<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 MARCH 31, 2000 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
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 MAY 11, 2000
Common Stock 13,211,449
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<PAGE> 2
CONTOUR ENERGY CO. AND SUBSIDIARIES
INDEX
<TABLE>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000 (unaudited).............. 2
Consolidated Statements of Loss for the three months ended
March 31, 1999 and 2000 (unaudited)........................................................... 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 2000 (unaudited)........................................................... 4
Notes to Consolidated Financial Statements (unaudited).......................................... 5
Management's Discussion and Analysis of Financial Condition and Results of Operations........... 10
PART II. OTHER INFORMATION........................................................................ 15
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTOUR ENERGY CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents .............................................................. $ 10,370 $ 33,551
Accounts receivable .................................................................... 18,389 23,119
Accounts receivable - drilling programs ................................................ 199 233
Prepaid expenses and other current assets .............................................. 1,042 892
------------ ---------
Total current assets ................................................................. 30,000 57,795
------------ ---------
Oil and gas properties, successful efforts method:
Unproved properties, net ............................................................. 22,260 21,914
Properties subject to amortization ................................................... 428,116 403,135
Pipelines and other transportation assets, at cost ..................................... 1,582 1,582
Furniture, fixtures and equipment ...................................................... 3,596 3,596
------------ ---------
455,554 430,227
Less: Accumulated depreciation, depletion and amortization ............................ (289,798) (286,684)
------------ ---------
Total property and equipment, net .................................................... 165,756 143,543
------------ ---------
Restricted cash ........................................................................ 7,500 7,500
Other non-current assets, net .......................................................... 526 492
------------ ---------
Total assets ......................................................................... $ 203,782 $ 209,330
============ =========
LIABILITIES:
Accounts payable and accrued expenses .................................................. $ 25,207 $ 34,808
Accounts payable - drilling programs ................................................... 115 163
Current portion of long-term debt ...................................................... 8,598 8,406
------------ ---------
Total current liabilities ............................................................ 33,920 43,377
------------ ---------
Long-term debt ......................................................................... 246,165 246,993
------------ ---------
Total liabilities .................................................................... 280,085 290,370
------------ ---------
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 2,000,000 shares authorized at December 31, 1999
and March 31, 2000; 1,363,319 and 1,365,173 shares issued and outstanding at
December 31, 1999 and March 31, 2000, respectively (liquidation values at
December 31, 1999 and March 31, 2000 of $41,824 and $42,777, respectively) ........... 2,045 2,048
Common stock, $.10 par value, 20,000,000 shares authorized at December 31, 1999
and March 31, 2000; 13,212,005 and 13,211,449 shares issued and outstanding at
December 31, 1999 and March 31, 2000, respectively ................................... 1,321 1,321
Additional paid-in capital ............................................................. 301,516 301,513
Accumulated deficit .................................................................... (381,185) (385,922)
------------ ---------
Total stockholders' deficit .......................................................... (76,303) (81,040)
------------ ---------
Total liabilities and stockholders' deficit ............................................ $ 203,782 $ 209,330
============ =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 4
CONTOUR ENERGY CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
-------- --------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Oil and gas revenues .......................................... $ 15,507 $ 15,227
Interest and other income ..................................... 161 313
Gain on sale of oil and gas properties ........................ -- 3,361
-------- --------
Total revenues ................................................ 15,668 18,901
-------- --------
COSTS AND EXPENSES:
Production expenses ........................................... 5,284 2,855
Exploration expenses .......................................... 1,370 2,321
General and administrative expenses ........................... 1,374 1,630
Interest and other debt expenses .............................. 8,666 8,809
Depreciation, depletion and amortization ...................... 9,960 8,023
-------- --------
Total expenses ................................................ 26,654 23,638
-------- --------
Loss before income taxes ......................................... (10,986) (4,737)
Income taxes ..................................................... -- --
-------- --------
Net loss ......................................................... (10,986) (4,737)
Less: cumulative preferred stock dividends .................... (1,137) (895)
-------- --------
Net loss applicable to common stock .............................. $(12,123) $ (5,632)
======== ========
Basic and diluted loss per common share .......................... $ (.96) $ (.43)
======== ========
Weighted average common shares outstanding ....................... 12,602 13,212
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 5
CONTOUR ENERGY CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................................... $(10,986) $ (4,737)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization ................................. 9,960 8,023
Gain on sale of properties ............................................... -- (3,361)
Gain on debt redemption .................................................. -- (46)
Exploration expenses ..................................................... 1,370 2,321
Accretion and amortization of debt expenses .............................. 1,233 926
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ............................... 196 (4,764)
Decrease in prepaid expenses and other current assets .................... 353 150
Decrease in other non-current assets ..................................... 3 34
Increase in accounts payable and accrued expenses ........................ 1,969 9,649
-------- --------
Net cash provided by operating activities .................................. 4,098 8,195
-------- --------
INVESTING ACTIVITIES:
Capital expenditures ....................................................... (5,823) (4,601)
Proceeds from the sale of oil and gas properties ........................... -- 19,831
-------- --------
Net cash (used in) provided by investing activities ........................ (5,823) 15,230
-------- --------
FINANCING ACTIVITIES:
Redemption of subordinated debentures ...................................... -- (244)
-------- --------
Net cash used in financing activities ...................................... -- (244)
-------- --------
(Decrease) increase in cash and cash equivalents .............................. (1,725) 23,181
Cash and cash equivalents, beginning of period ................................ 8,435 10,370
-------- --------
Cash and cash equivalents, end of period ...................................... $ 6,710 $ 33,551
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 6
CONTOUR ENERGY CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
General. The accompanying unaudited interim consolidated financial
statements of Contour Energy Co. (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 solely of normal recurring adjustments) necessary for a
fair statement in all material respects of the results for the interim periods
presented. The results of operations for the three months ended March 31, 2000
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, 1999. These unaudited consolidated interim financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1999 Annual Report on Form 10-K.
The consolidated balance sheet as of December 31, 1999 has been derived
from the December 31, 1999 audited consolidated financial statements. The
consolidated statements of income and cash flows for the three months ended
March 31, 1999 have been derived from the March 31, 1999 audited consolidated
financial statements. The consolidating condensed balance sheet as of December
31, 1999 and the consolidating condensed statements of income (loss)
and cash flows for the three months ended March 31, 1999 have been derived from
the Notes to consolidated financial statements included in the March 31, 1999
audited consolidated financial statements.
NOTE 2 - SALE OF A PORTION OF VOLUMETRIC OVERRIDING ROYALTY INTEREST
In March 2000, the Company sold a portion of its volumetric overriding
royalty interest ("VORI") (the "VORI Sale"). The net proceeds from the VORI Sale
were approximately $19.8 million. Since the portion of the VORI sold
(approximately 16.5 Bcf) represents production commencing April 1, 2003, the
VORI Sale will not impact the Company's operating cash flows until 2003. In the
first quarter of 2000 the Company recognized a gain of approximately $3.4
million related to this transaction.
NOTE 3 - REDEMPTION OF CONVERTIBLE SUBORDINATED DEBENTURES
In the first quarter of 2000, the Company retired $0.3 million face
amount of its 8 1/2% Convertible Subordinated Debentures. The settlement
payments included principal amounts of $0.2 million and accrued interest of
$7,000. On April 3, 2000, the Company paid off the remaining principal of $8.4
million and interest of $0.4 million on its outstanding 8 1/2% Convertible
Subordinated Debentures.
NOTE 4 - PREFERRED STOCK
The Company has not declared the quarterly dividends of $0.65625 per
preferred share for February 1, 1998 through May 1, 2000, aggregating
approximately $8.9 million, covering ten 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.
In March 2000, a class action suit was brought against the Company in
the Court of Chancery of the State of Delaware, complaining, among other
things, that the Company had not taken necessary steps to facilitate the
election of two additional directors to its board by preferred stockholders.
Under the charter provisions relating to the Company's preferred stock, upon
the occasion of the dividends not being paid on such preferred stock for six
quarters, the preferred stockholders are, as a class entitled to elect two
directors to the Company's board. Among the relief sought in such proceeding
are an injunction directing the Company to create new directorships for
nominations from preferred stockholders at the 2000 annual meeting of
stockholders, directing that past dividends be paid, declaring that the
Company's reverse stock split in 1999, which involved the settlement of
fractional shares by the payment of a small amount of cash (less than $1,500)
by the Company, constituted a repurchase of common shares in violation of the
preferred stock charter provisions and was therefore void and other relief. The
Company has consistently acknowledged, publicly and privately, the rights of
such preferred stockholders to elect two directors and believes it has not in
any way encumbered the preferred shareholders from exercising such rights. The
Company believes that the complaint and the relief sought are wholly without
merit and will vigorously defend its positions in such proceedings.
NOTE 5 - EARNINGS PER SHARE
The basic loss per common share as shown on the Consolidated Statements
of Loss reflects net loss less cumulative preferred stock dividends, whether or
not declared, divided by the weighted average number of common shares
outstanding during the respective periods. In calculating diluted loss per
common share, common shares issuable under stock options and convertible
preferred stock are added to the weighted average common shares outstanding when
dilutive. For the three months ended March 31, 2000 and 1999, all potentially
dilutive securities are anti-dilutive and therefore are not included in the
diluted earnings per share ("EPS") calculation. Potentially dilutive securities
outstanding at March 31, 2000 that could impact EPS in the future include stock
options granted to employees to purchase 0.4 million common shares and the
Preferred Stock which can be converted into 0.5 million common shares.
In 1999, the Company effected a 1 for 10 reverse common stock split;
all historical share and per share data appearing in this document have been
restated to reflect this reverse stock split.
5
<PAGE> 7
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 14% Senior Secured Notes due
2002-2003 and of the Company's Series B and Series D 10 3/8 % Senior
Subordinated Notes due 2006. Concorde Gas Marketing, Inc. ("Concorde"), a
wholly-owned subsidiary of the Company, is also a guarantor of the Company's
Series B 14% Senior Secured Notes due 2002-2003. The following guarantor
consolidating condensed financial statements present:
1. Consolidating condensed balance sheets as of December 31, 1999
and March 31, 2000, consolidating condensed statements of income
(loss) for the three months ended March 31, 1999 and 2000 and
consolidating condensed statements of cash flows for the three
months ended March 31, 1999 and March 31, 2000.
2. Contour Energy Co. (the "Parent"), combined Guarantor
Subsidiaries (other than Concorde), Concorde 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, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets ......................... $ 334,360 $ 128,855 $ 6,317 $ 737 $ (440,269) $ 30,000
Property and equipment, net ............ -- 161,107 -- 6,141 (1,492) 165,756
Restricted cash ........................ -- 7,500 -- -- -- 7,500
Other non-current assets, net .......... (149,279) 11,540 -- -- 138,265 526
---------- ------------ -------- ------------- ------------ ------------
Total assets ......................... $ 185,081 $ 309,002 $ 6,317 $ 6,878 $ (303,496) $ 203,782
========== ============ ======== ============= ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities .................... $ 15,219 $ 456,789 $ 1,501 $ 680 $ (440,269) $ 33,920
Long-term debt ......................... 246,165 -- -- -- -- 246,165
Stockholders' deficit .................. (76,303) (147,787) 4,816 6,198 136,773 (76,303)
---------- ------------ -------- ------------- ------------ ------------
Total liabilities and
stockholders' deficit ................. $ 185,081 $ 309,002 $ 6,317 $ 6,878 $ (303,496) $ 203,782
========== ============ ======== ============= ============ ============
</TABLE>
6
<PAGE> 8
CONSOLIDATING CONDENSED BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets ......................... $ 334,063 $ 133,619 $ 10,722 $ 922 $ (421,531) $ 57,795
Property and equipment, net ............ -- 138,114 -- 5,811 (382) 143,543
Restricted cash ........................ -- 7,500 -- -- -- 7,500
Other non-current assets, net .......... (145,067) 11,765 -- -- 133,794 492
---------- ------------ -------- ------------- ------------ ------------
Total assets ......................... $ 188,996 $ 290,998 $ 10,722 $ 6,733 $ (288,119) $ 209,330
========== ============ ======== ============= ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities .................... $ 23,043 $ 435,682 $ 5,485 $ 697 $ (421,530) $ 43,377
Long-term debt ......................... 246,993 -- -- -- -- 246,993
Stockholders' deficit .................. (81,040) (144,684) 5,237 6,036 133,411 (81,040)
---------- ------------ -------- ------------- ------------ ------------
Total liabilities and
stockholders' deficit ............ $ 188,996 $ 290,998 $ 10,722 $ 6,733 $ (288,119) $ 209,330
========== ============ ======== ============= ============ ============
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ..................................... $ -- $ 13,732 $ 603 $ 1,387 $ (54) $ 15,668
Costs and expenses ........................... (8,701) (16,684) (122) (1,003) (144) (26,654)
Equity in earnings (loss) of subsidiaries .... (2,285) 865 -- -- 1,420 --
---------- ------------ -------- ------------ ------------ ------------
Net income (loss) .......................... $ (10,986) $ (2,087) $ 481 $ 384 $ 1,222 $ (10,986)
========== ============ ======== ============ ============ ============
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................ $ -- $ 16,904 $ 655 $ 763 $ 579 $ 18,901
Costs and expenses ...................... (8,950) (14,461) (235) (522) 530 (23,638)
Equity in earnings of subsidiaries ...... 4,213 659 -- -- (4,872) --
---------- ------------ -------- ------------- ------------ ------------
Net income (loss) ..................... $ (4,737) $ 3,102 $ 420 $ 241 $ (3,763) $ (4,737)
========== ============ ======== ============= ============ ============
</TABLE>
7
<PAGE> 9
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................ $ (10,986) $ (2,087) $ 481 $ 384 $ 1,222 $ (10,986)
Non-cash income (loss) adjustments ....... 3,517 9,835 -- 433 (1,222) 12,563
Changes in operating assets
and liabilities ........................ 7,188 (4,370) (481) 184 -- 2,521
---------- ------------ -------- ------------- ------------ ------------
Net cash provided by (used in)
operating activities ..................... (281) 3,378 -- 1,001 -- 4,098
---------- ------------ -------- ------------- ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures ..................... -- (5,823) -- -- -- (5,823)
Distributions from partnerships .......... -- 1,001 -- -- (1,001) --
---------- ------------ -------- ------------- ------------ ------------
Net cash used in investing activities ...... -- (4,822) -- -- (1,001) (5,823)
---------- ------------ -------- ------------- ------------ ------------
FINANCING ACTIVITIES:
Distributions to partners .............. -- -- -- (1,001) 1,001 --
---------- ------------ -------- ------------- ------------ ------------
Net cash provided by (used in) financing
activities ............................... -- -- -- (1,001) 1,001 --
---------- ------------ -------- ------------- ------------ ------------
Decrease in cash
and cash equivalents ..................... (281) (1,444) -- -- -- (1,725)
Cash and cash equivalents,
beginning of period ...................... 275 8,160 -- -- -- 8,435
---------- ------------ -------- ------------- ------------ ------------
Cash and cash equivalents,
end of period .......................... $ (6) $ 6,716 $ -- $ -- $ -- $ 6,710
========== ============ ======== ============= ============ ============
</TABLE>
8
<PAGE> 10
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................ $ (4,737) $ 3,102 $ 420 $ 241 $ (3,763) $ (4,737)
Non-cash income (loss) adjustments ....... (3,332) 7,213 -- 220 3,762 7,863
Changes in operating assets
and liabilities ........................ 8,313 (2,657) (420) (168) 1 5,069
---------- ------------ -------- ------------- ------------ ------------
Net cash provided by operating activities ... 244 7,658 -- 293 -- 8,195
---------- ------------ -------- ------------- ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures ..................... -- (4,708) -- 107 -- (4,601)
Proceeds from sale of property ........... -- 19,831 -- -- -- 19,831
Distributions from partnerships .......... -- 400 -- -- (400) --
---------- ------------ -------- ------------- ------------ ------------
Net cash provided by investing activities ... -- 15,523 -- 107 (400) 15,230
---------- ------------ -------- ------------- ------------ ------------
FINANCING ACTIVITIES:
Redemption on subordinated debentures .. (244) -- -- -- -- (244)
Distributions to partners .............. -- -- -- (400) 400 --
---------- ------------ -------- ------------- ------------ ------------
Net cash used in financing activities .... (244) -- -- (400) 400 (244)
---------- ------------ -------- ------------- ------------ ------------
Increase in cash and
cash equivalents ......................... -- 23,181 -- -- -- 23,181
Cash and cash equivalents,
beginning of period ...................... 12 10,358 -- -- -- 10,370
---------- ------------ -------- ------------- ------------ ------------
Cash and cash equivalents,
end of period ............................ $ 12 $ 33,539 $ -- $ -- $ -- $ 33,551
========== ============ ======== ============= ============ ============
</TABLE>
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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 2000, the Company used price 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. 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 66% and 49% of its natural gas production for the three months
ended March 31, 1999 and 2000, respectively, at average NYMEX quoted prices of
$2.27 and $2.48, per Mmbtu, respectively, before transaction and transportation
costs. As of March 31, 2000, 6,420,000 Mmbtus of natural gas production for
April through October 2000 has been hedged by natural gas price swap agreements
at an average NYMEX quoted price of $2.60 per Mmbtu before transaction and
transportation costs. Through crude oil price swap agreements, the Company
hedged approximately 67% of its crude oil production for the three months ended
March 31, 2000 at an average NYMEX quoted price of $25.09 per bbl, before
transaction and transportation costs. No crude oil was hedged in the three month
period ended March 31, 1999. As of March 31, 2000, 107,000 bbls of crude oil
production for March 2000 through August 2000 has been hedged by crude oil price
swap agreements at an average NYMEX quoted price of $27.00 per bbl before
transaction and transportation costs. Hedging activities increased oil and gas
revenues by approximately $2.5 million in the three months ended March 31, 1999,
and decreased oil and gas revenues by approximately $0.2 million for the three
months ended March 31, 2000, as compared to estimated revenues had no hedging
activities been conducted. At March 31, 2000, the unrealized loss on the
Company's existing hedging instruments for future production months in 2000
approximated $1.9 million.
10
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth certain operating data regarding
net production, average sales prices, production expenses and revenues
associated with the Company's oil and natural gas operations for the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
--------- ---------
<S> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................................................. 82.8 112.3
Natural gas (Mmcf)........................................................................ 7,247 4,808
Natural gas equivalent (Mmcfe)............................................................ 7,744 5,482
AVERAGE SALES PRICE PER UNIT (INCLUDING THE EFFECTS OF HEDGING):
Oil and other liquid hydrocarbons (per Bbl)............................................... $ 11.63 $ 23.69
Natural gas (per Mcf)..................................................................... 1.97 2.51
Natural gas equivalent (per Mcfe)......................................................... 1.97 2.69
COST PER MCFE:
Lifting costs............................................................................. $ .59 $ .44
Severance and ad valorem taxes............................................................ .10 .08
General and administrative expenses....................................................... .18 .30
Depreciation, depletion and amortization (oil and gas activities)......................... 1.20 1.44
Interest expense, excluding accretion and amortization.................................... .96 1.44
</TABLE>
The Company's oil and gas revenues of $15.2 million for the first
quarter of 2000 decreased 2% compared to $15.5 million in the same period of
1999 primarily as a result of a decrease in gas production (34%) which was
related to the sale of interests in certain north Louisiana fields to Phillips
Petroleum Company ("Phillips Transaction") in the second quarter of 1999 (see
Liquidity and Capital Resources). Partially offsetting this gas production
decline was higher oil production (36%) related to increases in offshore oil
production, higher gas prices (27%) and higher oil prices (104%). The first
quarter of 2000 includes a gain of $3.4 million on the sale of a portion of the
Company's volumetric overriding royalty interest ("VORI"), (see Liquidity and
Capital Resources).
Interest and other income increased from $0.2 million in the first
quarter of 1999 to $0.3 million in the first quarter of 2000. This increase was
due to higher average cash balances in the current period and a $46,000 gain
related to the partial redemption of the Company's 8 1/2% Convertible
Subordinated Debentures.
Production expenses for the first quarter of 2000 decreased 45% to $2.9
million from $5.3 million in the same period last year, resulting primarily from
the Phillips Transaction and lower workover expenses. Lifting costs (production
expenses less ad valorem and severance taxes) per Mcfe for the first quarter of
2000 decreased 25% to $0.44, when compared to the same period in 1999,
reflecting higher workover expenses in the first quarter of 1999 and an ongoing
cost reduction program on Company operated properties.
Exploration expenses totaled $2.3 million in the first quarter of 2000
and $1.4 million in the corresponding period of 1999, an increase of 64%, due to
higher dry hole expenses and higher unevaluated leasehold abandonment expenses.
General and administrative ("G&A") expenses of $1.6 million in the
first quarter of 2000 increased 14% compared to $1.4 million in the
corresponding period last year. Reductions of $0.4 million in G&A expense for
allocations to exploration expense and in overhead recovery masked an overall 8%
decline in total G&A expenses compared to the first quarter of 1999. On a unit
basis, G&A expenses were $0.30 per Mcfe in the first quarter of 2000 compared to
$0.18 per Mcfe in the corresponding quarter of 1999.
Interest and other debt expenses of $8.8 million in the first quarter
of 2000 increased 1% from $8.7 million in the same period of 1999. The increase
in interest expense resulted primarily from higher average interest rates during
the current period due to the issuance of the 14% Senior Secured Notes in May
1999. In addition to its 2000 cash interest
11
<PAGE> 13
expense of $7.9 million, the Company recorded non-cash charges in the first
quarter of 2000 of $0.6 million for amortization of debt issuance costs, $0.2
million for accretion of note discount and $0.1 million for accretion of debt
valuation discount.
Depreciation, depletion and amortization ("DD&A") expense decreased 20%
from $10.0 million in the first quarter of 1999 to $8.0 million in the current
period, primarily as a result of lower natural gas production related to the
Phillips Transaction, partially offset by $1.3 million of DD&A expense in the
current period 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. The units-of-production DD&A rate for oil and gas activities was $1.20
per Mcfe in the first quarter 1999 compared to $1.44 per Mcfe in the current
period. Excluding the impact of the Bayou Sauveur field, the DD&A rate for the
first quarter of 2000 was $1.22 per Mcfe.
The Company recognized a net loss of $4.7 million in the first quarter
of 2000 and a net loss of $11.0 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 ended March 31, 2000 are not
necessarily indicative of results to be expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Net cash provided by operating activities, before working
capital adjustments, during the first three months of 2000 aggregated $3.1
million. Funds provided by investing activities were comprised of proceeds from
the sale of oil and gas properties of $19.8 million (see below), partially
offset by capital expenditures of $4.6 million. Funds used in financing
activities of $0.2 million were comprised of the partial redemption of the
Company's 8 1/2% Convertible Subordinated Debentures. As result of these
activities, cash and cash equivalents increased from $10.4 million at December
31, 1999 to $33.6 million as of March 31, 2000. As of March 31, 2000, the
Company had working capital of $14.4 million, compared to a working capital
deficit of $3.9 million at the end of 1999. In April 2000, the Company expended
$24.2 million for principal and interest, including repayment of the remaining
principal of $8.4 million and interest of $0.4 million on its outstanding 8 1/2%
Convertible Subordinated Debentures .
In April 1999, the Company entered into an Exploration and Development
Agreement with Phillips Petroleum Company 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
(2) retained the 42 Bcf, 8-year VORI and a 1% override on the excess of
production above such VORI and (3) retained 25% of its working interest in the
Cotton Valley formation.
In March 2000, the Company sold a portion of its VORI (the "VORI
Sale"). The net proceeds from the VORI Sale were approximately $19.8 million.
Since the portion of the VORI sold (approximately 16.5 Bcf) represents
production commencing April 1, 2003, the VORI Sale will not impact the Company's
operating cash flows until 2003. In the first quarter of 2000 the Company
recognized a gain of approximately $3.4 million related to this transaction.
Proceeds from the VORI Sale are included in the Company's cash balance as of
March 31, 2000.
Capital Resources. In 1999, after the Company paid all amounts
outstanding under its 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.
The Company has received the benefits of a general increase in the
level of commodity prices over the past several months. This increase, combined
with the actions described above and the VORI Sale, have provided the Company
with near-term liquidity and capital for its ongoing operations. However, the
commodity markets are volatile and there is no certainty that current oil and
natural gas prices can be sustained at these levels. In addition, the Company
continues to have significant debt outstanding relative to its asset base and
pays a high portion of its cash flow to service such debt. Furthermore, as the
Company does not have a revolving credit facility, the Company does not have
ready access to incremental sources of capital to supplement its operational
requirements. The Company believes that it has the ability for the foreseeable
future based on current market conditions and operating performance, to meet all
obligations as they come due and fund its current capital
12
<PAGE> 14
expenditure program from cash on hand and operational cash flows. However, there
can be no assurance that the Company will be able to fund future obligations.
The Company had $268.2 million principal amount of debt outstanding as
of March 31, 2000 ($255.4 million recorded on the balance sheet), requiring
$31.1 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
$42.8 million at March 31, 2000, including dividend arrearages of $8.6 million.
The Company has not declared the quarterly dividends of $0.65625 per preferred
share for February 1, 1998 through May 1, 2000, aggregating approximately $9.0
million, covering ten 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. See Part II Item 1,
Legal Proceedings.
Capital Commitments. The Company's 2000 capital expenditure budget
provides for $15.0 million to be expended on development drilling and
exploratory activities primarily in south Louisiana and the shallow waters of
the Gulf of Mexico. As with the Company's other obligations discussed above,
funding for this level of capital expenditures will be provided by cash on hand
and cash flow from operations which is dependent on a number of variables,
including commodity prices, production levels and operating costs. In the first
three months of 2000, the Company expended $2.4 million on exploration and
development drilling and participated in drilling 6 gross (1.38 net) wells, of
which 5 gross (1.07 net) wells were completed and 1 gross (0.31 net) well was
dry. As of the end of the quarter, the Company was participating in the
drilling/completing of 1 gross (0.33 net) wells.
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.
Accounting Pronouncements. 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")
which was amended in June 1999 by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000, and
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. Retroactive application to periods prior to adoption is not allowed. The
Company has not quantified the impact of adoption on its financial statements.
13
<PAGE> 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses its Senior and Subordinated debt instruments to
finance a significant portion of its operations. The Company is exposed to
market risk from changes in commodity prices. In the normal course of business
the Company enters into hedging transactions, including forward sales contracts,
natural gas and crude oil price swap agreements, natural gas basis swap
agreements and options to mitigate its exposure to commodity price movements,
but not for trading or speculative purposes. In 2000, the Company used price
swap agreements to reduce exposure to downward price fluctuations for its
natural gas and crude 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 crude oil price swap agreements, the table
presents notional amounts in Mmbtus and bbls at weighted average prices for
contracts in place at March 31, 2000.
<TABLE>
<CAPTION>
MATURITY DATE
----------------------------------------------------
FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL @ 3/31/00
---------- -------- --------- --------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Debt:
14.00% (Maturity) (1)..... $ 4,120 $ 100,720 $ 104,840 $ 102,743
8.50% (Maturity).......... $ 8,406 8,406 8,406
10.38% (Maturity)......... $ 155,000 155,000 69,750
---------- --------- --------- ---------- --------- ----------
Total Maturity............... $ 8,406 $ 4,120 $ 100,720 $ 155,000 $ 268,246 $ 180,899
========== ========= ========= ========== ========= ==========
Blended weighted
average interest rate..... 8.50% 14.00% 14.00% 10.38%
Commodity price
derivatives:
Price swaps:
Notional amounts:
Natural gas (Mmbtus) ..... 6,420,000
Weighted average price.... $ 2.60
Fair value at 3/31/00(2).. $ (2,027)
Crude oil (bbls) ......... 107,000
Weighted average price.... $ 27.00
Fair value at 3/31/00(2).. $ 101
</TABLE>
(1) The 14% notes mature in 2002 and 2003 at premiums ranging from 103% to 105%
of the stated principal amount.
(2) Represents estimated amounts to settle the contracts at March 31, 2000.
14
<PAGE> 16
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, 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 and 14 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
Words such as "anticipated," "expect," "estimate," "project" 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 1. LEGAL PROCEEDINGS
In March 2000, a class action suit was brought against the Company in
the Court of Chancery of the State of Delaware, complaining, among other things,
that the Company had not taken necessary steps to facilitate the election of two
additional directors to its board by preferred stockholders. Under the charter
provisions relating to the Company's preferred stock, upon the occasion of the
dividends not being paid on such preferred stock for six quarters, the preferred
stockholders are, as a class, entitled to elect two directors to the Company's
board. Among the relief sought in such proceeding are an injunction directing
the Company to create new directorships for nominations from preferred
stockholders at the 2000 annual meeting of stockholders, directing that past
dividends be paid, declaring that the Company's reverse stock split in 1999,
which involved the settlement of fractional shares by the payment of a small
amount of cash (less than $1,500) by the Company, constituted a repurchase of
common shares in violation of the preferred stock charter provisions and was
therefore void and other relief. The Company has consistently acknowledged,
publicly and privately, the rights of such preferred stockholders to elect two
directors and believes it has not in any way encumbered the preferred
shareholders from exercising such rights. The Company believes that the
complaint and the relief sought are wholly without merit and will vigorously
defend its positions in such proceedings.
ITEM 3. ARREARAGES IN PAYMENT OF DIVIDENDS
As of May 1, 2000, total dividends in arrears on the Company's $2.625
Convertible Exchangeable Preferred Stock ("Preferred Stock") were $9.0 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
------- -------
<S> <C>
27 Financial Data Schedule (included only in the
electronic filing of this document).
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
first quarter of 2000.
15
<PAGE> 17
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: May 15, 2000 By: /s/ Rick G. Lester
------------------------------------
Rick G. Lester
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
<PAGE> 18
INDEX TO EXHIBITS
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 33,551
<SECURITIES> 0
<RECEIVABLES> 23,352
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,795
<PP&E> 430,227
<DEPRECIATION> 286,684
<TOTAL-ASSETS> 209,330
<CURRENT-LIABILITIES> 43,377
<BONDS> 246,993
0
2,048
<COMMON> 1,321
<OTHER-SE> (81,040)
<TOTAL-LIABILITY-AND-EQUITY> 209,330
<SALES> 15,227
<TOTAL-REVENUES> 18,901
<CGS> 0
<TOTAL-COSTS> 5,176
<OTHER-EXPENSES> 9,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,809
<INCOME-PRETAX> (4,737)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,737)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,737)
<EPS-BASIC> (.43)
<EPS-DILUTED> (.43)
</TABLE>
