-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GoyHDooSZumk6cY+UkCJ3x+0usjXnA+5OqR+nVpMqeMhzAZSAO5rT1dQgqQeQrcI 0G1XvOAtlvnGyHkzuykbig== 0000950134-02-005672.txt : 20020515 0000950134-02-005672.hdr.sgml : 20020515 20020515134713 ACCESSION NUMBER: 0000950134-02-005672 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COHO ENERGY INC CENTRAL INDEX KEY: 0000908797 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752488635 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22576 FILM NUMBER: 02650468 BUSINESS ADDRESS: STREET 1: 14785 PRESTON RD STREET 2: STE 860 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9727748300 MAIL ADDRESS: STREET 1: 14785 PRESTON RD STREET 2: SUITE 860 CITY: DALLAS STATE: TX ZIP: 75240 10-Q 1 d96812e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to_______. Commission file number 0-22576 COHO ENERGY, INC. (Exact name of registrant as specified in its charter) Texas 75-2488635 - ------------------------------- ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 14785 Preston Road, Suite 860 Dallas, Texas 75254 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 774-8300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 14, 2002 - -------------------------------------- --------------------------- Common Stock, par value $.01 per share 18,714,175 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Report of Independent Public Accountants 3 Condensed Consolidated Balance Sheets - December 31, 2001 and March 31, 2002 (Unaudited) 4 Condensed Consolidated Statements of Operations - three months ended March 31, 2001 and 2002 (Unaudited) 5 Condensed Consolidated Statement of Shareholders' Equity - three months ended March 31, 2002 (Unaudited) 6 Condensed Consolidated Statements of Cash Flows - three months ended March 31, 2001 and 2002 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings 25 Item 2. Changes in Securities and Use of Proceeds 26 Item 3. Defaults Upon Senior Securities 26 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Coho Energy, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Coho Energy, Inc. (a Texas corporation) and subsidiaries as of March 31, 2002, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2002 and 2001, and the condensed consolidated statement of shareholder's equity for the three-month period ended March 31, 2002. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Coho Energy, Inc. and subsidiaries as of December 31, 2001 (not presented herein) and, in our report dated March 29, 2002, we expressed an unqualified opinion on that statement. However, our report was modified regarding substantial doubt about the Company's ability to continue as a going concern. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Dallas, Texas May 7, 2002 3 COHO ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31 MARCH 31 2001 2002 ------------ ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents ........................... $ 9,779 $ 10,677 Cash in escrow ...................................... 25 25 Accounts receivable, principally trade .............. 8,198 8,335 Accrued unrealized gains on derivatives ............. 2,226 37 Other current assets ................................ 691 931 ------------ ------------ 20,919 20,005 Property and equipment, at cost net of accumulated depletion and depreciation, based on full cost accounting method ................................... 332,952 330,846 Other assets .......................................... 23,272 112 ------------ ------------ $ 377,143 $ 350,963 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities not subject to compromise Current liabilities Accounts payable, principally trade ............... $ 4,928 $ 713 Accrued liabilities and other payables ............ 3,815 3,539 Accrued reorganization costs ...................... 75 887 Accrued unrealized losses on derivatives ......... 11,935 506 Accrued interest .................................. 1,396 1,034 Current portion of long term debt ................. 282,845 -- ------------ ------------ Total current liabilities ..................... 304,994 6,679 Liabilities subject to compromise Accounts payable, principally trade ................. -- 5,771 Accrued liabilities and other payables .............. -- 944 Long term debt ...................................... -- 327,680 ------------ ------------ Total liabilities subject to compromise ....... -- 334,395 Long term debt, excluding current portion ............. 2,710 -- Long term derivative liabilities ...................... 257 397 Commitments and contingencies ......................... 450 450 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 18,714,175 shares .......... 187 187 Additional paid-in capital .......................... 324,483 324,586 Other comprehensive income .......................... 2,004 1,858 Retained deficit .................................... (257,942) (317,589) ------------ ------------ Total shareholders' equity .................... 68,732 9,042 ------------ ------------ $ 377,143 $ 350,963 ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 COHO ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31 ---------------------------- 2001 2002 ------------ ------------ Operating revenues Net crude oil and natural gas production ................. $ 20,611 $ 14,868 ------------ ------------ Operating expenses Crude oil and natural gas production ..................... 5,890 6,347 Taxes on oil and gas production .......................... 1,444 889 General and administrative ............................... 1,323 1,360 Loss on derivatives ...................................... 280 2,938 Depletion and depreciation ............................... 4,115 4,513 ------------ ------------ Total operating expenses ............................ 13,052 16,047 ------------ ------------ Operating income (loss) .................................... 7,559 (1,179) ------------ ------------ Other income and expenses Interest and other income ................................ 72 20 Interest expense ......................................... (9,378) (5,232) Loss on standby loan embedded derivative ................. (2,340) -- ------------ ------------ (11,646) (5,212) Loss from operations before reorganization costs, income taxes and accumulated effect of an accounting change ........................................ (4,087) (6,391) Reorganization costs ....................................... 1,200 (53,256) ------------ ------------ Loss before income taxes and accumulated effect of an accounting change .................................. (2,887) (59,647) Income tax expense (benefit) ............................... -- -- ------------ ------------ Loss before accumulated effect of an accounting change ..... (2,887) (59,647) Accumulated effect of an accounting change ................. 9,180 -- ------------ ------------ Net income (loss) .......................................... $ 6,293 $ (59,647) ============ ============ Basic and diluted loss per common share Loss before accumulated effect of an accounting change ... $ (.15) $ (3.19) Net income (loss) ........................................ $ .34 $ (3.19)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 COHO ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
NUMBER OF ACCUMULATED COMMON ADDITIONAL OTHER RETAINED SHARES COMMON PAID-IN COMPREHENSIVE EARNINGS OUTSTANDING STOCK CAPITAL INCOME (LOSS) (DEFICIT) TOTAL ------------ ---------- ------------ -------------- ------------ ---------- Balance at December 31, 2001 ........... 18,714,175 $ 187 $ 324,483 $ 2,004 $ (257,942) $ 68,732 Stock option compensation ............ -- -- 103 -- -- 103 Net loss ............................. -- -- -- -- (59,647) (59,647) Amortization of hedging derivative ... -- -- -- (146) -- (146) ------------ ---------- ------------ -------------- ------------ ---------- Balance at March 31, 2002 .............. 18,714,175 $ 187 $ 324,586 $ 1,858 $ (317,589) $ 9,042 ============ ========== ============ ============== ============ ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 COHO ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31 ---------------------------- 2001 2002 ------------ ------------ Cash flows from operating activities Net income (loss) .......................................... $ 6,293 $ (59,647) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion and depreciation ............................. 4,115 4,513 Standby loan interest .................................. 3,249 1,554 Reorganization costs ................................... -- 52,439 Loss on standby loan embedded derivative ............... 2,340 -- Accumulated effect of an accounting change ............. (9,180) -- Loss on derivatives .................................... -- 2,525 Amortization of debt issuance costs and other .......... 805 720 Changes in operating assets and liabilities: Accounts receivable and other assets .................... 137 (433) Accounts payable and accrued liabilities ................ (3,683) 2,715 ------------ ------------ Net cash provided by operating activities .................... 4,076 4,386 ------------ ------------ Cash flows from investing activities Property and equipment ................................. (14,276) (2,406) Changes in accounts payable and accrued liabilities related to exploration and development .............. 675 (25) ------------ ------------ Net cash used in investing activities ........................ (13,601) (2,431) ------------ ------------ Cash flows from financing activities Increase in long term debt ............................. 10,000 -- Repayment of long term debt ............................ -- (1,057) ------------ ------------ Net cash provided by (used in) financing activities .......... 10,000 (1,057) ------------ ------------ Net increase in cash and cash equivalents .................... 475 898 Cash and cash equivalents at beginning of period ............. 6,661 9,779 ------------ ------------ Cash and cash equivalents at end of period ................... $ 7,136 $ 10,677 ============ ============ Cash paid (received) during the period for: Interest ............................................... $ 4,517 $ 3,408 Income taxes ........................................... $ -- $ -- Reorganization costs (includes prepayments) ............ $ 2,297 $ 575 Reorganization receipts (interest income) .............. $ -- $ (21)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 COHO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2002 (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 accounting principles generally accepted in the United States, or those normally made in annual reports on Form 10-K. All material adjustments, consisting only of normal recurring accruals other than adjustments related to the Company's 2000 plan of reorganization, the current bankruptcy proceedings and adjustments to record the accumulated effect of an accounting change, which, in the opinion of management, were necessary for a fair presentation of the results for the interim periods, have been made. The results of operations for the three month period ended March 31, 2002 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, 2001. Accounts Receivable The Company performs ongoing reviews with respect to accounts receivable and maintains an allowance for doubtful accounts receivable ($488,000 and $470,000 at December 31, 2001 and March 31, 2002, respectively) based on expected collectibility. Other Assets Other assets at December 31, 2001 include unamortized debt issuance costs related to the Company's senior subordinated notes due 2007, also referred to as the standby loan, and senior revolving credit facility of $20.3 million and $2.9 million, respectively. There were no unamortized debt issuance costs at March 31, 2002. Historically, these costs have been amortized using the straight line method over the terms of the related financing; however, due to the Company's current bankruptcy proceedings, these costs were written-off during the first quarter of 2002 to reorganization expense. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans. Pursuant to APB No. 25, no compensation expense is recognized for stock option awards when the exercise price of the Company's stock options equals the market price of the underlying stock on the measurement date. On April 1, 2000, the Company awarded approximately 491,000 stock options with an exercise price less than the market price on the measurement date by $1.68 per share. Compensation costs have been amortized using the straight line method over the two-year vesting period of the stock options. The Company has recognized $103,000 of compensation expense related to such stock options for the quarter ended March 31, 2002. Hedging Activities and Other Derivative Instruments The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. The statement required the Company to recognize all derivative instruments (including certain derivative instruments embedded in other contracts) on the balance sheet as either an asset or liability based on fair value on January 1, 2001. In addition, subsequent changes in fair value for the effective portion of derivatives qualifying as hedges were required to be recognized in other comprehensive income ("OCI") until the sale of the related hedged production was recognized in earnings. The accumulated effect of this accounting change resulted in an increase in net income of $9.2 million and an increase in OCI of $2.0 million during the year ended December 31, 2001. On January 1, 2002, the Company voluntarily 8 COHO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2002 (TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED) (UNAUDITED) removed the hedge designation between its hedge arrangements and the related crude oil production or dedesignated the hedging relationship, for accounting purposes, for the remainder of the hedges. Subsequent to the dedesignation of the hedging relationship, realized gains and losses and future changes in fair value must be recorded in earnings and recognized in gain/loss on derivatives in the period when the realized gain or loss or change in fair value occurs. In addition, deferred unrealized gains recorded in OCI at December 31, 2001 will be amortized into earnings upon the sale of the related production. Based on the OCI recorded as of March 31, 2002, $1.9 million of deferred net gains on derivatives will be reclassified to earnings during the next twelve-month period upon the sale of related production. For the three-month period ended March 31, 2002, the Company recorded realized losses on settlement of hedges, losses on derivatives due to changes in the fair value of derivatives and a gain related to the amortization of OCI of $413,000, $2.5 million and $145,000, respectively. The Company has entered into certain arrangements that fix a minimum and maximum price range for a portion of its future crude oil and natural gas production. The Company entered into these arrangements to reduce the downside risk associated with potential crude oil and natural gas price declines by setting a floor price for its future production based on the NYMEX crude oil and natural gas prices. Due to working capital constraints, the Company entered into the "costless collar" type of transactions because they do not require upfront premiums. Prior to January 1, 2002, these hedge arrangements qualified as cash flow hedges under SFAS No. 133; however, on January 1, 2002, as discussed above, the Company voluntarily dedesignated the hedging relationship for the remainder of its hedges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for further discussion on the Company's hedge arrangements and a summary of the Company's existing hedge arrangements. The Company has entered into notes in connection with the standby loan agreement and certain lease agreements which contain provisions for payments based on crude oil and natural gas prices. These agreements are considered to include embedded derivatives under SFAS No. 133. See note 4 for additional discussion on agreements containing embedded derivatives. 2. BANKRUPTCY PROCEEDINGS On November 1, 2001, the lenders under the senior revolving credit facility notified the Company that its borrowing base under this facility had been redetermined in the semi-annual review from $195 million to $175 million effective November 1, 2001, causing a borrowing base deficiency of $20 million. The Company did not have sufficient working capital to cure the borrowing base deficiency within the 90 day cure period and on February 1, 2002 a notice of default was issued by the lenders under the senior revolving credit facility. The Company is also in default under the terms of its standby loan agreement. On February 6, 2002, the Company and its wholly owned subsidiaries, Coho Resources, Inc. and Coho Oil & Gas, Inc., filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. The bankruptcy petitions were filed to protect the Company while it develops a solution to its liquidity problems. The Company is currently operating as debtor-in-possession under the court's supervision and pursuant to its orders. The Company filed schedules with the bankruptcy court on March 8, 2002. The Company, the bank group, and the unsecured creditors committee, together with CIBC World Markets Corp. ("CIBC"), as the financial advisor for all three, have developed a marketing plan, subject to bankruptcy court approval, in the attempt to achieve maximum value for the Company's assets. The marketing plan allows the Company to explore other alternatives available, in addition to a sale of the Company's assets, including a recapitalization of the Company's debt and equity from existing or new investors to cure the $20 million borrowing base deficiency and to provide working capital to develop its properties. A recapitalization may include a partial sale of assets. Any sale or recapitalization will be subject to bankruptcy court approval under a Chapter 11 plan of reorganization or liquidation or in accordance with Section 363 of the bankruptcy code, which generally provides for a partial sale of assets prior to confirmation of a plan of reorganization or liquidation. 9 COHO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2002 (TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED) (UNAUDITED) All adjustments to the carrying value of the Company's assets or liabilities related to the bankruptcy filing have not been reflected in the March 31, 2002 balance sheet. In accordance with Statement of Position 90-07, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," during 2002, the Company will adjust liabilities subject to compromise to its estimate of the allowed claims. During the first quarter of 2002, the Company recorded an estimated default penalty on the standby loan of $29.3 million and adjusted the recorded amount of the standby loan embedded derivative which resulted in a $10.2 million gain. In addition, unamortized debt issuance costs of $22.6 million and debt discounts of $10.7 million were written off. The adjustments to the March 31, 2002 carrying values related to the standby loan default penalty, standby loan embedded derivative, unamortized debt issuance costs and debt discounts were recorded in earnings as reorganization costs. Subsequent to its February 6, 2002 filing of a voluntary petition for bankruptcy protection, the Company filed two motions with the bankruptcy court to seek use of the bank group's cash collateral on an on-going basis. Since filing bankruptcy, the Company has been operating under two orders authorizing the use of cash collateral, initially an interim order and currently a final order which was approved on February 26, 2002 and authorizes expenditures through June 30, 2002. Under these orders, the Company may pay for ordinary course of business goods and services incurred after February 6, 2002 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 approved by the bankruptcy court. At this time, it is not possible to predict the outcome of the bankruptcy proceedings, in general, or the effect on the Company's business or on the interests of the creditors or shareholders. Management believes, however, that it may not be possible to satisfy in full all of the claims against the Company and the shareholders of the Company may not realize any value on their investment. If all of the Company's oil and gas properties are sold, the Company will be liquidated. As a result of the bankruptcy filing, all of the Company's liabilities incurred prior to February 6, 2002, including secured debt, are subject to compromise. Under the bankruptcy code, payment of these liabilities may not be made except pursuant to a plan of reorganization or liquidation or bankruptcy court approval. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses, has received a notice of default from its lenders under its existing bank credit facility, is in default under the terms of its standby loan agreement and on February 6, 2002, filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. These factors raise substantial doubt about the Company's ability 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 $331 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 Company's ability to continue as a going concern is dependent upon the 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 proved oil and gas reserves. These factors, among others, raise substantial doubt concerning the Company's ability to continue as a going concern. The Chapter 11 filing excluded the Company's wholly owned subsidiary, Coho Resources Limited, which had current assets of $18,000 and current liabilities of $2,000 included in the Company's condensed consolidated balance sheet at March 31, 2002. 10 COHO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2002 (TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED) (UNAUDITED) 3. PROPERTY AND EQUIPMENT
DECEMBER 31, MARCH 31, 2001 2002 ------------ ------------ Crude oil and natural gas leases and rights including exploration, development and equipment thereon, at cost ....................................... $ 742,214 $ 744,621 Accumulated depletion and depreciation ............................................. (409,262) (413,775) ------------ ------------ $ 332,952 $ 330,846 ============ ============
Related overhead and expenditures of $240,000 were capitalized in the first quarter of 2001. Due to the significant decrease in development work during 2002, capitalized overhead expenditures have been reduced to $75,000 for the first quarter of 2002. During the three months ended March 31, 2001 and 2002, the Company did not capitalize any interest or other financing charges on funds borrowed to finance unproved properties or major development projects. At December 31, 2001 and March 31, 2002, the Company had no unproved crude oil and natural gas costs excluded from costs subject to depletion. 4. LONG-TERM DEBT
DECEMBER 31, MARCH 31, 2001 2002 ------------ ------------ Credit facility ...................................... $ 195,000 $ 195,000 Standby loan (senior subordinated notes due 2007) .... 82,515 93,452 Standby loan embedded derivative (contingent interest) ......................................... -- 1,538 Standby loan default penalty ......................... -- 29,344 Standby loan interest to be paid-in-kind ............. 3,621 4,984 Promissory notes ..................................... 3,419 3,362 Other ................................................ 1,000 -- ------------ ------------ 285,555 327,680 Current maturities of long-term debt ................. (282,845) (327,680) ------------ ------------ $ 2,710 $ -- ============ ============
Credit Facility At March 31, 2002, $195 million in borrowings were outstanding under the revolving credit facility and classified as liabilities subject to compromise due to the bankruptcy filing. Interest on borrowings under the credit facility are payable monthly under our cash collateral order. Pursuant to the cash collateral order, interest accrues at the London interbank offered rate ("LIBOR") plus the applicable margin under the credit facility (currently 3%) plus the 2% default rate until March 15, 2002 on borrowings of $195 million and will accrue at the same rate until May 13, 2002 on borrowings of $175 million. Subsequent to these periods, interest will accrue on outstanding balances at prime plus the applicable margin under the credit facility (currently 2%) plus the 2% default rate. 11 COHO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2002 (TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED) (UNAUDITED) The credit agreement contains financial and other covenants. The Company was unable to maintain the required ratio of cash flow to interest expenses, senior debt to cash flow and current assets to current liabilities, as required by the credit agreement, during the first quarter of 2002. As of March 31, 2002, the covenant ratios of cash flow to interest expense, senior debt to cash flow, and current assets to current liabilities were 2.6 to 1, 5.5 to 1, and 0.6 to 1, respectively. Non-cash transactions resulting from the adoption and accounting treatment of SFAS No. 133 are excluded from the calculation of covenant ratios under the credit facility. Standby Loan On March 31, 2000, in connection with its 2000 plan of reorganization, the Company issued, mainly to its majority shareholders, an aggregate principal amount of $72 million in senior subordinated notes due March 31, 2007. These senior subordinated notes, herein referred to as the "standby loan," bear interest at a minimum annual rate of 15% plus additional interest, after March 31, 2001, in an amount equal to 1/2% for every $0.25 that the "actual price" for the Company's crude oil and natural gas production exceeds $15 per barrel of oil equivalent up to a maximum of 10% additional interest per year. Any time the average realized price exceeds $20 per barrel of oil equivalent, the Company will be required to pay the 10% maximum additional interest. The senior subordinated notes require semiannual interest payments which are required to be paid-in-kind under the intercreditor arrangement between the standby lenders and the lenders under the senior revolving credit facility unless the Company meets specified financial tests. "Paid-in-kind" refers to the payment of interest owed under the standby loan by increasing the amount of principal outstanding through the issuance of additional standby loan notes, rather than paying the interest in cash. As a result of the bankruptcy filing on February 6, 2002, interest on the standby loan ceased to accrue. See the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 for a detailed description of the additional interest calculations. The standby loan agreement contains certain covenants and cross default provisions, including cross default provisions which automatically cause the Company to be in default under the terms of the standby loan agreement in the event the Company is in default under the senior revolving credit facility or in the event the Company seeks relief under any provision of the bankruptcy law. The Company's February 6, 2002 bankruptcy filing automatically accelerated all amounts due, including the prepayment fee, under the standby loan. Due to the bankruptcy filing the carrying value of the Company's outstanding debt at March 31, 2002 is classified as a liability subject to compromise and all interest on the standby loan ceased to accrue subsequent to February 6, 2002. The standby loan agreement contains a prepayment provision which was triggered by the Company's filing for bankruptcy. The prepayment provision requires a standard make-whole payment at 300 basis points over the treasury rate, which is defined as the yield of U.S. Treasury securities with a term equal to the then-remaining term of the standby loan notes that has become publicly available on the third business day before the date fixed for repayment. As of February 6, 2002, the date the Company filed for bankruptcy, the estimated prepayment fee, also referred to as the default penalty, of $29.3 million, using a calculated treasury rate of 4.22%, was accrued and is reflected in liabilities subject to compromise with the offsetting charge to reorganization expense. The Company adopted SFAS No. 133 effective January 1, 2001. This statement required the Company to record the fair value of the additional semiannual interest feature, which is considered an embedded derivative, as a liability (see note 5). Accordingly, a debt discount was recorded related to the standby loans reflecting the fair value of the embedded derivatives at the date the original notes were issued. Historically, the debt discount has been amortized into interest expense using the straight line method over the term of the related notes. Subsequent to filing bankruptcy on February 6, 2002, the unamortized debt discount of $10.7 million was written off to reorganization expense. Promissory Notes Claims for tax, penalty and interest were filed against the Company by the State of Louisiana and the State of Mississippi during the Company's previous bankruptcy. During 2001, the Company settled claims with both taxing 12 COHO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2002 (TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED) (UNAUDITED) authorities. Five-year, interest-bearing promissory notes were issued for settlement of these priority tax claims. The outstanding balance of $3.4 million is included in liabilities subject to compromise as long term debt due to the bankruptcy filing during February 2002. Other The Company has settled the claims of Chevron Corp. and Chevron USA for indemnification of any environmental liabilities in the Brookhaven field in conjunction with its 2000 bankruptcy reorganization. The terms of this settlement required the Company to fund $2.5 million over a two-year period to partially finance the implementation of a remediation plan. The Company paid the final payment of $1.0 million on January 1, 2002. 5. DERIVATIVE LIABILITIES The standby loan agreement (see note 4) contains an additional semiannual interest feature which is calculated based on the actual price the Company receives for its oil and gas production. The additional interest feature of the standby loan agreement is considered an embedded derivative under SFAS No. 133. During the first quarter of 2002, subsequent to the Company's filing for bankruptcy, the Company adjusted the recorded amount of the embedded derivative to the estimated amount of interest due through February 6, 2002 and recorded the resulting gain of $10.2 million in earnings as a reduction in reorganization expense. The adjusted value of the embedded derivative of $1.5 million is recorded on the balance sheet and included in long term debt subject to compromise at March 31, 2002. Certain leases in Laurel, Mississippi contain provisions for a portion of the lease payments to be based on the price of crude oil. These provisions are considered embedded derivatives under SFAS No. 133 and are recorded at their fair value of $473,000, with $76,000 recorded in current liabilities and $397,000 in long term derivative liabilities, at March 31, 2002. 6. EARNINGS PER SHARE Basic and diluted earnings per share ("EPS") have been calculated based on the weighted average number of shares outstanding for the three months ended March 31, 2001 and 2002 of 18,714,175. For the three months ended March 31, 2002, conversion of stock options and warrants would have been antidilutive and, therefore, was not considered in diluted EPS. 7. COMPREHENSIVE INCOME Comprehensive income includes net income and certain items recorded directly to Stockholders' Equity and classified as OCI. On January 1, 2002, the Company voluntarily dedesignated its hedging relationship on the remainder of its hedges, as described above in Note 1. Accordingly, unrealized gains of $2.0 million at December 31, 2001, which were included in OCI, are being amortized into earnings over the original hedge period. Comprehensive income for the three months ended March 31, 2001 and March 31, 2002 is as follows:
THREE MONTHS ENDED MARCH 31 ---------------------------- 2001 2002 ------------ ------------ Net (Loss) Income ...................................... $ 6,293 $ (59,647) Other Comprehensive Income Cumulative effect of change in accounting .......... (5,827) -- Changes in fair value of open hedging positions .... (2,363) -- Amortization related to settled contracts .......... -- (145) ------------ ------------ Comprehensive Loss ..................................... $ (1,897) $ (59,792) ============ ============
13 COHO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2002 (TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED) (UNAUDITED) 8. COMMITMENTS AND CONTINGENCIES Like other crude oil and natural gas producers, the Company's operations are subject to extensive and 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. At March 31, 2002, the Company had accrued approximately $500,000 related to such costs, of which $50,000 is included in current liabilities and $450,000 is included in contingent liabilities. At this time, 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. Litigation. On May 27, 1999, the Company filed a lawsuit against five affiliates of Hicks, Muse, Tate & Furst. The lawsuit alleges (1) breach of the written contract terminated by HM4 Coho L.P. ("HM4"), a limited partnership formed by Hicks Muse on behalf of the Hicks, Muse, Tate & Furst Equity Fund IV, in December 1998, (2) breach of the oral agreements reached with HM4 on the restructured transaction in February 1999 and (3) promissory estoppel. The Company reached a settlement of the litigation in May, 2001, subject to approval of the United States Bankruptcy Court (the "Bankruptcy Court") and resolution of certain disputes relating to a matter under seal by order of the Bankruptcy Court as discussed below. Final settlement documents were signed during October 2001 and approved by the Bankruptcy Court in January 2002. The disputed termination issue discussed below has not been finalized so the final settlement has been extended until May 15, 2002. The Company does not expect the settlement to have a material impact on the Company's financial position or results of operations. Pursuant to the Company's 2000 plan of reorganization, shareholders as of February 7, 2000, are eligible to receive their pro rata share of 20% of the proceeds available from the Hicks Muse lawsuit settlement after fees and expenses. The Company has not yet determined the impact, if any, of its current bankruptcy proceedings on the distribution of these proceeds to shareholders. During 2001, the Company became involved in a matter in connection with the lawsuit filed by the Company against Hicks Muse. This matter is under seal by order of the Bankruptcy Court. The matter involves a termination issue and the plaintiff claims damages that are based on a percentage of the ultimate amount recovered, if any, in the lawsuit against Hicks Muse. These percentages would be calculated on a graduated scale decreasing from 30% to 10% as the amount recovered increases. Alternatively, the plaintiff claims damages on the basis of lost time. However, the Company does not believe that either of these methods represents an appropriate measure of damages. The Company believes that the claim is without merit. At the order of the Bankruptcy Court, certain matters were arbitrated. The arbitration panel's sealed findings were forwarded to the Bankruptcy Court and considered in conjunction with the final settlement discussed above. The damages awarded are currently being appealed by the plaintiff. The Company does not expect this matter to have a material impact on its financial position or results of operations. Resolution of this matter may, however, impact the amount of proceeds available to the Company from the settlement of the Hicks Muse lawsuit. On June 9, 2000, Energy Investment Partnership No. 1, an affiliate of Hicks, Muse, Tate & Furst, filed a lawsuit against certain former officers of the Company alleging, among other things, such officers made or caused to be made false and misleading statements as to the proved oil and gas reserves purportedly owned by the Company. The plaintiffs are asking for compensatory damages of approximately $15 million plus punitive damages. Subsequently, the plaintiff named Ryder Scott Company and Sproule Associates Inc., the independent petroleum consultants which evaluate the Company's oil and gas reserves, as additional defendants. Pursuant to the Company's bylaws, the Company may be required to indemnify such former officers against damages incurred by them as a result of the lawsuit not otherwise covered by the Company's directors' and officers' liability insurance policy. The settlement of the Company's lawsuit against certain affiliates of Hicks, Muse, Tate & Furst, as described above, requires dismissal of the claims against the former officers. If the suit continues against Ryder Scott Company and Sproule Associates Inc., the Company may be required to indemnify these companies subject to their terms and conditions contained in certain agreements with them, however the Company does not expect this matter to have a material impact on the Company's financial position or results of operations. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. Some of this information with respect to our plans and strategy for our business contains forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of their perception of expected future developments and other factors they believe are appropriate. Such statements are not guarantees of future performance and our actual results may differ materially from those projected in the forward-looking statements. BANKRUPTCY PROCEEDINGS On February 6, 2002, we and our wholly owned subsidiaries, Coho Resources, Inc. and Coho Oil & Gas, Inc., filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. The bankruptcy petitions were filed to protect us while we develop a solution to our liquidity problems. In November 2001, we received a notice of borrowing base deficiency from our bank lenders because the banks had reduced our borrowing base by $20 million in their semi-annual review. We were unable to cure the borrowing base deficiency within the 90-day cure period and received a notice of default from the lenders on February 1, 2002. We are currently operating as debtor-in-possession under the court's supervision and pursuant to its orders. We, our bank group and the unsecured creditors committee, together with CIBC World Markets Corp. ("CIBC"), as the financial advisor for all three, have developed a marketing plan, which is subject to bankruptcy court approval, in the attempt to achieve maximum value for our assets in this process. The marketing plan will allow us to explore other alternatives available to us, in addition to a sale of our assets, including a recapitalization of our debt and equity assuming we are able to raise sufficient equity from existing or new investors to cure the $20 million borrowing base deficiency and to provide working capital to develop our properties. A recapitalization may include a partial sale of our assets. Any sale or recapitalization will be subject to bankruptcy court approval under a Chapter 11 plan of reorganization or liquidation or in accordance with Section 363 of the bankruptcy code, which generally provides for a partial sale of assets prior to confirmation of a plan of reorganization or liquidation. Pursuant to our marketing plan, a tentative timetable has been established to solicit bids for the sale of our company or our assets. Critical dates are as follows: o May 16, 2002 - Indication of interest deadline; o April 29, 2002 - June 14, 2002 - Data room visits; o June 20, 2002 - Final offers due; o June 27, 2002 - Court hearing and auction; and o August 16, 2002 - Final closing. These dates are only estimates and can be amended or cancelled. The bankruptcy court and the unsecured creditors committee have expressed their willingness to consider alternatives and any and all bids may be rejected if we decide to pursue such alternative transactions. All adjustments to the carrying value of our assets or liabilities related to the bankruptcy filing have not been reflected in the March 31, 2002 balance sheet. In accordance with Statement of Position 90-07, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," during 2002, we will adjust liabilities subject to compromise to the estimate of the allowed claims. During the first quarter of 2002, we recorded an estimated default penalty on the standby loan of $29.3 million and adjusted the recorded amount of the standby loan embedded derivative which resulted in a $10.2 million gain. In addition, unamortized debt issuance costs of $22.6 million and debt discounts of $10.7 million were written off. The adjustments to the standby loan default penalty, standby loan embedded derivative, unamortized debt issuance costs and debt discounts were recorded in earnings as reorganization expense. 15 Subsequent to February 6, 2002, we filed two motions with the bankruptcy court to seek use of the bank group's cash collateral on an on-going basis. Since filing bankruptcy, we have been operating under two orders authorizing the use of cash collateral, initially an interim order and currently a final order which was approved on February 26, 2002 and authorizes expenditures through June 30, 2002. Under these orders, we may pay for ordinary course of business goods and services incurred after February 6, 2002 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 approved by the bankruptcy court. At this time, it is not possible to predict the outcome of the bankruptcy proceedings, in general, or the effect on our business or on the interests of the creditors or shareholders. Management believes, however, that it may not be possible to satisfy in full all of the claims against the Company and the shareholders of the Company may not realize any value on their investment. If all of our oil and gas properties are sold, the Company will be liquidated. As a result of the bankruptcy filing, all of our liabilities incurred prior to February 6, 2002, including secured debt, are subject to compromise. Under the bankruptcy code, payment of these liabilities may not be made except pursuant to a plan of reorganization or liquidation or bankruptcy court approval. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts (including $331 million in net property, plant and equipment) or the amount and classification of liabilities that might result should we be unable to continue as a going concern. Our ability to continue as a going concern is dependent upon the 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 proved oil and gas reserves. These factors, among others, raise substantial doubt concerning our ability to continue as a going concern. LIQUIDITY AND CAPITAL RESOURCES Cash Flow Provided by Operating Activities. Our only source of capital during the pendency of our bankruptcy proceedings is cash flow provided by operations. For the three months ended March 31, 2002, cash flow provided by operating activities was $4.4 million compared with cash flow provided by operating activities of $4.1 million for the same period in 2001. Operating revenues, net of lease operating expenses, production taxes and general and administrative expenses, decreased $5.7 million from $12.0 million in the first three months of 2001 to $6.3 million in the first three months of 2002, primarily due to: o a 19% decrease in the realized crude oil price between comparable periods; o a 53% decrease in the realized natural gas price between comparable periods; o a 7% decrease in crude oil production; o a 6% decrease in natural gas production; and o a 16% increase in production expenses. These decreases were partially offset by a 38% decrease in production taxes. Cash flow provided by operating activities also included a reduction of $1.2 million in reorganization costs in the first three months of 2001 and $4.6 million in interest expense on our credit facility as compared to $817,000 in reorganization costs and $3.0 million in interest expense on our credit facility for the first three months of 2002. Changes in operating assets and liabilities resulted in $2.3 million of cash provided for operating activities for the three months ended March 31, 2002, compared to $3.5 million of cash used for operating activities for the same period in 2001. See "Results of Operations" for a discussion of operating results. Working Capital. We had working capital deficit of $321.1 million, including $334.4 million of liabilities subject to compromise, at March 31, 2002 compared to a working capital deficit of $284.1 million at December 31, 2001. The deficit in working capital at March 31, 2002 is primarily due to several factors including: o an decrease of $2.2 million in accrued unrealized gains on derivatives; 16 o an increase of $1.6 million in trade payables; o an increase of $812,000 in accrued reorganization costs; o an increase of $668,000 in various other accrued liabilities; o an increase of $1.4 million in accrued standby loan interest included in long term debt subject to compromise; o an increase of $10.7 million in long term debt included in liabilities subject to compromise due to the write-off of the standby loan debt discount; o an increase of $29.3 million in long term debt included in liabilities subject to compromise due to the accrual of the standby loan prepayment fee; and o an increase of $2.7 million in long term debt included in liabilities subject to compromise due to the reclassification of the tax notes from long term debt to liabilities subject to compromise. These decreases in working capital were partially offset by a decrease of $10.2 million in accrued standby loan embedded derivative, a decrease in current long term debt of $1.0 million due to the payment of environmental obligations, a decrease of $362,000 in accrued interest and an increase of $898,000 in cash. Credit Facilities. At March 31, 2002, $195 million in borrowings were outstanding under the revolving credit facility and were classified as liabilities subject to compromise due to the bankruptcy filing. Interest on borrowings under the credit facility are payable monthly under our cash collateral order. Pursuant to the cash collateral order, interest accrued at the London interbank offered rate ("LIBOR") plus the applicable margin under the credit facility (currently 3%) plus the 2% default rate until March 15, 2002 on borrowings of $195 million and will accrue at the same rate until May 13, 2002 on borrowings of $175 million. Subsequent to these periods, interest will accrue at prime plus the applicable margin under the credit facility (currently 2%) plus the 2% default rate. The credit agreement contains financial and other covenants. We were unable to maintain the required ratio of cash flow to interest expense, senior debt to cash flow and current assets to current liabilities, as required by the credit agreement, during the first quarter of 2002. As of March 31, 2002, the covenant ratios of cash flow to interest expense, senior debt to cash flow, and current assets to current liabilities were 2.6 to 1, 5.5 to 1, and .06 to 1, respectively. Non-cash transactions resulting from the adoption and accounting treatment of SFAS No. 133 are excluded from the calculation of covenant ratios under the credit facility. On March 31, 2000, in connection with our 2000 plan of reorganization we issued, mainly to our majority shareholders, an aggregate principal amount of $72 million in senior subordinated notes, due March 31, 2007. These senior subordinated notes, herein referred to as the "standby loan," bear interest at a minimum annual rate of 15% plus additional interest, after March 31, 2001, in an amount equal to 1/2% for every $0.25 that the "actual price" for our crude oil and natural gas production exceeds $15 per barrel of oil equivalent up to a maximum of 10% additional interest per year. Any time the average realized price exceeds $20 per barrel of oil equivalent, we are required to pay the 10% maximum additional interest. The semiannual interest payments under the standby loan are required to be paid-in-kind subject to the requirements of the intercreditor arrangement between the standby lenders and the lenders under the new credit agreement unless we meet specified financial tests. "Paid-in-kind" refers to the payment of interest owed under the standby loan by increasing the amount of principal outstanding through the issuance of additional standby loan notes, rather than paying the interest in cash. As a result of the bankruptcy filing on February 6, 2002, interest on the standby loan ceased to accrue. See the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001 for a complete description of these additional interest calculations. The standby loan agreement contains certain covenants and cross default provisions, including cross default provisions which automatically cause us to be in default under the terms of the standby loan agreement in the event we are in default under the senior revolving credit facility or in the event we seek relief under any provision of the bankruptcy law. Our February 6, 2002 bankruptcy filing automatically accelerated all amounts due, including the prepayment fee, under the standby loan. Due to the bankruptcy filing, the carrying value of our outstanding debt at March 31, 2002 was classified as a liability subject to compromise and all interest on the standby loan ceased to 17 accrue subsequent to February 6, 2002. Due to the bankruptcy filing, the accrued interest will be paid in accordance with the court ordered settlement of unsecured claims. The standby loan agreement contains a prepayment provision which was triggered by our bankruptcy filing. The prepayment provision requires a standard make-whole payment at 300 basis points over the treasury rate, which is defined as the yield of U.S. Treasury securities with a term equal to the then-remaining term of the standby loan notes that has become publicly available on the third business day before the date fixed for repayment. As of February 6, 2002, the date we filed for bankruptcy, an estimated prepayment fee, also referred to as the default penalty, of $29.3 million, using a calculated treasury rate of 4.22%, was accrued and is reflected in liabilities subject to compromise. Capital Expenditures. During the first three months of 2002, we incurred capital expenditures of $2.4 million compared with $14.3 million for the first three months of 2001. During this three-month period, capital expenditures were directed primarily toward maintaining production from existing wells by improving the operating condition of wells, which had experienced mechanical failures, and where additional improvements could be accomplished while the well was being repaired. Due to a reduction in available capital resulting from lower product prices received in the fourth quarter of 2001 and the first quarter of 2002 and the bankruptcy filing on February 6, 2002, the number of capital projects initiated had to be curtailed. There were no drilling projects initiated or in progress during this period, on either our company or outside operated properties. Our board of directors has approved a $12 million capital expenditures budget, with $9.6 million remaining for the year 2002, which will be funded by working capital from operations. As discussed in "Bankruptcy Proceedings," we have filed for relief under Chapter 11 of the United States Bankruptcy Code and future capital expenditures will be subject to expenditure constraints imposed by the bankruptcy court. Subsequent to the bankruptcy filing, a Final Order Authorizing Use of Cash Collateral authorized capital expenditures of approximately $1.1 million per month through June 30, 2002, at which time we expect the cash collateral order to be amended to approve a similar capital expenditure level for future months. We have no material capital commitments related to our operations and are consequently able to adjust the level of our expenditures based on available cash flow. Hedging Activities and Other Derivatives. Crude oil and natural gas prices are subject to significant seasonal, political and other variables which are beyond our control. In an effort to reduce the effect of the volatility of the prices received for crude oil and natural gas, we have entered, and expect to continue to enter, into crude oil and natural gas hedging transactions by entering into certain arrangements that fix a minimum and maximum price range per barrel. We entered into these arrangements to reduce the downside risk associated with potential crude oil and natural gas price declines by setting a floor price for our future production based on the NYMEX crude oil and natural gas prices. Due to working capital constraints, we entered into the "costless collar" type of transactions because they do not require upfront premiums. Any gain or loss on our crude oil hedging transactions is determined as the difference between the contract price and the average closing price for West Texas Intermediate crude oil on the New York Mercantile Exchange for the contract period. Any gain or loss on our natural gas hedging transactions is determined as the difference between the contract price and the New York Mercantile Henry Hub settlement price the next to last business day of the contract. Currently, we have no existing natural gas hedge arrangements. At March 31, 2002, our hedge arrangements were as follows: Minimum and Maximum Crude Oil Price Arrangements o 500 barrels per day for the period April 1, 2002 to December 31, 2002, with a minimum price of $22.00 and a maximum price of $28.00. o 500 barrels per day for the period April 1, 2002 to December 31, 2002, with a minimum price of $22.00 and a maximum price of $29.60. o 500 barrels per day for the period of April 1, 2002 to December 31, 2002, with a minimum price of $24.00 and a maximum price of $28.60. o 500 barrels per day for the period of April 1, 2002 to December 31, 2002, with a minimum price of $22.50 and a maximum price of $25.50. o 500 barrels per day for the period of April 1, 2002 to December 31, 2002, with a minimum price of $22.50 and a maximum price of $26.45. 18 During April 2002, we have entered into additional hedge arrangements as follows: Minimum and Maximum Crude Oil Price Arrangements o 500 barrels per day for the period May 1, 2002 to September 30, 2002, with a minimum price of $22.00 and a maximum price of $28.25. o 1000 barrels per day for the period May 1, 2002 to September 30, 2002, with a minimum price of $23.00 and a maximum price of $28.90. o 1000 barrels per day for the period May 1, 2002 to September 30, 2002, with a minimum price of $23.00 and a maximum price of $28.00. o 1000 barrels per day for the period May 1, 2002 to September 30, 2002, with a minimum price of $23.00 and a maximum price of $27.25. o 500 barrels per day for the period May 1, 2002 to September 30, 2002, with a minimum price of $23.00 and a maximum price of $25.75. o 500 barrels per day for the period May 1, 2002 to September 30, 2002, with a minimum price of $23.00 and a maximum price of $25.50. o 500 barrels per day for the period May 1, 2002 to September 30, 2002, with a minimum price of $23.00 and a maximum price of $24.75. As of March 31, 2002, based on our first quarter 2002 crude oil production level of 9,874 barrels of oil equivalent per day, including hedges entered into during April and May 2002, 53% of our future crude oil production is hedged for the remainder of the year 2002. We adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. The Statement required us to recognize all derivative instruments (including certain derivative instruments embedded in other contracts) on the balance sheet as either an asset or liability. In addition, subsequent changes in fair value for the effective portion of derivatives qualifying as hedges were required to be recognized in other comprehensive income until the sale of the related hedges production was recognized in earnings. On January 1, 2002, we voluntarily removed the hedge designation between our hedge arrangements and the related crude oil production or dedesignated the hedging relationship, for accounting purposes, for the remainder of the hedges. Subsequent to the dedesignation of the hedging relationship, realized gains and losses and future changes in fair value must be recorded in earnings and recognized in gain/loss on derivatives in the period when the realized gain or loss or change in fair value occurs. In addition, deferred unrealized gains recorded in OCI at December 31, 2001 will be amortized into earnings upon the sale of the related production. 19 RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31 ---------------------------- 2001 2002 ------------ ------------ Selected Operating Data Production Crude Oil (Bbl/day) ................ 9,912 9,183 Natural Gas (Mcf/day) .............. 4,413 4,141 BOE (Bbl/day) ...................... 10,647 9,874 Average Crude Oil Sales Prices Actual Price Received per Bbl ...... $ 23.50 $ 16.91 Hedging Loss per Bbl (a) ........... $ (2.69) $ (.00) ------------ ------------ Net Price Received per Bbl ......... $ 20.81 $ 16.91 ============ ============ Average Natural Gas Sales Prices Actual Price Received per Mcf ...... $ 7.47 $ 2.40 Hedging Loss per Mcf (a) ........... $ (2.31) $ .00 ------------ ------------ Net Price Received per Mcf ......... $ 5.16 $ 2.40 ============ ============ Other Production expenses ................ $ 6.15 $ 7.14 Production taxes ................... $ 1.51 $ 1.00 Depletion per BOE .................. $ 4.29 $ 5.08 Production revenues (in thousands) Crude Oil .......................... $ 18,561 $ 13,975 Natural Gas ........................ 2,050 893 ------------ ------------ $ 20,611 $ 14,868 ============ ============
(a) Due to the dedesignation of our hedge arrangements on January 1, 2002, realized hedging gains and losses subsequent to December 31, 2001 are not included in operating revenues. For the quarter ended March 31, 2002, realized crude oil hedging losses of $0.50 per BOE were included in loss on derivatives. There were no natural gas hedging losses during the first quarter of 2002. Operating Revenues. During the first three months of 2002, production revenues decreased 28% to $14.9 million as compared to $20.6 million for the same period in 2001. This decrease was primarily due to a 19% decrease in the price received for crude oil (net of hedging losses discussed below), a 53% decrease in the price received for natural gas (net of hedging losses discussed below), a 7% decrease in daily crude oil production and a 6% decrease in natural gas production. The 7% decrease in daily crude oil production during the three months ended March 31, 2002 is due to overall production decreases in our operated Mississippi and non-operated Oklahoma properties due to a reduction in available funds, as a result of lower crude oil prices received in the fourth quarter of 2001 and first quarter of 2002 and capital constraints imposed by the bankruptcy court subsequent to February 6, 2002, to repair wells that have failed with respect to our operated properties and due to normal production declines. These decreases were partially offset by increases in crude oil production on our operated Oklahoma properties. Due to capital constraints, management does not believe the forecasted future capital expenditures will be adequate to provide sufficient working capital to materially improve our crude oil and natural gas production above current levels. The 6% decrease in daily natural gas production during the first three months of 2002 is due to production declines on our operated Oklahoma and Mississippi gas properties due to: o a reduction in available funds, as discussed above, to repair wells that have failed; o freezing conditions in Oklahoma in the early months of 2002; 20 o conversion of producing wells to water injection wells for the installation of the East Velma Middle Block water injection project; and o normal production declines. Average crude oil prices (net of hedging losses discussed below) for the comparable three-month periods decreased 19%. The 19% decrease for the comparable three month periods represents a decrease of $6.59 per Bbl in the actual price received from the sale of our crude oil between the comparable periods which was partially offset by a decrease of $2.69 per Bbl in crude oil hedging losses reflected in crude oil sales between the comparable periods. Substantially all of our Mississippi crude oil is sold under contracts which are based on posted crude oil prices and substantially all of our Oklahoma crude oil is sold under a contract which is based on the New York Mercantile Exchange price. The price per Bbl received is adjusted for the quality and gravity of the crude oil and is generally lower than the NYMEX price. Our overall average crude oil price received during the first three months of 2002 was $16.91 per Bbl, which represented a discount of 22% to the average NYMEX price for such period. The realized price for our natural gas (net of hedging losses discussed below) decreased 53% from $5.16 per Mcf in the first three months of 2001 to $2.40 per Mcf in the first three months of 2002. We experienced a $5.07 per Mcf decrease in the actual price received from the sale of our natural gas which was partially offset by a decrease of $2.31 per Mcf in natural gas hedging losses between the comparable periods. Production revenues for the three months ended March 31, 2002 included no crude oil and natural gas hedging losses as compared to crude oil and natural gas hedging losses netted into production revenues for the three months ended March 31, 2001 of $2.4 million ($2.69 per Bbl) and $916,000 ($2.31 per Mcf), respectively. On January 1, 2002, we dedesignated the hedging relationship, for accounting purposes, on the remainder of our hedges. Accordingly, all subsequent crude oil hedging gains and losses are recognized as loss on derivatives. During the first quarter of 2002, we realized crude oil hedging losses of $413,000 ($.50 per Bbl) as loss on derivatives. Expenses. Production expenses were $6.3 million for the first three months of 2002 compared to $5.9 million for the first three months of 2001. On a BOE basis, production costs increased 16% to $7.14 per BOE in 2002 from $6.15 per BOE in 2001 for the comparable three-month period. The increase in expenses and the increase on a BOE basis for the comparable three-month periods is primarily due to: o increased labor costs primarily due to salary increases and a decrease in capitalized labor costs; o increased insurance costs due to a $65,000 refund during the first quarter of 2001 and increased rates during the first quarter of 2002; and o increased production cost on our outside operated properties. These costs were partially offset by a decrease in electrical costs between the comparable periods. Production taxes decreased $555,000 or 38% for the first three months of 2002 as compared to the first three months of 2001 due to lower crude oil and natural gas prices resulting in decreased revenues. General and administrative costs increased $37,000 or 3% between the comparable three-month periods. The increase is primarily due to: o increases of $131,000 in professional fees, primarily due to financial advisory fees during the first quarter of 2002 which, subsequent to filing bankruptcy, are being reported as reorganization costs; o capitalization of $125,000 of salaries and salary related costs associated with exploration and development during the first three months of 2002 as compared to $240,000 during the same period in 2001; and o decreases in cost recoveries from working interest owners of $172,000 during the first three months of 2002 as compared to the first three months of 2001 due to a decrease in well activity. 21 These increases were substantially offset by decreases of $325,000 in employee-related costs primarily due to staff attrition and the termination of employees during the fourth quarter of 2001 and due to a net decrease of $56,000 in miscellaneous other general corporate expenditures. Loss on derivatives for the three month periods ended March 31, 2001 and March 31, 2002 is as follows:
THREE MONTHS ENDED ----------------------- MARCH 31 2001 2002 ---------- ---------- (in thousands) Change in fair value of embedded derivatives - lease agreements .... $ 71 $ 189 Change in fair value - hedging arrangements ........................ -- 2,482 Ineffectiveness hedging arrangements ............................... 209 -- Amortization of OCI ................................................ -- (145) Realized loss on settlement of hedge arrangements .................. -- 412 ---------- --------- $ 280 2,938 ========== =========
The increase in loss on derivatives for the three months ended March 31, 2002 as compared to the same period in 2001 is due to the dedesignation of our hedging relationship for the remainder of our hedges, for accounting purposes, effective January 1, 2002. During 2001, only the ineffective portion of our hedging losses and the change in fair value on our hedges which did not qualify for hedge accounting treatment were recognized in loss on derivatives. During 2002, due to the voluntary dedesignation of the hedging relationship on the remainder of our hedges, all changes in fair value for all hedge arrangements are recognized as loss on derivatives and deferred gains previously recognized in OCI and are being amortized into loss on derivatives. Depletion and depreciation expense increased 10% to $4.5 million for the three months ended March 31, 2002 from $4.1 million for the comparable three-month period in 2001. This increase is due to an increased depletion rate per BOE from $4.29 per BOE during 2001 to $5.08 per BOE during 2002. This increased depletion rate per BOE for the three month period ending March 31, 2002 is due to an increase in depletable costs and due to a decline in total proved reserves. Interest expense for the three-month period ended March 31, 2002 decreased to $5.2 million compared to $9.4 million for the same period in 2001. Following is a summary of interest expense between comparable periods:
THREE MONTHS ENDED MARCH 31 ----------------------- 2001 2002 ---------- ---------- (in thousands) Credit facility ................................ $ 4,555 $ 2,435 Credit facility default interest ............... -- 585 Standby loan ................................... 2,903 1,363 Amortization of standby loan original issue discount ..................................... 346 190 Amortization of debt issuance costs ............ 1,565 632 Miscellaneous .................................. 9 27 ---------- ---------- $ 9,378 $ 5,232 ========== ==========
The decrease for the comparable three month period is due to: o lower interest rates on our credit facility for the three months ended March 31, 2002; o discontinuance of the accrual of interest on our standby loan subsequent to February 6, 2002 as a result of our bankruptcy filing; o discontinuance of the amortization of the standby loan original issue discount subsequent to February 6, 2002 as a result of our bankruptcy filing; and 22 o discontinuance of the amortization of debt issuance costs on the credit facility and standby loan subsequent to February 6, 2002 as a result of our bankruptcy filing. Reorganization costs increased $54.5 million for the comparable three-month periods from a gain of $1.2 million for the three months ending March 31, 2001 to a loss of $53.3 million for the three months ending March 31, 2002. During the first quarter of 2001, settlements of disputed bankruptcy claims related to our 2000 bankruptcy proceedings resulted in lower settlement amounts than originally estimated, resulting in a $1.3 million gain. During the first quarter of 2002: o $1.0 million of costs were incurred, primarily for professionals working on our 2002 bankruptcy proceedings; o the standby loan default penalty of $29.3 million was recorded; o debt issuance costs of $22.6 million were written off; and o debt discounts of $10.7 million were written off. These costs were partially offset by accrued proceeds of $200,000 from the sale of our Tunisian properties pursuant to the 2001 bankruptcy proceedings associated with those properties and a $10.2 million gain on standby embedded derivative for three months ended March 31, 2002. The $10.2 million gain represents the adjustment from fair value of $11.8 million at December 31, 2001 to the estimated allowed claim of $1.5 million to be filed with bankruptcy court. Previously, the fair value of the standby loan embedded derivative was the estimated discounted future interest payments over the term of the related debt; however, due to our bankruptcy filing, the maximum allowed claim will be actual interest due through February 6, 2002, the date of our bankruptcy filing. Accumulated effect of an accounting change for the three months ended March 31, 2001 relates to the adoption of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 required us to record the fair value at January 1, 2001 of embedded derivatives contained in certain agreements on the balance sheet with an offsetting amount in accumulated effect of an accounting change. At January 1, 2001, we recorded the fair value of embedded derivatives for certain leases in Laurel, Mississippi and the standby loan resulting in a $300,000 loss and $9.5 million gain, respectively. The accumulated effect of the accounting change related to the standby loan embedded derivative was an increase in net income of $9.5 million because, under the previous accounting treatment, the changes in the estimated future additional interest due to changes in forecasted crude oil and natural gas prices were recorded on an undiscounted basis through earnings as compared to the fair market value basis under SFAS No. 133 that considers the time value of the future additional interest payments. Due to the factors discussed above, our net loss for the three months ended March 31, 2002 was $59.6 million as compared to a net gain of $6.3 million for the same period in 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We use financial instruments which inherently have some degree of market risk. The primary sources of market risk include fluctuations in commodity prices and interest rate fluctuations. PRICE FLUCTUATIONS Effect of Price Fluctuations - Hedging Contracts. Our results of operations are highly dependent upon the prices received for crude oil and natural gas production. We have entered, and expect to continue to enter, into forward sale agreements or other arrangements for a portion of our crude oil and natural gas production to hedge our exposure to price fluctuations. At March 31, 2002, we have hedged a portion of our crude oil production through December 31, 2002. To calculate the potential effect of the hedging contracts on our realized loss on derivatives, we applied prices from March 31, 2002 future oil price curves for the remainder of 2002 to the quantity of our oil production hedged for these periods. In addition, we applied March 31, 2002 future oil pricing from the price curves assuming a 10% increase in prices and assuming a 10% decrease in prices. The estimated changes in our realized loss on derivatives through December 31, 2002 resulting from the hedging contracts in place at March 31, 2002 are as follows: 23
Remainder of Changes in Realized Loss on Derivatives 2002 - -------------------------------------------------------- ------------ Increase (decrease) based on current price curve $ (52,000) Increase (decrease) based on 10% decrease in price curve $ 115,000 Increase (decrease) based on 10% increase in price curve $ (729,000)
INTEREST RATE RISK Total debt as of March 31, 2002 included $195 million of floating-rate debt attributed to bank credit facility borrowing. As a result, our annual interest cost in 2002 and 2003 will fluctuate based on short-term interest rates. The impact on annual cash flow of a ten percent change in the floating interest rate (approximately 50 basis points) would be approximately $1.0 million assuming outstanding debt of $195 million throughout the year. Currently, $175.0 million of outstanding debt under our bank credit facility is at a guaranteed rate of 5.00% plus the 2% default rate through May 31, 2002. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Bankruptcy Proceedings. February 6, 2002, we and our consolidated subsidiaries, Coho Resources, Inc. and Coho Oil & Gas, Inc., filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Northern District of Texas. Consistent with bankruptcy cases involving publicly traded companies and their affiliates, a number of proceedings have occurred since February 6, 2002, the most significant of which are discussed below. The bankruptcy court approved Fulbright & Jaworski L.L.P. as our counsel for bankruptcy proceedings, Andrews & Kurth L.L.P. as our corporate securities and special litigation counsel, CIBC World Markets Corp. as the financial advisor to us, the bank group and the unsecured creditors committee, and Arthur Andersen LLP as our auditors. The bankruptcy court also approved our retention of ordinary course of business professionals. These professionals are assisting us in our efforts to reorganize our business and to continue our operations as debtor-in-possession. An official committee for the unsecured creditors has been formed by the Office of the United States Trustee. The bankruptcy court approved counsel for the Official Unsecured Creditors Committee. The bankruptcy court approved our use of cash collateral in the continued operations of our business. Our use of cash collateral has been approved through June 30, 2002. A budget for July and August 2002 will be submitted for approval in June 2002. Under the Order Authorizing Use Of Cash Collateral, we made interest payments to the bank group of $2.5 million, $823,000 and $857,000 in February, March and April 2002, respectively. Additional monthly interest payments are included in the cash collateral budgets. In addition, we made a principle payment of $224,000 on April 15, 2002 as required under the cash collateral order. Immediately following the commencement of our bankruptcy case, we obtained permission from the bankruptcy court to pay working and royalty interest owners to ensure that payments to them were not interrupted. As a result, working and royalty interest owners will continue to receive all payments to which they are entitled throughout the pendency of our bankruptcy cases. In April 2002, the bankruptcy court approved a key employee retention program and a senior management incentive retention program to minimize management and key employee turnover by providing an incentive to continue services throughout the pendency of the bankruptcy proceedings. Under the key employee retention program, key employees are divided into two classes; tier one and tier two. Two members of management are included in tier one and will be entitled to receive a retention payment equal to one year of their respective annual base salary upon the sale of assets or the confirmation of a plan of reorganization. Tier two includes all employees, excluding senior management and tier one employees. Tier two employees will be entitled to receive a retention payment of a minimum of six months salary, and based on years of service, up to a maximum of one year salary, if the employee is terminated for other than cause as a result of the sale of assets or reorganization. Senior management will be entitled to two years salary upon the sale of assets or the confirmation of a plan of reorganization. In April 2002, we obtained bankruptcy court approval to enter into costless collar hedging arrangements with JPMorgan, for up to 80% of our production, to reduce the downside risk associated with potential crude oil price declines. JPMorgan was issued a priming lien against all of our assets as security for the hedging transactions. On February 20, 2002, we converted the bankruptcy proceedings for Coho Anaguid and Coho International from Chapter 11 reorganization proceedings to Chapter 7 liquidation proceedings. Litigation. We are the plaintiff in a lawsuit styled Coho Energy, Inc. v. Hicks, Muse, et al, which we filed in the District Court of Dallas County, Texas, 68th Judicial District on May 27, 1999. The lawsuit alleges (1) breach of the written contract terminated by HM4 Coho L.P. ("HM4"), a limited partnership formed by Hicks Muse on behalf of the Hicks, Muse, Tate & Furst Equity Fund IV, in December 1998, (2) breach of the oral agreements reached with HM4 on the restructured transaction in February 1999 and (3) promissory estoppel. We reached a settlement of the litigation in May 2001, subject to approval of the United States Bankruptcy Court (the "Bankruptcy Court") and resolution of certain disputes relating to a matter under seal by order of the Bankruptcy Court as discussed below. Final settlement documents were signed during October 2001 and approved by the Bankruptcy Court in January 25 2002. The disputed termination issue discussed below has not been finalized so the final settlement has been extended until May 15, 2002. We do not expect the settlement to have a material impact on our financial position or results of operations. Pursuant to our 2000 plan of reorganization, shareholders as of February 7, 2000, are eligible to receive their pro rata share of 20% of the proceeds available from the Hicks Muse lawsuit settlement after fees and expenses. We have not yet determined the impact, if any, of our current bankruptcy proceedings on the distribution of these proceeds to shareholders. During 2001, we became involved in a matter in connection with the lawsuit filed by us against Hicks Muse. This matter is under seal by order of the Bankruptcy Court. The matter involves a termination issue and the plaintiff claims damages that are based on a percentage of the ultimate amount recovered, if any, in the lawsuit against Hicks Muse. These percentages would be calculated on a graduated scale decreasing from 30% to 10% as the amount recovered increases. Alternatively, the plaintiff claims damages on the basis of lost time. However, we do not believe that either of these methods represents an appropriate measure of damages. We believe the claim is without merit. At the order of the Bankruptcy Court, certain matters were arbitrated. The arbitration panel's sealed findings were forwarded to the Bankruptcy Court for consideration in conjunction with the final settlement discussed above. The damages awarded are currently being appealed by the plaintiff. We do not expect this matter to have a material impact on our financial position or results of operations. Resolution of this matter may, however, impact the amount of proceeds available to us from the settlement of the Hicks Muse lawsuit. On June 9, 2000, Energy Investment Partnership No. 1, an affiliate of Hicks, Muse, Tate & Furst, filed a lawsuit in the United States District Court for the Northern District of Texas, Dallas Division, against certain of our former officers alleging, among other things, such officers made or caused to be made false and misleading statements as to the proved oil and gas reserves purportedly owned by us. The plaintiffs are asking for compensatory damages of approximately $15 million plus punitive damages. Subsequently, the plaintiff named Ryder Scott Company and Sproule Associates Inc., the independent petroleum consultants which evaluate our oil and gas reserves, as additional defendants. Pursuant to our bylaws, we may be required to indemnify such former officers against damages incurred by them as a result of the lawsuit not otherwise covered by our directors' and officers' liability insurance policy. The settlement of our lawsuit against certain affiliates of Hicks, Muse, Tate & Furst, as described above, requires dismissal of the claims against the former officers. If the suit continues against Ryder Scott Company and Sproule Associates Inc., we may be required to indemnify these companies subject to the terms contained in our agreements with them; however, we do not expect the ultimate outcome of this matter to have a material impact on our financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES Credit Facility. On November 1, 2001, the lenders under the senior revolving credit facility notified us that our borrowing base under this facility had been redetermined in the semiannual review from $195 million to $175 million effective November 1, 2001. On November 2, 2001, we received a notice of borrowing base deficiency because borrowings under the credit facility exceed the redetermined borrowing base by $20 million. Under the credit facility, we could have remedied the borrowing base deficiency by providing additional collateral sufficient to eliminate the borrowing base deficiency or making a cash payment sufficient to eliminate the borrowing base deficiency. All of our assets are pledged as collateral under the credit facility and we did not have sufficient working capital to make a cash payment to eliminate the borrowing base deficiency within the 90 day cure period. On February 1, 2002, we received a notice of default on the $195 million in advances outstanding under the credit facility and subsequently filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. At March 31, 2002, the outstanding advances of $195 million under the senior revolving credit facility were classified as liabilities subject to compromise due to our bankruptcy filing. Subsequent to our bankruptcy filing, monthly payments of interest have been made pursuant to our cash collateral order and future monthly interest payments are included in our cash collateral budgets. Standby Loan. The standby loan agreement contains certain covenants and cross default provisions, including cross default provisions which automatically cause us to be in default under the terms of the standby loan agreement 26 in the event we are in default under the senior revolving credit facility or in the event we seek relief under any provision of the bankruptcy law. On February 1, 2002, we received a notice of default under the senior revolving credit facility. This default automatically caused us to be in default under the standby loan agreement. On February 6, 2002, we filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code which automatically accelerated all amounts due under the standby loan, which includes $93.5 million in principal, $5.0 million in accrued interest, $1.5 million in additional contingent interest and $29.3 million for the estimated default penalty, for an aggregate of $129.3 million. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 - Order Approving Debtors' Motion for Order Authorizing Implementation of Initial Key Employee Retention Program entered on April 30, 2002. 10.2 - Order Approving Debtors' Motion for Order Authorizing Implementation of Senior Management Retention Program entered on April 30, 2002. 10.3 - Agreed Order Approving Retention of CIBC World Markets Corp. as Financial Advisors Pursuant to 11 U.S.C.ss.ss.327 and 328 entered on April 14, 2002, amending the Letter Agreement dated November 16, 2001, by and between Coho Energy, Inc. and CIBC World Markets Corp. (b) REPORTS ON FORM 8-K We have filed with the Securities and Exchange Commission a Current Report on Form 8-K dated February 20, 2002 related to the Company and its wholly owned subsidiaries, Coho Resources, Inc. and Coho Oil & Gas, Inc. filing a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. 27 COHO ENERGY, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COHO ENERGY, INC. (Registrant) Date: May 15, 2002 By: /s/ Gary L. Pittman ---------------------------------------- Gary L. Pittman (Vice President and Chief Financial Officer) By: /s/ Susan J. McAden ---------------------------------------- Susan J. McAden (Chief Accounting Officer and Controller) 28 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.1 - Order Approving Debtors' Motion for Order Authorizing Implementation of Initial Key Employee Retention Program entered on April 30, 2002. 10.2 - Order Approving Debtors' Motion for Order Authorizing Implementation of Senior Management Retention Program entered on April 30, 2002. 10.3 - Agreed Order Approving Retention of CIBC World Markets Corp. as Financial Advisors Pursuant to 11 U.S.C.ss.ss.327 and 328 entered on April 14, 2002, amending the Letter Agreement dated November 16, 2001, by and between Coho Energy, Inc. and CIBC World Markets Corp.
EX-10.1 3 d96812ex10-1.txt IMPLEMENTATION OF INITIAL KEY EMPLOYEE RETENTION EXHIBIT 10.1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION IN RE: ) COHO ENERGY, INC., ) CASE NO. 02-31189-HCA-11 ) COHO RESOURCES, INC., ) ) CASE NO. 02-31190-HCA-11 COHO OIL & GAS, INC., ) ) ) CASE NO. 02-31191-HCA-11 ) ) JOINTLY ADMINISTERED ) UNDER CASE NO. 02-31189-HCA-11 ) HEARING DATE APRIL 3, 2002 AT 1:45 P.M. ORDER APPROVING DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF INITIAL KEY EMPLOYEE RETENTION PROGRAM ON THIS DAY came on for consideration the Motion filed on behalf of Coho Energy, Inc. et al., ("Debtors") for an Order Authorizing Implementation of Initial Key Employee Retention Program and Supporting Brief, (the "Motion"). Counsel for the Debtors appeared. No party filed a response to the Motion or otherwise appeared at the hearing in opposition to the Motion. The Court, having considered the Motion, evidence adduced in support thereof, and presentation of counsel finds that: 1. This Court has jurisdiction of this Motion pursuant to by virtue of 28 U.S.C. Section Section157, 1334. This Motion involves a core proceeding. 2. Adequate and proper notice of the Motion, and opportunity for hearing thereon, was provided by the Debtors. ORDER APPROVING DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION IMPLEMENTATION OF INITIAL KEY EMPLOYEE RETENTION PROGRAM PAGE 1 3. The Debtors seek authority under sections 105 and 363 of the Bankruptcy Code to implement a back end loaded key employee retention and severance program (as described more fully below, the "Key Employee Retention Program"). The purpose for the Key Employee Retention Program is to minimize management and other key employee turnover, retain talent in a tight labor market and motivate key employees (each a "Key Employee," and collectively, the "Key Employees") to: (a) continue to provide essential services during this critical juncture in the Debtors' existence; and (b) remain employed by the Debtors throughout these chapter 11 cases. 4. The Debtors' ability to maintain their business operations and preserve value for their estates is dependent upon the continued employment, active participation and dedication of the Key Employees who possess irreplaceable historical knowledge, experience and skills necessary to support the Debtors' business operations, including, without limitation, the Debtors' finances, systems, operations, properties and assets, personnel and management. The Debtors' ability to stabilize and preserve their business operations and assets will be substantially hindered if the Debtors are unable to retain the services of their Key Employees. 5. The Debtors prior bankruptcy filing and uncertainty surrounding the future of their operations has had a significant and adverse effect on the morale of their employees. Unless an incentive plan is expeditiously implemented, the Debtors senior management expect that a number of the Key Employees will resign. 6. The Debtors' situation is unique in that following the confirmation of the Debtors' plan of reorganization in March, 2000, as part of their post-confirmation program to streamline operations and reduce general and administrative operating expenses to the fullest possible DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 2 extent, the Debtors' workforce was reduced from 122 employees, as of March, 2000, to 74, as of the Petition Date. As a result, in the view of Debtors' management, each and every current employee is critical to the Debtors' operations and the Debtors' can ill afford to lose any employees at this time. Indeed, the Debtors' retention plan recognizes the importance of retaining employees at every level and not just senior management and executives. 7. Increased employee responsibilities, the general level of stress visited upon a debtor in possession's key employees and other burdens occasioned by the Debtors' status as debtors in possession may lead some of the Key Employees to resign in the near future and pursue alternative employment despite the Debtors' need for their continued services. Also, competitors of the Debtors and other parties have begun, and will undoubtedly continue to seek, to hire the Key Employees. 8. The Debtors can not afford to lose the Key Employees for many reasons, including: (a) the difficulty of replacing such employees because experienced job candidates often find the prospect of working for a chapter 11 company unattractive; (b) finding suitable replacement employees is improbable unless the Debtors retain executive search firms, with their attendant fees, and incur further costs in the form of signing bonuses, reimbursement for relocation expenses and above market salaries to induce qualified personnel to accept employment with the Debtors; and (c) losing an important employee generally leads to departure of other subordinate employees, which labor flight seriously disrupts the Debtors' ability to pursue a timely and successful reorganization in chapter 11. 9. The implementation of the Retention Program is necessary to provide incentives to the Key Employees to remain on the job throughout the pendency of the Debtors' cases in DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 3 order to preserve and maintain the value of the Debtors' operations and assets. Implementing the Key Employee Retention Program will demonstrate to employees that: (i) their services, and not just the services of the Debtors' senior management, are valued; (ii) their compensation awards are competitive; and (iii) that the Debtors are taking every conceivable, reasonable action to stabilize their operations. The Key Employee Retention Program will significantly benefit the reorganization process by boosting employee morale at the very time when employee dedication and loyalty is needed most. 10. Under the Key Employee Retention Program, Key Employees, are divided into two (2) classes; Tier 1 and Tier 2. The members of Tier 1 are Susan McAden, Controller and Charles Gibson, Manager of Engineering. Tier 2 consists of the Debtors' remaining full time employees, and include field personnel, corporate staff, and administrative personnel. Michael McGovern, Chief Executive Officer; Gary Pittman, Vice President and Chief Financial Officer and Gerald Ruley, Vice President of Operations are not included in the Key Employee Retention Program. 11. Consistent with the terms of their employment contracts, the Tier 1 Key Employees will be entitled to receive a stay retention payment equal to one year of their annual base salaries as an incentive to remain with the Debtors; provided, however, none of these payments will be made until the EARLIER of: (a) the confirmation of a plan of reorganization; (b) the sale of substantially all of the Debtors' assets; (c) the conversion of the Debtors' cases to Chapter 7; or (d) the termination of the Tier 1 employees, other than for cause "Tier 1 Payment Triggering Event." The Tier 1 Employees will forfeit any entitlement to payments under the Key Employee Retention Plan should they resign prior to a Tier 1 Payment Triggering Event. DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 4 12. Consistent with the terms of the Debtors' Severance Plan adopted on March 7, 2002, Tier 2 Key Employees will be entitled to receive a stay retention payment equal to four weeks for every year of service, and fraction year of service with a minimum payment equal to 26 weeks, and maximum of 52 weeks, of service as an incentive to remain with the Debtors; provided, however, that none of these payments will be made until the EARLIER of: (a) the confirmation of a plan of reorganization pursuant to which a Tier 2 Key Employee does not retain his or her job with a reorganized debtor entity; (b) the sale of substantially all of the Debtors' assets which does not result a Tier 2 Employee's employment by the purchaser of such assets; or (c) the termination of the Tier 2 employees, other than for cause. 13. If all of the Key Employees receive payments, the Key Employee Retention Program would be as follows:
Category Maximum Cumulative Retention Payment -------- ------------------------------------ Tier 1 Employees $ 280,370 Tier 2 Employees Dallas Office $ 906,008 Mississippi Field $ 908,658 Oklahoma Field $ 852,478 ---------- TOTAL $2,947,514
14. It is unlikely that any significant number of the Tier 2 Key Employees in Oklahoma and Mississippi would receive payments under the Key Employee Retention Program since they are expected to retain employment regardless of whether the Debtors' operations and properties are reorganized or sold to one or more third parties. DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 5 15. A Key Employee will be deemed ineligible to participate in the Key Employee Retention Program if such Key Employee resigns, or is terminated for cause, before the triggering date for payments remaining under the Key Employee Retention Program. 16. The termination, except for cause, of a Key Employee triggers payment only as to that employee, and not to all employees in the same tier. 17. The Key Employee Retention Program replaces, and is not in addition to, any other severance or retention programs which were in existence with respect to Key Employees as of the Petition Date. 18. The Key Employee Retention Program provides no greater compensation to Key Employees than the employment contracts, in the case of Tier 1 Key Employees or the Debtors existing severance policy, in the case of Tier 2 Key Employees, that existed as of the Petition Date. 19. No COBRA benefits are included as part of the Key Employee Retention Program. 20. Under 11 U.S.C. Section 363(b), a debtor is authorized to use property of the estate other than in the ordinary course of business after notice and hearing for purposes of implementing an employee retention program as contemplated herein. See In re Montgomery Ward Holding Corp., 242 B.R. 147 (D. Del. 1999). As stated by the Fifth Circuit, the debtor in possession must demonstrate "some articulated business justification for using, selling or leasing property outside the ordinary course of busine Section" In re Continental Airlines, Inc., 780 F.2d 1223, 1226 (5th Cir. 1986). The debtor is also required to show the court that the proposed use of estate property will assist the debtor's reorganization. See In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983). DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 6 21. Once the Debtors establish a valid business justification, "[t]he business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was in the best interests of the company." In re Integrated Resources, Inc., 147 B.R. 650, 656 (S.D.N.Y. 1992) (quoting Smith v. Gorkam, 488 A.2d 858, 872 (Del. 1985)). 22. The business judgment rule is respected within the context of a chapter 11 case and shields a debtor's management from judicial second-guessing. Id.; In re John-Manville Corp., 60 B.R. 612, 615-16 (Bankr. S.D.N.Y. 1986)(stating that "the Code favors the continued operation of a business by a debtor and a presumption of reasonableness attaches to a Debtor's management decisions."). 23. Given the importance of the Key Employees to the Debtors' continued operations, the Key Employee Retention Program is approved. Courts have consistently recognized the needs of chapter 11 debtors to retain their employees in order to assure continued business functions in chapter 11 and, therefore, have approved retention and severance programs under 11 U.S.C. Section 363(b)(1) similar to, or more costly than, the Key Employee Retention Program proposed by the Debtors. 24. The facts of these cases dictate that the relief requested herein is warranted. The Key Employees are engaged in essential areas of operations of the Debtors, including executive, managerial, engineering and administrative positions; their continued employment and high morale is absolutely vital to the Debtors' prospects of reorganization and continued operation. DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 7 Without the continued services of the Key Employees, the prospect of the Debtors' reorganizing, and maximizing the value of their operations for the benefit of creditors will be irreparably damaged. 25. In the event the Key Employee Retention Program is not implemented, there is a substantial risk that Key Employees would abandon the Debtors and seek less risky employment. The Debtors could be forced to hire replacement employees through the use, in large part, of executive placement agencies. Notwithstanding the time necessary to conduct job search and screen prospective candidates, such agencies also charge a substantial fee for their services. In addition, even with the use of such agencies, it is unlikely that the Debtors' could induce qualified applicants to accept employment with a debtor in possession without the use of signing bonuses, relocation expenses and above market salaries. Alternatively, the Debtors could be forced to add substantially to the number of its turnaround management consultant staff and incur the increase in costs that this direction entails. 26. At this critical time in these chapter 11 cases, the Debtors can ill afford either the time or the money necessary to replace the Key Employees. All these factors clearly indicate that it is in the best interest of all creditors that the Key Employees be provided the benefits provided for in the retention program described herein in order to ensure their continued employment and to use their best efforts to reorganize these Debtors; it is, therefore, DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 8 ORDERED that the Initial Key Employee Retention Program described herein is hereby approved and the Debtors are authorized to take any and all actions necessary to implement said program. SIGNED the 29th day of April, 2002. /s/ HAROLD C. ABRAMSON -------------------------------- HONORABLE HAROLD C. ABRAMSON UNITED STATES BANKRUPTCY JUDGE Submitted by and upon entry please return a copy to: Louis R. Strubeck, Jr. Texas State Bar No. 19425600 FULBRIGHT & JAWORSKI, L.L.P. 2200 Ross Avenue, Suite 2800 Dallas, TX 75201 Phone: 214.855-8040 Fax: 214.855-8200 E-mail: lstrubeck@fulbright.com Counsel for Debtors DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 9 EX-10.2 4 d96812ex10-2.txt IMPLEMENTATION OF SENIOR MANAGEMENT RETENTION EXHIBIT 10.2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION IN RE: ) ) COHO ENERGY, INC., ) CASE NO. 02-31189-HCA-11 ) COHO RESOURCES, INC., ) ) CASE NO. 02-31190-HCA-11 COHO OIL & GAS, INC., ) ) ) CASE NO. 02-31191-HCA-11 ) ) JOINTLY ADMINISTERED ) UNDER CASE NO. 02-31189-HCA-11 ) HEARING DATE APRIL 10, 2002 AT 1:45 P.M. ORDER APPROVING DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF SENIOR MANAGEMENT RETENTION PROGRAM Came on for consideration the Motion filed on behalf of Coho Energy, Inc. et al., ("Debtors") for an Order Authorizing Implementation of Senior Management Retention Program and Supporting Brief, (the "Motion"). Counsel for the Debtors, the Official Committee of Unsecured Creditors ("Committee") and the Lenders appeared. No party filed any opposition to the Motion or otherwise appeared at the hearing in opposition to the Motion. The Court, having considered the Motion, evidence adduced in support thereof, and presentation of counsel finds that: 1. This Court has jurisdiction of this Motion pursuant to by virtue of 28 U.S.C. Sections 157, 1334. This Motion involves a core proceeding. 2. Adequate and proper notice of the Motion, and opportunity for hearing thereon, was provided by the Debtors. ORDER APPROVING DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF SENIOR MANAGEMENT RETENTION PROGRAM PAGE 1 3. The Debtors seek authority under sections 105 and 363 of the Bankruptcy Code for approval of a retention and severance program for the three members of its senior management team (as described more fully below, the "Senior Management"). The purpose for the Senior Management Retention Program is to retain the Debtors' senior management team until such time as the Debtors have reorganized their affairs, or achieved a sale of their assets. 4. The Debtors' ability to maintain their business operations and preserve value for their estates is dependent upon the continued employment, active participation and dedication of the Senior Management who possess critical knowledge, experience and skills necessary to support the Debtors' business operations, including, without limitation, the Debtors' finances, systems, operations, properties and assets, personnel and management. The Debtors' ability to stabilize and preserve their business operations and assets will be substantially hindered if the Debtors are unable to retain the services of Senior Management. 5. The Debtors' bankruptcy filing, and the uncertainty surrounding the future of their operations, has created a significant doubt concerning Senior Management's tenure with the company, as well as related uncertainty regarding Senior Management's pre-petition severance agreements with the Debtors. Unless an incentive retention plan is expeditiously implemented, the Debtors Senior Management are expected to pursue other opportunities. 6. The Debtors can not afford to lose Senior Management for many reasons, including: (a) the difficulty of replacing them because experienced job candidates often find the prospect of working for a chapter 11 company unattractive; (b) finding suitable replacement employees is improbable unless the Debtors retain executive search firms, with their attendant fees, and incur further costs in the form of signing bonuses, reimbursement for relocation expenses and above market salaries to induce qualified personnel to accept employment with the Debtors; and (c) losing an Senior Management may lead to departure of other subordinate employees, which labor flight seriously disrupts the Debtors' ability to pursue a timely and successful reorganization in chapter 11. DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 2 7. The implementation of the Retention Program is necessary to provide incentives to Senior Management to remain on the job throughout the pendency of the Debtors' cases in order to preserve and maintain the value of the Debtors' operations and assets. The Senior Management Retention Program will significantly benefit the reorganization process. 8. The Debtors' Senior Management team consists of three individuals: Michael McGovern, Chief Executive Officer; Gary Pittman, Vice President and Chief Financial Officer and Gerald Ruley, Vice President of Operations. 9. Consistent with the terms of their employment contracts, the Senior Management will receive a stay retention payment equal to two (2) years of their annual base salaries as an incentive to remain with the Debtors; provided, however, no payments will be made until the EARLIER of: (a) the confirmation of a plan of reorganization; (b) the sale of substantially all of the Debtors' assets; (c) the conversion of the Debtors' cases to Chapter 7; or (d) the termination of a member of Senior Management, other than for cause "Senior Management Triggering Event." Senior Management will forfeit any entitlement to payments under the Key Employee Retention Plan should they resign prior to a Senior Management Triggering Event. 10. If all of the Senior Management received payments, the Senior Management Retention Program would be as follows: DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 3
Member of Senior Management Maximum Cumulative Retention Payment --------------------------- ------------------------------------ Michael McGovern $ 700,000 Gary Pittman $ 400,000 Gerald Ruley $ 500,000 --------- TOTAL $1,600.00 ---------
11. A member of Senior Management will be deemed ineligible to participate in the Senior Management Retention Program if he resigns, or is terminated for cause, before the triggering date for payments remaining under the Senior Management Retention Program. 12. The termination, except for cause, of a Senior Management employee triggers payment only as to that employee, and not to all Senior Management employees. 13. The Senior Management Retention Program replaces, and is not in addition to, any other severance or retention programs which were in existence with respect to Senior Management as of the Petition Date. 14. The Senior Management Retention Program provides no greater compensation to Senior Management than the employment contracts. 15. No COBRA benefits are included as part of the Senior Management Retention Program. 16. Under 11 U.S.C. Section 363(b), a debtor is authorized to use property of the estate other than in the ordinary course of business after notice and hearing for purposes of implementing an employee retention program as contemplated herein. See In re Montgomery Ward Holding Corp., 242 B.R. 147 (D. Del. 1999). As stated by the Fifth Circuit, the debtor in DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 4 possession must demonstrate "some articulated business justification for using, selling or leasing property outside the ordinary course of business." In re Continental Airlines, Inc., 780 F.2d 1223, 1226 (5th Cir. 1986). The debtor is also required to show the court that the proposed use of estate property will assist the debtor's reorganization. See In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983). 17. Once the Debtors establish a valid business justification, "[t]he business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was in the best interests of the company." In re Integrated Resources, Inc., 147 B.R. 650, 656 (S.D.N.Y. 1992) (quoting Smith v. Gorkam, 488 A.2d 858, 872 (Del. 1985)). 18. The business judgment rule is respected within the context of a chapter 11 case and shields a debtor's management from judicial second-guessing. Id.; In re John-Manville Corp., 60 B.R. 612, 615-16 (Bankr. S.D.N.Y. 1986)(stating that "the Code favors the continued operation of a business by a debtor and a presumption of reasonableness attaches to a Debtor's management decisions."). 19. Given the importance of the Senior Management to the Debtors' continued operations, the Senior Management Retention Program is approved. Courts have consistently recognized the needs of chapter 11 debtors to retain their employees in order to assure continued business functions in chapter 11 and, therefore, have approved retention and severance programs under 11 U.S.C. Section 363(b)(1) similar to, or more costly than, the Key Employee Retention Program proposed by the Debtors. DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 5 20. The facts of these cases dictate that the relief requested herein is warranted. Senior Management employees are engaged in essential areas of operations of the Debtors, including executive, managerial, engineering and financial positions; their continued employment and high morale is absolutely vital to the Debtors' prospects of reorganization and continued operation. Without the continued services of the Senior Management, the prospect of the Debtors' reorganizing, and maximizing the value of their operations for the benefit of creditors will be irreparably damaged. 21. In the event the Senior Management Retention Program is not implemented, there is a substantial risk that Senior Management will resign and seek other employment. The Debtors could be forced to hire replacement employees through the use, in large part, of executive placement agencies. Notwithstanding the time necessary to conduct job search and screen prospective candidates, such agencies also charge a substantial fee for their services. In addition, even with the use of such agencies, it is unlikely that the Debtors' could induce qualified applicants to accept employment with a debtor in possession without the use of signing bonuses, relocation expenses and above market salaries. 22. At this critical time in these chapter 11 cases, the Debtors can ill afford either the time or the money necessary to replace Senior Management. All these factors clearly indicate that it is in the best interest of all creditors that the Senior Management be provided the benefits provided for in the retention program described herein in order to ensure their continued employment and to use their best efforts to reorganize these Debtors; it is, therefore, DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 6 ORDERED that the Senior Management Retention Program described herein is hereby approved and the Debtors are authorized to take any and all actions necessary to implement said program. SIGNED the 29th day of April, 2002. /s/ HAROLD C. ABRAMSON -------------------------------- HONORABLE HAROLD C. ABRAMSON UNITED STATES BANKRUPTCY JUDGE Submitted by and upon entry please return a copy to: Louis R. Strubeck, Jr. Texas State Bar No. 19425600 FULBRIGHT & JAWORSKI, L.L.P. 2200 Ross Avenue, Suite 2800 Dallas, TX 75201 Phone: 214.855-8040 Fax: 214.855-8200 E-mail: lstrubeck@fulbright.com Counsel for Debtors DEBTORS' MOTION FOR ORDER AUTHORIZING IMPLEMENTATION OF KEY EMPLOYEE RETENTION PROGRAM PAGE 7 EX-10.3 5 d96812ex10-3.txt AGREED ORDER APPROVING RETENTION EXHIBIT 10.3 UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF TEXAS DALLAS DIVISION IN RE: ) COHO ENERGY, INC. ) CASE NO. 02-31189-BJH-11 A TEXAS CORPORATION, DEBTORS ) CHAPTER 11 ) ) IN RE: ) COHO RESOURCES, INC. ) CASE NO. 02-31190-SAF-11 A NEVADA CORPORATION, DEBTORS ) CHAPTER 11 ) ) IN RE: ) COHO RESOURCES, INC. ) CASE NO. 02-31191-HCA-11 A DELAWARE CORPORATION, DEBTORS ) CHAPTER 11 ) ) ) JOINTLY ADMINISTERED UNDER ) CASE NO. 02-31189-HCA-11 ) ) HEARING DATE: MARCH 21, 2002 ) AT 1:45 P.M. AGREED ORDER APPROVING RETENTION OF CIBC WORLD MARKETS CORP. AS FINANCIAL ADVISORS PURSUANT TO 11 U.S.C. Section 327 AND 328 Came on for consideration is the Motion of Coho Energy, Inc., et al., debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, "Debtors") to Approve CIBC World Markets Corp. ("CIBC") as Financial Advisors pursuant to 11 U.S.C. Section 327 and 328 and FED. R. BANKR. P. 2014 and 2016 (the "CIBC Motion"). The Court, considered (a) the CIBC Motion, (b) the Affidavit of Joseph J. Radecki, Managing Director of CIBC, attached to the Motion as Exhibit "B" (the "Affidavit"); (c) the Engagement Agreement dated as of November 16, 2001, attached to the Motion as Exhibit "A" (the "Engagement Agreement"); and (d) the pleadings filed in these cases including the Limited Opposition to the CIBC Motion filed by the Official Committee of Unsecured Creditors (the AGREED ORDER APPROVING RETENTION OF CIBC WORLD MARKETS CORP. AS FINANCIAL ADVISORS PURSUANT TO 11 U.S.C. Section 327 AND 328 PAGE 1 "Committee") and the Objection filed by the United States Trustee and the Objection filed on behalf of Thomas & Culp (collectively, the "Objections"). The Court has also considered the testimony of Mr. Radecki, statements of counsel and the agreement of the Debtors, the Committee and the Lenders modifying the relief requested in the CIBC Motion as stated on the record at the hearing on the CIBC Motion (the "Agreement"). Based on the foregoing, the Court determines that the legal and factual bases set forth in the CIBC Motion, the Affidavit, and the Engagement Agreement, as modified by the Agreement, establish just cause for the relief granted herein; therefore, the Court finds that: 1. The Court has jurisdiction over this matter pursuant to 28 U.S.C. Sections 157 and 1334. 2. This is a core proceeding pursuant to 28 U.S.C. Section 157(b)(2). 3. Notice of the CIBC Motion and the hearing was sufficient and adequate under the circumstances. 4. The CIBC Motion and the Affidavit are in full compliance with all applicable provisions of the Bankruptcy Code; the Federal Rules of Bankruptcy Procedure; and the Local Rules of this Court. 5. CIBC does not hold or represent any interest adverse to the Debtors' estates and is a "disinterested person," as defined in Section 101(14) of the Bankruptcy Code and as required by Section. 327(a) of the Bankruptcy Code. 6. The employment of CIBC, in accordance with the CIBC Agreement and as modified by this Agreed Order, is in the best interest of the Debtors, their estates and the estates' creditors. AGREED ORDER APPROVING RETENTION OF CIBC WORLD MARKETS CORP. AS FINANCIAL ADVISORS PURSUANT TO 11 U.S.C. Section 327 AND 328 PAGE 2 The compensation, as set forth in paragraph 5 of the Engagement Agreement, the CIBC Motion and as modified by this Agreed Order, constitutes "reasonable terms and conditions of employment" in accordance with section 328(a) of the Bankruptcy Code; it is, therefore, ORDERED that the Objection filed by Thomas & Culp is overruled; it is further ORDERED that unless otherwise defined herein, capitalized terms shall have the same meaning as provided in the Engagement Agreement; it is, therefore, ORDERED that the CIBC Motion, as modified or clarified herein, is GRANTED; it is further ORDERED that the Debtors are authorized to retain and employ CIBC as financial advisors for the Debtors, JP Morgan Chase Bank as Agent for the Lenders ("Lenders") and the Committee in these chapter 11 cases, pursuant to section 327 of the Bankruptcy Code, on the terms and conditions set forth in the CIBC Motion and the Engagement Agreement, attached to this Agreed Order as Exhibit "A," nunc pro tunc as of the Petition Date, subject to the following modifications or clarifications: (a) Page 2, paragraph 5(a) of the Engagement Agreement is modified to provide that the Monthly Fee payable to CIBC is reduced to $125,000 per month, beginning with the Monthly Fee payable for August, 2002; (b) Page 2, paragraph 5(b) of Engagement Agreement is modified to reduce the Restructuring Fee payable to CIBC to 75 basis points (0.75%) of the aggregate amount of all senior debt and senior subordinated debt of the Company; (c) Pages 3 and 4, paragraphs 5(f) of the Engagement Agreement is modified to provide that CIBC shall immediately credit 50% of the Monthly Fees received AGREED ORDER APPROVING RETENTION OF CIBC WORLD MARKETS CORP. AS FINANCIAL ADVISORS PURSUANT TO 11 U.S.C. Section 327 AND 328 PAGE 3 subsequent to the entry of this Order against the Sale or Restructuring Fees it is entitled to receive under the Engagement Letter; (d) Page 3, paragraph 5(c) of Engagement Agreement is modified to provide that the Sale Fee payable to CIBC shall be equal to 85 basis points (0.85%) of the aggregate consideration paid or received upon consummation of a Sale Transaction below $200 million and 100 basis points (1.00%) of the aggregate consideration paid or received upon the consummation of a Sale Transaction above $200 million; (e) Page 3, paragraph 5(f) of the Engagement Agreement is modified such that one hundred percent (100%) of any Monthly Fee payable to CIBC for August, 2002, and thereafter, shall be credited against the payment of the Restructuring Fee or Sale Fee; (f) Page 4, paragraph 8, entitled "Indemnification," of the Engagement Letter is eliminated, in its entirety, such that no indemnification is provided to CIBC pursuant to its retention as a financial advisor in this case; and (g) The Sale Fee and Restructuring Fee are mutually exclusive payments, and CIBC can receive payment of either a Sale Transaction Fee or a Restructuring Fee, but not both; (h) CIBC will not prepare an Opinion as provided in page 2, paragraph 4 and page 3, paragraph 5(d) of the Engagement Letter; it is further ORDERED that CIBC is authorized to provide any and all financial advisory services to the Debtors, Lenders and the Committee that are necessary or appropriate in connection with their chapter 11 cases, as described in the CIBC Motion or the Engagement Agreement; it is further AGREED ORDER APPROVING RETENTION OF CIBC WORLD MARKETS CORP. AS FINANCIAL ADVISORS PURSUANT TO 11 U.S.C. Section 327 AND 328 PAGE 4 ORDERED that CIBC shall keep reasonably detailed records reflecting the services provided pursuant to the Engagement Letter as modified by this Agreed Order, which narrative shall be provided to counsel for the Debtors, United States Trustee, Lenders and Committee and which shall be submitted to the Court as part of any fee application(s) filed by CIBC in accordance with this, or subsequent, order of this Court; it is further ORDERED that the Compensation, as modified herein, is approved pursuant to Section 328(a) of the Bankruptcy Code; it is further ORDERED that consistent with the foregoing, and in accordance the Compensation as modified herein, the Debtors are authorized to pay the Monthly Fees provided for in the Engagement Letter as modified herein; provided, however, that the final allowance of Compensation to which CIBC ultimately is entitled shall be determined by this Court pursuant to a final hearing, on notice, on a fee application filed by CIBC; it is further ORDERED that the Restructuring Fee or Sale Fee earned by CIBC shall be paid, immediately and directly out of such Transaction's proceeds as a cost of sale, into, and held in, an escrow account for CIBC's benefit ("Escrowed CIBC Fees Account"). The Restructuring or Sale Fee deposited in the Escrowed Fees Account shall be paid to CIBC in accordance with this Court's Order on CIBC's fee application. DATED: April 3, 2002 /s/ HAROLD C. ABRAMSON --------------------------------- UNITED STATES BANKRUPTCY JUDGE AGREED ORDER APPROVING RETENTION OF CIBC WORLD MARKETS CORP. AS FINANCIAL ADVISORS PURSUANT TO 11 U.S.C. Section 327 AND 328 PAGE 5 AGREED AS TO FORM AND CONTENT: FULBRIGHT & JAWORSKI L.L.P. By: /s/ LOUIS R. STRUBECK, JR. ------------------------------------------------ Louis R. Strubeck, Jr. 2200 Ross Avenue, Suite 2800 Dallas, Texas 75201 Telephone - (214) 855-8040 Facsimile - (214) 855-8200 Counsel for Debtors LOCKE LIDDELL & SAPP LLP By: /s/ THOMAS H. GRACE ------------------------------------------------ Thomas H. Grace 600 Travis Street, Suite 3400 Houston, TX 77002-3095 Telephone - (713) 226-1377 Facsimile - (713) 223-3717 tgrace@lockeliddel.com Counsel for Lender CIBC WORLD MARKET CORP. By: /s/ JOSEPH RADECKI ------------------------------------------------ Joseph Radecki Managing Director 425 Lexington Avenue New York, New York 10017 Telephone - (212) 885-4400 Facsimile - (212) 885-4990 AGREED ORDER APPROVING RETENTION OF CIBC WORLD MARKETS CORP. AS FINANCIAL ADVISORS PURSUANT TO 11 U.S.C. Section 327 AND 328 PAGE 6 MUNGER, TOLLER, OLSON LLP By: /s/ MARK SHINDERMAN ------------------------------------------------ Mark Shinderman 355 South Grand Avenue, Suite 3500 Los Angeles, California 90071-1560 Telephone - (213) 683-9201 Facsimile - (213) 683-4010 Counsel Official Committee of Unsecured Creditors AGREED ORDER APPROVING RETENTION OF CIBC WORLD MARKETS CORP. AS FINANCIAL ADVISORS PURSUANT TO 11 U.S.C. Section 327 AND 328 PAGE 7 -----END PRIVACY-ENHANCED MESSAGE-----