined the number of remaining
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shares, Jefferies & Company, Inc. or another investment bank approved by the
Bankruptcy Court will assist us in placing the remaining shares with other
investors.
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 Coho issues more new common stock or other
securities in the future. See "Dilution."
WHAT HAPPENS IF THE PLAN OF REORGANIZATION IS NOT CONFIRMED?
If the Plan of Reorganization is not confirmed, 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 March , 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 Offering and Plan of Distribution -- Conditions to the Offering."
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 stock
exchange.
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AM I REQUIRED TO SUBSCRIBE IN THE OFFERING?
No.
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.
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.
WHERE CAN I FIND ADDITIONAL INFORMATION ABOUT THE COMPANY?
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
under the Exchange Act. Accordingly, we file periodic reports and proxy
statements with the Securities and Exchange Commission (the "Commission"). All
reports and proxy statements, and other information filed by us with the
Commission may be inspected at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of these materials may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants, such as Coho, that file electronically with
the Commission.
In addition, we have filed a Plan of Reorganization and a Disclosure
Statement with the United States Bankruptcy Court for the Northern District of
Texas in connection with our ongoing bankruptcy reorganization proceedings. You
may refer to the Disclosure Statement and Plan of Reorganization for further
information. Upon written request, we will provide you with a copy of the Plan
of Reorganization and the related Disclosure Statement. Written requests should
be sent to us at 14785 Preston Road, Suite 860, Dallas, Texas 75240 to the
attention of Ms. Anne Marie O'Gorman.
WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS?
If you have questions or need assistance, please contact , the
subscription agent for the offering, at .
Banks and Brokerage Firms please call (800) .
For a more complete description of this offering, see "The Offering and
Plan of Distribution" beginning on page 18.
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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 "Risk Factors" and
the financial data and related notes, before making an investment decision. The
terms "Coho," "the Company," "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.
THE COMPANY
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 January 1, 1999, our total proved reserves were 111 million barrels of
oil equivalent ("BOE"), 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. We also have
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 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 76% 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 (i)
relatively low-risk activities such as development and delineation drilling,
multiple completions, recompletions, workovers, enhancement of production
facilities and secondary recovery projects; (ii) use of 3-D seismic and other
technologies to identify exploration projects and to identify reserves; (iii)
acquisition of controlling interests in underdeveloped crude oil and natural gas
properties; and (iv) 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 with the Bankruptcy Court our plan of
reorganization under Chapter 11 of the United States Bankruptcy Code (which, as
amended, is referred to in this registration statement as the "Plan of
Reorganization"). At a hearing on February 4, 2000, the Bankruptcy Court
approved our disclosure statement with respect to the Plan of Reorganization
(which, as amended, is referred to as the "Disclosure Statement"). In that
hearing, the Bankruptcy Court also scheduled a confirmation hearing to consider
the Plan of Reorganization for March 15, 2000. We will file the approved
Disclosure Statement with the Bankruptcy Court before it is mailed to holders of
claims and equity interests for voting on our Plan of Reorganization. Before the
mailing we will also file an amended Plan of Reorganization with the Bankruptcy
Court to reflect the matters contained in the approved Disclosure Statement. The
amended Plan of Reorganization will be filed jointly with the official unsecured
creditors committee in our Chapter 11 case.
Following that hearing, we began the process of soliciting acceptances and
rejections to the Plan of Reorganization by means of the Disclosure Statement.
In response to those solicitation efforts, we seek approval of the Plan of
Reorganization by a majority of our creditors and holders of equity interests in
each class entitled to submit a ballot to accept or reject the Plan of
Reorganization. If that approval is obtained, we will proceed to seek
confirmation of the Plan of Reorganization by the Bankruptcy Court on March 15,
2000.
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THE OFFERING
Reasons for the Offering... We are proceeding with the offering to raise
capital as part of a comprehensive reorganization
plan under Chapter 11 of the Bankruptcy Code (the
"Plan of Reorganization"). The Plan of
Reorganization is designed to provide additional
financial flexibility and allow us to continue as a
going concern.
Terms of the Offering...... We will distribute to each shareholder of record on
February , 2000, at no charge, 13.519 rights for
each share of our existing common stock then owned.
Because we will not issue fractional rights, the
actual allocation of rights will be rounded as
follows: (i) fractions of 1/2 or greater will be
rounded to the next higher whole number; and (ii)
fractions of less than 1/2 will be rounded to the
next lower whole number. If the offering is not
fully subscribed by the shareholders receiving
rights by the expiration date of the rights, we
will offer the remaining available shares to others
at $0.26 per share.
Basic Subscription
Privilege.................. Each right will entitle the holder to purchase one
share of our new common stock for $0.26, the
per-share subscription price.
Over-Subscription
Privilege.................. Each holder of rights who elects to exercise the
basic subscription privilege in full may also
subscribe for additional shares at the same
subscription price. If over-subscription requests
exceed the number of shares that are available, we
will allocate the available shares pro rata among
those rights holders who exercised their
over-subscription privilege based on the number of
shares each rights holder subscribed for under the
basic subscription privilege. The subscription
agent will return any excess payments by mail
without interest or deduction promptly after the
expiration of the offering.
Conditions to the
Offering................... The exercise of your rights is subject to the
conditions described under "The Offering and Plan
of Distribution -- Conditions to the Offering."
Termination of the
Offering................... We may terminate the offering for any reason before
the rights expire. If we terminate the offering, we
will promptly return all subscription payments. We
will not pay interest on, or deduct any amounts
from, subscription payments if we terminate the
offering. If you do not exercise your rights before
the expiration time, they will expire and will no
longer be exercisable.
Subscription Price......... $0.26 per share.
Record Date................ February , 2000.
Expiration Date............ The rights will expire, if not exercised, at 5:00
p.m., New York City time, on March , 2000, unless
we decide to extend the expiration date of the
rights until some later time.
Transferability of
Rights..................... The rights are not transferable and may not be
sold.
Procedure for Exercising
Rights..................... Unless you own your shares of our existing common
stock through a nominee, you may exercise your
rights by properly completing and signing your
Notice of Exercise of Rights. You must deliver your
Notice of Exercise of Rights with full payment of
the subscription price to the subscription agent on
or before the expiration date. If you use the mail,
we recommend that you use insured, registered mail,
return receipt requested. We will not pay interest
on subscription payments.
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Once you have exercised the basic subscription
privilege or over-subscription privilege your
exercise may not be revoked. Rights not exercised
before the expiration date of the rights will
expire and have no value.
How Holders of Rights Can
Exercise Rights Through
Others................... If you hold shares of our existing common stock
through a broker, custodian bank or other nominee,
we will ask your broker, custodian bank or other
nominee to notify you of the offering. If you wish
to exercise your rights, you will need to have your
broker, custodian bank or other nominee act for
you. To indicate your decision, you should complete
and return to your broker, custodian bank or other
nominee the form entitled "Beneficial Owner
Election Form," together with your check for the
total 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.
How Foreign Shareholders
Can Exercise Rights........ The subscription agent will mail a Notice of
Exercise of Rights to you if you are a shareholder
whose address is outside the United States or if
you have an Army Post Office or a Fleet Post Office
address. To exercise your rights, you must notify
the subscription agent on or before 11:00 a.m., New
York City time, on March , 2000, and take all
other steps that are necessary to exercise your
rights, on or before the date on which the rights
expire. If you do not follow these procedures
before the expiration date of the rights, your
rights will expire and have no value.
Issuance of New Common
Stock...................... We will issue certificates representing shares of
our new common stock purchased pursuant to the
exercise of rights as soon as practicable after the
expiration date of the rights and the confirmation
of the Plan of Reorganization.
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 on your own assessment
of your best interests in consultation with your
legal and financial advisors.
Listing of Our Existing
Common Stock............... Our existing common stock is currently traded on
Nasdaq's OTC Bulletin Board under the symbol
"COHO." On February 4, 2000, the closing price of
our existing common stock on the OTC Bulletin Board
was $0.49 per share. We anticipate that our new
common stock will be quoted on the OTC Bulletin
Board under the symbol "COHO."
No Listing of the Rights... The rights will not be listed on any stock
exchange.
Use of Proceeds............ If all rights are exercised, we will receive
approximately $90 million from the offering, before
paying estimated expenses. We will use the net
proceeds from the offering primarily to pay down
existing bank debt and for working capital and
general corporate purposes.
New Common Stock
Outstanding.............. If the Plan of Reorganization is confirmed, we will
have outstanding 640,087,800 shares of our new
common stock and we will have
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reserved for issuance (i) up to 346,153,846 shares
to be issued upon completion of the offering and
(ii) up to 104,200,340 shares to be issued upon
completion of the Standby Loan. After the offering,
if all rights are exercised, we will have
outstanding 986,241,646 shares of our new common
stock. The number of shares outstanding will depend
on the number of shares issued under this offering
and under the Standby Loan. For example, if 50% of
the rights are exercised and $45 million is
borrowed under the Standby Loan, we will have
outstanding 918,140,920 shares of our new common
stock. See "Capitalization," "Description of Our
Capital Stock," and "Dilution" for additional
information concerning our new common stock.
For additional information concerning the rights and our common stock, see
"The Offering and Plan of Distribution," and "Description of Our Capital Stock"
below.
FORWARD-LOOKING STATEMENTS
Parts of the information contained or referred to in this prospectus,
including information with respect to the Plan of Reorganization, the benefits
of the Plan of Reorganization, and matters such 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. For a discussion of important factors that
could cause actual results to differ materially from the forward-looking
statements, see "Risk Factors" beginning on page 10 and "Cautionary Statement
Regarding Forward-Looking Statements" beginning on page 17.
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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, 1998 and from our
unaudited consolidated financial statements for the nine-month periods ended
September 30, 1998 and 1999. Additionally, the September 30, 1999 balance sheet
data has been adjusted (1) to give pro forma effect for projected operating
results through March 31, 2000, the assumed effective date of the Plan of
Reorganization, (2) to give pro forma effect to the effectiveness of the Plan of
Reorganization and assuming that all of the rights are exercised pursuant to the
offering and (3) to give pro forma effect to the effectiveness of the Plan of
Reorganization assuming 50% of the rights are exercised pursuant to the offering
and assuming $45 million is borrowed pursuant to the Standby Loan. This
information should be read in conjunction with the other information contained
under the captions "Capitalization," "Selected Historical Consolidated Financial
Information," 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>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Operating revenues........................................ $54,272 $63,130 $ 68,759 $ 55,829 $ 37,957
Operating expenses........................................ 13,875 15,970 26,859 21,010 15,063
General and administrative expenses....................... 7,264 7,163 7,750 4,752 7,574
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.................... 0.29 0.29 (7.94) (2.78) (1.16)
Diluted earnings (loss) per common share.................. 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
EBITDA.................................................... 33,133 39,997 31,125 30,067 11,587
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PURCHASE OF PURCHASE OF
PRO FORMA PRO FORMA 50% OF SHARES NO SHARES
IMMEDIATELY PURCHASE OF PURSUANT TO PURSUANT TO
AS OF AS OF PRIOR TO ALL SHARES OFFERING AND OFFERING AND
DECEMBER 31, SEPTEMBER 30, EFFECTIVENESS PURSUANT $45 MILLION $70 MILLION
1998 1999 OF THE PLAN TO OFFERING STANDBY LOAN STANDBY LOAN
------------ ------------- ---------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $(388,297) $(406,832) $(405,337) $ 6,315 $ 4,865 $ 6,315
Net property and equipment... 324,574 313,924 311,436 311,436 311,436 311,436
Total assets................. 350,068 341,566 347,078 334,818 353,371 359,967
Long-term debt, excluding
current portion............ -- -- -- 172,000 220,208 265,208
Total shareholders' equity... (61,243) (91,065) (92,058) 144,855 120,008 81,604
</TABLE>
- ---------------
General and administrative expenses for the nine months ended September 30,
1999 were 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.
"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 the Company's
operating performance or liquidity.
Working capital (deficit) amounts for 1998 and 1999 include $384,031 and
$388,685, respectively, related to the current portion of long-term debt.
8
<PAGE> 12
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 certain summary
information with respect to our operations as of the dates or for the periods
indicated. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Company's Consolidated Financial Statements and the
related notes to those financial statements included in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
1996 1997 1998
-------- ---------- --------
<S> <C> <C> <C>
PROVED RESERVES:
Crude oil and condensate (Mbbls)............................ 34,822 95,084 100,004
Natural gas (Mmcf).......................................... 113,132 147,505 66,328
Total (MBOE)...................................... 53,678 119,668 111,059
Estimated future net cash flows (before income tax, in
thousands)................................................ $819,968 $1,043,516 $549,018
Present value of proved reserves (in thousands)............. $417,083 $ 526,277 $269,298
Proved developed reserves as a percent of total reserves.... 76% 70% 67%
</TABLE>
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------ NINE MONTHS ENDED
1996 1997 1998 SEPTEMBER 30, 1999
------ ------ ------ ------------------
<S> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Crude oil and condensate (Mbbls).................. 2,467 2,820 5,069 2,472
Natural gas (Mmcf)................................ 6,646 7,666 8,124 2,060
Total (MBOE)............................ 3,576 4,098 6,424 2,815
AVERAGE SALES PRICE PER UNIT:
Crude oil and condensate (per Bbl)................ $16.42 $16.31 $10.40 $13.59
Natural gas (per Mcf)............................. 2.07 2.23 1.98 2.12
PER BOE DATA:
Average sales price............................... $15.18 $15.41 $10.70 $13.48
Production expenses............................... 3.88 3.90 4.18 5.35
</TABLE>
9
<PAGE> 13
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 has not yet been
confirmed by the Bankruptcy Court. Even if all of the voting classes set forth
in the Plan of Reorganization accept the Plan of Reorganization, the Plan of
Reorganization might not be confirmed by the Bankruptcy Court. Section 1129 of
the Bankruptcy Code sets forth the requirements for confirmation and requires,
among other things, that the confirmation of a plan of reorganization is not
likely to be followed by the liquidation or the need for further financial
reorganization of the debtor, and that the value of distributions to dissenting
creditors and equity security holders not be less than the value of
distributions those creditors and equity security holders would receive if the
debtor were liquidated under Chapter 7 of the Bankruptcy Code. 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 the
Bankruptcy Court will confirm our plan.
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 projected 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 such an
assumption may not necessarily be true. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 to the
consolidated financial statements.
The bankruptcy may have created a negative image of us.
The effect, if any, which the Plan of Reorganization may have on our
operations after it is confirmed cannot be accurately predicted or quantified.
We believe that the consummation of the Plan of Reorganization will have a
minimal future effect on our relationships with our customers, employees and
suppliers. If confirmation and consummation of the Plan of Reorganization do not
occur expeditiously, our relationships with our customers, employees and
suppliers could be adversely effected. Even an expedited confirmation and
consummation of the 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 adversely affect our financial health.
After the confirmation 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;
10
<PAGE> 14
- 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.
Please refer to "The Plan of Reorganization -- The New Debt and Equity" for
a description of our new indebtedness after confirmation of the Plan of
Reorganization and to "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 confirmation of the Plan of Reorganization, we anticipate that we will have
two principal sources of liquidity during the next 12 months: (i) cash on hand,
including the net proceeds of the offering and the Standby Loan, and (ii) cash
generated by operations. See "Risk Factors -- High Degree of Leverage,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Existing Debt
and Equity," the unaudited pro forma financial information and the related notes
and the consolidated financial statements and the related notes included in this
prospectus.
If the Plan of Reorganization is confirmed, our ability to raise funds
through additional indebtedness could be limited by the terms of the 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 certain
assets to fund our operations, although the terms of our new indebtedness could
limit our use of the proceeds of any sale of assets. See "Plan of
Reorganization -- Description of 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.
Pending litigation may have an adverse effect on us.
We are a defendant in a number of law suits in Mississippi that allege
environmental damage to property and personal injury in connection with our
drilling operations and the drilling operations of our predecessors in the
Brookhaven Field in Lincoln County, Mississippi. The cause of the alleged damage
is portrayed by plaintiffs as "naturally occurring radioactive materials"
resulting from petroleum mining operations. Our predecessors on the Brookhaven
Field were Florabama Associates, Ltd., and Chevron Corp. or Chevron USA. Inc. We
are vigorously defending against these claims. Florabama and Chevron allege
claims for indemnification for any liability they may have to the Brookhaven
Field plaintiffs, including claims for monetary and punitive damages, as well as
clean-up costs associated with the properties. The total amount of claims
alleged exceeds $250 million. We 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 our cash flow under the terms of the Plan of
Reorganization. See "Oil and Gas Operations -- Legal Matters."
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 nine months ended September 30, 1999 of $29.8
million. There can be no assurances that we will become profitable in the
future. See "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.
11
<PAGE> 15
We may not be able to replace depleted reserves.
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, conduct successful exploration and development
activities or, through engineering studies, identify additional behind-pipe
zones or secondary recovery reserves, 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.
Our profitability is highly dependent on industry conditions.
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 such 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. 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 our ability to produce and market our crude
oil and natural gas. If market factors were to change dramatically, the
financial effect on us could be substantial. The availability of markets and the
volatility of product prices are beyond our control and thus represent a
significant risk.
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.
To manage our exposure to price risks in the marketing of our crude oil and
natural gas, we have from time to time 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, we may sell a
futures contract and thereafter make physical delivery of crude oil or natural
gas to comply with that contract. These contracts may expose us to the risk of
financial loss in some circumstances, including instances in which production is
less than expected, our customers fail to purchase or deliver the contracted
quantities
12
<PAGE> 16
of crude oil or natural gas, or a sudden, unexpected event materially affects
crude oil or natural gas prices. These contracts may also restrict our ability
to benefit from unexpected increases in crude oil and natural gas prices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
We rely on estimates of proved reserves and future net revenue information
that are subject to many factors.
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 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 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, 1998. The average sales prices as of December 31, 1998, used for
purposes of our estimates 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 our reserves.
Our overall average realized crude oil prices received per Bbl were $8.81,
$14.21, and $18.00, in the first, second and third quarters of 1999,
respectively.
There may be unknown defects in the title to our properties.
As is customary in the oil and gas industry, in certain 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 them at our expense. We
could lose our entire investment in any property we drill that possesses a
material title defect that we are unable to 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 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.
We face significant business risks.
Exploration and development for crude oil and natural gas involves many
risks. There is no assurance that we will discover commercial quantities of
crude oil and natural gas, or that we will be able to continue acquiring
underdeveloped crude oil and natural gas fields and enhancing production and
reserves by workovers, secondary recovery projects, recompletions and
development drilling. In addition, because our strategy is to acquire interests
in underdeveloped crude oil and natural gas fields that have been operated by
others for many years, we may be liable for any damage or pollution caused by
the former operators of those crude oil and natural gas fields. Our 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, all of which could result in personal
injuries, loss of life, pollution damage and other damage to our properties and
others. We maintain insurance against certain losses or liabilities arising from
our operations in accordance with customary industry practices and in amounts
that we believe to be reasonable. However, insurance is not available to us
against all operational risks, or is not economically feasible for us to obtain.
The occurrence of a significant event that is not fully insured could have a
material adverse effect on our financial condition and the results of
operations.
13
<PAGE> 17
We face significant competition.
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 such
undeveloped crude oil and natural gas properties include the staff and data
necessary to identify, investigate and purchase the properties, and the
financial resources necessary to acquire and develop such 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 that 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 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
the Plan of Reorganization is consummated, the continued availability of such
materials and resources to us cannot be assured.
We are subject to significant government regulation.
Our 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. 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 adversely affect our financial
condition and the results of operations. See "Oil and Gas
Operations -- Governmental Regulations" and "Oil and Gas
Operations -- Environmental Regulations."
We are dependent on key personnel.
We depend to a large extent on several members of our senior management
team for their management and business and financial contacts. The
unavailability of these individuals could have an adverse effect on our
business.
We have a high level of dependence on two customers.
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 our revenues. During the nine
months ended September 30,1999, EOTT and Amoco Production Company accounted for
39% and 40%, respectively, of our revenue. We sold our Monroe Field properties
in December 1998 and therefore do not currently have a relationship with Mid
Louisiana Marketing Company. While we believe that our 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 our results of operations.
We have not paid, and for the foreseeable future will not pay, cash dividends.
We have never paid cash dividends on our common stock and do not intend to
pay cash dividends on the new common stock in the foreseeable future. In the
past, we have used our available cash flow to conduct exploration and
development activities or to make acquisitions, and we expect to continue to do
so in the future. In addition, the terms of the new credit facility and the
Standby Loan will restrict our
14
<PAGE> 18
paying dividends. See "Description of New Debt and Equity." It is unlikely that
we 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 our
subsidiaries. Furthermore, the debt agreements of our principal operating
subsidiaries generally prohibit our subsidiaries from paying dividends or making
certain other cash payments to us.
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 346,153,846
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 in
Coho 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.
The subscription price may not reflect the value of Coho.
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 Coho. See "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 certain provisions of our governing documents may
prevent some transactions.
If the Plan of Reorganization is confirmed, certain provisions of our
amended and restated articles of incorporation and amended and restated bylaws
may tend to deter potential unsolicited offers or 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 such provisions will
apply to the new common stock, and may have the effect of delaying, deferring or
preventing a change of control of Coho.
Our new common stock may not be listed on Nasdaq or any other stock exchange.
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 the Plan of Reorganization. In an effort to meet the
requirements for listing on Nasdaq, we may decide to effect a reverse stock
split. 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. In addition, the large number of shares of new common stock
that will be outstanding upon confirmation of the Plan of Reorganization,
combined with the rights to be issued under this offering, will likely (i)
depress the prices at which some or all of the new common stock will trade for
the foreseeable future, (ii) limit the marketability of the new common stock and
(iii) adversely affect our ability to list the new common stock
15
<PAGE> 19
on Nasdaq or any other national securities exchange. 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.
16
<PAGE> 20
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus 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 Exchange
Act. All statements, other than statements of historical facts, included in this
prospectus 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 of business opportunities) that may
be presented to and pursued by the Company
- changes in laws or regulations
- the other factors discussed above under "Risk Factors" beginning on page
10
Such 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.
17
<PAGE> 21
THE OFFERING AND PLAN OF DISTRIBUTION
BEFORE EXERCISING OR SELLING ANY RIGHTS, YOU SHOULD READ CAREFULLY THE
INFORMATION SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 10.
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 February , 2000, we are distributing to you, at no charge, 13.519
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 $0.26. 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 confirmed.
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 rounded as follows: (i) fractions of 1/2 or
greater will be rounded to the next higher whole number; and (ii) fractions of
less than 1/2 will be rounded to the next lower whole number.
EXPIRATION OF THE RIGHTS
You may exercise your rights at any time before 5:00 p.m., New York City
time, on March , 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 $0.26 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 the Plan of Reorganization has been confirmed.
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
$0.26 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 rights do
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<PAGE> 22
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 confirmation
of the 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 the Plan of Reorganization is not confirmed. 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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<PAGE> 23
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 March ,
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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<PAGE> 24
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 $0.26 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 February ,
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
21
<PAGE> 25
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 such 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 such 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 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 herein, 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> 26
PROCEDURES FOR DTC PARTICIPANTS
We expect that rights will be eligible for transfer through, and that your
exercise of your basic subscription privilege and your over-subscription
privilege may be made through, the facilities of the Depository Trust Company
("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
$0.26 per share. After the rights expire, we will determine the number of
remaining shares. Jefferies & Company, Inc. or another investment bank approved
by the Bankruptcy Court will assist us in placing the remaining shares with
others.
SUBSCRIPTION PRICE
The subscription price is $0.26 per share.
DETERMINATION OF THE SUBSCRIPTION PRICE
The subscription price was determined through negotiations between the
Company and holders of a majority of the existing bonds. Under the 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 $0.26 subscription price 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 the Plan of
Reorganization (614,484,288). 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
$0.26. See "Dilution."
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.
SHARES OF NEW COMMON STOCK OUTSTANDING AFTER THE OFFERING
If the Plan of Reorganization is confirmed, and assuming we issue all of
the shares offered in this offering, 986,241,646 shares of our new common stock
will be issued and outstanding after the offering
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<PAGE> 27
expires. Based on the 640,087,800 shares of our new common stock that will be
issued and outstanding after the effective date of confirmation of the 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 54.08% increase in the number
of outstanding shares of our new common stock. See "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
pursuant to 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 the Plan of Reorganization has been
confirmed.
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 Coho 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 pursuant
to 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, 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 certain 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 certain 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> 28
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 $2.4
million. We will use the net proceeds from the offering to pay down existing
bank debt in association with the Plan of Reorganization and for working capital
and general corporate purposes. Existing bank debt under our existing bank group
loan had a maturity date of January 2, 2003; however, the lenders under our
existing bank group loan have accelerated the full amount outstanding. Existing
bank debt under our existing bank group loan bears interest at the rate of prime
plus 4%.
DIVIDEND POLICY
We have never paid cash dividends on our existing common stock and for the
foreseeable future do not plan to do so on the new common stock. Because we are
a holding company, our ability to pay dividends depends on the ability of our
subsidiaries to pay cash dividends or make other cash distributions to us. The
agreements governing our debt generally prohibit our subsidiaries from paying
dividends or making other cash distributions to us. See "Risk Factors." 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 are 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 February 4, 2000).................... 51/64 11/32
</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 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 $0.49 on February 4, 2000.
If the Plan of Reorganization is confirmed, we anticipate that our new
common stock will be quoted on Nasdaq's OTC Bulletin Board.
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<PAGE> 29
CAPITALIZATION
The following table sets forth our consolidated capitalization 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 of
Reorganization, (2) to give pro forma effect to the effectiveness of the Plan of
Reorganization and assuming that all of the rights are exercised pursuant to the
offering, (3) to give pro forma effect to the effectiveness of the Plan of
Reorganization assuming that 50% of the rights are exercised pursuant to the
offering and $45 million is borrowed under the Standby Loan, and (4) to give pro
forma effect to the effectiveness of the Plan of Reorganization and assuming
that none of the rights are exercised pursuant to 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
50% OF PURCHASE OF
PRO FORMA SHARES NO SHARES
IMMEDIATELY PRO FORMA PURSUANT TO PURSUANT TO
BEFORE PURCHASE OF OFFERING AND OFFERING AND
SEPTEMBER 30, EFFECTIVENESS ALL SHARES $45 MILLION $70 MILLION
1999 OF THE PURSUANT TO STANDBY STANDBY
HISTORICAL PLAN(3) OFFERING(4) 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........................... -- -- -- 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 1,000,000,000
shares(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) Shares of existing common stock outstanding were 25,603,512 at September 30,
1999 and Pro Forma Immediately Before Effectiveness of the Plan of
Reorganization. Shares of new common stock outstanding were 986,241,646
under Pro Forma Purchase of All Shares Pursuant to Offering; 918,140,920
under Pro Forma Purchase of 50% of Shares Pursuant to Offering and $45
million Standby Loan; and 744,288,140 under Pro Forma Purchase of No Shares
Pursuant to Offering and $70 million Standby Loan.
26
<PAGE> 30
(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 of
Reorganization.
(4) The Pro Forma columns that present the purchase of shares pursuant to 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: 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 approximately $0.23 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 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 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 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.
- 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 All Shares" column and issuance of
195,420,437 shares of new common stock at an assumed fair market value of
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.
27
<PAGE> 31
SELECTED FINANCIAL DATA
The following information is selected or derived from, and is qualified by
reference to, our consolidated financial statements included in this prospectus.
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 this prospectus. The
report of Arthur Andersen LLP, our independent certified public accountant, on
our financial statements for the three years in the period ended December 31,
1998, is qualified as to our ability to continue as a going concern. Our
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 our
operations or financial performance.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Operating revenues...................... $ 26,464 $ 40,903 $ 54,272 $ 63,130 $ 68,759 $ 55,829 $ 37,957
Operating costs......................... 9,372 12,457 13,875 15,970 26,859 21,010 15,063
General and administrative expenses..... 3,435 5,400 7,264 7,163 7,750 4,752 7,574(1)
Reorganization costs.................... -- -- -- -- -- -- 2,685
Depletion and depreciation.............. 9,989 14,717 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.................... 3,972 8,048 7,464 10,474 32,721 24,344 25,789
Other expense........................... 973 -- -- -- 3,023 -- 1,048
Income tax expense (benefit)............ (303) 112 3,483 4,021 (14,383) (18,432) (26)
Net earnings (loss) from continuing
operations before income taxes........ (974) 169 5,906 6,288 (203,346) (71,080) (29,822)
Net earnings (loss)..................... (1,654) 1,780 5,906 6,288 (203,346) (71,080) (29,822)
Basic earnings (loss) from continuing
operations per common share........... (0.07) (0.02) 0.29 0.29 (7.94) (2.78) (1.16)
Diluted earnings (loss) from continuing
operations per common share........... (0.07) (0.02) 0.29 0.28 (7.94) (2.78) (1.16)
Basic earnings (loss) per common
share(2).............................. (0.12) 0.05 0.29 0.29 (7.94) (2.78) (1.16)
Diluted earnings (loss) per common
share(3).............................. (0.12) 0.05 0.29 0.28 (7.94) (2.78) (1.16)
OTHER FINANCIAL DATA:
Capital expenditures.................... $ 19,503 $ 29,970 $ 52,384 $ 72,667 $ 70,143 $ 62,464 $ 4,995
EBITDA(4)............................... 12,684 23,046 33,133 39,997 31,127 30,067 11,587
BALANCE SHEET DATA:
Working capital (deficit)(4)............ $ (2,379) $ 14,433 $ 6,662 $ (2,021) $(388,297) $(406,832)
Net property and equipment.............. 171,524 175,899 210,212 531,409 324,574 313,924
Total assets............................ 196,970 204,042 230,041 555,128 350,068 341,566
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) (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:
14,190 in 1994; 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: 14,190 in 1994; 17,392 in 1995;
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.
28
<PAGE> 32
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. The Plan of
Reorganization may be amended from time to time in accordance with the
Bankruptcy Code, and the Company has reserved the right to revoke and withdraw
the Plan of Reorganization at any time before it is confirmed. You may obtain a
copy of the Plan of Reorganization and related Disclosure Statement by sending a
written request to the Company at 14785 Preston Road, Suite 860, Dallas, Texas
75240 to the attention of Ms. Anne Marie O'Gorman.
The Plan of Reorganization 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 of Reorganization were arrived at after a diligent search for, and
extensive evaluation of, numerous financing and liquidation proposals by the
Company, and consultation with the Company's financial advisors as to what type
of Plan of Reorganization might be feasible after lengthy negotiations with
certain of the Company's creditors. The Company believes that the Plan of
Reorganization provides the Company's creditors and the Company's 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 the Company was to be
liquidated under Chapter 7 of the Bankruptcy Code. The Company believes that
reorganization under the Plan of Reorganization is feasible and that the Plan of
Reorganization provides for the greatest and earliest possible recoveries for
the creditors of the Company and the shareholders of the Company. After the
effective date of confirmation of the Plan of Reorganization (the "Effective
Date"), the Company, as reorganized under the Plan of Reorganization (the
"Reorganized Company"), may operate its businesses and buy, use and otherwise
acquire and dispose of its property 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 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 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 will be fixed and determined before the conclusion of the hearing on
the confirmation of the Plan of Reorganization (the "Confirmation Hearing").
The Bank Group Claim is to be paid in full in cash on the Effective Date.
The 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 ("Lenders") led by The
Chase Manhattan Bank ("Chase"), as agent for the Lenders, (b) the offering
described in this prospectus, (c) cash on hand from the Company's operations and
(d) if necessary, the sale of senior subordinated notes to PPM America, Inc.;
Oaktree Capital Management, L.L.C.; Pacholder Associates, Inc.; Appaloosa
Management, L.P. and their assignees; other holders of Existing Bonds who opt to
participate; and other parties who may participate (the "Standby Lenders").
29
<PAGE> 33
2. Existing Bond Holders.
The Company is the issuer of $150 million 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 (collectively, "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 Company, are the guarantors
of the 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 of Reorganization,
the Existing Bond Indenture and 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 the new common stock of the Reorganized Company.
This 96% of the new common stock would be diluted by shares of new common stock
issued in connection with (a) this offering and (b) if applicable, the Standby
Loan.
3. Existing Shareholders.
The Company currently has 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. The shareholders will receive fair and
equitable treatment under the Plan of Reorganization. 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% of new common stock
will be diluted by shares of new common stock issued in connection with (a) this
offering and (b) 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 $0.26 per share, up to a total amount of $90 million.
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 Claims: retainers on hand, on the later of the
$2,329,000 Effective Date, the due date or court
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 Claims: bearing interest at a rate of 6% per annum
$5,260,000 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 Will receive payment in full, in cash on the
Total Estimated Amount of Class 3 Claims: Effective Date from advances made under the
$262,350,000 Credit Facility and proceeds of the
offering and, if applicable, the Standby
Loan.
Estimated Recovery: Full recovery.
Class 4 Unimpaired
Senior Miscellaneous Secured Claims Will receive cash payment of 100% of allowed
Total Estimated Amount of Class 4 Claims: claims on the Effective Date, or paid on
$300,000 other agreed terms.
Estimated Recovery: Full recovery.
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
CLASSIFICATION TREATMENT
- -------------- ---------
<S> <C>
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: 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: claims, payable in four equal quarterly
$4,700,000 (Estimate assumes no installments without interest.
significant adverse result to the Company
in the Bankruptcy Court's allowance and
estimation process. See "Oil and Gas
Operations -- Legal Matters.")
Estimated Recovery: Full recovery over one
year.
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.
Class 8 Impaired
Holders of Existing Company Common Stock Will receive (1) shares representing 4% of
25,603,512 shares outstanding the 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 (2)
rights to purchase additional shares of the
new common stock at $0.26 per share.
Estimated Recovery: 3% to 38% of the
Reorganized Company 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, the Reorganized 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 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 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 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 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 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%
31
<PAGE> 35
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 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 (i) the expiration of any interest period under the Credit Facility
or (ii) quarterly, beginning the first quarter after the Effective Date. Amounts
outstanding under the Credit Facility will accrue interest at the option of the
Reorganized Company at (i) 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 (ii) 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 (i) 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 Company, (ii) 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 Company evaluated by the Lenders for purposes of
determining the borrowing base, and (iii) security interests in other tangible
and intangible assets of the Company (collectively, the "Collateral"). The
rights and responsibilities of Chase, the Lenders and the Company 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 must be met by the Company before
the Effective Date for Chase to be obligated to enter into the Credit Facility,
and Chase's commitment under the Credit Agreement will be conditioned on the
confirmation of the Plan of Reorganization by the Bankruptcy Court.
The Credit Agreement will contain certain financial and other covenants
including, (i) 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, (ii) restrictions on the payment of dividends and (iii)
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 to
the Company 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, then they will be entitled to an
additional aggregate $6.5 million of closing fees. All fees paid by the 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
which must be met before the Lenders will be committed to fund the Credit
Facility on the Effective Date, including: (i) agreement concerning definitive
documents, (ii) completion of economic due diligence and (iii) approval by Chase
of the Reorganized Company's management team and capital structure. Chase and
the Company will come to agreement on definitive documents in keeping with the
terms of the Plan of Reorganization by March 1, 2000. When Chase indicates to
the Company by the later of March 14, 2000 and 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.
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<PAGE> 36
The Offering.
To implement the Plan of Reorganization, the Reorganized Company will raise
up to $90 million of new investment in the Reorganized Company by (i) the
offering made under this prospectus and (ii) if applicable, up to $90 million of
loans to be made by the Standby Lenders (the "Standby Loan").
Under the offering, shareholders have the exclusive first opportunity to
buy additional shares of the new common stock for a price of $0.26 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 the offering may do so,
to the extent that other shareholders do not elect to participate in the
offering. If the offering is not fully subscribed to $90 million by the
shareholders as of the record date, the Company may offer the remaining shares
of new common stock to others. Jefferies & Company, Inc. or another investment
bank approved by the Bankruptcy Court will be retained for the limited purpose
of placing the remaining shares of new common stock.
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 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 offering and, if
necessary, the Standby Loan. The Standby Loan is to be made pursuant to a senior
subordinated note facility under which the Reorganized Company 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 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 Company chooses to extend the offering to that
date. The rights and responsibilities of the Standby Lenders and the Company
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.
Debt under the Standby Loan Agreement will be evidenced by notes (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 payments 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 shall 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 price
received by the Reorganized Company for all of its 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. "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 Credit
Facility. Subject to a final agreement between Chase and the Standby Lenders,
after the initial twelve-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 Company from making any cash
interest payments on the Standby Loan indebtedness if the outstanding
33
<PAGE> 37
indebtedness under both the Credit Facility and the Standby Loan exceeds 3.75
times the EBITDAX for the trailing four quarters. The Reorganized 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 at 300 basis points over Treasury Rate (as defined below) 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. "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. 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 of 75% of the current loan commitments
under the Credit Facility (the "Required Lenders") consent to such payment.
If Standby Loan Notes are issued, the Standby Lenders will receive a
percentage of the fully diluted new common stock of the Reorganized Company as
of the Effective Date (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 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 Company and persons participating in
the offering. See "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 (1) a due diligence fee of $200,000 payable
immediately and (2) a break up fee of $1.0 million (the "Break Up Fee"), to be
paid if the Standby Lenders give the Company 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 Company confirms a plan of reorganization without
an alternative financing proposal, the Company 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 Company 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. The Company 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: (1) agreement to
definitive documents and (2) completion of economic due diligence. The Standby
Lenders and the Company will come to agreement on definitive documents in
keeping with the terms of the Plan of Reorganization 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
Company 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
Company in writing on 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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<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. Certain
information contained in this prospectus, including information with respect to
our plans and strategy for its business, are forward-looking statements. See
Cautionary Statement Regarding "Forward-Looking Statements".
SUBSEQUENT EVENTS
See "Liquidity and Capital Resources" for a description of certain events
affecting our current liquidity.
OUR HISTORY
Coho Energy, Inc. (the "Company") was incorporated in June 1993 under the
laws of the State of Texas and conducts a majority of its operations through
Coho Resources, Inc. ("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 ("Existing Bonds") 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 Existing Bank
Group Loan, 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-
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<PAGE> 39
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. During 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 to 77% from crude
oil sales and 23% from natural gas sales for the same period in 1998. For the
year ended December 31, 1998, crude oil sales and natural gas sales represented
approximately 77% and 23%, respectively, compared to approximately 75% crude oil
sales and 25% natural gas sales in each of 1996 and 1997. Approximately 60% of
natural gas sales revenues in 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. Operating
revenues were $38.0 million for the first nine months of 1999 which represented
a 32% decrease from the same period in 1998. This decrease 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.
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.
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 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 "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> 40
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 (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 disclosure statement (which, as amended, is
referred to as the "Disclosure Statement") with respect to the Plan of
Reorganization. In that hearing, the Bankruptcy Court also scheduled the
confirmation hearing to consider the Plan of Reorganization for March 15, 2000.
We will file the approved Disclosure Statement with the Bankruptcy Court before
it is mailed to holders of claims and equity interests for voting on our Plan of
Reorganization. Before the mailing we will also file an amended Plan of
Reorganization with the Bankruptcy Court to reflect the matters contained in the
approved Disclosure Statement. The amended Plan of Reorganization will be filed
jointly with the official unsecured creditors committee in our Chapter 11 case.
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 issuance of common stock in exchange for 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.
The September 30, 1999 financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts
(including $313.9 million in net property, plant and equipment) or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern. The ability of the Company to continue as a
going concern is dependent upon confirmation of a plan of reorganization,
adequate sources of capital and the ability to sustain positive results of
operations and cash flows sufficient to continue to explore for and develop oil
and gas reserves. These factors, among others, raise substantial doubt
concerning the ability of the Company to continue as a going concern.
As a result of the Chapter 11 filing, the Company has incurred and will
continue to incur significant costs for professional fees as the Plan of
Reorganization 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.
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<PAGE> 41
RESULTS OF OPERATIONS
Selected Operating Data
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRODUCTION:
Crude oil (Bbl/day)........................ 6,742 7,726 13,889 14,501 9,054
Natural gas (Mcf/day)...................... 18,160 21,003 22,260 23,966 7,547
BOE (Bbl/day)........................... 9,769 11,227 17,599 18,495 10,311
AVERAGE SALES PRICES:
Crude oil (per Bbl)........................ $ 16.42 $ 16.31 $ 10.40 $ 10.81 $ 13.59
Natural gas (per Mcf)(a)................... 2.07 2.23 1.98 1.99 2.12
PER BOE DATA:
Production costs(b)........................ $ 3.88 $ 3.90 $ 4.18 $ 4.16 $ 5.35
Depletion.................................. 4.55 4.69 4.38 4.40 3.63
PRODUCTION REVENUES (IN THOUSANDS):
Crude Oil.................................. $40,527 $45,991 $52,689 $42,785 $33,586
Natural gas................................ 13,745 17,139 16,070 13,044 4,370
------- ------- ------- ------- -------
Total production revenues.......... $54,272 $63,130 $68,759 $55,829 $37,957
======= ======= ======= ======= =======
</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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
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.
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. During
1998 and the first quarter of 1999, substantially all of the Company's crude oil
was sold under contracts which were keyed off of posted crude
38
<PAGE> 42
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.
Production revenues for the nine months ended September 30, 1998 and 1999
included no crude oil hedging gains or losses. Production revenues in 1999
included no natural gas hedging gains or losses compared to natural gas hedging
gains of $488,000 ($0.10 per Mcf) for the same period in 1998. Any gain or loss
on the Company's crude oil hedging transactions is determined as the difference
between the contract price and the average closing price for West Texas
Intermediate ("WTI") on the NYMEX for the contract period. Any gain or loss on
the Company's natural gas hedging transactions is generally determined as the
difference between the contract price and the average settlement price for the
last three days during the month in which the hedge is in place. Consequently,
hedging activities do not affect the actual sales price received for the
Company's crude oil and natural gas. At September 30, 1999, the Company had no
natural gas or crude oil production hedged and there were no deferred or
unrealized hedging gains or losses.
Expenses. Production expenses (including production taxes) were $15.1
million for the first nine months of 1999 compared to $21.0 million for the
first nine months of 1998. The decrease in expenses for the comparable nine
month periods is primarily due to decreased production and decreased 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 primarily due to
$2.4 million of well repair work performed to return shut-in wells to
production. 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 interim
results as significantly as when the costs are concentrated in a short period of
time. The Company continued its well repair work in the fourth quarter of 1999
and intends to continue additional well repair work in the first quarter of 2000
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. This increase is 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. This
decrease is 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 include the accrual of the
maximum penalty of 25% of the taxes due.
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<PAGE> 43
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 Existing Bond 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. This decrease is 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. 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 during 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 nine
months ended September 30, 1999 were $29.8 million as compared to net losses of
$71.1 million for the same period in 1998. The 1999 losses include a writedown
of the Tunisian oil and natural gas properties of $5.4 million and the 1998
losses include a writedown of the United States crude oil and natural gas
properties of $73 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 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
40
<PAGE> 44
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.
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 ($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. 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
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<PAGE> 45
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 in this prospectus.
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 Existing Bonds on October 3, 1997, which bear a higher interest rate
than the Company's Existing Bank Group Loan. 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.
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.
During 1998, the carrying values of the 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 $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.
1997 COMPARED WITH 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
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<PAGE> 46
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.
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 costs 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 ("Existing Bonds") on October 3,
1997 which bear a higher interest rate than the Company's Existing Bank Group
Loan. 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 values 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.
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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 totaling $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
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 from 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 rise 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 Existing Bank Group Loan but are not sufficient to cover
past due interest on the Existing Bonds or on the borrowings under the Existing
Bank Group Loan.
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 pre-petition
liabilities to Liabilities Subject to Compromise as a result of the Chapter 11
filing.
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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 December 31, 1999,
$18.6 million in cash, an increase of $12.8 million since the Petition Date,
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. 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 of $1.8 million on February 1, 2000 and March 1,
2000.
On February 22, 1999, the Company was informed by the Bank Group that the
Company's 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, 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 Existing Bank Group Loan and
received written notice from Bank Group on March 8, 1999, that it was 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, 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 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 payments 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 Agreement. 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, 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. 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 $101.8 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 $89.6 million related to installments
due on the over advance.
The Existing Bank Group Loan 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.
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<PAGE> 49
The Company did not pay the April 15, 1999 interest payment of
approximately $6.7 million due on its Existing Bonds and currently is 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
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 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. An
additional $1.6 million of Existing Bond 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 Existing Bonds 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.
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 Existing Bank Group Loan.
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.
Plan of Reorganization. The Company filed the Plan of Reorganization with
the Bankruptcy Court on November 30, 1999. A confirmation hearing is scheduled
for March 15, 2000 for final approval of the Plan of Reorganization. See "Oil
and Gas Operations -- Legal Matters."
Under the Plan of Reorganization, the Company will establish a Credit
Facility with Chase, acting on behalf of the Lenders, for a principal amount of
up to $250 million; and the Company will generate additional funds necessary for
the reorganization with proceeds of an offering of up to an aggregate of
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<PAGE> 50
$90 million, and if necessary, the Standby Loan. See "The Plan of
Reorganization -- The New Debt and Equity."
Proceeds from the offering together with cash on hand as of the Effective
Date, borrowings under the Credit Facility, and if necessary, borrowings under
the Standby Loan will be used to (1) repay amounts due under the Existing Bank
Group Loan, including accrued interest and reasonable fees and expenses, (2) pay
administrative expenses associated with the bankruptcy proceeding and (3)
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. See "The
Plan of Reorganization -- Classification and Treatment Summary."
The holders of the Existing Bonds will receive shares representing 96% of
the new common stock as of the Effective Date without giving effect to dilution
from shares issued under the offering or the Standby Loan. See "The Plan of
Reorganization -- 2. Existing Bond Holders."
Existing shareholders will receive (i) shares representing 4% of the new
common stock as of the Effective Date without giving effect to dilution from
shares issued under the offering or the Standby Loan and (ii) rights to purchase
additional shares of new common stock at $0.26 per share. See "The Plan of
Reorganization -- 3. Existing Shareholders."
Dividends. While the Company is restricted on the payment of dividends
under the Existing Bank Group Loan, dividends are permitted on Company equity
securities provided (i) the Company is not in default under the Existing Bank
Group Loan; 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 Existing Bond
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 Existing Bonds were issued plus the net proceeds
from any future sales of capital stock of the Company. Due to the Company's
default under the Existing Bank Group Loan 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. Additionally, the terms of the Credit
Facility and the Standby Loan restrict our paying dividends.
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.
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.
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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.
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 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. The Company had no natural gas or crude oil
production hedges during the nine months ended September 30, 1999.
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, 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. 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. To date, 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.
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 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 PROSPECTUS ARE
"YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR 2000
INFORMATION AND READINESS DISCLOSURE ACT.
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BUSINESS
GENERAL
Coho Energy, Inc. (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. 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 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.
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 an 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
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<PAGE> 53
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.
On May 27, 1999, the 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 Company seeks monetary
damages of approximately $500 million. The lawsuit is currently in the discovery
phase. 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.
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's decision to change the
Company's borrowing capacity was based on the then-current decline in crude oil
prices. As a result of the Bank Group's 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 has 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 the over advance, since the date of acceleration. Under 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.
Additionally, the Company's 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. The 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 Existing Bonds, which own in excess of 25% in principal amount of the
outstanding Existing Bonds. As a result, on May 19, 1999, one of the holders of
the Existing Bonds filed a lawsuit against the Company, and each subsidiary who
is the guarantor of the Existing Bonds, in the Supreme Court of the State of New
York. The Company contested that claim, which was stayed by the bankruptcy
proceedings. In the lawsuit the Company contended that certain procedures for
seeking remedies under the Existing Bond Indenture were not followed. On January
5, 2000, this lawsuit 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's 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. However, on August 23, 1999, the
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Company filed a petition for Chapter 11 bankruptcy protection since the Company
believed that the resolution of a restructuring of the Company could not be
completed without the protection and assistance of the Bankruptcy Court.
BUSINESS STRATEGY
While the Company remains committed in the long term to its multifaceted
growth strategy of the past, as discussed below, the effects of low oil prices
and resulting cash flow dictate 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 and
Mississippi. The Company's Oklahoma properties offer numerous shallow oil and
gas recompletion and drilling opportunities with favorable economics.
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 94 development
wells, of which 87% 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 more recently
shot two large 3-D seismic programs in and around its existing properties in
Mississippi. At the time of purchase, 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 was able to
achieve favorable average production costs of $4.18 per BOE for 1998. However,
production costs for the nine months ended September 30, 1999 increased to $5.35
per BOE. This increase from the prior year is due to the Company performing a
substantial amount of well repair work to return shut-in wells to production, as
well as increased severance taxes 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.
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<PAGE> 55
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 55 MMBbls
of crude oil and natural gas liquid reserves and approximately 33 Bcf of natural
gas reserves as well as interests in approximately 40,000 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"). We are a holding company with no direct operations
except providing some management services to our subsidiaries. We have no
significant assets other than the stock of our subsidiaries. We conduct our
business through our subsidiaries. As a result, we depend on capital
contributions or financing to meet our obligations. Our subsidiaries are
separate legal entities that have no obligation to make any funds available to
us for any purpose.
References in this prospectus to 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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OIL AND GAS OPERATIONS
The Company 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 and 1999 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.
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 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 is currently around 600 BOE per day. 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 five 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. 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 and 1999. The Company may pursue these drilling opportunities as oil prices
and cash flow allow. In 1996, the Company completed a 37-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
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<PAGE> 57
3-D 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 the Company'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>
NINE AT DECEMBER 31, 1998
MONTHS -----------------------------------
YEAR ENDED DECEMBER 31, ENDED NET
----------------------- SEPTEMBER 30, PRODUCTIVE
1996 1997 1998 1999(C) WELLS AVERAGE
BOE/ BOE/ BOE/ ------------- ----------- PERCENTAGE WORKING
FIELD DAY DAY DAY BOE/DAY OIL GAS OPERATED INTEREST
- ----- ----- ------ ------ ------------- ---- ---- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mississippi................. 6,861 8,178 8,202 4,616 127 3 96% 90%
Oklahoma(a)................. -- -- 6,345 5,369 634 36 52% 42%
Louisiana(b)................ 2,892 2,848 2,409 -- -- -- -- --
Other....................... 16 201 643 326 2 -- 8% 10%
----- ------ ------ ------ --- --
Total............. 9,769 11,227 17,599 10,311 763 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.
(c) In response to depressed crude oil prices during 1998 and early 1999, the
Company significantly reduced minor and major repairs and drilling
activity on its operated properties beginning in August 1998, ceased all
repair work and drilling activity in December 1998 and halted production
on wells which were uneconomical. The Company restarted repairs and
maintenance on the properties it operates and began doing limited
recompletion and workover activity in the second half of 1999.
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, the Company 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.
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<PAGE> 58
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. Daily production for the nine months ended September 30, 1999 averaged
584 BOE per day as a result of the reduced business activity indicated above
(see footnote (c) to the table above).
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
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 turned to sales in early 1999. 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. For the nine months ended
September 30, 1999, daily production averaged 241 Mcf.
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 49% of the
Company's total Mississippi production on a BOE basis for the nine months ended
September 30, 1999. 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. The Company 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 and 1999, 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 the nine months ended September 30,
1999 from Laurel was 2,300 BOE, down from the level experienced in 1998 due to a
scaled back operating and capital program which resulted from the substantial
decline in commodity prices experienced in late 1998 and early 1999 and budget
constraints. 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 the Company in April 1989. At the time of
acquisition, Martinville was only producing 80 net BOE per day, while the
average production for the nine months ended September 30, 1999 was 770 net BOE
per day. The field covers more than 7,400 acres, and currently has 21 producing
wells. Like Laurel,
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the field is characterized by highly complex faulting and produces from multiple
horizons. The Company 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 and early 1999, 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. As in Laurel Field, this reserve
decline was attributable primarily to low year-end oil prices.
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. For the nine months ended September 30, 1999, the average
daily production was 370 BOE, a decrease of 54% from 1998 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 and capital budget constraints.
Soso is a large, geologically complex field which had already produced over
75 MMBOE at the time the Company acquired it. Also, like Brookhaven, the
Company'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.
In 1998, the Company acquired 35 miles of new 2-D seismic data across the
Soso field. This 2-D seismic data should enhance the Company's development of
the Hosston and Cotton Valley formations. The Company 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. For the nine months ended September
30, 1999, daily production averaged 456 BOE, down from 1998 as a result of the
natural decline of the reservoirs, low oil prices and reduced capital activity
(see footnote (c) to the table above).
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.
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Mid-Continent Area
In December 1997, the Company acquired interests in approximately 40,000
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.
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, 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 and 1999, the Company 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. The Company intends to continue this
exploitation program in 2000. 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 the near future. 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. Daily production, however, for the
nine months ended September 30, 1999, decreased to 466 BOE due to reduced
activity as a result of budget constraints.
Sholem Alechem Fault Block "A" Unit, Oklahoma. Located in Stephens County,
Oklahoma, the Sholem Alechem Fault Block "A" Unit ("Sholem Alechem") 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, the Company 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, 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. Daily production for the nine months ended September 30, 1999 was 679 BOE.
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
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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 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. For the nine months ended September 30, 1999, daily
production was 969 BOE.
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.
The Company also has non-operating working interests in three fields in
Oklahoma. At December 31, 1998, year end proved 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. In addition, these projects should
incur low capital and production costs due to existing field infrastructures.
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 exists in and
around the Company'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 their 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. In June 1999, the Company commenced drilling an exploratory well on this
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 wrote down its Tunisian
properties by $5.4 million during the third quarter of 1999. Anadarko
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<PAGE> 62
Tunisia Anaguid Company, one of the working interest partners in this permit,
will assume responsibility as operator and plans to continue exploration of this
permit.
In June 1999, the Company extended its Anaguid permit in Tunisia through
June 2001. The Company has a commitment to drill one additional well during that
two-year period.
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, NINE MONTHS
------------------------ ENDED
1996 1997 1998 SEPTEMBER 30, 1999
------ ------ ------ ------------------
<S> <C> <C> <C> <C>
CRUDE OIL:
Volumes (MBbls).......................... 2,468 2,820 5,069 2,472
Average sales price (per Bbl)(a)......... $16.42 $16.31 $10.40 $13.59
NATURAL GAS:
Volumes (MMcf)........................... 6,646 7,666 8,125 2,060
Average sales price (per Mcf)(b)......... $ 2.07 $ 2.23 $ 1.98 $ 2.12
AVERAGE PRODUCTION COST (PER BOE)(c)....... $ 3.88 $ 3.90 $ 4.18 $ 5.35
</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.
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<PAGE> 63
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 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 the Company
acquires additional properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of the
Company 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 in this
prospectus.
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<PAGE> 64
ACREAGE
The following table summarizes the developed and undeveloped acreage owned
or leased by the Company 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.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, in certain 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 such title defects at
our expense. We could lose our entire investment in any property we drill that
possesses a title defect of such a nature that it would be prudent to commence
drilling upon but which we were unable to 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 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 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 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 such reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. We compete for such 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
the Plan of Reorganization is consummated, the continued availability of such
materials and resources to us cannot be assured.
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<PAGE> 65
CUSTOMERS AND MARKETS
Substantially all of the Company'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 the Company and
are sold by the Company 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 the Company's revenues. During the nine months ended
September 30, 1999, EOTT and Amoco Production Company accounted for 39% and 40%,
respectively, of the Company's revenue. We sold our Monroe Field properties in
December 1998 and therefore do not currently have a relationship with Mid
Louisiana Marketing Company. While we believe our 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
our results of operations.
The Company has a three-year crude oil purchase agreement with EOTT which
became 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 on a month-to-month basis. As part of this contract,
the Company has agreed to sell to EOTT approximately 50% of its 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
Production Company 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 oil 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 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 in this prospectus.
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
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<PAGE> 66
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 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 before 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 before 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 the Company 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,
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<PAGE> 67
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, 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
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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 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 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 any 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
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<PAGE> 69
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
above ground storage tanks from its well sites. Inactive tanks are replaced, as
necessary, with newer above ground 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
provides 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 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 September 30, 1999, the Company had 137 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.
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LEGAL MATTERS
The Bankruptcy Proceedings.
On August 23, 1999, the Company and its consolidated subsidiaries filed a
voluntary Chapter 11 petition with the United States Bankruptcy Court for the
Northern District of Texas (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 in this section.
The Bankruptcy Court has approved Fulbright & Jaworski L.L.P. as counsel
for the Company and Arthur Andersen LLP as the Company's financial consultants
and auditors. The Bankruptcy Court also has approved the Company's retention of
oil and gas reserve engineers, special counsel for the Company in certain
litigation, and certain ordinary course of business professionals. All of these
professionals are assisting the Company in its efforts to reorganize its
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
Company's bankruptcy proceedings.
Shortly following the commencement of its cases, the Company obtained
approval from the Bankruptcy Court to utilize the cash collateral in the
continued operations of its business, including certain capital expenditure
programs. The Company's use of cash collateral was extended through January 30,
2000. Under the Third Interim Order to Use Cash Collateral, in December 1999,
the Company 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 its cases, the Company 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 Company's cases.
In October, 1999, one of the shareholders of the Company filed a motion to
compel the Company to hold an annual shareholders' meeting. As of August 23,
1999, the 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 August 23, 1999 because of extensive, ongoing
negotiations between the Company, the Bank Group and the holders of Existing
Bonds concerning the restructuring of the Company's 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 Existing Bonds, the Company elected to postpone the annual
meeting and combine it with a special meeting once an agreement with the Bank
Group and holders of Existing Bonds was reached. Although the Company reasonably
believed that it would reach an agreement with the Bank Group and the holders of
Existing Bonds before August 23, 1999, unfortunately such an agreement was not
reached and the Company filed for bankruptcy protection.
The Bankruptcy Court denied the request to compel a shareholders' meeting
provided that the 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 of Reorganization. The Company complied with the
Bankruptcy Court's directive. The Bankruptcy Court also issued an order for the
Company to show cause as to why the exclusive period for the Company 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
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<PAGE> 71
terminated as to the Bank Group, the official equity committee and the official
unsecured creditors committee.
On November 30, 1999, the Company filed a 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
disclosure statement (which, as amended, is referred to as the "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. We will file the approved Disclosure
Statement with the Bankruptcy Court before it is mailed to holders of claims and
equity interests for voting on our Plan of Reorganization. Before the mailing we
will also file an amended Plan of Reorganization with the Bankruptcy Court to
reflect the matters contained in the approved Disclosure Statement. The amended
Plan of Reorganization will be filed jointly with the official unsecured
creditors committee in our Chapter 11 case.
Other Proceedings.
Hicks Muse Lawsuit. The 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
Company, which would have given Hicks Muse control of the 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 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 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. The Company is not able to evaluate the recovery they might receive
in the lawsuit and its outcome is contingent on trial or settlement.
"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. The Company's predecessors on the
Brookhaven Field were Florabama Associates, Ltd. ("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 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. 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. 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 million. While the allowance of a claim in those amounts
would render the Plan of Reorganization infeasible, the Company believes that
these claims will be resolved or estimated in
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<PAGE> 72
connection with the bankruptcy cases at a level no greater than what can be paid
out of the Company's cash flow under the terms of the Plan of Reorganization
after the Effective Date.
The Stratton Lawsuit. The "Stratton Lawsuit" in Oklahoma involves three
wells operated by Chesapeake Operating Inc. ("Chesapeake"). 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 taking place in and before February 1997. The Company believes that
any liability attributed to them in the Stratton Lawsuit is covered by insurance
and therefore, will not affect the feasibility of the Plan of Reorganization.
Alternatively, the Company does not believe it is liable for the claims asserted
in the Stratton Lawsuit.
Currently, a number of other state court cases are pending against the
Company. The Company believes that any liabilities attributed to them in these
cases are covered by insurance and therefore, will not effect the feasibility of
the Plan of Reorganization.
Insurance Coverage Disputes with United National Insurance Company Involving
Pending Litigation.
The Company has 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 Company, 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 Company about limitations to potential coverage, including
applicable deductibles chargeable to the Company.
If coverage is pursued by the Company, the disputed coverage issues raised
by these lawsuits may require judicial resolution through declaratory judgment
litigation.
(a) THE NORM LAWSUITS (Brookhaven Field)
United National has informed representatives of the Company that
United National reserves its rights to decline coverage on grounds that the
Company 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 Company has 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
Company's 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 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.
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<PAGE> 73
(d) GENERAL LIABILITY COVERAGE ISSUES
United National has informed the Company of its position that
potential coverage is not available for the claims in the NORM Lawsuit and
Stratton Lawsuit under the general liability provisions of the policies. In
particular, United National has informed the Company 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 before the issuance of the United National policies.
United National has also informed the Company 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 Company of its position that the
claims in the NORM Lawsuit and Stratton Lawsuit also may not be subject to
potential coverage under the energy industries pollution liability
provisions. United National has informed the Company 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 Company 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 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.
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 Company would be liable before policy proceeds attaching.
The Company believes that there is no merit to United National's various
positions described above and the Company reserves all rights with respect to
these policies and United National's conduct in connection therewith.
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Unasserted Causes of Action.
The Company has an unasserted claim against Texaco Exploration and
Production, Inc. regarding imbalances in gas volume from wells in which the
Company has an interest.
The Official Equity Committee contends that causes of action may exist
against one or more of the Company's management team as it existed on August 23,
1999. The Company contends there is no merit in such claims.
The Company believes 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.
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.
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MANAGEMENT
DIRECTORS
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.............................................. 54 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.
Under 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
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Company has agreed to nominate the two persons designated by EIP for election to
the board of directors of the Company at each annual meeting of the Company's
shareholders. No nominees of EIP are members of the current board, and EIP has
not made any new nominations. If the shares of existing common stock owned by
EIP are both less than one million shares and less than 4% of the outstanding
shares of existing 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. As long as any nominee
of EIP serves as a director of the Company, the Company is required to appoint
one of the nominees 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.
EXECUTIVE OFFICERS
The names of the executive officers of Coho and certain information about
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..................... 45 Treasurer
</TABLE>
For information concerning Jeffrey Clarke, see the table under "Directors"
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.
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, before 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.
Keri Clarke has served as Vice President, Land and Environmental/Regulatory
Affairs, of the Company (and CRI, before 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.
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<PAGE> 77
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, before
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 F. 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.
In late 1999, the Company proposed a work force reduction. In connection
with the proposed work force reduction, Eddie M. LeBlanc, III, is no longer
employed by the Company. Mr. LeBlanc was Senior Vice President and Chief
Financial Officer of the Company.
We expect the foregoing directors and officers (other than Mr. LeBlanc) to
be our directors and officers after the confirmation of our Plan of
Reorganization, subject to the provisions of this paragraph. 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 the Company's 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. We are not
currently aware of the identities of the board members for the one-year period
after confirmation that will be nominated in accordance with the Plan of
Reorganization.
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EXECUTIVE COMPENSATION
The following tables set forth information with respect to the five most
highly compensated executive officers of the Company, including the 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 Corporate 1998 175,000 0 -- 12,835
Development and Corporate Secretary(4)(6) 1997 161,650 85,000 150,000 11,170
Anne Marie O'Gorman........................ 1999 $175,000 $ 0 -- $ 11,511
Senior Vice President Corporate 1998 175,000 0 -- 83,106
Development and Corporate Secretary(4)(6) 1997 161,650 85,000 100,000 10,516
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 the Company's 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 the Company.
(2) Mr. Pearce's All Other Compensation includes the Company's contribution 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 the Company's 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, at the request of the Bank Group,
the Company proposed a work force reduction. In connection with the proposed
work force reduction, Mr. LeBlanc's employment relationship with the Company
was severed effective December 31, 1999.
(4) Ms. O'Gorman's All Other Compensation includes the Company's 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 the Company's contribution 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 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").
(7) Upon confirmation of the Plan of Reorganization, all options will be
canceled.
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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
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*.................. -- $ -- 250,000 0 $0 $0
Anne Marie O'Gorman..... -- $ -- 203,432 0 $0 $0
Larry L. Keller......... -- $ -- 78,333 15,000 $0 $0
</TABLE>
- ---------------
* In late 1999, the Company proposed a work force reduction. In connection
with the proposed work force reduction, Mr. LeBlanc's employment
relationship with the Company was severed effective December 31, 1999.
(1) Upon confirmation of the Plan of Reorganization, all options will be
canceled.
(2) Computed based upon the difference between the market price on December 31,
1999 of $ 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 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 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 the bonus, incentive compensation and other programs
that are created by the board. 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 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). If any
of Messrs. Clarke or Pearce 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. If any of Messrs. Clarke or Pearce 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 Agreements was amended on March 17, 1997 to
provide that the Company will 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
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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 "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 existing 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 existing
common stock before the transaction beneficially own more than 60 percent of the
then outstanding common stock of the resulting corporation, no person who did
not own existing 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 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 existing
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 existing 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 such ownership existed before 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 if the executive
officer's employment is terminated 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. The
options or restricted stock awards 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.
The above-described employment agreements and severance agreements will be
modified according to the terms of the Plan of Reorganization if the Plan of
Reorganization is confirmed.
Our board of directors has proposed that the Plan of Reorganization provide
for a retention plan ("Retention Plan") under which key employees are provided
with additional incentives to continue their
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<PAGE> 81
employment with the Company as we pursue reorganization. If the Plan of
Reorganization is confirmed, 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 the 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 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 1999.
During 1999 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 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 meeting 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 existing 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 existing 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 existing 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. 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 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, 1999, no director was granted options
under the Director Plan. Upon confirmation of the Plan of Reorganization, the
Company anticipates that the Director Plan will be terminated.
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SECURITY OWNERSHIP OF PRINCIPAL 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 existing common stock as of February 4, 2000. Unless otherwise
specified, such persons have sole voting power and sole dispositive power with
respect to all shares attributable to it. The percentage ownership of these
principal shareholders after the completion of this offering cannot be estimated
because the Company does not know how many shares will be purchased by its
shareholders under this offering.
<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 4, 2000.
(2) Based solely on information contained in a Schedule 13G dated December 23,
1999 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
3,220,000 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.
(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.
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<PAGE> 83
The following table sets forth certain information with respect to existing
common stock beneficially owned as of December 31, 1999 by (i) 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 PERCENT
BENEFICIAL 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, the Company proposed a work force reduction. In connection
with the proposed work force reduction, Mr. LeBlanc's employment
relationship with the Company was severed effective December 31, 1999.
(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 the 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 such 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 the Plan of Reorganization is confirmed, all
options will be canceled.
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<PAGE> 84
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 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 under an agreement with EIP. See "Management." 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.
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.
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<PAGE> 85
DESCRIPTION OF EXISTING INDEBTEDNESS
EXISTING BANK GROUP LOAN
The Company has a revolving credit facility (the "Existing Bank Group
Loan") with 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 (collectively, the "Bank Group"). The total
credit commitment and borrowing base under the Existing Bank Group Loan at
December 31, 1998 was $300 million and $242 million, respectively. The Existing
Bank Group Loan is secured by the crude oil and natural gas properties of the
Company and guaranteed by all of the Company's material subsidiaries, excluding
the Existing Bank Group Loan co-borrowers, and such guarantees are secured by
all of the crude oil and natural gas properties of the subsidiaries and the
stock of all guaranteeing subsidiaries. The Existing Bank Group Loan is subject
to borrowing base availability as determined from time to time by the 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 the Company. The borrowing base may be affected from time
to time by the performance of the Company's crude oil and natural gas properties
and changes in crude oil and natural gas prices. The Company incurs a commitment
fee of 3/8% per annum on the unused portion of the borrowing base.
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%, 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
before 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. The Existing Bank Group Loan terminates January 2, 2003;
all amounts due under the Existing Bank Group Loan have been accelerated.
On February 22, 1999, the Company was informed by the Bank Group that its
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.
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. On March 8, 1999, the
Company received written notice from the Bank Group that it was in default under
the terms of the Existing Bank Group Loan Agreement and the Bank Group 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 the
period between March and July 1999. 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
interest 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. Under 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.
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<PAGE> 86
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 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 $101.8 million as of September 30, 1999, including
approximately $12.2 million of past due interest 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 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.
EXISTING BONDS
The $150 million of 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 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 "Existing Bond 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.
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
Existing Bond Indenture. Under the Existing Bond Indenture, the trustee under
the Existing Bond 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 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 August
23, 1999. As a result of the Chapter 11 filing the Company has ceased accruing
interest on unsecured debt, including the Existing Bonds. An additional $1.6
million of Existing Bond 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. See "Management's Discussion and Analysis of
Financial Position and Results of Operations -- Liquidity and Capital
Resources."
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<PAGE> 87
DESCRIPTION OF OUR CAPITAL STOCK
OUR AUTHORIZED CAPITAL STOCK
The authorized capital stock of the 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 February 4, 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 the Company's Stock Option
Plans are of no effect since such plans will be canceled and no shares will be
reserved on the Effective Date.
DESCRIPTION OF OUR 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 Company. In the event of a
liquidation, dissolution or winding up of the Company; (d) upon the 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 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 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 non-assessable.
DESCRIPTION OF OUR PREFERRED STOCK
The preferred stock may be issued, from time to time, in one or more
series, and the board of directors of the 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
Company issues 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 the Company's 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, under certain
circumstances, in an attempt to prevent an acquisition of the Company. The
Company has no present intention to issue any shares of preferred stock.
LIMITATION OF DIRECTOR LIABILITY
The articles of incorporation of the 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 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 the
Company 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, 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 confirmation of the 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.
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<PAGE> 88
DIVIDENDS
The Existing Bond 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 Existing Bonds were issued plus
the net proceeds from any future sales of capital stock of the Company. If the
Plan of Reorganization is confirmed, the Company will enter into new agreements,
in which similar restrictions on the Company's payment of dividends will be
imposed.
RIGHTS PLAN
In September 1994, the 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.
If the Plan of Reorganization is confirmed, the rights plan will be
terminated.
REGISTRATION AND NOMINATION RIGHTS
The Company is a party to two agreements giving certain rights to specified
shareholders. First, the Company and Kenneth H. Lambert, a director of the
Company, are parties to an Amended and Restated Registration Rights Agreement,
providing him with the right to make one request that the Company register his
shares of the existing common stock and to participate in a registration by the
Company (a "piggyback" registration). Second, the 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 Company.
If the Plan of Reorganization is confirmed, these two agreements will be
terminated.
Under the 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 the 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 confirmation of the 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 the
Plan of Reorganization, our articles of incorporation will be amended to
authorize the new common stock. The Plan of Reorganization provides for certain
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 the 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
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<PAGE> 89
Section 1123(a)(6) of the 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.
DILUTION
Under the Plan of Reorganization, the shareholders of the Company as of the
date the Bankruptcy Court enters its order approving the Disclosure Statement
(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 this offering 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 Company. THESE PERCENTAGES ARE SUBJECT TO DILUTION UNDER SOME
FEATURES OF THE PLAN OF REORGANIZATION, AS DISCUSSED BELOW.
Under this offering, each shareholder of the Company as of the record date
of the offering (the "Rights Offering Record Holders") are being 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
record date of this offering (the "Rights Offering Record Date"), a Rights
Offering Record Holder will 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 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 $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 this offering are not
purchased by the Rights Offering Record Holders (including those accepting their
basic subscription privilege and those purchasing shares under the
over-subscription privilege), the Company may offer those remaining shares to
other parties at $0.26 per share.
The total number of shares offered under this offering is 346,153,846; if
all of these shares are sold under this 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 Company does not know whether it will be able to sell all of the shares
offered under this offering. To the extent that the Company does not sell all of
those shares, the Company will borrow funds in an amount to be determined by the
Company under the Standby Loan.
Under the terms of the Standby Loan, the Reorganized 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 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 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 this offering. To assure that
86
<PAGE> 90
these results are achieved, the Reorganized Company 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 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 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.
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 Voting Record
Date 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 certain 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>
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%
Purchasers under this offering..... 35.1% 21.3% N/A
Standby Lenders.................... N/A 9.0% 14%
</TABLE>
LEGAL MATTERS
Certain legal matters related to the rights offered by this prospectus are
being passed upon for the Company by Fulbright & Jaworski L.L.P., Dallas, Texas.
INDEPENDENT AUDITORS
The consolidated financial statements of Coho Energy, Inc. as of December
31, 1997 and 1998 and for each of the three years in the period ended December
31, 1998 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.
87
<PAGE> 91
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 SEC are also available to the public on the Commission's
internet Web site 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.
88
<PAGE> 92
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, 1997 and 1998..... F-3
Consolidated Statements of Operations, Years Ended December
31, 1996, 1997 and 1998................................... F-4
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1996, 1997
and 1998.................................................. F-5
Consolidated Statements of Cash Flows, Years Ended December
31, 1996, 1997 and 1998................................... F-6
Notes to Consolidated Financial Statements, Years Ended
December 31, 1996, 1997 and 1998.......................... F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................... F-26
Condensed Consolidated Balance Sheets, September 30, 1999... F-27
Condensed Consolidated Statements of Operations, Nine Months
Ended September 30, 1998
and 1999.................................................. F-28
Condensed Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 1998
and 1999.................................................. F-29
Notes to Condensed Consolidated Financial Statements........ F-30
</TABLE>
F-1
<PAGE> 93
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.
Our opinion, as expressed above, is based on the facts and circumstances
existing on March 24, 1999, the date of our original report. Subsequent to that
date 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 described in Note 15,
"Subsequent Events -- Bankruptcy Proceedings," management believes that it may
not be possible to satisfy in full all claims against the Company if the
reorganization plan filed with the Bankruptcy Court is not approved. If this
matter is not resolved prior to completion of our audit of the Company's
financial statements for the year ending December 31, 1999, our auditors' report
on those financial statements will be qualified as being subject to the ultimate
outcome of that uncertainty.
Arthur Andersen LLP
Dallas, Texas
March 24, 1999 (except with
respect to the matter discussed
in Note 15, as to which the
date is August 23, 1999).
F-2
<PAGE> 94
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
Current portion of long term debt (note 4)................ 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
F-3
<PAGE> 95
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
Interest and other income................................. 1,012 646 214
Interest expense.......................................... (8,476) (11,120) (32,935)
------- -------- ---------
(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
F-4
<PAGE> 96
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
F-5
<PAGE> 97
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
F-6
<PAGE> 98
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
F-7
<PAGE> 99
COHO ENERGY, INC. AND SUBSIDIARIES
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 common
shares plus, when their effect is dilutive, common stock equivalents consisting
of stock options
F-8
<PAGE> 100
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-9
<PAGE> 101
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 ("Existing
Bonds") due to cross default provisions in the indenture related to the Existing
Bonds. 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 Existing Bonds
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 Existing Bonds, 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 Existing Bonds 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 Existing Bonds 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
F-10
<PAGE> 102
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of a portion or all of the Existing Bonds to equity. See Note 15 -- Subsequent
Events -- Bankruptcy Proceedings.
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
F-11
<PAGE> 103
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. See Note 15 -- Subsequent Events -- Bankruptcy Proceedings.
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 ("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 Revolving Credit Facility 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-12
<PAGE> 104
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Existing
Bonds specified in the Indenture. If the Company is in default of the Existing
Bonds 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
Existing Bonds 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 Existing
Bonds, the Trustee, by written notice to the Company, or the holders of at least
25% in principal amount of the outstanding Existing Bonds, 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
Revolving Credit Facility remain outstanding and have not been cured or waived.
All amounts outstanding under the Existing Bonds 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.
See Note 15 -- Subsequent Events -- Bankruptcy Proceedings.
Debt Repayments
Based on the balances outstanding and current default under the Revolving
Credit Facility and the Existing Bonds 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.
F-13
<PAGE> 105
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.
F-14
<PAGE> 106
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such 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 Existing Bonds 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 under 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
F-15
<PAGE> 107
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as 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
-------------------- -------------------- --------------------
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..... 1,700,313 $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>
WTD AVE
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>
F-16
<PAGE> 108
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> <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.
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
F-17
<PAGE> 109
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$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 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
F-18
<PAGE> 110
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Existing Bonds was $57 million
compared to the related carrying value of $149 million. The fair value of the
Existing Bonds 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.
F-19
<PAGE> 111
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.
F-20
<PAGE> 112
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.
F-21
<PAGE> 113
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
-------- -------- --------
$ 50,638 $340,411 $ 70,143
======== ======== ========
Property and equipment, net of accumulated
depletion.......................................... $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>
(c) Costs Incurred
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Reserves.
F-22
<PAGE> 114
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-23
<PAGE> 115
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>
15. SUBSEQUENT EVENTS -- BANKRUPTCY PROCEEDINGS
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 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 (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 disclosure statement with respect to the Plan
of Reorganization. In that hearing, the Bankruptcy Court also scheduled the
confirmation hearing to consider the Plan of Reorganization for March 15, 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 issuance of common stock in exchange for 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.
F-24
<PAGE> 116
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 prior to the Petition Date, including secured debt, are subject to
compromise. Under the Bankruptcy Code, payment of these liabilities may not be
made except under the Plan of Reorganization or Bankruptcy Court approval.
NORM Litigation Claims Filed in Bankruptcy Proceedings
As discussed under Note 9 -- Commitments and Contingencies, Coho Resources,
Inc., is a defendant in a number of individual lawsuits 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. The
Company's predecessors on the Brookhaven Field were Florabama Associates, Ltd.
("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
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. 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. 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 million. While the
allowance of a claim in those amounts would render the Plan of Reorganization
infeasible, the Company believes 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 Company's cash flow under the terms of the Plan of
Reorganization after the Effective Date.
F-25
<PAGE> 117
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 and 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
F-26
<PAGE> 118
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30
1999
------------
(UNAUDITED)
<S> <C>
Current Assets
Cash and cash equivalents................................. $ 10,138
Cash in escrow............................................ 77
Accounts receivable, principally trade.................... 10,200
Other current assets...................................... 1,684
---------
22,099
Property and Equipment, at cost net of accumulated depletion
and depreciation, based on full cost accounting method
(note 3).................................................. 313,924
Other Assets................................................ 5,543
---------
$ 341,566
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities Not Subject to Compromise:
Current Liabilities
Accounts payable, principally trade.................... $ 549
Accrued liabilities and other payables................. 2,592
Accrued interest....................................... 3,139
---------
Total current liabilities......................... 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
---------
428,931
---------
Commitments and Contingencies (note 6)...................... 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
Additional paid-in capital................................ 137,812
Retained deficit.......................................... (229,133)
---------
Total shareholders' equity........................ (91,065)
---------
$ 341,566
=========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-27
<PAGE> 119
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
1998 1999
-------- --------
<S> <C> <C>
Operating Revenues
Net crude oil and natural gas production.................. $ 55,829 $ 37,957
-------- --------
Operating Expenses
Crude oil and natural gas production...................... 18,282 13,200
Taxes on oil and gas production........................... 2,728 1,863
General and administrative (note 3)....................... 4,752 7,574
State income tax penalties................................ -- 1,048
Depletion and depreciation................................ 22,235 10,213
Writedown of crude oil and natural gas properties......... 73,000 5,433
-------- --------
Total operating expenses.......................... 120,997 39,331
-------- --------
Operating Income (Loss)..................................... (65,168) (1,374)
-------- --------
Other Income and Expenses
Interest and other income................................. 168 241
Interest expense (note 4)................................. (24,512) (26,030)
-------- --------
(24,344) (25,789)
-------- --------
Loss from Operations Before Reorganization Costs and Income
Taxes..................................................... (89,512) (27,163)
Reorganization Costs........................................ -- 2,685
-------- --------
Loss from Operations Before Income Taxes.................... (89,512) (29,848)
Income Tax Expense (Benefit)................................ (18,432) (26)
-------- --------
Net Loss.................................................... $(71,080) $(29,822)
======== ========
Basic Loss per Common Share (Note 5)........................ $ (2.78) $ (1.16)
======== ========
Diluted Loss per Common Share (Note 5)...................... $ (2.78) $ (1.16)
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-28
<PAGE> 120
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
F-29
<PAGE> 121
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, which were 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. 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. See Note
7 -- Subsequent Events -- Bankruptcy Proceedings.
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 shareholders.
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
F-30
<PAGE> 122
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compromise. Under the Bankruptcy Code, payment of these liabilities may not be
made except under 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 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>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Operating revenues.......................................... $ 37,957
Operating expenses.......................................... $ 33,888
Net loss.................................................... $(29,822)
</TABLE>
F-31
<PAGE> 123
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30
1999
------------
<S> <C>
Crude oil and natural gas leases and rights including
exploration, development and equipment thereon, at cost... $ 683,542
Accumulated depletion and depreciation...................... (369,618)
---------
$ 313,924
=========
</TABLE>
Overhead expenditures capitalized totaled $4,227,000 and $-0- for the nine
month periods ended September 30, 1998 and 1999, respectively. Such charges are
capitalized in accordance with the accounting policies of the Company. Due to
the cessation of exploration and development of crude oil and natural gas
reserves in 1998, all overhead expenditures incurred during 1999 have been
charged to general and administrative expense.
During the nine months ended September 30, 1998 and 1999, the Company did
not capitalize any interest or other financing charges on funds borrowed to
finance unproved properties or major development projects.
Unproved crude oil and natural gas properties totaling $56,193,000 at
September 30, 1999 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%. 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
F-32
<PAGE> 124
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
arrearage related to the installment payments due on the over advance and past
due interest was approximately $101.8 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 $89.6 million related to
installments due on the over advance.
The Restated Credit Agreement contains certain financial and other
covenants including, among other covenants, (i) the maintenance of minimum
amounts of shareholders' equity, (ii) maintenance of minimum ratios of cash flow
to interest expense as well as current assets to current liabilities, (iii)
limitations on the Company's ability to incur additional debt, and (iv)
restrictions on the payment of dividends. At September 30, 1999, the Company was
not in compliance with the minimum shareholders' equity, cash flow to interest
expense and current assets to current liabilities covenants.
The Company did not pay the April 15, 1999 interest payment of $6.7 million
due on its Existing Bonds and currently is in default under the terms of the
Existing Bonds 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 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 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 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. An additional $1.6 million of Existing Bond 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 Existing Bonds 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 nine months 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 nine months 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 Existing Bonds, as discussed in Note 4. As a
result, on May 19, 1999 two of the holders of the Existing Bonds filed a lawsuit
against the Company and each subsidiary of the Company that is a guarantor of
the Existing Bonds.
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.
F-33
<PAGE> 125
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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.
On May 27, 1999, the Company filed a lawsuit against HM4 Coho L.P. ("HM4")
and affiliated persons. The lawsuit alleges (1) breach of the written contract
terminated by HM4 in December 1998, (2) breach of the oral agreements reached
with HM4 on the restructured transaction in February 1999 and (3) promissory
estoppel. In the lawsuit, the Company seeks monetary damages of approximately
$500 million. The lawsuit is currently in the discovery stages. While the
Company believes that the lawsuit has merit and that the actions of HM4 in
December 1998 and February 1999 were the primary cause of the Company's current
liquidity crisis, there can be no assurance as to the outcome of this
litigation.
In 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.
7. SUBSEQUENT EVENTS -- BANKRUPTCY PROCEEDINGS
Bankruptcy Proceedings
On November 30, 1999, the Company filed a 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
disclosure statement with respect to the Plan of Reorganization. In that
hearing, the Bankruptcy Court also scheduled the confirmation hearing to
consider the Plan of Reorganization for March 15, 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 issuance of common stock in exchange for debt of the Company which
materially dilutes the current equity interest.
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 prior to the Petition Date, including secured debt, are subject to
compromise. Under the Bankruptcy Code, payment of these liabilities may not be
made except under the Plan of Reorganization or Bankruptcy Court approval.
NORM Litigation Claims Filed in Bankruptcy Proceedings
As discussed under Note 9 -- Commitments and Contingencies, Coho Resources,
Inc., is a defendant in a number of individual lawsuits 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. The
Company's predecessors on the Brookhaven Field were Florabama Associates, Ltd.
("Florabama"), and Chevron Corp. or Chevron USA, Inc. ("Chevron"). The Company
is vigorously
F-34
<PAGE> 126
COHO ENERGY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. 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. 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 million. While the
allowance of a claim is those amounts would render the Plan of Reorganization
infeasible, the Company believes 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 Company's cash flow under the terms of the Plan of
Reorganization after the Effective Date.
F-35
<PAGE> 127
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 346,153,846 SHARES
COHO ENERGY, INC.
NEW COMMON STOCK
---------------------
PROSPECTUS
---------------------
FEBRUARY , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 128
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......... $23,760
Blue Sky Registration Fees..................................
-------
Legal Fees and Expenses.....................................
-------
Accounting Fees and Expenses................................
-------
Printing Expenses...........................................
-------
Subscription Agent Fees.....................................
-------
Placement Agent Fees........................................
-------
Miscellaneous...............................................
-------
TOTAL.............................................
-------
</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 such 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
such a proceeding, such 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 certain 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 such law and the
Articles of Incorporation.
Texas corporations are also authorized to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the corporation cannot indemnify its directors and
II-1
<PAGE> 129
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 such 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 certain 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 offerings were involved.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
Exhibits designated by the symbol * are filed with this Registration
Statement. Exhibits designated by the symbol + are to be filed with an amendment
to this Registration Statement. All exhibits not so designated are incorporated
by reference to a prior filing as indicated.
<TABLE>
<C> <S>
2.1+ -- Company's Chapter 11 Plan of Reorganization as filed with
the United States Bankruptcy Court for the Northern
District of Texas on December 21, 1999.
2.2+ -- Disclosure Statement as filed with the United States
Bankruptcy Court for the Northern District of Texas on
December 21, 1999.
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)).
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).
</TABLE>
II-2
<PAGE> 130
<TABLE>
<S> <C>
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).
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).
</TABLE>
II-3
<PAGE> 131
<TABLE>
<C> <S>
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).
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).
</TABLE>
II-4
<PAGE> 132
<TABLE>
<C> <S>
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+ -- First Amendment to 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).
23.5* -- Acknowledgement of Arthur Andersen LLP.
24.1 -- Powers of Attorney (Included as part of the signature
page).
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.
II-5
<PAGE> 133
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Coho pursuant
to the foregoing provisions, or otherwise, Coho has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
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 such 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 such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
<PAGE> 134
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 February 7,
2000.
COHO ENERGY, INC.
By: /s/ JEFFREY CLARKE
----------------------------------
Jeffrey Clarke
Chairman of the Board, President
and Chief Executive Officer
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Jeffrey Clarke, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same and all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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 of the Board, President, February 7, 2000
- ----------------------------------------------------- Chief Executive Officer
Jeffrey Clarke (Principal Executive Officer and
Principal Financial Officer)
/s/ SUSAN J. MCADEN Vice President and Controller February 7, 2000
- ----------------------------------------------------- (Principal Accounting Officer)
Susan J. McAden
/s/ LOUIS F. CRANE Director February 7, 2000
- -----------------------------------------------------
Louis F. Crane
/s/ ALAN EDGAR Director February 7, 2000
- -----------------------------------------------------
Alan Edgar
/s/ KENNETH H. LAMBERT Director February 7, 2000
- -----------------------------------------------------
Kenneth H. Lambert
</TABLE>
II-7
<PAGE> 135
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS R. MARTIN Director February 7, 2000
- -----------------------------------------------------
Douglas R. Martin
/s/ JAKE TAYLOR Director February 7, 2000
- -----------------------------------------------------
Jake Taylor
</TABLE>
II-8
<PAGE> 136
INDEX TO EXHIBITS
<TABLE>
<C> <S>
2.1+ -- Company's Chapter 11 Plan of Reorganization as filed with
the United States Bankruptcy Court for the Northern
District of Texas on December 21, 1999.
2.2+ -- Disclosure Statement as filed with the United States
Bankruptcy Court for the Northern District of Texas on
December 21, 1999.
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)).
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).
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).
</TABLE>
<PAGE> 137
<TABLE>
<C> <S>
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).
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).
</TABLE>
<PAGE> 138
<TABLE>
<C> <S>
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).
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+ -- First Amendment to 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.
</TABLE>
<PAGE> 139
<TABLE>
<C> <S>
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).
23.5* -- Acknowledgement of Arthur Andersen LLP.
24.1 -- Powers of Attorney (Included as part of the signature
page).
99.1+ -- Form of Notice of Exercise of Rights and related
documents.
</TABLE>
<PAGE> 1
EXHIBIT 21.1
COHO ENERGY, INC.
LIST OF SUBSIDIARIES
Coho Resources Limited, Alberta, Canada (100% subsidiary of Coho Energy, Inc.)
Coho Resources, Inc., Nevada (owned 41.14% by Coho Resources Limited and 58.86%
by Coho Energy, Inc.)
Coho Marketing & Transportation, Inc., Nevada (100% subsidiary of Coho
Resources, Inc.)
Coho Shell Company, Delaware (100% subsidiary of Coho Energy, Inc.)
Profile Petroleum Ltd., Alberta, Canada (100% subsidiary of Coho Resources
Limited)
Grayon Developments Limited, Alberta, Canada (100% subsidiary of Coho Resources
Limited)
Coho International Limited, Bahamas (100% subsidiary of Coho Resources Limited)
Coho Anaguid, Inc., Delaware (100% subsidiary of Coho Resources, Inc.)
Interstate Natural Gas Company, Delaware (100% subsidiary of Coho Resources,
Inc.)
Coho Exploration, Inc., Delaware (100% subsidiary of Interstate Natural Gas
Company)
Coho Louisiana Production Company, Delaware (100% subsidiary of Interstate
Natural Gas Company)
Coho Oil & Gas, Inc. Delaware, (100% subsidiary of Coho Resources, Inc.)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference in
this registration statement of our report dated March 24, 1999 included in Coho
Energy, Inc's Form 10-K for the year ended December 31, 1998 and to all
references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 7, 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 January 29, 1999, relating to estimated quantities of
certain of the Company's proved reserves of oil and gas included in the
company's annual report on Form 10-K for the year ended December 31, 1998. 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
February 4, 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 interest of Coho Energy, Inc. (the
Company) dated January 28, 1999, relating to estimated quantities of certain of
the Company's proved reserves of oil and gas included in the company's annual
report on Form 10-K for the year ended December 31, 1998. 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
February 4, 2000
<PAGE> 1
[AALLP LETTERHEAD] EXHIBIT 23.5
February 7, 2000
Coho Energy, Inc.:
We are aware that Coho Energy, Inc. has incorporated by reference in its
Registration Statement its Form 10-Q for the quarter ended September 30, 1999,
which includes our report dated November 12, 1999 covering the unaudited
interim financial information contained therein. Pursuant to Regulation C of
the Securities Act of 1933, that report is not considered a part of the
registration statement prepared or certified by our firm or a report prepared
or certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
Arthur Andersen LLP
