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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 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 OCTOBER 31, 2000
Common Stock 13,211,449
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CONTOUR ENERGY CO.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 (unaudited)................... 2
Consolidated Statements of Loss for the three months and nine months ended
September 30, 1999 and 2000 (unaudited)................................................................ 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000 (unaudited)................................................................ 4
Notes to Consolidated Financial Statements (unaudited)................................................... 5
Item II. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 13
Item III. Quantitative and Qualitative Disclosure About Market Risk...................................... 19
PART II. OTHER INFORMATION................................................................................. 20
</TABLE>
1
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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, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................................. $ 10,370 $ 19,231
Accounts receivable ................................................................... 18,389 27,879
Accounts receivable - drilling programs ............................................... 199 170
Prepaid expenses and other current assets ............................................. 1,042 3,665
--------- ---------
Total current assets ................................................................ 30,000 50,945
--------- ---------
Oil and gas properties, successful efforts method:
Unproved properties, net ............................................................ 22,260 25,521
Properties subject to amortization .................................................. 428,116 407,198
Pipelines and other transportation assets, at cost .................................... 1,582 1,582
Furniture, fixtures and equipment ..................................................... 3,596 3,601
--------- ---------
455,554 437,902
Less: Accumulated depreciation, depletion and amortization ........................... (289,798) (295,083)
--------- ---------
Total property and equipment, net ................................................... 165,756 142,819
--------- ---------
Restricted cash ....................................................................... 7,500 7,500
Other non-current assets, net ......................................................... 526 26
--------- ---------
Total assets ............................................................................. $ 203,782 $ 201,290
========= =========
LIABILITIES:
Accounts payable and accrued expenses ................................................. $ 25,207 $ 36,522
Accounts payable - drilling programs .................................................. 115 176
Current portion of long-term debt ..................................................... 8,598 --
--------- ---------
Total current liabilities ........................................................... 33,920 36,698
--------- ---------
Long-term debt ........................................................................ 246,165 248,675
--------- ---------
Total liabilities ........................................................................ 280,085 285,373
--------- ---------
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 2,000,000 shares authorized at December 31,
1999 and September 30, 2000; 1,363,319 and 1,365,173 shares issued and
outstanding at December 31, 1999 and September 30, 2000, respectively
(liquidation values at December 31, 1999 and September 30, 2000 of $41,824
and $44,568, respectively) .......................................................... 2,045 2,048
Common stock, $.10 par value, 20,000,000 shares authorized at December 31, 1999
and September 30, 2000; 13,211,449 shares issued and outstanding at
December 31, 1999 and September 30, 2000 .......................................... 1,321 1,321
Additional paid-in capital ............................................................ 301,516 301,513
Accumulated deficit ................................................................... (381,185) (388,965)
--------- ---------
Total stockholders' deficit .............................................................. (76,303) (84,083)
--------- ---------
Total liabilities and stockholders' deficit .............................................. $ 203,782 $ 201,290
========= =========
</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)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- ---------------------------
1999 2000 1999 2000
------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas revenues ........................... $ 12,120 $ 17,172 $ 40,477 $ 49,814
Interest and other income ...................... 591 391 1,655 1,081
Gain (loss) on sale of oil and gas properties... (135) (25) 25,556 7,310
-------- -------- -------- --------
Total revenues ................................. 12,576 17,538 67,688 58,205
-------- -------- -------- --------
EXPENSES:
Production expenses ............................ 3,011 2,838 12,559 8,322
Exploration expenses ........................... 1,117 1,436 4,229 5,903
General and administrative expenses ............ 2,142 2,263 6,177 5,721
Interest and other debt expenses ............... 9,069 8,564 29,036 25,921
Depreciation, depletion and amortization ....... 10,479 5,981 28,505 20,118
-------- -------- -------- --------
Total expenses ................................. 25,818 21,082 80,506 65,985
-------- -------- -------- --------
Loss before income taxes and extraordinary item (13,242) (3,544) (12,818) (7,780)
Income taxes ...................................... -- -- -- --
-------- -------- -------- --------
Net loss before extraordinary item ................ (13,242) (3,544) (12,818) (7,780)
Extraordinary gain (loss) ......................... (13) -- 10,959 --
-------- -------- -------- --------
Net loss .......................................... (13,255) (3,544) (1,859) (7,780)
Less: cumulative preferred stock dividends ..... (1,036) (896) (3,310) (2,688)
-------- -------- -------- --------
Net loss applicable to common stock ............... $(14,291) $ (4,440) $ (5,169) $(10,468)
======== ======== ======== ========
Basic and diluted loss per common share
before extraordinary item ....................... $ (1.09) $ (.34) $ (1.26) $ (.79)
Basic and diluted loss per common share ........... $ (1.10) $ (.34) $ (.41) $ (.79)
Basic and diluted weighted average common shares
outstanding ..................................... 13,044 13,211 12,756 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>
NINE MONTHS ENDED SEPT. 30,
---------------------------
1999 2000
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................. $ (1,859) $ (7,780)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Gain on sale of assets ............................................. (25,556) (7,310)
Extraordinary gain ................................................. (10,959) --
Gain on debt redemption ............................................ -- (46)
Depreciation, depletion and amortization ........................... 28,505 20,118
Exploration expenses ............................................... 4,229 5,903
Compensation expense ............................................... -- 103
Accretion and amortization of debt expenses and other expenses ..... 3,848 2,613
Changes in operating assets and liabilities:
Increase in accounts receivable .................................... (3,162) (9,461)
Decrease (increase) in prepaid expenses and other current assets ... 74 (2,623)
(Increase) decrease in other non-current assets .................... (389) 500
Increase in accounts payable and accrued expenses .................. 840 11,273
--------- ---------
Net cash (used in) provided by operating activities .................. (4,429) 13,290
--------- ---------
INVESTING ACTIVITIES:
Expenditures for exploration and development activities .............. (11,133) (19,570)
Proceeds from sale of properties ..................................... 82,865 23,796
Restricted cash investment ........................................... (7,500) --
Acquisition purchase price adjustment ................................ 6,889 --
--------- ---------
Net cash provided by investing activities ............................ 71,121 4,226
--------- ---------
FINANCING ACTIVITIES:
Proceeds from long term borrowings ................................... 4,000 --
Principal payments on long term borrowings ........................... (115,500) --
Proceeds from sale of notes, net ..................................... 126,063 --
Redemption of Senior Secured Notes ................................... (36,501) --
Redemption and retirement of subordinated and senior notes ........... (30,459) (8,650)
Other ................................................................ -- (5)
--------- ---------
Net cash used in financing activities .............................. (52,397) (8,655)
--------- ---------
Increase in cash and cash equivalents ................................... 14,295 8,861
Cash and cash equivalents, beginning of period .......................... 8,435 10,370
--------- ---------
Cash and cash equivalents, end of period ................................ $ 22,730 $ 19,231
========= =========
</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 nine months ended
September 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 November 1, 2000, aggregating
approximately $10.8 million, covering twelve 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 Company's charter provides that
Preferred Stockholders, voting separately as a class, have the right to elect
two additional directors to the Board until all dividends in default on
preferred stock have been paid in full.
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. 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. 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.
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.
5
<PAGE> 7
NOTE 5 - EARNINGS PER SHARE
The basic net loss per common share before extraordinary item and the
basic net loss per common share as shown on the Consolidated Statements of Loss
reflects net loss before extraordinary item and net 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 net loss per common share before extraordinary
item and the diluted net 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 net loss
per share ("EPS") have been restated to reflect the 1 for 10 reverse stock
split. The extraordinary gain per common share for the nine month period ended
September 30, 1999 was $0.86 per share. For the three and nine months ended
September 30, 1999, potentially dilutive stock options were not in the money and
the remaining potentially dilutive securities were anti-dilutive and therefore
not included in the EPS calculations. For the three and nine months ended
September 30, 2000, all potentially dilutive securities are anti-dilutive and
therefore are not included in the diluted EPS calculation. Potentially dilutive
securities outstanding at September 30, 2000 that could impact EPS in the future
include stock options granted to employees to purchase 0.1 million common shares
and the Preferred Stock which can be converted into approximately 0.5 million
common shares (See Note 7 - Other Developments).
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
The Company plans to adopt Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") effective January 1, 2001. The statement, as amended, requires that all
derivatives be recognized as either assets or liabilities and measured at fair
value, and changes in the fair value of derivatives be reported in current
earnings, unless the derivative is designated and effective as a hedge. If the
intended use of the derivative is to hedge the exposure to changes in the fair
value of an asset, a liability or firm commitment, then the changes in the fair
value of the derivative instrument will generally be offset in the income
statement by the change in the item's fair value. However, if the intended use
of the derivative is to hedge the exposure to variability in expected future
cash flows then the changes in fair value of the derivative instrument will
generally be reported in Other Comprehensive Income (OCI). The gains and losses
on the derivative instrument that are reported in OCI will be reclassified to
earnings in the period in which earnings are impacted by the hedged item.
The Company has received a mark-to-market valuation report from its
counterparty dated November 7, 2000. Based on this report, when SFAS 133 is
adopted on January 1, 2001, a liability of approximately $4.0 million would be
recorded to reflect the fair market value of hedges currently in place for the
periods subsequent to January 1, 2001. Because the Company's derivatives
currently in place qualify for hedge accounting, an offsetting entry would be
made to OCI. Due to commodity price volatility, the fair value of the Company's
derivative instruments has changed dramatically since September 30, 2000 (See
"Item 3. Quantitative and Qualitative Disclosure About Market Risk"). Volatility
in the commodity price markets prevents management from determining the actual
transitional valuation effect on future consolidated results of operations or
financial position once SFAS 133 is implemented on January 1, 2001.
NOTE 7 - OTHER DEVELOPMENTS
In July 2000, the Board of Directors approved the Contour Energy Unit
Performance Plan (the "UP Plan") under which a total of 1,579,943 units were
made available for grants to employees. The UP Plan is a cash-based incentive
plan that accrues value based on appreciation of the Company's common stock. All
employees are eligible to participate in the UP Plan, subject to their agreement
to forfeit any outstanding stock options held. As of September 30, 2000,
1,352,591 units have been granted with 303,595 stock options forfeited. The
units will vest at a rate of one-third on January 1 of 2001, 2002, and 2003.
Unexercised units will terminate on December 31, 2003. Value attributable to
units that are exercised is payable only in cash.
The value attributable to each unit is equal to the price of the
Company's common stock on the date of exercise less the exercise price. The
exercise price for the units granted to date is $1.93. However, a cap has been
placed on the appreciation margin that can be realized as follows:
o Maximum appreciation for units that vest on January 1, 2001 is
$1.75 per unit.
o Maximum appreciation for units that vest on January 1, 2002 is
$2.25 per unit
o Maximum appreciation for units that vest on January 1, 2003 is
$2.75 per unit.
6
<PAGE> 8
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for compensation expense attributable to
the UP Plan. For the three and nine months ended September 30, 2000, the Company
recognized $103,000 as compensation expense relating to these units.
7
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NOTE 8 - 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 September 30, 2000, consolidating condensed statements of
income (loss) for the three months and nine months ended
September 30, 1999 and 2000 and consolidating condensed
statements of cash flows for the nine months ended September
30, 1999 and September 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>
8
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CONSOLIDATING CONDENSED BALANCE SHEET
SEPTEMBER 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......................... $ 309,844 $ 119,859 $ 8,921 $ 1,064 $(388,743) $ 50,945
Property and equipment, net ........... -- 137,021 -- 5,429 369 142,819
Restricted cash ....................... -- 7,500 -- -- -- 7,500
Other non-current assets, net ......... (130,719) 10,559 -- -- 120,186 26
--------- --------- --------- --------- --------- ---------
Total assets......................... $ 179,125 $ 274,939 $ 8,921 $ 6,493 $(268,188) $ 201,290
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities.................... $ 14,533 $ 406,028 $ 4,005 $ 876 $(388,744) $ 36,698
Long-term debt ........................ 248,675 -- -- -- -- 248,675
Stockholders' (deficit) equity ........ (84,083) (131,089) 4,916 5,617 120,556 (84,083)
--------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity (deficit)... $ 179,125 $ 274,939 $ 8,921 $ 6,493 $(268,188) $ 201,290
========= ========= ========= ========= ========= =========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 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 .................................... $ -- $ 10,806 $ 291 $ 702 $ 777 $ 12,576
Costs and expenses .......................... (8,885) (16,700) (315) (881) 963 (25,818)
Equity in earnings (loss) of subsidiaries ... (4,357) (203) -- -- 4,560 --
Extraordinary item .......................... (13) -- -- -- -- (13)
-------- -------- -------- -------- -------- ---------
Net income (loss) ......................... $(13,255) $ (6,097) $ (24) $ (179) $ 6,300 $(13,255)
======== ======== ======== ======== ======== =========
</TABLE>
9
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CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 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 .................................... $ -- $ 17,218 $ (429) $ 749 $ -- $ 17,538
Costs and expenses .......................... (8,703) (11,530) (365) (580) 96 (21,082)
Equity in earnings (loss) of subsidiaries ... 5,159 (624) -- -- (4,535) --
Extraordinary item .......................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) ......................... $ (3,544) $ 5,064 $ (794) $ 169 $ (4,439) $ (3,544)
======== ======== ======== ======== ======== ========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 .................................... $ -- $ 61,130 $ 1,081 $ 5,636 $ (159) $ 67,688
Costs and expenses .......................... (29,451) (48,534) (639) (2,632) 750 (80,506)
Equity in earnings (loss) of subsidiaries ... 16,633 3,446 -- -- (20,079) --
Extraordinary item .......................... 10,959 -- -- -- -- 10,959
-------- -------- -------- -------- -------- --------
Net income (loss) ......................... $ (1,859) $ 16,042 $ 442 $ 3,004 $(19,488) $ (1,859)
======== ======== ======== ======== ======== ========
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 ................................ $ -- $ 54,485 $ 908 $ 2,234 $ 578 $ 58,205
Costs and expenses ...................... (26,339) (38,508) (810) (1,611) 1,283 (65,985)
Equity in earnings of subsidiaries ...... 18,559 721 -- -- (19,280) --
-------- -------- -------- -------- -------- --------
Net income (loss) ..................... $ (7,780) $ 16,698 $ 98 $ 623 $(17,419) $ (7,780)
======== ======== ======== ======== ======== ========
</TABLE>
10
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CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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) .......................... $ (1,859) $ 16,042 $ 442 $ 3,004 $ (19,488) $ (1,859)
Non-cash income (loss) adjustments ......... (23,744) 5,856 -- (1,533) 19,488 67
Changes in operating assets
and liabilities ......................... 77,737 (80,295) (442) 363 -- (2,637)
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities ....................... 52,134 (58,397) -- 1,834 -- (4,429)
--------- --------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Expenditures for capital and exploration
activities ............................... -- (11,133) -- -- -- (11,133)
Proceeds from the sale of properties ....... -- 73,439 -- 9,426 -- 82,865
Restricted cash investment ................. -- (7,500) -- -- -- (7,500)
Acquisition purchase price adjustment ...... -- 6,889 -- -- -- 6,889
Distributions from partnerships ............ -- 11,260 -- -- (11,260) --
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ................................. -- 72,955 -- 9,426 (11,260) 71,121
--------- --------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Net payments on long term
borrowings ................................ (111,500) -- -- -- -- (111,500)
Proceeds from sale of notes, net ........... 126,063 -- -- -- -- 126,063
Redemption of subordinated
& senior notes ............................ (30,459) -- -- -- -- (30,459)
Redemption of Senior Secured notes ......... (36,501) -- -- -- -- (36,501)
Distributions to partners .................. -- -- -- (11,260) 11,260 --
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities ................................. (52,397) -- -- (11,260) 11,260 (52,397)
--------- --------- --------- --------- --------- ---------
(Decrease) increase in cash
and cash equivalents ....................... (263) 14,558 -- -- -- 14,295
Cash and cash equivalents,
beginning of period ........................ 275 8,160 -- -- -- 8,435
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents,
end of period .............................. $ 12 $ 22,718 $ -- $ -- $ -- $ 22,730
========= ========= ========= ========= ========= =========
</TABLE>
11
<PAGE> 13
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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) .......................... $ (7,780) $ 16,698 $ 98 $ 623 $(17,419) $ (7,780)
Non-cash income (loss) adjustments ......... (15,992) 19,264 -- 587 17,419 21,278
Changes in operating assets
and liabilities .......................... 32,427 (32,402) (98) (135) -- (208)
-------- -------- -------- -------- -------- --------
Net cash provided by operating
activities .............................. 8,655 3,560 -- 1,075 -- 13,290
-------- -------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Expenditures for capital and exploration
activities ............................... -- (19,696) -- 126 -- (19,570)
Proceeds from sale of property ............. -- 23,796 -- -- -- 23,796
Distributions from partnerships ............ -- 1,201 -- -- (1,201) --
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities ............................... -- 5,301 -- 126 (1,201) 4,226
-------- -------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Redemption and retirement on
subordinated debentures .................. (8,650) -- -- -- -- (8,650)
Distributions to partners .................. -- -- -- (1,201) 1,201 --
Other ...................................... (5) -- -- -- -- (5)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities .............................. (8,655) -- -- (1,201) 1,201 (8,655)
-------- -------- -------- -------- -------- --------
Increase in cash and
cash equivalents ........................... -- 8,861 -- -- -- 8,861
Cash and cash equivalents,
beginning of period ........................ 12 10,358 -- -- -- 10,370
-------- -------- -------- -------- -------- --------
Cash and cash equivalents,
end of period .............................. $ 12 $ 19,219 $ -- $ -- $ -- $ 19,231
======== ======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following review of operations for the three and nine months ended
September 30, 1999 and 2000 should be read in conjunction with the financial
statements of the Company and Notes thereto included elsewhere in the Form 10-Q
and with the Financial Statements, Notes and Management's Discussion and
Analysis for the year ended December 31, 1999 included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
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. The Company normally employs the average NYMEX price for
the last three days of the contract for natural gas and the monthly average of
closing NYMEX prices for crude oil as the underlying index ("Index Price"). To
the extent the Index Price closes above the established ceiling the Company must
make payments to the counterparty on the differential between the Index 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 Price and the floor. If the Index Price 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. However, see
Note 6 - New Accounting Pronouncements. 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 and collars, the Company
hedged approximately 54%, 94%, 44% and 65% of its natural gas production for the
third quarter of 1999, the third quarter of 2000, the first nine months of 1999
and the first nine months of 2000, respectively. As of September 30, 2000,
930,000 Mmbtus of natural gas production for October 2000 has been hedged by
natural gas price swap agreements at an average Index Price of $2.60 per Mmbtu
before transaction and transportation costs. As of September 30, 2000, 3,210,000
Mmbtu's of natural gas production for October through December 2000 has been
hedged by collars at a floor of $4.00 per Mmbtu and a ceiling of $4.98 per
Mmbtu. As of the date of this report, the Company has three collars in place for
15,000 Mmbtus per day each totaling 45,000 Mmbtus per day, or approximately 70%,
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
a closing Index Price above $3.00/Mmbtu. However, at prices below $3.00/Mmbtu,
the floor moves to an Index 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 a closing
Index Price above $3.09/Mmbtu. However, at prices below $3.09/Mmbtu, the floor
moves to an Index Price plus $0.66/Mmbtu. The terms of the third collar include
a ceiling of $5.33/Mmbtu and a floor of $4.00/Mmbtu at the closing Index Price.
Through crude oil price swap agreements and collars, the Company
hedged approximately 46%, 48%, 17% and 62% of its crude oil production for the
third quarter of 1999, the third quarter of 2000, the first nine months of 1999
and the first nine months of 2000, respectively. As of September 30, 2000, the
Company has two collars in place covering an average of 900 barrels per day, or
approximately 75%, of its expected crude oil production for the remainder of
2000 and an average of 598 barrels per day, or approximately 50%, of its
expected crude oil production for calendar year 2001. The terms of the first
collar include a ceiling of $32.00/bbl and a floor of $25.24/bbl at a closing
Index Price above $22.00/bbl. However, at prices below $22.00/bbl, the floor
moves to an Index Price plus $3.24 /bbl. The terms of the second collar include
a ceiling of $32.48/bbl and a floor of $27.20/bbl at a closing Index Price above
$23.00/bbl. However, at prices below $23.00/bbl, the floor moves to an Index
Price plus $4.20/bbl.
Included within oil and gas revenues for the three months and nine
months ended September 30, 1999 and 2000 was approximately $(1.8) million,
$(4.8) million, $0.6 million and $(7.2) million, respectively, representing net
(losses) and net gains from hedging activities. At September, 30, 2000, the
mark-to-market unrealized loss on the Company's existing hedging instruments for
future production months approximated $6.7 million, of which $2.7 million
related to October 2000. The Company, under the terms of its existing hedge
instruments, is required, from time to time, to provide collateral to the
counterparty(s). The amount of collateral required is a function of the mark to
market value of the hedge instruments at a point in time as determined by the
counterparty(s). The credit risk exposure from
13
<PAGE> 15
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.
RESULTS OF OPERATIONS
The following table sets forth certain operating data regarding net
production, average sales prices and expenses associated with the Company's oil
and natural gas operations for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls) .......................... 91.8 148.5 257.5 364.4
Natural gas (Mmcf) ................................................. 4,812 4,166 17,777 13,597
Natural gas equivalent (Mmcfe) ..................................... 5,363 5,057 19,322 15,783
AVERAGE SALES PRICE PER UNIT (INCLUDING EFFECTS OF HEDGING):
Oil and other liquid hydrocarbons (per Bbl) ........................ $ 19.12 $ 25.95 $ 15.55 $ 26.01
Natural gas (per Mcf) .............................................. 2.15 3.36 2.04 2.94
Natural gas equivalent (per Mcfe) .................................. 2.26 3.53 2.09 3.14
COST PER MCFE:
Lifting costs ...................................................... $ .44 $ .53 $ .54 $ .47
Severance and ad valorem taxes ..................................... .12 .03 .11 .06
General and administrative expenses ................................ .40 .45 .32 .36
Depreciation, depletion and amortization (oil and gas activities) .. 1.95 1.18 1.48 1.27
Interest expense, excluding accretion and amortization ............. 1.50 1.53 1.32 1.48
</TABLE>
Three Months Ended September 30, 2000 and 1999. The Company's oil and
gas revenues increased by $5.0 million, or 42%, to $17.2 million for the third
quarter of 2000 compared to the same period of 1999. This increase was primarily
the result of higher oil and natural gas prices and higher oil and liquid
production, partially offset by lower natural gas production. Higher oil and
natural gas prices increased revenues by approximately $6.0 million in the third
quarter 2000 while natural gas liquids revenues received for the first time
added approximately $0.6 million to revenues. Natural gas production decreased
by 13% in the third quarter 2000, primarily the result of normal field declines,
partially offset by increased volumes from the Phillip's volumetric production
payment and new production added from the Company's drilling program. The
decrease in natural gas production reduced revenues by approximately $1.4
million.
Interest and other income decreased from $591,000 in the third quarter
of 1999 to $391,000 in the third quarter of 2000 due to lower average cash
balances in the current period.
Production expenses for the third quarter of 2000 decreased 7% to $2.8
million from $3.0 million in the same period last year, primarily from lower
severance taxes as a result of receiving severance tax exemptions in certain
Louisiana wells. Lifting costs (production expenses less severance and ad
valorem taxes) per Mcfe for the third quarter of 2000 increased 20% to $0.53
when compared to the same period in 1999, primarily as a result of lower
production levels in the third quarter 2000.
Exploration expenses increased to $1.4 million in the third quarter of
2000 compared to $1.1 million in the corresponding period of 1999, an increase
of 27%, primarily due to higher seismic expenditures and dry hole expenses,
partially offset by lower lease rental expense and overhead allocated to
exploration activities.
General and administrative ("G&A") expenses were $2.3 million in the
third quarter of 2000 compared to $2.1 million in the same period of 1999. The
third quarter of 2000 includes $0.5 million of professional and legal expenses
related to the preferred shareholders lawsuit and $0.1 million of compensation
expense related to the Company's Unit Performance Plan, see Note 3 and Note 7 -
Consolidated Financial Statements for further discussion. The third quarter of
1999 included $0.8 million of expenses of a non-recurring nature. Excluding the
foregoing expenses in 2000 and 1999, G&A increased by $0.4 million in the third
quarter 2000, primarily due to lower third-party recoveries and a lower
14
<PAGE> 16
allocation to exploration activities. On a unit of production basis, G&A
expenses were $0.45 per Mcfe in the third quarter of 2000 compared to $0.40 per
Mcfe in the corresponding quarter of 1999.
Interest and other debt expenses of $8.6 million for the third quarter
2000 decreased 5% from $9.1 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 third quarter 2000 cash interest expense of
$7.7 million, the Company recorded non-cash charges in the third quarter of 2000
of $0.9 million for amortization of debt issuance costs, accretion of note
discount, net of accretion of note premium and accretion of debt valuation
discount.
Depreciation, depletion and amortization ("DD&A") expenses decreased
43% from $10.5 million in the third quarter of 1999 to $6.0 million in the
current period. The third quarter of 1999 included $4.4 million of DD&A expense
related to the Bayou Sauveur field to amortize the total well costs of the field
over current proved developed reserves. The units-of-production DD&A rate for
oil & gas activities was $1.95 per Mcfe in the third quarter of 1999 compared to
$1.18 per Mcfe in the third quarter of 2000. Excluding the impact of the Bayou
Sauveur field, the DD&A rate for the third quarter of 1999 was $1.12 per Mcfe.
In September 1999, the Company retired $1.7 million face amount of its
7 7/8% Convertible Subordinated Notes. The settlement payments included
principal amounts of $1.4 million and accrued interest of $34,000 and the third
quarter of 1999 includes an extraordinary gain of $0.2 million for these
transactions.
The Company recognized a net loss of $3.5 million in the third quarter
of 2000 and a net loss of $13.3 million in the same period last year. The
reasons for the decrease in net loss are described in the foregoing discussion.
Nine Months Ended September 30, 2000 and 1999. The Company's oil and
gas revenues increased by 23%, or $9.3 million, to $49.8 million for the first
nine months of 2000 compared to the same period of 1999, primarily as a result
of higher oil and natural gas prices and higher oil and liquid production,
partially offset by lower natural gas production. Higher oil and natural gas
prices increased revenues by approximately $16.0 million in the first nine
months of 2000 while natural gas liquids revenues received for the first time
added approximately $0.6 million to revenues. Natural gas production decreased
by 24% in the first nine months of 2000, primarily the result of the sale of
North Louisiana properties to Phillips in the second quarter of 1999 and normal
field declines, partially offset by new production added from the Company's
drilling program. The decrease in natural gas production reduced revenues by
approximately $8.5 million. The first nine months of 1999 includes a $25.7
million gain on the sale of properties to Phillips Petroleum Company
("Phillips") relating to certain of the Company's interests in the Bryceland,
West Bryceland and Sailes fields in north Louisiana. The first nine months of
2000 includes a $7.3 million gain on the sale of properties.
Interest and other income decreased from $1.7 million in the first nine
months of 1999 to $1.1 million in the first nine months of 2000 due to lower
average cash balances in the current period.
Production expenses for the first nine months of 2000 decreased 34% to
$8.3 million from $12.6 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 workover expense. Lifting costs (production expenses
less severance and ad valorem taxes) per Mcfe for the first nine months of 2000
decreased 13% to $0.47 compared to the same period in 1999, primarily due to
lower workover expense.
Exploration expenses totaled $5.9 million in the first nine months of
2000 and $4.2 million in the corresponding period of 1999, an increase of 40%,
primarily due to higher current period leasehold abandonment, dry hole and
seismic expenses, partially offset by lower overhead and lease rentals.
G&A expenses were $5.7 million in the first nine months of 2000
compared to $6.2 million in the first nine months of 1999. The first nine months
of 2000 includes $0.8 million of professional and legal expenses related to the
preferred shareholders lawsuit and $0.1 million of compensation expense related
to the Company's Unit Performance Plan, see Note 3 and Note 7 - Consolidated
Financial Statements for further discussion. The first nine months of 1999
included $1.7 million of non-recurring professional, consulting and transaction
costs. Excluding the foregoing expenses, G&A expense increased by $0.4 million
for the first nine months of 2000, primarily due to lower third-party recoveries
due to the sale of North Louisiana properties to Phillips and a lower allocation
to exploration activities. On a unit of production basis, G&A expenses were
$0.36 per Mcfe in the first nine months of 2000 compared to $0.32 per Mcfe in
the corresponding period of 1999.
15
<PAGE> 17
Interest and other debt expenses of $25.9 million in the first nine
months of 2000 decreased 11% from $29.0 million in the same period of 1999. The
decrease in interest expenses resulted primarily from lower average debt in the
current period. In addition to its 2000 cash interest expense of $23.3 million,
the Company recorded non-cash charges in the first nine months of 2000 of $2.6
million for amortization of debt issuance costs, accretion of note discount, net
of accretion of note premium and accretion of debt valuation discount.
DD&A expenses decreased 29% from $28.5 million for the first nine
months of 1999 to $20.1 million in the first nine months of 2000, primarily from
lower production in the first nine months of 2000 due to the sale of north
Louisiana properties to Phillips and $3.6 million less of DD&A expense
associated with the Bayou Sauveur field. The units-of-production DD&A rate for
oil and gas activities was $1.48 per Mcfe in the first nine months of 1999
compared to $1.27 per Mcfe in the first nine months of 2000. Excluding the
impact of the Bayou Sauveur field, the DD&A rate for the first nine months of
1999 was $1.26 per Mcfe and $1.18 per Mcfe for the first nine months of 2000.
In the first nine months of 1999, the Company negotiated a private
offering of $135 million principal amount, 14% Senior Secured Notes, repurchased
$35 million principal amount of the notes and repurchased $46.1 million of its
7 7/8% Convertible Subordinated Notes due December 15, 1999 and its 8 1/2%
Convertible Subordinated Debentures due April 1, 2000. In the first nine months
of 1999, the Company recognized an extraordinary gain of approximately $10.8
million related to these repurchases and refinancings. In September 1999, the
Company retired $1.7 million face amount of its 7 7/8% Convertible Subordinated
Notes. The settlement payments included principal amounts of $1.4 million and
accrued interest of $34 thousand and the first nine months of 1999 includes an
extraordinary gain of $0.2 million for these transactions.
The Company recognized a net loss of $7.8 million in the first nine
months of 2000 and a net loss of $1.9 million in the same period last year. The
reasons for the increase in net loss are described in the foregoing discussion.
The results of operations for the quarter and nine months ended
September 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 nine months of 2000 aggregated $13.6 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 $19.6 million for exploration 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 $19.2 million as of September 30,
2000. As of September 30, 2000, the Company had working capital of $14.2
million, compared to a working capital deficit of $3.9 million at the end of
1999.
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.
At September 30, 2000, the Company had $7.5 million of "Restricted
Cash" on its balance sheet. This amount represented collateral for letters of
credit to support MMS bonding requirements for estimated future plugging and
abandonment obligations. Subsequent to September 30, 2000, the Company was able
to reduce the current collateral to $5.0 million. The Company has agreed to add
$100,000 per month for twenty-five months beginning in November 2000 to
replenish the collateral to $7.5 million.
16
<PAGE> 18
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 while the 14% senior secured notes are outstanding.
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, has 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 (See Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Hedging Activities).
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, since 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 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 September 30, 2000 ($248.7 million recorded on the balance
sheet), requiring semi-annual cash interest payments on April 15 and October 15
in each year of $15.4 million. 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 $44.6 million at
September 30, 2000, including dividend arrearages of $10.5 million. The Company
has not declared the quarterly dividends of $0.65625 per preferred share for
February 1, 1998 through November 1, 2000, aggregating approximately $10.8
million, covering twelve 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 Company's charter provides that the Preferred Stockholders, voting
separately as a class, have the right to elect two additional directors to the
Board until all dividends in default on preferred stock have been paid in full.
See Note 3 - Consolidated Financial Statements.
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 and October 2000, the Company's Board of Directors
approved increases in the Company's 2000 capital budget for up to $25 million,
including a new shallow gas exploratory drilling venture in south Texas. As with
the Company's other obligations discussed above, funding for this level of
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 nine months of 2000, the
Company expended $16.4 million on exploration and development activities. Of
this amount $9.0 million was spent on new-well drilling and completions, and
$7.4 million on other expenditures including recompletions, plugging and
abandonment, leasehold, and seismic and G&G. In the first nine months of 2000,
the Company participated in drilling 13 gross (3.5 net) wells, of which 8 gross
(2.2 net) wells were completed and 5 gross (1.3 net) wells were plugged and
abandoned. As of the end of the quarter, the Company was participating in the
drilling of 2 gross (.73 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. The Company plans to adopt Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") effective January 1, 2001. The statement,
as amended, requires that all derivatives be recognized as either assets or
liabilities and measured at fair value, and changes in the fair value of
derivatives be reported in current earnings, unless the derivative is designated
and effective as a hedge. If the intended use of the derivative is to hedge the
exposure to changes in the fair value of an asset, a liability or firm
commitment, then the changes in the fair value of the derivative instrument will
generally be offset in the income statement by the change in the item's fair
value. However, if the intended use of the derivative is to hedge the exposure
to variability in expected future cash flows then the changes in fair value of
the derivative instrument will generally be reported in Other Comprehensive
Income (OCI). The gains and losses on the derivative instrument that are
reported in OCI will be reclassified to earnings in the period in which earnings
are impacted by the hedged item.
17
<PAGE> 19
The Company has received a mark-to-market valuation report from its
counterparty dated November 7, 2000. Based on this report, when SFAS 133 is
adopted on January 1, 2001, a liability of approximately $4.0 million would be
recorded to reflect the fair market value of hedges currently in place for the
periods subsequent to January 1, 2001. Because the Company's derivatives
currently in place qualify for hedge accounting, an offsetting entry would be
made to OCI. Due to commodity price volatility, the fair value of the Company's
derivative instruments has changed dramatically since September 30, 2000 (See
"Item 3. Quantitative and Qualitative Disclosure About Market Risk"). Volatility
in the commodity price markets prevents management from determining the actual
transitional valuation effect on future consolidated results of operations or
financial position once SFAS 133 is implemented on January 1, 2001.
18
<PAGE> 20
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 currently has no
outstanding floating rate debt and therefore its earnings and cash flows are not
subject to interest rate risk. However, the fair value of the Company's
fixed-rate debt instruments are subject to interest-rate risk. Generally, the
fair market value of debt with a fixed interest rate will increase as interest
rates fall, and the fair market value will decrease as interest rates rise. The
Company is also 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 and the fair values for the contracts in place at September 30,
2000.
<TABLE>
<CAPTION>
MATURITY DATE
---------------------------------------------------- FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL @ 9/30/00
--------- --------- --------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED DEBT:
14.00% (Maturity) (1)...... $ 4,120 $ 100,720 $ 104,840 $ 104,000
10.38% (Maturity).......... $ 155,000 155,000 103,075
--------- --------- ---------- --------- ---------
Total Maturity................ $ 4,120 $ 100,720 $ 155,000 $ 259,840 $ 207,075
========= ========= ========== ========== =========
Blended weighted
average interest rate...... 14.00% 14.00% 10.38%
COMMODITY PRICE
DERIVATIVES:
Price swaps:
Notional amounts:
Natural gas (Mmbtus) ...... 930,000
Weighted average price..... $ 2.60
Fair value at 9/30/00(2)... $ (2,516)
Collars:
Notional amounts:
Natural gas (Mmbtus) ...... 3,210,000
Price range................ $4.00 - $4.98
Fair value at 9/30/00(2)... $ (885)
Natural gas (Mmbtus) ...... 5,475,000
Price range................ $5.00 - $3.55/$3.00
Fair value at 9/30/00(2)... $ (1,639)
Natural gas (Mmbtus) ...... 5,475,000
Price range................ $5.00 - $3.75/$3.09
Fair value at 9/30/00(2)... $ (1,378)
Crude oil (bbls) .......... 228,500
Price range................ $32.00 - $25.24/$22.00
Fair value at 9/30/00(2)... $ (175)
Crude oil (bbls) .......... 72,800
Price range................ $32.48 - $27.20/$23.00
Fair value at 9/30/00(2)... $ (39)
</TABLE>
(1) The 14% notes mature in 2002 and 2003 at premiums ranging from 103% to
105% of the stated principal amount.
(2) Represents the mark-to-market fair value of the contracts at September
30, 2000.
19
<PAGE> 21
FORWARD-LOOKING STATEMENTS
Statements contained in this Report and other materials filed or to be
filed by the Company with the Securities and Exchange Commission (as well as
information included in oral or other written statements made or to be made by
the Company or its representatives) that are forward-looking in nature are
intended to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, relating to matters such as anticipated
operating and financial performance, business prospects, developments and
results of the Company. Actual performance, prospects, developments and results
may differ materially from any or all anticipated results due to economic
conditions and other risks, uncertainties and circumstances partly or totally
outside the control of the Company, including rates of inflation, oil and
natural gas prices, uncertainty of reserve estimates, rates and timing of future
production of oil and gas, exploratory and development activities, acquisition
risks, changes in the level and timing of future costs and expenses related to
drilling and operating activities and those risk factors described on pages 13
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 3. ARREARAGES IN PAYMENT OF DIVIDENDS
As of November 1, 2000, total dividends in arrears on the Company's
$2.625 Convertible Exchangeable Preferred Stock ("Preferred Stock") were $10.8
million.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company reports estimated proven reserves as of October 1, 2000 of
186.6 Bcfe.
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 August 30, 2000, the Company filed an 8-K to disclose its estimated
proved reserves as of July 1, 2000.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTOUR ENERGY CO.
Date: November 14, 2000 By: /s/ Rick G. Lester
------------------------------
Rick G. Lester
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule (included only in the electronic filing of this
document).
</TABLE>
