<PAGE> 1
================================================================================
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 JUNE 30, 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 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 JULY 31, 2000
-------------- ----------------------------
Common Stock 13,211,449
================================================================================
<PAGE> 2
CONTOUR ENERGY CO. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)........................ 2
Consolidated Statements of Income (Loss) for the three months and six months ended
June 30, 1999 and 2000 (unaudited)..................................................................... 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 2000 (unaudited)..................................................................... 4
Notes to Consolidated Financial Statements (unaudited)................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk........................................ 17
PART II. OTHER INFORMATION................................................................................. 18
Item 1. Legal Proceedings................................................................................ 18
Item 3. Arrearages in Payment of Dividends............................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 19
Item 6. Exhibits and Reports on Form 8-K................................................................. 19
</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, JUNE 30,
1999 2000
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents......................................................... $ 10,370 $ 16,582
Accounts receivable............................................................... 18,389 22,550
Accounts receivable - drilling programs........................................... 199 159
Prepaid expenses and other current assets......................................... 1,042 2,877
---------- ----------
Total current assets............................................................ 30,000 42,168
---------- ----------
Oil and gas properties, successful efforts method:
Unproved properties, net........................................................ 22,260 21,749
Properties subject to amortization.............................................. 428,116 404,922
Pipelines and other transportation assets, at cost ............................... 1,582 1,582
Furniture, fixtures and equipment................................................. 3,596 3,603
---------- ----------
455,554 431,856
Less: Accumulated depreciation, depletion and amortization....................... (289,798) (289,102)
---------- ----------
Total property and equipment, net............................................... 165,756 142,754
---------- ----------
Restricted cash .................................................................. 7,500 7,500
Other non-current assets, net..................................................... 526 26
---------- ----------
Total assets......................................................................... $ 203,782 $ 192,448
========== ==========
LIABILITIES:
Accounts payable and accrued expenses............................................. $ 25,207 $ 24,995
Accounts payable - drilling programs.............................................. 115 165
Current portion of long-term debt................................................. 8,598 --
---------- ----------
Total current liabilities....................................................... 33,920 25,160
---------- ----------
Long term debt.................................................................... 246,165 247,827
---------- ----------
Total liabilities.................................................................... 280,085 272,987
---------- ----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 2,000,000 shares authorized at December 31,
1999 and June 30, 2000; 1,363,319 and 1,365,173 shares issued and
outstanding at December 31, 1999 and June 30, 2000, respectively
(liquidation values at December 31, 1999 and June 30, 2000
of $41,824 and $43,673, respectively)........................................... 2,045 2,048
Common stock, $.10 par value, 20,000,000 shares authorized at December 31,
1999 and June 30, 2000; 13,211,449 shares issued and outstanding at
December 31, 1999 and June 30, 2000............................................. 1,321 1,321
Additional paid-in capital........................................................ 301,516 301,513
Accumulated deficit............................................................... (381,185) (385,421)
---------- ----------
Total stockholders' deficit.......................................................... (76,303) (80,539)
---------- ----------
Total liabilities and stockholders' deficit.......................................... $ 203,782 $ 192,448
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 4
CONTOUR ENERGY CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1999 2000 1999 2000
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas revenues................................... $ 12,850 $ 17,415 $ 28,357 $ 32,642
Interest and other income.............................. 903 377 1,064 690
Gain on sale of oil and gas properties................. 25,691 3,974 25,691 7,335
--------- ---------- ---------- ----------
Total revenues......................................... 39,444 21,766 55,112 40,667
--------- ---------- ---------- ----------
EXPENSES:
Production expenses.................................... 4,264 2,629 9,548 5,484
Exploration expenses................................... 1,742 2,146 3,112 4,467
General and administrative expenses.................... 2,661 1,828 4,035 3,458
Interest and other debt expenses....................... 11,301 8,548 19,967 17,357
Depreciation, depletion and amortization............... 8,066 6,114 18,026 14,137
--------- ---------- ---------- ----------
Total expenses......................................... 28,034 21,265 54,688 44,903
--------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary item.. 11,410 501 424 (4,236)
Income taxes.............................................. -- -- -- --
--------- ---------- ---------- ----------
Net income (loss) before extraordinary item............... 11,410 501 424 (4,236)
Extraordinary gain........................................ 10,972 -- 10,972 --
--------- ---------- ---------- ----------
Net income (loss)......................................... 22,382 501 11,396 (4,236)
Less: cumulative preferred stock dividends............. (1,137) (897) (2,274) (1,792)
--------- ---------- ---------- ----------
Net income (loss) applicable to common stock.............. $ 21,245 $ (396) $ 9,122 $ (6,028)
========= =========== ========== ==========
Basic and diluted income (loss) per common share
before extraordinary item............................... $ .82 $ (.03) $ (.15) $ (.46)
Basic and diluted income (loss) per common share.......... $ 1.69 $ (.03) $ .72 $ (.46)
Basic and diluted weighted average common shares
outstanding............................................. 12,602 13,211 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)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 2000
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................................. $ 11,396 $ (4,236)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of assets........................................................... (25,691) (7,335)
Extraordinary gain............................................................... (10,972) --
Gain on debt redemption.......................................................... -- (46)
Depreciation, depletion and amortization......................................... 18,026 14,137
Exploration expenses............................................................. 3,112 4,467
Accretion and amortization of debt expenses and other expenses................... 2,847 1,765
Changes in operating assets and liabilities:
Increase in accounts receivable.................................................. (1,111) (4,121)
Increase in prepaid expenses and other current assets............................ (72) (1,835)
(Increase) decrease in other non-current assets.................................. (1,035) 500
Decrease in accounts payable and accrued expenses................................ (556) (162)
---------- ----------
Net cash (used in) provided by operating activities................................ (4,056) 3,134
----------- ----------
INVESTING ACTIVITIES:
Expenditures for capital and exploration activities................................ (8,950) (12,074)
Acquisition purchase price adjustment.............................................. 6,889 --
Proceeds from sale of properties................................................... 74,400 23,807
---------- ----------
Net cash provided by investing activities.......................................... 72,339 11,733
----------- ----------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings................................................. 4,000 --
Principal payments on long-term borrowings......................................... (115,500) --
Proceeds from sale of notes, net................................................... 126,297 --
Redemption of senior secured notes................................................. (36,400) --
Redemption and retirement of subordinated and senior notes......................... (28,651) (8,650)
Other.............................................................................. -- (5)
---------- -----------
Net cash used in financing activities.............................................. (50,254) (8,655)
----------- -----------
Increase in cash and cash equivalents................................................. 18,029 6,212
Cash and cash equivalents, beginning of period........................................ 8,435 10,370
---------- ----------
Cash and cash equivalents, end of period.............................................. $ 26,464 $ 16,582
========== ==========
</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 and six months ended June 30,
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.
NOTE 2 - REDEMPTION AND RETIREMENT 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, at maturity, the remaining
principal of $8.4 million and interest of $0.4 million on its outstanding 8 1/2%
Convertible Subordinated Debentures.
NOTE 3 - PREFERRED STOCK
The Company has not declared the quarterly dividends of $0.65625 per
preferred share for February 1, 1998 through August 1, 2000, aggregating
approximately $9.9 million, covering eleven 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 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 was 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 and plaintiffs reached a settlement of the class action suit
that included (i) the process of nominating and electing two additional
directors to the Company's Board of Directors, (ii) agreement by the Company to
defer its preferred stock recapitalization plans until after such election,
(iii) payment by the Company of plaintiffs' attorneys' fees of $350,000 plus
expenses capped at $20,000, and (iii) dismissal with prejudice of all other
complaints, including all complaints involving the 1999 common stock 1 for 10
reverse split. At the July 25, 2000 annual meeting of shareholders, two
additional directors were elected to the board of directors of the Company in
compliance with the settlement. On August 7, 2000, the settlement was approved
by the Court of Chancery of the State of Delaware.
5
<PAGE> 7
NOTE 4 - SALE OF OIL AND GAS PROPERTIES
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. In the second quarter of 2000, the Company
sold its mostly non-producing interests in the East Cameron offshore area and
recorded a $4.0 million gain related to this sale.
NOTE 5 - EARNINGS PER SHARE
The basic income (loss) per common share before extrordinary 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, 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 income (loss)
per common share before extraordinary item and the diluted income (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. In 1999 both basic and diluted earnings per share ("EPS") have been
restated to reflect the 1 for 10 reverse stock split. The extraordinary gain per
common share for the three and six month periods ended June 30, 1999 was $0.87
per share. For the three and six months ended June 30, 1999, potentially
dilutive stock options were not in the money and the remaining potentially
dilutive securities were anti-dilutive and therefore not included in the EPS
calculations. For the three and six months ended June 30, 2000, all potentially
dilutive securities are anti-dilutive and therefore are not included in the
diluted EPS calculation. Potentially dilutive securities outstanding at June 30,
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 approximately 0.5 million common shares.
6
<PAGE> 8
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 10u% 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
June 30, 2000, consolidating condensed statements of income (loss) for
the three months and six months ended June 30, 1999 and 2000 and
consolidating condensed statements of cash flows for the six months
ended June 30, 1999 and June 30, 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) equity...... (76,303) (147,787) 4,816 6,198 136,773 (76,303)
---------- ----------- --------- ---------- ---------- -----------
Total liabilities and
stockholders' equity (deficit)... $ 185,081 $ 309,002 $ 6,317 $ 6,878 $ (303,496) $ 203,782
========== =========== ========= ========== ========== ===========
</TABLE>
7
<PAGE> 9
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 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...................... $ 309,874 $ 112,736 $ 11,746 $ 972 $ (393,160) $ 42,168
Property and equipment, net......... -- 136,844 -- 5,637 273 142,754
Restricted cash..................... -- 7,500 -- -- -- 7,500
Other non-current assets, net....... (135,879) 11,583 -- -- 124,322 26
----------- ----------- --------- ---------- ---------- -----------
Total assets...................... $ 173,995 $ 268,663 $ 11,746 $ 6,609 $ (268,565) $ 192,448
========== =========== ========= ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities................. $ 6,707 $ 404,817 $ 6,038 $ 759 $ (393,161) $ 25,160
Long-term debt...................... 247,827 -- -- -- -- 247,827
Stockholders' (deficit) equity...... (80,539) (136,154) 5,708 5,850 124,596 (80,539)
----------- ------------ --------- ---------- ---------- ------------
Total liabilities and
stockholders' equity (deficit) $ 173,995 $ 268,663 $ 11,746 $ 6,609 $ (268,565) $ 192,448
========== =========== ========= ========== =========== ===========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $ -- $ 36,592 $ 187 $ 3,547 $ (882) $ 39,444
Costs and expenses.................. (11,865) (15,150) (202) (748) (69) (28,034)
Equity in earnings (loss) of
subsidiaries...................... 23,275 2,784 -- -- (26,059) --
Extraordinary item.................. 10,972 -- -- -- -- 10,972
---------- ---------- --------- ---------- ---------- -----------
Net income (loss)................. $ 22,382 $ 24,226 $ (15) $ 2,799 $ (27,010) $ 22,382
========== ========== ========== ========== =========== ===========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ -- $ 20,363 $ 682 $ 722 $ (1) $ 21,766
Costs and expenses..................... (8,686) (12,517) (210) (509) 657 (21,265)
Equity in earnings of subsidiaries..... 9,187 685 -- -- (9,872) --
---------- ---------- --------- ---------- ---------- ----------
Net income (loss)................... $ 501 $ 8,531 $ 472 $ 213 $ (9,216) $ 501
========== ========== ========= ========== ========== ==========
</TABLE>
8
<PAGE> 10
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ -- $ 50,324 $ 790 $ 4,934 $ (936) $ 55,112
Costs and expenses..................... (20,566) (31,834) (324) (1,751) (213) (54,688)
Equity in earnings (loss) of
subsidiaries......................... 20,990 3,649 -- -- (24,639) --
Extraordinary item..................... 10,972 -- -- -- -- 10,972
---------- ---------- --------- ---------- ---------- -----------
Net income (loss).................... $ 11,396 $ 22,139 $ 466 $ 3,183 $ (25,788) $ 11,396
========== ========== ========= ========== =========== ===========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ -- $ 37,267 $ 1,337 $ 1,485 $ 578 $ 40,667
Costs and expenses..................... (17,636) (26,978) (445) (1,031) 1,187 (44,903)
Equity in earnings of subsidiaries..... 13,400 1,346 -- -- (14,746) --
---------- ---------- --------- ---------- ---------- ----------
Net income (loss).................... $ (4,236) $ 11,635 $ 892 $ 454 $ (12,981) $ (4,236)
=========== ========== ========= ========== ========== ===========
</TABLE>
9
<PAGE> 11
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 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) ........................ $ 11,396 $ 22,139 $ 466 $ 3,183 $(25,788) $ 11,396
Non-cash income (loss) adjustments ....... (29,115) (7,494) -- (1,857) 25,788 (12,678)
Changes in operating assets
and liabilities ....................... 67,710 (62,069) (466) (7,949) -- (2,774)
--------- -------- ------- ------- -------- ---------
Net cash provided by (used in)
operating activities ..................... 49,991 (47,424) -- (6,623) -- (4,056)
--------- -------- ------- ------- -------- ---------
INVESTING ACTIVITIES:
Expenditures for capital and exploration
activities ............................ -- (8,950) -- -- -- (8,950)
Proceeds from the sale of properties ..... -- 64,974 -- 9,426 -- 74,400
Acquisition purchase price adjustment .... -- 6,889 -- -- -- 6,889
Distributions from partnerships ......... -- 2,803 -- -- (2,803) --
--------- -------- ------- ------- -------- ---------
Net cash provided by (used in) investing
activities ............................... -- 65,716 -- 9,426 (2,803) 72,339
--------- -------- ------- ------- -------- ---------
FINANCING ACTIVITIES:
Net payments on long term borrowings .... (111,500) -- -- -- -- (111,500)
Proceeds from sale of notes, net ........ 126,297 -- -- -- -- 126,297
Redemption of subordinated & senior notes (28,651) -- -- -- -- (28,651)
Redemption of Senior Secured notes ...... (36,400) -- -- -- -- (36,400)
Distributions to partners ............... -- -- -- (2,803) 2,803 --
--------- -------- ------- ------- -------- ---------
Net cash provided by (used in) financing
activities ............................... (50,254) -- -- (2,803) 2,803 (50,254)
--------- -------- ------- ------- -------- ---------
(Decrease) increase in cash
and cash equivalents ..................... (263) 18,292 -- -- -- 18,029
Cash and cash equivalents,
beginning of period ...................... 275 8,160 -- -- -- 8,435
--------- -------- ------- ------- -------- ---------
Cash and cash equivalents,
end of period ......................... $ 12 $ 26,452 $ -- $ -- $ -- $ 26,464
========= ======== ======= ======= ======== =========
</TABLE>
10
<PAGE> 12
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 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) ....................... $ (4,236) $ 11,634 $ 892 $ 454 $(12,980) $ (4,236)
Non-cash income (loss) adjustments ...... (11,681) 11,284 -- 405 12,980 12,988
Changes in operating assets
and liabilities ...................... 24,572 (29,141) (892) (157) -- (5,618)
-------- -------- ----- ----- -------- --------
Net cash provided by (used in) operating
activities ............................. 8,655 (6,223) -- 702 -- 3,134
-------- -------- ----- ----- -------- --------
INVESTING ACTIVITIES:
Expenditures for capital and exploration
activities ........................... -- (12,173) -- 99 -- (12,074)
Proceeds from sale of property .......... -- 23,807 -- -- -- 23,807
Distributions from partnerships ......... -- 801 -- -- (801) --
-------- -------- ----- ----- -------- --------
Net cash provided by investing activities .. -- 12,435 -- 99 (801) 11,733
-------- -------- ----- ----- -------- --------
FINANCING ACTIVITIES:
Redemption and retirement on
subordinated debentures .............. (8,650) -- -- -- -- (8,650)
Distributions to partners .............. -- -- -- (801) 801 --
Other .................................. (5) -- -- -- -- (5)
-------- -------- ----- ----- -------- --------
Net cash (used in) provided by financing
activities .......................... (8,655) -- -- (801) 801 (8,655)
-------- -------- ----- ----- -------- --------
Increase in cash and
cash equivalents ........................ -- 6,212 -- -- -- 6,212
Cash and cash equivalents,
beginning of period ..................... 12 10,358 -- -- -- 10,370
-------- -------- ----- ----- -------- --------
Cash and cash equivalents,
end of period ........................... $ 12 $ 16,570 $ -- $ -- $ -- $ 16,582
======== ======== ===== ===== ======== ========
</TABLE>
11
<PAGE> 13
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, collars 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 has used price swap agreements and collars. 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. Collars combine put and call options to establish
a ceiling and a floor. To the extent the underlying index (normally NYMEX)
closes above the established ceiling the Company must make payments to the
counterparty on the differential between the indexed price and the ceiling.
Conversely, if the index price closes below the established floor, the
counterparty must make payments to the Company on the differential between the
index and the floor. If the index closes between the ceiling and the floor, no
settlement is due. 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
52%, 56%, 60% and 52% of its natural gas production for the second quarter of
1999, the second quarter of 2000, the first six months of 1999 and the first six
months of 2000, respectively, at average NYMEX quoted prices of $2.11 per Mmbtu,
$2.60 per Mmbtu, $2.21 per Mmbtu and $2.54 per Mmbtu, respectively, before
transaction and transportation costs. As of June 30, 2000, 3,690,000 Mmbtus of
natural gas production for July 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. As of June 30, 2000, 4,590,000
Mmbtu's of natural gas production for July through October 2000 has been hedged
by collars at a floor of $4.00 per Mmbtu and a ceiling of $4.98 per Mmbtu.
Through crude oil price swap agreements, the Company hedged approximately 73%
and 70% of its crude oil production for the three and six months ended June 30,
2000, respectively, at average NYMEX quoted prices of $27.65 per bbl and $26.38
per bbl, respectively, before transaction and transportation costs. No crude oil
was hedged in the three and six month period ended June 30, 1999. As of June 30,
2000, 31,000 bbls of crude oil production for July 2000 through August 2000 has
been hedged by crude oil price swap agreements at an average NYMEX quoted price
of $25.40 per bbl before transaction and transportation costs. Hedging
activities decreased oil and gas revenues by approximately $0.1 million in the
three months ended June 30, 1999, and increased oil and gas revenues by
approximately $2.4 million for the six months ended June 30, 1999, as compared
to estimated revenues had no hedging activities been conducted. Hedging
activities decreased oil and gas revenues by approximately $2.3 million and $2.4
million in the three and six months ended June 30, 2000, respectively, as
compared to estimated revenues had no hedging activities been conducted. At
June, 30, 2000, the unrealized loss on the Company's existing hedging
instruments for future production months in 2000 approximated $6.7 million.
Since June 30, 2000, the Company has executed two collars on approximately 50%
of its expected natural gas production for the calendar year 2001. The terms of
the first collar include a ceiling of $5.00/Mmbtu and a floor of $3.55/Mmbtu at
closing NYMEX prices above $3.00/Mmbtu. However, at prices below $3.00/Mmbtu,
the floor moves to NYMEX price plus $0.55 /Mmbtu. The terms of the second collar
include a ceiling of $5.00/Mmbtu and a floor of $3.75/Mmbtu at closing NYMEX
prices above $3.09/Mmbtu. However, at prices below $3.09/Mmbtu, the floor moves
to NYMEX price plus $0.66/Mmbtu. 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.
12
<PAGE> 14
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ----------------------
1999 2000 1999 2000
------- ------- -------- --------
<S> <C> <C> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls) ......................... 82.8 103.6 165.7 215.9
Natural gas (Mmcf) ................................................ 5,718 4,623 12,965 9,431
Natural gas equivalent (Mmcfe) .................................... 6,215 5,245 13,959 10,726
AVERAGE SALES PRICE PER UNIT (INCLUDING EFFECTS OF HEDGING):
Oil and other liquid hydrocarbons (per Bbl) ....................... $ 15.52 $ 28.61 $ 13.58 $ 26.05
Natural gas (per Mcf) ............................................. 2.04 3.02 2.00 2.76
Natural gas equivalent (per Mcfe) ................................. 2.09 3.23 2.02 2.95
COST PER MCFE:
Lifting costs ..................................................... $ .58 $ .42 $ .58 $ .44
Severance and ad valorem taxes .................................... .11 .08 .10 .08
General and administrative expenses ............................... .43 .35 .29 .32
Depreciation, depletion and amortization
(oil and gas activities) ........................................ 1.23 1.14 1.22 1.29
Interest expense, excluding accretion and amortization ............ 1.62 1.47 1.25 1.45
</TABLE>
Three Months Ended June 30, 2000 and 1999. The Company's oil and gas
revenues of $17.4 million for the second quarter of 2000 increased 35% compared
to $12.9 million in the same period of 1999 primarily as a result of increases
in gas prices (48%), oil prices (84%) and oil production (25%), partially offset
by a decrease in gas production (19%). 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. The second quarter of 1999 includes a $25.7 million gain
on the sale of these properties and the second quarter of 2000 includes a gain
of $4.0 million related to the sale of mostly non-producing interests in the
East Cameron offshore area.
Interest and other income decreased from $0.9 million in the second quarter
of 1999 to $0.4 million in the second quarter of 2000 due to lower average cash
balances in the current period.
Production expenses for the second quarter of 2000 decreased 40% to $2.6
million from $4.3 million in the same period last year, resulting primarily from
north Louisiana properties sold to Phillips in the second quarter of 1999 and
lower workover expenses. Lifting costs (production expenses less ad valorem and
severance taxes) per Mcfe for the second quarter of 2000 decreased 28% to $0.42
when compared to the same period in 1999.
Exploration expenses totaled $2.1 million in the second quarter of 2000 and
$1.7 million in the corresponding period of 1999, an increase of 24%, primarily
due to higher current quarter unproved property abandonments and dry hole
expenses.
General and administrative ("G&A") expenses of $1.8 million in the second
quarter of 2000 decreased 33% compared to $2.7 million in the corresponding
period last year. The prior year included $0.8 million of non-recurring
professional, consulting and transaction costs. However, G&A expense allocated
to exploration expense and overhead recovery was also $0.4 million higher than
the current period. On a unit of production basis, general and administrative
expenses were $0.35 per Mcfe in the second quarter of 2000 compared to $0.43 per
Mcfe in the corresponding quarter of 1999.
Interest and other debt expenses of $8.5 million in the current quarter
decreased 25% from $11.3 million in the same period of 1999. The decrease in
interest expenses resulted primarily from lower average debt balances during the
current period. In addition to its second quarter 2000 interest expense of $7.7
million, the Company recorded non-cash
13
<PAGE> 15
charges in the second quarter of 2000 of $0.6 million for amortization of debt
issuance costs and $0.2 million for accretion of note discount, net of accretion
of note premium.
Depreciation, depletion and amortization ("DD&A") expenses decreased 25%
from $8.1 million in the second quarter of 1999 to $6.1 million in the current
period, primarily as a result of lower production due to the sale of North
Louisiana properties to Phillips in the second quarter 1999 and a decrease in
the units-of-production DD&A rate for oil and gas activities from $1.23 per Mcfe
in the second quarter of 1999 to $1.14 per Mcfe in the current period.
In the second quarter 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 77/8%
Convertible Subordinated Notes due December 15, 1999 and its 8 1/2% Convertible
Subordinated Debentures due April 1, 2000. In the second quarter of 1999, the
Company recognized an extraordinary gain of approximately $11 million related to
these repurchases and refinancings. See Liquidity and Capital Resources for
further discussion.
The Company recognized net income of $0.5 million in the second quarter of
2000 and net income of $22.4 million in the same period last year. The reasons
for the decrease in earnings are described in the foregoing discussion.
Six Months Ended June 30, 2000 and 1999. The Company's oil and gas revenues
of $32.6 million for the first half of 2000 increased 15% compared to $28.4
million in the same period of 1999 primarily as a result of increases in gas
prices (38%), oil prices (92%) and higher oil production (30%), partially offset
by lower gas production (27%). 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 half 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. The first
six months of 2000 includes a gain of $3.4 million on the sale of a portion of
the Company's volumetric overriding royalty interest ("VORI"), and a $4.0
million gain on the sale of mostly non-producing interests in the East Cameron
offshore area. See Liquidity and Capital Resources.
Interest and other income decreased from $1.1 million in the first half of
1999 to $0.7 million in the first half of 2000 due to lower average cash
balances in the current period.
Production expenses for the first six months of 2000 decreased 42% to $5.5
million from $9.5 million in the same period last year, resulting primarily from
the sale of North Louisiana properties to Phillips in the second quarter of 1999
and lower current period workover expenses. Lifting costs per Mcfe for the first
six months of 2000 decreased 24% to $0.44 when compared to the same period in
1999.
Exploration expenses totaled $4.5 million in the first half of 2000 and
$3.1 million in the corresponding period of 1999, an increase of 45%, primarily
due to higher current period unproved property abandonments and dry hole
expenses.
G&A expenses of $3.5 million in the first six months of 2000 decreased 13%
compared to $4.0 million in the corresponding period last year. Last year
included non-recurring professional, consulting and transaction costs. However,
prior period G&A expense allocated to exploration expense and overhead recovery
was also $0.8 million higher than the current period. On a unit of production
basis, G&A expenses were $0.32 per Mcfe in the first half of 2000 compared to
$0.29 per Mcfe in the corresponding period of 1999 .
Interest and other debt expenses of $17.4 million in the first half of 2000
decreased 13% from $20.0 million in the same period of 1999. The decrease in
interest expenses resulted primarily from lower average debt during the current
period. In addition to its 2000 interest expense of $15.6 million, the Company
recorded non-cash charges in the first six months of 2000 of $1.2 million for
amortization of debt issuance costs, $0.5 million for accretion of note
discount, net of accretion of note premium and $0.1 million for accretion of
debt valuation discount.
Depreciation, depletion and amortization ("DD&A") expenses decreased 21%
from $18.0 million in the first six months of 1999 to $14.1 million in the
current period, primarily as a result of lower first half 2000 production due to
the sale of north Louisiana properties to Phillips 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
14
<PAGE> 16
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
$1.22 per Mcfe in the first six months of 1999 compared to $1.29 per Mcfe in the
current period. Excluding the impact of the Bayou Sauveur field, the DD&A rate
for the first six months of 2000 was $1.18 per Mcfe.
In the first half 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 77/8%
Convertible Subordinated Notes due December 15, 1999 and its 8 1/2% Convertible
Subordinated Debentures due April 1, 2000. In the second quarter of 1999, the
Company recognized an extraordinary gain of approximately $11 million related to
these repurchases and refinancings, see Liquidity and Capital Resources for
further discussion.
The Company recognized a net loss of $4.2 million in the first six months
of 2000 and net income of $11.4 million in the same period last year. The
reasons for the decrease in earnings are described in the foregoing discussion.
The results of operations for the quarter and six months ended June 30,
2000 are not necessarily indicative of results to be expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities, before working capital
adjustments, during the first six months of 2000 aggregated $8.8 million. Funds
provided by investing activities were comprised of proceeds from the sale of oil
and gas properties of $23.8 million (see below), partially offset by
expenditures of $12.1 million for exploration and development drilling, and
other exploratory and development activities. Funds used in financing activities
of $8.7 million were comprised of the redemption and retirement at maturity 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 $16.6 million as of June 30, 2000. As of June 30, 2000, the Company
had working capital of $17.0 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. In the second
quarter of 2000, the Company sold its mostly non-producing interests in the East
Cameron offshore area and recorded a $4.0 million gain related to this sale.
Capital Resources. In 1999, after the Company paid all amounts outstanding
under its bank 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 and the East Cameron 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
15
<PAGE> 17
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 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 $259.8 million of debt outstanding (principal plus premium)
as of June 30, 2000 ($247.8 million recorded on the balance sheet), requiring
$30.8 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
$43.7 million at June 30, 2000, including dividend arrearages of $9.9 million.
The Company has not declared the quarterly dividends of $0.65625 per preferred
share for February 1, 1998 through August 1, 2000, aggregating approximately
$9.9 million, covering eleven 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 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. This election
occurred at the July 25, 2000 annual meeting of shareholders. See Part II Item
1, Legal Proceedings and Item 4, Submission of Matters to a Vote of Security
Holders.
Capital Commitments. The Company's original 2000 capital expenditure budget
provided 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. In July 2000, the Company announced that its Board of
Directors had approved a 40% increase in the Company's 2000 capital budget,
including a new shallow gas exploratory drilling venture in south Texas. Total
expenditures for exploration and development drilling activities for the year
are now projected to be approximately $21 million. 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 six months of 2000, the Company expended $7.1
million on exploration and development drilling and participated in drilling 9
gross (2.53 net) wells, of which 7 gross (1.89 net) wells were completed and 2
gross (.64 net) wells were plugged and abandoned. As of the end of the quarter,
the Company was participating in the drilling of 3 gross (.66 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.
16
<PAGE> 18
ITEM 3. 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, collars 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 and collars 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 and natural gas collars, the table presents
notional amounts in Mmbtus and bbls at weighted average prices and applicable
price ranges for contracts in place at June 30, 2000.
<TABLE>
<CAPTION>
MATURITY DATE
---------------------------------------------- FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL @ 6/30/00
--------- ------- ------ -------- ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Debt:
14.00% (Maturity) (1)..... $4,120 $100,720 $104,840 $105,888
10.38% (Maturity)......... $155,000 155,000 72,850
------ -------- -------- -------- --------
Total Maturity............... $4,120 $100,720 $155,000 $259,840 $178,738
====== ======== ======== ======== ========
Blended weighted
average interest rate..... 14.00% 14.00% 10.38%
Commodity price
derivatives:
Price swaps:
Notional amounts:
Natural gas (Mmbtus) ..... 3,690,000
Weighted average price.... $ 2.60
Fair value at 6/30/00(2).. $ (6,531)
Crude oil (bbls) ......... 31,000
Weighted average price.... $ 25.40
Fair value at 6/30/00(2).. $ (187)
Natural gas collars:
Notional amounts:
Natural gas (Mmbtus) ..... 4,590,000
Price range............... $4.00 - $4.98
Fair value at 6/30/00(3).. $ --
</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 June 30, 2000.
(3) As of June 30, 2000, natural gas futures prices for the hedged period were
within the floor and ceiling range.
17
<PAGE> 19
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 "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 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 was 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 and plaintiffs reached a settlement of the class action
suit that included (i) the process of nominating and electing two additional
directors to the Company's Board of Directors, (ii) agreement by the Company to
defer its preferred stock recapitalization plans until after such election,
(iii) payment by the Company of plaintiffs' attorneys' fees of $350,000 plus
expenses capped at $20,000, and (iii) dismissal with prejudice of all other
complaints, including all complaints involving the 1999 common stock 1 for 10
reverse split. At the July 25, 2000 annual meeting of shareholders, two
additional directors were elected to the board of directors of the Company in
compliance with the settlement (see Item 4, Submission of Matters to a Vote of
Security Holders). On August 7, 2000, the settlement was approved by the Court
of Chancery of the State of Delaware.
ITEM 3. ARREARAGES IN PAYMENT OF DIVIDENDS
As of August 1, 2000, total dividends in arrears on the Company's
$2.625 Convertible Exchangeable Preferred Stock ("Preferred Stock") were $9.9
million.
18
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As of the close of business on May 26, 2000, the record date for the Annual
Meeting of Stockholders of the Company held on July 25, 2000 (the "Meeting"),
there were issued and outstanding (i) 13,211,449 shares of common stock, $.10
par value, of the Company (the "Common Stock"), and (ii) 1,365,173 shares of
$2.625 convertible exchangeable preferred stock, $1.50 par value, of the Company
(the "Preferred Stock"). The meeting included the election of seven directors to
be voted on by holders of Common Stock and Preferred Stock voting together as a
single class, with each share entitled to one vote, plus the election of two
additional directors to be voted on only by holders of Preferred Stock voting as
a single class with each share entitled to one vote (see Legal Proceedings).
There were represented at the Meeting the holders of 12,974,552 shares of
Common Stock and 1,089,896 shares of Preferred Stock, of which 12,964,552 shares
of Common Stock and 1,059,461 shares of Preferred Stock were represented by
valid proxies, and the balance were present at the Meeting voting by ballot. All
of the incumbent directors listed in the Company's proxy statement for the
meeting were reelected. The number of votes cast for and against each nominee
are set forth below:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
--------- --------------
<S> <C> <C>
John F. Bookout............................. 13,957,949 106,499
John J. Conklin, Jr......................... 13,962,130 102,318
Ralph P. Davidson........................... 13,963,005 101,443
Adam P. Godfrey............................. 13,960,485 103,963
William J. Murray........................... 13,961,578 102,870
Edward Park................................. 13,960,307 104,141
Ward W. Woods............................... 13,960,472 103,976
</TABLE>
The nominees for the two additional director positions and the tabulated
votes cast for each nominee are set forth below:
<TABLE>
<CAPTION>
VOTES FOR
---------
<S> <C>
Lee Balter................................... 44,594
Seth W. Hamot................................ 187,030
Robert D. Kincaid............................ 293,561
David K. Lifschultz.......................... 62,037
Eric Pomerantz............................... 13,428
Raymond L. Steele............................ 71,314
Robert P. Wardin............................. 19,866
</TABLE>
Mr. Robert D. Kincaid and Mr. Seth W. Hamot received the most votes of the
nominees and hence were elected to the two additional board positions effective
July 25, 2000.
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:
On May 25, 2000, the Company filed an 8-K to disclose its
estimated proved reserves as of April 1, 2000.
19
<PAGE> 21
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: August 11, 2000 By: /s/Rick G. Lester
----------------------------
Rick G. Lester
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
20
<PAGE> 22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
