<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NO. 0-25214
CONTOUR ENERGY CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0447267
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
601 JEFFERSON ST.
SUITE 1100
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 652-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT OCTOBER 31, 1999
Common Stock 13,212,005
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<PAGE> 2
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
------
<S> <C>
Item I. Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999 (unaudited)................... 2
Consolidated Statements of Income (Loss) for the three months and nine months ended
September 30, 1998 and 1999 (unaudited)................................................................ 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1999 (unaudited)................................................................ 4
Notes to Consolidated Financial Statements (unaudited)................................................... 5
Item II. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 13
Item III. Quantitative and Qualitative Disclosure About Market Risk...................................... 20
PART II. OTHER INFORMATION................................................................................. 21
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ........................................................... $ 8,435 $ 22,730
Accounts receivable ................................................................. 18,071 20,796
Accounts receivable - drilling programs ............................................. 624 1,061
Prepaid expenses and other current assets ........................................... 1,121 1,047
------------- -------------
Total current assets .............................................................. 28,251 45,634
------------- -------------
Oil and gas properties, successful efforts method:
Unproved properties, net .......................................................... 38,293 34,678
Properties subject to amortization ................................................ 496,686 413,575
Pipelines and other transportation assets, at cost .................................. 1,582 1,582
Furniture, fixtures and equipment ................................................... 3,554 3,596
------------- -------------
540,115 453,431
Less: Accumulated depreciation, depletion and amortization ......................... (283,660) (282,317)
------------- -------------
Total property and equipment, net ................................................. 256,455 171,114
------------- -------------
Restricted cash ..................................................................... -- 7,500
Other non-current assets, net ....................................................... 1,491 921
------------- -------------
Total assets ........................................................................... $ 286,197 $ 225,169
============= =============
LIABILITIES:
Accounts payable and accrued expenses ............................................... $ 33,113 $ 34,110
Accounts payable - drilling programs ................................................ 272 1,068
Current portion of long-term debt ................................................... 32,251 12,929
------------- -------------
Total current liabilities ......................................................... 65,636 48,107
------------- -------------
Long term debt ...................................................................... 287,500 245,491
------------- -------------
Total liabilities ...................................................................... 353,136 293,598
------------- -------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 2,000,000 shares authorized at December 31,
1998 and September 30, 1999; 1,733,628 and 1,363,319 shares issued and
outstanding at December 31, 1998 and September 30, 1999, respectively
(liquidation value at December 31, 1998 and September 30, 1999 of
$48,633 and $40,929, respectively) ................................................ 2,600 2,045
Common stock, $.10 par value, 20,000,000 shares authorized at December 31, 1998
and September 30, 1999; 12,602,224 and 13,212,005 shares issued and outstanding
at December 31, 1998 and September 30, 1999, respectively ......................... 1,260 1,321
Additional paid-in capital .......................................................... 300,653 301,516
Accumulated deficit ................................................................. (371,452) (373,311)
------------- -------------
Total stockholders' deficit ............................................................ (66,939) (68,429)
------------- -------------
Total liabilities and stockholders' deficit ............................................ $ 286,197 $ 225,169
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 4
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
------------------------------ ------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas revenues ............................... $ 18,630 $ 12,120 $ 62,839 $ 40,477
Interest and other income .......................... 16 591 82 1,655
Gain (loss) on sale of oil and gas properties ...... -- (135) -- 25,556
------------ ------------ ------------ ------------
Total revenues ..................................... 18,646 12,576 62,921 67,688
------------ ------------ ------------ ------------
EXPENSES:
Production expenses ................................ 4,556 3,011 15,300 12,559
Exploration expenses ............................... 3,043 1,117 9,712 4,229
General and administrative expenses ................ 1,913 2,142 5,530 6,177
Interest and other debt expenses ................... 8,342 9,069 24,657 29,036
Depreciation, depletion and amortization ........... 9,203 10,479 30,389 28,505
------------ ------------ ------------ ------------
Total expenses ..................................... 27,057 25,818 85,588 80,506
------------ ------------ ------------ ------------
Loss before income taxes and extraordinary item ....... (8,411) (13,242) (22,667) (12,818)
Income taxes .......................................... -- -- -- --
------------ ------------ ------------ ------------
Net loss before extraordinary item .................... (8,411) (13,242) (22,667) (12,818)
Extraordinary gain (loss) ............................. -- (13) -- 10,959
------------ ------------ ------------ ------------
Net loss .............................................. (8,411) (13,255) (22,667) (1,859)
Less: cumulative preferred stock dividends ......... (1,122) (1,036) (3,413) (3,310)
------------ ------------ ------------ ------------
Net loss applicable to common stock ................... $ (9,533) $ (14,291) $ (26,080) $ (5,169)
============ ============ ============ ============
Basic and diluted loss per common share
before extraordinary item ........................... $ (.76) $ (1.09) $ (2.07) $ (1.26)
Basic and diluted loss per common share ............... (.76) (1.10) (2.07) (0.41)
Basic and diluted weighted average common shares
outstanding ......................................... 12,577 13,044 12,574 12,756
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 5
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30,
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .......................................................... $ (22,667) $ (1,859)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Gain on sale of assets .......................................... -- (25,556)
Extraordinary gain .............................................. -- (10,959)
Depreciation, depletion and amortization ........................ 30,389 28,505
Exploration expenses ............................................ 9,712 4,229
Accretion and amortization of debt expenses and other expenses .. 3,811 3,848
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ...................... 6,373 (3,162)
Increase in prepaid expenses and other current assets ........... 20 74
Increase in other non-current assets ............................ (206) (389)
Decrease in accounts payable and accrued expenses ............... 1,858 840
----------- -----------
Net cash provided by (used in) operating activities ............... 29,290 (4,429)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures .............................................. (48,267) (11,133)
Proceeds from sale of properties .................................. 17,070 82,865
Restricted cash investment......................................... -- (7,500)
Acquisition purchase price adjustment ............................. -- 6,889
----------- -----------
Net cash (used in) provided by investing activities ............... (31,197) 71,121
----------- -----------
FINANCING ACTIVITIES:
Proceeds from long term borrowings ................................ 102,600 4,000
Principal payments on long term borrowings ........................ (118,900) (115,500)
Proceeds from sale of common stock, net ........................... 33 --
Proceeds from sale of notes, net .................................. 29,576 126,063
Proceeds from conversion of preferred stock ....................... (2) --
Dividends on preferred stock ...................................... (4,582) --
Redemption of Senior Secured Notes ................................ -- (36,501)
Redemption of subordinated and senior notes ....................... (228) (30,459)
----------- -----------
Net cash provided by (used in) financing activities ............... 8,497 (52,397)
----------- -----------
Increase in cash and cash equivalents ................................ 6,590 14,295
Cash and cash equivalents, beginning of period ....................... 162 8,435
----------- -----------
Cash and cash equivalents, end of period ............................. $ 6,752 $ 22,730
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 6
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - INDUSTRY CONDITIONS AND LIQUIDITY
During 1998 and through the first quarter of 1999, the oil and gas
industry experienced a worldwide excess of supply over demand for oil and
natural gas resulting in sharply reduced prices. As a result, many companies in
the oil and gas industry, including Contour Energy Co. (formerly Kelley Oil &
Gas Corporation) ("the Company"), experienced reduced profitability and cash
flows which, in turn, created significant liquidity problems. To address these
liquidity issues, the Company has taken the measures discussed in the following
paragraphs.
In April 1999, the Company entered into an Exploration and Development
Agreement with Phillips Petroleum Company ("Phillips") relating to certain of
the Company's interests in the Bryceland, West Bryceland and Sailes fields in
north Louisiana. Pursuant to the agreement, the Company (1) received an $83
million cash payment (subject to certain post-closing adjustments) (2) retained
a 42 Bcf, 8-year volumetric overriding royalty interest and a 1% override on the
excess of production above such royalty interest and (3) retained 25% of its
working interest in the Cotton Valley formation. In addition, Phillips, will at
its risk and expense, operate, develop, exploit and explore the properties
thereby relieving the Company of significant operating, exploration and
development costs in the future. The transaction closed on May 17, 1999. The
Company recognized a gain of approximately $25.7 million (subject to purchase
price adjustments) in the second quarter of 1999 related to this transaction.
In April 1999, the Company negotiated a private offering of $135
million principal amount, 14% Senior Secured Notes (the "Notes"). The Notes are
secured by a first lien on substantially all of the Company's proved oil and
natural gas properties remaining after the sale to Phillips and guaranteed by
three entities wholly-owned by the Company. On June 2, 1999, the Company offered
to repurchase $35 million principal amount of the Notes at a repurchase price
equal to 104% of the principal amount, plus accrued and unpaid interest to the
date of the repurchase, in accordance with the Notes indenture. On June 30, 1999
the Company funded $37.5 million for the repurchase (including $1.1 million for
accrued interest and commitment fee and $1.4 million premium).
In April 1999, the Company began an offer to purchase ("Offer to
Purchase") the outstanding principal amounts of its 7 7/8% Convertible
Subordinated Notes due December 15, 1999 and its 8 1/2% Convertible Subordinated
Debentures due April 1, 2000 (collectively, the "Securities") at a price equal
to $590 per $1,000 principal amount. On May 17, 1999, the Company funded the
repurchase of $46.1 million of the Securities through the Offer to Purchase at a
cost of approximately $28.5 million (not including accrued interest paid of $1.2
million).
The net proceeds from the combination of these transactions and cash on
hand were used by the Company to repay all borrowings outstanding under its
revolving credit facility of $115.5 million plus accrued interest and terminate
the revolving credit facility, to fund cash collateral for a $1.5 million letter
of credit which was subsequently increased to $7.5 million, to fund the
repurchase of $46.1 million aggregate principal amount of the Company's 7 7/8%
Convertible Subordinated Notes due December 15, 1999 and 8 1/2% Convertible
Subordinated Debentures due April 1, 2000, at a cost of approximately $28.5
million, all at May 17, 1999 and to repurchase $35 million of Notes at 104% of
their principal amount. The Company will use any remaining net proceeds for
general corporate purposes. In the second quarter of 1999 the Company recognized
an extraordinary gain of approximately $11 million related to these repurchases
and refinancings, comprised of: (i) a net gain on the Securities tender offer of
$15.8 million, reduced by, (ii) a $1.4 million premium on the $35 million Notes
repurchase and the proportionate write-off of debt issue costs of $2.3 million
and (iii) the write-off of credit facility debt issue costs of $1.1 million. The
third quarter of 1999 includes reductions of $0.2 million for adjustments to
this extraordinary gain.
While industry conditions cannot be predicted with certainty and are
dependent upon a number of commodity and economic factors which are beyond the
Company's control, the Company believes that the cash on hand subsequent to the
consummation of the above transactions and the recent increase in oil and
natural gas prices, if continued, will sustain its operations over the
short-term. However, the Company will continue to have significant debt
outstanding and limited ability
5
<PAGE> 7
to incur further indebtedness, which, combined with industry conditions beyond
its control, may adversely affect its financial condition, results of operations
and cash flows. While the Company anticipates that it will be able to meet its
obligations in 1999, including principal and interest payments of $3.6 million
due in December 1999, there can be no assurance that it will be able to meet its
obligations in subsequent years including principal and interest payments of
$25.2 million due in April 2000. Non-payment of such obligations would be a
default under the Company's indentures. If that occurs, the Company may be
required to refinance or restructure all or a portion of its indebtedness, to
sell assets, or become subject to various other creditor rights under the
indentures.
On June 28, 1999, the Company announced that its board of directors
approved changing the Company's name to Contour Energy Co. and its NASDAQ ticker
symbol to CONCC. Concurrent with the name change, the Company established the
authorized capital stock of the Company at 22 million shares, 20 million of
which were designated as common stock and 2 million as preferred stock, and
effected a 1 for 10 reverse stock split, reducing the total outstanding shares
of common stock from approximately 126 million to approximately 12.6 million
(without giving effect to the preferred stock exchange offer described in the
following paragraph). These actions were consented to by the Company's majority
stockholder and became effective on July 30, 1999. All historical share and per
share data appearing in this document have been restated to reflect this reverse
stock split.
On June 28, 1999, the Company began an offer to exchange 15 shares of
its common stock (or 1.5 shares on a post-split basis) for each share of its
$2.625 convertible exchangeable preferred stock ("Preferred Stock"). Pursuant to
the exchange offer, 368,633 shares of Preferred Stock were tendered representing
approximately 21% of the total Preferred Stock outstanding. All shares validly
tendered were accepted for exchange. In July 1999, the shares were exchanged for
552,950 shares of newly issued common stock of the Company (after giving effect
to the 1 for 10 reverse stock split), increasing the Company's shares of
outstanding common stock to approximately 13.2 million. With the exchange, the
Company eliminated dividend arrearages of approximately $1.5 million.
On August 30, 1999, at market close, the Company's shares of common
stock and convertible Preferred Stock, which traded under the symbols of CONCC
and CONCP, were delisted from the Nasdaq SmallCap Market. This action was taken
as a result of the Company's failure to meet the net tangible assets, market
capitalization and net income requirements for continued listing on the Nasdaq
SmallCap Market. On August 31, 1999, at market open, the Company's stock began
trading on the OTC Bulletin Board under the symbols of CONC and CONCP.
In September 1999, the Company retired $1.7 million face amount of its
7 7/8% Convertible Subordinated Notes. The settlement payments included
principal amounts of $1.4 million and accrued interest of $34,000 and the third
quarter of 1999 includes an extraordinary gain of $0.2 million for these
transactions.
NOTE 2 - BASIS OF PRESENTATION
General. The accompanying unaudited interim consolidated financial
statements of the Company have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission in accordance
with generally accepted accounting principles for interim financial information.
These financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation, in all material
respects, of the results for the interim periods. The results of operations for
the periods ended September 30, 1999 are not necessarily indicative of results
to be expected for the full year. The accounting policies followed by the
Company are set forth in Note 2 to the financial statements in its Annual Report
on Form 10-K for the year ended December 31, 1998. These unaudited consolidated
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K and its Quarterly Report on Form 10-Q for the three months
ended March 31, 1999.
Comprehensive Income. In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 is effective for periods beginning
after December 15, 1997. SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as owners.
As of September 30, 1999, there are no adjustments ("Other comprehensive
income") to net income in deriving comprehensive income.
6
<PAGE> 8
NOTE 3 - PREFERRED STOCK
On April 14, 1998, the Company declared a dividend of $2.625 per share
of Preferred Stock (approximately $4.6 million), which was paid on April 30,
1998. The Company has not declared the quarterly dividends of $0.65625 per
preferred share for February 1, 1998, May 1, 1998, August 1, 1998, November 1,
1998, February 1, 1999, May 1, 1999, August 1, 1999 and November 1, 1999,
aggregating approximately $7.2 million (after giving effect to the Preferred
Stock exchange in the third quarter of 1999), covering eight quarters. Further
dividends are restricted under the Company's indentures governing its 10 3/8%
Senior Subordinated Notes and its 14% Senior Secured Notes. No interest is
payable on Preferred Stock arrearages; however, the terms of the Preferred Stock
enable holders, voting separately as a class, to elect two additional directors
to the Board at each meeting of stockholders at which directors are to be
elected during any period when Preferred Stock dividends are in arrears in an
aggregate amount equal to at least six quarterly dividends, whether or not
consecutive.
NOTE 4 - DERIVATIVE AND HEDGE ACCOUNTING
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at its fair value. Depending on the intended use of the
derivative, changes in its fair value will be reported in the period of change
as either a component of earnings or a component of other comprehensive income.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Earlier application of SFAS 133 is encouraged, but
retroactive application to periods prior to adoption is not allowed. The Company
is currently evaluating the impact of SFAS 133.
NOTE 5 - EARNINGS PER SHARE
The basic income (loss) per common share before extraordinary item and
the basic income (loss) per common share as shown on the Consolidated Statements
of Income (Loss) reflects net income (loss) before extraordinary item and net
income (loss), respectively and the effects of the Company's preferred stock
exchange offer (see Note 1), including cumulative preferred stock dividends,
whether or not declared, divided by the weighted average number of common shares
outstanding during the respective periods. The extraordinary gain (loss) per
common share for the three and nine month periods ended September 30, 1999 was
$0.00 and $0.86 per share, respectively. In calculating diluted income (loss)
per common share, common shares issuable under stock options and upon conversion
of convertible subordinated debentures and convertible preferred stock are added
to the weighted average common shares outstanding when dilutive. For the three
and nine months ended September 30, 1998, all potentially dilutive securities
are anti-dilutive and therefore are not included in the earnings per share
("EPS") calculations. For the three and nine months ended September 30, 1999,
potentially dilutive stock options were not in the money and the remaining
potentially dilutive securities are anti-dilutive and therefore are not included
in the EPS calculations.
Potentially dilutive securities outstanding at September 30, 1999 that
could impact EPS in the future include stock options granted to employees to
purchase 0.6 million common shares, the Company's 7 7/8% Convertible
Subordinated Notes and 8 1/2% Convertible Subordinated Debentures which can be
converted into 37 thousand and 50 thousand common shares, respectively, and the
Preferred Stock which can be converted into 0.5 million (includes the effect of
the preferred stock exchange in the third quarter of 1999) common shares. See
Note 1 regarding the Company's purchase of a portion of the outstanding 7 7/8%
Convertible Subordinated Notes and 8 1/2% Convertible Subordinated Debentures.
7
<PAGE> 9
NOTE 6 - GUARANTOR FINANCIAL STATEMENTS
Kelley Oil Corporation, a wholly-owned subsidiary of the Company and
Kelley Operating Company, Ltd., an indirect wholly-owned partnership of the
Company are guarantors of the Company's Series B and Series C 10 3/8% Senior
Subordinated Notes due 2006. The following guarantor consolidating condensed
financial statements present:
1.Consolidating condensed balance sheets as of December 31, 1998 and
September 30, 1999, consolidating condensed statements of income
(loss) for the three months and nine months ended September 30,
1998 and 1999, and consolidating condensed statements of cash
flows for the nine months ended September 30, 1998 and 1999.
2.Contour Energy Co. (formerly Kelley Oil & Gas Corporation) (the
"Parent"), combined Guarantor Subsidiaries and combined
Non-Guarantor Subsidiaries, all with their investments in
subsidiaries accounted for using the equity method.
3.Elimination entries necessary to consolidate the Parent and all of
its subsidiaries.
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets .................... $ 424,609 $ 212,946 $ 10,859 $ (620,163) $ 28,251
Property and equipment, net ....... -- 243,927 14,008 (1,480) 256,455
Other non-current assets, net ..... (165,642) 18,611 -- 148,522 1,491
------------- ------------- ------------- ------------- -------------
Total assets .................... $ 258,967 $ 475,484 $ 24,867 $ (473,121) $ 286,197
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities ............... $ 38,406 $ 641,113 $ 6,281 $ (620,164) $ 65,636
Long-term debt .................... 287,500 -- -- -- 287,500
Stockholders' deficit ............. (66,939) (165,629) 18,586 147,043 (66,939)
------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' deficit .......... $ 258,967 $ 475,484 $ 24,867 $ (473,121) $ 286,197
============= ============= ============= ============= =============
</TABLE>
8
<PAGE> 10
CONSOLIDATING CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets .............................. $ 355,377 $ 226,423 $ (333) $ (535,833) $ 45,634
Property and equipment, net ................. -- 165,726 6,278 (890) 171,114
Restricted cash ............................. -- 7,500 -- -- 7,500
Other non-current assets, net ............... (150,473) 2,267 9,426 139,701 921
------------- ------------- ------------- ------------- ------------
Total assets .............................. $ 204,904 $ 401,916 $ 15,371 $ (397,022) $ 225,169
============= ============= ============= ============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities ......................... $ 27,842 $ 551,500 $ 4,598 $ (535,833) $ 48,107
Long term debt .............................. 245,491 -- -- -- 245,491
Stockholders' deficit ....................... (68,429) (149,584) 10,773 138,811 (68,429)
------------- ------------- ------------- ------------- ------------
Total liabilities and
stockholders' deficit ................. $ 204,904 $ 401,916 $ 15,371 $ (397,022) $ 225,169
============= ============= ============= ============= ============
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ -- $ 16,261 $ 2,442 $ (57) $ 18,646
Expenses .................................... (8,454) (16,964) (1,948) 309 (27,057)
Equity in earnings (loss) of subsidiaries ... 43 494 -- (537) --
------------- ------------- ------------- ------------- ------------
Net income (loss) ........................... $ (8,411) $ (209) $ 494 $ (285) $ (8,411)
============= ============= ============= ============= ============
</TABLE>
9
<PAGE> 11
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ -- $ 10,806 $ 993 $ 777 $ 12,576
Expenses .................................... (8,885) (16,700) (1,196) 963 (25,818)
Equity in earnings (loss) of subsidiaries ... (4,357) (203) -- 4,560 --
Extraordinary item .......................... (13) -- -- -- (13)
----------- ------------ ------------ ----------- -----------
Net income (loss) ........................... $ (13,255) $ (6,097) $ (203) $ 6,300 $ (13,255)
=========== ============ ============ =========== ===========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ (18) $ 54,844 $ 8,281 $ (186) $ 62,921
Expenses .................................... (25,056) (56,121) (5,702) 1,291 (85,588)
Equity in earnings of subsidiaries .......... 2,407 2,579 -- (4,986) --
----------- ------------ ------------ ----------- -----------
Net income (loss) ........................... $ (22,667) $ 1,302 $ 2,579 $ (3,881) $ (22,667)
=========== ============ ============ =========== ===========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ -- $ 61,130 $ 6,717 $ (159) $ 67,688
Expenses .................................... (29,451) (48,534) (3,271) 750 (80,506)
Equity in earnings of subsidiaries .......... 16,633 3,446 -- (20,079) --
Extraordinary item .......................... 10,959 -- -- -- 10,959
----------- ------------ ------------ ----------- -----------
Net income (loss) ........................... $ (1,859) $ 16,042 $ 3,446 $ (19,488) $ (1,859)
=========== ============ ============ =========== ===========
</TABLE>
10
<PAGE> 12
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................. $ (22,667) $ 1,302 $ 2,579 $ (3,881) $ (22,667)
Non-cash income (loss) adjustments ............ 1,405 36,281 2,344 3,881 43,911
Changes in operating assets
and liabilities ............................. 12,952 (8,320) 3,414 -- 8,046
---------- ----------- ----------- ---------- ----------
Net cash provided by (used in)
operating activities .......................... (8,310) 29,263 8,337 -- 29,290
---------- ----------- ----------- ---------- ----------
INVESTING ACTIVITIES:
Capital expenditures .......................... -- (46,095) (2,172) -- (48,267)
Proceeds from sale of property ................ -- 17,070 -- -- 17,070
Distributions from partnerships ............... -- 6,206 -- (6,206) --
---------- ----------- ----------- ---------- ----------
Net cash used in investing activities ............ -- (22,819) (2,172) (6,206) (31,197)
---------- ----------- ----------- ---------- ----------
FINANCING ACTIVITIES:
Net payments on long term borrowings .......... (16,300) -- -- -- (16,300)
Proceeds from sale of notes, net .............. 29,576 -- -- -- 29,576
Redemption of subordinated notes .............. (228) -- -- -- (228)
Proceeds from sale of common stock, net ....... 33 -- -- -- 33
Proceeds from conversion of preferred stock ... (2) -- -- -- (2)
Distributions to partners ..................... -- -- (6,206) 6,206 --
Dividends on preferred stock .................. (4,582) -- -- -- (4,582)
---------- ----------- ----------- ---------- ----------
Net cash provided by (used in) financing
activities .................................... 8,497 -- (6,206) 6,206 8,497
---------- ----------- ----------- ---------- ----------
Decrease in cash and cash equivalents ............ 187 6,444 (41) -- 6,590
Cash and cash equivalents,
beginning of period ........................... 117 4 41 -- 162
---------- ----------- ----------- ---------- ----------
Cash and cash equivalents,
end of period ................................. $ 304 $ 6,448 $ -- $ -- $ 6,752
========== =========== =========== ========== ==========
</TABLE>
11
<PAGE> 13
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................... $ (1,859) $ 16,042 $ 3,446 $ (19,488) $ (1,859)
Non-cash income (loss) adjustments .......... (23,744) 5,856 (1,533) 19,488 67
Changes in operating assets
and liabilities ........................... 77,737 (80,295) (79) -- (2,637)
----------- ----------- ----------- ----------- ----------
Net cash provided by (used in)
operating activities ........................ 52,134 (58,397) 1,834 -- (4,429)
----------- ----------- ----------- ----------- ----------
INVESTING ACTIVITIES:
Capital expenditures ........................ -- (11,133) -- -- (11,133)
Proceeds from the sale of properties ........ -- 73,439 9,426 -- 82,865
Restricted cash investment .................. -- (7,500) -- -- (7,500)
Acquisition purchase price adjustment ....... -- 6,889 -- -- 6,889
Distributions from partnerships ............. -- 11,260 -- (11,260) --
----------- ----------- ----------- ----------- ----------
Net cash used in investing activities .......... -- 72,955 9,426 (11,260) 71,121
----------- ----------- ----------- ----------- ----------
FINANCING ACTIVITIES:
Net payments on long term borrowings ........ (111,500) -- -- -- (111,500)
Proceeds from sale of notes, net ............ 126,063 -- -- -- 126,063
Redemption of subordinated & senior notes ... (30,459) -- -- -- (30,459)
Redemption of Senior Secured notes .......... (36,501) -- -- -- (36,501)
Distributions to partners ................... -- -- (11,260) 11,260 --
Dividends on preferred stock ................ -- -- -- -- --
----------- ----------- ----------- ----------- ----------
Net cash used in financing
activities .................................. (52,397) -- (11,260) 11,260 (52,397)
----------- ----------- ----------- ----------- ----------
(Decrease) increase in cash and cash
equivalents ................................. (263) 14,558 -- -- 14,295
Cash and cash equivalents,
beginning of period ......................... 275 8,160 -- -- 8,435
----------- ----------- ----------- ----------- ----------
Cash and cash equivalents,
end of period ............................... $ 12 $ 22,718 $ -- $ -- $ 22,730
=========== =========== =========== =========== ==========
</TABLE>
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Introduction and General Conditions of the Oil and Natural Gas Industry
and Commodity Prices. Contour Energy Co. (formerly Kelley Oil & Gas Corporation)
and its consolidated subsidiaries (the "Company") are engaged in oil and natural
gas exploration, development, production and acquisition activities. Through the
first quarter of 1999, the prices of oil and natural gas fell sharply reflecting
the volatility of commodity prices and the industry generally. The Company
cannot predict future prices of oil and natural gas. Although both oil and
natural gas prices have recovered, should prices decline, the Company's results
of operations and liquidity could be adversely impacted. The success of the
Company is in part dependent on factors outside the control of the Company, but
which directly affect the financial condition of the Company, including capital
market conditions and highly volatile oil and natural gas prices. Due to recent
industry conditions, the Company, as others within the industry, has been
required to reconsider its capital expenditure budget, which could adversely
impact production levels, and to evaluate various financing and strategic
alternatives.
Hedging Activities. The Company periodically uses forward sales
contracts, natural gas and crude oil price swap agreements, natural gas basis
swap agreements and options to reduce exposure to downward price fluctuations on
its natural gas and crude oil production. The Company does not engage in
speculative transactions. During 1999, the Company used price and basis swap
agreements. Price swap agreements generally provide for the Company to receive
or make counterparty payments on the differential between a fixed price and a
variable indexed price for natural gas and crude oil. Basis swap agreements
generally provide for the Company to receive or make counterparty payments on
the differential between a variable indexed price and the price it receives from
the sale of natural gas production, and are used to hedge against unfavorable
price movements in the relationship between such variable indexed price and the
price received for such production. Gains and losses realized by the Company
from hedging activities are included in oil and gas revenues and average sales
prices in the period that the related production is sold. The Company's hedging
activities also cover the oil and gas production attributable to the interest in
such production of the public unitholders in its subsidiary partnerships.
Through natural gas price swap agreements, the Company hedged
approximately 54% and 44% of its natural gas production for the third quarter of
1999 and the first nine months of 1999, respectively, at average NYMEX quoted
prices of $2.09 per Mmbtu and $2.18 per Mmbtu, respectively, before transaction
and transportation costs. As of September 30, 1999, 1,085,000 Mmbtus of natural
gas production for October 1999 had been hedged by natural gas price swap
agreements at an average NYMEX quoted price of $2.13 per Mmbtu before
transaction and transportation costs. Through crude oil price swap agreements,
the Company hedged approximately 46% and 17% of its crude oil production for the
third quarter of 1999 and the first nine months of 1999, respectively, at
average NYMEX quoted prices of $20.00 per bbl, before transaction and
transportation costs. As of September 30, 1999, 64,400 bbls of crude oil
production for October through December 1999 has been hedged by crude oil price
swap agreements at an average NYMEX quoted price of $20.00 per bbl before
transaction and transportation costs. Hedging activities reduced revenues by
approximately $1.8 million and increased revenues by approximately $0.6 million
in the third quarter of 1999 and the first nine months of 1999, respectively, as
compared to estimated revenues had no hedging activities been conducted. At
September 30, 1999, the unrealized loss on the Company's existing hedging
instruments for future production months in 1999 approximated $1.0 million. The
credit risk exposure from counterparty nonperformance on natural gas forward
sales contracts and derivative financial instruments is generally the amount of
unrealized gains under the contracts. The Company has not experienced
counterparty nonperformance on these agreements and does not anticipate any in
future periods
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". See Note 4 - Derivative and Hedge
Accounting to the Notes to Consolidated Financial Statements contained in this
Report for further discussion.
On June 28, 1999, the Company announced that its board of directors had
approved changing the Company's name to Contour Energy Co. and its NASDAQ ticker
symbol to CONCC. Concurrent with the name change, the Company established the
authorized capital stock of the Company at 22 million shares, 20 million of
which were designated as common stock and 2 million as preferred stock, and
effected a 1 for 10 reverse stock split, reducing the total outstanding shares
of common stock from approximately 126 million to approximately 12.6 million
(without giving effect to the preferred stock exchange offer described in the
following paragraph). These actions were consented to by the Company's majority
13
<PAGE> 15
stockholder and became effective on July 30, 1999. On August 30, 1999, at market
close, the Company's shares of common stock and convertible preferred stock,
which traded under the symbols of CONCC and CONCP, were delisted from the Nasdaq
SmallCap Market. This action was taken as a result of the Company's failure to
meet the net tangible assets, market capitalization and net income requirements
for continued listing on the Nasdaq SmallCap Market. On August 31, 1999, at
market open, the Company's stock began trading on the OTC Bulletin Board under
the symbols of CONC and CONCP.
On June 28, 1999, the Company began an offer to exchange 15 shares of
its common stock (or 1.5 shares on a post-split basis) for each share of its
$2.625 convertible exchangeable preferred stock ("Preferred Stock"). Pursuant to
the exchange offer, 368,633 shares of Preferred Stock were tendered representing
approximately 21% of the total Preferred stock outstanding. All shares validly
tendered have been accepted for exchange. In July 1999, the shares were
exchanged for 552,950 shares of newly issued common stock of the Company (after
giving effect to the 1 for 10 reverse stock split), increasing the Company's
shares of outstanding common stock to approximately 13.2 million. With the
exchange, the Company eliminated dividend arrearages of approximately $1.5
million.
RESULTS OF OPERATIONS
The following table sets forth certain operating data regarding net
production, average sales prices and expenses associated with the Company's oil
and natural gas operations for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls) ........................... 84 91.8 308 257.5
Natural gas (Mmcf) .................................................. 8,528 4,812 28,031 17,777
Natural gas equivalent (Mmcfe) ...................................... 9,032 5,363 29,879 19,322
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (per Bbl) ......................... $ 12.55 $ 19.12 $ 13.52 $ 15.55
Natural gas (per Mcf) ............................................... 2.07 2.15 2.10 2.04
Natural gas equivalent (per Mcfe) ................................... 2.07 2.26 2.11 2.09
COST PER MCFE:
Lifting costs ....................................................... $ .39 $ .44 $ .40 $ .54
Severance and ad valorem taxes ...................................... .11 .12 .12 .11
General and administrative expenses ................................. .21 .40 .19 .32
Depreciation, depletion and amortization (oil and gas activities) ... 1.00 1.95 1.00 1.48
Interest expense, excluding accretion and amortization .............. .92 1.50 .83 1.32
</TABLE>
As of October 1, 1999, the Company's estimated proved reserves totaled
184 Bcfe.
Three Months Ended September 30, 1999 and 1998. The Company's oil and
gas revenues of $12.1 million for the third quarter of 1999 decreased 35%
compared to $18.6 million in the same period of 1998 primarily as a result of
decreases in gas production (44%). The decrease in gas production is primarily
due to production associated with the Company's interests in the Bryceland, West
Bryceland and Sailes fields in north Louisiana which were sold to Phillips in
the second quarter of 1999, see Liquidity and Capital Resources for further
discussion.
Interest and other income increased from $16,000 in the second quarter
of 1998 to $591,000 in the third quarter of 1999 due to higher average cash
balances in the current period.
Production expenses for the third quarter of 1999 decreased 35% to $3.0
million from $4.6 million in the same period last year, resulting primarily from
north Louisiana properties sold to Phillips in the second quarter of 1999.
Lifting costs (production expenses less ad valorem and severance taxes) per Mcfe
for the third quarter of 1999 increased 13% to $0.44 when compared to the same
period in 1998 reflecting a higher percentage of offshore properties at higher
lifting costs per unit after the second quarter sale of north Louisiana
properties to Phillips.
14
<PAGE> 16
Exploration expenses totaled $1.1 million in the third quarter of 1999
and $3.0 million in the corresponding period of 1998, a decrease of 63%,
primarily due to lower current quarter seismic expenditures and dry hole
expenses.
General and administrative ("G&A") expenses of $2.1 million in the
third quarter of 1999 included $0.8 million of cost of a non-recurring nature.
Ongoing G&A expenses of $1.3 million decreased 32% compared to $1.9 million in
the corresponding period last year. On a unit of production basis, G&A expenses
were $0.40 per Mcfe in the third quarter of 1999 compared to $0.21 per Mcfe in
the corresponding quarter of 1998 reflecting higher non-recurring professional,
consulting and transaction costs. Excluding the non-recurring costs, G&A
expenses were $0.25 per Mcfe in the third quarter of 1999.
Interest and other debt expenses of $9.1 million in the current quarter
increased 10% from $8.3 million in the same period of 1998. The increase in
interest expenses resulted primarily from higher average interest rates during
the current period. In addition to its third quarter 1999 interest expense of
$8.1 million, the Company recorded non-cash charges in the third quarter of 1999
of $1.0 million for amortization of debt issuance costs, accretion of note
discount, net of accretion of note premium and accretion of debt valuation
discount.
Depreciation, depletion and amortization ("DD&A") expenses increased
14% from $9.2 million in the third quarter of 1998 to $10.5 million in the
current period, including $4.4 million related to the Bayou Sauveur field (Bourg
wells). This results from the amortization of the total well costs of both the
Bourg No. 1 and Bourg No. 2 wells over the current proved developed reserves in
the Bayou Sauveur field. This was partially offset by lower current period
production due to the sale of north Louisiana properties to Phillips in the
second quarter 1999. The units-of-production DD&A rate for oil & gas activities
was $1.00 per Mcfe in the third quarter of 1998 compared to $1.95 per Mcfe in
the third quarter of 1999. Excluding the impact of the Bayou Sauveur field, the
DD&A rate for the third quarter of 1999 was $1.12 per Mcfe.
In September 1999, the Company retired $1.7 million face amount of its
7 7/8% Convertible Subordinated Notes. The settlement payments included
principal amounts of $1.4 million and accrued interest of $34,000 and the third
quarter of 1999 includes an extraordinary gain of $0.2 million for these
transactions.
The Company recognized a net loss of $13.3 million in the third quarter
of 1999 and a net loss of $8.4 million in the same period last year. The reasons
for the decrease in earnings are described in the foregoing discussion.
Nine Months Ended September 30, 1999 and 1998. The Company's oil and
gas revenues of $40.5 million for the first nine months of 1999 decreased 36%
compared to $62.8 million in the same period of 1998 primarily as a result of
decreases in gas production (37%) and oil production (16%). The decrease in gas
production is primarily attributable to the sale of North Louisiana properties
to Phillips in the second quarter of 1999. The first nine months of 1999
includes a $25.7 million gain on the sale of properties to Phillips Petroleum
Company relating to certain of the Company's interests in the Bryceland, West
Bryceland and Sailes fields in north Louisiana, see Liquidity and Capital
Resources for further discussion.
Interest and other income increased from $82,000 in the first nine
months of 1998 to $1.7 million in the first nine months of 1999 due to higher
average cash balances in the current period.
Production expenses for the first nine months of 1999 decreased 18% to
$12.6 million from $15.3 million in the same period last year, resulting
primarily from the sale of North Louisiana properties to Phillips in the second
quarter of 1999, partially offset by higher current period workover expenses.
Lifting costs per Mcfe for the first nine months of 1999 increased 35% to $0.54
when compared to the same period in 1998, reflecting a higher percentage of
offshore properties at higher lifting costs per unit after the second quarter
1999 sale of north Louisiana properties to Phillips and higher workover expenses
($0.05 per mcfe).
Exploration expenses totaled $4.2 million in the first nine months of
1999 and $9.7 million in the corresponding period of 1998, a decrease of 57%,
primarily due to lower current period seismic expenditures and dry hole
expenses.
15
<PAGE> 17
G&A expenses of $6.2 million in the first nine months of 1999 included
$1.7 million of cost of a non-recurring nature. Ongoing G&A expenses of $4.5
million decreased 18% compared to $5.5 million in the corresponding period last
year. On a unit of production basis, G&A expenses were $0.32 per Mcfe in the
first nine months of 1999 compared to $0.19 per Mcfe in the corresponding period
of 1998 reflecting higher non-recurring professional, consulting and transaction
costs. Excluding the non-recurring costs, G&A expenses were $0.23 per Mcfe for
the first nine months of 1999.
Interest and other debt expenses of $29.0 million in the first nine
months of 1999 increased 17% from $24.7 million in the same period of 1998. The
increase in interest expenses resulted primarily from higher average interest
rates and higher average debt levels during the current period. In addition to
its 1999 interest expense of $25.6 million, the Company recorded non-cash
charges in the first nine months of 1999 of $3.5 million for amortization of
debt issuance costs, accretion of note discount, net of accretion of note
premium and accretion of debt valuation discount. The 1999 interest expense of
$25.6 million includes approximately $2.1 million of interest payments related
to debt that was redeemed in the current period.
DD&A expenses decreased 6% from $30.4 million in the first nine months
of 1998 to $28.5 million in the current period, primarily as a result of lower
production in the first nine months of 1999 due to the sale of north Louisiana
properties to Phillips partially offset by $5.1 million of DD&A expense in the
current period associated with the Bayou Sauveur field (Harry Bourg wells). The
$5.1 million of DD&A expense results from the amortization of the total well
costs of both the Bourg No. 1 and Bourg No. 2 wells over the current proved
developed reserves in the Bayou Sauveur field. The units-of-production DD&A rate
for oil and gas activities was $1.00 per Mcfe in the first nine months of 1998
compared to $1.48 per Mcfe in the first nine months of 1999. Excluding the
impact of the Bayou Sauveur field, the DD&A rate for the first nine months of
1999 was $1.26 per Mcfe.
In the first nine months of 1999, the Company negotiated a private
offering of $135 million principal amount, 14% Senior Secured Notes, repurchased
$35 million principal amount of the notes and repurchased $46.1 million of its
7 7/8% Convertible Subordinated Notes due December 15, 1999 and its 8 1/2%
Convertible Subordinated Debentures due April 1, 2000. In the first nine months
of 1999, the Company recognized an extraordinary gain of approximately $10.8
million related to these repurchases and refinancings, see Liquidity and Capital
Resources for further discussion. In September 1999, the Company retired $1.7
million face amount of its 7 7/8% Convertible Subordinated Notes. The settlement
payments included principal amounts of $1.4 million and accrued interest of $34
thousand and the first nine months of 1999 includes an extraordinary gain of
$0.2 million for these transactions.
The Company recognized a net loss of $1.9 million in the first nine
months of 1999 and a net loss of $22.7 million in the same period last year. The
reasons for the increase in earnings are described in the foregoing discussion.
The results of operations for the quarter and nine months ended
September 30, 1999 are not necessarily indicative of results to be expected for
the full year.
LIQUIDITY AND CAPITAL RESOURCES
During 1998 and through the first quarter of 1999, the oil and gas
industry experienced a worldwide excess of supply over demand for oil and
natural gas resulting in sharply reduced prices. As a result, many companies in
the oil and gas industry, including the Company, experienced reduced
profitability and cash flows which, in turn, created significant liquidity
problems. To address these liquidity issues, the Company has taken the measures
discussed in the following paragraphs.
In April 1999, the Company entered into an Exploration and Development
Agreement with Phillips Petroleum Company ("Phillips") relating to certain of
the Company's interests in the Bryceland, West Bryceland and Sailes fields in
north Louisiana. Pursuant to the agreement, the Company (1) received an $83
million cash payment (subject to certain post-closing adjustments), (2) retained
a 42 Bcf, 8-year volumetric overriding royalty interest and a 1% override on the
excess of production above such royalty interest and (3) retained 25% of its
working interest in the Cotton Valley formation. In addition, Phillips, will at
its risk and expense, operate, develop, exploit and explore the properties
thereby relieving the Company of significant operating, exploration and
development costs in the future. The transaction closed on May 17, 1999.
16
<PAGE> 18
The Company recognized a gain of approximately $25.7 million (subject to
purchase price adjustments) in the second quarter of 1999 related to this
transaction.
In April 1999, the Company negotiated a private offering of $135
million principal amount, 14% Senior Secured Notes (the "Notes"). The Notes are
secured by a first lien on substantially all of the Company's proved oil and
natural gas properties remaining after the sale to Phillips and guaranteed by
three entities wholly-owned by the Company. On June 2, 1999, the Company offered
to repurchase $35 million principal amount of the Notes at a repurchase price
equal to 104% of the principal amount, plus accrued and unpaid interest to the
date of the repurchase, in accordance with the Notes indenture. On June 30, 1999
the Company funded $37.5 million for the repurchase (including $1.1 million for
accrued interest and commitment fee and $1.4 million premium).
In April 1999, the Company began an offer to purchase ("Offer to
Purchase") the outstanding principal amounts of its 7 7/8% Convertible
Subordinated Notes due December 15, 1999 and its 8 1/2% Convertible Subordinated
Debentures due April 1, 2000 (collectively, the "Securities") at a price equal
to $590 per $1,000 principal amount. On May 17, 1999, the Company funded the
repurchase of $46.1 million of the Securities through the Offer to Purchase at a
cost of approximately $28.5 million (not including accrued interest paid of $1.2
million).
The net proceeds from the combination of these transactions and cash on
hand were used by the Company to repay all borrowings outstanding under its
revolving credit facility of $115.5 million plus accrued interest and terminate
the revolving credit facility, to fund cash collateral for a $1.5 million letter
of credit which was subsequently increased to $7.5 million, to fund the
repurchase of $46.1 million aggregate principal amount of the Company's 7 7/8%
Convertible Subordinated Notes due December 15, 1999 and 8 1/2% Convertible
Subordinated Debentures due April 1, 2000, at a cost of approximately $28.5
million, all at May 17, 1999 and to repurchase $35 million of Notes at 104% of
their principal amount. The Company will use any remaining net proceeds for
general corporate purposes. In the second quarter of 1999, the Company
recognized an extraordinary gain of approximately $11 million related to these
repurchases and refinancings, comprised of: (i) a net gain on the Securities
tender offer of $15.8 million, reduced by, (ii) a $1.4 million premium on the
$35 million Notes repurchase and the proportionate write-off of debt issue costs
of $2.3 million and (iii) the write-off of credit facility debt issue costs of
$1.1 million. The third quarter of 1999 includes reductions of $0.2 million for
adjustments to this extraordinary gain.
In September 1999, the Company retired $1.7 million face amount of its
7 7/8% Convertible Subordinated Notes. The settlement payments included
principal amounts of $1.4 million and accrued interest of $34 thousand and
resulted in an extraordinary gain in the third quarter of 1999 of $0.2 million.
While industry conditions cannot be predicted with certainty and are
dependent upon a number of commodity and economic factors which are beyond the
Company's control, the Company believes that the cash on hand subsequent to the
consummation of the above transactions and the recent increase in oil and
natural gas prices, if continued, will sustain its operations over the
short-term. However, the Company will continue to have significant debt
outstanding and limited ability to incur further indebtedness, which, combined
with industry conditions beyond its control, may adversely affect its financial
condition, results of operations and cash flows.
Liquidity. Net cash used in operating activities, before working
capital adjustments, during the first nine months of 1999 aggregated $1.8
million. Funds provided by investing activities were comprised of proceeds from
the sale of north Louisiana properties to Phillips of $ 82.9 million and a $6.9
million purchase price adjustment related to a 1997 acquisition of oil and gas
properties partially offset by capital expenditures of $11.1 million and $7.5
million to fund cash collateral for a letter of credit (restricted cash). Funds
used in financing activities of $52.4 million were comprised of net credit
facility principal payments of $111.5 million, redemption of a portion of the
Notes for $36.5 million and redemption of subordinated and senior notes of $30.5
million, partially offset by proceeds of $126.1 million from the sale of the
Notes. As a result of these activities, cash and cash equivalents increased from
$8.4 million at December 31, 1998 to $22.7 million as of September 30, 1999. As
of September 30, 1999, the Company had a working capital deficit of $2.5
million (excludes restricted cash of $7.5 million), compared to a working
capital deficit of $37.4 million at the end of 1998.
Capital Resources. After the Company paid all amounts outstanding under
the Credit Facility, the Credit Facility was terminated and the Company is not
likely to have access to a revolving credit facility to supplement its cash
needs. The Company's typical monthly cash flow cycle is such that the Company
usually receives a substantial portion of its proceeds from operations near the
end of each month. Accordingly, cash balances may be higher on any given day
during the month than at the end of the month.
17
<PAGE> 19
The terms of the Notes and subordinated obligations significantly limit
the ability of the Company to incur additional funded indebtedness. Accordingly,
the Company anticipates that it will be required to meet its obligations during
the remainder of 1999 from the net proceeds of the transactions described above,
cash on hand and cash flows from operations. While the Company anticipates that
it will be able to meet its obligations in 1999, including principal and
interest payments of $3.6 million due in December 1999, there can be no
assurance that it will be able to meet its obligations in subsequent years,
including principal and interest payments of $25.2 million due in April 2000.
Non-payment of such obligations would be a default under the Company's
indentures. If that occurs, the Company may be required to refinance or
restructure all or a portion of its indebtedness, to sell assets, or become
subject to various other creditor rights under the indentures.
The Company had $268.2 million principal amount of debt outstanding as
of September 30, 1999 ($258.4 million recorded on the balance sheet), requiring
$31.7 million in annual cash interest payments. The Company's outstanding $2.625
Convertible Exchangeable Preferred Stock (the "Preferred Stock") is cumulative,
requiring dividends to accumulate, currently at the rate of $3.6 million
annually, and carries liquidation preferences over the Common Stock totaling
$40.9 million at September 30, 1999, including dividend arrearages of $6.8
million after giving effect to the preferred stock exchange in the third quarter
of 1999. The Company has not declared the quarterly dividend of $0.65625 per
preferred share for February 1, 1998, May 1, 1998, August 1, 1998, November 1,
1998, February 1, 1999, May 1, 1999, August 1, 1999 and November 1, 1999,
aggregating approximately $7.2 million (after giving effect to the preferred
stock exchange in the third quarter of 1999), covering eight quarters. Further
dividends are restricted under the Company's indentures governing its 10 3/8%
Senior Subordinated Notes and its 14% Senior Secured Notes. Since the Company
has not paid dividends on the Preferred Stock for a period of six quarters, the
holders of the Preferred Stock, as a group, have the right to elect two
additional directors to the Company's Board of Directors.
Capital Commitments. In the first nine months of 1999, the Company's
development and exploration capital spending totaled $2.2 million and $4.8
million, respectively. In the fourth quarter of 1999, the Company expects
capital spending to be less than $5 million. In the first nine months of 1999,
the Company participated in drilling 10 gross (2.72 net) wells (excluding wells
on properties sold to Phillips), of which 8 gross (2.04 net) wells were
completed in the first nine months of 1999. As of September 30, 1999, the
Company was participating in the drilling of 1 gross (0.18 net) well.
Year 2000. The Company has reviewed and evaluated its Year 2000 issues.
These issues involve the potential disruption to systems, processes, and
business practices that may occur if system hardware and software utilized by
the Company, its vendors, and customers are unable to process year 2000 data.
The Company has worked closely with its information systems and
technology vendors to install updated software, where appropriate, that will be
Year 2000 compliant. All of the critical Year 2000 internal systems issues have
been tested and corrected, where necessary.
The Company identified those vendors and others that it believes
provide material services or are vital to its business. Discussions and
correspondence with these companies to determine their Year 2000 readiness have
been conducted throughout 1999 and are essentially complete.
The cost of reviewing and implementing corrective measures for Year
2000 issues to date has not been material to the Company and has been limited to
use of Company and vendor personnel for review and implementation of corrective
measures. The Company does not expect the remainder of the Year 2000 review and
corrective measures to involve significant costs.
Based on assessments to date and compliance plans in progress, nothing
has come to the attention of management to cause it to believe that Year 2000
issues, including the cost of implementing corrective measures, will have an
adverse material impact on the business or operations of the Company.
Nevertheless, as indicated above, achieving Year 2000 readiness is subject to
risk and uncertainties, especially regarding third parties, and there can be no
assurance the Company will not be adversely affected by Year 2000 issues.
18
<PAGE> 20
The foregoing statements are intended to be and are hereby designated
"Year 2000 Readiness Disclosures" within the meaning of the Year 2000
Information and Readiness Act.
Inflation and Changing Prices. Oil and natural gas prices, as with most
commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation.
19
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in commodity prices. The
Company uses its Senior and Subordinated debt instruments to finance a
significant portion of its operations (see Note 1). Prior to May 17, 1999, the
Company had market risk exposure for interest rate changes related to its Credit
Facility variable rate debt (see Note 1). In the normal course of business the
Company enters into hedging transactions, including natural gas and crude oil
price swap agreements and natural gas basis swap agreements, to mitigate its
exposure to commodity price movements, but not for trading or speculative
purposes. In the first nine months of 1999, the Company used price and basis
swap agreements to reduce exposure to downward price fluctuations for its
natural gas and oil production. For debt obligations the table below presents
principal cash flows and weighted average interest rates by year of maturity.
For natural gas price and basis swap agreements and crude oil price swap
agreements, the table presents notional amounts in Mmbtus and bbls and weighted
average prices for contracts in place at September 30, 1999 (amounts in
thousands unless otherwise indicated).
<TABLE>
<CAPTION>
MATURITY DATE
-------------------------
FAIR VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL @ 9/30/99
--------- --------- --------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Debt:
14.00% (Maturity)........... $100,000 100,000 100,000
7.88% (Maturity)............ $ 3,509 3,509 3,009
8.50% (Maturity)............ 9,693 9,693 8,239
10.38% (Maturity)........... $ 155,000 155,000 80,600
--------- --------- --------- --------- -------- ---------- --------- ---------
Total Maturity................. $ 3,509 $ 9,693 $100,000 $ 155,000 $ 268,202 $ 191,848
========= ========= ========= ========= ======== ========== ========= =========
Blended weighted
average interest rate....... 7.88% 8.5% 14.00% 10.38%
Commodity price
derivatives:
Price swaps:
Notional amounts
(Mmbtus) ............... 1,085,000
Weighted average price...... $ 2.13
Fair value at 9/30/99(1).... $ (831)
(bbls) ................. 64,400
Weighted average price...... $ 20.00
Fair value at 9/30/99(1).... $ (157)
</TABLE>
(1) Represents estimated amounts to settle the contracts at September 30, 1999.
20
<PAGE> 22
FORWARD-LOOKING STATEMENTS
Statements contained in this Report and other materials filed or to be
filed by the Company with the Securities and Exchange Commission (as well as
information included in oral or other written statements made or to be made by
the Company or its representatives) that are forward-looking in nature are
intended to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, relating to matters such as anticipated
operating and financial performance, business prospects, developments and
results of the Company. Actual performance, prospects, developments and results
may differ materially from any or all anticipated results due to economic
conditions and other risks, uncertainties and circumstances partly or totally
outside the control of the Company, including rates of inflation, oil and
natural gas prices, uncertainty of reserve estimates, rates and timing of future
production of oil and gas, exploratory and development activities, acquisition
risks, changes in the level and timing of future costs and expenses related to
drilling and operating activities and those risk factors described on pages 13,
14 and 15 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and on pages 12 through 20 of the Company's Registration
Statement on form S-4 (registration statement number 333-84053), filed July 30,
1999.
Words such as "anticipates," "believes," "expects, "estimates,"
"projects" and similar expressions are "intended to identify forward-looking
statements. Forward-looking statements include the risk factors described in the
Company's Form 10-K mentioned above.
PART II. OTHER INFORMATION
ITEM 3. ARREARAGES IN PAYMENT OF DIVIDENDS
As of November 1, 1999, total dividends in arrears on the Company's
$2.625 Convertible Exchangeable Preferred Stock ("Preferred Stock") were $7.2
million representing the quarterly dividends of $0.65625 per share for February
1, 1998, May 1, 1998, August 1, 1998, November 1, 1998, February 1, 1999, May 1,
1999, August 1, 1999 and November 1, 1999. The dividend arrearages for Preferred
Stock reflects the tender offer of 368,633 shares of Preferred Stock for the
Company's common stock, pursuant to an exchange offer completed on July 27,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER: EXHIBIT
------- -------
27 Financial Data Schedule (included only in the
electronic filing of this document).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
third quarter of 1999.
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTOUR ENERGY CO.
Date: November 15, 1999 By: /s/ Rick G. Lester
------------------------------
Rick G. Lester
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
------- -------
<S> <C>
27 Financial Data Schedule (included only in the
electronic filing of this document).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,730
<SECURITIES> 0
<RECEIVABLES> 21,857
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,634
<PP&E> 453,431
<DEPRECIATION> 282,317
<TOTAL-ASSETS> 225,169
<CURRENT-LIABILITIES> 48,107
<BONDS> 245,491
0
2,045
<COMMON> 1,321
<OTHER-SE> (71,795)
<TOTAL-LIABILITY-AND-EQUITY> 225,169
<SALES> 40,477
<TOTAL-REVENUES> 67,688
<CGS> 0
<TOTAL-COSTS> 16,788
<OTHER-EXPENSES> 34,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,036
<INCOME-PRETAX> (12,818)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,818)
<DISCONTINUED> 0
<EXTRAORDINARY> 10,959
<CHANGES> 0
<NET-INCOME> (1,859)
<EPS-BASIC> (.41)
<EPS-DILUTED> (.41)
</TABLE>
