INDEX TO FINANCIAL STATEMENTS
EXHIBIT 99.2
PAGE
----
Independent Auditor's Report ............................................................................. F-2
Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000 ............................ F-3
Consolidated Statements of Operations - For the Six Months Ended June 30, 2001 (unaudited)
and for the Year Ended December 31, 2000 ............................................................ F-4
Consolidated Statements of Comprehensive Income - For the Six Months Ended June 30, 2001
(unaudited) and for the Year Ended December 31, 2000 ................................................ F-5
Consolidated Statement of Changes in Stockholders' Equity - For the Period from January 1, 2000
through June 30, 2001 (unaudited) ................................................................... F-6
Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2001 (unaudited)
and for the Year Ended December 31, 2000 ............................................................ F-7
Notes to Consolidated Financial Statements ............................................................... F-8
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Cody Company and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Cody Company and
Subsidiaries (the "Company"), as of December 31, 2000, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cody Company and
Subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 16, 2001
CODY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
2001 December 31,
(unaudited) 2000
------------- ------------
($ in 000's)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 1,028 $ 8,061
Marketable securities, at fair value 33,440 34,559
Receivables, sale of securities 32,177 32,177
Accounts receivable, net 11,538 11,540
Current income tax receivable 10,047 -
Current portion of notes receivable 25 26
Other current assets 3,636 4,362
-------------- --------------
Total current assets 91,891 90,725
Property and Equipment
Oil and gas properties, under the successful efforts method, net 111,440 109,526
Other, net 16,569 14,458
-------------- --------------
Total property and equipment 128,009 123,984
Notes Receivable and Other 793 801
Cash Surrender Value of Life Insurance Policies 27,450 27,388
-------------- --------------
Total Assets $ 248,143 $ 242,898
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 5,419 $ 8,965
Accrued liabilities 23,386 7,214
Taxes payable 1,900 -
Deferred income taxes 11,416 10,200
Other current liabilities 7,802 7,770
-------------- --------------
Total current liabilities 49,923 34,149
Long-term Debt 50 22,700
Deferred Income Taxes 8,939 5,800
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock, no par value; 500,000 shares authorized;
448,164 shares issued and outstanding - -
Additional paid-in capital 60,451 60,451
Retained earnings 124,823 115,630
Accumulated other comprehensive income 3,957 4,168
-------------- --------------
Total stockholders' equity 189,231 180,249
-------------- --------------
Total Liabilities and Stockholders' Equity $ 248,143 $ 242,898
============== ==============
See accompanying notes to these consolidated financial statements.
F-3
CODY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six
Months
Ending For the Year
June 30, Ending
2001 December 31,
(unaudited) 2000
----------------- ---------------
($ in 000's)
Revenues:
Oil and gas sales $ 53,368 $ 64,813
Ranching 661 4,874
Investment income 1,250 4,388
Sales of land held for development - 1,407
Other income 3,387 660
--------------- ---------------
Total revenues 58,666 76,142
--------------- ---------------
Costs and Expenses:
Oil and gas operations:
Lease operating 5,464 9,992
Severance taxes and marketing 905 5,319
Exploratory and other oil and gas costs 477 2,552
Ranching 657 1,600
Land operations - 1,073
General and administrative 5,394 7,207
Severance expense and merger costs 12,552 3,600
Depletion, depreciation and amortization 9,338 19,628
--------------- ---------------
Total costs and expenses 34,787 50,971
--------------- ---------------
Income From Operations 23,879 25,171
Interest expense (475) (2,931)
Gain (loss) on sale of assets 4 (1,369)
Other 62 576
--------------- ---------------
Income Before Income Taxes and Cumulative Effect of Change in Accounting
Principle 23,470 21,447
Income tax expense (12,153) (3,912)
--------------- ----------------
Income Before Cumulative Effect of a Change in Accounting Principle 11,317 17,535
Cumulative effect of change in accounting for derivatives, net of income
tax benefit of ($1,252) (2,124) -
--------------- ---------------
Net Income $ 9,193 $ 17,535
=============== ===============
See accompanying notes to these consolidated financial statements.
F-4
CODY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Six
Months
Ending
June 30, For the Year
2001 Ending December
(unaudited) 31, 2000
--------------- ------------------
($ in 000's)
Net Income $ 9,193 $ 17,535
Change in Unrealized Gains on Available for Sale
Securities, Net of Income Taxes: (211) 703
--------------- ---------------
Comprehensive Income $ 8,982 $ 18,238
=============== ===============
See accompanying notes to these consolidated financial statements.
F-5
CODY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 2000 THROUGH JUNE 30, 2001
($ in 000's)
Unrealized
Gains On
Common Stock Additional Securities Total
------------------------- Paid-in Retained Available- Stockholders'
Shares Amount Capital Earnings For-sale Equity
------------ ---------- -------------- ------------- ---------------- ---------------
Balances, January 1, 2000 448,164 $ - $ 60,451 $ 98,095 $ 3,465 $ 162,011
Net change in unrealized gain - - - - 703 703
Net income - - - 17,535 - 17,535
---------- --------- ------------- ------------ -------------- ---------------
Balances, December 31, 2000 448,164 - 60,451 115,630 4,168 180,249
Net change in unrealized gain
(unaudited) - - - - (211) (211)
Net income (unaudited) - - - 9,193 - 9,193
---------- --------- ------------- ------------ -------------- ---------------
Balances, June 30, 2001 (unaudited) 448,164 $ - $ 60,451 $ 124,823 $ 3,957 $ 189,231
========== ========= ============= ============ ============== ===============
See accompanying notes to these consolidated financial statements.
F-6
CODY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six For the Year
Months Ending Ending
June 30, 2001 December 31,
(unaudited) 2000
------------------ ----------------
($ in 000's)
Cash Flows from Operating Activities:
Net income $ 9,193 $ 17,535
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting principle 2,124 -
Depletion, depreciation and amortization 9,338 19,628
(Gain)/ loss on sale of oil and gas properties (102) (206)
Change in cash surrender value of life insurance policies (62) (577)
(Gain)/loss on sale of investments 98 1,575
Deferred income tax expense 5,736 469
Changes in operating assets and liabilities:
Accounts receivable and accrued income 2 (6,102)
Income tax receivable (10,047) -
Prepaid expenses and other current assets (912) (1,121)
Accounts payable and accrued liabilities 13,165 8,992
Other 162 495
-------------- -------------
Net cash provided by operating activities 28,695 40,688
Cash Flows from Investing Activities:
Additions to property and equipment (13,697) (51,102)
Proceeds from sale of oil and gas properties 436 1,169
Proceeds from sale of land - 950
Net sale of marketable securities 681 6,052
Decrease in notes receivable and other 9 2,067
-------------- ------------
Net cash used in investing activities (12,571) (40,864)
Cash Flows from Financing Activities:
Draw on short sale of equity securities (507) (1,138)
Proceeds from long-term debt - 18,800
Payments on long-term debt (22,650) (21,300)
-------------- ------------
Net cash used in financing activities (23,157) (3,638)
-------------- ------------
Net Decrease in Cash and Cash Equivalents (7,033) (3,814)
Cash and Cash Equivalents, at beginning of period 8,061 11,875
-------------- ------------
Cash and Cash Equivalents, at end of period $ 1,028 $ 8,061
============== ============
Supplemental Cash Flow Information:
Interest paid $ 489 $ 2,900
============== ============
Income taxes paid $ 12,865 $ 4,746
============== ============
See accompanying notes to these consolidated financial statements.
F-7
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2001 is unaudited)
1. Organization and Summary of Significant Accounting Policies:
-----------------------------------------------------------
Organization - Cody Company (Cody) was formed in 1967, as a wholly-owned
------------
subsidiary of The Gates Corporation (Gates), to act as a holding company
for Gates' interests in the oil and gas industry. In 1996, Gates
reorganized its holdings, and in a simultaneous spinoff, Cody received
various Gates assets including Gates Land Company (a land development
company located in Colorado Springs, Colorado), and A Bar A Ranch, Inc.
(cattle and dude ranching (hospitality) operations located in Colorado and
Wyoming, which are reporting as ranching for financial statement
purposes). Oil and gas interests were also transferred from Gates to a
wholly-owned Limited Liability Company, Cody Energy, LLC (CEL). Gates Land
Company, Bear Creek Land, LLC and the ranches operate as divisions of
Cody. Collectively, these entities, along with CEL, are referred to as
"the Company."
Cody is wholly owned by the Gates Family Foundation (2%) and Gates Family
trusts and family members (98%) (See Note. 12.)
CEL has two subsidiary companies, Cody Oil & Gas Inc. and Cody Texas, L.P.
Cody Texas, L.P. is the general partner of five oil and gas limited
partnerships, which are consolidated for financial statement purposes.
The Company operates in four segments: oil and gas, hospitality, ranching,
and land sales. However, the oil and gas segment represents over 90% of
the consolidated assets, revenues and results of operation.
Nature of Business - The Company's operating activities primarily consist
------------------
of oil and gas exploration, development and production in Texas, New
Mexico, Oklahoma, and Louisiana. The Company is also engaged in land
development in Colorado; and dude and cattle ranches in Wyoming and
Colorado. In 2000, the Company had no significant land development
operations in Colorado. In addition, the Company holds for investment
purposes various stocks and bonds.
Basis of Consolidation and Presentation - The consolidated financial
---------------------------------------
statements include the accounts of Cody and subsidiaries, all of which are
wholly owned. All significant intercompany transactions have been
eliminated.
Use of Estimates - The preparation of the Company's consolidated financial
----------------
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the balance sheet dates and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
The Company's financial statements are based on a number of significant
estimates, including oil and gas reserve quantities which are the basis
for the calculation of depreciation, depletion and impairment of oil and
gas properties. CEL's reserve estimates were prepared by an independent
petroleum engineering firm. Management emphasizes that reserve estimates
are inherently imprecise and that estimates of more recent discoveries are
more imprecise than those for properties with long production histories.
In addition, recoverable reserves are directly correlated to the market
price of oil and gas, which have been very volatile in
F-8
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 200 is audited)
recent years. Accordingly, CEL's oil and gas reserve estimates are expected
to change as future information becomes available and with changes in the
market price of oil and gas.
Cash and Cash Equivalents - The Company considers all highly liquid debt
-------------------------
instruments purchased with an initial maturity of three months or less to
be cash equivalents.
Marketable Securities and Related Receivables and Other Liabilities -
-------------------------------------------------------------------
Marketable securities are accounted for in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Pursuant to SFAS No. 115, the
Company's securities are classified as available-for-sale based on
management's intent. Investment securities are stated at market value, with
unrealized gains and losses, net of applicable income taxes, reported as a
separate component of stockholder's equity. These securities are primarily
comprised of government and municipal bonds.
In 1994, a portion of the Company's securities was sold short. Subsequent
to June 30, 2001, the Company closed the short sale transaction. This
amount is reflected as receivables, sale of securities. Also, at June 30,
2001 and December 31, 2000, the Company has a related note payable, the
outstanding balance of which is $6,779,000 and $7,275,000, respectively.
This amount is reflected as "other current liabilities" in the Company's
balance sheet. This balance was also repaid after June 30, 2001.
Notes Receivable - Notes receivable arise from sales of commercial property
----------------
and are classified in accordance with the term of the related agreement.
Generally, the notes are collateralized by the underlying property.
Oil and Gas Properties - The Company follows the successful efforts method
----------------------
of accounting for oil and gas properties. Under the successful efforts
method, costs of productive wells, development dry holes, and productive
leases are capitalized and amortized on a unit of production basis over the
life of remaining related reserves. Cost centers for amortization purposes
are determined on a field-by-field basis. Management estimates that the
salvage value of lease and well equipment will approximately offset the
future liability for plugging and abandonment of the related wells.
Accordingly, no accrual for such costs has been recorded. Productive wells,
development dry holes, and productive leasehold costs are evaluated
periodically and any impairments in value are charged to expense (Note 6).
Oil and gas leasehold costs are capitalized when incurred. Unproved
properties are evaluated periodically and any impairments in value are
charged to expense.
Exploratory expenses, including geological and geophysical expenses and
annual delay rentals for oil and gas leases, are charged to expense as
incurred. Exploratory drilling costs are initially capitalized, but charged
to expense if and when the well is determined to be unsuccessful.
Ranches and Other Property and Equipment - Ranch improvements, livestock,
----------------------------------------
and other property and equipment (consisting primarily of furniture,
fixtures, and computers) are depreciated and amortized by the straight-line
method based on useful lives ranging from 31 years for ranch improvements
and 3 to 7 years for livestock and other properties and equipment.
F-9
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2001 is unaudited)
Revenue Recognition - The Company recognizes oil and gas revenues as it is
-------------------
produced. Purchase, sale, and transportation of natural gas and crude oil
are recognized upon completion of the sale and when transported volumes
are delivered. Land sales of Gates Land Company are recognized upon
completion of the sale under the full accrual method.
Income Taxes - The provision for income taxes has been determined using
------------
the liability method required by SFAS No. 109, Accounting for Income
Taxes. Under this statement, a current or deferred income tax asset or
liability is recognized, subject to certain limitations, for the tax
consequences of all events recognized in the financial statements. The
deferred income tax asset or liability is measured by the provisions of
enacted tax law.
Concentration of Market and Credit Risk - Financial instruments which
---------------------------------------
subject the Company to concentrations of credit risk consist principally
of available-for-sale securities and receivables. The Company's policy is
to evaluate, prior to entering agreements, each purchaser's and partner's
financial condition. The Company sells to purchasers with different
geographic and economic characteristics. Receivables are generally
uncollateralized, are from purchasers and partners and are predominantly
from oil and gas companies generally located in southwestern region of the
United States.
Unaudited Information - The consolidated balance sheet as of June 30, 2001
---------------------
and the consolidated statement of operations for the six month periods
ended June 30, 2001 were taken from the Company's books and records
without audit. However, in the opinion of management, such information
includes all adjustments (consisting only of normal recurring accruals)
which are necessary to properly reflect the consolidated financial
position of the Company as of June 30, 2001 and the results of operations
for the six months then ended.
New Accounting Pronouncements - In June 2001, the Financial Accounting
-----------------------------
Standards Board ("FASB") issued Statements of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for
under the purchase method. For all business combinations for which the
date of acquisition is after June 30, 2001, SFAS 141 also establishes
specific criteria for the recognition of intangible assets separately from
goodwill and requires unallocated negative goodwill to be written off
immediately as an extraordinary gain, rather than deferred and amortized.
SFAS 142 changes the accounting for goodwill and other intangible assets
after an acquisition. The most significant changes made by SFAS 142 are:
1) goodwill and intangible assets with indefinite lives will no longer be
amortized; 2) goodwill and intangible assets with indefinite lives must be
tested for impairment at least annually; and 3) the amortization period
for intangible assets with finite lives will no longer be limited to forty
years. The Company does not believe that the adoption of these statements
will have a material effect on its financial position, results of
operations, or cash flows.
In June 2001, the FASB also approved for issuance SFAS 143 "Asset
Retirement Obligations." SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets,
including (1) the timing of the liability recognition, (2) initial
measurement of the liability, (3) allocation of asset retirement cost to
expense, (4) subsequent measurement of the liability and (5) financial
statement disclosures. SFAS 143 requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset
and subsequently allocated to expense using a systematic and rational
method. The
F-10
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2001 is unaudited)
Company will adopt the statement effective no later than January 1, 2003,
as required. The transition adjustment resulting from the adoption of SFAS
143 will be reported as a cumulative effect of a change in accounting
principle. At this time, the Company cannot reasonably estimate the effect
of the adoption of this statement on its financial position, results of
operations, or cash flows.
In August 2001, the FASB also approved SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The new accounting model for long-lived assets to be disposed of by sale
applies to all long-lived assets, including discontinued operations, and
replaces the provisions of APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
for the disposal of segments of a business. SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses
that have not yet occurred. SFAS 144 also broadens the reporting of
discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. At this time, the Company
cannot estimate the effect of this statement on its financial position,
results of operations, or cash flows.
2. Acquisitions:
------------
In 2000, CEL acquired working interest in the Raymondville Field for
approximately $11.3 million. The Raymondville Field includes six producing
wells. CEL also acquired a working interest in the Lopeno Field for
approximately $10.9 million in cash in 2000. The Lopeno Field includes 34
producing wells.
3. Marketable Securities and Investment Income:
-------------------------------------------
Marketable securities as of June 30, 2001 and December 31, 2000 consist of
the following (in thousands):
Unrealized Marketable
Cost Gain Securities
--------------- -------------- ---------------
June 30, 2001
-------------
Fixed income bonds and securities $ 33,204 $ 236 $ 33,440
December 31, 2000
------------------
Fixed income bonds and securities $ 34,209 $ 350 $ 34,559
Fixed income securities generally consist of government and municipal
bonds.
F-11
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited.)
Investment income consists of dividends and interest.
4. Accounts Receivable:
-------------------
Accounts receivable are comprised of the following:
June 30, December 31,
2001 2000
---------------- --------------
($ in 000's)
Oil and gas sales, net of allowance for doubtful accounts of $0
and $12 $ 9,500 $ 9,633
Joint interest billings, net of allowance for doubtful accounts of
$20 and $20 1,399 1,654
Other 639 253
------------- -------------
Net accounts receivable $ 11,538 $ 11,540
============= =============
F-12
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited)
5. Property and Equipment:
----------------------
Property and equipment, at cost, by significant categories are as follows:
June 30, December 31,
2001 2000
------------- --------------
($ in 000's)
Oil and Gas Properties:
Producing properties $ 186,855 $ 177,655
Unevaluated 4,275 3,628
Well and field equipment 40,680 40,096
------------- -------------
231,810 221,379
Less accumulated depletion, depreciation and amortization (120,370) (111,853)
------------- -------------
$ 111,440 $ 109,526
============= =============
Other:
Land and building in progress $ 4,879 $ 2,535
Ranches 12,434 12,223
Other 9,695 9,707
------------- -------------
27,008 24,465
Less accumulated depreciation and amortization (10,439) (10,007)
------------- -------------
$ 16,569 $ 14,458
============= =============
6. Impairment of Long-lived Assets:
-------------------------------
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amounts of those assets.
Impairment amounts are offset directly to the related assets.
A substantial portion of the Company's long-lived assets are oil and gas
producing properties. The Company evaluates these properties on a
field-by-field basis by comparing estimated undiscounted future net cash
flows to the net book value. If such comparisons are negative, then the
properties are adjusted to their estimated fair value. Based upon this
evaluation, CEL determined that no impairments were required at December
31, 2000 and June 30, 2001.
F-13
7. Long-Term Debt:
--------------
The following is a summary of CEL's debt (in thousands):
June 30, December 31,
2001 2000
--------------- ----------------
Note payable to bank
$ 50 $ 22,700
=============== ================
The Company has a note payable to the bank with available credit of $45
million. The note is due in quarterly installments plus interest
commencing January 1, 2002 with the first principal payment due March 31,
2002. The interest rates fluctuate based on the bank's prime or Eurodollar
rate as elected by CEL. The interest rates on various debt tranches were
6.02% (June 30, 2001) and 8.105% (December 31, 2000). The notes are
collateralized by the Company's oil and gas properties including those
held by the partnerships, and require CEL to maintain certain working
capital and borrowing base ratios and impose limitations on dividends,
interest, principal payments, acquisitions and sales of property.
Future minimum maturities for subsequent years as of December 31, 2000,
are as follows (in 000's):
2001 $ -
2002 5,675
2003 5,675
2004 5,675
2005 5,675
-----------
$ 22,700
===========
During the six months ended June 30, 2001, the Company repaid all its
outstanding debt except for $50,000. This remaining $50,000 was repaid
subsequent to June 30, 2001.
8. Oil and Gas Derivatives:
-----------------------
At December 31, 2000, CEL was a party to several derivative agreements,
primarily in the form of costless collars. The majority of these
agreements expired in June 2001. Under these agreements, CEL is required
to pay a third party a cash settlement equal to the excess of the New York
Mercantile (NYMEX) settlement price over an agreed upon strike price for
certain volumes of oil and gas. The Company receives cash from the third
party when the NYMEX settlement price falls below the agreed upon strike
price. The agreements are generally for 6 to 12-month periods. Prior to
December 31, 2000, CEL designated these agreements as hedges up to the
amount of actual production. In addition, CEL requires the NYMEX swap
price to be at least 80% correlated with prices in its market.
F-14
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited)
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company did not
designate the contracts for hedge accounting under SFAS 133, and therefore
all realized and unrealized gains and losses have been immediately
recorded in the Statement of Operations for the six months ending June 30,
2001.
As of January 1, 2001, the fair value of the derivative instruments was
approximately ($3,376,000). This amount is recorded, net of income tax
benefit, in statement of operations as a cumulative effect from change in
accounting principle.
At June 30, 2001, CEL has one put option for which it receives payment
from a third party equal to the excess of the strike price over the NYMEX
settlement price for the option period on the specified volumes. If the
NYMEX settlement price exceeds the strike price, no payment is exchanged.
The fair value of this put option was $130,000 at June 30, 2001, and is
recorded in current assets as the contract will expire within the next six
months. All other contracts expired during the six months ended June 30,
2001. Recorded with Other Income is the Unrealized gain associated with
the change in fair value of derivative instruments totaling $3,506,000 for
the period. In addition, Other Income also includes realized losses of
$1,738,000 associated with the settlement of derivative instruments that
did not qualify for hedge accounting.
9. Commitments and Contingencies:
-----------------------------
Significant Customer - CEL and a purchaser have executed long-term gas
--------------------
purchase agreements covering several properties. These agreements provide
for CEL to sell produced gas at market responsive prices which are tied to
published indexes and have a term for the life of production. Sales to
this purchaser and its affiliate represented 11% and 12% of total oil and
gas sales for the six months ended June 30, 2001 and the year ended
December 31, 2000, respectively.
In addition, CEL sold 34% and 47% of its production to three other
purchasers during the six months ended June 30, 2001 and the year ended
December 31, 2000, respectively.
Lease Arrangements - The Company leases its office space and equipment
------------------
under noncancelable operating leases. Future minimum rental commitments,
by year and in the aggregate, for operating leases are as follows as of
December 31, 2000:
($ in 000's)
--------------
2001 $ 563
2002 544
2003 522
2004 19
-------------
$ 1,648
=============
Rental expense was approximately $282,000 and $543,000 for the six
months ended June 30, 2001 and the year ended December 31, 2000.
F-15
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited.)
Partnership Commitments - Cody Texas, L.P. as general partner of five
-----------------------
limited partnerships is required to meet obligations of the
partnerships if these partnerships do not generate sufficient cash
flow. No payments were required under the terms of the partnership
agreements in 2000 and the six months ended June 30, 2001.
Employment Agreements - CEL is obligated under employment agreements
---------------------
with senior management to provide specific severance amounts upon the
occurrence of certain events. Also in connection with the merger of the
Company, Cody has advised CEL's employees it will provide certain
benefits to CEL's employees. Pursuant to these arrangements, CEL and
Cody expensed $3,600,000 during 2000 and $9,568,000 during the six
months ended June 30, 2001.
Profit Sharing - CEL has a profit sharing plan for all employees based
--------------
on a percentage of adjusted income. Total expense under the plan was
approximately $530,000 for the six months ending June 30, 2001, and
$903,000 in 2000.
Contingencies - Various Federal, state, and local laws and regulations
-------------
covering the release of waste materials into the environment affect the
Company's operations and costs. Management believes it is in
substantial compliance with environmental laws and the ultimate
resolution of any claims or legal proceedings instituted against it
will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
10. Income Taxes:
------------
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. Current
deferred tax liabilities relate primarily to gains on securities
($11,800,000 at December 31, 2000), which have been deferred for tax
purposes, but recognized for financial reporting in prior periods, net
of deferred tax assets created primarily by severance arrangements
($1,200,000) and capital loss carryforwards ($400,000). Long-term tax
liabilities differences are primarily due to intangible drilling costs,
depreciation, depletion, and impaired properties totaling approximately
$5,800,000, which are recorded in different periods for financial and
tax reporting purposes.
The provision for income taxes includes the following components:
June 30, December 31,
2001 2000
------------- -------------
Current expense $ 6,417 $ 3,443
Deferred tax expense 4,484 469
------------- -------------
Total $ 10,901 $ 3,912
============= =============
F-16
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited.)
The difference between the U.S. Federal statutory rate and the Company
effective tax rate is as follows:
June 30, December 31,
2001 2000
-------------- ---------------
U.S. Federal statutory rate 34% 34%
State taxes 3% 2%
Foreign taxes 1% -
Tax exempt interest (1%) (4%)
Non deductible merger expenses 6% -
Other 11% (14%)
-------- ----------
Tax expense per financial statements 54% 18%
======== ==========
11. Defined Contribution Plan:
-------------------------
The Company has a defined contribution plan which qualifies under Section
401(k) of the Internal Revenue Code. It covers all full-time employees at
date of employment. Subject to maximums imposed by the Internal Revenue
Service, the Company matches 100% of the employee's contributions up to
6% of the employee's annual compensation if the employee contributes at
least 3% of annual compensation. All employer contributions are fully
vested at the time of contribution. Company contributions were
approximately $200,000 for the year ended December 31, 2000 and the six
months ended June 30, 2001.
12. Subsequent Event (Unaudited):
----------------------------
Subsequent to June 30, 2001, the Company merged with a subsidiary of Cabot
Oil & Gas Corporation. In the merger, total consideration was
approximately $230 million, consisting of $181 million in cash and
approximately 2,000,000 shares at Cabot Class A common stock valued at
approximately $49 million. Prior to the merger, substantially all non-oil
and gas related assets were distributed to an entity owned by the
shareholders of the Cody Company. This entity is not affiliated with Cabot
Oil & Gas Corporation.
F-17
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited.)
13. Oil and Gas Producing Activities:
--------------------------------
Costs Incurred in Oil and Gas Producing Activities - Costs incurred in oil
--------------------------------------------------
and gas producing activities during the year ended December 31, 2000 are
set forth below (in thousands):
2000
-----------
Property acquisition costs (including lease and well
equipment):
Proved properties $ 25,278
Unproved properties 1,118
-----------
$ 26,396
Exploration costs $ 2,552
===========
Development costs $ 18,101
===========
Results of Operations for Oil and Gas Producing Activities - The
----------------------------------------------------------
following table sets forth the direct results of operations from oil
and gas producing and exploration activities (excluding corporate
overhead, interest, and income taxes) for the year ending December 31,
2000 (in thousands).
2000
------------
Sales $ 64,813
Production costs (16,582)
Exploration expenses (2,552)
Depreciation, depletion and amortization (18,974)
------------
Results of operations from producing and
exploration activities (excluding corporate
overhead and interest costs) $ 26,705
============
14. Estimated Proved Oil and Gas Reserves (unaudited):
-------------------------------------------------
Reserve information presented below is based upon reports prepared by
independent petroleum reservoir engineers (Netherland, Sewell and
Associates, Inc.). Reserve estimates are inherently imprecise and
estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, these estimates are expected to
change as future information becomes available.
F-18
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited.)
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are those expected to be recovered
through existing wells with existing equipment and operating methods.
Estimated Reserve Quantities - Net quantities of crude oil (including
----------------------------
condensate and natural gas liquids) and natural gas for the Company as of
the beginning and the end of the years ended December 31, 2000, as well as
the changes in proved reserves, are set forth in the tables below (in
thousands).
Oil Gas
(bbls) (mcf)
----------- ----------
(in thousands)
Total Proved Reserves:
Balance, January 1, 2000 8,741 70,046
Revisions of previous estimates 2,891 4,123
Sales of reserves (10) (577)
Extensions, discoveries, and purchases 1,593 40,516
Production (534) (15,394)
---------- -----------
Balance, December 31, 2000 12,681 98,714
========== ===========
Proved Developed Reserves:
Balance, January 1, 2000 5,951 47,840
========== ===========
Balance, December 31, 2000 7,430 63,939
========== ===========
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
---------------------------------------------------------------------------
Reserves - The following tables set forth the computation of the
--------
standardized measure of discounted future net cash flows relating to proved
reserves (in thousands). The standardized measure is the estimated future
cash inflows from proved reserves less estimated future production and
development costs and estimated future income taxes. Future cash inflows
represent expected revenues from the production of proved reserves based on
prices and any fixed determinable future escalation provided by contractual
arrangements in existence at the fiscal year end. Escalation based on
inflation, federal regulatory changes and supply and demand is not
considered. Estimated future production and development costs related to
future production of reserves are based on historical costs. Such costs
include, but are not limited to, drilling development wells and
installation of production facilities. Inflation and other anticipatory
costs are not considered until the actual cost change takes effect.
Estimated future income tax expenses are computed using the appropriate
year-end statutory tax rates. Consideration is given to the effects of
permanent differences, tax credits and allowances. A discount rate of 10%
is applied to the annual future net cash flows after income taxes.
F-19
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited.)
The methodology and assumptions used in calculating the standardized measure are
those required by SFAS No. 69. It is not intended to be representative of the
fair market value of proved reserves. The valuations of revenues and costs do
not necessarily reflect the amounts to be received or expended by the Company.
In addition to the valuations used, numerous other factors are considered in
evaluating known and prospective oil and gas reserves.
Future net cash flows presented below are computed using a year-end price of
$26.80 per bbl for oil, $9.52 per MMBtu for gas, and $30.32 per bbl for natural
gas liquids.
For the Year
Ended
December 31,
2000
------------
Future cash inflows $ 1,291,208
Future production and development costs (345,460)
Future income taxes payable to parent (289,987)
-----------
Net future cash flows 655,761
10% annual discount for estimated timing of cash flows (277,660)
-----------
Standardized measure of discounted future net cash flows $ 378,101
===========
F-20
CODY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for periods subsequent to December 31, 2000 is unaudited.)
The principal sources of the changes in the standardized measure of
discounted future net cash flows are as follows (in thousands):
For the Year
Ended
December 31,
2000
------------------
Extensions, discoveries, additions $ 26,221
Acquisition of oil and gas reserves 133,622
Sales and transfers net of production costs (48,230)
Revisions in quantity estimates 22,856
Sale of producing properties (332)
Changes in estimated future development costs (33,491)
Previously estimated development costs incurred during the year 8,511
Net change due to changes in prices and production costs 271,495
Net change in income taxes (138,296)
Accretion of discount 9,443
Other 31,867
---------------
Net increase (decrease) 283,666
Beginning of year 94,435
---------------
End of year $ 378,101
===============
F-21