UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 15, 2002
ENERGY PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 001-16179 72-1409562
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation of organization) Identification Number)
201 St. Charles Avenue, Suite 3400
New Orleans, Louisiana 70170
(Address of principal executive offices)
(504) 569-1875
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed from last report)
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
January 22, 2002, as set forth in the page(s) attached hereto:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On January 15, 2002, Energy Partners, Ltd. ("EPL") announced that it had
completed the acquisition of Hall-Houston Oil Company and certain affiliated
interests ("Hall-Houston"). Hall-Houston, founded in 1983, was a privately held
exploration and production company based in Houston, Texas with operations
focused in the central region of the Gulf of Mexico Shelf. Hall-Houston is an
exploration-focused company with technical expertise, high quality natural gas
reserves and an attractive inventory of exploratory prospects.
Closing of the transaction was subject to a minimum threshold for
participation in EPL's exchange offer to Hall-Houston's debtholders of 80% of
the $80.2 million debt outstanding. At closing, 96% of the total Hall-Houston
debt outstanding was tendered in exchange for a combination of $38.4 million in
newly-issued EPL 11% Senior Subordinated Notes and $38.4 million in newly-issued
EPL Series D Exchangeable Convertible Preferred Stock. The balance of the
non-tendered debt of $3.4 million was retired in cash.
Hall-Houston preferred and common stockholders and holders of affiliated
interests received approximately $1.7 million in cash, 574,931 shares of EPL
common stock and warrants to purchase four million EPL common shares. Of these
warrants, one million have a strike price of $9.00 per share and three million
have a strike price of $11.00 per share. Also, preferred stockholders of
Hall-Houston will have the right to receive contingent consideration related, in
general, to the before tax present value of future proved reserve additions from
exploratory prospect acreage held by Hall-Houston as of the closing date.
The cash portions of the transaction were funded by bank debt. EPL has
arranged an increase in its existing credit facility to a total of $100 million.
EPL also announced on January 15, 2002, that Gary Hall, Hall-Houston's
Chairman and CEO, would be named Vice-Chairman of EPL and elected a Director by
EPL's Board of Directors; Bruce Sidner, Hall-Houston's Vice President of
Exploration, would be named EPL's Executive Vice President of Exploration; and
John Peper, Hall-Houston's Senior Vice President and General Counsel, would be
named Executive Vice President of Law and Business Development, all subject to
Board of Directors approval, which was granted on January 17, 2002.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
(1) The audited consolidated balance sheets of Hall-Houston Oil Company
and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the three-year period ended December
31, 2001, including the notes thereto, and the related report of KPMG
LLP.
(b) Pro Forma Financial Information
(1) Unaudited Pro Forma Condensed Consolidated Balance Sheet of Energy
Partners, Ltd. as of December 31, 2001, including the notes thereto.
(2) Unaudited Pro Forma Condensed Consolidated Statement of Operations of
Energy Partners, Ltd. for the year ended December 31, 2001, including
the notes thereto.
(c) Exhibits.
23.1 Consent of KPMG LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hall-Houston Oil Company:
We have audited the accompanying consolidated balance sheets of Hall-Houston Oil
Company and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide 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 Hall-Houston Oil
Company and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As described in note 2 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments in 2001.
KPMG LLP
Houston, Texas
March 19, 2002
3
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(Dollar amounts in thousands)
ASSETS 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 606 $ 4,608
Cash collateral account, restricted 572 2,545
Accounts receivable:
Trade, net of allowance of $1,192 and $592 at December 31, 2001 and
2000, respectively 5,403 9,936
Insurance recovery -- 1,152
Employees and affiliates 7 20
Other 42 69
Taxes receivable 831 --
Inventories 1,200 1,015
Prepaid expense 2,310 992
Other current assets 58 49
------------ ------------
Total current assets 11,029 20,386
------------ ------------
Oil and natural gas properties, at cost, using the successful-efforts method of accounting 149,391 86,375
Less accumulated depreciation, depletion, impairment, and amortization (64,762) (41,242)
------------ ------------
Net oil and natural gas properties 84,629 45,133
Other property and equipment, net of accumulated depreciation 339 403
Deferred income taxes, net 12,447 2,791
Deferred financing costs, net of accumulated amortization of $552 in 2001 and $111 in 2000 1,168 889
Other assets 928 722
------------ ------------
$ 110,540 $ 70,324
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 7,365 $ --
Accounts payable and accrued liabilities 32,174 22,137
Gas imbalances payable 76 76
------------ ------------
Total current liabilities 39,615 22,213
------------ ------------
Long-term debt 80,156 36,000
Employee royalty trust obligation 6,583 5,654
Accrued dismantlement and abandonment costs 6,398 3,078
Other long-term liabilities 386 367
Deferred revenue 4,055 12,303
------------ ------------
Total liabilities 137,193 79,615
------------ ------------
Mandatory redeemable preferred stock, $0.01 par value. Authorized 5,000,000 shares;
$100 liquidation preference per share; issued and outstanding 180,038 shares 18,004 18,004
Stockholders' deficit:
Common stock, $0.01 par value. Authorized 19,000,000 Series A and 6,000,000
Series B Nonvoting shares; issued and outstanding 3,175,489 Series A shares 32 32
Additional paid-in capital 82 82
Accumulated deficit (44,771) (27,409)
------------ ------------
Total stockholders' deficit (44,657) (27,295)
Contingencies (note 16)
------------ ------------
$ 110,540 $ 70,324
============ ============
See accompanying notes to consolidated financial statements.
4
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2001, 2000 and 1999
(Dollar amounts in thousands except per share amounts)
2001 2000 1999
------------ ------------ ------------
Revenue:
Oil and natural gas revenues $ 27,904 $ 19,254 $ 9,679
Gain on sale of oil and natural gas properties 6,457 27,734 17,482
Other 1,650 489 716
------------ ------------ ------------
36,011 47,477 27,877
------------ ------------ ------------
Costs and expenses:
Lease operating 8,760 6,023 7,160
Exploration expenditures and dry hole costs 14,283 3,070 11,999
Impairment of oil and natural gas properties 7,312 957 6,224
Depreciation, depletion and amortization 18,064 7,452 6,283
General and administrative 3,247 4,202 4,423
Merger-related costs 427 -- --
Other 600 825 4,326
------------ ------------ ------------
52,693 22,529 40,415
------------ ------------ ------------
Income (loss) from operations (16,682) 24,948 (12,538)
Other income (expense):
Interest income 329 308 294
Interest expense (9,406) (5,001) (4,054)
------------ ------------ ------------
(9,077) (4,693) (3,760)
------------ ------------ ------------
Income (loss) before income taxes (25,759) 20,255 (16,298)
Income tax benefit 10,535 1,742 122
------------ ------------ ------------
Net income (loss) (15,224) 21,997 (16,176)
Preferred stock dividends (2,138) (1,913) (2,250)
------------ ------------ ------------
Net income (loss) attributed to
common stockholders $ (17,362) $ 20,084 $ (18,426)
============ ============ ============
Net income (loss) per share attributed to common
stockholders:
Basic $ (5.47) $ 6.32 $ (5.80)
============ ============ ============
Diluted $ (5.47) $ 3.65 $ (5.80)
============ ============ ============
Weighted average number of common shares outstanding
used in computing net income (loss) per share:
Basic 3,175 3,175 3,175
============ ============ ============
Diluted 3,175 6,033 3,175
============ ============ ============
See accompanying notes to consolidated financial statements.
5
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Years ended December 31, 2001, 2000 and 1999
(Dollar amounts in thousands)
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT DEFICIT
------------ ------------ ------------ -------------
Balances as of
December 31, 1998 $ 32 $ 82 $ (29,067) $ (28,953)
Accrued dividends in arrears
on mandatory redeemable
preferred stock -- -- (2,250) (2,250)
Net loss -- -- (16,176) (16,176)
------------ ------------ ------------ ------------
Balances as of
December 31,1999 32 82 (47,493) (47,379)
Dividends on mandatory
redeemable preferred stock -- -- (1,913) (1,913)
Net income -- -- 21,997 21,997
------------ ------------ ------------ ------------
Balances as of
December 31, 2000 32 82 (27,409) (27,295)
Accrued dividends in arrears
on mandatory redeemable
preferred stock -- -- (1,688) (1,688)
Dividends on mandatory
redeemable preferred stock -- -- (450) (450)
Net loss -- -- (15,224) (15,224)
------------ ------------ ------------ ------------
Balances as of
December 31, 2001 $ 32 $ 82 $ (44,771) $ (44,657)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
6
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(Dollar amounts in thousands)
2001 2000 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (15,224) $ 21,997 $ (16,176)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Gain on sale of oil and gas assets (6,457) (27,734) (17,482)
Depreciation, depletion, and amortization 18,064 7,452 6,283
Amortization of deferred revenue (8,248) (7,441) (7,985)
Dry hole and impairment costs 19,443 1,262 14,888
Deferred income taxes (9,656) (2,791) --
Change in assets and liabilities affecting operating activities:
Decrease (increase) in accounts receivable 5,725 (7,420) (3,298)
Decrease (increase) in taxes receivable (831) -- 926
Decrease (increase) in materials and supplies inventory (185) 369 (875)
Decrease (increase) in other assets (1,092) 15 341
Increase in accounts payable and accrued liabilities 9,127 1,962 7,560
Increase in deferred revenue -- 5,710 17,765
Increase (decrease) in other liabilities 929 (473) 2,707
Other (94) (90) (225)
------------- ------------- -------------
Total adjustments 26,725 (29,179) 20,605
------------- ------------- -------------
Net cash provided by (used in) operating activities 11,501 (7,182) 4,429
------------- ------------- -------------
Cash flows from investing activities:
Property acquisitions (1,650) (3,064) (180)
Exploration and development expenditures (73,957) (30,675) (47,319)
Other property and equipment additions (57) (80) (198)
Proceeds from sales of oil and gas assets 10,817 56,468 20,774
------------- ------------- -------------
Net cash provided by (used in) investing activities (64,847) 22,649 (26,923)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings under short-term debt 7,661 -- --
Borrowings under long-term debt 48,388 32,525 32,399
Principal payments under long-term debt and notes payable (7,860) (48,497) (137)
Cash dividends on mandatory redeemable preferred stock (900) (3,713) (450)
Deposits to cash collateral account (12,388) (12,525) (33,470)
Fundings from cash collateral account 45,630 29,682 55,038
Refunding obligations to cash collateral account (31,187) (15,469) (25,296)
------------- ------------- -------------
Net cash provided by (used in) financing activities 49,344 (17,997) 28,084
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (4,002) (2,530) 5,590
Cash and cash equivalents, beginning of year 4,608 7,138 1,548
------------- ------------- -------------
Cash and cash equivalents, end of year $ 606 $ 4,608 $ 7,138
============= ============= =============
Supplemental cash flow information:
Interest paid $ 7,247 $ 5,171 $ 2,138
============= ============= =============
Income taxes paid $ 1,000 $ -- $ --
============= ============= =============
Non cash transactions:
Vendor offset received relating to the Company's 2000 Exploration
and Development Facility (see note 5) $ 2,612 $ 2,475 $ --
============= ============= =============
Vendor offset received relating to the Company's 1996 Exploration
and Development Facility (see note 5) $ -- $ -- $ 6,511
============= ============= =============
Facility fees associated with long-term debt (see note 5) $ 720 $ 1,000 $ --
============= ============= =============
Property acquisition - assumption of abandonment liability $ 1,325 $ -- $ --
============= ============= =============
Accrued preferred dividends in arrears $ 1,688 $ -- $ 2,250
============= ============= =============
See accompanying notes to consolidated financial statements.
7
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
(1) ORGANIZATION
BACKGROUND AND BUSINESS
Hall-Houston Oil Company (the Company), a Texas corporation, was
incorporated in 1982 and commenced operations in November 1983. The Company
is an independent energy company engaged in oil and natural gas
exploration, development, and production operations primarily in the
shallow to moderate depth waters of the Gulf of Mexico off the coasts of
Louisiana and Texas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The consolidated financial statements of the Company include its wholly
owned subsidiaries, Hall-Houston Operating Company and Hall-Houston
Malaysia Ltd., which were formed during 1990 and the net assets of the
Hall-Houston Employee Royalty Trust (see note 11). All significant
intercompany accounts and transactions are eliminated in consolidation.
Hall-Houston Malaysia Ltd. was formed to engage in oil and natural gas
exploration, development, and production operations offshore of Malaysia
and has been inactive since 1999.
CASH COLLATERAL ACCOUNT, RESTRICTED
The Company's restricted cash was invested in short-term, highly-liquid
investments. The carrying value approximated fair value because of the
short-term maturity of these investments. As of December 31, 2001 and 2000,
the amount disclosed as restricted cash is available to the Company in
accordance with the terms of the Company's 2000 Exploration and Development
Facility (see note 5).
INVENTORIES
Materials and supplies are carried at the lower of average cost or market
value. There was no reduction of average cost to market value during 2001
or 2000.
REVENUE RECOGNITION
The Company records revenue in accordance with the entitlement method of
accounting for production imbalances in which any amount of production
volumes received in excess of the Company's net revenue interest in the
property is recorded as a liability. If less than the Company's entitlement
is received, the underproduction is recorded as a receivable. Production
imbalances are recorded at the lower of the sales price in effect at the
time of production or current market value. Substantially all of such
amounts are anticipated to be settled with production in future periods.
The Company's imbalance position was not significant in terms of units or
value at December 31, 2001 or 2000.
OTHER PROPERTY AND EQUIPMENT
Other property and equipment is carried at cost. Depreciation of other
property and equipment is provided for on a straight-line basis over the
estimated useful lives of the assets ranging from three to five years.
8
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
OIL AND NATURAL GAS PROPERTIES
The Company uses the successful efforts method of accounting for its oil
and natural gas producing activities. Costs to acquire mineral interests in
oil and natural gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved
reserves and geological and geophysical costs are expensed. Capitalized
costs of producing oil and natural gas properties are depleted on a
units-of-production basis over the estimated life of the related proved
reserves. Oil is converted to equivalent cubic feet of natural gas on an
energy content basis of one barrel to 6 thousand cubic feet (Mcf).
Depreciation and depletion of capitalized costs is provided on a
property-by-property basis. Costs associated with unproved properties and
costs associated with properties that have yet to commence production of
approximately $19,857,000 and $18,325,000 as of December 31, 2001 and 2000,
respectively, have been excluded from depreciation and depletion.
Unproved leasehold costs are assessed periodically on a
property-by-property basis and impairments in value are recognized to the
extent, if any, that the cost of the property has been impaired. Costs of
oil and natural gas properties surrendered are charged against the
valuation allowance. The Company recorded unproved leasehold impairment of
approximately $237,000, $718,000, and $1,761,000 in 2001, 2000, and 1999,
respectively.
The estimated costs of dismantling and abandoning offshore oil and natural
gas properties are provided for currently using the units-of-production
basis over the estimated life of the related proved reserves. Such
provision is included in depreciation, depletion, and amortization in the
accompanying statements of operations. As of December 31, 2001, estimated
costs of dismantling and abandoning offshore oil and natural gas
properties, net of salvage value, were approximately $9,466,000. To date,
approximately $6,398,000 has been accrued for and is included in the
accompanying consolidated balance sheets.
The Company reviews its long-lived assets to be held and used, including
proved oil and natural gas properties accounted for under the successful
efforts method of accounting, whenever events or circumstances indicate the
carrying value of those assets may not be recoverable. Generally accepted
accounting principles require that an impairment loss be recognized
whenever the carrying amount of an asset exceeds the estimated future net
cash flows (undiscounted) of the asset. The Company performs its impairment
review of proved oil and natural gas properties on a depletable unit basis.
For any depletable unit determined to be impaired, an impairment loss equal
to the difference between the carrying value and the fair value of the
depletable unit is immediately recognized. Fair value, on a depletable unit
basis, is estimated to be the present value of expected future cash flows
computed by applying expected future oil and natural gas prices, as
determined by management, to estimated future production of oil and natural
gas reserves over the economic lives of the reserves. Impairment of proved
properties of approximately $7,075,000, $239,000, and $4,463,000 was
recognized in 2001, 2000, and 1999, respectively.
Upon the sale or retirement of a complete unit of proved property, the cost
and related accumulated depreciation, depletion, impairment, and
amortization are eliminated from the property accounts, and the resulting
gain or loss is recognized.
9
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
ENVIRONMENTAL
The Company is subject to extensive Federal, state, and local environmental
laws and regulations. These laws, which are constantly changing, regulate
the discharge of materials into the environment and may require the Company
to remove or mitigate the environmental effect of the disposal or release
of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefit are expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessment and/or remediation is probable, and the costs can
be reasonably estimated.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method,
which requires that deferred tax assets and liabilities be recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change
in the tax rates is recognized in income in the period that includes the
enactment date. Total deferred tax assets are reduced by a valuation
allowance to an amount that in management's judgment is more likely than
not to be realized as a future tax benefit. The provision for deferred tax
expense or benefit is the change during the period in the deferred tax
assets, net of any valuation allowance, and liabilities.
DEFERRED FINANCING COSTS
Facility fees incurred in conjunction with the establishment of various
debt facilities are deferred and are amortized as additional interest
expense over the maturity period of the related debt (see note 5).
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed in
the same manner as basic earnings per share except that the denominator is
increased to include the number of additional common shares that could have
been outstanding assuming the conversion of Redeemable Preferred Stock (see
note 8) which have a dilutive effect on earnings per share. For the years
ended December 31, 2001 and 1999, the Company excluded all potentially
dilutive securities, as a net loss was incurred during the periods.
CASH EQUIVALENTS AND STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, highly liquid investments
with original maturities of three months or less are considered cash
equivalents. At December 31, 2001, 2000, and 1999, interest bearing cash
equivalents were approximately $1,000,000, $6,300,000, and $10,700,000,
respectively.
CONCENTRATION OF CREDIT RISK
A portion of the Company's oil and natural gas production revenues are
derived from uncollateralized sales to customers in the oil and natural gas
industry. The concentration of credit risk within a single industry
10
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
affects the Company's overall exposure to credit risk as the industry may
be similarly affected by changes in economic and other conditions. During
November 2001, the Company sold natural gas production to ENA Upstream
Company LLC, an indirect subsidiary of Enron Corp. ENA Upstream Company LLC
filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy
Code in January 2002. The Company recorded an allowance associated with
such receivable of approximately $414,000 as of December 31, 2001.
DERIVATIVE INSTRUMENTS
During 2001, the Company entered into a number of commodity option
contracts to reduce exposure to fluctuations in the price of natural gas.
The contracts consisted of cash settled natural gas put options. The
natural gas put options were settled based on the average of the reported
settlement price for the last three scheduled trading days of the NYMEX
Henry Hub Natural Gas Futures Contracts for the applicable settlement
period. The counterparty was required to make a payment to the Company if
the settlement price for any settlement period was below the target price
specified in the put option contract. Premiums associated with entering
into such transactions were approximately $1,452,000 and the Company
recognized gains from increases in the intrinsic value of the derivative
instruments of approximately $3,007,000 as a result of the settlement price
being below the target price specified in the applicable contract. The
Company did not designate the commodity option contracts as cash flow
hedges under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities which the Company adopted January 1, 2001. The Company
had no derivative instruments in 2000 or 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities, as well as the reported amounts of revenues and expenses
and reserve information which affects the depreciation, depletion, and
amortization calculation and the measurement of impairment of the carrying
amount of proved oil and gas properties on total capitalized costs. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts for
comparability with current year presentation.
(3) SALES OF OIL AND NATURAL GAS PROPERTIES
During 2001, 2000, and 1999, the Company sold its interests in certain
domestic proved oil and natural gas properties in unrelated transactions
with third parties. The oil and natural gas property sales had a positive
impact on the Company's liquidity and capital resources and resulted in
substantial gains to the Company.
11
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
The following chronological table lists such sales for the years ended
December 31, 2001, 2000, and 1999, respectively, with the corresponding
gain or loss:
YEAR ENDED DECEMBER 31, 2001 CASH PROCEEDS GAIN/(LOSS)
---------------------------- ------------- -------------
October 2001 $ 10,601,000 $ 6,277,000
Net adjustments to prior year's sales 216,000 180,000
------------- -------------
$ 10,817,000 $ 6,457,000
============= =============
During 2001, the Company sold the interest it owned in East Cameron Block
76 associated with an oil and natural gas discovery that was the product of
exploratory drilling activities during the year ended December 31, 2001.
YEAR ENDED DECEMBER 31, 2000 CASH PROCEEDS GAIN/(LOSS)
---------------------------- ------------- -------------
April 2000 $ 10,000 $ 10,000
June 2000 56,458,000 27,663,000
Net adjustments to prior year's sales -- 61,000
------------- -------------
$ 56,468,000 $ 27,734,000
============= =============
During 2000, the Company sold the interests it owned in South Pelto Block
17, East Cameron Blocks 88 and 89 and High Island Block A-442 associated
with oil and natural gas discoveries made by the Company through the
closing date of the sale.
YEAR ENDED DECEMBER 31, 1999 CASH PROCEEDS GAIN/(LOSS)
---------------------------- ------------- -------------
June 1999 $ 194,000 $ 194,000
November 1999 19,151,000 17,651,000
Net adjustments to prior year's sales 1,429,000 (363,000)
------------- -------------
$ 20,774,000 $ 17,482,000
============= =============
The Company sold two overriding royalty interests in June of 1999 and the
Company sold the interest it owned in West Cameron Block 587 in November of
1999 associated with an oil and natural gas discovery which was the product
of exploratory drilling activities during the year.
The Company has indemnified the purchasers of the oil and natural gas
properties against certain title defects, environmental and property tax
claims, and any other related liens accruing to the oil and natural gas
properties sold through the respective sales' closing dates. Management
does not believe such indemnification obligations will have a material
adverse impact on the Company's financial condition.
12
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
(4) NOTES PAYABLE
The following details the Company's short-term borrowings as of December
31, 2001:
2001
---------------
Note payable bearing interest at 10%, due January 31, 2002, secured by certain interests in $ 4,000,000
oil and natural gas properties (see note 12)
Note payable due in monthly installments through October 2002, including interest at 5.77%, 1,365,000
unsecured
Note payable to a commercial bank, bearing interest at 2.89%, due May 21, 2002, guaranteed by
related parties (see note 12) 2,000,000
---------------
$ 7,365,000
===============
The Company had no short-term borrowings outstanding at December 31, 2000.
(5) LONG-TERM DEBT
The following details the Company's long-term debt as of December 31, 2001
and 2000:
2001 2000
--------------- ---------------
2000 Exploration and Development Facility $ 30,600,000 $ 15,600,000
South Timbalier Block 185 Facility 14,619,000 20,400,000
East Cameron Block 161 Facility 13,846,000 --
East Cameron Block 263 Facility 10,891,000 --
West Cameron Block 431 Facility 10,200,000 --
--------------- ---------------
$ 80,156,000 $ 36,000,000
=============== ===============
2000 EXPLORATION AND DEVELOPMENT FACILITY
During September 2000, the Company completed a financing referred to as the
"Hall-Houston 2000 Exploration and Development Facility" (2000 Facility)
through the private placement of $30,600,000 of 2000 12% Senior Exploration
and Development Facility Notes (2000 Notes). The 2000 Notes were issued by
the Company pursuant to a Note Purchase and Sale Agreement effective
September 1, 2000 which also provided for the Note Purchasers to have
rights to overriding royalty interests in certain oil and natural gas
properties. The 2000 Facility is intended to provide financing for oil and
natural gas exploration and development costs incurred by the Company
within the United States of America.
The 2000 Facility was established with a revolving credit facility feature
(2000 Revolver). The 2000 Revolver is scheduled to terminate on December
31, 2002, at which time the 2000 Revolver converts to a term loan (2000
Term Loan) maturing on December 31, 2004. Through the term of the 2000
Revolver, amounts advanced under the 2000 Notes and subsequently repaid are
available to be redrawn. The obligations under the 2000 Notes represent a
general corporate obligation of the Company, but no financial covenant
compliance or reserve coverage ratio obligations are imposed on the
Company.
13
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
Outstanding advances under the 2000 Notes bear interest at 12% per annum
payable quarterly in arrears beginning September 30, 2000. A facility fee
of 2% of the amount committed by each purchaser was added to each
purchaser's outstanding principal amount of the loan and the facility fee
bears interest at 12% per annum payable quarterly in arrears. A commitment
fee of 1/2 of 1% per annum on the undrawn commitment amount is also payable
quarterly in arrears. As of December 31, 2001, amounts outstanding under
the 2000 Facility totaled $30,600,000 inclusive of the $600,000 facility
fee.
During the term of the 2000 Revolver, amounts advanced under the 2000 Notes
are deposited in a cash collateral account, with such funds being available
only for the payment of domestic oil and natural gas exploration and
development costs incurred by the Company and for the payment of principal
and accrued interest outstanding thereunder. Upon conversion of the 2000
Revolver to the 2000 Term Loan, funds in the collateral account will be
available to the Company only for the payment of principal and accrued
interest outstanding under the 2000 Notes.
Also during the term of the 2000 Revolver, the Company is required to
deposit into the cash collateral account 50% of the net cash flow from
production operations conducted on the Company's domestic oil and natural
gas properties, subject to certain exclusions, and 50% of the net cash
proceeds received by the Company from the sale of an interest in any such
property or the sale of a production payment created out of any such
interest, subject to certain exclusions, until the amount then deposited in
the cash collateral account equals the outstanding balance of principal and
accrued interest. Upon conversion of the 2000 Revolver to the 2000 Term
Loan, the required amount to be deposited into the cash collateral account
increases from 50% to 75%. During the 2000 Term Loan period, funds on
deposit in the cash collateral account will be distributed not less
frequently than quarterly to the holders of the 2000 Notes in payment of
outstanding principal and accrued interest. The 2000 Term Loan period will
continue until the earlier of the 2000 Notes having been paid in full or
December 31, 2004, at which time outstanding advances, facility fees,
accrued interest, and commitment fees under the 2000 Notes will be repaid
and the 2000 Facility will terminate.
The payment and other obligations under the 2000 Notes are collateralized
by the funds held in the cash collateral account. Upon request of those
holders of 2000 Notes representing in excess of 50% of the 2000 Facility
amount, the Company will collateralize the payment and other obligations
under the 2000 Facility with mortgages covering its domestic oil and
natural gas properties representing not less than 85% of the value
associated with the Company's interest in all of its domestic oil and
natural gas properties, subject to certain exclusions. The value of the
Company's domestic oil and natural gas properties is calculated from the
estimated pre-tax future cash flow from all categories of proved, probable,
and possible reserves, discounted at a 10% per annum discount rate,
attributable to the net revenue interest of the Company in those oil and
natural gas properties. To the extent required, the calculation will be
made by the Company as of the end of each calendar quarter and will be
based on the most recent independent engineering report and internally
generated engineering reports, supplements, and updates. The Company has
the right to terminate the 2000 Facility and repay outstanding advances,
facility fees, accrued interest, and commitment fees at any time prior to
its scheduled termination date. In connection with any such termination,
the balance of any funds on deposit in the cash collateral account for the
2000 Facility will be released to the Company and all mortgages and other
security interests will be released.
Generally, holders of the 2000 Notes also acquired rights to receive
overriding royalty interests in the oil and natural gas properties on which
funds from the cash collateral account for the 2000 Facility are spent.
14
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
The right to an overriding royalty interest on any particular property is
fully earned when the overriding royalty interest is created and the
overriding royalty interest survives the repayment of the 2000 Notes.
Overriding royalty interests are earned on a property acquisition with
existing production at the time of acquisition, if the acquisition is paid
for with funds from the cash collateral account for the 2000 Facility.
Overriding royalty interests are earned in respect to other oil and natural
gas properties when funds associated with the 2000 Facility are drawn from
the cash collateral account for the payment of oil and natural gas
exploration or development activities on such properties. The amount of the
overriding royalty interest on each property is 2% proportionately reduced
to the Company's interest in that property, subject to further reduction in
certain instances.
SOUTH TIMBALIER BLOCK 185 FACILITY
During June 2000, the Company completed a financing referred to as the
"Hall-Houston South Timbalier Block 185 Facility" (ST 185 Facility) through
the private placement of $20,400,000 of South Timbalier Block 185 12%
Senior Secured Facility Notes (ST 185 Notes). The ST 185 Notes were issued
by the Company pursuant to a Note Purchase and Sale Agreement (ST 185
Agreement) effective June 1, 2000. Amounts outstanding under the ST 185
Facility are secured by mortgages covering all of the Company's
mortgageable leasehold and other interests and rights in that portion of
South Timbalier Block 185 containing oil and natural gas reserves
associated with the discovery well drilled thereon by the Company in 1999
(ST 185 Dedicated Reserves). The ST 185 Agreement also provides for such
purchasers to be paid an amount equal to the production proceeds that would
be attributable to a 2% overriding royalty interest in the ST 185 Dedicated
Reserves proportionately reduced to the Company's interest in the property
(ST 185 Nominal Overriding Royalty Interest). The proceeds from the ST 185
Facility provided general working capital to the Company.
Within 30 days of the ST 185 Notes being repaid and the ST 185 Facility
being terminated, the holders of the ST 185 Notes will be paid an amount
equal to the value of the ST 185 Nominal Overriding Royalty Interest at
such time. If the repayment of the loan is in connection with the sale of
the Company's interest in South Timbalier Block 185, the value of such ST
185 Nominal Overriding Royalty Interest will be that portion of the
purchase price allocated thereto by the purchaser of such interest. If the
repayment of the loan is other than in connection with the sale of such
interest, the value of such ST 185 Nominal Overriding Royalty Interest will
be determined based upon the future cash flow attributable to the ST 185
Dedicated Reserves discounted at 25% per annum, as determined in good faith
by the Company based upon the most recent estimates of proved and probable
reserves and production rates using production prices determined as of the
close of business on the third business day prior to the date of repayment
based on the forward 12 month New York Mercantile Exchange strip prices of
oil or natural gas, as the case may be, escalated at 3% per annum
thereafter, less estimated transportation and other allowable costs.
The ST 185 Notes mature on December 31, 2003, include a facility fee equal
to 2% of the amount committed by each purchaser and bear interest at 12%
per annum. Interest at 12% and the ST 185 Nominal Overriding Royalty
Interest payment accruing through September 30, 2000 were paid November 14,
2000. Thereafter quarterly payments in an amount equal to 75% of the
Company's net revenue received during the relevant calendar quarter from
the sale of ST 185 Dedicated Reserves plus the amount due in respect of the
ST 185 Nominal Overriding Royalty Interest are payable 45 days after the
end of each calendar quarter. Payments associated with such 75% of net
revenue calculation are applied first to interest and then to the
15
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
principal balance. As of December 31, 2001 amounts outstanding under the ST
185 Facility totaled approximately $14,619,000 inclusive of the $400,000
facility fee.
EAST CAMERON BLOCK 161 FACILITY
During January 2001, the Company completed a financing referred to as the
"Hall-Houston East Cameron Block 161 Facility" (EC 161 Facility) through
the private placement of $15,300,000 of East Cameron Block 161 12% Senior
Secured Facility Notes (EC 161 Notes). The EC 161 Notes were issued by the
Company pursuant to a Note Purchase and Sale Agreement (EC 161 Agreement)
effective January 15, 2001. Amounts outstanding under the EC 161 Facility
are secured by mortgages covering all of the Company's mortgageable
leasehold and other interests and rights in that portion of East Cameron
Block 161 containing oil and natural gas reserves associated with the
discovery wells drilled thereon by the Company (EC 161 Dedicated Reserves).
The EC 161 Agreement also provides for such purchasers to be paid an amount
equal to the production proceeds that would be attributable to a 2%
overriding royalty interest in the EC 161 Dedicated Reserves
proportionately reduced to the Company's interest in the property (EC 161
Nominal Overriding Royalty Interest). The proceeds from the EC 161 Facility
provided general working capital to the Company.
Within 30 days of the EC 161 Notes being repaid and the EC 161 Facility
being terminated, the holders of the EC 161 Notes will be paid an amount
equal to the value of the EC 161 Nominal Overriding Royalty Interest at
such time. If the repayment of the loan is in connection with the sale of
the Company's interest in East Cameron Block 161, the value of such EC 161
Nominal Overriding Royalty Interest will be that portion of the purchase
price allocated thereto by the purchaser of such interest. If the repayment
of the loan is other than in connection with the sale of such interest, the
value of such EC 161 Nominal Overriding Royalty Interest will be determined
based upon the future cash flow attributable to EC 161 Dedicated Reserves
discounted at 25% per annum, as determined in good faith by the Company
based upon the most recent estimates of proved and probable reserves and
production rates and operating and capital costs and using production
prices based on the first day of the calendar quarter in which such full
and final payment occurs based on all the forward monthly prices on the New
York Mercantile Exchange for oil or natural gas, as the case may be,
escalated at 3% per annum thereafter, less estimated transportation and
other allowable costs.
The EC 161 Notes mature on December 31, 2003, include a facility fee equal
to 2% of the amount committed by each purchaser and bear interest at 12%
per annum. Interest at 12% and the EC 161 Nominal Overriding Royalty
Interest payment accruing through March 31, 2001 was paid May 15, 2001.
Thereafter quarterly payments in an amount equal to 75% of the Company's
net revenue received during the relevant calendar quarter from the sale of
EC 161 Dedicated Reserves plus the amount due in respect of the EC 161
Nominal Overriding Royalty Interest are payable 45 days after the end of
each calendar quarter. Payments associated with such 75% of net revenue
calculation are applied first to interest and then to the principal
balance. As of December 31, 2001, amounts outstanding under the EC 161
Facility totaled approximately $13,846,000 inclusive of the $300,000
facility fee.
EAST CAMERON BLOCK 263 FACILITY
During April 2001, the Company completed a financing referred to as the
"Hall-Houston East Cameron Block 263 Facility" (EC 263 Facility) through
the private placement of $11,220,000 of East Cameron Block 263 12% Senior
Secured Facility Notes (EC 263 Notes). The EC 263 Notes were issued by the
16
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
Company pursuant to a Note Purchase and Sale Agreement (EC 263 Agreement)
effective March 1, 2001. Amounts outstanding under the EC 263 Facility are
secured by mortgages covering all of the Company's mortgageable leasehold
and other interests and rights in that portion of East Cameron Block 263
containing oil and natural gas reserves associated with the discovery wells
drilled thereon by the Company (EC 263 Dedicated Reserves). The EC 263
Agreement also provides for such purchasers to be paid an amount equal to
the production proceeds that would be attributable to a 2% overriding
royalty interest in the EC 263 Dedicated Reserves proportionately reduced
to the Company's interest in the property (EC 263 Nominal Overriding
Royalty Interest). The proceeds from the EC 263 Facility provided general
working capital to the Company.
Within 30 days of the EC 263 Notes being repaid and the EC 263 Facility
being terminated, the holders of the EC 263 Notes will be paid an amount
equal to the value of the EC 263 Nominal Overriding Royalty Interest at
such time. If the repayment of the loan is in connection with the sale of
the Company's interest in East Cameron Block 263, the value of such EC 263
Nominal Overriding Royalty Interest will be that portion of the purchase
price allocated thereto by the purchaser of such interest. If the repayment
of the loan is other than in connection with the sale of such interest, the
value of such EC 263 Nominal Overriding Royalty Interest will be determined
based upon the future cash flow attributable to the EC 263 Dedicated
Reserves discounted at 25% per annum, as determined in good faith by the
Company based upon the most recent estimates of proved and probable
reserves and production rates and operating and capital costs and using
production prices based on the first day of the calendar quarter in which
such full and final payment occurs based on all the forward monthly prices
on the New York Mercantile Exchange for oil or natural gas, as the case may
be, escalated at 3% per annum thereafter, less estimated transportation and
other allowable costs.
The EC 263 Notes mature on March 31, 2004, include a facility fee equal to
2% of the amount committed by each purchaser and bear interest at 12% per
annum. Interest at 12% and the EC 263 Nominal Overriding Royalty Interest
payment accruing through April 30, 2001 was paid June 15, 2001. Thereafter
quarterly payments in an amount equal to 75% of the Company's net revenue
received during the relevant calendar quarter from the sale of EC 263
Dedicated Reserves plus the amount due in respect of the EC 263 Nominal
Overriding Royalty Interest are payable 45 days after the end of each
calendar quarter. Payments associated with such 75% of net revenue
calculation are applied first to interest and then to the principal balance
(the payment for the calendar quarter ending June 30, 2001 related to net
revenues received in May and June of 2001). As of December 31, 2001,
amounts outstanding under the EC 263 Facility totaled approximately
$10,891,000 inclusive of the $220,000 facility fee.
WEST CAMERON BLOCK 431 FACILITY
During September 2001, the Company completed a financing referred to as the
"Hall-Houston West Cameron Block 431 Facility" (WC 431 Facility) through
the private placement of $10,200,000 of West Cameron Block 431 12% Senior
Secured Facility Notes (WC 431 Notes). The WC 431 Notes were issued by the
Company pursuant to a Note Purchase and Sale Agreement (WC 431 Agreement)
effective July 16, 2001. Amounts outstanding under the WC 431 Facility are
secured by mortgages covering all of the Company's mortgageable leasehold
and other interests and rights in that portion of West Cameron Block 431
containing oil and natural gas reserves associated with the discovery well
drilled thereon by the Company (WC 431 Dedicated Reserves). The WC 431
Agreement also provides for such purchasers to be paid an amount equal to
the production proceeds that would be attributable to a 2% overriding
royalty
17
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
interest in the WC 431 Dedicated Reserves proportionately reduced to the
Company's interest in the property (WC 431 Nominal Overriding Royalty
Interest). The proceeds from the WC 431 Facility provided general working
capital to the Company.
Within 30 days of the WC 431 Notes being repaid and the WC 431 Facility
being terminated, the holders of the WC 431 Notes will be paid an amount
equal to the value of the WC 431 Nominal Overriding Royalty Interest at
such time. If the repayment of the loan is in connection with the sale of
the Company's interest in West Cameron Block 431, the value of such WC 431
Nominal Overriding Royalty Interest will be that portion of the purchase
price allocated thereto by the purchaser of such interest. If the repayment
of the loan is other than in connection with the sale of such interest, the
value of such WC 431 Nominal Overriding Royalty Interest will be determined
based upon the future cash flow attributable to the WC 431 Dedicated
Reserves discounted at 25% per annum, as determined in good faith by the
Company based upon the most recent estimates of proved and probable
reserves and production rates and capital costs and using production prices
on the first day of the calendar quarter in which the full and final
payment occurs based on all of the forward monthly prices on the New York
Mercantile Exchange for oil or natural gas, as the case may be, escalated
at 3% per annum thereafter, less estimated transportation and other
allowable costs.
The WC 431 Notes mature on March 31, 2004, include a facility fee equal to
2% of the amount committed by each purchaser and bear interest at 12% per
annum payable in quarterly installments due and payable 45 days after the
end of each calendar quarter. The first three such quarterly installments
shall be in the aggregate amount of accrued and unpaid interest on the loan
balance through the end of the relevant calendar quarter. Thereafter
quarterly payments in an amount equal to 75% of the Company's net revenue
received during the relevant calendar quarter from the sale of WC 431
Dedicated Reserves plus the amount due in respect of the WC 431 Nominal
Overriding Royalty Interest are payable 45 days after the end of each
calendar quarter. Payments associated with such 75% of net revenue
calculation are applied first to interest and then to the principal. As of
December 31, 2001, amounts outstanding under the WC 431 Facility totaled
$10,200,000 inclusive of the $200,000 facility fee.
1996 EXPLORATION AND DEVELOPMENT FACILITY
On November 25, 1996, the Company completed a financing referred to as the
"Hall-Houston 1996 Exploration and Development Facility" (1996 Facility)
through the private placement of $35,000,000 of 1996 12% Senior Secured
Exploration and Development Facility Notes (1996 Notes), $1,500,000 of
which was subscribed for by the Hall-Houston Employee Royalty Trust (see
note 11). The 1996 Notes were issued by the Company pursuant to a Note
Purchase and Sale Agreement (1996 Agreement) dated November 1, 1996 which
also provided for such purchasers to have rights to overriding royalty
interests in certain oil and natural gas properties. The 1996 Facility
provided financing for oil and natural gas exploration and development
costs incurred by the Company within the domestic United States of America.
The 1996 Facility was established with a revolving credit facility feature
(1996 Revolver). Under the terms of the 1996 Agreement, in December 1998,
the Company received approval to extend the 1996 Revolver for a one-year
period resulting in a scheduled commitment termination date of December 31,
1999 at which time the 1996 Revolver converted to a term loan (1996 Term
Loan) maturing on December 31, 2001. Through the term of the 1996 Revolver,
amounts advanced under the 1996 Notes and subsequently repaid were
available to be redrawn. The obligations under the 1996 Notes represent a
general corporate
18
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
obligation of the Company, but no financial covenant compliance or reserve
coverage ratio obligations are imposed on the Company. On June 8, 2000, the
Company paid in full amounts outstanding under the 1996 Notes and the 1996
Facility terminated. In connection with such termination, the balance of
any funds on deposit in the cash collateral account for the 1996 Facility
were released to the Company and all mortgages and other security interests
were released.
Outstanding advances under the 1996 Notes bore interest at 12% per annum
payable quarterly in arrears beginning January 30, 1997. A commitment fee
of 1/2 of 1% per annum on the undrawn commitment amount was also payable
quarterly in arrears. During the term of the 1996 Revolver, amounts
advanced under the 1996 Notes were deposited in a cash collateral account
with such funds being available only for the payment of domestic oil and
natural gas exploration and development costs incurred by the Company and
for the payment of principal and accrued interest outstanding thereunder.
Holders of the 1996 Notes also acquired rights to receive overriding
royalty interests in the oil and natural gas properties on which funds from
the cash collateral account for the 1996 Facility were spent. The right to
an overriding royalty interest on any particular property was fully earned
when the overriding royalty interest was created and the overriding royalty
interest survives the repayment of the 1996 Notes. The amount of the
overriding royalty interest on each property was 4%, proportionately
reduced to the Company's interest in that property.
1999 ACQUISITION AND DEVELOPMENT FACILITY
On September 15, 1999, the Company completed a financing referred to as the
"Hall-Houston 1999 Acquisition and Development Facility" (1999 Facility)
through the private placement of $15,000,000 of 1999 12% Senior Secured
East Cameron Blocks 88 and 89 Acquisition and Development Facility Notes
(1999 Notes). The 1999 Notes were issued by the Company pursuant to a Note
Purchase and Sale Agreement (1999 Agreement) dated September 1, 1999.
Quarterly payments in an amount equal to 75% of the Company's net revenue
from East Cameron Blocks 88 and 89 were payable 45 days after the end of
each calendar quarter and payments were applied first to interest and then
to the principal balance.
The 1999 Agreement also provided for such purchasers to have rights to a 3%
overriding royalty interest in East Cameron Blocks 88 and 89. Amounts
advanced under the 1999 Notes were deposited in a cash collateral account
with such funds being available only for the acquisition of an additional
interest in the East Cameron Blocks 88 and 89 and for further development
of the East Cameron 88 and 89 Blocks. On June 8, 2000, the Company paid in
full amounts outstanding under the 1999 Notes and the 1999 Facility
terminated.
(6) PRODUCTION PAYMENTS
During 2001, 2000, and 1999, the Company was subject to volumetric
production payment obligations created in favor of KCS Energy Services,
Inc. (KCS Services) and KCS Energy Marketing, Inc. These obligations were
created and subsequently supplemented between September 1994 and August
2000 in exchange for advance payments to the Company aggregating
approximately $125,628,000. Of this amount, approximately $12,219,000 was
received in 1994, approximately $20,181,000 was received in 1995,
approximately $6,562,000 was received in 1996, approximately $17,370,000
was received in 1997, approximately $45,821,000 was received in 1998,
approximately $17,765,000 was received in 1999 and the balance of
$5,710,000 was received in 2000. These proceeds were received in exchange
for the
19
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
obligation to deliver a specified volume of natural gas production that, in
the aggregate for the production payments, totaled 73,136,351 million
British thermal units (MMBtu).
Under the terms of these production payments, the aggregate delivery
obligation from the committed oil and natural gas properties commenced in
December 1994, continues through December 2002 and varies from month to
month during that period, with recourse for the delivery obligation
associated with each production payment being limited solely to the
Company's interests in the oil and natural gas properties committed to that
production payment (a number of oil and natural gas properties have
depleted subsequent to being committed to the production payments). In
August 1998, the Company sold a number of oil and natural gas properties
committed to the production payment obligation. The buyer of the oil and
natural gas properties assumed delivery obligations of 29,606,288 MMBtu,
and the Company was released from these future delivery obligations.
Natural gas volumes are to be delivered from the Company's interest in the
oil and natural gas properties committed to the production payment (at
December 31, 2001, these included interests in East Cameron Block 160, High
Island Block A-327, South Pelto Block 18, Vermilion Block 320 and West
Cameron Block 149). The Company is scheduled to delivery 2,474,741 MMBtu
during 2002 in fulfillment of the Company's remaining future delivery
obligations under the volumetric production payments. Deferred revenue of
approximately $4,055,000 and $12,303,000 at December 31, 2001 and 2000,
respectively relates to the production payments and such amounts are
amortized to natural gas revenues as production volumes are delivered to
KCS Services.
During January 2000, KCS Services filed for bankruptcy protection under
Chapter 11 of the Federal Bankruptcy Code. During February 2001, KCS
Services emerged from bankruptcy. Management of the Company does not
believe that this will have any adverse impact on the Company's operations.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
For purposes of estimating the fair value of financial instruments, the
Company has determined that the carrying amounts recorded on the balance
sheet approximate the fair value for cash and cash equivalents, accounts
receivable and current liabilities. In making this determination, the
Company considered the short-term maturity of those assets and liabilities.
The following table details the carrying value and approximate fair value
of the Company's long-term debt at December 31, 2001 and 2000.
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------------------- -------------------------------------
CARRYING APPROXIMATE FAIR CARRYING APPROXIMATE FAIR
VALUE VALUE VALUE VALUE
--------------- ---------------- --------------- ----------------
Long-term debt (see note 5) $ 80,156,000 $ 80,156,000 $ 36,000,000 $ 40,203,000
The fair value of the fixed-rate long-term debt as of December 31, 2001 was
estimated by assessing the consideration received by holders of such
long-term debt in the Energy Partners, Ltd. merger and acquisition of the
Company (see note 17) and the consideration received by holders of such
long-term debt who did not elect to participate in the merger and
acquisition. The fair value of the fixed-rate long-term debt as of December
31, 2000 was estimated by discounting the principal and interest payments
at rates available for debt of similar terms and maturity.
20
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
(8) MANDATORILY REDEEMABLE PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Redeemable
Preferred Stock with a $0.01 par value per share and a $100 liquidation
value per share. Issued and outstanding shares were 180,038 at December 31,
2001 and 2000, respectively. The Redeemable Preferred Stock has the
following features: (i) a dividend rate of $10 per share per annum, payable
quarterly; (ii) dividends could, at the Company's option, be paid through
September 1998 in shares of Redeemable Preferred Stock at a price of $100
per share; and (iii) dividends in arrears accrue at a rate of $12.50 per
share per annum until such dividends in arrears are paid. The Company has
been in arrears in payment of cash dividends on its Redeemable Preferred
Stock since July 30, 2001 and as of December 31, 2001 accrued dividends in
arrears total approximately $1,688,000 which are included in the
accompanying 2001 consolidated balance sheet in accounts payable and
accrued liabilities.
The holders of the Redeemable Preferred Stock are entitled to elect three
directors to the board of directors. The board of directors is restricted
to nine members with the balance of up to six members to be elected by the
holders of Series A Common Stock. Each share of Redeemable Preferred Stock
is currently convertible into 15.87 shares of the Company's Series A Common
Stock.
The Company currently can, at its option, redeem on a non pro-rata basis
the Redeemable Preferred Stock at a redemption price of $100 per share plus
accrued and unpaid dividends. Optional redemption offers to any management
shareholder (defined as Gary L. Hall, Wayne P. Hall or Bruce R. Sidner) may
only be made on a pro-rata basis to all holders. At December 31, 2001 and
2000, the Redeemable Preferred Stock was subject to mandatory redemption in
three equal installments on August 15, 2001, 2002, and 2003 with a
redemption price of $100 per share plus accrued and unpaid dividends. The
Company was statutorily unable to redeem one-third of the outstanding
Redeemable Preferred Stock on August 15, 2001 as provided by its terms.
(9) STOCK WARRANTS
Warrants to purchase 1,577,521 shares of Series B Nonvoting Common Stock
expired unexercised on August 15, 2001. Such warrants had been outstanding
with a predecessor of Chase Bank and had been issued in connection with a
prior lending transaction. The warrants had an initial exercise price of
$5.00 per share, subject to adjustment, and were exercisable during the
ten-year period following their issuance.
(10) EARNINGS PER SHARE
Presented below is a reconciliation of income and shares for purposes of
computing basic and diluted earnings per share.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2001 2000 1999
------------------------- ------------------------- -------------------------
LOSS SHARES INCOME SHARES LOSS SHARES
------------ --------- ----------- --------- ------------ ---------
Income (loss) per common share - basic $(17,362,000) 3,175,489 $20,084,000 3,175,489 $(18,426,000) 3,175,489
Convertible preferred stock -- -- 1,913,000 2,857,203 -- --
Income (loss) per common share - diluted $(17,362,000) 3,175,489 $21,997,000 6,032,692 $(18,426,000) 3,175,489
21
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
For all periods presented, the stock warrants were considered to be
anti-dilutive in computing diluted earnings per share.
(11) HALL-HOUSTON EMPLOYEE ROYALTY TRUST
In 1988, the Company established a grantor trust (Employee Royalty Trust)
for the purpose of providing deferred compensation for management and
employees and subsequently transferred to the Employee Royalty Trust
certain overriding royalty interests in unproved oil and natural gas
leases. The Employee Royalty Trust is consolidated with the Company for
financial statement and income tax purposes.
During 2000, the Employee Royalty Trust sold its overriding royalty
interests in certain oil and natural gas properties to an unaffiliated
purchaser for approximately $136,000 and increased its deferred
compensation obligation by the same amount. The gains on the sale of
Employee Royalty Trust overriding royalty interests and the related
employee compensation in an equal amount are eliminated for financial
reporting purposes. In addition, during 2001 and 2000 the Employee Royalty
Trust received distributions of approximately $48,000 and $50,000,
respectively, from a trust associated with the Company's 1996 Facility (see
note 5) and increased its deferred compensation obligation by the same
amount. The distributions and the related employee compensation in an equal
amount are eliminated for financial reporting purposes. During 2000, the
Employee Royalty Trust distributed approximately $1,036,000 as compensation
to management and employees in the form of cash bonuses.
During 1996, the Employee Royalty Trust participated in the Company's 1996
Facility (see note 5) by committing to advance funds, with such borrowings
to be evidenced by a $1,500,000 1996 Note issued by the Company. The
Company repaid all amounts outstanding to the Employee Royalty Trust under
such borrowing and interest of approximately $79,000 during 2000. In
addition, during 2001 and 2000 the Employee Royalty Trust made short-term
loans to the Company for $5,800,000, which bear interest at prime plus 3%
per annum. On January 15, 2002, the Employee Royalty Trust sold the
promissory notes totaling $5,800,000, including the right to payment of all
indebtedness (both principal and interest), and overriding royalty
interests it held to Energy Partners, Ltd. (see note 17). The Company paid
interest of approximately $159,000 associated with such borrowings during
2000. The note receivable of the Employee Royalty Trust and the note
payable of the Company to the Employee Royalty Trust have been eliminated
for financial reporting purposes. As of December 31, 2001 and 2000, the
Employee Royalty Trust held cash of approximately $267,000 and $56,000,
respectively. In addition, as of December 31, 2000, the Employee Royalty
Trust had investments of approximately $19,000 available for distribution.
(12) RELATED PARTY TRANSACTIONS
During 2001, an entity affiliated with a director of the Company made a
short-term loan to the Company of $5,000,000 (see note 4) of which
$4,000,000 had been advanced and was outstanding as of December 31, 2001.
The Note is due on January 31, 2002, bears interest at 10% per annum and is
secured by the Company's interest in certain oil and natural gas
properties.
During 2001, Wayne P. Hall and Bruce R. Sidner (each an officer, director,
and shareholder in the Company) and an entity affiliated with Gary L. Hall
(an officer, director, and controlling shareholder in the Company)
guaranteed a loan made to the Company by a commercial bank (see note 4),
which guarantee
22
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
was collateralized by assets pledged by two such persons. Such parties
received no consideration for guaranteeing the Company's loan.
During 2001, an entity affiliated with a director of the Company
participated in the Company's WC 431 Facility (see note 5) by advancing
$4,000,000 with such borrowings being evidenced by a $4,080,000 WC 431 Note
inclusive of the $80,000 facility fee. As of December 31, 2001, amounts
outstanding thereunder totaled $4,080,000 inclusive of the facility fee.
Terms of such WC 431 Note were identical to those of other participants in
the Company's WC 431 Facility.
During 2001, an entity affiliated with a director of the Company
participated in the Company's EC 263 Facility (see note 5) by advancing
$1,920,000 with such borrowings being evidenced by a $1,958,400 EC 263 Note
inclusive of the $38,400 facility fee. As of December 31, 2001, amounts
outstanding thereunder totaled approximately $1,901,000 inclusive of the
facility fee. Terms of such EC 263 Note were identical to those of other
participants in the Company's EC 263 Facility.
During 2001, various officers and directors and entities affiliated with
them participated in the Company's EC 161 Facility (see note 5) by
advancing $8,000,000 with such borrowings being evidenced by $8,160,000 of
EC 161 Notes inclusive of the $160,000 facility fee. As of December 31,
2001, amounts outstanding thereunder totaled approximately $7,384,000
inclusive of the facility fee. Terms of such EC 161 Notes were identical to
those of other participants in the Company's EC 161 Facility.
During 2000, various officers and directors and entities affiliated with
them participated in the Company's 2000 Facility (see note 5) by committing
to advance $10,500,000 with such borrowings being evidenced by $10,710,000
of 2000 Notes inclusive of the $210,000 facility fee. As of December 31,
2001, amounts outstanding thereunder totaled $10,710,000 inclusive of the
facility fee. Terms of such 2000 Notes were identical to those of other
participants in the Company's 2000 Facility.
During 2000, various officers and directors and entities affiliated with
them participated in the Company's ST 185 Facility (see note 5) by
advancing $9,100,000 with such borrowings being evidenced by $9,282,000 of
ST 185 Notes inclusive of the $182,000 facility fee. As of December 31,
2001 amounts outstanding thereunder totaled approximately $6,651,000
inclusive of the facility fee. Terms of such ST 185 Notes were identical to
those of other participants in the Company's ST 185 Facility.
During 1999, a director, entities affiliated with an officer and an entity
affiliated with a director participated in the Company's 1999 Facility (see
note 5) by advancing $6,350,000 with such borrowings being evidenced by
$6,350,000 of 1999 Notes (which amount was repaid in full in 2000, with no
amounts remaining outstanding as of December 31, 2000). The terms of such
1999 Notes were identical to those of other participants in the Company's
1999 Facility.
During 1999, an entity consisting primarily of various officers, directors,
and affiliated entities purchased for approximately $2,306,000 overriding
royalty interests in a number of oil and natural gas properties from the
Employee Royalty Trust (see note 11). The entity also purchased for
approximately $194,000 overriding royalty interests in two oil and natural
gas properties from the Company.
During 1996, various officers, directors, and affiliated entities (other
than the Employee Royalty Trust, which is discussed in note 11)
participated in the Company's 1996 Facility (see note 5) by committing to
advance $16,800,000 (which was subsequently increased to approximately
$16,852,000 in 1998), with
23
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
such borrowings being evidenced by $16,852,000 of 1996 Notes (under which
$16,849,000 had been advanced and was subsequently repaid in full in 2000,
with no amounts remaining outstanding as of December 31, 2000). The terms
of such 1996 Notes were identical to those of other participants in the
Company's 1996 Facility.
Gary L. Hall (an officer, director, and controlling shareholder in the
Company), certain of his relatives and affiliated entities, Bruce R.
Sidner, Wayne P. Hall, and John H. Peper (each an officer, director, and
shareholder in the Company) and entities affiliated with W.P. Dillard (a
director and shareholder of the Company) have participated as working
interest owners in various oil and natural gas properties in which the
Company also owned and, in certain instances presently owns, an interest.
Amounts due from such persons were approximately $381,000 and $358,000 as
of December 31, 2001 and 2000, respectively.
The Company has entered into master service agreements, master time charter
agreements and production management agreements with certain holders of the
Company's securities. In particular, the Company has such an agreement with
a entity affiliated with a member of the Company's board of directors.
Under these agreements, the relevant holders provide goods and services on
a nonexclusive basis as requested by the Company in its drilling and
production operations. In certain cases, amounts paid by the Company under
these agreements are material to the Company or relevant supplier. Amounts
outstanding under such agreements were approximately $3,108,000 and
$471,000 as of December 31, 2001 and 2000, respectively.
(13) INCOME TAXES
Components of income tax benefit for the years ended December 31, 2001,
2000, and 1999 are as follows:
2001 2000 1999
------------- ------------- -------------
Current expense (benefit) $ (879,000) $ 1,049,000 $ (122,000)
Deferred expense (benefit) (9,656,000) (2,791,000) --
------------- ------------- -------------
Total $ (10,535,000) $ (1,742,000) $ (122,000)
============= ============= =============
Reconciliations of the United States federal statutory rate to the
Company's effective rate of income (loss) are as follows:
PERCENTAGE OF PRETAX EARNINGS
--------------------------------------
2001 2000 1999
-------- -------- --------
Federal statutory rate (35.00)% 35.00% (35.00)%
Change in valuation allowance for deferred tax assets (3.52) (43.55) 34.25
Other (2.38) (0.05) --
-------- -------- --------
Effective tax rate (40.90)% (8.60)% (0.75)%
======== ======== ========
At December 31, 2001 the Company had entered into a merger agreement (see
note 17). The Company and the purchaser will make an election under IRC
Section 338 to treat the sale of the Company as a sale of the Company's
assets at which time the Company will recognize a gain and will use a
majority of its net
24
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
operating losses. Therefore, the Company recorded a benefit for a portion
of its deferred tax assets as of December 31, 2001. The Company has
determined that it is more likely than not that a portion of the deferred
tax assets will not be realized and has recorded a valuation allowance for
those amounts. During 2001 and 2000, the valuation allowance decreased by
approximately $907,000 and $8,820,000, respectively.
The components of net deferred tax assets at December 31, 2001 and 2000 are
as follows:
2001 2000
------------- -------------
Net operating loss carryforwards $ 7,964,000 $ --
Oil and natural gas property differences 4,744,000 3,428,000
Compensation accrual 2,304,000 1,979,000
Alternative minimum tax credits 1,935,000 2,791,000
------------- -------------
16,947,000 8,198,000
Valuation allowance on deferred tax assets (4,500,000) (5,407,000)
------------- -------------
Net deferred tax assets $ 12,447,000 $ 2,791,000
============= =============
Temporary differences between the financial and tax basis of the Company's
deferred tax assets and liabilities are principally related to differences
in the financial statement amounts and tax basis amounts for oil and
natural gas properties due to differences in determining depletion,
depreciation, and amortization, intangible drilling costs, abandonments,
and lease impairments. The tax effect of alternative minimum tax credit
carryforwards available to the Company for tax purposes have been measured
as deferred tax assets.
At December 31, 2001, the Company has approximately $22,755,000 in net
operating loss carryforwards, which expire beginning in the year 2012.
(14) LEASES
The Company leases office space under a noncancelable operating lease which
expires on April 30, 2002. The Company amended such lease agreement in
2002. Future minimum annual lease payments are as follows under such
amended agreement:
RENTAL PAYMENTS
---------------
2002 $ 611,000
2003 703,000
2004 715,000
2005 727,000
2006 738,000
Thereafter 1,767,000
---------------
$ 5,261,000
===============
25
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
The Company incurred rent expense of approximately $423,000, $391,000, and
$396,000 during the years ended December 31, 2001, 2000, and 1999,
respectively.
(15) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan for the benefit of its employees. The
Company's contribution to the 401(k) plan is discretionary. The Company did
not elect to make a contribution for 2001 and the Company contribution
committed for 2000 amounted to approximately $352,000. During 2001, the
Company contributed approximately $352,000 in cash in satisfaction of the
Company's 2000 401(k) contribution commitment.
(16) CONTINGENCIES
The Company has been named as a defendant in various lawsuits incidental to
the nature of its operations. There are also certain commitments and
uncertainties related to its normal operations or incidental to the
property sales previously made by the Company. Management believes that
there are no commitments, uncertainties or contingent liabilities that will
have a material adverse effect on the consolidated financial position or
results of operations of the Company, although it is possible that new
information or future developments could require the Company to reassess
its potential exposure related to these matters.
(17) AGREEMENT AND PLAN OF MERGER
On January 15, 2002, the Company was acquired by Energy Partners, Ltd.
(EPL) and became a wholly owned subsidiary of EPL.
Holders of the Company's long-term debt tendered approximately $76,742,000
of such debt in exchange for a combination of approximately $38,371,000 in
newly-issued EPL 11% Senior Subordinated Notes and approximately 383,707
shares of newly-issued EPL Exchangeable Convertible Preferred Stock which
has a liquidation preference of $100 per share. The balance of the
Company's non-tendered debt of approximately $3,414,000 was retired for
cash. Holders of the Company's debt also received cash in payment of
accrued interest of approximately $2,841,000. Holders of classes of debt
with nominal overriding royalty interests (see note 5) also received
approximately $984,000 in accordance with the terms of the applicable
credit facility.
Common shareholders exchanged their stock for $150,000 in cash and warrants
to purchase 1,000,000 shares of EPL common stock.
Redeemable Preferred shareholders exchanged their stock for $225,000 in
cash and warrants to purchase 1,500,000 shares EPL common stock. Redeemable
Preferred shareholders also received the right to 75% of contingent
consideration, the value of which will not exceed $50,000,000, related, in
general, to the before tax present value of future proved reserve additions
from exploratory prospect acreage held by the Company on January 15, 2002.
The Redeemable Preferred shareholders relinquished their rights to
dividends in arrears and redemption obligations beyond the cash and
securities received as merger consideration.
Contemporaneously with the acquisition, the Company issued 125,000 shares
of 2002 Preferred Stock in exchange for the working interests held by
certain entities affiliated with Gary L. Hall (an officer, director, and
controlling shareholder in the Company), and Bruce R. Sidner, Wayne P. Hall
and John H. Peper (each
26
an officer, director, and shareholder in the Company). The 2002 Preferred
shareholders then exchanged their stock for warrants to purchase 500,000
shares of EPL common stock. The 2002 Preferred Stock shareholders also
received the right to 25% of contingent consideration, the value of which
will not exceed $50,000,000, related, in general, to the before tax present
value of future proved reserve additions from exploratory prospect acreage
held by the Company on January 15, 2002.
The Employee Royalty Trust exchanged promissory notes totaling $5,800,000,
including the right to payment of all indebtedness (both principal and
interest), and overriding royalty interests held by it for $250,000 in cash
and warrants to purchase 1,000,000 shares of EPL common stock.
The trusts associated with the Company's 2000 Facility and 1996 Facility
received approximately $1,100,000 in cash and 574,931 shares of EPL common
stock in exchange for the overriding royalty interests held by such trusts.
(18) SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES (UNAUDITED)
Users of this information should be aware that the process of estimating
quantities of proved and proved developed natural gas and crude oil
reserves is very complex, requiring significant subjective decisions in the
evaluation of all available geological, engineering, and economic data for
each reservoir. The data for a given reservoir may also change
substantially over time as a result of numerous factors including, but not
limited to, additional development activity, evolving production history,
and continual reassessment of the viability of production under varying
economic conditions. Consequently, material revisions to existing reserve
estimates occur from time to time. Although every reasonable effort is made
to ensure that reserve estimates reported represent the most accurate
assessments possible, the significance of the subjective decisions required
and variances in available data for various reservoirs make these estimates
generally less precise than other estimates presented in connection with
financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that 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 reserves are proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
27
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
The following table sets forth the Company's net proved reserves,
including the changes therein, and proved developed reserves:
CRUDE
OIL/CONDENSATE
NATURAL GAS (Mmcf) (BARRELS)
------------------ --------------
Proved developed and undeveloped reserves:
December 31, 1998 11,523 120,185
Purchases of reserves in place 16,169 329,186
Sale of reserves (29,918) --
Extension, discoveries, and other additions 61,791 703,297
Production (1,415) (58,509)
---------- ----------
December 31, 1999 58,150 1,094,159
Purchases of reserves in place -- --
Sale of reserves (39,925) (438,067)
Extension, discoveries, and other additions 26,598 (175,639)
Production (3,825) (85,984)
---------- ----------
December 31, 2000 40,998 394,469
Purchases of reserves in place -- --
Sale of reserves (5,273) (302,236)
Extension, discoveries, and other additions 25,319 238,028
Production (6,170) (33,476)
---------- ----------
December 31, 2001 54,874 296,785
========== ==========
Proved developed reserves:
December 31, 1999 40,846 644,950
December 31, 2000 23,268 351,590
December 31, 2001 38,082 296,785
Capitalized costs for oil and natural gas producing activities consist of
the following:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Proved properties $ 143,744,000 $ 81,086,000 $ 77,115,000
Unproved properties 5,647,000 5,289,000 6,390,000
Accumulated depreciation, depletion,
impairment, and amortization (64,762,000) (41,242,000) (39,282,000)
------------- ------------- -------------
Net capitalized costs $ 84,629,000 $ 45,133,000 $ 44,223,000
============= ============= =============
28
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
Costs incurred for oil and natural gas property acquisition, exploration,
and development activities for the years ended December 31, 2001, 2000,
and 1999 are as follows:
2001 2000 1999
----------- ----------- -----------
Acquisition $ 3,146,000 $ 1,826,000 $ 9,174,000
Exploration 53,606,000 17,189,000 29,143,000
Development 23,289,000 17,209,000 15,693,000
----------- ----------- -----------
Total costs incurred $80,041,000 $36,224,000 $54,010,000
=========== =========== ===========
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
RESERVES
The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 (SFAS
No. 69), Disclosures about Oil and Natural gas Producing Activities. It
may be useful for certain comparative purposes, but should not be solely
relied upon in evaluating the Company or its performance. Further,
information contained in the following table should not be considered as
representative of realistic assessments of future cash flows, nor should
the Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company's oil and natural gas
properties.
The Company believes that the following factors should be taken into
account in reviewing the following information: (1) future costs and
selling prices will probably differ from those required to be used in
these calculations; (2) due to future market conditions and governmental
regulations, actual rates of production achieved in future years may vary
significantly from the rate of production assumed in the calculations;
(3) selection of a 10% discount rate is arbitrary and may not be
reasonable as a measure of the relative risk inherent in realizing future
net oil and natural gas revenues; and (4) future net revenues may be
subject to different rates of income taxation.
Under the standardized measure, future cash inflows were estimated by
applying period end oil and natural gas prices adjusted for fixed and
determinable escalations to the estimated future production of period-end
proved reserves. Future cash inflows were reduced by estimated future
development, abandonment and production costs based on period-end costs
in order to arrive at net cash flow before tax. Future income tax expense
has been computed by applying period-end statutory tax rates to aggregate
future net cash flows, reduced by the tax basis of the properties
involved and tax carryforwards. Use of a 10% discount rate is required by
SFAS 69.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide
range of factors, including estimates of probable as well as proved
reserves and varying price and cost assumptions considered more
representative of a range of possible economic conditions that may be
anticipated.
29
HALL-HOUSTON OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statement
December 31, 2001, 2000, and 1999
The standardized measure of discounted future net cash flows relating to
proved oil and natural gas reserves is as follows:
2001 2000 1999
------------- ------------- -------------
Future cash inflows $ 148,609,000 $ 401,737,000 $ 156,169,000
Future production costs (21,312,000) (18,394,000) (25,739,000)
Future development and abandonment costs (27,852,000) (28,399,000) (30,981,000)
Future income tax expense -- (106,151,000) (9,920,000)
------------- ------------- -------------
Future net cash flows after income taxes 99,445,000 248,793,000 89,529,000
10% annual discount for estimated timing of
cash flows (20,161,000) (61,293,000) (18,056,000)
------------- ------------- -------------
Standardized measure of discounted future net
cash flows $ 79,284,000 $ 187,500,000 $ 71,473,000
============= ============= =============
A summary of the changes in the standardized measure of discounted future
net cash flows applicable to proved oil and natural gas reserves for the
years ended December 31, 2001, 2000, and 1999 are as follows:
2001 2000 1999
------------- ------------- -------------
Beginning of the period $ 187,500,000 $ 71,473,000 $ 4,830,000
Sales, net of production costs (14,386,000) (8,333,000) 2,563,000
Purchases of reserves in place -- -- 18,633,000
Net changes in prices and production costs (202,112,000) 330,809,000 (15,660,000)
Extensions, discoveries, and improved
recovery, net of future production costs 32,469,000 159,641,000 93,243,000
Change in estimated future development costs (1,321,000) (11,076,000) 121,000
Development costs incurred 23,289,000 17,209,000 15,693,000
Revision in quantity estimates 11,904,000 4,459,000 (4,689,000)
Accretion of discount 26,065,000 7,167,000 483,000
Net change in income taxes 73,147,000 (72,950,000) (197,000)
Sales of reserves in place (16,006,000) (62,521,000) (51,482,000)
Changes in production rates and other (41,265,000) (248,378,000) 7,935,000
------------- ------------- -------------
End of period $ 79,284,000 $ 187,500,000 $ 71,473,000
============= ============= =============
The computation of the standardized measure of discounted future net cash
flows relating to proved oil and natural gas reserves at December 31,
2001 was based on period end prices which approximated $2.65 per Mcf for
natural gas and $20.14 per barrel for crude oil.
30
ENERGY PARTNERS, LTD
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On January 15, 2002, Energy Partners, Ltd. (EPL) acquired Hall-Houston Oil
Company (Hall-Houston). Consideration was approximately $88.3 million,
consisting of $5.1 million of cash, 574,931 shares of EPL's Common Stock, $0.01
par value per share, $38.4 million in Series D Exchangeable Convertible
Preferred Stock $1.00 par value and $38.4 million in 11% Senior Subordinated
Notes, 1 million warrants to purchase EPL Common Stock at $9.00 per share and 3
million warrants to purchase EPL Common Stock at $11.00 per share. In addition
EPL assumed Hall-Houston's working capital deficit. All of the purchase price
was allocated to the net assets acquired.
The following unaudited pro forma condensed consolidated financial
information has been prepared by management utilizing the historical financial
statements of EPL and Hall-Houston for the year ended December 31, 2001.
Adjustments have been made to reflect the financial impact of purchase
accounting and other items had the acquisition taken place on January 1, 2001
with respect to operating data and December 31, 2001 with respect to the balance
sheet data. The pro forma adjustments are described in the accompanying notes
and are based upon preliminary estimates and certain assumptions that management
of the companies believes reasonable under the circumstances.
The unaudited pro forma condensed consolidated financial information is
presented for comparative purposes only and does not purport to be indicative of
the results which would actually have been obtained had the acquisition been
effected on the pro forma date, nor is it indicative of the results which may be
obtained in the future. The unaudited pro forma condensed consolidated financial
information in the opinion of management reflects all adjustments necessary to
present fairly the data for such periods.
31
ENERGY PARTNERS, LTD
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
(In thousands)
(Unaudited)
HISTORICAL HISTORICAL
EPL HALL-HOUSTON ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ---------
Current assets:
Cash and cash equivalents $ -- $ 1,178 $ 1,178
Trade and other accounts receivable 13,753 6,283 20,036
Fair value of commodity derivative instruments 2,047 -- 2,047
Prepaid expenses and other 1,459 3,568 5,027
--------- --------- ---------
Total current assets 17,259 11,029 28,288
Property and equipment - net 223,862 84,968 (a) 42,016 350,846
Other assets 363 928 1,291
Deferred financing costs 1,293 1,168 (a) (1,168) 1,293
--------- --------- ---------
$ 242,777 $ 98,093 $ 381,718
========= ========= =========
Current liabilities:
Accounts payable and accrued expenses $ 21,389 $ 32,250 (a) (4,132) $ 49,507
Current maturities of long-term debt
and notes payable 85 7,365 7,450
--------- --------- ---------
Total current liabilities 21,474 39,615 56,957
Long-term debt 25,408 86,739 (a)(86,739) 75,217
(a) 11,438
(a) 38,371
Deferred revenue -- 4,055 4,055
Deferred income taxes 16,782 (12,447) (a) 12,447 16,782
Other 14,246 6,784 (a) (2,001) 19,029
Redeemable preferred stock -- 18,004 (a)(18,004) --
Stockholders' equity:
Preferred stock -- -- (a) 38,371 38,371
Common stock 269 32 (a) (32) 275
(a) 6
Additional paid-in-capital 180,995 82 (a) (82) 187,429
(a) 6,434
Accumulated other comprehensive income 981 -- 981
Accumulated deficit (17,378) (44,771) (a) 44,771 (17,378)
--------- --------- ---------
Total stockholders' equity 164,867 (44,657) 209,678
--------- --------- ---------
$ 242,777 $ 98,093 $ 381,718
========= ========= =========
32
ENERGY PARTNERS, LTD
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(In thousands, except per share data)
(Unaudited)
HISTORICAL HISTORICAL
EPL HALL-HOUSTON ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ---------
Revenue:
Oil and gas $ 143,870 $ 27,904 $ 171,774
Other 2,057 1,650 3,707
--------- --------- ---------
145,927 29,554 175,481
--------- --------- ---------
Costs and expenses:
Lease operating 36,269 8,760 (b)(1,948) 43,081
Taxes, other than on earnings 7,190 -- 7,190
Exploration expenditures and dry holes 15,141 14,283 29,424
Impairment of oil and gas properties -- 7,312 7,312
Depreciation, depletion and amortization 46,870 18,064 (c) 3,173 68,107
General and administrative
Stock-based compensation 1,651 -- 1,651
Other general and administrative 18,182 4,274 (b) 1,948 24,404
--------- --------- ---------
Total costs and expenses 125,303 52,693 181,169
--------- --------- ---------
Income (loss) from operations 20,624 (23,139) (5,688)
--------- --------- ---------
Other income (expense):
Interest income 329 329 658
Interest expense (1,916) (9,406) (d) 4,797 (6,525)
Gain on sale of oil and gas assets 39 6,457 6,496
--------- --------- ---------
(1,548) (2,620) 629
--------- --------- ---------
Income (loss) before income taxes 19,076 (25,759) (5,059)
Income taxes (7,102) 10,535 (e)(1,612) 1,821
--------- --------- ---------
Net income (loss) $ 11,974 $ (15,224) $ (3,238)
========= ========= =========
Basic earnings (loss) per share $ 0.45 (f)$ (0.22)
========= =========
Basic weighted average shares outstanding 26,865 27,440
========= =========
Diluted earnings (loss) per share $ 0.44 (f)$ (0.22)
========= =========
Diluted weighted average shares outstanding 26,920 27,440
========= =========
33
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(1) ENTRIES
(a) EPL acquired Hall-Houston for aggregate consideration of $88.3 million
consisting of $5.1 million of cash, 574,931 shares of EPL's common stock
valued at $5.81 per share, $38.4 million in Series D Exchangeable
Convertible Preferred Stock (Preferred Stock) which has a conversion price
of $8.54 per share, $38.4 million in 11 % Senior Subordinated Notes (Senior
Notes) and warrants with a Black Scholes value of $3.1 million which will
convert into 1 million shares of EPL common stock at a strike price of
$9.00 and 3 million shares of EPL common stock at a strike price of $11.00.
EPL also paid interest accruing through the closing date and assumed
Hall-Houston's working capital deficit as of January 15, 2002. This entry
adjusts the historical book values of Hall-Houston's assets and liabilities
to their estimated fair values as of December 31, 2001. The calculation of
the total purchase price and the preliminary allocation to assets and
liabilities are shown below (in thousands, except share data):
Calculation and preliminary allocation of purchase price:
Shares of EPL common stock issued 574,931
Average EPL stock price $ 5.81
--------
Fair value of common stock issued $ 3,340
Fair value of EPL warrants issued 3,100
Cash paid 1,725
--------
Fair value of common stock, warrants and cash issued $ 8,165
Fair value of EPL Preferred Stock issued to Hall-Houston debt holders 38,371
Fair value of EPL Senior Notes issued to Hall-Houston debt holders 38,371
Cash paid to Hall-Houston debt holders not accepting debt exchange consideration 3,414
Cash paid to Hall-Houston debt holders for accrued interest and nominal overriding
royalty interests 3,429
Plus estimated merger costs to be incurred 2,870
--------
Total purchase price $ 94,620
Plus fair value of liabilities assumed by EPL:
Current liabilities(1) $ 35,483
Deferred income taxes --
Other non current liabilities, excluding abandonment liability of $2.0 million 8,838
--------
Total purchase price plus liabilities assumed $138,941
--------
Fair value of assets acquired by EPL:
Current assets $ 11,029
Proved oil and gas properties 124,509
Unproved oil and gas properties 2,136
Other property and equipment 339
Other assets 928
--------
Fair value of assets acquired $138,941
--------
(1) excludes $1.7 million of accrued Hall-Houston dividends as the
rights to such were relinquished and $2.4 million of accrued
interest paid at closing.
The entire purchase price has been allocated to the net assets
acquired. Deferred financing costs of $1.2 million for Hall-Houston debt
which was redeemed or converted has been given no value in the purchase
accounting and abandonment liabilities of $2.0 million accrued on
Hall-Houston producing leases have been adjusted out of other liabilities
in the purchase accounting as the abandonment will be accrued by EPL over
the producing lives of the leases acquired.
34
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
Due to the taxable nature of the transaction, EPL will make an
election under Section 338 of the Internal Revenue Service Code. This
election will restate the tax basis of Hall-Houston's assets to fair market
value resulting in no difference between the book and tax basis of the
assets and liabilities acquired. All Hall-Houston deferred tax assets have
been eliminated in the purchase accounting entries.
The purchase price allocation is preliminary and is subject to change
due to several factors, including: (1) changes in the fair values of
Hall-Houston's assets and liabilities as of the closing date of the merger
and (2) the actual merger costs incurred.
Payment of up to an additional $50 million for the acquisition is
contingent upon the attainment of certain objectives. Annually beginning
March 1, 2003 through 2007, additional consideration, if any, will be paid
in stock or cash at our option (with a minimum of 20% in cash), based upon
a percentage of the amount by which the before tax net present value
related, in general, to exploratory prospect acreage acquired exceeds a net
present value discounted at 30%. Due to the uncertainty inherent in
estimating the value of the contingent consideration, total final
consideration will not be determined until March 1, 2007. Any amounts paid
will be capitalized as additional purchase price when paid and have not
been included in the pro forma calculations.
(b) To reclassify Hall-Houston insurance expense from lease operating to
general and administrative to be consistent with the classification in
EPL's historical statement of operations.
(c) This adjustment reflects the change in depreciation, depletion and
amortization amounts recorded on a historical basis to amounts that would
have been included in the financial statements effective January 1, 2001.
(d) To record the net change in interest expense from:
- $38.4 million of Senior Notes at the current interest rate of 11%
- Interest expense on $11.4 million of additional borrowings under EPL's
bank credit facility at EPL's then outstanding borrowing rate of 3.4%
- The reduction in interest expense due to the redemption or conversion of
all Hall-Houston long-term debt.
Senior Notes issued in exchange for Hall-Houston debt $ 4,221
Increased borrowing under EPL bank facility using current rate 388
Redemption of Hall-Houston debt (9,406)
-------
Adjustment needed $(4,797)
-------
(e) To record the provision for Federal and state income taxes at a corporate
statutory rate of 36%.
(f) To reflect pro forma net income per basic share. Pro forma diluted earnings
per share has not been presented below as any common stock equivalents
would be antidilutive. Income available to common stockholders are derived
as follows (in thousands, except per share amounts):
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss $(3,238)
7% preferred stock dividends (2,686)
-------
BASIC EPS:
Loss available to common
stockholders (5,924) 27,440 $(0.22)
------- ------
35
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
(2) SUPPLEMENTAL PRO FORMA INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
The following pro forma supplemental information regarding oil and gas
operations is presented pursuant to the disclosure requirements of Statement of
Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing
Activities."
The following table reflects the costs incurred in oil and gas property
acquisitions, exploration and development activities of EPL and Hall-Houston and
the combined company on a pro forma basis, for the year ended December 31, 2001
(in thousands):
Combined
EPL Hall-Houston Company
-------- ------------ --------
Oil and gas property acquisitions $ 2,516 $ 3,146 $ 5,662
Exploration 45,592 53,606 99,198
Development 55,882 23,289 79,171
-------- -------- --------
Total costs incurred $103,990 $ 80,041 $184,031
======== ======== ========
The following tables set forth the changes in the net quantities of oil and
gas reserves of EPL, Hall-Houston and the combined company on a pro forma basis,
for the year ended December 31, 2001:
Combined
EPL Hall-Houston Company
------ ------------ --------
Oil-Mbbls
------------
Proved developed and undeveloped reserves at
December 31, 2000 27,521 394 27,915
Purchases of reserves in place 117 -- 117
Sale of reserves -- (302) (302)
Extensions, discoveries and other additions 2,797 311 3,108
Revisions (1,192) (73) (1,265)
Production (3,781) (33) (3,814)
------ ---- ------
Proved developed and undeveloped reserves at
December 31, 2001 25,462 297 25,759
====== ==== ======
Proved developed reserves as of:
December 31, 2000 25,024 352 25,376
December 31, 2001 22,176 297 22,473
36
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
Combined
EPL Hall-Houston Company
-------- ------------ --------
Gas-Mmcf
------------
Proved developed and undeveloped reserves at
December 31, 2000 49,150 40,998 90,148
Purchases of reserves in place 301 -- 301
Sale of reserves -- (5,273) (5,273)
Extensions, discoveries and other additions 28,383 18,554 46,937
Revisions (3,422) 6,765 3,343
Production (12,615) (6,170) (18,785)
-------- -------- --------
Proved developed and undeveloped reserves at
December 31, 2001 61,797 54,874 116,671
======== ======== ========
Proved developed reserves as of:
December 31, 2000 39,522 23,268 62,790
December 31, 2001 38,099 38,082 76,181
Subsequent to December 31, 2001, Hall-Houston acquired additional working
interests in several of its properties from affiliates. In addition EPL acquired
overriding royalty interests directly from affiliates of Hall-Houston. These
transactions combined increased proved reserves by approximately 5.8 Bcfe or 5%,
as compared to the proved reserve quantities of the combined company as of
December 31, 2001 that are disclosed in the previous tables and underlie the
standardize measure data which follows.
The following table sets forth the standardized measure of discounted
future net cash flows relating to proved oil and gas reserves for EPL,
Hall-Houston and the combined company on a pro forma basis, as of December 31,
2001 (in thousands):
Combined
EPL Hall-Houston Adjustment(1) Company
--------- ------------ ------------- ---------
Future cash inflows $ 630,941 $ 148,609 $ 779,550
Future production costs (293,945) (21,312) (315,257)
Future development and abandonment
costs (168,989) (27,852) (196,841)
Future income tax expense (4,688) -- (35,800) (40,488)
--------- --------- ---------
Future net cash flows after income taxes 163,319 99,445 226,964
10% annual discount for estimated timing of
cash flows (39,942) (20,161) 8,340 (51,763)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 123,377 $ 79,284 $ 175,201
========= ========= =========
(1) Hall-Houston's historical financial information includes net
operating loss carryforwards sufficient to offset future taxable
income. This entry adjusts the combined company future income
taxes and related discount to reflect the pro forma future tax
expense as the net operating losses will not be brought forward
to the combined company.
The computation of the standardized measure of discounted future net cash
flows relating to proved oil and gas reserves at December 31, 2001 was based on
period end spot prices adjusted for lease quality, transportation fees and price
differentials. The December 31, 2001 computation for EPL was based on period end
prices of approximately $2.71 per
37
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
Mcf for natural gas and $18.21 per barrel for crude oil while Hall-Houston's
computation was based on period end prices of approximately $2.65 per Mcf and
$20.14 per barrel for crude oil.
The following table includes the components of the changes in the
standardized measure of discounted future net cash flows of EPL, Hall-Houston
and the combined company on a pro forma basis, for the year ended December 31,
2001 (in thousands):
Combined
EPL Hall-Houston Adjustment(1) Company
--------- ------------ ------------- ---------
Beginning of the period $ 348,102 $ 187,500 $ 535,602
Sales and transfers of oil and gas produced
net of production costs (100,411) (14,386) (114,797)
Net changes in prices and production costs (349,126) (202,112) (551,238)
Extensions, discoveries and improved
recoveries, net of future production
costs 49,217 32,469 81,686
Revisions of quantity estimates (12,619) 11,904 (715)
Previously estimated development costs
incurred during the period 10,861 23,289 34,150
Purchases and sales of reserves in place 637 (16,006) (15,369)
Changes in estimated future development costs (20,014) (1,321) (21,335)
Changes in production rates (timing) and other 11,638 (41,265) (29,627)
Accretion of discount 48,995 26,065 75,060
Net change in income taxes 136,097 73,147 (27,460) 181,784
--------- --------- ---------
Net decrease (224,725) (108,216) (360,401)
--------- --------- ---------
End of period $ 123,377 $ 79,284 $ 175,201
========= ========= =========
(1) Hall-Houston's historical financial information includes net
operating loss carryforwards sufficient to offset future taxable
income. This entry adjusts the combined company discounted future
income taxes to reflect the change in the pro forma future tax
expense as the net operating losses will not be brought forward
to the combined company.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENERGY PARTNERS, LTD.
Date: March 28, 2002 By: /s/ SUZANNE V. BAER
--------------------------------------------
Suzanne V. Baer
Executive Vice President and Chief Financial
Officer
39
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of KPMG LLP
40