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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission file number 000-24971
CONTANGO OIL & GAS COMPANY
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4079863
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3700 BUFFALO SPEEDWAY, SUITE 960
HOUSTON, TEXAS 77098
(Address of principal executive offices)
(713) 960-1901
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
The total number of shares of common stock, par value $0.04 per share,
outstanding as of October 9, 2000 was 22,931,415.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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CONTANGO OIL & GAS COMPANY
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of September 30, 2000 and June 30, 2000.................. 3
Condensed Statements of Operations for the three months ended
September 30, 2000 and 1999...................................................... 4
Condensed Statements of Cash Flows for the three months ended
September 30, 2000 and 1999...................................................... 5
Condensed Statement of Shareholders' Equity for the three months ended September
30, 2000......................................................................... 6
Notes to Condensed Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 13
Item 2. Changes in Securities and Use of Proceeds................................................ 13
Item 3. Defaults Upon Senior Securities.......................................................... 15
Item 4. Submission of Matters to Vote of Security Holders........................................ 15
Item 5. Other Information........................................................................ 15
Item 6. Exhibits and Reports on Form 8-K......................................................... 15
SIGNATURES......................................................................................... 18
</TABLE>
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PART I - FINANCIAL INFORMATION
CONTANGO OIL & GAS COMPANY (A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 6,984,815 $ 3,770,906
Accounts receivable, net ...................................................... 2,175,774 273,336
Prepaid insurance ............................................................. 87,801 65,785
Advances to operators and other ............................................... 15,285 1,056,817
------------- ------------
Total current assets ...................................................... 9,263,675 5,166,844
------------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Natural gas and oil properties, successful efforts method of accounting:
Proved properties ......................................................... 4,855,321 2,210,370
Unproved properties, not being amortized .................................. 2,654,812 61,919
Furniture and equipment ....................................................... 41,240 22,806
Accumulated depreciation, depletion and amortization .......................... (1,463,796) (893,060)
------------- ------------
Total property, plant and equipment ....................................... 6,087,577 1,402,035
------------- ------------
OTHER ASSETS:
Investment in Republic Exploration, L.L.C ..................................... 3,731,803 --
Other assets .................................................................. 73,625 73,625
------------- ------------
Total other assets ........................................................ 3,805,428 73,625
------------- ------------
TOTAL ASSETS ....................................................................... $ 19,156,680 $ 6,642,504
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................................. $ 154,515 $ 117,255
Accrued preferred stock dividends ............................................. 24,658 --
Accrued liabilities ........................................................... 1,502,627 119,865
------------- ------------
Total current liabilities ................................................. 1,681,800 237,120
------------- ------------
SHAREHOLDERS' EQUITY:
Convertible preferred stock, 8%, Series A, $0.04 par value, 5,000 shares
authorized, 2,500 shares issued and outstanding at September 30, 2000,
liquidation preference of $1,000 per share ................................ 100 --
Convertible preferred stock, 8%, Series B, $0.04 par value, 10,000 shares
authorized, 5,000 shares issued and outstanding at September 30, 2000,
liquidation preference of $1,000 per share ................................ 200 --
Common stock, $0.04 par value, 50,000,000 shares authorized,
22,931,915 issued and outstanding at September 30, 2000 and
20,396,661 shares issued and outstanding at June 30, 2000 ................. 917,276 815,866
Additional paid-in capital .................................................... 20,031,923 9,252,204
Accumulated deficit ........................................................... (1,815,942) (1,815,942)
Deficit accumulated during development stage .................................. (1,658,677) (1,846,744)
------------- ------------
Total shareholders' equity ................................................ 17,474,880 6,405,384
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $ 19,156,680 $ 6,642,504
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CONTANGO OIL & GAS COMPANY (A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
TOTAL FROM
THREE MONTHS ENDED JULY 1, 1999
SEPTEMBER 30, (INCEPTION OF
---------------------------- DEVELOPMENT
2000 1999 STAGE)
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Natural gas and oil sales .............................. $ 2,081,734 $ -- $ 2,380,073
------------ ------------ ------------
EXPENSES:
Lease operating expense ................................ 208,835 -- 294,089
Exploration expense .................................... 681,000 10,000 1,285,136
Depreciation, depletion and amortization ............... 570,736 610 915,551
Impairment of proved natural gas and oil properties .... -- -- 548,245
General and administrative expense ..................... 464,882 290,070 1,228,458
------------ ------------ ------------
Total expenses ..................................... 1,925,453 300,680 4,271,479
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS ............................... 156,281 (300,680) (1,891,406)
Interest expense ............................................ (1,174) -- (11,515)
Interest income ............................................. 57,618 2,300 198,667
Gain on sale of assets ...................................... -- -- 70,235
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX ............................. 212,725 (298,380) (1,634,019)
Provision for income tax .................................... -- -- --
------------ ------------ ------------
NET INCOME (LOSS) ........................................... 212,725 (298,380) (1,634,019)
Preferred stock dividends ................................... 24,658 -- 24,658
------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK .............. $ 188,067 $ (298,380) $ (1,658,677)
============ ============ ============
DEFICIT ACCUMULATED DURING
DEVELOPMENT STAGE, BEGINNING OF PERIOD ................. (1,846,744) -- --
------------ ------------ ------------
DEFICIT ACCUMULATED DURING
DEVELOPMENT STAGE, END OF PERIOD ....................... $ (1,658,677) $ (298,380) $ (1,658,677)
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic .................................................. $ 0.01 $ (0.05)
============ ============
Diluted ................................................ $ 0.01 $ (0.05)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic .................................................. 21,448,929 5,648,669
============ ============
Diluted ................................................ 23,046,549 5,648,669
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CONTANGO OIL & GAS COMPANY (A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
TOTAL FROM
THREE MONTHS ENDED JULY 1, 1999
SEPTEMBER 30, (INCEPTION OF
---------------------------- DEVELOPMENT
2000 1999 STAGE)
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ 212,725 $ (298,380) $ (1,634,019)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization ...................... 570,736 610 915,551
Exploration expense ........................................... 681,000 -- 1,285,136
Impairment of proved natural gas and oil properties ........... -- -- 548,245
Gain on sale of assets ........................................ -- -- (70,235)
Changes in operating assets and liabilities:
Increase in accounts receivable ............................. (1,298,639) -- (1,556,278)
Increase in prepaid insurance ............................... (22,016) (17,357) (79,798)
Increase in accounts payable ................................ 37,260 47,627 153,715
Increase in accrued liabilities ............................. 159,726 86,341 279,591
Other ....................................................... 27,124 -- 27,124
------------ ------------ ------------
Net cash provided by (used in) operating activities ...... 367,916 (181,159) (130,968)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Natural gas and oil exploration and development expenditures ...... (4,121,207) -- (7,112,201)
Investment in Republic Exploration, L.L.C ......................... (4,000,000) -- (4,000,000)
Additions to furniture and equipment .............................. (18,434) (13,726) (41,240)
Decrease (increase) in advances to operators ...................... 1,047,408 -- (9,409)
Proceeds from sale of assets ...................................... -- -- 151,179
------------ ------------ ------------
Net cash used in investing activities ........................... (7,092,233) (13,726) (11,011,671)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
preferred stock and warrants .................................... 9,938,226 1,804,600 17,736,830
Preferred stock dividends ......................................... -- (75,565) (75,565)
------------ ------------ ------------
Net cash provided by financing activities ....................... 9,938,226 1,729,035 17,661,265
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS .............................. 3,213,909 1,534,150 6,518,626
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................... 3,770,906 466,189 466,189
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................... $ 6,984,815 $ 2,000,339 $ 6,984,815
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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CONTANGO OIL & GAS COMPANY (A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
FROM
JULY 1, 1999
PREFERRED STOCK COMMON STOCK (INCEPTION OF TOTAL
------------------ ---------------------- PAID-IN ACCUMULATED DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STAGE) EQUITY
-------- -------- ----------- --------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 2000 ...... -- $ -- 20,396,661 $ 815,866 $ 9,252,204 $(1,815,942) $ (1,846,744) $ 6,405,384
Stock-based compensation ...... -- -- 35,254 1,410 942,293 -- -- 943,703
Sale of shares (08/00) ........ 2,500 100 2,500,000 100,000 4,899,900 -- -- 5,000,000
Sale of shares (09/00) ........ 5,000 200 -- -- 4,999,800 -- -- 5,000,000
Offering expenses ............. -- -- -- -- (62,274) -- -- (62,274)
Net income .................... -- -- -- -- -- -- 212,725 212,725
Preferred stock dividends ..... -- -- -- -- -- -- (24,658) (24,658)
-------- -------- ----------- --------- ------------ ------------ ------------ -------------
Balance at September 30, 2000 . 7,500 $ 300 22,931,915 $ 917,276 $ 20,031,923 $(1,815,942) $ (1,658,677) $ 17,474,880
======== ======== =========== ========= ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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CONTANGO OIL & GAS COMPANY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all normal, recurring adjustments
considered necessary for a fair presentation have been included. All such
adjustments are of a normal recurring nature. The financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in Contango Oil & Gas Company's ("Contango" or the "Company") Form
10-KSB for the year ended June 30, 2000. The results of operations for the three
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending June 30, 2001.
1. DEVELOPMENT STAGE RISK AND LIQUIDITY
DEVELOPMENT STAGE ACCOUNTING. Contango is a development stage
enterprise engaged in the exploration for and production of natural gas and oil
in the United States. Since July 1, 1999, Contango has completed four property
acquisitions, entered into and commenced an onshore south Texas exploration
program, participated in the drilling of two successful exploration wells in the
Gulf of Mexico, and was a founder with a 10% ownership in Republic Exploration,
L.L.C., a Gulf of Mexico exploration company. For the period from July 1, 1999
through September 30, 2000, Contango incurred cumulative losses of approximately
$1.7 million. In the future, we may continue to report cumulative losses if we
do not generate sufficient revenues from natural gas and oil production, either
through drilling activities or through acquisition of producing properties, to
cover operating expenses, depreciation, depletion and amortization, general and
administrative costs and exploration expense.
DEVELOPMENT STAGE RISK. Contango is subject to several categories of
risk associated with its development stage activities. Natural gas and oil
exploration is a speculative business and involves a high degree of risk. Among
the factors that have a direct bearing on the Company's prospects are the
uncertainties inherent in estimating natural gas and oil reserves and future
hydrocarbon production and cash flows, particularly with respect to wells that
have not been fully tested and wells having limited production histories. Other
factors include access to additional capital, changes in the price of natural
gas and oil, availability and cost of services and equipment and the presence of
competitors with greater financial resources and capacity.
LIQUIDITY. Management believes that cash on hand together with
anticipated cash flow from operations, proceeds from recent equity sales and
possible bank borrowings will be adequate to satisfy a significant portion of
planned capital expenditures to drill exploratory wells in the Company's onshore
Gulf coast and offshore Gulf of Mexico exploration programs and satisfy general
corporate needs over the next twelve months. The Company may continue to seek
additional equity and bank financing to fund the remaining $2.5 million
investment in Republic Exploration, the Company's exploration program, general
and administrative costs and to take advantage of other opportunities that may
become available. The availability of such funds will depend upon prevailing
market conditions and other factors over which the Company has no control, as
well as the Company's financial condition and results of operations. There can
be no assurances that the
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CONTANGO OIL & GAS COMPANY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Company will have sufficient funds available to finance its intended exploration
and development programs or acquisitions or to successfully execute its business
plan. The Company's exploration drilling program will be curtailed if sufficient
funds are unavailable and, in any event, is contingent upon continued
exploration success.
2. SHAREHOLDERS' EQUITY
COMMON STOCK. On August 24, 2000, the Southern Ute Indian Tribe doing
business as the Southern Ute Indian Tribe Growth Fund exercised the option it
previously acquired to purchase 2,500,000 shares of common stock for net
proceeds of $2,500,000.
PREFERRED STOCK. On August 24, 2000, Contango sold in a private
placement transaction 2,500 shares of its Series A senior convertible cumulative
preferred stock (the "Series A Preferred Stock") to Trust Company of the West,
as an investment manager and custodian on behalf of a client, for net proceeds
of $2,500,000. Series A Preferred Stock ranks prior to the Company's common
stock (and any other junior stock) with respect to the payment of dividends or
distributions and upon liquidation, dissolution, winding-up or otherwise and is
pari passu to the Company's Series B senior convertible cumulative preferred
stock. Holders of Series A Preferred Stock are entitled to receive quarterly
dividends at a dividend rate equal to 8% per annum if paid in cash on a current
quarterly basis or otherwise at a rate of 10% per annum if not paid on a current
quarterly basis or if paid in shares of Series A Preferred Stock, in each case,
computed on the basis of $1,000 per share. Holders of Series A Preferred Stock
may, at their discretion, elect to convert such shares to shares of the
Company's common stock at a conversion price of $1.25 per share. In addition,
upon the occurrence of certain events, the Company may elect to convert all of
the outstanding shares of Series A Preferred Stock at a conversion price of
$1.25 per share.
On September 27, 2000, Contango sold in a private placement transaction
5,000 shares of its Series B senior convertible cumulative preferred stock (the
"Series B Preferred Stock") to Aquila Energy Capital Corporation for net
proceeds of $5,000,000. Series B Preferred Stock ranks prior to the Company's
common stock (and any other junior stock) with respect to the payment of
dividends or distributions and upon liquidation, dissolution, winding-up or
otherwise and is pari passu to the Company's Series A Preferred Stock. Holders
of Series B Preferred Stock are entitled to receive quarterly dividends at a
dividend rate equal to 8% per annum if paid in cash on a current quarterly basis
or otherwise at a rate of 10% per annum if not paid on a current quarterly basis
or if paid in shares of Series B Preferred Stock, in each case, computed on the
basis of $1,000 per share. Holders of Series B Preferred Stock may, at their
discretion, elect to convert such shares to shares of the Company's common stock
at a conversion price of $2.20 per share. In addition, upon the occurrence of
certain events, the Company may elect to convert all of the outstanding shares
of Series B Preferred Stock at a conversion price of $2.20 per share.
WARRANTS. On August 24, 2000, as part of the formation of Republic
Exploration, Contango granted to each of Juneau Exploration Company. L.L.C. and
a private company, in separate private placement transactions, a five-year
warrant to purchase 125,000 shares of common stock at an exercise price of $1.00
per share.
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CONTANGO OIL & GAS COMPANY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
On August 24, 2000 in order to induce the Southern Ute Indian Tribe
Growth Fund to exercise its option to purchase 2,500,000 shares of common stock,
the Company issued to the Southern Ute Indian Tribe Growth Fund a five-year
warrant to purchase 250,000 shares of common stock at an exercise price of $1.00
per share.
On August 24, 2000, as part of the sale of the Series A Preferred
Stock, Contango issued to Trust Company of the West, as an investment manager
and custodian on behalf of a client, a five-year warrant to purchase 500,000
shares of common stock at an exercise price of $1.00 per share
3. NET INCOME (LOSS) PER COMMON SHARE
A reconciliation of the components of basic and diluted net income
(loss) per common share is presented in the table below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------------- ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income (loss) attributable
to common stock ................. $ 188,067 21,448,929 $ 0.01 $ (298,380) 5,648,669 $ (0.05)
========= =========
Effect of Dilutive Securities:
Stock options ..................... -- 1,597,620 -- --
---------- ----------- ---------- ----------
Diluted:
Net income (loss) attributable
to common stock ................. $ 188,067 23,046,549 $ 0.01 $ (298,380) 5,648,669 $ (0.05)
========== =========== ========= ========== ========== =========
</TABLE>
4. NON-CASH INVESTING AND FINANCING ACTIVITIES
A summary of non-cash investing and financing activities is presented
below.
In July 2000, the Company issued 23,750 shares of common stock to
certain individuals in connection with services provided to the Company.
In September 2000, the Company issued 11,000 shares of common stock to
certain individuals in connection with services provided to the Company.
At various time during 2000, the Company has issued options and
warrants to certain individuals and companies in connection with (i) services
provided to the Company, (ii) sales of common and preferred stock and (iii)
exploration activities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the financial
statements and the accompanying notes and other information included elsewhere
in this Form 10-QSB and in our Form 10-KSB for the fiscal year ended June 30,
2000, previously filed with the Securities and Exchange Commission.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
Statements made in this Form 10-QSB about our company may constitute
"forward-looking statements". The words and phrases "should be", "will be",
"believe", "expect", "anticipate" and similar expressions identify
forward-looking statements. We believe the expectations reflected in such
forward-looking statements are accurate. However, we cannot assure you that such
expectations will occur. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from actual
future results expressed or implied by the forward-looking statements. You
should not unduly rely on these forward-looking statements in this report, as
they speak only as of the date of this report. Except as required by law, we are
not obligated to publicly release any revisions to these forward-looking
statements to reflect events or circumstances occurring after the date of this
report or to reflect the occurrence of unanticipated events.
GENERAL
We are a development stage, independent energy company engaged in the
exploration and production of natural gas and oil in the United States. Our
development stage and our entry into the natural gas and oil business began on
July 1, 1999, when the previous board of directors approved a plan to hire new
management and enter the natural gas and oil exploration business. We did not
produce any natural gas or oil prior to November 1999.
RESULTS OF OPERATIONS
The following is a discussion of the results of our operations for the
three months ended September 30, 2000, compared to those for the three months
ended September 30, 1999. The results of operations for the period ended
September 30, 2000 are not directly comparable to results for the period ended
September 30, 1999, as we had little operational activities during the period
ended September 30, 1999. In addition, we did not operate as a natural gas and
oil exploration and production company prior to July 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
NATURAL GAS AND OIL SALES. We recorded natural gas and oil sales of
approximately $2.1 million for the three months ended September 30, 2000. This
primarily was attributable to new production from our exploration play onshore
in south Texas. We had no natural gas and oil production during the three months
ended September 30, 1999.
LEASE OPERATING EXPENSE. For the three months ended September 30, 2000,
we recorded approximately $208,800 of lease operating expense, including
severance taxes. This was
10
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attributable to production operations both onshore Texas and offshore in the
Gulf of Mexico. We had no lease operating expense during the three months ended
September 30, 1999.
EXPLORATION COSTS. For the three months ended September 30, 2000, we
recorded $681,000 of exploration costs. Of this amount, approximately $601,800
was attributable to the cost of shooting 3-D seismic onshore in south Texas. For
the three months ended September 30, 1999, we recorded $10,000 of exploration
costs.
DEPRECIATION, DEPLETION AND AMORTIZATION. For the three months ended
September 30, 2000, we recorded approximately $570,700 of depreciation,
depletion and amortization. This primarily was attributable to depletion and
amortization related to production from our exploration play in south Texas and
to the Eugene Island 28 well offshore Louisiana and to depreciation of fixed
assets, primarily office equipment. For the three months ended September 30,
1999, we recorded $610 of depreciation, depletion and amortization.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased approximately $174,800, from approximately $290,100 for the three
months ended September 30, 1999 to approximately $464,900 for the three months
ended September 30, 2000. This increase primarily was attributable to an
increased level of both financial and operational activities. Primary components
of general and administrative expense for the three months ended September 30,
2000 included approximately $23,600 in insurance expense, $142,100 in legal,
accounting and other professional fees, $38,400 in office administrative expense
and $223,700 in salaries and benefits.
INTEREST INCOME. Interest income increased approximately $55,300, from
$2,300 for the three months ended September 30, 1999 to approximately $57,600
for the three months ended September 30, 2000. Interest income was derived from
interest earned on our cash balances during the reporting periods. The increase
in interest income primarily was due to the increase in cash balances resulting
from proceeds of equity offerings completed during the three months ended
September 30, 2000.
REPUBLIC EXPLORATION, L.L.C.
In August 2000, we purchased a 10% interest in Republic Exploration for
$4.0 million with the option to purchase another 23.3% interest for an
additional $2.5 million. The option expires on December 29, 2000 and, if
exercised, would result in our paying a total of $6.5 million for a 33.3%
interest in Republic Exploration. Republic Exploration has the license rights to
existing and newly reprocessed 3-D seismic covering over 8,600 square miles of
the shallow waters of the Gulf of Mexico continental shelf. Republic Exploration
was formed to evaluate, generate, acquire and explore prospects using this
seismic data. The other two members of Republic Exploration are Juneau
Exploration, the managing member of Republic Exploration, and a privately held
company. Both companies have extensive experience in Gulf of Mexico exploration.
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PRODUCTION, PRICES AND OPERATING EXPENSES
The following table presents information regarding the production
volumes, average sales prices received and average production costs associated
with our sales of natural gas and oil for the period indicated. We had no
natural gas and oil production for the three months ended September 30, 1999.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, 2000
------------------
<S> <C>
Production:
Natural gas (thousand cubic feet).................................................. 312,000
Oil and condensate (barrels)....................................................... 18,000
Total (thousand cubic feet equivalent)......................................... 420,000
Average sales price:
Natural gas (per thousand cubic feet).............................................. $ 4.95
Oil and condensate (per barrel).................................................... 29.79
Total (per thousand cubic feet equivalent)..................................... 4.96
Expenses (per thousand cubic feet equivalent):
Lease operating expense............................................................ $ 0.50
Depreciation, depletion and amortization of oil and gas properties................. 1.36
</TABLE>
At October 31, 2000, our total net production was approximately 10.0
million cubic feet of natural gas and 400 barrels of oil per day. This
production primarily is attributable to wells that have recently been drilled in
our south Texas exploration program. Since May 2000, we have drilled a total of
10 exploratory wells in south Texas, nine of which have been successful. Of
these nine, seven are producing, and two are being completed.
Our overall production level will decline over time if we fail to make
new discoveries or acquisitions. Our production level also will be significantly
reduced when Juneau Exploration's 25% after payout back in working interest
occurs. This will result in an approximate 18% reduction in our proportionately
reduced net revenue interest. Based on prices and anticipated production volumes
in late October 2000, we anticipate Juneau Exploration's 25% after payout
working interest will occur in our second or third fiscal quarter (October 2000
- March 2001).
CAPITAL RESOURCES AND LIQUIDITY
During the three months ended June 30, 2000, we raised $10.0 million in
three separate private placements of our common and preferred stock. On August
24, 2000, we sold $2.5 million of our Series A senior convertible cumulative
preferred stock to Trust Company of the West. Additionally, on August 24, 2000,
the Southern Ute Indian Tribe doing business as the Southern Ute Indian Tribe
Growth Fund exercised the option it previously acquired to purchase 2,500,000
shares of common stock for net proceeds of $2.5 million. On September 27, 2000,
we sold $5.0 million of our Series B senior convertible cumulative preferred
stock to Aquila Energy Capital. These three latest transactions bring the total
equity we have raised since July 1999 to approximately $17.9 million.
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<PAGE> 13
In addition to these equity transactions, we reported revenues from
operations for the three months ended September 30, 2000 of approximately $2.1
million. Based on our business model that assumes continuing exploration
success, we expect operating cash flow to be a significant source of our funds
during the current fiscal year. Based on natural gas and crude oil prices in
late October, we anticipate operating cash flow of around $1.7 million in
November 2000. We currently have no bank borrowings or other debt.
Our primary cash outlays include exploration and development capital
expenditures and general and administrative expenses. At September 30, 2000, we
had approximately $7.0 million in cash that was available to fund exploration
and development activities. Contango's focus will continue to be on the
generation and exploration of opportunities onshore Gulf coast and offshore in
the Gulf of Mexico. Current plans and prospect identification call for the
drilling of 15 to 20 onshore exploration wells and three to five offshore
exploration wells during the current fiscal year. We anticipate that our capital
expenditures for the fiscal year ending June 30, 2001 will be between $15
million to $25 million, including a $6.5 million investment for a 33.3% interest
in Republic Exploration and that general and administrative expenses will be
approximately $1.5 million.
We believe that our cash on hand, together with anticipated cash flow
from operations, proceeds from recent equity sales and possible bank borrowings,
will be adequate to satisfy a significant portion of planned capital
expenditures to drill exploratory wells in our onshore Gulf coast and offshore
Gulf of Mexico exploration programs and satisfy our general corporate needs over
the next twelve months. We may continue to seek additional equity and bank
financing to fund our remaining $2.5 million of our $6.5 million investment in
Republic Exploration, our exploration program, our general and administrative
costs and to take advantage of other opportunities that may become available.
The availability of such funds will depend upon prevailing market conditions and
other factors over which we have no control, as well as our financial condition
and results of operations. We cannot assure you that we will have sufficient
funds available to finance our intended exploration and development programs or
acquisitions or to successfully execute our business plan. Our exploration
drilling program will be curtailed if we are unable to raise sufficient funds
and, in any event, is contingent upon continued exploration success.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company is not a party to any legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 24, 2000, Contango issued 10,000 shares at an average value of
$0.875 per share to William H. Gibbons as partial consideration for his services
as treasurer of the company. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act, as it did not involve a
public offering of securities.
On July 24, 2000, Contango issued 13,750 shares at a value of $1.00 per
share to an individual as consideration for consulting services provided to the
company. The issuance of these securities was exempt from registration under
Section 4(2) of the Securities Act, as it did not involve a public offering of
securities.
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<PAGE> 14
On August 24, 2000, Contango sold in a private placement transaction
2,500 shares of its Series A senior convertible cumulative preferred stock (the
"Series A Preferred Stock") and a five-year warrant to purchase 500,000 shares
of common stock at an exercise price of $1.00 per share to Trust Company of the
West, as an investment manager and custodian on behalf of a client, for net
proceeds of $2,500,000. Series A Preferred Stock ranks prior to the company's
common stock (and any other junior stock) with respect to the payment of
dividends or distributions and upon liquidation, dissolution, winding-up or
otherwise and is pari passu to the company's Series B senior convertible
cumulative preferred stock. Holders of Series A Preferred Stock are entitled to
receive quarterly dividends at a dividend rate equal to 8% per annum if paid in
cash on a current quarterly basis or otherwise at a rate of 10% per annum if not
paid on a current quarterly basis or if paid in shares of Series A Preferred
Stock, in each case, computed on the basis of $1,000 per share. Holders of
Series A Preferred Stock may, at their discretion, elect to convert such shares
to shares of the company's common stock at a conversion price of $1.25 per
share. In addition, upon the occurrence of certain events, the company may elect
to convert all of the outstanding shares of Series A Preferred Stock at a
conversion price of $1.25 per share. As a result of the transaction, Trust
Company of the West, in its capacities as investment manager and custodian, owns
approximately 20% of the company's diluted common shares. The issuance of the
securities to Trust Company of the West was exempt from registration under
Section 4(2) of the Securities Act, as it did not involve a public offering of
securities. There were no underwriting discounts, commissions or finder's fees
paid in connection with the placement.
On August 24, 2000, the Southern Ute Indian Tribe doing business as the
Southern Ute Indian Tribe Growth Fund exercised the option it previously
acquired to purchase 2,500,000 shares of common stock for net proceeds of
$2,500,000. In order to induce the Southern Ute Indian Tribe Growth Fund to
exercise such option, Contango issued to the Southern Ute Indian Tribe Growth
Fund a five-year warrant to purchase 250,000 shares of common stock at an
exercise price of $1.00 per share. As a result of the transaction, the Southern
Ute Indian Tribe Growth Fund owns approximately 16% of the company's diluted
common shares. The issuance of securities to the Southern Ute Indian Tribe
Growth Fund was exempt from registration under Section 4(2) of the Securities
Act, as it did not involve a public offering of securities.
On August 24, 2000, as part of the formation of Republic Exploration,
Contango granted to each of Juneau Exploration and a private company in separate
private placement transactions a five-year warrant to purchase 125,000 shares of
common stock at an exercise price of $1.00 per share. The issuance of these two
five-year warrants was exempt from registration under Section 4(2) of the
Securities Act, as it did not involve a public offering of securities. There
were no underwriting discounts, commissions or finder's fees paid in connection
with the placements.
On September 27, 2000, Contango sold in a private placement transaction
5,000 shares of its Series B senior convertible cumulative preferred stock (the
"Series B Preferred Stock") to Aquila Energy Capital for net proceeds of
$5,000,000. Series B Preferred Stock ranks prior to the company's common stock
(and any other junior stock) with respect to the payment of dividends or
distributions and upon liquidation, dissolution, winding-up or otherwise and is
pari passu to the company's Series A Preferred Stock. Holders of Series B
Preferred Stock are entitled to receive quarterly dividends at a dividend rate
equal to 8% per annum if paid in cash on a current quarterly basis or otherwise
at a rate of 10% per annum if not paid on a current quarterly basis or if paid
in shares of Series B Preferred Stock, in each case, computed on the basis of
$1,000 per share. Holders of Series B Preferred Stock may, at their discretion,
elect to convert such shares to shares of the
14
<PAGE> 15
company's common stock at a conversion price of $2.20 per share. In addition,
upon the occurrence of certain events, the company may elect to convert all of
the outstanding shares of Series B Preferred Stock at a conversion price of
$2.20 per share. As a result of the transaction, Aquila Energy Capital owns
approximately 7% of the company's diluted common shares. The issuance of the
securities to Aquila Energy Capital was exempt from registration under Section
4(2) of the Securities Act, as it did not involve a public offering of
securities. There were no underwriting discounts, commissions or finder's fees
paid in connection with the placement.
On September 29, 2000, Contango issued 6,000 shares at an average value
of $1.77 per share to William H. Gibbons as partial consideration for his
services as treasurer of the company. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act, as it did not
involve a public offering of securities.
On September 29, 2000, Contango issued 5,000 shares at an average value
of $2.06 per share to an individual as consideration for consulting services
provided to the company. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act, as it did not involve a
public offering of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The following is a list of exhibits filed as part of this Form 10-QSB.
Where so indicated by footnote, exhibits, which were previously filed, are
incorporated by reference.
3.1 Restated Articles of Incorporation of the Company, as amended.(1)
3.2 Amended and Restated By Laws of the Company.(4)
3.3 Amendment to Articles of Incorporation of the Company.(4)
4.1 Facsimile of common stock certificate of the Company.(1)
4.2 Certificate of Designations, Preferences and Relative Rights and
Limitations for Series A Senior Convertible Cumulative Preferred
Stock.(6)
4.3 Certificate of Designations, Preferences and Relative Rights and
Limitations for Series B Senior Convertible Cumulative Preferred
Stock.(8)
10.1 Alcorn/MGPX Oil & Gas Lease Acquisition Agreement.(2)
10.2 Agreement, dated effective as of September 1, 1999, between
Contango Oil & Gas Company and Juneau Exploration, L.L.C.(2)
15
<PAGE> 16
10.3 Securities Purchase Agreement between Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999.(3)
10.4 Warrant to Purchase Common Stock between Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999.(3)
10.5 Co-Sale Agreement among Kenneth R. Peak, Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999.(3)
10.6 Securities Purchase Agreement by and between Contango Oil & Gas
Company and the Southern Ute Indian Tribe doing business as the
Southern Ute Indian Tribe Growth Fund dated June 8, 2000.(5)
10.7 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Trust Company of the West, in its
capacities as Investment Manager and Custodian.(6)
10.8 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and the Southern Ute Indian Tribe doing
business as the Southern Ute Indian Tribe Growth Fund.(6)
10.9 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Fairfield Industries
Incorporated.(6)
10.10 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Juneau Exploration Company,
L.L.C.(6)
10.11 Amendment dated August 14, 2000 to agreement between Contango Oil &
Gas Company and Juneau Exploration Company, L.L.C. dated effective
as of September 1, 2000.(7)
10.12 Securities Purchase Agreement dated September 27, 2000 by and
between Contango Oil & Gas Company and Aquila Energy Capital
Corporation.(8)
27.1+ Financial Data Schedule.
99.1 Press Release of Contango Oil & Gas Company dated August 24,
2000.(6)
99.2 Press Release of Contango Oil & Gas Company dated September 27,
2000.(8)
----------
+ Filed herewith.
(1) Filed as an exhibit to the Company's Form 10-SB Registration
Statement, as filed with the Securities and Exchange Commission on
October 16, 1998.
(2) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
June 30, 1999, as filed with the Securities and Exchange Commission on
November 11, 1999.
(3) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
December 31, 1999, as filed with the Securities and Exchange
Commission on February 14, 2000.
(4) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
March 31, 2000, as filed with the Securities and Exchange Commission
on May 10, 2000.
(5) Filed as an exhibit to the Company's report on Form 8-K, dated June 8,
2000, as filed with the Securities and Exchange Commission on June 14,
2000.
(6) Filed as an exhibit to the Company's report on Form 8-K, dated August
24, 2000, as filed with the Securities and Exchange Commission on
September 8, 2000.
(7) Filed as an exhibit to the Company's annual report on Form 10-KSB for
the fiscal year ended June 30, 2000, as filed with the Securities and
Exchange Commission on September 27, 2000.
(8) Filed as an exhibit to the Company's report on Form 8-K, dated
September 27, 2000, as filed with the Securities and Exchange
Commission on October 3, 2000.
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<PAGE> 17
(b) REPORTS ON FORM 8-K:
Contango filed a report on Form 8-K September 8, 2000 reporting that on
August 24, 2000 that (i) it had sold in a private placement 2,500 shares of its
Series A senior convertible cumulative preferred stock for net proceeds of $2.5
million and a five-year warrant to purchase 500,000 shares of common stock at
$1.00 per share to Trust Company of the West; (ii) it had sold in a private
placement 2,500,000 shares of its common stock and a five-year warrant to
purchase 250,000 shares of common stock at $1.00 per share to the Southern Ute
Indian Tribe doing business as the Southern Ute Indian Tribe Growth Fund; (iii)
it had sold in a private placement a five-year warrant to purchase 125,000
shares of common stock at $1.00 per share to Juneau Exploration Company. L.L.C.
and a private company in connection with the formation of Republic Exploration,
L.L.C.; and (iv) it had acquired a 10% interest in a newly formed limited
liability company named Republic Exploration, L.L.C. for an initial investment
of $4.0 million, with an option to acquire an option to acquire an additional
23.3% interest before December 29, 2000 for $2.5 million.
Contango filed a report on Form 8-K on October 3, 2000 reporting that
on September 27, 2000 it had sold in a private placement 5,000 shares of its
Series B senior convertible cumulative preferred stock for net proceeds of
$5,000,000.
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
CONTANGO OIL & GAS COMPANY
Date: November 3, 2000 By: /s/ KENNETH R. PEAK
-------------------------------------------
Kenneth R. Peak
President and Chief Executive Officer
(Principal Executive and Financial Officer)
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<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Company, as amended.
3.2 Amended and Restated Bylaws of the Company.
3.3 Amendment to Articles of Incorporation of the Company.
4.1 Facsimile of common stock certificate of the Company.
4.2 Certificate of Designations, Preferences and Relative Rights and
Limitations for Series A Senior Convertible Cumulative Preferred
Stock.
4.3 Certificate of Designations, Preferences and Relative Rights and
Limitations for Series B Senior Convertible Cumulative Preferred
Stock.
10.1 Alcorn/MGPX Oil & Gas Lease Acquisition Agreement.
10.2 Agreement, dated effective as of September 1, 1999, between Contango
Oil & Gas Company and Juneau Exploration, L.L.C.
10.3 Securities Purchase Agreement between Contango Oil & Gas Company and
Trust Company of the West, dated December 29, 1999.
10.4 Warrant to Purchase Common Stock between Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999.
10.5 Co-Sale Agreement among Kenneth R. Peak, Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999.
10.6 Securities Purchase Agreement by and between Contango Oil & Gas
Company and the Southern Ute Indian Tribe doing business as the
Southern Ute Indian Tribe Growth Fund dated June 8, 2000.
10.7 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Trust Company of the West, in its
capacities as Investment Manager and Custodian.(6)
10.8 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and the Southern Ute Indian Tribe doing
business as the Southern Ute Indian Tribe Growth Fund.
10.9 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Fairfield Industries Incorporated.
10.10 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Juneau Exploration Company, L.L.C.
10.11 Amendment dated August 14, 2000 to agreement between Contango Oil &
Gas Company and Juneau Exploration Company, L.L.C. dated effective
as of September 1, 2000.
10.12 Securities Purchase Agreement dated September 27, 2000 by and
between Contango Oil & Gas Company and Aquila Energy Capital
Corporation.
27.1 Financial Data Schedule.
99.1 Press Release of Contango Oil & Gas Company dated August 24, 2000.
99.2 Press Release of Contango Oil & Gas Company dated September 27,
2000.
</TABLE>
