UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended MARCH 31, 1997
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 0-10955
CODA ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1842480
(State of incorporation) (IRS Employer Identification No.)
5735 Pineland Dr., Suite 300, Dallas, Texas 75231
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 692-1800
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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value 913,611 Shares
Outstanding at May 1, 1997
PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
(in thousands)
March 31,
December 1997
31, (Unaudited)
1996
-------- ---------
Current Assets:
Cash and cash equivalents $ 7,994 $ 8,150
Accounts receivable - revenue 14,432 10,884
Accounts receivable - joint interest
and other 1,673 2,029
Other current assets 1,046 1,077
-------- --------
25,145 22,140
-------- --------
Oil and gas properties (full cost
accounting method):
Proved oil and gas properties 249,693 266,109
Unproved oil and gas properties 1,000 1,000
Less accumulated depletion,
depreciation and amortization (20,757) (26,447)
-------- --------
229,936 240,662
-------- --------
Gas plants and gathering systems 34,258 35,448
Less accumulated depreciation (2,305) (2,967)
-------- --------
31,953 32,481
-------- --------
Other properties and assets, net 8,536 8,386
-------- --------
$295,570 $303,669
======== ========
See Notes to Consolidated Financial Statements
1
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(dollars in thousands)
March 31,
December 31, 1997
1996 (Unaudited)
------------ -----------
Current liabilities:
Current maturities of long-term debt and notes
payable $ 120 $ ---
Accounts payable - trade 8,934 7,120
Accounts payable - revenue and other 5,210 4,612
Accrued interest 3,366 5,997
Income taxes payable 579 306
-------- --------
18,209 18,035
-------- --------
Long-term debt - less current maturities 64,966 71,100
-------- --------
10 1/2% Senior Subordinated Notes 110,000 110,000
-------- --------
Deferred income taxes 37,061 37,839
-------- --------
Commitments and contingent liabilities
15% Cumulative redeemable preferred stock, 40,000
shares of $.01 par value authorized; 20,000
shares issued and outstanding; liquidation
preferences of $23,591 at March 31, 1997,
including dividends in arrears 20,000 20,000
-------- --------
Common stockholders' equity of management,
subject to put and call rights, 13,611 shares
of $.01 par value common stock issued and
outstanding 4,560 4,560
Less related notes receivable (937) (937)
-------- --------
3,623 3,623
-------- --------
Other common stockholders' equity:
Common stock 1 million, $.01 par value, shares
authorized, 900,000 shares issued and outstanding 9 9
Additional paid-in capital 89,991 89,991
Retained deficit (48,289) (46,928)
-------- --------
41,711 43,072
-------- --------
$295,570 $303,669
======== ========
See Notes to Consolidated Financial Statements
2
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)
Predecessor Successor
------------- --------------------------------------
Pro Forma
44 Days Three Months Three Months
47 Days Ended Ended Ended Ended
February 16, March 31, March 31, March 31,
1996 1996 1996 1996
------ ------ ------ ------
Revenues:
Oil and gas sales $ 8,079 $ 8,964 $17,043 $19,568
Gas gathering and
processing 5,322 4,799 10,121 12,411
Other income 168 201 369 371
------- -------- ------- -------
13,569 13,964 27,533 32,350
------- -------- ------- -------
Costs and expenses:
Oil and gas production 3,607 3,885 7,492 8,572
Gas gathering and
processing 4,567 3,888 8,455 10,686
Depletion, depreciation
and amortization 2,583 3,498 6,897 6,619
General and administrative 320 352 672 198
Interest 1,102 2,087 4,300 3,985
Stock option compensation 3,199 --- --- ---
Writedown of oil and gas
properties --- 83,305 --- ---
------- -------- ------- -------
15,378 97,015 27,816 30,060
------- -------- ------- -------
Income (loss) before
income taxes (1,809) (83,051) (283) 2,290
Income tax expense
(benefit) (511) (29,915) (4) 929
------- -------- ------- -------
Net income (loss) (1,298) (53,136) (279) 1,361
Preferred stock dividend
requirements --- 361 750 853
------- -------- ------- -------
Net income (loss)
available for common
stockholders $(1,298) $(53,497) $(1,029) $ 508
======= ======== ======= =======
See Notes to Consolidated Financial Statements
3
CODA ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Predecessor Successor
------------- -------------------------
Three
47 Days 44 Days Months
Ended Ended Ended
February 16, March 31, March 31,
1996 1996 1997
------- ------ ------
Cash flows from operating
activities:
Net income (loss) $ (1,298) $ (53,136) $ 1,361
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depletion, depreciation
and amortization 2,583 3,498 6,619
Writedown of oil and gas
properties --- 83,305 ---
Deferred income tax
expense (benefit) (511) (30,000) 778
Stock option compensation 3,199 --- ---
Other 6 --- ---
Effect of changes in:
Accounts receivable 3,386 (4,630) 3,192
Other current assets (63) (207) (31)
Accounts payable and other
current liabilities (4,166) 2,631 (54)
-------- --------- --------
Net cash provided by
operating activities 3,136 1,461 11,865
-------- --------- --------
Cash flows from investing
activities:
Additions to oil and gas
properties (1,717) (770) (16,416)
Proceeds from sale of
assets 110 53 ---
Purchase of Coda by JEDI,
net of $5,740 cash
acquired --- (174,373) ---
Gas plant and gathering
systems and other
property additions (114) (43) (1,223)
Payments received on
amounts due from
stockholders 130 124 ---
-------- --------- --------
Net cash used by investing
activities (1,591) (175,009) (17,639)
-------- --------- --------
Cash flows from financing
activities:
Proceeds from bank
borrowings --- --- 11,000
Proceeds from issuance of
subordinated debt --- 210,000 ---
Proceeds from issuance of
common and preferred stock --- 110,026 ---
Repayment of bank
borrowings and
subordinated debt (19) (142,667) (4,986)
Financing costs (390) (320) (84)
-------- --------- --------
Net cash provided (used)
by financing activities (409) 177,039 5,930
-------- --------- --------
Increase in cash 1,136 3,491 156
Cash at beginning of period 4,604 --- 7,994
-------- --------- --------
Cash at end of period $ 5,740 $ 3,491 $ 8,150
======== ========= ========
Supplemental cash flow
information:
Interest paid $ 1,548 $ 1,317 $ 1,354
======== ========= ========
Income taxes paid $ --- $ 120 $ 424
======== ========= ========
See Notes to Consolidated Financial Statements
4
CODA ENERGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. THE MERGER
On February 16, 1996, pursuant to an Agreement and Plan of Merger, Coda
Energy, Inc. ("Coda"), was acquired by Joint Energy Development Investments
Limited Partnership ("JEDI"), which is an affiliate of Enron Capital & Trade
Resources Corp. ("ECT"), (the "Merger"). Coda, together with its subsidiaries,
prior to and including February 16, 1996 is referred to herein as the
Predecessor and after such date as the Successor and collectively, for both
periods, the Company. In conjunction with the Merger, JEDI entered into certain
agreements with members of the Company's management (the "Management Group"),
providing for a continuing role of management in the Company after the Merger.
Following consummation of the Merger, the Management Group owns approximately 5%
of Coda's common stock on a fully-diluted basis. JEDI owns the remaining 95%.
The Merger has been accounted for using the purchase method of accounting.
As such, JEDI's cost of acquiring Coda has been allocated to the assets and
liabilities acquired based on estimated fair values. As a result, the Company's
financial position and operating results subsequent to the date of the Merger
reflect a new basis of accounting and are not comparable to prior periods.
The allocation of JEDI's purchase price to the assets and liabilities
of Coda resulted in a significant increase in the carrying value of the
Company's oil and gas properties. Under the full cost method of accounting, the
carrying value of oil and gas properties (net of related deferred taxes) is
generally not permitted to exceed the sum of the present value (10% discount
rate) of estimated future net cash flows (after tax) from proved reserves, based
on current prices and costs, plus the lower of cost or estimated fair value of
unproved properties (the "cost center ceiling"). Based upon the allocation of
JEDI's purchase price and estimated proved reserves and product prices in effect
at the date of the Merger, the purchase price allocated to oil and gas
properties was in excess of the cost center ceiling by approximately $83.3
million ($53.3 million net of related deferred taxes). The resulting writedown
is a non-cash charge and has been included in the results of operations for the
period ended March 31, 1996.
2. ACCOUNTING AND REPORTING POLICIES
The consolidated financial statements include the accounts of Coda and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior years' amounts to conform to the current year
presentation.
The accompanying consolidated financial statements, which should be read in
conjunction with the audited consolidated financial statements for the 319-day
period ended December 31, 1996,
5
reflect all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary to present fairly the financial
position as of March 31, 1997, and the results of operations and cash flows for
the 47 day period ended February 16, 1996, the 44 day period ended March 31,
1996 and the three months ended March 31, 1997. The results for the period ended
March 31, 1997, are not necessarily indicative of results for a full year.
Fees from overhead charges billed to working interest owners, including the
Company, of $848,000, $808,000 and $1.8 million for the 47 day period ended
February 16, 1996, the 44 day period ended March 31, 1996 and the three months
ended March 31, 1997, respectively, have been classified as a reduction of
general and administrative expenses in the accompanying consolidated statements
of operations.
3. PRO FORMA INFORMATION
The pro forma statement of operations information was prepared as if the
Merger and the sale of the 10 1/2% Senior Subordinated Notes (the "Notes") had
occurred on January 1, 1996. The pro forma information does not purport to
represent the results of operations which would have occurred had such
transactions been consummated on January 1, 1996 or for any future period. The
pro forma information was prepared by adjusting the 1996 periods: (i) to adjust
depletion, depreciation, and amortization to reflect JEDI's purchase price
allocated to property and equipment, (ii) to adjust interest expense to give
effect to the net reduction of approximately $37.0 million under the Company's
credit facility and repayment of a note payable to an officer of the Company,
partially offset by an increase in the interest rate on borrowings under the new
credit facility of .25%, (iii) to record interest on the Notes at an interest
rate of 10 1/2%, (iv) to record amortization of the issuance cost of the Notes
over the term such debt is expected to be outstanding (10 years), (v) to adjust
the writedown of oil and gas properties and stock option compensation to
eliminate these non-recurring charges related to the Merger, (vi) to adjust the
provision for income taxes for the change in financial taxable income resulting
from the above adjustments, and (vii) to record the cumulative dividend
requirements of the redeemable preferred stock issued to JEDI.
4. ACQUISITIONS
In February 1997, the Company purchased 123 producing oil and gas
properties from J. M. Huber Corporation for an aggregate purchase price of
approximately $13.2 million, of which $6.5 million was financed under the
Company's credit agreement. The properties are predominately located in Texas,
Oklahoma and Arkansas. The Company estimates the properties have proved
reserves of approximately 1.5 million barrels of oil and 13.0 Bcf of gas.
5. LONG-TERM DEBT
On February 14, 1996, the Company entered into a credit agreement with
NationsBank of Texas, N.A. ("NationsBank"), as lender and as agent, and
additional lenders named therein (as amended, the "Credit Agreement") which
provides for a revolving credit facility in an amount up to $250.0
6
million. Pursuant to the terms of the Credit Agreement, the semiannual borrowing
base redetermination as of April 1, 1997, resulted in an increase of the
Company's borrowing base from $115 million to $120 million. The next
redetermination is scheduled for October 31, 1997. At March 31, 1997, $71.0
million was outstanding under the Credit Agreement and $44.0 million was
available for borrowing thereunder. On March 31, 1997, the Company repaid in
full (principal balance of $466,000) it's note payable to NationsBank that was
due January 2, 1998.
6. 10 1/2% SENIOR SUBORDINATED NOTES
On March 18, 1996, the Company completed the sale of the Notes which bear
interest at an annual rate of 10 1/2% payable semiannually in arrears on April 1
and October 1 of each year. The Notes are general, unsecured obligations of the
Company, are subordinated in right of payment to all Senior Debt (as defined in
the indenture governing the Notes (the "Indenture")) of Coda, and are senior in
right of payment to all future subordinated debt of the Company. The claims of
the holders of the Notes are subordinated to Senior Debt, which, as of March 31,
1997, was $71.1 million.
The Notes were issued pursuant to an Indenture, which contains certain
covenants that, among other things, limit the ability of Coda and its Restricted
Subsidiaries (as defined in the Indenture) to incur additional indebtedness and
issue Disqualified Stock (as defined in the Indenture), pay dividends, make
distributions, make investments, make certain other restricted payments, enter
into certain transactions with affiliates, dispose of certain assets, incur
liens securing pari passu or subordinated indebtedness of Coda and engage in
mergers and consolidations.
Coda's payment obligations under the Notes are fully, unconditionally
and jointly and severally guaranteed on a senior subordinated basis by all of
Coda's current subsidiaries and future Restricted Subsidiaries. Such guarantees
are subordinated to the guarantees of Senior Debt issued by the Guarantors (as
defined in the Indenture) under the Credit Agreement and to other guarantees of
Senior Debt issued in the future. All of Coda's current subsidiaries are wholly
owned. There are currently no restrictions on distributions from the Guarantors
to Coda.
Separate financial statements and other disclosures concerning the
Guarantors are not presented because management has determined they are not
material to investors. The combined condensed financial information of the
Company's current subsidiaries, the Guarantors, is as follows:
7
December 31, March 31,
1996 1997
--------------- ----------
Current assets $ 7,745 $ 5,490
Oil and gas properties, net 50,176 49,074
Gas plants and gathering systems, net 31,617 32,145
Other properties and assets, net 1,113 988
------- --------
Total assets $90,651 $ 87,697
======= ========
Current liabilities
Intercompany payables $ 8,321 $ 6,482
Deferred income taxes 33,551 29,763
Stockholder's equity 16,191 17,151
32,588 34,301
Total liabilities and stockholder's ------- --------
equity $90,651 $ 87,697
======= ========
Predecessor Successor
--------------- -------------------------
Three
44 Days Months
47 Days Ended Ended Ended
February 16, March 31, March 31,
1996 1996 1997
------ ------ ------
Revenues:
Oil and gas sales $ 2,529 $ 3,180 $ 6,653
Gas gathering and processing 5,322 4,799 12,411
Other income 2 47 37
------- -------- -------
7,853 8,026 19,101
Costs and expenses:
Oil and gas production 843 884 1,868
Gas gathering and processing 4,567 3,888 10,686
Depletion, depreciation and 1,039 1,350 2,512
amortization 435 504 742
General and administrative 460 467 469
Interest --- 19,159 ---
Writedown of oil and gas properties ------- -------- -------
7,344 26,252 16,277
------- -------- -------
Income (loss) before income taxes 509 (18,226) 2,824
Income tax expense (benefit) 277 (6,591) 1,111
------- -------- -------
Net income (loss) $ 232 $(11,635) $ 1,713
======= ======== =======
8
7. PREFERRED STOCK
Under Coda's Restated Certificate of Incorporation, the Board of Directors
is authorized to issue up to 40,000 shares of preferred stock, par value $0.01
per share. All 40,000 shares of preferred stock are designated as "15%
Cumulative Preferred Stock" (the "Preferred Stock"). The holders of each share
of Preferred Stock are entitled to receive, when and as declared by the Board of
Directors, cumulative preferential dividends, at the rate of $150.00 per share
per annum. There are currently 20,000 shares of Preferred Stock issued and
outstanding. Shares of Preferred Stock in excess of such 20,000 shares shall be
issuable only for the purpose of paying dividends on the Preferred Stock. As of
March 31, 1997, the Preferred Stock had accumulated approximately $3.6 million
in preferred dividends which had not been declared by the Board of Directors.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The Company is an independent energy company principally engaged in the
acquisition and exploitation of producing oil and natural gas properties. The
Company also owns and operates natural gas processing and liquids extraction
facilities and natural gas gathering systems. Coda seeks to acquire properties
whose predominant economic value is attributable to proved producing reserves
and to enhance that value through control of operations, reduction of costs and
development of properties.
The Company's principal strategy is to increase oil and natural gas reserves
and cash flow by selectively acquiring and exploiting producing oil and natural
gas properties, especially those properties with enhanced recovery and other
lower risk development potential. Coda's exploitation efforts include, where
appropriate, the drilling of lower risk development wells, the initiation of
secondary recovery projects, the renegotiation of marketing agreements and the
reduction of drilling, completion and lifting costs. Cost savings may be
principally achieved through reductions in field staff and the more effective
utilization of field facilities and equipment by virtue of geographic
concentration.
The Company expects to continue its efforts to acquire additional oil and
natural gas properties. Future acquisitions, if any, would necessitate, in most
cases, borrowing additional funds under the Company's credit facility. The
ability to borrow such funds is dependent upon the Company's borrowing base from
time to time and the effect upon the borrowing base of the properties to be
acquired.
On February 16, 1996, pursuant to an Agreement and Plan of Merger, Coda was
acquired by Joint Energy Development Investments Limited Partnership ("JEDI"),
which is an affiliate of Enron Capital & Trade Resources Corp. ("ECT") (the
"Merger"). Coda, together with its subsidiaries, prior to and including February
16, 1996 is referred to herein as the Predecessor and after such date as the
Successor and collectively, for both periods, the Company. The Merger has been
accounted for using the purchase method of accounting. As such, JEDI's cost of
acquiring Coda has been allocated to the assets and liabilities acquired based
on estimated fair values. As a result, the Company's financial position and
operating results subsequent to the date of the Merger reflect a new basis of
accounting and are not comparable to prior periods.
FORWARD-LOOKING STATEMENTS
All statements in this document concerning the Company other than purely
historical information (collectively "Forward-Looking Statements") reflect the
current expectation of management and are based on the Company's historical
operating trends, estimates of proved reserves and other information currently
available to management. These statements assume, among other things, (i) that
no significant changes will occur in the operating environment for the Company's
oil and gas properties, gas plants and gathering systems and (ii) that there
will be no material acquisitions or
10
divestitures. The Company cautions that the Forward-Looking Statements are
subject to all the risks and uncertainties incident to the acquisition,
development and marketing of, and exploration for, oil and gas reserves. These
risks include, but are not limited to, commodity price risk, environmental risk,
drilling risk, reserve, operations and production risks, regulatory risks and
counterparty risk. Many of these risks are described elsewhere herein. The
Company may make material acquisitions or dispositions, enter into new or
terminate existing oil and gas sales or hedging contracts, or enter into
financing transactions. None of these can be predicted with any certainty and,
accordingly, are not taken into consideration in the Forward-Looking Statements
made herein. For all of the foregoing reasons, actual results may vary
materially from the Forward-Looking Statements and there is no assurance that
the assumptions used are necessarily the most likely.
RESULTS OF OPERATIONS
The following table sets forth certain operating data regarding the
production and sales volumes, average sales prices, and costs associated with
the Company's oil and gas operations and gas gathering and processing operations
for the periods indicated.
11
Predecessor Successor
------------- ----------------------------------
Pro Forma Three
47 Days 44 Days Three Months Months
Ended Ended Ended Ended
February 16, March 31, March 31, March 31,
1996 1996 1996 1997
------ ------ ------ ------
OIL AND GAS OPERATING DATA:
Net production:
Oil (Mbbls) 408 427 835 808
Gas (Mmcf) 500 512 1,012 1,089
Average sales price:
Oil (per Bbl) $ 17.57 $ 18.89 $ 18.25 $ 20.54
Gas (per Mcf) $ 1.82 $ 1.75 $ 1.78 $ 2.73
Average production cost per BOE $ 7.33 $ 7.59 $ 7.46 $ 8.66
GAS GATHERING AND PROCESSING
OPERATING DATA:
Sales:
Gas sales (MMBTU) 1,555 1,430 2,985 3,104
Gas sales average price $ 2.24 $ 2.07 $ 2.16 $ 2.88
Natural gas liquids sales
(M gallons) 5,868 5,487 11,355 9,337
Natural gas liquids average
price $0.3173 $ 0.3313 $0.3241 $0.3719
Costs and expenses (in thousands):
Gas purchases $ 3,760 $ 3,390 $ 7,450 $ 9,552
Plant operating expenses $ 506 $ 499 $ 1,005 $ 1,134
Comparison of the three months ended March 31, 1996 (pro forma)
and 1997 (historical)
The unaudited pro forma combined information was prepared as if the Merger
and the issuance of $110.0 million of 10 1/2% Senior Subordinated Notes (the
"Notes") had occurred on January 1, 1996. The unaudited pro forma information
was prepared by combining the two 1996 periods and giving effect to adjustments
affecting (i) depletion, depreciation and amortization, (ii) interest expense,
(iii) income taxes and (iv) certain other costs resulting from the Merger as
more fully outlined in the Notes to Consolidated Financial Statements. The
comparisons below compare the unaudited pro forma information for 1996 to
unaudited historical information for 1997.
12
Oil and gas sales for the three months ended March 31, 1997, increased 15%
to approximately $19.6 million from approximately $17.0 million in the
comparable period in 1996 primarily due to an increase of $2.29 per barrel and
$.95 per Mcf in the average sales price of oil and gas, respectively, partially
offset by a 3% decrease in oil production. The decrease in oil production is a
result of natural declines in production partially offset by production from
acquisitions in December 1996 and February 1997. as a results of the acquisition
of oil and gas properties in February 1997 and favorable drilling results in
1996. During the three months ended March 31, 1997, 85% of oil and gas sales was
attributable to oil production. Oil and gas prices remain unpredictable. See "-
Changes in Prices and Hedging Activities" below.
Gas gathering and processing revenues for the three months ended March 31,
1997 increased 23% to approximately $12.4 million from approximately $10.1
million in the comparable period in 1996 primarily due to a 33% and a 15%
increase in the average sales price for gas and natural gas liquids,
respectively. This increase was partially offset by an 18% decrease in natural
gas liquids volumes due to natural production declines.
Gas gathering and processing expenses for the three months ended March 31,
1997 increased 26% to approximately $10.7 million from approximately $8.5
million in the comparable period in 1996 due primarily to an increase in the
purchase price paid to producers. Gas gathering and processing expenses usually
fluctuate in ratio with gas gathering and processing revenues.
Oil and gas production expenses (including production taxes) for the three
months ended March 31, 1997 increased 14% to approximately $8.6 million from
approximately $7.5 million for the same period in 1996, reflecting the effects
of the properties acquired in 1996 and 1997 and from new wells drilled. Oil and
gas production expenses for the three months ended March 31, 1997 were $8.66 per
BOE and are expected to remain near this level for the remainder of the year.
Depletion, depreciation and amortization expense for the three months ended
March 31, 1997, decreased 4% to approximately $6.6 million from approximately
$6.9 million for the pro forma period in 1996 reflecting the effect on
depletion, depreciation and amortization rates of upward reserve revisions at
December 31, 1996 and acquisitions in December 1996 and February 1997. Oil and
gas depletion, depreciation and amortization expense decreased from $5.94 per
BOE for the three months ended March 31, 1996 (pro forma), to $5.75 per BOE for
the three months ended March 31, 1997. The Company anticipates that the
depletion, depreciation and amortization rate per BOE will be approximately
$5.75 for 1997 absent significant additional acquisitions or reserve revisions.
General and administrative expenses for the three months ended March 31,
1997 decreased 71% to approximately $198,000 from $672,000 for the same period
in 1996. This decrease is primarily due to the accrual for bonuses ($189,000)
and directors fees ($70,000) incurred in 1996 but not in 1997. Also,
contributing to the decrease were additional overhead charges billed to working
interest owners on the properties acquired in December 1996 and February 1997.
The Company expects that
13
general and administrative expenses for the year ended December 31, 1997 will be
near 1996 levels absent significant additional acquisitions.
Interest expense for the three months ended March 31, 1997 decreased 8% to
approximately $4.0 million from approximately $4.3 million (pro forma) in 1996,
primarily due to decreases in outstanding debt levels as a result of utilizing
available cash flow to reduce amounts outstanding under the Company's credit
facility.
Net income for the three months ended March 31, 1997, was approximately $1.4
million compared to a net loss of approximately $279,000 (pro forma) in 1996.
This increase resulted primarily from higher oil and gas prices and decreases in
general and administrative expenses.
CHANGES IN PRICES AND HEDGING ACTIVITIES
Annual average oil and natural gas prices have fluctuated significantly over
the past three years. The Company's weighted average oil price per barrel during
1996 and at December 31, 1996, was $20.22 and $24.88, respectively. For the
three months ended March 31, 1997, the Company averaged $2.32 per barrel less
(including an oil hedging price decrease of $1.34 per barrel) and $.36 per Mcf
less for its oil and natural gas sales, respectively, than the average NYMEX
prices for the same period. On May 1, 1997, the NYMEX closing price for the near
month for oil and natural gas was $19.91 per barrel and $2.24 per Mcf,
respectively.
In an effort to reduce the effects of the volatility of the price of oil and
natural gas on the Company's operations, management has adopted a policy of
hedging oil and natural gas prices on a portion of the Company's production
through the use of commodity futures, options, and swap agreements whenever
market prices are in excess of the prices anticipated in the Company's operating
budget and profit plan. While the use of these hedging arrangements limits the
downside risk of adverse price movements, it may also limit future gains from
favorable movements. All hedging is accomplished pursuant to exchange-traded
contract or master swap agreements based upon standard forms. The Company
addresses market risk by selecting instruments whose value fluctuations
correlate strongly with the underlying commodity being hedged. Credit risk
related to hedging activities, which is minimal, is managed by requiring minimum
credit standards for courterparties, periodic settlements and mark-to-market
valuations. Under the standard form swap and option agreements in use by the
Company, the Company's revenues will be limited when the NYMEX price exceeds the
strike price. The total potential reduction in revenues is equal to the
difference between the strike prices and the NYMEX price for the production
month hedged multiplied by the number of barrels swapped. To the extent this
amount exceeds the credit limit established by the counterparty, the Company may
be required to utilize cash to fund a margin account. The Company has not
historically been required to provide any significant amount of collateral in
connection with its hedging activities.
The Company has sold swaps to hedge 495,000 barrels at a weighted average
NYMEX price of $19.15 for the nine months ending December 31, 1997 under various
transactions entered into as of
14
March 31, 1997. As of March 31, 1997 the Company had open position for sold call
options covering 25,000 barrels of oil per month at an option price of $20.00
per Bbl for the period April 1997 to August 1997. In connection with two swaps
beginning January 1, 1997 covering 10,000 barrels per month and 15,000 barrels
per month at a strike price of $19.41 and $19.00, respectively, which expire
June 30, 1997 and December 31, 1997, respectively, the Company granted the
counterparty a one day option at the expiration of the swap to extend the swap
under the same terms for an additional twelve months.
During the 47 day period ended February 16, 1996, the 44 day period ended
March 31, 1996 and the three months ended March 31, 1997 the Company's oil
revenues were decreased by $14,000, $250,000 and $1.1 million respectively, as a
result of hedging transactions.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash and cash equivalents of
approximately $8.2 million and working capital of approximately $4.1 million.
three months ended March 31, 1997 increased to approximately $11.9 million
compared to $4.6 million for the comparable period in 1996 due primarily to an
increase in oil and gas prices and a reduction in general and administrative
expenses. Excluding the impact of the Merger, cash flows used in investing
activities increased to $17.6 million for the three months ended March 31, 1997
from $2.2 million for the comparable period in 1996, primarily as a result of
the acquisition in February 1997 of oil and gas properties for $13.2 million.
Cash flows provided by financing activities decreased from $176.6 million for
the three months ended March 31, 1996 to $5.9 million for the comparable period
in 1997, primarily due to financing transactions related to the Merger.
The Company has two principal operating sources of cash: (i) net oil and gas
sales from its oil and gas properties and (ii) net margins earned from gas
gathering and processing operations. The Company expects to continue its efforts
to acquire additional oil and gas properties. Future acquisitions, if any, would
necessitate, in most cases, borrowing additional funds under the Company's
credit facility. The ability to borrow such funds is dependent upon the
Company's borrowing base from time to time and the effect upon the borrowing
base of the properties to be acquired.
The Company from time to time solicits bids for selected portions of its
existing oil and natural gas properties which it believes are no longer suitable
for its business strategy. Sales of properties in the past three years have not
been material and no substantial sales of properties are currently under
negotiation.
The Company has development drilling programs designed for all its major
operating areas. The Company has budgeted capital spending of between $15
million and $20 million in 1997, excluding property acquisitions, but is not
contractually committed to expend these funds. During the first three months of
1997, the Company incurred approximately $2.5 million of these costs. In
addition,
15
the Company is continuing to evaluate oil and natural gas properties for future
acquisitions. Historically, the Company has used the public equity market (i) to
raise cash to fund acquisitions or repay indebtedness incurred for acquisitions
and (ii) as a medium of exchange for other companies' capital stock or assets in
connection with acquisitions. As a result of being 95% owned by JEDI (on a fully
diluted basis), the Company does not expect to utilize the public equity market
to finance acquisitions in the near term. Accordingly, any material expenditures
in connection with acquisitions would require borrowing under the Company's
credit facility or from other sources. There can be no assurance that such funds
will be available to the Company. Furthermore, the Company's ability to borrow
in the future is subject to restrictions imposed by the Company's credit
facility and the indenture governing the Notes (the "Indenture").
The Merger
The Company incurred substantial indebtedness in connection with the Merger
and is highly leveraged. As of March 31, 1997, the Company had total
indebtedness of approximately $181.1 million and common stockholders' equity of
approximately $46.7 million. Based upon the Company's current level of
operations and anticipated growth, management of the Company believes that
available cash, together with available borrowings under the Credit Agreement
will be adequate to meet the Company's anticipated future requirements for
working capital, capital expenditures and scheduled payments of principal of,
and interest on, its indebtedness, including the Notes. There can be no
assurance that such anticipated growth will be realized, that the Company's
business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable the Company to
service its indebtedness, including the Notes, or make necessary capital
expenditures. The Company may find it necessary to refinance a portion of the
principal amount of the Notes at or prior to their maturity. However, there can
be no assurance that the Company will be able to obtain financing to complete a
refinancing of the Notes.
Credit Agreement
On February 14, 1996, the Company entered into a credit agreement with
NationsBank of Texas, N.A. ("NationsBank"), as lender and as agent, and
additional lenders named therein (as amended, the "Credit Agreement"). Pursuant
to the terms of the Credit Agreement, the semiannual borrowing base
redetermination as of April 1, 1997 resulted in an increase of the Company's
borrowing base from $115 million to $120 million. The next redetermination is
scheduled for October 31, 1997. At March 31, 1997, $71.0 million was outstanding
under the Credit Agreement and $44.0 million was available for borrowing
thereunder. On March 31, 1997, the Company repaid in full (principal balance of
$466,000) it's note payable to NationsBank that was due January 2, 1998.
15% Cumulative Preferred Stock
The Company's Restated Certificate of Incorporation authorizes the issuance
of up to 40,000 shares of Preferred Stock. In conjunction with the Merger, the
Company issued 20,000 shares of Preferred Stock to JEDI for $20.0 million in
cash. Shares of Preferred Stock in excess of such
16
20,000 shares are issuable only for the purpose of paying dividends on the
Preferred Stock. The holders of each share of Preferred Stock are entitled to
receive, when and as declared by the Board of Directors, cumulative preferential
dividends, at the rate of $150.00 per share per annum. The payment of Preferred
Stock dividends in cash is restricted by the Credit Agreement and the Indenture.
As of March 31, 1997, the Preferred Stock had accumulated approximately $3.6
million in preferred dividends which had not been declared by the Board of
Directors.
17
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) Exhibits
3.1 Restated Certificate of Incorporation of Coda filed as Exhibit 3.1
to the Company'sRegistration Statement on Form S-4 filed April 9,
1996 (Registration No 333-2375, the "1996 Form S-4") and
incorporated by reference herein.
3.2 Amended and Restated Bylaws of Coda filed as Exhibit 3.2 to the 1996
Form S-4 and incorporated by reference herein.
3.3 Certificate of Incorporation of Diamond Energy Operating Company, as
amended, filed as Exhibit 3.3 to the 1996 Form S-4 and incorporated
by reference herein.
3.4 Bylaws of Diamond Energy Operating Company, as amended, filed as
Exhibit 3.4 to the 1996 Form S-4 and incorporated by reference
herein.
3.5 Articles of Incorporation of Taurus Energy Corp., as amended, filed
as orm S-4 and the 1996 incorporated Exhibit 3.5 to ted by reference
herein.
3.6 Bylaws of Taurus Energy Corp., as amended, filed as Exhibit 3.6 to
the 1996 Form S-4 and incorporated by reference herein.
3.7 Articles of Incorporation of Electra Resources, Inc. filed as
Exhibit 3.7 to the 1996 Form S-4 and incorporated by reference
herein.
3.8 Bylaws of Electra Resources, Inc. filed as Exhibit 3.8 to the 1996
Form S-4 and incorporated by reference herein.
4.1 Indenture, dated as of March 18, 1996, among Coda, Coda's guarantor
subsidiaries, Diamond Energy Operating Company, Taurus Energy Corp.
and Electra Resources, Inc. (collectively, the "Guarantors"), and
Texas Commerce Bank National Association, as trustee, relating to
$110,000,000 aggregate principal amount of 10 1/2% Series A and
Series B Senior Subordinated Notes due 2006 filed as Exhibit 4.1 to
the 1996 Form S-4 and incorporated by reference herein.
4.2 Registration Rights Agreement, dated as of March 18, 1996, among
Coda, the Guarantors and Goldman, Sachs, & Co., Chemical Securities,
Inc., ECT Securities Corp. and NationsBanc Capital Markets, Inc.
(collectively, the "Initial Purchasers") filed as Exhibit 4.2 to the
1996 Form S-4 and incorporated by reference herein.
18
4.3 Purchase Agreement, dated as of March 12, 1996, among Coda, the
Guarantors and the Initial Purchasers filed as Exhibit 4.3 to the
1996 Form S-4 and incorporated by reference herein.
4.4 Credit Agreement, dated February 14, 1996, among the Company,
individually and as agent, and additional lenders named therein,
filed as Exhibit 4.5 to the 1996 Form S-4 and incorporated by
reference herein.
4.5 Promissory Note dated February 14, 1996, in the original principal
amount of $87,500,000.00, executed by Coda, payable to NationsBank
filed as Exhibit 4.6 to the 1996 Form S-4 and incorporated by
reference herein.
4.6 Promissory Note dated February 14, 1996, in the original principal
amount of $37,500,000.00, executed by Coda, payable to Bank One,
Texas, N.A. filed as Exhibit 4.7 to the 1996 Form S-4 and
incorporated by reference herein.
4.7 Promissory Note dated February 14, 1996, in the original principal
amount of $75,000,000.00, executed by Coda, payable to Texas
Commerce Bank National Association filed as Exhibit 4.8 to the 1996
Form S-4 and incorporated by reference herein.
4.8 Promissory Note dated February 14, 1996, in the original principal
amount of $50,000,000.00, executed by Coda, payable to the First
National Bank of Boston filed as Exhibit 4.9 to the 1996 Form S-4
and incorporated by reference herein.
4.9 Specimen Certificate of Series B 10 1/2% Senior Subordinated Notes
due 2006 (included in Exhibit 4.1 hereto), filed as Exhibit 4.11 to
the 1996 Form S-4 and incorporated by reference herein.
4.10 First Supplement to Indenture dated as of April 25, 1996 filed as
Exhibit 4.12 the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 and incorporated by reference
herein amending the Indenture filed as Exhibit 4.1 above.
4.11 First Amendment to Credit Agreement, dated August 1, 1996, among the
Company, NationsBank and additional lenders named therein, filed as
Exhibit 4.13 to the Company's quarterly report on Form 10-Q for the
quarterly period ended September 30, 1996 (the "September 1996 10-
Q") and incorporated by reference herein amending the Credit
Agreement filed as Exhibit 4.4 above.
10.1/(2)/ Form of Indemnification Agreement entered into between Coda and each
of its directors and officers filed as Exhibit 10.1 to Coda's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, and
incorporated by reference herein.
19
10.2/(2)/ List of directors and officers that have entered into
Indemnification Agreements with Coda filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995, (the "September 1995 10-Q") and
incorporated by reference herein.
10.3 Agreement and Plan of Merger, by and among Coda, JEDI and Coda
Acquisition, Inc. dated as of October 30, 1995 filed as Exhibit 2.1
to Coda's Current Report on Form 8-K dated October 30, 1995 (the
"October 1995 8-K"), and incorporated by reference herein.
10.4 Agreement of Coda to provide schedules to the Agreement and Plan of
Merger (Exhibit 10.3) omitted pursuant to Item 6.01 (b)(2) of
Regulation S-K filed as Exhibit 2.2 to the September 1995 10-Q, and
incorporated by reference herein.
10.5 Amendment to Agreement and Plan of Merger dated as of December 22,
1995 filed as Exhibit 2.1 to Coda's Current Report on Form 8-K dated
December 22, 1995, and incorporated by reference herein.
10.6 Second Amendment to Agreement and Plan of Merger dated as of January
10, 1996 filed as Exhibit 2.1 to Coda's Current Report on Form 8-K
dated January 10, 1996, and incorporated by reference herein.
10.7 Agreement of Coda to provide schedules and exhibits to Second
Amendment to Agreement and Plan of Merger (Exhibit 10.6) and to
provide schedules to Amendment No. 1 to Subscription Agreement
(Exhibit 10.18) and Amendment No. 1 to Stockholders Agreement
(Exhibit 10.19) filed as Exhibit 99.4 to Coda's Current Report on
Form 8-K dated January 10, 1996, and incorporated by reference
herein.
10.8/(2)/ Stockholders Agreement dated October 30, 1995 filed as Exhibit 99.2
to the October 1995 8-K, and incorporated by reference herein.
10.9/(2)/ Subscription Agreement among Coda Acquisition, Inc. and The
Management Investors dated October 30, 1995 filed as Exhibit 99.3 to
the October 1995 8-K, and incorporated by reference herein.
10.10 Agreement of Coda to provide schedules to Stockholders Agreement
(Exhibit 10.8) and to Subscription Agreement (Exhibit 10.9) filed as
Exhibit 99.11 to the October 1995 8-K, and incorporated by reference
herein.
10.11/(2)/ Business Opportunity Agreement dated as of October 30, 1995 filed as
Exhibit 99.4 to the October 1995 8-K, and incorporated by reference
herein.
20
10.12/(2)/ Executive Employment Agreement between Coda Acquisition, Inc. and
Randell A. Bodenhamer filed as Exhibit 99.5 to the October 1995 8-K,
and incorporated by reference herein.
10.13/(2)/ Executive Employment Agreement between Coda Acquisition, Inc. and J.
William Freeman filed as Exhibit 99.6 to the October 1995 8-K, and
incorporated by reference herein.
10.14/(2)/ Executive Employment Agreement between Coda Acquisition, Inc. and
Grant W. Henderson filed as Exhibit 99.7 to the October 1995 8-K,
and incorporated by reference herein.
10.15/(2)/ Executive Employment Agreement between Coda Acquisition, Inc. and
Jarl P. Johnson filed as Exhibit 99.8 to the October 1995 8-K, and
incorporated by reference herein.
10.16/(2)/ Executive Employment Agreement between Coda Acquisition, Inc. and
Douglas H. Miller filed as Exhibit 99.9 to the October 1995 8-K, and
incorporated by reference herein.
10.17/(2)/ Executive Employment Agreement between Coda Acquisition, Inc. and
J.W. Spencer, III filed as Exhibit 99.10 to the October 1995 8-K,
and incorporated by reference herein.
10.18/(2)/ Amendment No. 1 to Subscription Agreement dated as of January 10,
1996 filed as Exhibit 99.2 to Coda's Current Report on Form S-K
dated January 10, 1996, and incorporated by reference herein.
10.19/(2)/ Amendment No. 1 to Stockholders Agreement dated as of January 10,
1996 filed as Exhibit 99.3 to Coda's Current Report on Form 8-K
dated January 10, 1996, and incorporated by reference herein.
10.20 Credit Agreement, dated February 14, 1996, among the Company,
NationsBank, individually and as agent, and additional lenders named
therein filed as Exhibit 4.4 above.
10.21 Promissory Note dated February 14, 1996, in the original principal
amount of $87,500,000.00, executed by Coda, payable to NationsBank,
filed as Exhibit 4.5 above.
10.22 Promissory Note dated February 14, 1996, in the original principal
amount of $37,500,000.00, executed by Coda, payable to Bank One,
Texas, N.A. filed as Exhibit 4.6 above.
21
10.23 Promissory Note dated February 14, 1996, in the original principal
amount of $75,000,000.00, executed by Coda, payable to Texas
Commerce Bank National Association filed as Exhibit 4.7 above.
10.24 Promissory Note dated February 14, 1996, in the original principal
amount of $50,000,000.00, executed by Coda, payable to the First
National Bank of Boston filed as Exhibit 4.8 above.
10.25/(2)/ Form of Nonstatutory Stock Option Agreement attached and filed as
Exhibit A to Exhibit 99.3 to the October 1995 8-K, and incorporated
by reference herein.
10.26/(2)/ Form of Limited Recourse Promissory Note attached and filed as
Exhibit B to Exhibit 99.3 to the October 1995 8-K, and incorporated
by reference herein.
10.27/(2)/ Form of Security Agreement attached and filed as Exhibit C to
Exhibit 99.3 to the October 1995 8-K, and incorporated by reference
herein.
10.28/(2)/ List of Management Investors who are parties to Nonstatutory Stock
Option Agreement (Exhibit 10.25), Limited Recourse Promissory Note
(Exhibit 10.26) or Security Agreement (Exhibit 10.27) filed as
Exhibit 10.27 to the 1996 Form S-4, and incorporated by reference
herein.
10.29 First Amendment to Credit Agreement, dated August 1, 1996, among the
Company, NationsBank and additional lenders named therein filed as
Exhibit 4.11 above.
10.30/(2)/ Limited Recourse Promissory Note dated July 31, 1996, in the
original principal amount of $1,187,500.00 executed by Douglas H.
Miller, payable to the Company, filed as Exhibit 10.30 to the
September 1996 10-Q, and incorporated by reference herein.
10.31/(2)/ Amendment to Nonstatutory Stock Option Agreement dated July 31, 1996
between the Company and Douglas H. Miller filed as Exhibit 10.31 to
the September 1996 10-Q, and incorporated by reference herein
amending the Nonstatutory Stock Option Agreement filed as Exhibit
10.25 above.
27/(1)/ Financial data schedule
- ------------------------
/(1)/ Filed herewith.
/(2)/ Identifies management contract or compensation plan.
22
(B) Reports on Form 8-K - None
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CODA ENERGY, INC.
(Registrant)
By: /s/ Grant W. Henderson
-------------------------------------
Grant W. Henderson
President and Chief Financial Officer
Date: May 12, 1997
23
EXHIBIT INDEX
Sequential
Exhibit No. Description of Exhibit Page No.
----------- ----------------------- ----------
27.* Financial Data Schedule
- ----------
* Filed herewith
24