As filed with the Securities and Exchange Commission on May 15,June 6, 2002
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
----------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
CONTANGO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 1311 95-4079863
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
----------------
3700 Buffalo Speedway, Suite 960, Houston, Texas 77098
(713) 960-1901
(Address and telephone number of principal executive offices)
----------------
KENNETH R. PEAK
President and Chief Executive Officer
3700 Buffalo Speedway, Suite 960, Houston, Texas 77098
(713) 960-1901
(Name, address and telephone number of agent for service)
----------------
Copies to:
RICHARD A. SHORTZ CHARLES H. STILL, JR.
THOMAS P. CONAGHAN Bracewell & Patterson, L.L.P.
Morgan, Lewis & Bockius LLP 711 Louisiana Street, Suite 2900
300 S. Grand Avenue Houston, Texas 77002
Los Angeles, California 90071 (713) 223-2900
(213) 612-2500
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Number of
Title of Each Class of Shares to Proposed Maximum Proposed Maximum Amount of
Securities to be be Offering Price Aggregate Registration
Registered Registered per Share Offering Price Fee
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Depositary Shares....... 920,000 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Series C Preferred Stock
(1).................... 92,000 $250.00 $23,000,000 $2,116.00$2,116.00(2)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
(1) Plus an indeterminate number of shares of common stock issuable upon the
conversion of the Series C Preferred Stock.
(2) The entire amount of the registration fee, $2,116.00, is being offset by
the $2,116.00 registration fee previously paid in respect of unsold
securities pursuant to the Registration Statement on Form S-1, Registration
No. 333-88252, filed by Contango Oil & Gas Company on May 15, 2002.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it does not solicit an offer to buy these +
+securities in any state or other jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion dated May 15,June 6, 2002
Prospectus
, 2002
CONTANGO OIL & GAS COMPANY
800,000 Shares
Depositary Shares Each Representing 1/10 of a Share of %
Convertible Cumulative Preferred Stock, Series C
LIQUIDATION PREFERENCE EQUIVALENT TO $25.00 PER DEPOSITARY SHARE
[CONTANGO OIL & GAS LOGO]
Contango Oil & Gas Company:
... We are an independent natural gas and oil company. We explore and acquire
natural gas and oil properties primarily onshore on the Gulf Coast and
offshore in the Gulf of Mexico. Our current production is from onshore south
Texas and offshore Gulf of Mexico.
... Contango Oil & Gas Company
3700 Buffalo Speedway, Suite 960
Houston, Texas 77098
(713) 960-1901
Symbol and Market:
... Depositary shares: "MCF.PrC"/Application for listing has been filed with
American Stock Exchange
... Common stock: "MCF"/American Stock Exchange
... Last reported sale price of common stock on May 14,June 5, 2002: $3.20$2.95
The Offering:
... Cash dividends on the Series C preferred stock will be cumulative from the
original date of issuance and will be payable quarterly from the original
date of issuance at the rate of % of the liquidation preference per year
($ per year per depositary share).
... You may convert each share of Series C preferred stock represented by your
depositary shares at any time into shares of our common stock based on
the initial conversion price of $ , subject to adjustment, which is
equivalent initially to a conversion rate of shares of common stock for
each depositary share.
... On or after ,June 30, 2004, we may, under certain circumstances described in
this prospectus, at our option, cause the Series C preferred stock to
automatically convert into shares of common stock.
... The Series C preferred stock is redeemable at any time after ,June 30, 2006 at
our option at the redemption prices described in this prospectus.
... The Series C preferred stock will rank junior to our Series A preferred stock
and our Series B preferred stock, and senior to our common stock, with
respect to dividend rights, andredemption rights, rights upon our liquidation,
winding-up or dissolution.dissolution, or otherwise.
... We have granted the underwriter an option to purchase an additional 120,000
depositary shares to cover over-allotments, if any.
Price to Underwriting Proceeds to
Public Discount Contango(1)
-------- ------------ -----------
Per Depositary share....................... $25.00 $1.75 $23.25
Total...................................... $20,000,000 $1,400,000 $18,600,000
- -----
(1) Before deducting expenses of the offering payable by Contango estimated at
$400,000.
This investment involves a high degree of risk. See "Risk Factors" beginning on
page 10.
Delivery of the depositary shares will be made on or after , 2002.
-----------
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Morgan Keegan & Company, Inc.
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 1
The Offering............................................................. 3
Summary Historical and Pro Forma Consolidated Financial Information...... 6
Summary Reserve and Operating Data....................................... 9
Risk Factors............................................................. 10
Cautionary Statement About Forward-Looking Statements.................... 17
Ratio of Earnings to Combined Fixed Charges and Preferred Dividends...... 19
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 20
Price Range of Our Common Stock.......................................... 20
Capitalization........................................................... 21
Selected Historical Consolidated Financial Information................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 30
Management............................................................... 41
Security Ownership of Certain Beneficial Owners and Management........... 45
Certain Relationships and Transactions................................... 47
Description of Series C Preferred Stock and Depositary Shares............ 48
Description of Our Other Capital Stock................................... 61
Material Federal Income Tax Consequences................................. 63
Underwriting............................................................. 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Where You Can Find More Information...................................... 70
Glossary of Natural Gas and Oil Terms.................................... 71
Report of Independent Petroleum Engineers................................ A-1
Index to Financial Statements............................................ F-1
----------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with different information. You should not
assume that the information contained in this prospectus is accurate as of any
date other than the date on the front of this prospectus.
i
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus, but does
not contain all information that may be important to you. In this prospectus,
the terms "Contango," "we," or "us" refer to Contango Oil & Gas Company and its
subsidiaries. We encourage you to read this prospectus in its entirety before
making an investment decision. You should carefully consider the information
included in "Risk Factors." In addition, certain statements include forward-
looking information that involves risks and uncertainties. See "Cautionary
Statement About Forward-Looking Statements." If you encounter a technical term
or abbreviation that you do not understand, please refer to our "Glossary of
Natural Gas and Oil Terms" beginning on page 71 for a definition.
About Contango
We are an independent natural gas and oil company that explores for,
develops, produces and sells natural gas and crude oil. Our exploration and
production efforts are currently focused onshore on the Gulf Coast and offshore
in the Gulf of Mexico. Our primary source of production is currently in south
Texas where we own an approximate 68% working interest and a 51% net revenue
interest in properties located in our South Texas Exploration Program or
"STEP." While our STEP interests currently account for nearly all of our
production, we also have interests in producing properties located offshore in
the Gulf of Mexico.
As of April 1, 2002, we owned rights to 29.2 Bcfe of proved developed
producing reserves, an increase of over 61% from June 30, 2001. The pre-tax net
present value of our proved developed producing reserves as of April 1, 2002
was approximately $55.7 million.
Total revenues and EBITDAX, which we define as earnings before interest,
income taxes, depreciation, depletion and amortization, impairment expense and
expensed exploration expenditures, including gains or losses from hedging, were
$20.1 million and $16.6 million, respectively, for the nine months ended March
31, 2002. For the year ended June 30, 2001, total revenues and EBITDAX were
$24.0 million and $19.0 million, respectively. Average net daily production for
the nine months ended March 31, 2002 and for the year ended June 30, 2001 was
18.8 Mmcf of natural gas per day and 499 barrels of crude oil per day and 9.8
Mmcf of natural gas per day and 335 barrels of crude oil per day, respectively.
Our average net daily production for the three months ended March 31, 2002 was
23.6 Mmcf of natural gas and 640 barrels of crude oil.
Our Strategy
Our strategy is predicated upon two core beliefs: (1) that the only
competitive advantage in the commodity-based natural gas and oil business is to
be among the lowest cost producers and (2) that virtually all the exploration
and production industry's value creation occurs through the drilling of
successful exploratory wells. As a result, our business strategy includes the
following elements:
Funding exploration prospects developed by proven geoscientists. Our
prospect generation and evaluation functions are performed by our alliance
partner, Juneau Exploration Company, L.P. or "JEX." This proven group of four
explorationists with 15 to 20 years of experience each has demonstrated its
ability to find reserves both onshore and offshore in the Gulf of Mexico. In
our experience, only a select group of explorationists are able to consistently
and profitably find natural gas and oil. Our STEP properties were discovered by
JEX and resulted in very competitive finding and development costs of $1.41 per
Mcfe. Our principal exploration strategy is to fund exploration prospects
generated by JEX.
Negotiating acquisitions of proved properties. Since January 1, 2002, we
have spent $23.4 million to acquire 12.9 Bcfe of proved developed producing
reserves of natural gas and oil. We will continue to seek producing property
acquisitions based on our view of the pricing cycles of natural gas and oil and
available exploitation opportunities of probable and possible reserves.
1
Controlling general and administrative and geological and geophysical costs.
Our goal is to be among the highest in the industry in revenue and profit per
employee and among the lowest in the industry in general and administrative
costs. We plan to continue our program of outsourcing geological, geophysical,
reservoir engineering and land functions, and partnering with cost efficient
operators whenever possible. We currently have four employees.
Structuring transactions to minimize front-end investments. We seek to
maximize returns on capital by minimizing up-front investments of our own
capital in acreage, seismic data, and prospect generation. We want our key
partners to share in both the risk and the rewards of our success.
Seeking new alliance ventures. While our core focus will remain the domestic
exploration and production business, we will also continue to seek alliance
ventures with companies and individuals that offer attractive investment
opportunities. These opportunities may include domestic or foreign exploration
prospects, as well as investments in downstream natural gas assets, includingsuch as our
recent acquisition of an option to purchase a minority equity investmentinterest in a Liquified Natural Gas (LNG) terminal.proposed
liquified natural gas, or LNG, receiving and regasification terminal being
developed in Freeport, Texas by Cheniere Energy, Inc.
Structuring incentives to drive behavior. We believe that equity ownership
aligns the interests of our partners, employees, and stockholders. Our
directors and executive officers currently hold approximately 32% of our common
stock. In addition, our alliance agreement with JEX requires JEX to co-invest
on every prospect that it recommends to us.
Onshore Exploration
Our onshore exploration strategy is to identify large acreage positions with
available 3-D seismic data and to quickly evaluate, develop and drill economic
prospects. Our first significant onshore exploration program was our STEP
properties. Our STEP properties have proven to be an excellent program for us,
resulting in 31 economically successful wells out of a 40-well exploration
program over a 22-month period. Over 95% of our net reserves and net production
is from our STEP properties.
Our onshore business strategy includes acquiring additional large acreage
prospects in south Texas and in other areas of the United States.
Offshore Exploration
We formed the Republic Exploration, L.L.C. and Magnolia Offshore
Exploration, L.L.C. joint ventures with JEX to find and develop natural gas and
oil opportunities in the Gulf of Mexico. Two different private seismic data
companies have licensed the rights to reprocessed 3-D seismic data covering a
total of approximately 2,000 blocks of the Gulf of Mexico continental shelf to
these two joint ventures. Republic Exploration, in which we have a 33 1/3%
interest, has access to approximately 1,400 of these blocks of reprocessed 3-D
seismic data. Magnolia Offshore Exploration, in which we have a 50% interest,
has access to approximately 600 blocks of reprocessed 3-D seismic data.
To date, Republic Exploration and Magnolia Offshore Exploration have focused
on identifying prospects, purchasing lease blocks at federal and state lease
sales, and farming out these leases to industry partners. In the future,
however, we expect that Republic Exploration and Magnolia Offshore Exploration
may seek to retain a working interest in these offshore prospects. Further,
Contango may seek to farm-in a working interest in the prospects alongside of,
and on the same terms as, third-party industry partners.
Recent Developments
We invested approximately $20$20.0 million during our third quarter ending
March 31, 2002, and $3.4 million on April 1, 2002 for a total of $23.4 million
in working interest acquisitions since January 2002. These proved reserve
acquisitions increased our net proved developed producing reserves by 12.9 Bcfe
at an acquisition cost of $1.81 per Mcfe, and thereby increased our working
interest and net revenue interest in the STEP wells to approximately 68% and
51%, respectively, from 43% and 33%, respectively.
2
In addition, on March 28, 2002, we repurchased 2,575,000 shares of our
common stock owned by the Southern Ute Indian Tribe Growth Fund for $6.2
million. After this share repurchase, which represented a 22% reduction in
outstanding common shares, we had 8,930,382 common shares outstanding as of
April 30, 2002.
Our offices are located at 3700 Buffalo Speedway, Suite 960, Houston, Texas
77098, our telephone number is (713) 960-1901, and our web-page is
www.mcfx.biz. Information on this web-page is not part of this prospectus.
THE OFFERING
Securities Offered.......... 800,000 depositary shares each representing 1/10
of a share of our Series C preferred stock
Dividends................... Cumulative annual cash dividends of $ per
share of Series C preferred stock, which is the
equivalent of $ per depositary share,
payable quarterly in cash on or before March 31,
June 30, September 30, and December 31,
commencing September 30, 2002, when, as and if
declared by the board. Dividends will be paid in
arrears on the basis of a 360-day year consisting
of twelve 30-day months. Dividends on the Series
C preferred stock will accumulate and be
cumulative from the date of issuance. Accumulated
dividends on the Series C preferred stock will
not bear interest.
Liquidation Preference...... $250.00 per share of Series C preferred stock,
which is the equivalent of $25.00 per depositary
share, plus unpaid accumulated and accrued
dividends.
Ranking..................... With respect to dividend rights, redemption
rights and rights upon our liquidation, winding-
up or dissolution or otherwise, the Series C
preferred stock will rank:
- junior to all of our Series A preferred stock
and Series B preferred stock;
- senior to all of our common stock and to all of
our other capital stock unless the terms of that
stock expressly provide that it ranks senior to
or on a parity with the Series C preferred
stock; and
- on a parity with any of our capital stock
issued in the future, the terms of which
expressly provide that it will rank on a parity
with the Series C preferred stock.
Redemption.................. On or after June 30, 2006, we may, at our option,
redeem all, but not a portion, of the Series C
preferred stock at a cash redemption price of
105% of the $250.00 liquidation value or $262.50
per share of Series C preferred stock, which is
the equivalent of $26.25 per depositary share,
plus unpaid accumulated and accrued dividends to
the redemption date. On or after June 30, 2009,
we may, at our option, redeem all, but not a
portion, of the Series C preferred stock at a
cash redemption price of $250.00, which is the
equivalent of $25.00 per depositary share, plus
unpaid accumulated and accrued dividends to the
redemption date.
3
Conversion Rights........... Each share of Series C preferred stock may be
converted at any time, at the holder's option,
into, initially, shares of our common
stock plus cash in lieu of fractional shares. The
conversion ratio is based on an initial
conversion price of $ per share of common
stock. The conversion price is subject to
adjustment upon the occurrence of certain events.
The depositary shares themselves are not
convertible into our common stock, but holders of
depositary shares may instruct the depositary to
convert the depositary shares into a proportional
number of shares of our common stock, but only in
increments of ten depositary shares.
Mandatory Conversion........ On or after June 30, 2004, we may, at our option,
cause all, but not a portion, of the Series C
preferred stock to be automatically converted
into shares of our common stock at the then
prevailing conversion price. We may exercise our
conversion right only if, for 20 trading days
within any period of 30 consecutive trading days,
including the last trading day of the period, the
closing price of our common stock equals or
exceeds 130% of the then prevailing conversion
price of the Series C preferred stock. In
addition, if there are less than 9,200 shares of
Series C preferred stock outstanding, we may, on
or after June 30, 2006, at our option, cause the
Series C preferred stock to be automatically
converted into a number of shares of our common
stock equal to the liquidation preference of each
share of Series C preferred stock, $250.00,
divided by the lesser of the then prevailing
conversion price and the average closing price of
the common stock for the five trading day period
ending on the second day immediately preceding
the date fixed for conversion. We may not cause
the mandatory conversion of the Series C
preferred stock unless we have paid all
cumulative dividends for prior periods.
Voting Rights............... Except as provided below or as required by
Delaware law and our certificate of
incorporation, which will include the certificate
of designations for the Series C preferred stock,
the holders of Series C preferred stock will have
no voting rights. If dividends payable on the
Series C preferred stock are in arrears for six
or more quarterly periods, the holders of the
Series C preferred stock, voting as a single
class with the shares of any other parity
preferred stock having similar rights that are
then exercisable, will be entitled at the next
regular or special meeting of our stockholders to
elect one director, and the number of directors
that compose our board will be increased by one
director. These voting rights and the term of the
additional director so elected will continue
until the dividend arrearage on the Series C
preferred stock has been paid in full. The
affirmative consent of holders of at least a
majority of the outstanding Series C preferred
stock will be required for the issuance of any
class or series of stock, or security convertible
into stock, ranking senior to the Series C
preferred stock as to dividend rights, redemption
rights or rights upon our liquidation, winding-up
4
or dissolution and for amendments to our
certificate of incorporation that would affect
adversely the rights of holders of the Series C
preferred stock.
4
Tax Consequences............ The U.S. federal income tax consequences of
purchasing, owning and disposing of the
depositary shares, the Series C preferred stock
and any common stock received upon its conversion
are described in "Material Federal Income Tax
Consequences." Prospective investors are urged to
consult their own tax advisors regarding the tax
consequences of purchasing, owning and disposing
of the depositary shares, the Series C preferred
stock and any common stock received upon its
conversion in light of their personal investment
circumstances, including consequences resulting
from the possibility that actual or constructive
distributions on the Series C preferred stock may
exceed our current and accumulated earnings and
profits, as calculated for U.S. federal income
tax purposes, in which case they would not be
treated as dividends for U.S. federal income tax
purposes.
Use of Proceeds............. We intend to use the net proceeds to repay all of
the outstanding debt under our secured reducing
revolving credit facility with Guaranty Bank,
FSB, which we refer to as our "Credit Facility"
in this prospectus, totaling $17.4$15.9 million as of
April 30,June 1, 2002, with any remaining proceeds to fund
a portion of our exploration and development
activities.activities, or our possible investment in the
proposed Freeport LNG terminal. Pending use for
these purposes, we plan to invest the net
proceeds to be usedfrom the offering in short-term
investment-grade interest-bearing securities.
5
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables present a summary of our historical and pro forma
consolidated financial information, in each case for the periods and as of the
dates indicated. Our summary historical financial information for the years
ended June 30, 1999, 2000 and 2001 is derived from our audited financial
statements included in this prospectus. Since January 2002, Contango has
completed multiple acquisitions to increase its working and net revenue
interests in the STEP properties, as described in "Recent Developments." The
results of operations of these acquisitions for the period ended March 31, 2002
have been included from the dates of closing of the acquisition. Our summary
historical financial information for the nine months ended March 31, 20022001 and
20012002 is derived from the unaudited financial statements also included in this
prospectus. Prior to July 1, 1999, we operated under different management and a
different board of directors, and we were not engaged in the natural gas and
oil business. Accordingly, the financial information for periods ending prior
to July 1, 1999 is not comparable to information for the periods beginning on
or after July 1, 1999.
Our summary pro forma financial information for the year ended June 30, 2001
and the nine months ended March 31, 2002 is derived from the unaudited pro
forma financial statements included in this prospectus. Our summary pro forma
financial information presents the pro forma effects of the acquisitions of
additional working and net revenue interests in the STEP properties, as
described in "Recent Developments." Our pro forma balance sheet assumes that
the $3.4 million acquisition which was completed on April 1, 2002 occurred as
of March 31, 2002. The other acquisitions, which totaled approximately $20
million and each of which occurred in our third quarter ended March 31, 2002,
are described in "Recent Developments" and are included in the historical
balance sheet data as of March 31, 2002. Our pro forma statement of operations
assumes that all of the acquisitions referred to above occurred at the
beginning of the period presented. A more complete explanation of the pro forma
adjustments can be found in the notes to the pro forma financial statements.
This table should also be read together with "Management's Discussion and
Analysis of Financial ConditionsCondition and Results of Operations."
6
Year Ended June 30, Nine Months Ended March 31,
----------------------------------------------------- -------------------------------------
Pro Forma Pro Forma
1999 2000 2001 2001 2001 2002 2002
----------- ------------- ----------- ------------ ----------- ----------- -----------
Statement of Operations
Data:
Revenues:
Natural gas and oil
sales.................. $ -- $ 298,339 $24,548,723 $ 35,758,630 $16,811,345 $15,908,607 $22,258,682
Gain (loss) from
hedging activities..... -- -- (557,654) (557,654) (1,678,813) 4,145,216 4,145,216
----------- ------------- ----------- ------------ ----------- ----------- -----------
Total revenues......... -- 298,339 23,991,069 35,200,976 15,132,532 20,053,823 26,403,898
----------- ------------- ----------- ------------ ----------- ----------- -----------
Expenses:
Operating expenses...... -- 85,254 2,631,905 3,747,586 1,686,836 2,525,620 3,389,596
Exploration expenses.... -- 604,136 4,167,427 4,167,427 2,324,521 2,522,836 2,522,836
Depreciation, depletion
and amortization....... -- 344,815 4,023,672 6,385,809 2,742,883 6,044,823 9,268,506
Impairment of proved
natural gas and oil
properties............. -- 548,245 300,466 300,466 -- -- --
General and
administrative
expense................ 107,725 763,576 2,356,421 2,356,421 1,677,778 1,331,146 1,331,146
----------- ------------- ----------- ------------ ----------- ----------- -----------
Total expenses......... 107,725 2,346,026 13,479,891 16,957,709 8,432,018 12,424,425 16,512,084
----------- ------------- ----------- ------------ ----------- ----------- -----------
Income (loss) from
operations............. (107,725) (2,047,687) 10,511,178 18,243,267 6,700,514 7,629,398 9,891,814
Interest expense........ -- (10,341) (8,674) (693,810) (5,555) (97,244) (523,861)
Interest income......... 23,407 141,049 414,403 414,403 323,376 169,156 169,156
Gain on sale of assets.. -- 70,235 -- -- -- 373,539 373,539
----------- ------------- ----------- ------------ ----------- ----------- -----------
Income (loss) before
income taxes.......... (84,318) (1,846,744) 10,916,907 17,963,860 7,018,335 8,074,849 9,910,648
Provision for income
taxes.................. 800 -- 3,179,248 5,645,682 1,810,057 2,826,063 3,468,593
----------- ------------- ----------- ------------ ----------- ----------- -----------
Net income (loss)....... (85,118) (1,846,744) 7,737,659 12,318,178 5,208,278 5,248,786 6,442,055
Preferred stock
dividends.............. 30,226 -- 475,205 475,205 325,206 450,000 450,000
----------- ------------- ----------- ------------ ----------- ----------- -----------
Net income (loss)
attributable to common
stock.................. $ (115,344) $ (1,846,744) $ 7,262,454 $ 11,842,973 $ 4,883,072 $ 4,798,786 $ 5,992,055
=========== ============= =========== ============ =========== =========== ===========
Net income (loss) per
share:
Basic................. $ (0.15) $ (0.37) $ 0.64 $ 1.05 $ 0.44 $ 0.42 $ 0.52
=========== ============= =========== ============ =========== =========== ===========
Diluted............... $ (0.15) $ (0.37) $ 0.54 $ 0.86 $ 0.37 $ 0.37 $ 0.45
=========== ============= =========== ============ =========== =========== ===========
Weighted average common
shares outstanding:
Basic................... 754,933 4,953,729 11,287,098 11,287,098 11,220,609 11,477,836 11,477,836
=========== ============= =========== ============ =========== =========== ===========
Diluted................. 754,933 4,953,729 14,381,124 14,381,124 14,161,895 14,301,024 14,301,024
=========== ============= =========== ============ =========== =========== ===========
7
Nine Months Ended
Year Ended June 30, March 31,
------------------------------------ --------------------------
1999 2000 2001 2001 2002
--------- ----------- ------------ ------------ ------------
Other Financial Data:
EBITDAX (1)(2)........ $(107,725) $ (480,256) $ 19,002,743 $ 11,767,918 $ 16,570,596
Net cash flow provided
by (used in)
operating
activities........... $ (92,913) $ (912,409) $ 12,957,712 $ 7,325,366 $ 18,374,345
Net cash used in
investing
activities........... $ -- $(3,505,913) $(24,535,487) $(17,903,771) $(27,333,561)
Net cash provided by
financing
activities........... $ -- $ 7,723,039 $ 9,393,211 $ 9,587,212 $ 11,483,601
Capital expenditures.. $ -- $ 2,957,369 $ 22,768,970 $ 14,605,582 $ 26,788,506
Ratio of earnings to
combined fixed
charges and preferred
dividends............ (3) (4) 14.4x 13.6x 10.1x
As of June 30, As of March 31, 2002
------------------------------- -----------------------
1999 2000 2001 Actual Pro Forma
-------- ---------- ----------- ----------- -----------
Balance Sheet Data:
Working capital
(deficit)............ $413,524 $4,929,724 $ 4,781,823 $ 1,984,011 $(1,408,467)
Total assets.......... $489,889 $6,642,504 $31,722,197 $51,498,499 $51,498,499
Long term debt (5).... $ -- $ -- $ -- $17,608,250 $17,608,250
Stockholders' equity
(6).................. $413,524 $6,405,384 $25,019,693 $23,647,796 $23,647,796
- --------
(1) EBITDAX represents earnings before interest, income taxes, depreciation,
depletion and amortization, impairment expense and expensed exploration
expenditures, including gain (loss) from hedging activities. We have
reported EBITDAX because we believe EBITDAX is a measure commonly reported
and widely used by investors as an indicator of a company's operating
performance and ability to incur and service debt. We believe EBITDAX
assists investors in comparing a company's performance on a consistent
basis without regard to depreciation, depletion and amortization,
impairment of natural gas and oil properties and exploration expenses which
can vary significantly depending upon accounting methods. EBITDAX is not a
calculation based on the U.S. generally accepted accounting principles and
should not be considered an alternative to net income (loss) in measuring
our performance or used as an exclusive measure of cash flow because it
does not consider the impact of working capital growth, capital
expenditures, debt principal reductions and other sources and uses of cash
which are disclosed in our statements of cash flows. Investors should
carefully consider the specific items included in our computation of
EBITDAX. While we have disclosed our EBITDAX to permit a more complete
comparative analysis of our operating performance and debt servicing
ability relative to other companies, investors should be cautioned that
EBITDAX as reported by us may not be comparable in all instances to EBITDAX
as reported by other companies. EBITDAX amounts may not fully be available
for management's discretionary use, due to requirements to conserve funds
for capital expenditures, debt service, preferred stock dividends and other
commitments.
(2) Pro forma EBITDAX for the year ended June 30, 2001 and the nine months
ended March 31, 2002 was $29,096,969 and $22,056,695, respectively.
(3) Earnings were insufficient to cover fixed charges and preferred dividends
by $130,820.
(4) Earnings were insufficient to cover fixed charges and preferred dividends
by $1,846,744.
(5) ExcludesLong term debt as of March 31, 2002 excludes $1,425,000 relating to the
current portion of our long term debt.
(6) Stockholders' equity as of March 31, 2002 actual reflects a $6,180,000
reduction, which represents the repurchase by the Company of 2,575,000
shares of its common stock.
8
SUMMARY RESERVE AND OPERATING DATA
The tables below present a summary of our reserve and operating data for the
periods and of the dates indicated. Estimates of proved reserves as of June 30,
2000 and 2001 and as of April 1, 2002 are based on reserve reports prepared by
our independent petroleum engineering consultants. William M. Cobb &
Associates, Inc. prepared the report for our reserves as of June 30, 2000 and
June 30, 2001 and W.D. Von Gonten & Co. prepared the report for our reserves as
of April 1, 2002. For additional information, please read the supplemental
natural gas and oil information following the notes to our consolidated
financial statements included elsewhere in this prospectus.
The pre-tax net present value of future cash flows attributable to our
proved reserves as of April 1, 2002, was determined by using the April 1, 2002
prices of $3.56 per Mcf for natural gas at the Houston Ship Channel and $20.00
per barrel of oil at Koch's South Texas Crude Oil Posting, in each case after
adjusting for basis, transportation costs, and BTUBtu content. Estimated reserve
volumes and values were determined under the method prescribed by the SEC that
requires the application of period-end prices for each period, held constant
throughout the projected reserve life. You should not assume that the pre-tax
net present value of estimated future cash flows referred to in this prospectus is the
current market value of our estimated natural gas and oil reserves. Appendix A
to this prospectus contains a letter prepared by W.D. Von Gonten & Co.,
summarizing the reserve report as of April 1, 2002.
Year Ended Nine Months Ended
June 30, March 31,
---------------- -------------------
2000 2001 2001 2002
------ --------- --------- ---------
Production:
Natural gas (Mcf)........................ 28,094 3,570,026 2,238,360 5,137,800
Oil (barrels)............................ 6,384 122,093 86,765 136,200
------ --------- --------- ---------
Total (Mcfe)............................ 66,398 4,302,584 2,758,950 5,955,000
Natural gas (Mcf per day)................ 77 9,781 8,199 18,820
Oil (barrels per day).................... 17 335 318 499
------ --------- --------- ---------
Total (Mcfe per day )................... 179 11,791 10,107 21,814
Average sales price:
Natural gas (per Mcf).................... $ 4.16 $ 5.92 $ 6.39 $ 2.70
Oil (per barrel)......................... 28.43 27.95 28.98 20.55
------ --------- --------- ---------
Total (per Mcfe)........................ $ 4.49 $ 5.71 $ 6.09 $ 2.78
Selected data per Mcfe:
Production and severance taxes........... $ 0.12 $ 0.39 $ 0.41 $ 0.19
Lease operating expenses................. $ 1.16 $ 0.22 $ 0.20 $ 0.23
General and administrative expenses...... $11.50 $ 0.55 $ 0.61 $ 0.22
Depreciation, depletion and amortization
of natural gas and oil properties....... $ 5.15 $ 0.92 $ 0.99 $ 1.00
As of June 30,
-----------------------
As of April 1,
2000 2001 2002
----------- ----------- --------------
Estimated Proved Natural Gas and Oil
Reserves:
Natural gas reserves (Mmcf):
Proved developed...................... 1,206 14,013 25,552
Proved undeveloped.................... 1,480 2,121 --
----------- ----------- -----------
Total................................ 2,686 16,134 25,552
=========== =========== ===========
Oil reserves (thousands of barrels):
Proved developed...................... 70 300 613
Proved undeveloped.................... 67 35 --
----------- ----------- -----------
Total................................ 137 335 613
=========== =========== ===========
Total proved reserves (Mmcfe)........ 3,508 18,144 29,230
----------- ----------- -----------
Pre-tax net present value:
Proved developed...................... $ 6,009,225 $37,748,571 $55,734,738
Proved undeveloped.................... 6,250,896 4,877,226 --
----------- ----------- -----------
Total................................ $12,260,121 $42,625,797 $55,734,738
=========== =========== ===========
Prices used in computing pre-tax net
present value:
Natural gas (per Mcf)................. $ 5.03 $ 4.08 $ 3.56
Oil (per barrel)...................... $ 30.70 $ 24.26 $ 20.00
9
RISK FACTORS
You should carefully consider the risks described below before buying
depositary shares in this offering. You should also refer to other information
contained in this prospectus, including our consolidated financial statements
and related notes.
Risk Factors Related to our Business
We have no ability to control the prices that we receive for natural gas and
oil. Natural gas and oil prices fluctuate widely, and low prices could have a
material adverse effect on our revenues, profitability and growth. Our
revenues, profitability and future growth will depend significantly on natural
gas and crude oil prices. Prices received also will affect the amount of future
cash flow available for capital expenditures and will affect our ability to
raise additional capital. Lower prices may also affect the amount of natural
gas and oil that we can economically produce.
Prices for natural gas and oil fluctuate widely. For example, natural gas
and oil prices declined significantly in 1998 and, for an extended period of
time, remained below prices that prevailed in previous years. Conversely, in
late 2000 and early 2001, prices, particularly for natural gas, increased to
unprecedented levels only to fall back to levels experienced in the late 1990s.
Factors that can cause price fluctuations include:
. The domestic and foreign supply of natural gas and oil
. Overall economic conditions
. The level of consumer product demand
. Weather conditions
. The price and availability of alternative fuels
. Political conditions in the Middle East and other natural gas and oil
producing regions
. The price of foreign imports
. Domestic and foreign governmental regulations
Because we have a limited operating history in the natural gas and oil
industry, our future operating results are difficult to forecast. We entered
the natural gas and oil exploration and production business in July 1999, and
as a result, we have limited historical financial and operating information
available on which to base your evaluation of our future performance. This
limited operating history makes it difficult to predict our future results.
Additionally, because we have fewer financial resources than many companies in
our industry, we may be at a disadvantage in bidding for acreage, seismic data
and exploratory prospects and producing natural gas and oil properties.
Our ability to successfully execute our business plan is dependent on our
ability to obtain adequate financing. Our business plan, which includes
participation in an increasing number of exploration prospects, has required
and will require substantial capital expenditures. We anticipate that we will
require additional financing to fund our planned growth. Our ability to raise
additional capital will depend on the results of our operations and the status
of various capital and industry markets at the time we seek such capital.
Accordingly, we cannot be certain that additional financing will be available
to us on acceptable terms, if at all. In particular, our Credit Facility, which
we discuss in "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Credit Facility," imposes limits
on our ability to borrow under the facility based on adjustments to the value
of our hydrocarbon reserves, and our Credit Facility and the terms of our
outstanding preferred stock limit our ability to incur additional indebtedness.
In the event additional capital resources are unavailable, we may be required
to curtail our exploration and development activities or be forced to sell some
of our assets in an untimely fashion or on less than favorable terms.
10
Hedging our production may result in losses. From time to time, we enter
into hedging arrangements on a portion of our natural gas and oil production to
reduce our exposure to declines in the prices of natural gas and oil. The value
of these arrangements can be volatile and can materially affect our future
reported financial results. Hedging arrangements also expose us to risk of
significant financial loss in some circumstances including the following:
. There is a change in the expected differential between the underlying
price in the hedging agreement and actual prices received
. Production is less than expected
. Payments owed under derivative hedging contracts typically come due
prior to receipt of the hedged months production revenues
. The other party to the hedging contract defaults on its contract
obligations
In addition, these hedging arrangements limit the benefit we would receive
from increases in the prices for natural gas and oil. Furthermore, if we choose
not to engage in hedging arrangements in the future, we may be more adversely
affected by changes in natural gas and oil prices than our competitors who
engage in hedging arrangements. Please refer to our discussion in "Hedging
Activities" under "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Reserve estimates depend on many assumptions that may turn out to be
inaccurate. Any material inaccuracies in these reserve estimates or underlying
assumptions could materially affect the quantities and present values of our
reserves. The process of estimating natural gas and oil reserves is complex. It
requires interpretations of available technical data and various assumptions,
including assumptions relating to economic factors. Any significant
inaccuracies in these interpretations or assumptions could materially affect
the estimated quantities and present value of reserves shown in this
prospectus. Please read "Business--Natural Gas and Oil Reserves" for a
discussion of our proved natural gas and oil reserves.
In order to prepare these estimates we must project production rates and
timing of development expenditures. We must also analyze available geological,
geophysical, production and engineering data, and the extent, quality and
reliability of this data can vary. The process also requires economic
assumptions relating to matters such as natural gas and oil prices, drilling
and operating expenses, capital expenditures, taxes and availability of funds.
Therefore, estimates of natural gas and oil reserves are inherently imprecise.
Actual future production, natural gas and oil prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable
natural gas and oil reserves most likely will vary from our estimates. Any
significant variance could materially affect the estimated quantities and pre-
tax net present value of reserves shown in this prospectus. In addition, we may
adjust estimates of proved reserves to reflect production history, results of
exploration and development, prevailing natural gas and oil prices and other
factors, many of which are beyond our control. Moreover, the producing wells
included in our reserve report have produced for a relatively short period of
time as of April 1, 2002. Because most of our reserve estimates are not based
on a lengthy production history and are calculated using volumetric analysis,
these estimates are less reliable than estimates based on a lengthy production
history.
You should not assume that the pre-tax net present value of our proved
reserves referred to in this prospectus is the current market value of our
estimated natural gas and oil reserves. We base the pre-tax net present value
of future net cash flows from our proved reserves on prices and costs on the
date of the estimate. Actual future prices, costs, and the volume of produced
reserves may differ materially from those used in the pre-tax net present value
estimate.
Natural gas and oil reserves are depleting assets and the failure to replace
our reserves would adversely affect our production and cash flows. Our future
natural gas and oil production depends on our success in finding or acquiring
new reserves. If we fail to replace reserves, our level of production and cash
flows would be adversely impacted. Production from natural gas and oil
properties decline as reserves are depleted, with the rate of decline depending
on reservoir characteristics. Our total proved reserves will decline as
reserves are produced unless we conduct other successful exploration and
development activities or acquire properties
11
containing proved reserves, or both. Further, substantially all of our reserves
are proved developed producing. Accordingly, we do not have significant
opportunities to increase our production from our existing proved reserves. Our
ability to make the necessary capital investment to maintain or expand our
asset base of natural gas and oil reserves would be impaired to the extent cash
flow from operations is reduced and external sources of capital become limited
or unavailable. We may not be successful in exploring for, developing or
acquiring additional reserves. If we are not successful, our future production
and revenues will be adversely affected.
We depend on the services of our president and chief executive officer, and
implementation of our business plan could be seriously harmed if we lost his
services. We depend heavily on the services of Kenneth R. Peak, our president
and chief executive officer. We do not have an employment agreement with Mr.
Peak, and the proceeds from a $10 million "key person" life insurance policy on
Mr. Peak may not be adequate to cover our losses in the event of Mr. Peak's
death. The loss of his services could seriously harm or prevent us from
implementing our business plan.
We depend on the technical services provided by JEX and could be seriously
harmed if our alliance agreement with JEX were terminated. Because we have only
four employees, none of whom are geoscientists or engineers, we are dependent
upon alliance partners for the success of our natural gas and oil exploration
projects and expect to remain so for the foreseeable future. In particular, we
have an agreement with JEX to source, screen, generate and present exploration
and acquisition opportunities to us. This agreement is cancelable by JEX with
180-days notice or 30-days notice if we are in default under our alliance
agreement. Highly-qualified explorationists or engineers are difficult to
attract and retain in this industry. As a result, the loss of the services of
JEX could have a material adverse effect on us and could prevent us from
pursuing our business plan. Additionally, JEX's loss of certain explorationists
or engineers could have a material adverse effect on our operations as well.
Exploration is a high risk activity, and our participation in drilling
activities may not be successful. The fiscal year ended June 30, 2001
represents our first year of meaningful levels of natural gas and oil
production and proved reserves. Our future success will largely depend on the
success of our exploration drilling program. Participation in exploration
drilling activities involves numerous risks, including the risk that no
commercially productive natural gas or oil reservoirs will be discovered. The
cost of drilling, completing and operating wells is often uncertain, and
drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, including:
. Unexpected drilling conditions
. Blowouts, fires or explosions with resultant injury, death or
environmental damage
. Pressure or irregularities in formations
. Equipment failures or accidents
. Adverse weather conditions
. Compliance with governmental requirements and laws, present and future
. Shortages or delays in the availability of drilling rigs and the
delivery of equipment
Even when properly used and interpreted, 3-D seismic data and visualization
techniques are only tools used to assist geoscientists in identifying
subsurface structures and hydrocarbon indicators. They do not allow the
interpreter to know conclusively if hydrocarbons are present or economically
producible. Poor results from our drilling activities would materially and
adversely affect our future cash flows and results of operations.
In addition, as a "successful efforts" company, we choose to account for
unsuccessful exploration efforts, i.e. the drilling of "dry holes," as an
expense of operations which impacts our earnings. Significant expensed
exploration charges in any period would materially adversely affect our
earnings for that period and could cause our earnings to be volatile from
period to period.
12
The natural gas and oil business involves many operating risks that can
cause substantial losses. The natural gas and oil business involves a variety
of operating risks, including:
. Blowouts, fires and explosions
. Surface cratering
. Uncontrollable flows of underground natural gas, oil or formation water
. Natural disasters
. Pipe and cement failures
. Casing collapses
. Stuck drilling and service tools
. Abnormal pressure formations
. Environmental hazards such as natural gas leaks, oil spills, pipeline
ruptures or discharges of toxic gases
If any of these events occur, we could incur substantial losses as a result
of:
. Injury or loss of life
. Severe damage to and destruction of property, natural resources or
equipment
. Pollution and other environmental damage
. Clean-up responsibilities
. Regulatory investigation and penalties
. Suspension of our operations
. Repairs necessary to resume operations
Offshore operations also are subject to a variety of operating risks
peculiar to the marine environment, such as capsizing, collisions and damage or
loss from hurricanes or other adverse weather conditions. These conditions can
cause substantial damage to facilities and interrupt production. As a result,
we could incur substantial liabilities that could reduce the funds available
for exploration, development or leasehold acquisitions, or result in loss of
properties.
If we were to experience any of these problems, it could affect well bores,
platforms, gathering systems and processing facilities, any one of which could
adversely affect our ability to conduct operations. In accordance with
customary industry practices, we maintain insurance against some, but not all,
of these risks. Losses could occur for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. We may not be able to
maintain adequate insurance in the future at rates we consider reasonable, and
particular types of coverage may not be available. An event that is not fully
covered by insurance could have a material adverse effect on our financial
position and results of operations.
Our ability to market our natural gas and oil may be impaired by capacity
constraints on the gathering systems and pipelines that transport our natural
gas and oil. Most of our natural gas, and a substantial portion of our oil, is
transported through gathering systems and pipelines which we do not own.
Transportation capacity on gathering systems and pipelines is occasionally
limited and at times unavailable due to repairs or improvements being made to
these facilities or due to capacity being utilized by other natural gas or oil
shippers that may have priority transportation agreements. If the gathering
systems or our transportation capacity is materially restricted or is
unavailable in the future, our ability to market our natural gas or oil could
be impaired and cash flow from the affected properties could be reduced, which
could have a material adverse effect on our financial condition and results of
operations.
13
Most of our natural gas and oil production is concentrated in south Texas
and is sold to a single purchaser. Most of our current production comes from
wells drilled in south Texas. This production is being sold on a spot basis to
a single purchaser. Any disruption of our marketing arrangements or financial
difficulties with our purchaser, or alternative marketing sources, could have
an adverse effect on our ability to market our natural gas and oil production.
Additionally, if our purchaser suffered financial difficulties, we might not be
able to collect receivables from the purchaser.
We have no assurance of title to our leased interests. Our practice in
acquiring exploration leases or undivided interests in natural gas and oil
leases is not to incur the expense of retaining lawyers to examine the title to
the mineral interest prior to executing the lease. Instead, we rely upon the
judgment of lease brokers or landmen who perform the field work in examining
records in the appropriate governmental, county or parish clerk's office before
leasing a specific mineral interest. This practice is widely followed in the
industry. Prior to the drilling of an exploration well the operator of the well
will typically obtain a preliminary title review of the drillsite lease and/or
spacing unit within which the proposed well is to be drilled to identify any
obvious deficiencies in title to the well and, if there are deficiencies, to
identify measures necessary to cure those defects to the extent reasonably
possible. We have no assurance, however, that any such deficiencies have been
cured by the operator of any such wells. It does happen, from time to time,
that the examination made by the title lawyers reveals that the lease or leases
are invalid, having been purchased in error from a person who is not the
rightful owner of the mineral interest desired. In these circumstances, we may
not be able to proceed with our exploration and development of the lease site
or may incur costs to remedy a defect. It may also happen, from time to time,
that the operator may elect to proceed with a well despite defects to the title
identified in the preliminary title opinion.
Competition in the natural gas and oil industry is intense, and we are
smaller and have a more limited operating history than most of our competitors.
We compete with a broad range of natural gas and oil companies in our
exploration and property acquisition activities. We also compete for the
equipment and labor required to operate and develop these properties. Most of
our competitors have substantially greater financial resources than we do.
These competitors may be able to pay more for exploratory prospects and
productive natural gas and oil properties. Further, they may be able to define,
evaluate, bid for and purchase a greater number of properties and prospects
than we can. Our ability to explore for natural gas and oil and to acquire
additional properties in the future will depend on our ability to evaluate and
select suitable properties and to consummate transactions in this highly
competitive environment. In addition, most of our competitors have been
operating for a much longer time than we have and have demonstrated the ability
to operate through industry cycles. We may not be able to compete effectively
with these companies or in such a highly competitive environment.
We are subject to complex laws and regulations, including environmental
regulations, that can adversely affect the cost, manner or feasibility of doing
business. Our operations are subject to numerous laws and regulations governing
the operation and maintenance of our facilities and the discharge of materials
into the environment. Failure to comply with such rules and regulations could
result in substantial penalties and have an adverse effect on us. These laws
and regulations may:
. Require that we obtain permits before commencing drilling
. Restrict the substances that can be released into the environment in
connection with drilling and production activities
. Limit or prohibit drilling activities on protected areas, such as
wetlands or wilderness areas
. Require remedial measures to mitigate pollution from former operations,
such as plugging abandoned wells
Under these laws and regulations, we could be liable for personal injury and
clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. We maintain only
14
limited insurance coverage for sudden and accidental environmental damages. We
do not believe that insurance coverage for environmental damages that occur
over time is available at a reasonable cost. Moreover, we do not believe that
insurance coverage for the full potential liability that could be caused by
sudden and accidental environmental damages is available at a reasonable cost.
Accordingly, we may be subject to liability, or we may be required to cease
production from properties in the event of environmental damages. These laws
and regulations have been changed frequently in the past. In general, these
changes have imposed more stringent requirements that increase operating costs
or require capital expenditures in order to remain in compliance. It is also
possible that unanticipated factual developments could cause us to make
environmental expenditures that are significantly different from those we
currently expect. Existing laws and regulations could be changed and any such
changes could have an adverse effect on our business and results of
operations.
We cannot control the activities on properties we do not operate. Other
companies operate all of the properties in which we have an interest. As a
result, we have a limited ability to exercise influence over operations for
these properties or their associated costs. Our dependence on the operator and
other working interest owners for these projects and our limited ability to
influence operations and associated costs could materially adversely affect
the realization of our targeted returns on capital in drilling or acquisition
activities. The success and timing of our drilling and development activities
on properties operated by others therefore depend upon a number of factors
that are outside of our control, including:
. Timing and amount of capital expenditures
. The operator's expertise and financial resources
. Approval of other participants in drilling wells
. Selection of technology
Acquisition prospects are difficult to assess and may pose additional risks
to our operations. After this offering, we expect to evaluate and, where
appropriate, pursue acquisition opportunities on terms our management
considers favorable. In particular, we expect to pursue acquisitions that have
the potential to increase our domestic natural gas and oil reserves. The
successful acquisition of natural gas and oil properties requires an
assessment of:
. Recoverable reserves
. Exploration potential
. Future natural gas and oil prices
. Operating costs
. Potential environmental and other liabilities and other factors
. Permitting and other environmental authorizations required for our
operations
In connection with such an assessment, we would expect to perform a review
of the subject properties that we believe to be generally consistent with
industry practices. Nonetheless, the resulting conclusions are necessarily
inexact and their accuracy inherently uncertain, and such an assessment may
not reveal all existing or potential problems, nor will it necessarily permit
a buyer to become sufficiently familiar with the properties to fully assess
their merits and deficiencies. Inspections may not always be performed on
every platform or well, and structural and environmental problems are not
necessarily observable even when an inspection is undertaken.
Future acquisitions could pose numerous additional risks to our operations
and financial results, including:
. Problems integrating the purchased operations, personnel or technologies
. Unanticipated costs
15
. Diversion of resources and management attention from our exploration
business
. Entry into regions or markets in which we have limited or no prior
experience
. Potential loss of key employees, particularly those of the acquired
organization
Risks Related to Our Securities
Delaware law may limit our ability to pay cash dividends on the Series C
preferred stock. Under Delaware law, cash dividends on capital stock may only
be paid from "surplus" or, if there is no "surplus", from the corporation's net
profits for the then current or the preceding fiscal year. Unless we continue
to operate profitably, our ability to pay cash dividends on the Series C
preferred stock would require the availability of adequate "surplus", which is
defined as the excess, if any, of our net assets over our capital. Further,
even if adequate surplus is available to pay cash dividends on the Series C
preferred stock, we may not have sufficient cash to pay dividends on the Series
C preferred stock.
The Series C preferred stock is subordinated to all our existing
indebtedness and to our Series A and Series B preferred stock and the terms of
our Series C preferred stock do not limit our ability to incur future
indebtedness that will rank senior to the Series C preferred stock. If we were
to liquidate and distribute our assets, the rights of the holders of each
series of our preferred stock, including the Series C preferred stock, would be
subordinate to all of our then existing indebtedness, including indebtedness
under our Credit FacilityFacility. In addition, if we were to liquidate and distribute
our assets, the rights of the holders of our Series C preferred stock would be
subordinate to the rights of the holders of our Series A preferred stock and
our Series B preferred stock. The terms of the Series C preferred stock do not
limit the amount of indebtedness or other obligations that we may incur.
In addition, the terms of our Series A preferred stock and our Series B
preferred stock provide that we may not pay dividends on our Series C preferred
stock if we fail to pay scheduled dividends in cash to the holders of our
Series A preferred stock and our Series B preferred stock.
We do not intend to pay dividends on our common stock. We have never
declared or paid a dividend on our common stock and do not expect to do so in
the foreseeable future. We currently intend to retain any future earnings for
funding growth, and, therefore, holders of our common stock will not be able to
receive a return on their investment unless they sell their shares.
The sale of shares of our common stock eligible for future sale may
adversely affect the price of our common stock. Sales of substantial amounts of
our common stock in the public market following this offering could adversely
affect the market price of the common stock. We, each of our directors and
officers and certain of our stockholders have agreed, for a period of 90 days
after the date of this prospectus, not to offer, pledge, sell, contract to
sell, or otherwise dispose of any shares of our common stock or preferred stock
other than through our issuances of common stock to our employees under our
1999 Stock Incentive Plan, without prior written consent of Morgan Keegan &
Company, Inc. Upon expiration of this period, all 7,866,049 shares of common
stock beneficially owned by our directors and officers and these stockholders
will be eligible for sale into the market, subject to compliance with the
volume and manner of sale limitations of Rule 144 under the Securities Act of
1933, as amended. The sale of shares upon expiration of this period, or the
perception of the availability of shares for sale, could adversely affect the
prevailing market price of our common stock.
Anti-takeover provisions of our certificate of incorporation, bylaws and
Delaware law could adversely effect a potential acquisition by third parties
that may ultimately be in the financial interests of our stockholders. Our
certificate of incorporation, bylaws and the Delaware General Corporation Law
contain provisions that may discourage unsolicited takeover proposals. These
provisions could have the effect of inhibiting fluctuations in the market price
of our common stock that could result from actual or rumored takeover attempts,
preventing changes in our management or limiting the price that investors may
be willing to pay for shares of common stock. These provisions, among other
things, authorize the board of directors to:
. Designate the terms of and issue new series of preferred stock
16
. Limit the personal liability of directors
. Limit the persons who may call special meetings of stockholders
. Prohibit stockholder action by written consent
. Establish advance notice requirements for nominations for election of
the board of directors and for proposing matters to be acted on by
stockholders at stockholder meetings
. Require us to indemnify directors and officers to the fullest extent
permitted by applicable law
. Impose restrictions on business combinations with some interested
parties
CAUTIONARY STATEMENT ABOUT FORWARD--LOOKING STATEMENTS
Some of the statements made in this prospectus may contain "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.
The words and phrases "should be", "will be", "believe", "expect",
"anticipate", "estimate", "forecast", "goal" and similar expressions identify
forward-looking statements and express our expectations about future events.
These include such matters as:
. Our financial position
. Business strategy and budgets
. Anticipated capital expenditures
. Drilling of wells
. Natural gas and oil reserves
. Timing and amount of future production of natural gas and oil
. Operating costs and other expenses
. Cash flow and anticipated liquidity
. Prospect development and property acquisitions
. Hedging results
Although we believe the expectations reflected in such forward-looking
statements are reasonable, we cannot assure you that such expectations will
occur. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from future results expressed or
implied by the forward-looking statements. These factors include among others:
. Risks associated with exploration
. Ability to raise capital to fund capital expenditures
. Ability to find, acquire, market, develop and produce new properties
. Volatility of natural gas and oil prices
. Uncertainties in the estimation of proved reserves and in the projection
of future rates of production and timing of development expenditures
. Operating hazards attendant to the natural gas and oil business
. Downhole drilling and completion risks that are generally not
recoverable from third parties or insurance
17
. Potential mechanical failure or under-performance of significant wells
. Climatic conditions
. Availability and cost of material and equipment
. Delays in anticipated start-up dates
. Actions or inactions of third-party operators of our properties
. Commodity price movements adversely affecting our hedge position
. Ability to find and retain skilled personnel
. Availability of capital
. Strength and financial resources of competitors
. Regulatory developments
. Environmental risks
. General economic conditions
When you consider these forward-looking statements, you should keep in mind
the risk factors and the other cautionary statements in this prospectus. You
should not unduly rely on these forward-looking statements in this prospectus,
as they speak only as of the date of this prospectus. Except as required by
law, we undertake no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date of this prospectus or to reflect the occurrence of unanticipated
events. See the information under the heading "Risk Factors" above for some of
the important factors that could affect our financial performance or could
cause actual results to differ materially from estimates contained in forward-
looking statements.
18
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
Our consolidated ratio of earnings to combined fixed charges and preferred
dividends for the periods shown are as follows:
Year ended
June 30, Nine months ended March 31,
---------------- --------------------------------------
Pro Forma Pro Forma, as
1999 2000 2001 2001 2002 2002(3) Adjusted 2002(4)
---- ---- ---- ---- ---- --------- ----------------
Ratio of earnings to
combined fixed charges
and preferred
dividends............. (1) (2) 14.4x 13.6x 10.1x 8.5x 4.1x
- --------
(1) Earnings were insufficient to cover fixed charges and preferred dividends
by $130,820.
(2) Earnings were insufficient to cover fixed charges and preferred dividends
by $1,846,744.
(3) Gives effect to the acquisitions described under "Prospectus Summary--
Recent Developments" as if they were completed at the beginning of the
period presented.
(4) Gives further effect to the issuance of the Series C preferred stock with
an assumed dividend rate of 8% per annum in connection with this offering
and the application of the proceeds from this offering to the repayment of
indebtedness under our Credit Facility, as described in "Use of Proceeds"
as if both events occurred at the beginning of the period presented.
For purposes of this ratio, earnings are defined as income before income
taxes plus fixed charges excluding preferred dividends. Combined fixed charges
and preferred dividends consist of interest expense, the estimated interest
component of rent expense that includes an interest factor and preferred
dividends grossed up using an effective tax rate of 35%.
USE OF PROCEEDS
We estimate that we will receive net proceeds of $18.2 million, or $21.0
million if the underwriter exercises its over-allotment option in full, from
the sale of the depositary shares offered by this prospectus, after deducting
underwriting discounts and commissions and estimated offering expenses. We
intend to use the net proceeds to repay all of the outstanding debt under our
secured reducing revolving credit facility with Guaranty Bank, FSB, which we
refer to as our "Credit Facility" in this prospectus, totaling approximately
$18.2 million at March 31, 2002 and $17.4$15.9 million as of April 30,June 1, 2002, with
available remaining proceeds to fund a portion of our exploration and
development activities. We may also use some of the remaining proceeds from the
offering towards our possible investment in the proposed Freeport LNG terminal.
See "Business--Freeport LNG Terminal." If we choose to exercise our option to
invest in the project, we will spend $1.5 million to purchase a 10% limited
partner interest in the venture. We also have the option to increase our
investment to 20% for an additional $1.5 million. Pending use for these
purposes, we plan to invest the net proceeds in short-term investment-grade
interest-bearing securities.
The weighted average interest rate for outstanding borrowings under our
Credit Facility as of March 31, 2002 was 4.3%. Our Credit Facility has a
maturity of June 29, 2004. We have used borrowings under our Credit Facility to
fund a portion of our exploration, development and property acquisition
activities and expect to continue to do so in the future.
19
DIVIDEND POLICY
We intend to pay regular cash dividends on our Series C preferred stock,
which dividends will be paid to the holders of our depositary shares on a
proportional basis. We also pay cash dividends on our Series A preferred stock
and our Series B preferred stock. We will not be able to pay dividends on our
Series C preferred stock if we fail to pay cash dividends on our Series A
preferred stock and Series B preferred stock.
We have not declared or paid any dividends on our shares of common stock and
do not anticipate paying any dividends on our shares of common stock in the
future. Currently, except for the regular dividends that we pay on our Series A
and Series B preferred stock, and the dividends that we expect to pay on the
Series C preferred stock, we intend to retain any future earnings for use in
the operations and expansion of our natural gas and oil business. Our Credit
Facility currently prohibits us from paying any cash dividends on our common
stock. The Credit Facility does, however, permit the payment of stock dividends
on our common stock. Any future decision to pay dividends on our common stock
will be at the discretion of our board and will depend upon our financial
condition, results of operations, capital requirements, and other factors our
board may deem relevant. The sum of annual dividend payments on our Series A,
Series B and Series C preferred stock is $ million per year.
PRICE RANGE OF OUR COMMON STOCK
Our common stock was listed on the American Stock Exchange in January 2001
under the symbol "MCF." Prior to that time, our common stock traded on the
Nasdaq over-the-counter market. The table below shows, for the periods
indicated, the high and low tradingclosing prices of our common stock.
High Low
----- -----
Fiscal Year 2000(1):
Quarter ended September 30, 1999.............................. $1.25 $0.25
Quarter ended December 31, 1999............................... 2.00 1.25
Quarter ended March 31, 2000.................................. 2.00 1.50
Quarter ended June 30, 2000................................... 2.25 1.50
Fiscal Year 2001:
Quarter ended September 30, 2000.............................. $7.06 $1.50
Quarter ended December 31, 2000............................... 5.91 3.25
Quarter ended March 31, 2001.................................. 7.50 4.65
Quarter ended June 30, 2001................................... 5.09 3.72
Fiscal Year 2002:
Quarter ended September 30, 2001.............................. $4.00 $2.30
Quarter ended December 31, 2001............................... 3.04 2.35
Quarter ended March 31, 2002.................................. 3.46 2.55
Quarter ended June 30, 2002 (through May 14,June 5, 2002)............ 3.94 3.022.90
- --------
(1) The Company began its operations as a natural gas and oil exploration
company on July 1, 1999.
As of March 31, 2002, there were 166 holders of record of our common stock.
On May 14,June 5, 2002, the last reported saleclosing price of our common stock on the American Stock
Exchange was $3.20.$2.95.
20
CAPITALIZATION
The following table shows (1) our cash and capitalization as of March 31,
2002 on an actual basis and (2) our pro forma cash and capitalization as of
March 31, 2002, giving effect to our acquisition of additional interests in our
STEP properties on April 1, 2002, as adjusted to reflect this offering of the
depositary shares and the application of the net proceeds from this offering to
reduce indebtedness in the manner described under "Use of Proceeds" assuming no
exercise of the underwriter's over-allotment option. The table is derived from,
should be read in conjunction with, and is qualified in its entirety by
reference to, our historical and pro forma financial statements and the
accompanying notes included elsewhere in this prospectus. You should also read
this table in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
As of March 31, 2002
------------------------
Pro Forma,
Actual as Adjusted
----------- -----------
Cash and cash equivalents............................ $ 4,110,727 $ 768,249
=========== ===========
LONG TERM DEBT (including current portion of
$1,425,000 for actual and $0 pro forma, as
adjusted)........................................... $19,033,250 $ 833,250
----------- -----------
SHAREHOLDERS' EQUITY:
Series A preferred stock, $0.04 par value, 5,000
shares authorized, 2,500 shares issued and
outstanding at March 31, 2002, liquidation
preference of $1,000 per share.................... 100 100
Series B preferred stock, $0.04 par value, 10,000
shares authorized, 5,000 shares issued and
outstanding at March 31, 2002, liquidation
preference of $1,000 per share.................... 200 200
Series C preferred stock, $0.04 par value,
liquidation preference of $250 per share, no
shares authorized or outstanding at March 31, 2002
actual, 92,000 shares authorized and 80,000 shares
issued and outstanding at March 31, 2002, pro
forma as adjusted................................. -- 3,200
Common stock, $0.04 par value, 50,000,000 shares
authorized, 11,505,182 issued and 8,930,182 shares
outstanding at March 31, 2002..................... 460,207 460,207
Additional paid-in capital......................... 20,968,735 39,165,535
Treasury shares at cost (2,575,000 shares)......... (6,180,000) (6,180,000)
Retained earnings.................................. 8,398,554 8,398,554
----------- -----------
Total shareholders' equity....................... 23,647,796 41,847,796
----------- -----------
TOTAL CAPITALIZATION................................. $42,681,046 $42,681,046
=========== ===========
21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following tables present our selected historical consolidated financial
information for the periods and as of the dates indicated. Our selected
historical consolidated financial information for the years ended June 30,
1999, 2000 and 2001 is derived from the audited financial statements included
in this prospectus. Since January 2002, we have completed multiple acquisitions
to increase our working and net revenue interests in our STEP properties, as
described above in "Recent Developments." The results of operations of these
acquisitions have been included from the dates of closing of the acquisitions
in the selected historical consolidated financial information. Our selected
historical consolidated financial information for the nine months ended March
31, 20022001 and 20012002 is derived from the unaudited financial statements included
in this prospectus. Prior to July 1, 1999, we operated under different
management and a different board of directors, and we were not engaged in the
natural gas and oil business. Accordingly, the financial information for the
periods ending prior to, and as of dates prior to, July 1, 1999 are not
comparable to information for periods beginning on or after July 1, 1999. The
selected historical consolidated financial information for periods prior to
July 1, 1999 is derived from our unaudited financial statements.
This table should also be read together with "Management's Discussion and
Analysis of Financial ConditionsCondition and Results of Operations."
Nine Months Ended March
Year Ended June 30, 31,
------------------------------------------------------ ------------------------
1997 1998 1999 2000 2001 2001 2002
------- --------- --------- ----------- ----------- ----------- -----------
Statement of Operations
Data:
Revenues:
Natural gas and oil
sales................. $ -- $ -- $ -- $ 298,339 $24,548,723 $16,811,345 $15,908,607
Gain (loss) from
hedging activities.... -- -- -- -- (557,654) (1,678,813) 4,145,216
------- --------- --------- ----------- ----------- ----------- -----------
Total revenues....... -- -- -- 298,339 23,991,069 15,132,532 20,053,823
------- --------- --------- ----------- ----------- ----------- -----------
Expenses:
Operating expenses..... -- -- -- 85,254 2,631,905 1,686,836 2,525,620
Exploration expenses... -- -- -- 604,136 4,167,427 2,324,521 2,522,836
Depreciation,
depletion and
amortization.......... -- -- -- 344,815 4,023,672 2,742,883 6,044,823
Impairment of proved
natural gas and oil
properties............ -- -- -- 548,245 300,466 -- --
General and
administrative
expense............... -- 16,436 107,725 763,576 2,356,421 1,677,778 1,331,146
------- --------- --------- ----------- ----------- ----------- -----------
Total expenses....... -- 16,436 107,725 2,346,026 13,479,891 8,432,018 12,424,425
------- --------- --------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. -- (16,436) (107,725) (2,047,687) 10,511,178 6,700,514 7,629,398
Interest expense........ -- -- -- (10,341) (8,674) (5,555) (97,244)
Interest income......... -- 7,443 23,407 141,049 414,403 323,376 169,156
Gain on sale of assets.. -- -- -- 70,235 -- -- 373,539
------- --------- --------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes.......... -- (8,993) (84,318) (1,846,744) 10,916,907 7,018,335 8,074,849
Provision for income
taxes.................. -- 800 800 -- 3,179,248 1,810,057 2,826,063
------- --------- --------- ----------- ----------- ----------- -----------
Net income (loss) before
discontinued
operations............. -- (9,793) (85,118) (1,846,744) 7,737,659 5,208,278 5,248,786
Preferred stock
dividends.............. -- -- 30,226 -- 475,205 325,206 450,000
------- --------- --------- ----------- ----------- ----------- -----------
Net income (loss)
attributable to common
stockholders from
continuing operations.. $ -- $ (9,793) $(115,344) $(1,846,744) $ 7,262,454 $ 4,883,072 $ 4,798,786
======= ========= ========= =========== =========== =========== ===========
Income (loss) from
discontinued
operations, net of
provision for income
taxes of $506,872
(1998) and $22,434
(1997)................. $28,065 $(497,044) $ -- $ -- $ -- $ -- $ --
Gain on disposition of
operations, net of
provision for income
taxes of $0............ -- 207,572 -- -- -- -- --
------- --------- --------- ----------- ----------- ----------- -----------
Net income (loss) from
discontinued
operations............. 28,065 (289,472) -- -- -- -- --
------- --------- --------- ----------- ----------- ----------- -----------
Net income (loss)
attributable to common
stockholders........... $28,065 $(299,265) $(115,344) $(1,846,744) $ 7,262,454 $ 4,883,072 $ 4,798,786
======= ========= ========= =========== =========== =========== ===========
Net income (loss) per
share:
Basic income (loss) per
common share:
Income (loss) from
continuing
operations............ $ -- $ (0.01) $ (0.15) $ (0.37) $ 0.64 $ 0.44 $ 0.42
Income (loss) from
discontinued
operations............ 0.03 (0.34) -- -- -- -- --
------- --------- --------- ----------- ----------- ----------- -----------
Basic net income
(loss) per common
share................. $ 0.03 $ (0.35) $ (0.15) $ (0.37) $ 0.64 $ 0.44 $ 0.42
======= ========= ========= =========== =========== =========== ===========
Diluted income (loss)
per common share:
Income (loss) from
continuing
operations............ $ -- $ (0.01) $ (0.15) $ (0.37) $ 0.54 $ 0.37 $ 0.37
Income (loss) from
discontinued
operations............ 0.03 (0.34) -- -- -- -- --
------- --------- --------- ----------- ----------- ----------- -----------
Basic net income
(loss) per common
share................. $ 0.03 $ (0.35) $ (0.15) $ (0.37) $ 0.54 $ 0.37 $ 0.37
======= ========= ========= =========== =========== =========== ===========
Weighted average common
shares outstanding:
Basic.................. 938,204 846,271 754,933 4,953,729 11,287,098 11,220,609 11,477,836
======= ========= ========= =========== =========== =========== ===========
Diluted................ 938,204 846,271 754,933 4,953,729 14,381,124 14,161,895 14,301,024
======= ========= ========= =========== =========== =========== ===========
22
Nine Months Ended
Year Ended June 30, March 31,
---------------------------------------------------------- --------------------------
1997 1998 1999 2000 2001 2001 2002
--------- --------- --------- ----------- ------------ ------------ ------------
Other Financial Data
EBITDAX (1)............ $ -- $ (16,436) $(107,725) $ (480,256) $ 19,002,743 $ 11,767,918 $ 16,570,596
Net cash flow provided
by (used in) operating
activities............ $ 244,765 $(155,428) $ (92,913) $ (912,409) $ 12,957,712 $ 7,325,366 $ 18,374,345
Net cash used in
investing activities.. $ (41,217) $ 628,884 $ -- $(3,505,913) $(24,535,487) $(17,903,771) $(27,333,561)
Net cash provided by
financing activities.. $(208,385) $ 81,612 $ -- $ 7,723,039 $ 9,393,211 $ 9,587,212 $ 11,483,601
Capital expenditures... $ -- $ -- $ -- $ 2,957,369 $ 22,768,970 $ 14,605,582 $ 26,788,506
Ratio of earnings to
combined fixed charges
and preferred
dividends............. (2) (2) (3) (4) 14.4x 13.6x 10.1x
As of June 30,
--------------------------------------------------- As of March
1997 1998 1999 2000 2001 31, 2002
---------- -------- -------- ---------- ----------- -----------
Balance Sheet Data:
Working capital........ $ 404,449 $528,868 $413,524 $4,929,724 $ 4,781,823 $ 1,984,011
Total assets........... $1,514,867 $575,107 $489,889 $6,642,504 $31,722,197 $51,498,499
Long term debt.........debt (5)..... $ 26,737 $ -- $ -- $ -- $ -- $17,608,250
Stockholders' equity
(5)(6)................... $ 859,359 $528,868 $413,524 $6,405,384 $25,019,693 $23,647,796
- --------
(1) EBITDAX represents earnings before interest, income taxes, depreciation,
depletion and amortization, impairment expense and expensed exploration
expenditures, including gain (loss) from hedging activities. We have
reported EBITDAX because we believe EBITDAX is a measure commonly reported
and widely used by investors as an indicator of a company's operating
performance and ability to incur and service debt. We believe EBITDAX
assists investors in comparing a company's performance on a consistent
basis without regard to depreciation, depletion and amortization,
impairment of natural gas and oil properties and exploration expenses which
can vary significantly depending upon accounting methods. EBITDAX is not a
calculation based on the U.S. generally accepted accounting principles and
should not be considered an alternative to net income (loss) in measuring
our performance or used as an exclusive measure of cash flow because it
does not consider the impact of working capital growth, capital
expenditures, debt principal reductions and other sources and uses of cash
which are disclosed in our statements of cash flows. Investors should
carefully consider the specific items included in our computation of
EBITDAX. While we have disclosed our EBITDAX to permit a more complete
comparative analysis of our operating performance and debt servicing
ability relative to other companies, investors should be cautioned that
EBITDAX as reported by us may not be comparable in all instances to EBITDAX
as reported by other companies. EBITDAX amounts may not fully be available
for management's discretionary use, due to requirements to conserve funds
for capital expenditures, debt service, preferred stock dividends and other
commitments.
(2) In the fiscal years ended June 30, 1997 and 1998, the Company did not have
any fixed charges.
(3) Earnings were insufficient to cover fixed charges and preferred dividends
by $130,820.
(4) Earnings were insufficient to cover fixed charges and preferred dividends
by $1,846,744.
(5) The stockholders'Long term debt as of March 31, 2002 excludes $1,425,000 relating to the
current portion of our long term debt.
(6) Stockholders' equity as of March 31, 2002 reflects a $6,180,000 reduction,
which represents the repurchase by the Company of 2,575,000 shares of its
common stock.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the financial statements and
the related notes and other information included elsewhere in this prospectus.
Introduction
We are an independent natural gas and oil company engaged in the
exploration, production and acquisition of natural gas and oil in the United
States. Our entry into the natural gas and oil business began on July 1, 1999.
The following is a discussion of the results of our operations for the nine
months ended March 31, 2002, compared to those for the nine months ended March
31, 2001, the fiscal year ended June 30, 2001, compared to the fiscal year
ended June 30, 2000 and the fiscal year ended June 30, 2000, compared to the
fiscal year ended June 30, 1999.
Critical Accounting Policies
The application of generally accepted accounting principles involves certain
assumptions, judgments, choices and estimates that affect reported amounts of
assets, liabilities, revenues and expenses. Thus, the application of these
principles can result in varying results from company to company. Our critical
accounting principles, which we describe below, relate to the successful
efforts method of accounting, consolidation principles and hedge accounting.
Successful Efforts Method of Accounting. We follow the successful efforts
method of accounting for our natural gas and oil business. Under the successful
efforts method, lease acquisition costs and all development costs are
capitalized. Proved natural gas and oil properties are reviewed when
circumstances suggest the need for such a review and, if required, the proved
properties are written down to their estimated fair value. Unproved properties
are reviewed quarterly to determine if there has been impairment of the
carrying value, and any such impairment is charged to expense in the period.
Estimated fair value includes the estimated present value of all reasonably
expected future production, prices and costs. Exploratory drilling costs are
capitalized until the results are determined. If proved reserves are not
discovered, the exploratory drilling costs are expensed. Other exploratory
costs, including 3-D seismic acquisitions, are expensed as incurred. The
provision for depreciation, depletion and amortization is based on the
capitalized costs as determined above, plus future costs to abandon offshore
wells and platforms, and is on a cost center by cost center basis using the
units of production method, with lease acquisition costs amortized over total
proved reserves and other costs amortized over proved developed reserves. We
create cost centers on a well-by-well basis on all of our natural gas and oil
activities.
Consolidation Principles. Our consolidated financial statements include the
accounts of Contango Oil & Gas Company and its subsidiaries and affiliates,
after elimination of all intercompany balances and transactions. Majority-owned
subsidiaries are fully consolidated. Minority-owned natural gas and oil
affiliates, such as 33.3% owned Republic Exploration, and 50% owned Magnolia
Offshore Exploration, are proportionately consolidated. In the case of
minority-owned affiliates that have disproportionate allocations among the
investors, our share of the affiliate's net income or loss is based on how
increases or decreases in the net assets of the venture will ultimately affect
cash payments to Contango. Since we are the only member that contributed cash
to Republic Exploration and Magnolia Offshore Exploration, we consolidate 100%
of all activities in a loss position into our financial statements until we
recoup our investment.
Hedge Accounting. In June 1998, the Financial Accounting Standards Board, or
" FASB""FASB", issued SFAS 133. In June 2000, the FASB issued SFAS 138, "Accounting
for Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133." SFAS 133, as amended, establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in a derivative's fair value be
24
recognized currently in earnings unless specific hedge criteria are met.
Although the derivative transactions we engage in are designed as economic
hedges for a portion of future natural gas and oil production, we have elected
not to designate these as "hedges" under SFAS No. 133. Accordingly, we
recognize the changes in the derivative's fair value in our income statement
under "Gain (loss) from hedging activities."
Nine Months Ended March 31, 2002 Compared to Nine Months Ended March 31, 2001
Natural Gas and Oil Sales. We reported natural gas and oil sales of
approximately $15.9 million for the nine months ended March 31, 2002, down from
approximately $16.8 million for the nine months ended March 31, 2001. This
decrease was attributable to substantial decreases in natural gas and oil
prices that were partially offset by production increases from new wells
drilled on our STEP properties plus increased net revenue interests in certain
of those wells resulting from acquisitions made during the three months ended
March 31, 2002.
For the nine months ended March 31, 2002, our net production increased to
approximately 18.8 Mmcf of natural gas per day and 499 barrels of oil per day.
For the comparable period of 2001, our net production was approximately 8.2
Mmcf of natural gas per day and 318 barrels of oil per day. For the nine months
ended March 31, 2002, our average realized price for natural gas was $2.70 per
Mcf and for oil was $20.55 per barrel, compared with prices for the nine months
ended March 31, 2001 of $6.39 per Mcf of natural gas and $28.98 per barrel of
oil.
Gain from Hedging Activities. We reported a gain from hedging activities for
the nine months ended March 31, 2002 of approximately $4.1 million. This gain
consists of approximately $5.2 million gain realized on settlement of swap
derivative agreements and an unrealized loss of approximately $1.1 million. For
the nine months ended March 31, 2001, we reported a loss from hedging
activities of approximately $1.7 million.
Operating Expenses. Operating expenses, including severance taxes, for the
nine months ended March 31, 2002 were approximately $2.5 million and were
attributable to production operations both onshore Texas and offshore in the
Gulf of Mexico. Of this amount, approximately $1.4 million was attributable to
lease operating expense and $1.1 million was attributable to production and
severance taxes. Operating expenses, including severance taxes, for the nine
months ended March 31, 2001 were approximately $1.7 million, of which
approximately $545,300 was attributable to lease operating expense and $1.1
million was attributable to production and severance taxes.
Exploration Expense. Exploration costs for the nine months ended March 31,
2002 were approximately $2.5 million. This primarily was attributable to the
expensing of $2.2 million in dry holes drilled on our STEP properties and
$279,500 seismic costs attributable to data offshore in the Gulf of Mexico. For
the nine months ended March 31, 2001, we reported approximately $2.3 million of
exploration expense. Of this amount, approximately $1.2 million was
attributable to the cost of shooting seismic data onshore in south Texas, and
the balance was primarily attributable to the expensing of three dry holes
drilled on our STEP properties during this period.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the nine months ended March 31, 2002 was approximately $6.0
million. This primarily was attributable to depletion and amortization related
to increased production from our STEP properties, as well as increased costs of
proved properties resulting from acquisitions completed during the three months
ended March 31, 2002. For the nine months ended March 31, 2001, we recorded
approximately $2.7 million of depreciation, depletion and amortization. This
primarily was attributable to depletion and amortization related to production
from our STEP properties and a well offshore Texas.
General and Administrative Expense. General and administrative expense
decreased approximately $346,600, from approximately $1.7 million for the nine
months ended March 31, 2001 to approximately $1.3 million for the nine months
ended March 31, 2002. This decrease was primarily attributable to lower
salaries
25
and benefits and to lower legal, accounting and other professional fees.
Components of general and administrative expense for the nine months ended
March 31, 2002 included approximately $379,800 in salaries and benefits,
$270,400 in legal, accounting and other professional fees, $87,700 in
insurance, $213,200 in office administration and $379,900 in other expenses.
Included in other expenses were non-cash expenses of approximately $224,000
attributable to activities of Republic Exploration and Magnolia Offshore
Exploration.
Interest Expense. We reported interest expense of approximately $97,200 for
the nine months ended March 31, 2002. For the nine months ended March 31, 2001,
we reported interest expense of approximately $5,600. This increase was
attributable to borrowings under our Credit Facility that totaled $18.2 million
as of March 31, 2002. We had no bank borrowing during the nine months ended
March 31, 2001.
Gain on Sale of Assets. We reported a gain on sale of assets of
approximately $373,500 for the nine months ended March 31, 2002. This gain was
attributable to lease sales of approximately $254,600 by Republic Exploration
during the quarter ended March 31, 2002 and the balance was attributable to the
sale of certain partnership interests and properties located in Colorado and
Ft. Bend Counties, Texas earlier in the fiscal year.
Year Ended June 30, 2001 Compared to Year Ended June 30, 2000
Natural Gas and Oil Sales. We reported natural gas and oil sales of
approximately $24.5 million for the fiscal year ended June 30, 2001. This
primarily was attributable to production from our onshore south Texas
exploration play that commenced in late June 2000. We reported natural gas and
oil sales for the fiscal year ended June 30, 2000 of approximately $298,300.
Our fiscal year 2000 sales were primarily attributable to production from the
Eugene Island 28 well offshore Louisiana that commenced in May 2000 and, to a
lesser extent, to a discovery onshore south Texas that commenced production in
late June 2000.
Loss From Hedging Activities. For the fiscal year ended June 30, 2001, we
reported a loss from hedging activities of approximately $557,700. This loss
was the net effect of approximately $1.3 million of realized hedging losses
during the fiscal year ended June 30, 2001 and approximately $888,400 of fair
market value of our hedging contracts at June 30, 2001. We had no hedging
activity during the fiscal year ended June 30, 2000.
Lease Operating Expenses. For the fiscal year ended June 30, 2001, we
reported approximately $2.6 million of lease operating expense including
production and severance taxes. These expenses were associated primarily with
our south Texas production. We reported lease operating expenses including
production and severance taxes of approximately $85,300 during the fiscal year
ended June 30, 2000.
Exploration Expenses. For the fiscal year ended June 30, 2001, we reported
approximately $4.2 million of exploration expense. This was primarily
attributable to approximately $2.8 million of dry hole costs associated with
drilling in south Texas and $1.2 million of geological and geophysical costs.
We reported approximately $604,100 of exploration expense during the fiscal
year ended June 30, 2000. This was attributable to approximately $190,000 of
dry hole costs associated with exploratory drilling onshore Texas and
approximately $414,000 of other geological and geophysical costs.
Depreciation, Depletion and Amortization. For the fiscal year ended June 30,
2001, we reported approximately $4.0 million of depreciation, depletion and
amortization. This primarily was attributable to depletion and amortization
related to our production both onshore Texas and offshore. For the fiscal year
ended June 30, 2000, we reported approximately $344,800 of depreciation,
depletion and amortization.
Impairment of Proved Oil and Gas Properties. For the fiscal year ended June
30, 2001, we reported impairments of approximately $300,500. This was
attributable to a write down of capitalized costs at the Brazos #436 well,
offshore Texas. For the fiscal year ended June 30, 2000, we reported
impairments of approximately $548,200. This was attributable to a write down of
capitalized costs at the Eugene Island 28 well and certain onshore properties
located in Colorado, Ft. Bend and Wharton Counties, Texas.
26
General and Administrative Expense. General and administrative expense
increased approximately $1.6 million, from approximately $763,600 for the
fiscal year ended June 30, 2000 to approximately $2.4 million for the fiscal
year ended June 30, 2001. This increase primarily was attributable to a
significantly higher level of operational and financial activities during the
fiscal year ended June 30, 2001. Major components of general and administrative
expense for the fiscal year ended June 30, 2001 included approximately $997,900
in salaries, bonuses, benefits and other compensation, $400,400 legal, $427,100
office administration, $107,500 insurance and $162,500 accounting and audit.
Interest Income. We reported interest income of approximately $414,400 and
$141,000 for the fiscal years ended June 30, 2001 and 2000, respectively.
Interest income was derived from interest earned on our cash balances during
the reporting periods. The increase in interest income was due to the increase
in cash balances resulting from proceeds of various equity offerings completed
during the fiscal year ended June 30, 2001 as well as an increased level of
cash as a result of increased sales of natural gas and oil.
Gain on Sale of Assets. During the fiscal year ended June 30, 2000, we
reported a gain of approximately $70,200 on the sale of natural gas and oil
properties. This primarily was associated with the sale of approximately 2,000
gross unproved leasehold acres in Shelby County, in Texas. There was no such gain
for the fiscal year ended June 30, 2001.
Year Ended June 30, 2000 Compared to the Year Ended June 30, 1999
We had no operations and generated no revenues during the fiscal year ended
June 30, 1999. We began operations as a natural gas and oil exploration and
development company on July 1, 1999 and generated our first natural gas and oil
revenues during the fiscal year ended June 30, 2000.
Capital Resources and Liquidity
During the nine months ended March 31, 2002, we funded our activities with
cash on hand, internally generated cash flow and borrowings under our secured,
reducing revolving line of credit with Guaranty Bank, FSB that matures in June
2004, which we refer to in this prospectus as our "Credit Facility." We
reported total revenues for the nine months ended March 31, 2002 of
approximately $20.1 million, which included approximately $4.1 million of gain
from hedging activities. EBITDAX, which we define as earnings before interest,
income taxes, depreciation, depletion and amortization, impairment expense and
expensed exploration expenditures, including gains or losses from hedging, for
the nine-month period was approximately $16.6 million.
At April 30,June 1, 2002, we had approximately $260,000$350,000 in cash on hand, $17.4$15.9
million borrowed under our Credit Facility and $4.6$5.2 million of funds available
under our Credit Facility.
During the three months ended March 31, 2002, we increased our ownership
interest in our STEP properties in three separate transactions at a total cost
of approximately $20.0 million. In April 2002, we further increased our
ownership in our STEP properties at a cost of approximately $3.4 million. As a
result, production levels at the beginning of the period increased from
approximately 15 Mmcf of natural gas and 400 barrels of oil per day to
approximately 20 Mmcf of natural gas and 500 barrels of oil per day at the end
of the period. At anticipated production levels and current commodity price
levels of approximately $3.50 per Mmbtu for natural gas and $25.00 per barrel
for oil, we expect to have EBITDAX of $1.5 to 2.0 million per month through
December 2002. Current levels of production are estimated to decline to 13 Mmcf
of natural gas and 200 barrels of oil per day by calendar year end 2002 absent
any increases resulting from future drilling activities.
Although we have completed our drilling activities at our STEP properties,
we continue to actively seek new exploration plays in south Texas as well as
other areas. In addition, we have an after payout carried working interest in
two offshore prospects, bothone of which arehas been successfully drilled and is being
completed and one of which is currently drilling. Through our 33.3% ownership
of Republic Exploration, we have an after payout carried working interest in a
well successfully drilled in October 2001 that recently began production.
27
Capital expenditures year to date, including our recent $3.4
27
million proved
reserve acquisition in our STEP properties, have totaled approximately $33.2$34.2
million. We anticipate capital expenditures for the full fiscal year 2002 to
total approximately $34.0 million. We have identified $5.0 million to $10.0
million in capital expenditures for the fiscal year 2003 and are actively
seeking additional opportunities and prospects for 2003. These capital
expenditures include potential contractual obligations in respect of our option
to purchase up to a 20% minority stake in the Freeport LNG terminal. See
"Business--Freeport LNG Terminal." If we choose to exercise our option to
invest in the project, we will spend $1.5 million, including the $750,000 that
we paid for the option, to purchase a 10% limited partner interest in the
venture. We also have the option to increase our investment to 20% for an
additional $1.5 million. If we invest, we will have a contractual obligation to
contribute towards the operating and development costs of the facility, our
share of which we expect to be approximately $1.0 million in fiscal year 2003
if we purchase a 10% interest in the facility and approximately $2.0 million in
fiscal year 2003 if we purchase a 20% interest in the facility.
As discussed above in "Use of Proceeds," we expect to use the majority of
the estimated net proceeds from this offering to pay down the borrowings under
our Credit Facility. We currently are using cash flows from operations to
reduce our indebtedness under our Credit Facility and estimate that by mid July
2002 this indebtedness will be reduced to approximately $13.5 million. Assuming
a mid-July closing of this offering and net proceeds of approximately $18.2
million, we expect to have cash on hand of approximately $4.7 million and
unused borrowing capacity of $20.6 million. We believe that our cash on hand, our anticipated cash
flow from operations, funds available under our Credit Facility and the balance
of the estimated net proceeds from this offering not used to pay down the
amounts borrowed under our Credit Facility will be adequate to satisfy planned
capital expenditures through fiscal year 2003. We may continue to seek
additional equity or other financing to fund possible acquisitions and an
expanded exploration program, and to take advantage of other opportunities that
may become available. The availability of such funds will depend upon
prevailing market conditions and other factors over which we have no control,
as well as our financial condition and results of operations. We cannot assure
you that we will have sufficient funds available if needed.
Credit Facility
Our Credit Facility is a secured, reducing revolving line of credit with
Guaranty Bank, FSB that matures in June 2004. At MayJune 1, 2002, the hydrocarbon
borrowing base was set at $21.5$21.1 million, and this amount reduces by $475,000 each
month. When we first negotiated our Credit Facility in June 2001, the
hydrocarbon borrowing base was $10.0 million with monthly reductions in the
borrowing base of $500,000. Borrowings under the Credit Facility bear interest,
at our option, at either (i) LIBOR plus two percent (2%) or (ii) the bank's
base rate plus one-fourth percent ( 1/4%) per annum. Additionally, we pay a
quarterly commitment fee of three-eighths percent ( 3/8%) per annum on the
average availability under the Credit Facility. The hydrocarbon borrowing base
is subject to semi-annual redetermination based primarily on the value of our
proved reserves. The Credit Facility requires the maintenance of certain
ratios, including those related to working capital, funded debt to EBITDAX, and
debt service coverage, as defined in the Credit Facility. Additionally, the
Credit Facility contains certain negative covenants that, among other things,
restrict or limit our ability to incur indebtedness, sell assets, pay dividends
and reacquire or otherwise acquire or redeem capital stock. We recently
received a waiver from Guaranty Bank, FSB permitting us to pay dividends to the
holders of Series C preferred stock. Failure to maintain required financial
ratios or comply with the Credit Facility's covenants can result in a default
and acceleration of all indebtedness under the Credit Facility.
As of March 31, 2002, $18.2 million was outstanding under the Credit
Facility, and we were in compliance with all financial covenants and ratios. Effective AprilAs
of June 1, 2002, the hydrocarbon borrowing base was increased from
$20.0 million to $22.0 million. As of April 30, 2002, $17.4$15.9 million was outstanding under the Credit Facility.
Quantitative and Qualitative Disclosure About Market Risk
Commodity Risk. Our major commodity price risk exposure is to the prices
received for our natural gas and oil production. Realized commodity prices
received for our production are the spot prices applicable to natural gas and
crude oil. Prices received for natural gas and oil are volatile and
unpredictable, and are beyond our control. For the nine months ended March 31,
2002, a 10% fluctuation in the prices received for natural gas and oil
production would have had an approximate $1.7 million impact on our revenues.
28
We periodically enter into hedges on a portion of our projected natural gas
and oil production to manage our exposure to declines in natural gas and oil
prices. We may use futures contracts, swaps, options and fixed-
28
pricefixed-price physical
contracts to hedge commodity prices. We use these derivative financial
instruments for non-trading purposes only. For the year ended June 30, 2001 and
the nine months ended March 31, 2002, we recognized a loss of $557,700 and a
gain of $4.1 million, respectively, from hedging activities.
Hedging Activities. Our revenues, profitability and future growth depend
substantially on prevailing prices for natural gas and oil. These prices also
affect the amount of cash flow available for capital expenditures and our
ability to borrow and raise additional capital. The amount we can borrow under
our Credit Facility is subject to periodic redetermination based in part on
changing expectations of future prices of natural gas and oil. Lower prices may
also reduce the amount of natural gas and oil that we can economically produce.
From time to time, we enter into hedging arrangements on a portion of our
anticipated natural gas and oil production as a part of our overall risk
management strategy. The following table provides our pricing and notional
volumes on open commodity derivative contracts as of April 30,June 4, 2002.
Weighted AverageStrike
Contract Description Term Strike Price(1) Quantity(2)
-------------------- --------------- ------------------------ -----------
Natural gas put................. 05/put......................... 08/2002-10/2002 $ 3.00 8,000/day
Natural gas call................call........................ 07/2002-12/2002 $ 4.02 8,000/day
Natural gas swap................ 06/2002-08/2002swap........................ 07/2002-01/2003 $ 3.80 7,000/3.66 2,000/day
Natural gas swap........................ 07/2002-01/2003 $ 3.72 2,000/day
Natural gas swap........................ 07/2002-01/2003 $ 3.62 2,000/day
Crude oil swap..................swap.......................... 04/2002-10/2002 $24.95 5,000/mth
- --------
(1) Prices per Mmbtu for natural gas and per barrel for oil
(2) Natural gas quantities in Mmbtu, oil quantities in barrels
At March 31, 2002, the mark-to-market valuation was a loss of $249,480. As
of June 4, 2002, the mark-to-market valuation was a gain of approximately
$135,100. Because these open contracts are marked-to-market on a daily basis,
we are exposed to wide swings in commodity prices and could be subject to
significant hedging losses in the event of a significant increase in natural
gas and oil prices. Accordingly, the terms of the agreements with certain
counter parties provide that if the mark-to-market loss to that counter party
exceeds $1.0 million, we will have to provide collateral to cover the potential
loss position.
We have never had any derivative contracts with Enron Corp. or its
affiliates.
Interest Rate Risk. The carrying value of our debt approximates fair value.
At March 31, 2002, we had approximately $19.0 million of long-term debt,
represented by $18.2 million outstanding, including $1.4 million that was
current, under the Credit Facility and $833,000 of other long-term payables.
The Credit Facility matures in June 2004 and bears interest, at our option, at
either (i) LIBOR plus two percent (2%) or (ii) the bank's base rate plus one-
fourth percent ( 1/4%) per annum. The average interest rate on long-term hedge
debt
at March 31, 2002 was 4.3%. The results of a 10% fluctuation in short-term
rates would have had an approximate $61,400 impact on interest expense for the
nine months ended March 31, 2002. We had no long-term hedge debt prior to January 1,
2002.
29
BUSINESS
Overview
We are an independent natural gas and oil company that explores for,
develops, produces and sells natural gas and crude oil. Our exploration and
production efforts are currently focused onshore on the Gulf Coast and offshore
in the Gulf of Mexico. Our primary source of production is currently in south
Texas where we own an approximate 68% working interest and a 51% net revenue
interest in properties located in our South Texas Exploration Program or
"STEP." While our STEP interests currently account for nearly all of our
production, we also have interests in producing properties located offshore in
the Gulf of Mexico. We also recently acquired an option to purchase up to 20%
of a proposed liquified natural gas (LNG) receiving and regasification terminal
being developed in Freeport, Texas by Cheniere Energy, Inc., a natural gas
exploration and production company. See "--Freeport LNG Terminal."
As of April 1, 2002, we owned rights to 29.2 Bcfe of proved developed
producing reserves, an increase of over 61% from June 30, 2001. The pre-tax net
present value of our proved developed producing reserves as of April 1, 2002
was approximately $55.7 million.
Total revenues and EBITDAX, which we define as earnings before interest,
income taxes, depreciation, depletion and amortization, impairment expense and
expensed exploration expenditures, including gains or losses from hedging, were
$20.1 million and $16.6 million, respectively, for the nine months ended March
31, 2002. For the year ended June 30, 2001, total revenues and EBITDAX were
$24.0 million and $19.0 million, respectively. Average net daily production for
the nine months ended March 31, 2002 and for the year ended June 30, 2001 was
18.8 Mmcf of natural gas per day and 499 barrels of crude oil per day and 9.8
Mmcf of natural gas per day and 335 barrels of crude oil per day, respectively.
Our average net daily production for the three months ended March 31, 2002 was
23.6 Mmcf of natural gas and 640 barrels of crude oil.
Our predecessor company was initially incorporated in the State of Nevada in
August 1986 under the name of Maple Enterprises, Inc. and in 1998 was renamed
MGPX Ventures, Inc. following a sale of substantially all of the company's
assets to MGPX Ventures' management. MGPX Ventures, Inc. subsequently had no
operating business until July 1999 when the company's board voted to enter the
natural gas and oil business, changing the company's name to our current name
and hiring Kenneth R. Peak as our chief executive officer. We did not record
any revenue from our natural gas and oil operations until the fiscal year ended
June 30, 2000. In December, 2000, we reincorporated in the State of Delaware
and effected a 2 for 1 reverse stock split. Prior to January 2001, our common
stock traded on the Nasdaq over-the-counter bulletin board. In January 2001, we
changed our listing to the American Stock Exchange and adopted the trading
symbol "MCF."
Our Strategy
Our strategy is predicated upon two core beliefs: (1) that the only
competitive advantage in the commodity-based natural gas and oil business is to
be among the lowest cost producers and (2) that virtually all the exploration
and production industry's value creation occurs through the drilling of
successful exploratory wells. As a result, our business strategy includes the
following elements:
Funding exploration prospects developed by proven geoscientists. Our
prospect generation and evaluation functions are performed by our alliance
partner, Juneau Exploration Company, L.P. or "JEX." This proven group of four
explorationists with 15 to 20 years of experience each has demonstrated its
ability to find reserves both onshore and offshore in the Gulf of Mexico. In
our experience, only a select group of explorationists are able to consistently
and profitably find natural gas and oil. Our STEP properties were discovered by
JEX and resulted in very competitive finding and development costs of $1.41 per
Mcfe. Our principal exploration strategy is to fund exploration prospects
generated by JEX.
Negotiating acquisitions of proved properties. Since January 1, 2002, we
have spent $23.4 million to acquire 12.9 Bcfe of proved developed producing
reserves of natural gas and oil. We will continue to seek producing property
acquisitions based on our view of the pricing cycles of natural gas and oil and
available exploitation opportunities of probable and possible reserves.
30
Controlling general and administrative and geological and geophysical costs.
Our goal is to be among the highest in the industry in revenue and profit per
employee and among the lowest in the industry in general and administrative
costs. We plan to continue our program of outsourcing geological, geophysical,
reservoir engineering and land functions, and partnering with cost efficient
operators whenever possible. We currently have four employees.
Structuring transactions to minimize front-end investments. We seek to
maximize returns on capital by minimizing our up-front investments of our own
capital in acreage, seismic data, and prospect generation. We want our key
partners to share in both the risk and the rewards of our success.
Seeking new alliance ventures. While our core focus will remain the domestic
exploration and production business, we will also continue to seek alliance
ventures with companies and individuals that offer attractive investment
opportunities. These opportunities may include domestic or foreign exploration
prospects, as well as investments in downstream natural gas assets, includingsuch as our
recent acquisition of an option to purchase a minority interest in a Liquified Natural Gas (LNG) terminal.proposed
LNG receiving and regasification terminal being developed in Freeport, Texas by
Cheniere Energy, Inc.
Structuring incentives to drive behavior. We believe that equity ownership
aligns the interests of our partners, employees, and stockholders. Our
directors and executive officers currently hold approximately 32% of our common
stock. In addition, our alliance agreement with JEX requires JEX to co-invest
on every prospect that it recommends to us.
Exploration Alliance with JEX
Under a September 1999 agreement, JEX evaluates natural gas and oil
prospects and recommends exploration prospect and proved property acquisition
investment opportunities to us. In exchange, we have committed, within various
parameters, to invest along with JEX in the recommended prospects and property
acquisitions. We also issued 200,000 shares of our common stock to JEX and
granted JEX options to purchase 400,000 shares of our common stock. The vesting
of those options depends on the success of certain prospects and reserves in
which we have invested under the agreement. As of April 30, 2002, 300,000
options had vested.
With respect to natural gas and oil prospects recommended by JEX, and
subject to a $6$6.0 million annual limit, we are obligated to purchase a
percentage of the working interests available to JEX. JEX is required to
purchase at least 5% of the available working interests of each prospect in
which we invest. Although our financial obligation is limited during any
calendar year, we have to date invested in the full 95% interest available to
us, and it is our intention, subject to our then existing financial condition,
to continue to fully invest in the interest available to us in each prospect
recommended by JEX.
JEX generally pays the cost of generating and preparing a prospect to drill
ready status. When drilling begins on a prospect, we are obligated to assign to
JEX an overriding royalty interest in our working interest in the prospect. Our
agreement with JEX states that this overriding royalty interest shall equal 3
1/3% of our working interest in the prospect. In practice, this 3 1/3% royalty
interest is assigned to the JEX exploration team and not to JEX itself. In
addition, when our revenues from prospects we invest in under the agreement
during a calendar year, net of taxes, royalties, and other expenses, equals our
capital expenditure related to the acquisition and development of the prospects
on a well-by-well basis, then JEX is entitled to an assignment or automatic
reversion of 25% of our working interest in the well. With respect to reserve
acquisitions, we have the right, but not the obligation, to purchase up to 95%
of the interests available to JEX in proved natural gas and oil reserves.
We may terminate the agreement upon 30 days written notice, and JEX may
terminate the agreement upon 180 days notice. If we are in default under the
agreement, however, JEX may terminate the agreement upon 30 days written
notice. John B. Juneau, one of our directors, is the sole manager of the
general partner of JEX.
31
Onshore Exploration and Properties
Our onshore exploration strategy is to identify large acreage positions with
available 3-D seismic data and to quickly evaluate, develop and drill economic
prospects. Our first significant onshore drilling program was STEP. STEP has
proven to be an excellent program for Contango, resulting in 31 economically
successful wells out of a 40-well exploration program.
The first STEP wells were discovered by JEX in the Summersummer of 2000 after a
review of seismic data covering approximately 100 square miles of territory
located on the STEP properties. JEX entered into a joint exploration agreement
with a limited partnership controlled by the mineral owner of the STEP
properties. This limited partnership acts as the operator of our STEP
properties.
We currently own approximately 70%68% of the working interests and 53%51% of the
net revenue interests in the STEP properties. As of April 1, 2002, our interest
in net production from the STEP properties was approximately 20 Mmcf of natural
gas per day and 500 barrels of oil per day. We do not expect to invest in any
additional wells located on the STEP properties. As a result, due to declining
reserves, we expect that our net production will decrease to approximately 13
Mmcf of natural gas per day and 200 barrels of oil per day by the end of
calendar year 2002. Over 95% of our net reserves and net production are from
our STEP properties.
We are in the process of identifying additional large onshore acreage
prospects in south Texas and in other areas of the country.
Offshore Exploration Joint Ventures
We formed the Republic Exploration and Magnolia Offshore Exploration joint
ventures with JEX to find and develop natural gas and oil opportunities in the
Gulf of Mexico. Two different private seismic data companies have licensed the
rights to reprocessed 3-D seismic data covering a total of 2,000 blocks of
reprocessed 3-D seismic data covering the Gulf of Mexico continental shelf to
these two joint ventures. Republic Exploration, in which we have a 33 1/3%
interest, has access to approximately 1,400 of these blocks of reprocessed 3-D
seismic data. Magnolia Offshore Exploration, in which we have a 50% interest,
has access to approximately 600 of these blocks of reprocessed 3-D seismic
data.
Republic Exploration, L.L.C. We invested approximately $6.7 million in
Republic Exploration for a 33 1/3% interest in its profits. Republic
Exploration holds a non-exclusive license to existing and recently reprocessed
3-D seismic data covering approximately 1,400 blocks of shallow waters in the
Gulf of Mexico continental shelf. Republic Exploration uses the data to acquire
and exploit natural gas and oil prospects. The other members of Republic
Exploration are JEX and a private seismic data company which licensed to the
venture its 3-D seismic data. JEX is the managing member of Republic
Exploration and decides which prospects Republic Exploration may acquire,
develop, and exploit. The Republic Exploration operating agreement also states
that the JEX exploration team receives a 3 1/3% overriding royalty interest in
each prospect that Republic Exploration successfully drills.
Since its August 2000 formation, Republic Exploration has acquired ten
offshore lease blocks and is awaiting award of one additional block where it
was the apparent high bidder at the March 2002 Central Gulf Lease Sale.
Republic Exploration acquired five blocks offshore Louisiana in the Central
Gulf of Mexico Lease Sale 178 held in March 2001 and two blocks in the Central
Gulf of Mexico Lease Sale 182 held in March 2002. Of the ten farmed out blocks
acquired since formation, Republic Exploration has entered into farm-out
agreements with respect to five. One wasTwo have been drilled successfully, in October 2001, two
resulted in dry holes, and two areone is being drilled. Under the farm-out agreements,
Republic Exploration will be carried on exploration and development activities
and will receive a reversionary interest upon payout of each block. We expect
Republic Exploration to participate in future state and federal offshore lease
sales.
The license to the 3-D seismic data provided to Republic Exploration by its
third member expires in 2025 or, if earlier, upon the dissolution of Republic
Exploration. During Republic Exploration's existence and for one
32
year after its dissolution, we may not acquire an interest in or derive a
benefit from the area covered by the licensed 3-D seismic data without the
approval of Republic Exploration's other members.
Magnolia Offshore Exploration L.L.C. We have purchased a 50% interest in
Magnolia Offshore Exploration in October 2001 for a $1.0 million initial
contribution and an agreement to pay an additional $4.0 million as needed to
cover capital needs. As of April 30,June 1, 2002, we have paid $400,000approximately $700,000 of
the $4.0 million. Magnolia Offshore Exploration uses 3-D seismic data covering
approximately 600 blocks in the Gulf of Mexico to explore for prospects at
water depths less than 350 feet.
Since its October 2001 formation, Magnolia Offshore Exploration has acquired
two blocks offshore Louisiana in the Central Gulf of Mexico Lease Sale 182 held
March 2002 and is awaiting award of a third block where it was the apparent
high bidder at the lease sale. We expect Magnolia Offshore Exploration to
participate in future state and federal offshore lease sales.
If we do not promptly pay the remaining $3.6$3.3 million that we pledged to make
available to Magnolia Offshore Exploration, when requested by Magnolia Offshore
Exploration, we will forfeit our 50% interest in Magnolia Offshore Exploration,
as well any right to recover previous contributions. JEX is the only other
member of Magnolia Offshore Exploration and acts as the managing member,
deciding which prospects Magnolia Offshore Exploration may acquire, develop,
and exploit. The seismic company that contributed the 600 blocks of data
receives a net profit interest in any discoveries.
As in the Republic Exploration operating agreement, the Magnolia Offshore
Exploration operating agreement states that the JEX exploration team receives a
3 1/3% overriding royalty interest in each prospect that Magnolia Offshore
Exploration successfully drills. During Magnolia Offshore Exploration's
existence and for one year after its dissolution, we may not acquire an
interest in or derive a benefit from the area covered by the 3-D seismic data
without the approval of JEX or its transferee.
To date, Republic Exploration and Magnolia Offshore Exploration have focused
on identifying prospects, purchasing lease blocks at federal and state lease
sales, and selling these leases to third parties, retaining reversionary
interests for themselves. In the future, however, we expect that Republic
Exploration and Magnolia Offshore Exploration will seek to acquire and retain
working interests in offshore prospects. Contango may farm-in some of these
prospects on terms generally available to unrelated third party industry
partners.
Offshore Operations and Properties
The following table sets forth certain information with respect to the
offshore Gulf of Mexico leasehold interests owned by us and related entities as
of April 30,June 1, 2002:
When
Block Location Acquired Status
----- -------- -------- ------
Brazos 436......................436.............. TX-OCS Jul-00 Producing
Eugene Island 28................28........ LA-OCS Mar-00 Producing
Eugene Island 110...............110....... LA-OCS Mar-01 Drilling
Grand Isle 24...................24........... LA-OCS Mar-01 Dry hole
Grand Isle 28...................28........... LA-OCS Mar-01 DrillingSuccessfully drilled and being completed
E. Cameron 107..................107.......... LA-OCS Mar-01 Available for farm-out
Eugene Island 113B..............113B...... LA-OCS Mar-01 Subject to farm-out option
High Island 25L.................25L......... TX-State Aug-01 Producing
High Island 53L.................53L......... TX-State Oct-00 Available for farm-out
Galveston 149L..................149L.......... TX-State Jul-00 Dry hole, block released
W. Cameron 200..................200.......... LA-OCS Mar-02 Evaluating
Vermilion 73....................73............ LA-OCS Pending Pending award by MMSMay-02 Available for farm-out
W. Delta 36.....................36............. LA-OCS Mar-02 Available for farm-out
Ship Shoal 155..................155.......... LA-OCS Mar-02 Available for farm-out
Viosca Knoll 75.................75......... LA-OCS Mar-02 Available for farm-out
Viosca Knoll 211................211........ LA-OCS Pending Pending award by MMSMay-02 Available for farm-out
33
The following table sets forth the name of the leaseholder together with the
working interest and net revenue interest with respect to the offshore Gulf of
Mexico leasehold interests owned by us and related entities as of April 30,June 1, 2002:
Magnolia
Republic Offshore
Exploration Exploration
Contango (1) (2)
------------ ------------- -------------
Block WI NRI WI NRI WI NRI
----- ----- ----- ------ ----- ------ -----
Brazos 436.......................... 18.12% 14.81% -- -- -- --
Eugene Island 28.................... 21.38% 15.28% -- -- -- --
Eugene Island 110(3)................ 0.00% 0.00% 0.00% 0.00% -- --
Grand Isle 28(3).................... 0.00% 0.00% 0.00% 0.00% -- --
E. Cameron 107...................... 33.75% 27.00% 66.25% 53.00% -- --
Eugene Island 113B.................. 33.75% 27.00% 66.25% 53.00% -- --
High Island 25L (4).................25L(4).................. -- -- 0.00% 0.00% -- --
High Island 53L..................... -- -- 100.00% 74.17% -- --
W. Cameron 200...................... -- -- 100.00% 80.00% -- --
Vermilion 73(5).....................73........................ -- -- 100.00% 80.00% -- --
W. Delta 36......................... -- -- 100.00% 80.00% -- --
Ship Shoal 155...................... -- -- -- -- 100.00% 80.00%
Viosca Knoll 75..................... -- -- -- -- 100.00% 80.00%
Viosca Knoll 211(5).................211.................... -- -- -- -- 100.00% 80.00%
- --------
(1) We have a 33 1/3% interest in Republic Exploration.
(2) We have a 50% interest in Magnolia Offshore Exploration.
(3) If successful, after payout working interest and net revenue interest for
Contango will be 8.44% and 6.75%, respectively, and for Republic
Exploration will be 16.56% and 13.25%, respectively.
(4) After payout working interest and net revenue interest for Republic
Exploration will be 25.00% and 19.17%, respectively.
(5) Pending awardFreeport LNG Terminal
On June 4, 2002, we agreed with Cheniere Energy, Inc., a natural gas
exploration and production company, to acquire an option to purchase a minority
stake in a proposed liquified natural gas (LNG) receiving and regasification
terminal being developed in Freeport, Texas by MMS.Cheniere. We paid $750,000 to
Cheniere for the option of purchasing a 10% interest in a Texas limited
partnership intended to be the legal entity holding the terminal and its
assets. It is intended that a wholly-owned subsidiary of Cheniere will act as
the general partner to the limited partnership and that Cheniere, through this
wholly-owned subsidiary, will manage the project. If we choose to exercise our
option to purchase 10% of the project, we must pay Cheniere an additional
$750,000. Our option to purchase this 10% stake expires at the earlier of (i)
December 15, 2002 or (ii) 7 days after receiving notice from Cheniere that
another third-party investor has purchased, on the terms no more favorable than
those offered to us, at least 20% of the interests in the limited partnership.
We also own a second option to increase our interests in the project by an
additional 10% for an additional $1.5 million. The second option expires on
December 15, 2002. If the second option is not exercised prior to September 15,
2002, we must pay Cheniere a nonrefundable $250,000 deposit to preserve our
option to increase our interest through December 15, 2002.
If we invest, we will have a contractual obligation to contribute towards
the operating and development costs of the facility, our share of which we
expect to be approximately $1.0 million in fiscal year 2003 if we purchase a
10% interest in the facility and approximately $2.0 million in fiscal year 2003
if we purchase a 20% interest in the facility. If we choose not to exercise our
option to invest in the Freeport LNG terminal, our initial $750,000 option
price will convert into an interest bearing secured loan payable by Cheniere no
later than July 15, 2003. The loan will be secured by all of Cheniere's
revenues and accounts receivables, including receivables from Cheniere's
natural gas and oil interests.
34
Natural Gas and Oil Prices
Substantially all of our production is sold under various terms and
arrangements at prevailing market prices. Our revenues, profitability and
future growth depend on natural gas and oil prices, thus price decreases would
adversely affect our revenues, profits and the value of our proved reserves.
Historically, the prices received for natural gas and oil have fluctuated
widely. Among the factors that can cause these fluctuations are:
. The domestic and foreign supply of natural gas and oil
. Overall economic conditions
. The level of consumer product demand
. Weather conditions
. The price and availability of alternative fuels
. Political conditions in the Middle East and other natural gas and oil
producing regions
. The price of foreign imports
. Domestic and foreign governmental regulations
. Potential price controls
34
From time to time, we enter into hedging arrangements to reduce our exposure
to decreases in the prices of natural gas and oil. Hedging arrangements expose
us to risk of significant financial loss in some circumstances including
circumstances where:
. There is a change in the expected differential between the underlying
price in the hedging agreement and actual prices received
. Production is less than expected
. Payments owed under derivative hedging contracts typically come due
prior to receipt of the hedged months production revenue
. The other party to the hedging contract defaults on its contract
obligations
In addition, hedging arrangements limit the benefit we would receive from
increases in the prices for natural gas and oil. We cannot assure you that the
hedging transactions we enter into will adequately protect us from declines in
the prices of natural gas and oil. On the other hand, we may choose not to
engage in hedging transactions in the future. As a result, we may be more
adversely affected by changes in natural gas and oil prices than our
competitors who engage in hedging transactions.
Our business has been and will continue to be affected by changes in natural
gas and oil prices. No assurance can be given to the trend in, or level of,
future natural gas and oil prices.
Marketing
Our production is marketed to third parties consistent with industry
practices. Typically, natural gas, oil and condensate are sold under daily or
monthly pricing agreements based upon factors normally considered in the
industry.
There are a variety of factors which affect the market for natural gas and
oil, including the extent of domestic production and imports of natural gas and
oil, the proximity and capacity of natural gas pipelines and other
transportation facilities, demand for natural gas and oil, the marketing of
competitive fuels and the effects of state and federal regulations on natural
gas and oil production and sales. We have not experienced any difficulties in
marketing our natural gas and oil. The natural gas and oil industry also
competes with other industries in supplying the energy and fuel requirements of
industrial, commercial and individual customers.
35
The availability of a ready market for our natural gas and oil production
depends on the proximity of reserves to, and the capacity of, natural gas and
oil gathering systems, pipelines and trucking or terminal facilities. We
deliver natural gas through gas gathering systems and gas pipelines that we do
not own. Federal and state regulation of natural gas and oil production and
transportation, tax and energy policies, changes in supply and demand and
general economic conditions all could adversely affect our ability to produce
and market our natural gas and oil. Most of our current production comes from
wells drilled in south Texas. This production is being sold to a single
purchaser. Any disruption of our marketing arrangements or financial
difficulties with our purchaser, or alternative marketing sources, could have
an adverse effect on our ability to market our natural gas and oil production.
Additionally, if our purchaser suffered financial difficulties, we might not be
able to collect receivables from the purchaser. However, we have the option to
market our production of natural gas and oil to other alternative purchasers.
Governmental Regulations
Our operations are affected from time to time in varying degrees by
political developments and governmental laws and regulations. Rates of
production of natural gas and oil have for many years been subject to
governmental conservation laws and regulations, and the petroleum industry has
been subject to federal and state tax laws dealing specifically with it.
Federal Income Tax. Federal income tax laws significantly affect our
operations. The principal provisions affecting us are those that permit us,
subject to certain limitations, to deduct as incurred, rather than to
capitalize and amortize, "intangible drilling and development costs" and to
claim depletion on a portion of our natural gas and oil properties based on the
greater of (1) the lesser of 15% of natural gas and oil gross income or net
income or (2) cost depletion.
35
Environmental Matters. Domestic natural gas and oil operations are subject
to extensive federal regulation and, with respect to federal leases, to
interruption or termination by governmental authorities on account of
environmental and other considerations including the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") also known as
the "Superfund Law". The recent trend towards stricter standards in
environmental legislation and regulation may continue, and this could increase
costs to us and others in the industry. Natural gas and oil lessees are subject
to liability for the costs of cleanup of pollution resulting from a lessee's
operations, and may also be subject to liability for pollution damages. We
maintain insurance against costs of clean-up operations but are not fully
insured against all such risks. A serious incident of pollution may also result
in the Department of the Interior requiring lessees under federal leases to
suspend or cease operation in the affected area.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose
a variety of regulations on "responsible parties" related to the prevention of
oil spills and liability for damages resulting from such spills in United
States waters. The OPA assigns liability to each responsible party for oil
removal costs and a variety of public and private damages. While liability
limits apply in some circumstances, a party cannot take advantage of liability
limits if the spill was caused by gross negligence or willful misconduct or
resulted from violation of a federal safety, construction or operating
regulation. Few defenses exist to the liability imposed by the OPA. The OPA
also imposes ongoing requirements on responsible parties, including proof of
financial responsibility to cover at least some costs in a potential spill. We
believe that currently we have established adequate proof of financial
responsibility for our offshore facilities. However, we cannot predict whether
these financial responsibility requirements under the OPA amendments will
result in the imposition of substantial additional annual costs to the company
in the future or otherwise materially adversely affect the company. The impact,
however, should not be any more adverse to us than it would be to other
similarly situated owners or operators in the Gulf of Mexico.
Our onshore operations are subject to numerous laws and regulations
controlling the discharge of materials into the environment or otherwise
relating to the protection of the environment, including CERCLA. Such laws and
regulations, among other things, impose absolute liability on the lessee under
a lease for the cost of clean-upclean-
36
up of pollution resulting from a lessee's operations, subject the lessee to
liability for pollution damages, may require suspension or cessation of
operations in affected areas, and impose restrictions on the injection of
liquids into subsurface aquifers that may contaminate groundwater. Such laws
could have a significant impact on our operating costs, as well as the natural
gas and oil industry in general. Federal, state and local initiatives to
further regulate the disposal of natural gas and oil wastes are also pending in
certain jurisdictions, and these initiatives could have a similar impact on us.
Other Laws and Regulations. Various laws and regulations often require
permits for drilling wells and also cover spacing of wells, the prevention of
waste of natural gas and oil, including maintenance of certain natural gas/oil
ratios, rates of production and other matters. The effect of these laws and
regulations, as well as other regulations that could be promulgated by the
jurisdictions in which we have production, could be to limit the number of
wells that could be drilled on our properties and to limit the allowable
production from the successful wells completed on the company's properties,
thereby limiting the company's revenues.
The MMS administers the natural gas and oil leases held by us on federal
onshore lands and offshore tracts in the Outer Continental Shelf. The MMS holds
a royalty interest in these federal leases on behalf of the federal government.
While the royalty interest percentage is fixed at the time that the lease is
entered into, from time to time the MMS changes or reinterprets the applicable
regulations governing its royalty interests, and such action can indirectly
affect the actual royalty obligation that we may be required to pay. The MMS is
currently engaged in developing new oil and gas valuation regulations for
royalty purposes. The natural gas rule was published in final form on December
16, 1997. Industry trade associations challenged portions of the rule, and on
March 28, 2000, a district court invalidated the challenged regulations. The
MMS has appealed the court's decision, and the appeal remains pending. The oil
rule was published in final form on March 15, 2000. Portions of this rule have
also been challenged by industry trade associations in court and the case
remains pending, with no resolution expected in the near future. We are not in
a position to predict the outcome of the 36
litigation, but we believe that the
impact of the final rules that emerge from the court review will not impact us
to any greater extent than other similarly situated producers.
The Federal Energy Regulatory Commission (the "FERC") has recently embarked
on wide-ranging regulatory initiatives relating to natural gas transportation
rates and services, including the availability of market-based and other
alternative rate mechanisms to pipelines for transmission and storage services.
In addition, the FERC has announced and implemented a policy allowing pipelines
and transportation customers to negotiate rates above the otherwise applicable
maximum lawful cost-based rates on the condition that the pipelines
alternatively offer so-called recourse rates equal to the maximum lawful cost-
based rates. With respect to gathering services, the FERC has issued orders
declaring that certain facilities owned by interstate pipelines primarily
perform a gathering function, and may be transferred to affiliated and non-
affiliated entities that are not subject to the FERC's rate jurisdiction. We
cannot predict the ultimate outcome of these developments, nor the effect of
these developments on transportation rates. Inasmuch as the rates for these
pipeline services can affect the natural gas prices received by us for the sale
of our production, the FERC's actions may have an impact on us. However, the
impact should not be substantially different on us than it will on other
similarly situated natural gas producers and sellers.
37
Natural Gas and Oil Reserves
The following table presents our estimated net proved natural gas and oil
reserves and the pre-tax net present value of our reserves at April 1, 2002,
based on a reserve report generated by W.D. Von Gonten & Co. The pre-tax net
present value is not intended to represent the current market value of the
estimated natural gas and oil reserves we own.
The pre-tax net present value of future cash flows attributable to our
proved reserves as of April 1, 2002 was determined by the April 1, 2002 prices
of $3.56 per Mcf for natural gas at the Houston Ship Channel and $20.00 per
barrel of oil at Koch's South Texas Crude Oil Posting, in each case after
adjusting for basis, transportation costs, and Btu content.
As of
April 1,
2002
-----------
Natural gas (Mmcf)........................................... 25,552
Oil (thousand barrels)....................................... 613
-----------
Total proved reserves (Mmcfe)................................ 29,230
Pre-tax net present value.................................... $55,734,738
The process of estimating natural gas and oil reserves is complex. It
requires various assumptions, including natural gas and oil prices, drilling
and operating expenses, capital expenditures, taxes and availability of funds.
We must project production rates and timing of development expenditures. We
analyze available geological, geophysical, production and engineering data, and
the extent, quality and reliability of this data can vary. Therefore, estimates
of natural gas and oil reserves are inherently imprecise. Actual future
production, natural gas and oil prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable natural gas and
oil reserves most likely will vary from estimates. Any significant variance
could materially affect the estimated quantities and net present value of
reserves. In addition, we may adjust estimates of proved reserves to reflect
production history, results of exploration and development, prevailing natural
gas and oil prices and other factors, many of which are beyond our control.
Because most of our reserve estimates are not based on a lengthy production
history and are calculated using volumetric analysis, these estimates are less
reliable than estimates based on a lengthy production history.
It should not be assumed that the pre-tax net present value is the current
market value of our estimated natural gas and oil reserves. In accordance with
requirements of the Securities and Exchange Commission, we base the estimated
discounted future net cash flows from proved reserves on prices and costs on
the date of the estimate. Actual future prices and costs may differ materially
from those used in the present value estimate.
3738
Production, Prices and Operating Expenses
The following table presents information regarding the production volumes,
average sales prices received and average production costs associated with our
sales of natural gas and oil for the period indicated. We had no natural gas
and oil production prior to the fiscal year ended June 30, 2000.
Year Ended Nine Months Ended
June 30, March 31,
---------------- -------------------
2000 2001 2001 2002
------ --------- --------- ---------
Production:
Natural gas (Mcf)...................... 28,094 3,570,026 2,238,360 5,137,800
Oil (barrels).......................... 6,384 122,093 86,765 136,200
------ --------- --------- ---------
Total (Mcfe)......................... 66,398 4,302,584 2,758,950 5,955,000
Natural gas (Mcf/per day).............. 77 9,781 8,199 18,820
Oil (barrels/per day).................. 17 335 318 499
------ --------- --------- ---------
Total (Mcfe/per day)................. 179 11,791 10,107 21,814
Average sales price:
Natural gas (per Mcf).................. $ 4.16 $ 5.92 $ 6.39 $ 2.70
Oil (per barrel)....................... 28.43 27.95 28.98 20.55
------ --------- --------- ---------
Total (per Mcfe)..................... $ 4.49 $ 5.71 $ 6.09 $ 2.78
Selected data per Mcfe:
Production and severance taxes........... $ 0.12 $ 0.39 $ 0.41 $ 0.19
Lease operating expenses................. $ 1.16 $ 0.22 $ 0.20 $ 0.23
General and administrative expenses...... $11.50 $ 0.55 $ 0.61 $ 0.22
Depreciation, depletion and amortization
of natural gas and oil properties....... $ 5.15 $ 0.92 $ 0.99 $ 1.00
Development, Exploration and Acquisition Capital Expenditures
The following table sets forth the costs incurred in natural gas and oil
property acquisitions, exploration and development activities for the periods
indicated:
Year Ended June 30, Nine Months
---------------------- Ended
2000 2001 March 31, 2002
---------- ----------- --------------
Property acquisition costs:
Unproved............................ $ 143,367 $ 1,901,405 $ 967,803
Proved.............................. 418,531 -- 19,956,452
Exploration costs..................... 2,395,471 20,867,565 5,864,251
Development costs..................... -- -- --
---------- ----------- -----------
Total costs incurred.............. $2,957,369 $22,768,970 $26,788,506
========== =========== ===========
38
Drilling Activity
The following table shows our drilling activity for the periods indicated:
Year Ended June 30, Nine Months
-------------------- Ended
2000 2001 March 31, 2002
--------- ---------- ---------------
Gross Net Gross Net Gross Net
----- --- ----- ---- -------- ------
Exploratory Wells:
Productive............................ 2.0 0.9 24.0 10.2 9.0 6.5
Non-productive........................ 6.0 0.8 7.0 3.0 3.0 1.4
--- --- ---- ---- ------- ------
Total............................... 8.0 1.7 31.0 13.2 12.0 7.9
=== === ==== ==== ======= ======
39
No development wells were drilled for the periods indicted.indicated.
Exploration and Development Acreage
Our principal natural gas and oil properties consist of producing and non-
producing natural gas and oil leases. The following table indicates our
interests in developed and undeveloped acreage as of April 1, 2002:
Developed(1) Undeveloped(1)(2)
Acreage Acreage
------------ ------------------
Gross Net Gross Net
------ ----- --------- --------
Onshore:
Texas...................................... 9,133 6,342 -- --
Offshore State Waters:
Louisiana.................................. -- -- 10,000 3,375
Offshore Outer Continental Shelf:
Louisiana.................................. 1,250 267 -- --
Texas...................................... 938 170 -- --
------ ----- --------- --------
Total.................................... 11,321 6,779 10,000 3,375
====== ===== ========= ========
- --------
(1) Excludes any interest in acreage in which we have no working interest
before payout.
(2) Excludes our 33.3% indirect interest in 20,714 gross undeveloped acres
(17,339 net undeveloped acres) held by Republic Exploration, and excludes
our 50.0% indirect interest in 10,760 gross undeveloped acres (10,760 net
undeveloped acres) held by Magnolia Offshore Exploration.
Productive Wells
The following table sets forth the number of gross and net productive
natural gas and oil wells in which we owned an interest as of April 1, 2002:
Total Productive
Wells
-----------------
Gross Net
-----------------
Natural gas............................................ 32 21.2
Oil.................................................... 1 0.8
------- --------
Total.............................................. 33 22.0
======= ========
39
Corporate Offices
We lease our corporate offices at 3700 Buffalo Speedway, Suite 960, Houston,
Texas 77098. Our lease covers 2,850 square feet of space for a monthly rental
of $5,819 through October 2003.
Employees
We currently have a total of four employees. We use the services of
independent consultants and contractors to perform various professional
services, including reservoir engineering and legal services. We are dependent
on our alliance partner, JEX, for geological and geophysical services and
prospect generation, evaluation and prospect leasing. In addition, as a working
interest owner in drilling wells and producing properties, we rely on third-
party operators and also utilize the services of independent contractors to
perform field and on-site drilling and production operation services.
Legal Proceedings
We are not a party to any legal proceedings, and we are not aware of any
legal proceeding contemplated against us.
40
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names, ages and positions of our
directors and executive officers:
Name Age Position
---- --- --------
Kenneth R. Peak............. 56 Chairman, President, Chief Executive Officer,
Chief Financial Officer, Secretary and Director
William H. Gibbons.......... 59 Vice President and Treasurer
Lesia Bautina............... 31 Controller
Jay D. Brehmer.............. 36 Director
John B. Juneau.............. 42 Director
Joseph J. Romano............ 49 Director
Darrell W. Williams......... 59 Director
Kenneth R. Peak was appointed president, chief executive and financial
officer, secretary and a director of Contango in July 1999. Before joining
Contango, Mr. Peak was the president of Peak Enernomics, Incorporated, a
natural gas and oil consulting firm that he formed in 1990. Mr. Peak began his
energy career in 1973 as a commercial banker in First National Bank of
Chicago's energy group. He became treasurer of Tosco Corporation in 1980 and
chief financial officer of Texas International Company ("TIC") in 1982. His
tenure with TIC included serving as president of TIPCO, the domestic operating
subsidiary of TIC's natural gas and oil operations. Mr. Peak has also served as
chief financial officer of Forest Oil from 1988 to 1989 and as an investment
banker with Howard Weil from 1989 to 1990. Mr. Peak was an officer in the U.S.
Navy from 1968 to 1971. Mr. Peak received a BS degree in physics from Ohio
University and a MBA from Columbia University. He currently serves as a
director of Patterson-UTI Energy, Inc., a North America provider of onshore
contract drilling services to exploration and production companies and
Cellxion, Inc., a privately owned manufacturing and construction company
serving the cellular telephone industry.
William H. Gibbons joined Contango in February 2000 and was appointed
treasurer in March 2000 and vice president and treasurer in November 2000.
Before joining Contango, he was treasurer of Packaged Ice, Inc. from 1998 to
2000. From 1990 to 1998 and from 1983 to 1986, he provided financial consulting
services to domestic and international oil companies, including a five-year
assignment with Walter International, Inc. Mr. Gibbons began his energy career
with Houston Oil & Minerals Corporation, where he served as treasurer from 1975
to 1981. He also was VP-Finance for Guardian Oil Company from 1981 to 1983 and
Director-Acquisitions for Service Corporation International from 1986 to 1990.
Mr. Gibbons received a BA degree in business administration from Duke
University and a MBA in finance from Tulane University.
Lesia A. Bautina joined Contango in November 2001 as Controller. Prior to
joining Contango, Ms. Bautina worked as an auditor for Arthur Andersen LLP from
1997 to 2001. Her primary experience is accounting and financial reporting for
exploration and production companies. Ms. Bautina received a degree in History
from the University of Lvov in the Ukraine in 1990 and a BBA in Accounting in
1996 from Sam Houston State University, where she graduated with honors. Ms.
Bautina is a Certified Public Accountant and Member of the Petroleum Accounting
Society of Houston. Ms. Bautina was born in the Ukraine, speaks four languages
fluently and became a United States citizen in February 2000.
Jay D. Brehmer has been a director of Contango since October 2000. He has
been Director, Capital & Finance of Aquila Energy Capital Corporation since
1998. Prior to joining Aquila, Mr. Brehmer was President and the founder of
Capital Financial Services from 1995 to 1998. From 1990 to 1995, he was vice
president of the Mutual of Omaha's investment banking subsidiary. Mr. Brehmer
holds a BBA degree in business administration from Drake University.
41
John B. Juneau has been a director of Contango since September 1999. Mr.
Juneau is a private investor and the manager of the general partner of JEX, a
firm that specializes in the generation and evaluation of natural gas and oil
prospects and is Contango's alliance partner. Prior to forming Juneau
Exploration,JEX, Mr. Juneau
served as senior vice president of exploration for Zilkha Energy Company from
1987 to 1998. His previous experience included three years as staff petroleum
engineer with Texas International Company, where his principal responsibilities
included reservoir engineering, as well as acquisitions and evaluations. Prior
to that, he was a production engineer with ENSERCH in Oklahoma City. Mr. Juneau
holds a BS degree in petroleum engineering from Louisiana State University and
is a registered professional engineer in the State of Texas.
Joseph J. Romano has been a director of Contango since September 1999. He
has been employed as chief financial officer by MSZ Investments, Inc. since
1998.1998 and has been the President and CFO of Zilkha Renewable Energy Company
since January 2002. In February 1989, Mr. Romano joined Zilkha Energy Company,
where he served as senior vice president and chief financial officer until
1998. He served as the chief financial officer, treasurer and controller of
Texas International Company from 1986 to 1988 and as its treasurer and
controller from 1982 to 1985. Prior to 1982, Mr. Romano spent five years
working in the Worldwide Energy Group of the First National Bank of Chicago. He
holds a BA degree in economics and political science from the University of
Wisconsin-Eau Claire and a MBA in finance from the University of Northern
Illinois.
Darrell W. Williams has been a director of Contango since September 1999. He
became president of Deutag Marketing and Technical Services in 1993, with
responsibility to develop new business with other companies having
international drilling departments in North America. In September 1996, Mr.
Williams was transferred to Germany and promoted to managing director of Deutag
International, which has responsibility for all drilling operations outside of
Europe. Before joining Deutag, Mr. Williams held senior executive positions
with Nabors Drilling from 1988 to 1993, Pool Company from 1985 to 1988, Baker
Oil Tools from 1980 to 1983 and SEDCO from 1970 to 1980. Mr. Williams graduated
from West Virginia University in 1964 with a degree in petroleum engineering.
Mr. Williams is past chairman of the Houston Chapter of International
Association of Drilling Contractors, a current member of the IADC executive
committee and a member of the Society of Petroleum Engineers.
Board Structure and Compensation
Directors of Contango serve as members of the board of directors until the next annual
stockholders meeting, until successors are elected and qualified or until their
earlier resignation or removal. Officers of Contango are elected by the board of directors
and hold office until their successors are chosen and qualified, until their
death or until they resign or have been removed from office. All corporate
officers serve at the discretion of the board of
directors.board. There are no family
relationships between any of our directors or executive officers.
Directors do not receive cash remuneration for serving on our board.
Instead, we compensate our directors by issuing to them, or to the corporate
investors that they represent, options to purchase 2,500 shares of common stock
each quarter.
Board Committees
Our policy is that all major corporate decisions be made by the full board.
As a result, we only have one committee of the board, the audit committee. The
audit committee recommends the appointment of independent public accountants to
conduct audits of our financial statements, reviews with the accountants the
plan and results of the auditing engagement, approves other professional
services provided by the accountants and evaluates the independence of the
accountants. The current members of our audit committee are Darrell W.
Williams, Joseph J. Romano, and Jay D. Brehmer.
42
Compensation of Executive Officers
We disclose below the compensation awarded to, earned by or paid to our
chief executive officer and our only other executive officer whose salary and
bonus exceeded $100,000 in the fiscal year ended June 30, 2001. Other than the
salary and bonus described in the table below, and the stock options described
in the next table, we did not pay any executive officer named in the table
below, which we refer to as the named executive officers, any fringe benefits,
perquisites or other compensation during the fiscal years ended June 30, 20012000
and 2000.2001. For the fiscal year ended June 30, 2000, Mr. Peak was the only
executive officer whose salary and bonus exceeded $100,000.
Annual Compensation Shares
Name Fiscal ------------------- Underlying
Principal Position Year Salary Bonus Options
------------------ ------ ------------------- ----------
Kenneth R. Peak (1)....................... 2001 $ 150,000 $ 150,000 200,000
Chairman, President, Chief Executive 2000 $ 139,555 $ -- --
and Financial Officer and Secretary
William H. Gibbons (2).................... 2001 $ 108,006 $ 30,000 50,000
Vice President and Treasurer............ 2000 $ 38,750 $ -- 25,000
- --------
(1) Mr. Peak was appointed as our chief executive officer on July 26, 1999 and
appointed chairman of the board on September 28, 1999. Prior to that date,
he was not affiliated with us in any way and did not receive any
compensation.
(2) Mr. Gibbons joined us in February 2000.
Stock Option Plan
In August 1999, the board and shareholders adopted the Contango Oil & Gas
Company 1999 Stock Incentive Plan, or the "Plan"."Plan." Under the Plan, we may grant
both restricted common stock and options to purchase common stock. Stock
options granted under the Plan may be either options intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code or non-qualified stock options. Awards under the Plan may be made
to any director, officer, employee, or independent contractor of ours or of any
subsidiary of ours, with respect to non-qualified stock options, and any other
person or entity that the board deems it appropriate to receive such an award.
The maximum number of shares of common stock, that may be awarded under the
Plan is five million, subject to adjustment to the extent we undertake a
reorganization, stock split, stock dividend reclassification or other change
affecting the common stock. In no event, however, will any director, officer,
employee, or independent contractor of ours or one of our subsidiaries receive
incentive stock option awards under the Plan exceeding a value of $100,000 in
any calendar year.
Option Grants in Fiscal Year 2001
The following table provides detailed information about the grants of stock
options to the named executive officers. All grants were made under our Plan.
Kenneth R. Peak and William H. Gibbons received 94.4% of all options granted to
employees during fiscal year 2001.
Number of
Securities Grant
Underlying Exercise Date
Options Price Expiration Present
Name of Optionee Granted ($/Share) Date Value (1)
---------------- ---------- -------- ---------- --------
Kenneth R. Peak.................... 100,000 $3.20 8/24/05 $ 81,000
100,000 $4.37 11/20/05 $221,200
William H. Gibbons................. 50,000 $4.37 11/20/05 $110,600
- --------
(1) To estimate the present value of the options granted, we applied the Black
Scholes option pricing model utilizing the following weighted-average
assumptions used for grants during the years ended June 30, 2000 and 2001,
respectively: (i) risk-free rate of 5.77 percent and 6.35 percent; (ii)
expected lives of five years for the Option Plan, (iii) expected volatility
of 50 percent for both periods; and (iv) expected dividend yield of zero
percent.
43
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table shows the number of options owned by the named executive
officers. Options in the column marked "unexercisable" are subject to vesting
and will be forfeited if a named executive officer's employment with us is
terminated for certain reasons. None of our named executive officers exercised
options or warrants during the fiscal year ended June 30, 2001.
Value of Unexercised
Number of Unexercised In-the-Money Warrants and Options
Warrants and Options at June 30, 2001(1)
------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ------------------ -----------------
Kenneth R. Peak......... 800,000 100,000 $ 1,307,667 $ 20,333
William H. Gibbons...... 37,500 37,500 37,708 7,542
- --------
(1) Based on $3.81 per share, the closing price per share of our common stock
on the American Stock Exchange on June 29, 2001 and the relevant exercise
price.
Employment Agreements
We have no employment agreement with any executive officer.
44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information regarding beneficial ownership of
our common stock as of May 1, 2002 by:
. Each person whom we know owns beneficially more than 5% of our common
stock;
. Each of our directors;
. The named executive officers; and
. All of our named executive officers and directors as a group.
Unless otherwise indicated, each person listed has sole voting and
dispositive power over the shares indicated as owned by that person, and the
address of each stockholder is the same as our address. Furthermore, under SEC
rules, shares are deemed to be "beneficially owned" by a person if he directly
or indirectly has or shares the power to vote or dispose of these shares,
whether or not he has any pecuniary interest in these shares, or if he has the
right to acquire the power to vote or dispose of these shares within 60 days,
including any right to acquire through the exercise of any option or warrant or
the conversion of any convertible security.
The address of Trust Company of the West is 865 South Figueroa Street, Los
Angeles, California, 90017 and the address of Aquila Energy Capital Corporation
is 909 Fannin Street, Suite 1850, Houston, Texas 77010. The address of each
director and executive officer is our address.
Common Shares
Beneficially Owned
Under Stock
Options and
Warrants, and
Common Issuable Upon Percent of
Shares Conversion of Common
Owned Preferred Stock Total Stock
--------- ------------------ --------- ----------
Aquila Energy Capital
Corporation(1)............. -- 1,143,864 1,143,864 11.35%
Trust Company of the
West(2).................... 1,851,852 1,449,351 3,301,2031,449,353 3,301,205 31.80%
Kenneth R. Peak(3).......... 1,119,055 853,333 1,972,388 20.16%
William H. Gibbons(4)....... 18,501 63,333 81,834 *
Jay Brehmer................. 11,000 -- 11,000 *
John B. Juneau(5)........... 400,001 614,170 1,014,171 10.63%
Joseph J. Romano(6)......... 50,001 69,167 119,168 1.32%
Darrell W. Williams(7)...... 123,251 99,170 222,421 2.46%
--------- --------- --------- -----
Directors, officers and 5%
stockholders, as a group... 3,573,661 4,292,388 7,866,0494,292,390 7,866,051 59.49%
Directors and executive
officers, as a group
(6 persons)(8)............. 1,721,809 1,699,173 3,420,982 32.18%
- --------
* Less than 1%.
(1) Includes stock options to purchase 7,500 shares of common stock which are
vested or will vest within 60 days, and 1,136,364 shares issuable upon the
conversion of Series B preferred stock.
(2) Trust Company of the West holds its securities of Contango in its capacity
as Investment Manager and Custodian for a client. Convertible shares
include stock options to purchase 449,353 shares of common stock which are
vested or will vest within 60 days, and 1,000,000 shares issuable upon the
conversion of Series A preferred stock.
(3) Includes stock options to purchase 153,333 shares of common stock and a
warrant to purchase 700,000 shares of common stock, all of which are vested
or will vest within 60 days.
(4) Includes stock options to purchase 63,333 shares of common stock which are
vested or will vest within 60 days.
(5) Includes stock options to purchase 19,167 shares of common stock and a
warrant to purchase 200,000 shares of common stock, all of which are vested
or will vest within 60 days. Also included in the shares are 200,000 shares
of common stock and stock options to purchase 270,000 shares of common
stock and
45
warrants to purchase 125,000 shares of Common Stockcommon stock that are owned by JEX,
all of which are vested or will vest within 60 days. Mr. Juneau is sole
manager of JEX.
(6) Includes stock options to purchase 19,167 shares of common stock and a
warrant to purchase 50,000 shares of common stock, all of which are vested
or will vest within 60 days.
(7) Includes stock options to purchase 19,170 shares of common stock and a
warrant to purchase 80,000 shares of common stock, all of which are vested
or will vest within 60 days.
(8) Includes stock options to purchase 544,170 shares of common stock and
warrants to purchase 1,155,000 shares of common stock, all of which are
vested or will vest within 60 days.
46
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Directors, Director Designees and Observers
As part of the terms of the Series A preferred stock, if TCW, as the holder
of Series A preferred stock, has not appointed or nominated for election at
least one member of the board and shares of the Series A preferred stock remain
outstanding, then, in its capacity as the holder of Series A preferred stock,
TCW shall be entitled to designate a person to attend any meetings of the board
for the sole purpose of observing any such meetings for and on behalf of TCW.
In addition, as part of the securities purchase agreement dated as of December
29, 1999 between us and TCW, as amended August 24, 2000, TCW has concurrent
rights to designate a person to attend any meetings of the board for the sole
purpose of observing any such meetings for and on behalf of TCW, provided that
TCW has not nominated or appointed at least one member of the board and it
holds at least 5% of our outstanding common stock.
As part of the securities purchase agreement dated as of September 27, 2000
between us and Aquila, we agreed to use our best efforts to cause one of the
directors to be an individual selected by Aquila in its sole discretion.
Additionally, if at any time Aquila has not appointed or nominated for election
at least one of the members of the board and it holds at least 5% of our
outstanding common stock or a sufficient number of shares of Series B preferred
stock which, if converted, would constitute at least 5% of our outstanding
common stock, or a combination of the foregoing, Aquila shall be entitled to
designate a person to attend any meetings of the board for the sole purpose of
observing any such meetings for and on behalf of Aquila.
Aquila has selected Mr. Brehmer as its director designee.
See "Description of Our Other Capital Stock--Preferred Stock."
The JEX Alliance
Under a September 1999 agreement, JEX evaluates natural gas and oil
prospects and proved reserves for us and recommends possible investment
opportunities to us. In exchange, we have committed, within various parameters,
to invest with JEX in the recommended prospects and reserves and to fund a
portion of the capital expenditures required to explore and develop the
opportunities. We also issued 200,000 shares of our common stock to JEX and
granted JEX options to purchase 400,000 shares of our common stock. As of May
1, 2002, 300,000 of the options have vested. The vesting of the other options
depends on the success of certain prospects and reserves in which we have
invested under the agreement. See "Business--Exploration Alliance with JEX."
In addition, as described in "Business" above, JEX is the managing member of the two offshore exploration
limited liability companies in which we hold significant interests, Republic
Exploration and Magnolia Offshore Exploration. See "Business--Offshore
Exploration Joint Ventures."
John B. Juneau, one of our directors, is the sole manager of the general
partner of JEX.
Relationship with the Southern Ute Indian Tribe
In January 2002, we repurchased all of the working interests and net revenue
interests held by the Southern Ute Indian Ute Tribe in the STEP properties for $7.0
million in cash. The terms of the transaction were made at arm's length.
The Southern Ute Indian Tribe is an affiliate of the Southern Ute Indian
Tribe Growth Fund which, prior to March 2002, was the owner of approximately
22% of our outstanding common stock and had a director on our board. In a March
2002, transaction, we repurchased all of the 2,575,000 shares of common stock
held by the SUIT Growth Fund for approximately $6.2 million. As a result of
this transaction, the SUIT Growth Fund ceased being a stockholder and its
director designee resigned from the board.
47
DESCRIPTION OF SERIES C PREFERRED STOCK AND DEPOSITARY SHARES
General
Under our certificate of incorporation, the board is authorized without
further stockholder action to provide for the issuance of up to 125,000 shares
of preferred stock, par value $0.04 per share, in one or more series, with such
voting powers, full or limited, or no voting powers, and with such
designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions, as shall be
set forth in resolutions providing for the issue of preferred stock adopted by
the board. The board has designated 5,000 shares of preferred stock as Series A
Senior Convertible Cumulative Preferred Stock, which we refer to as our Series
A preferred stock, and has designated 10,000 shares of preferred stock as
Series B Senior Convertible Cumulative Preferred Stock, which we refer to as
our Series B preferred stock. As of April 30, 2002, we had outstanding 2,500
shares of Series A preferred stock and 5,000 shares of Series B preferred
stock. For a description of the terms of our Series A preferred stock and
Series B preferred stock, see "Description of Our Other Capital Stock--
Preferred Stock."
Prior to the completion of this offering, the board will have adopted
resolutions creating the % Convertible Cumulative Preferred Stock, Series C,
which we refer to as our Series C preferred stock, and designating 92,000
shares of preferred stock as Series C preferred stock, and we will have filed
with the Secretary of State of the State of Delaware a certificate of
designations with respect to the Series C preferred stock.
The Bank of New York will act as the depositary and the transfer agent for
the depositary shares and the Series C preferred stock.
Each depositary share offered by this prospectus represents one tenth of a
share of Series C preferred stock. The shares of the Series C preferred stock
will be deposited with The Bank of New York, as depositary, under a deposit
agreement among Contango, the depositary and the registered holders and
beneficial owners from time to time of the depositary receipts issued under the
deposit agreement. The depositary receipts will evidence the depositary shares.
As a holder of depositary shares, we will not treat you as one of our
shareholders and you will not have shareholder rights. Delaware law governs
shareholder rights. The depositary will be the holder of the Series C preferred
shares underlying your depositary shares. As a holder of depositary shares, you
will have the rights of holders of depositary receipts, which are set out in
the deposit agreement. The deposit agreement and the depositary receipts are
governed by New York law. See "--Depositary Shares" below.
Immediately prior to the closing of the sale of the depositary shares
offered by this prospectus, we will issue and deposit with the depositary one
share of Series C preferred stock for each ten depositary shares being sold.
The depositary will then execute the depositary receipts and deliver them to
us. We will, in turn, deliver the depositary receipts to the underwriter.
Depositary receipts will be issued evidencing only whole depositary shares.
We have applied to have the depositary shares listed on the American Stock
Exchange under the symbol "MCF.PrC". The Series C preferred stock will not be
listed on any exchange, and we do not expect that there will be any trading
market for the Series C preferred stock except as represented by the depositary
shares.
Series C Preferred Stock
The following is a summary of the material terms of the Series C preferred
stock. The complete terms of the Series C preferred stock will be set forth in
the certificate of designations with respect to the Series C preferred stock,
the form of which is filed as an exhibit to the registration statement of which
this prospectus constitutes a part.
48
Ranking. With respect to the payment of dividends, rights upon redemption and the
distribution of assets upon our liquidation, dissolution or winding-up or
otherwise, the Series C preferred stock will rank:
. junior to the Series A preferred stock, the Series B preferred stock and
any other class or series of our capital stock the terms of which
provide that the class or series will rank senior to the Series C
preferred stock with respect to the payment of dividends, redemption, or
the distribution of assets upon our liquidation, dissolution or winding-upwinding-
up or otherwise;
. on a parity with any class or series of our capital stock the terms of
which provide that the class or series will rank on a parity with the
Series C preferred stock with respect to the payment of dividends,
redemption, or the distribution of assets upon our liquidation,
dissolution or winding-up or otherwise; and
. senior to our common stock and any other class or series of our capital
stock unless the terms of that stock provide that the class or series
will rank senior to or on a parity with the Series C preferred stock
with respect to the payment of dividends, redemption, or the
distribution of assets upon our liquidation, dissolution or winding-up
or otherwise.
So long as any shares of Series C preferred stock remain outstanding, we may
not authorize, increase the authorized amount of or issue any shares of any
class or series of our capital stock ranking senior to the Series C preferred
stock as to payment of dividends, redemption, or distribution of assets upon
our liquidation, dissolution or winding-up, or any securities convertible into
or exchangeable or exercisable for such senior stock, without the affirmative
vote of the holders of at least a majority of the outstanding shares of Series
C preferred stock.
Dividends. Holders of shares of Series C preferred stock, in preference to
the holders of shares of our common stock and of any other capital stock issued
by us ranking junior to the Series C preferred stock as to payment of
dividends, will be entitled to receive, when, as and if declared by the board
out of our assets legally available for payment, cumulative cash dividends
payable quarterly at the rate of % of the liquidation preference per year,
or $ per year per share of Series C preferred stock, equivalent to $
per year per depositary share. Dividends on the shares of Series C preferred
stock will accumulate from the date of issue and will be payable quarterly on
or before March 31, June 30, September 30 and December 31 of each year,
commencing September 30, 2002, to holders of record as they appear on the stock
register for the Series C preferred stock on the record dates, not less than 15
or more than 45 days preceding the payment dates, fixed by the board or an
authorized committee thereof. If the last day of a quarter falls on a non-
business day, we may pay dividends for that quarter on the first business day
following the end of the quarter. Accumulations of dividends on shares of
Series C preferred stock will not bear interest. Dividends payable on the
Series C preferred stock for less than a full quarterly dividend period will be
computed on the basis of the actual number of days elapsed in the period and a
360-day year consisting of twelve 30-day months.
Holders of Series C preferred stock will not be entitled to any dividends,
whether payable in cash, stock or other property, in excess of full cumulative
dividends.
When dividends are not paid in full on the Series C preferred stock and any
other shares of our capital stock ranking on a parity as to payment of
dividends with the Series C preferred stock, all dividends declared on the
Series C preferred stock and any other shares of our capital stock ranking on a
parity as to payment of dividends with the Series C preferred stock shall be
declared pro rata so that the amount of dividends declared per share on the
Series C preferred stock and such other shares shall in all cases bear to each
other the same ratio that the accumulated and unpaid dividends per share on the
Series C preferred stock and such other shares bear to each other. Except as
described in the preceding sentence, unless full dividends on the Series C
preferred stock have been paid, or declared and a sum sufficient for payment
thereof set apart for such payment, for all past dividend periods, no
dividends, other than in common stock or other shares of capital stock issued
by us ranking junior to the Series C preferred stock as to payment of
dividends, redemption, and distribution of assets upon our liquidation,
dissolution or winding-up, shall be declared or paid or set aside for payment,
nor shall any other distribution be made, on the common stock or on any other
shares of capital stock
49
issued by us ranking junior to or on a parity with the Series C preferred stock
as to payment of dividends or the distribution of assets upon our liquidation,
dissolution or winding-up.
49
Unless full dividends on the Series C preferred stock have been paid, or
declared and a sum sufficient for payment thereof set apart for such payment,
for all past dividend periods, we and our subsidiaries may not redeem,
repurchase or otherwise acquire for any consideration, nor may we or they pay
or make available any moneys for a sinking fund for the redemption of, any
shares of common stock or any other shares of capital stock issued by us
ranking junior to or on a parity with the Series C preferred stock as to
payment of dividends or the distribution of assets upon our liquidation,
dissolution or winding-up except by conversion into or exchange for shares of
capital stock issued by us ranking junior to the Series C preferred stock as to
payment of dividends and the distribution of assets upon our liquidation,
dissolution or winding-up.
We may not pay any dividends on our Series C preferred stock unless:
. full cumulative dividends have been or contemporaneously are declared
and paid in cash, or declared and a sum sufficient for payment set apart
for payment, on our Series A preferred stock and Series B preferred
stock for all quarterly dividend periods for those series ending on or
prior to the date of payment of the dividend on the Series C preferred
stock;
. an amount equal to the dividends accrued on the Series A preferred stock
and Series B preferred stock from the last dividend payment date for
those series to the date of payment of the dividend on the Series C
preferred stock has been declared and set apart for payment on the
Series A preferred stock and Series B preferred stock; and
. the dividend payment for the most recent quarterly dividend period on
the Series A preferred stock and Series B preferred stock has been paid
entirely in cash.
See "Description of Our Capital Stock--Preferred Stock." Given the
prohibition described in the first bullet pointed paragraph immediately above,
the payment of in kind dividends to the holders of our Series A preferred stock
or to the holders of our Series B preferred stock would mean that we would be
unable to ever pay subsequent cash dividends to the holders of our Series C
preferred stock. As a result, we will not pay in kind dividends to the holders
of our Series A and Series B preferred stock unless and until the prohibition
referred to above is removed from the terms of our Series A and Series B
preferred stock and the terms of the Series C preferred stock are amended to
permit the payment of dividends in kind to our Series A and Series B preferred
stockholders at an annual or special meeting or our stockholders.
Additionally, our Credit Facility with Guaranty Bank, FSB prohibits us from
paying dividends on our preferred stock, including the Series C preferred
stock, following the occurrence and during the continuance of any event of
default under the Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Description of Our CreditOperations--Credit Facility."
Voluntary Conversion. Each share of the Series C preferred stock may be
converted at any time prior to the close of business on the business day
immediately preceding a redemption date for the Series C preferred stock (see
"--Series C Preferred Stock--Redemption" below), at the option of the holder,
into:
. a number of shares of our common stock equal to (1) the liquidation
preference per share of Series C preferred stock, $250.00, divided by
(2) the conversion price, which initially is $ ; plus
. cash in lieu of fractional shares of common stock as provided below
under "--Series C Preferred Stock--Fractional Shares."
The conversion price is subject to adjustment upon the occurrence of certain
events. See "--Conversion Price Adjustment" below. We refer to the number of
shares of common stock into which each share of Series C preferred stock may be
converted at any given time, based on the conversion price then in effect, as
the conversion ratio. The initial conversion ratio, calculated by dividing
$250.00 by the initial conversion price of $ , is shares of common
stock, equivalent to shares of common stock for each depositary share.
50
In order to exercise the voluntary conversion right, the record holder of
any shares of Series C preferred stock to be converted shall surrender the
certificate representing the shares of Series C preferred stock to us at 50
our
offices or at the office of our transfer agent together with a duly completed
and executed notice that the holder elects to convert all ofor a portion of the
shares of the Series C preferred stock represented by such certificate and
specifying the name or names (with address) in which a certificate or
certificates for shares of common stock are to be issued and (if so required by
us or the transfer agent) accompanied by a written instrument or instruments of
transfer in form reasonably satisfactory to us or the transfer agent duly
executed by the holder or its duly authorized legal representative and transfer
tax stamps or funds therefore, if required. If less than all shares of Series C
preferred stock represented by the surrendered certificate are being converted,
we will also deliver a certificate or certificates representing the shares of
Series C preferred stock represented by the surrendered certificate that are
not being converted. The conversion of the shares of Series C preferred stock
will be deemed to have occurred at the close of business on the date we receive
the notice of conversion, and the holder will be deemed for all purposes to
have become the holder of the shares of common stock as of that time and date.
The holders of shares of Series C preferred stock at the close of business
on a record date for the payment of dividends will be entitled to receive the
dividend payment on those shares on the corresponding dividend payment date
notwithstanding the conversion of the shares of Series C preferred stock
following that record date or our default in payment of the declared dividend
due on that dividend payment date. However, shares of Series C preferred stock
surrendered for voluntary conversion during the period between the close of
business on any record date and the close of business on the business day
immediately preceding the applicable dividend payment date must be accompanied
by payment of an amount equal to the dividend payable on those shares of Series
C preferred stock on that dividend payment date. A holder of shares of Series C
preferred stock on a record date for the payment of dividends who, or whose
transferee, tenders any shares for conversion on the corresponding dividend
payment date will receive the dividend payable by us on the Series C preferred
stock on that date, and the converting holder need not include payment in the
amount of the dividend upon surrender of shares of Series C preferred stock for
conversion. Except as provided above, with respect to a voluntary conversion we
will make no payment or adjustment upon conversion of Series C preferred stock
for accumulated and unpaid dividends, whether or not in arrears, on converted
shares or for dividends on the shares of common stock issued upon conversion.
Mandatory Conversion. On or after June 30, 2004, we may, at our option,
cause all, but not a portion, of the outstanding shares of Series C preferred
stock to be converted into common stock at the conversion ratio then in effect.
We may exercise this conversion right only if, for at least 20 trading days
within any 30 consecutive trading-day period (including the last trading day of
the period) ending on the first trading day immediately preceding our issuance
of a press release as provided below announcing the mandatory conversion of the
Series C preferred stock, the last reported sale price of our common stock on
the American Stock Exchange, another national securities exchange or the Nasdaq
National Market equals or exceeds 130% of the conversion price of the Series C
preferred stock in effect on the applicable trading day.
To exercise the mandatory conversion right described above, we must issue a
press release for publication on Business Wire or an equivalent newswire
service prior to the opening of business on the first trading day following any
date on which the conditions described in the preceding paragraph are met,
announcing such a mandatory conversion. We will also give notice of the
mandatory conversion by mail to the holders of the Series C preferred stock not
more than four business days after the date of the press release. The
conversion date will be a date selected by us and will be no more than five
business days after the date on which we issue the press release described
above.
In addition to any information required by applicable law, regulation or
stock exchange rule, the press release and notice of a mandatory conversion
will state, as appropriate:
. the conversion date;
. the number of shares of common stock to be issued upon conversion of
each share of Series C preferred stock; and
51
. that dividends on the Series C preferred stock will cease to accrue on
the conversion date.
On and after the conversion date, dividends will cease to accrue on the
Series C preferred stock and all rights of holders of Series C preferred stock
will terminate except for the right to receive the shares of common stock
issuable upon conversion thereof and cash in lieu of fractional shares. The
holders of shares of Series C preferred stock at the close of business on a
record date for the payment of dividends will be entitled to receive the
dividend payment on those shares on the corresponding dividend payment date
notwithstanding the mandatory conversion of the shares of Series C preferred
stock after the record date and on or prior to the dividend payment date.
Except as provided in the immediately preceding sentence, with respect to a
mandatory conversion we will make no payment or adjustment upon conversion of
Series C preferred stock for accumulated and unpaid dividends on converted
shares or for dividends on the shares of common stock issued upon conversion.
We may not authorize, issue a press release regarding or give notice of any
mandatory conversion unless, prior to giving the conversion notice, all
accumulated and unpaid dividends on the Series C preferred stock for periods
ended prior to the date of the conversion notice have been paid in full.
In addition to the mandatory conversion provision described above, if there
are less than 9,200 shares of Series C preferred stock outstanding, we may, at
any time on or after June 30, 2006, at our option, cause all, but not a
portion, of the outstanding shares of Series C preferred stock to be
automatically converted into that number of shares of common stock per share of
Series C preferred stock equal to $250.00 (the liquidation preference per share
of Series C preferred stock) divided by the lesser of:
. the conversion price then in effect and
. the market value (as defined below under "--Series C Preferred Stock--
Conversion Price Adjustment") for the five trading day period ending on
the second trading day immediately prior to the conversion date.
The provisions of the immediately preceding four paragraphs shall apply to any
such mandatory conversion, except that (1) the conversion date will not be less
than 15 days nor more than 30 days after the date on which we issue a press
release announcing the mandatory conversion and (2) the press release and
notice of mandatory conversion will not state the number of shares of common
stock to be issued upon conversion of each share of Series C preferred stock,
but instead will state the basis for determining the number of shares of common
stock to be issued as set forth in this paragraph.
Fractional Shares. No fractional shares of common stock or securities
representing fractional shares of common stock will be issued upon conversion
of Series C preferred stock, whether voluntary or mandatory. We will pay cash
in lieu of any fractional share of common stock resulting from conversion based
on the last reported sale price of the common stock on the American Stock
Exchange, or such other national securities exchange or automated quotation
system on which the common stock is then listed or authorized for quotation,
or, if not so listed or authorized for quotation, an amount determined in good
faith by our board of directors to be the fair value of the common stock, at
the close of business on the trading day next preceding the date of conversion.
Conversion Price Adjustment. The conversion price is subject to adjustment,
in accordance with formulas that will be included in the certificate of
designations, in certain events, including upon:
. any payment of a dividend (or other distribution) on our common stock
payable in shares of common stock;
. any issuance to all holders of shares of common stock of rights, options
or warrants entitling them to subscribe for or purchase shares of common
stock or securities convertible into or exchangeable for shares of
common stock at less than the market value (as defined below) for the
period ending on the
52
date of issuance; provided, however, that no adjustment shall be made with
respect to such a distribution if the holder of shares of Series C
preferred stock would be entitled to receive such rights, options or
warrants upon conversion at any time of shares of Series C preferred stock
into common stock; and provided further, however, that if such rights,
options or warrants are only exercisable upon the occurrence of certain
triggering events, then the conversion price will not be adjusted until the
triggering events occur;
. any subdivision, split, combination or reclassification of the common
stock;
. any distribution consisting exclusively of cash (excluding any cash
distributed upon a merger or consolidation to which the penultimate
paragraph of this section entitled "Conversion Price Adjustment"
applies) to all holders of shares of common stock in an aggregate amount
that, combined together with (1) all other such all-cash distributions
made within the then-preceding 12 months in respect of which no
adjustment has been made and (2) any cash and the fair market value of
other consideration paid or payable in respect of any tender offer by us
or any of our subsidiaries for shares of common stock concluded within
the then-preceding 12 months in respect of which no adjustment has been
made, exceeds 10% of our market capitalization (defined as the product
of the market value for the period ending on the record date of such
distribution and the number of shares of common stock then outstanding)
on the record date of such distribution;
. the completion of a tender or exchange offer made by us or any of our
subsidiaries for shares of common stock that involves an aggregate
consideration that, together with (1) any cash and other consideration
payable in a tender or exchange offer by us or any of our subsidiaries
for shares of common stock expiring within the then-preceding 12 months
in respect of which no adjustment has been made and (2) the aggregate
amount of any such all-cash distributions referred to in the immediately
preceding bullet-pointed clause to all holders of shares of common stock
within the then-preceding 12 months in respect of which no adjustments
have been made, exceeds 10% of our market capitalization on the
expiration of such tender offer; or
. a distribution to all holders of common stock consisting of evidences of
indebtedness, shares of capital stock other than common stock or assets
(including securities, but excluding those dividends, rights, options,
warrants and distributions referred to above).
No adjustment of the conversion price will be required to be made until the
cumulative adjustments not made amount to 1% or more of the conversion price as
last adjusted.
The term "market value" means the mean average closing price of the common
stock for a five consecutive trading day period on the American Stock Exchange,
or such other national securities exchange or automated quotation system on
which the common stock is then listed or authorized for quotation, or, if not
so listed or authorized for quotation, an amount determined in good faith by
our board to be the fair value of the common stock.
In the event that we distribute rights or warrants, other than those
referred to in the second bullet point in this section entitled "Conversion
Price Adjustment", pro rata to holders of shares of common stock, so long as
any such rights or warrants have not expired or been redeemed by us, the holder
of any Series C preferred stock surrendered for conversion will be entitled to
receive upon conversion, in addition to the shares of common stock then
issuable upon conversion, a number of rights or warrants to be determined as
follows:
. if the conversion occurs on or prior to the date for the distribution to
the holders of the rights or warrants of separate certificates
evidencing the rights or warrants, the same number of rights or warrants
to which a holder of a number of shares of common stock equal to the
number of shares issuable on conversion is entitled at the time of the
conversion in accordance with the terms and provisions applicable to the
rights or warrants; and
53
. if the conversion occurs after the date for the distribution to the
holders of rights or warrants of separate certificates evidencing the
rights or warrants, the same number of rights or warrants to which a
holder of the number of shares of common stock into which such Series C
preferred stock was convertible immediately prior to such date would
have been entitled on the date had the Series C preferred stock been
converted immediately prior to that date in accordance with the terms
and provisions applicable to the rights or warrants.
The conversion price will not be subject to adjustment on account of any
declaration, distribution or exercise of such rights or warrants.
Subject to the provisions below under "--Series C Preferred Stock--Change of
Control" and "--Series C Preferred Stock--Consolidation, Merger and Sale of
Assets," following our reclassification, consolidation or merger with or into
another person or any merger of another person with or into us, with certain
exceptions, or any sale or other disposition of all or substantially all of our
assets, computed on a consolidated basis, pursuant to which the common stock is
converted into the right to receive other securities, cash or other property,
each share of Series C preferred stock then outstanding will thereafter be
convertible only into the kind and amount of securities, cash and other
property receivable upon such reclassification, consolidation, merger, sale or
other disposition by a holder of the number of shares of common stock into
which a share of Series C preferred stock was convertible immediately prior
thereto, after giving effect to any adjustment event, including an adjustment
upon a change of control, if applicable.
Any adjustment to the conversion price will result in a change in the
conversion ratio.
Change of Control. Except as provided below, upon a change of control, as
defined below, holders of Series C preferred stock shall, in the event that the
liquidation preference, $250.00, divided by the market value, as defined above
under "--Series C Preferred Stock--Conversion Price Adjustment", at that time
is greater than the conversion ratio in effect at that time, have a one-time
option to convert each of their outstanding shares of Series C preferred stock
into a number of shares of common stock equal to the liquidation preference,
$250.00, divided by an adjusted conversion price equal to the greater of:
. the market value (as defined above under "--Series C Preferred Stock--
Conversion Price Adjustment") as of the change of control date; and
. $ (as adjusted for stock splits, combinations, subdivisions,
recapitalizations and the like), which is 66 2/3% of the recent common
stock price set forth on the cover of this prospectus.
This option shall be exercisable during a period of not less than 30 days
nor more than 60 days commencing on the third business day after notice of the
change of control is given by us in the manner that will be specified in the
certificate of designations.
In lieu of issuing the shares of common stock issuable upon conversion of
shares of Series C preferred stock in the event of a change of control, we may,
at our option, make a cash payment equal to the market value determined for the
period ending on the change of control date for each share of common stock that
would otherwise be issuable. However, any such cash payment will be treated as
a redemption of the Series C preferred stock for purposes of the restrictions
referred to in the last paragraph under the heading "--Series C Preferred
Stock--Redemption" below.
Notwithstanding the foregoing, upon a change of control in which (1) each
holder of our common stock receives consideration consisting solely of common
stock of the successor, acquirer or other third party (and cash paid in lieu of
fractional shares) that is listed on a national securities exchange or quoted
on the NASDAQ National Market and (2) all of our common stock has been
exchanged for, converted into or acquired for common stock of the successor,
acquirer or other third party (and cash in lieu of fractional shares), and the
54
Series C preferred stock becomes convertible solely into such common stock, the
conversion price will not be adjusted as described in the first paragraph of
this subsection entitled "--Change of Control."
"Change of control" will be defined in the certificate of designations as
any of the following events:
. the sale, lease or transfer, in one or a series of related transactions,
of all or substantially all of our assets (determined on a consolidated
basis) to any person or group (as that term is used in Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended);
. the adoption of a plan the consummation of which would result in our
liquidation or dissolution; or
. the acquisition, directly or indirectly, by any person or group (as that
term is used in Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended, provided that the directors of the corporation and their
affiliates shall not be deemed to be a group solely by reason of the
fact that they are all directors or affiliates of directors), of
beneficial ownership (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) of more than 50% of the aggregate
voting power of our capital stock entitled to vote generally in the
election of members of our board.
The phrase "all or substantially all" of our assets is likely to be
interpreted by reference to applicable state law at the relevant time, and will
be dependent on the facts and circumstances existing at that time. As a result,
there may be a degree of uncertainty in ascertaining whether a sale or transfer
is of "all or substantially all" of our assets.
Consolidation, Merger And Sale Of Assets. The certificate of designations
will provide that we may, without the consent of any holder of the outstanding
Series C preferred stock, consolidate with or merge into any other person or
convey, transfer or lease all or substantially all of our assets to any person
or permit any person to consolidate with or merge into, or transfer or lease
all or substantially all its properties to, us provided that:
. the successor, transferee, or lessee is organized under the laws of the
United States or any political subdivision thereof;
. the shares of Series C preferred stock will become shares of the
successor, transferee or lessee, having in respect of the successor,
transferee or lessee the same powers, preferences and relative
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereon, as the Series C preferred stock had
immediately prior to the transaction; and
. we deliver to the transfer agent for the Series C preferred stock an
officers' certificate and an opinion of counsel stating that the
transaction complies with the certificate of designations.
Upon our consolidation with, or merger into, any other person or any
conveyance, transfer or lease of all or substantially all our assets as
described in the preceding paragraph, the successor resulting from the
consolidation or into which we are merged or the transferee or lessee to which
the conveyance, transfer or lease is made, will succeed to, and be substituted
for, and may exercise every right and power of ours under the shares of Series
C preferred stock, and thereafter, except in the case of a lease, the
predecessor (if still in existence) will be released from its obligations and
covenants with respect to the Series C preferred stock.
Liquidation Preferences. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of Contango, the holders of the Series C
preferred stock will be entitled to receive out of our assets available for
distribution to stockholders, before any distribution of assets is made to
holders of common stock or of any other shares of capital stock issued by us
ranking as to such a distribution junior to the Series C preferred stock,
liquidating distributions in the amount of $250.00 per share of Series C
preferred stock, equivalent to $25.00 per depositary share, plus all accrued
and unpaid dividends (whether or not earned or declared) for the then current,
and all prior, dividend periods. If upon any voluntary or involuntary
liquidation,
55
dissolution or winding-up of Contango, the amounts payable with respect to the
Series C preferred stock and any other shares of stock issued by us ranking as
to any such distribution on a parity with the Series C preferred stock are not
paid in full, the holders of the Series C preferred stock and of such other
shares will share ratably in any such distribution of our assets in proportion
to the full respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of the Series C preferred stock will not be entitled to
any further participation in any distribution of assets by us.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
Contango, holders of shares of Series C preferred stock will not be entitled to
receive any liquidating distributions until all amounts payable upon any such
event to holders of shares of our Series A preferred stock, Series B preferred
stock and any other class or series of our capital stock ranking senior to the
Series C preferred stock with respect to any such distribution have been paid
in full.
For purposes of liquidation rights, a consolidation or merger of us with or
into any other corporation or corporations or a sale of all or substantially
all of our assets is not a liquidation, dissolution or winding-up of Contango.
Redemption. We may not redeem the shares of Series C preferred stock prior
to June 30, 2006. At any time on or after June 30, 2006 and prior to June 30,
2009, we may, at our option, redeem all, but not a portion, of the shares of
Series C preferred stock at a cash redemption price equal to 105% of the
liquidation value, or $262.50 per share of Series C preferred stock, equivalent
to $26.25 per depositary share, plus all unpaid accumulated and accrued
dividends to the date of redemption.
At any time on or after June 30, 2009, we may, at our option, redeem all,
but not a portion, of the outstanding shares of Series C preferred stock at a
cash redemption price equal to the liquidation value, or $250.00 per share of
Series C preferred stock, equivalent to $25.00 per depository share, plus all
unpaid accumulated and accrued dividends to the date of redemption.
If we elect to redeem the Series C preferred stock in accordance with either
of the two preceding paragraphs, we will notify holders of Series C preferred
stock of our intention to redeem the Series C preferred stock by:
. issuing a press release on Business Wire or an equivalent newswire
service indicating our intention to redeem the Series C preferred stock;
and
. mailing a notice of our intention to redeem the Series C preferred stock
to all holders of Series C preferred stock.
In addition to any information required by applicable law, regulation or
stock exchange rule, the press release and notice of redemption will state:
. the redemption date, which will be a date not less than 30 nor more than
60 days after the date of the press release;
. the redemption price to be paid in respect of each share of Series C
preferred stock;
. that dividends on the Series C preferred stock will cease to be payable
on the redemption date, unless we default in making payment of any cash
payable upon redemption;
. that the option of holders of Series C preferred stock to convert shares
of Series C preferred stock into common stock will terminate at the
close of business on the business day immediately preceding the
redemption date, unless we default in making payment of any cash payable
upon redemption;
. the conversion price then in effect; and
56
. that shares of Series C preferred stock must be surrendered to us or to
the transfer agent in order to receive the redemption payment and the
procedures for surrendering shares of Series C preferred stock.
The right of holders of shares of Series C preferred stock to convert shares
of Series C preferred stock will terminate at the close of business on the
business day immediately preceding the redemption date, unless we default in
making payment of any cash payable upon redemption.
So long as any shares of Series A preferred stock of Series B preferred
stock remain outstanding, we will be prohibited from redeeming shares of Series
C preferred stock (1) without the consent of at least a majority of the holders
of the Series A preferred stock and Series B preferred stock, each voting as a
separate class and (2) unless full cumulative dividends have been or
contemporaneously are declared and paid (or declared and a sum sufficient for
payment thereof set apart for such payment) on the Series A preferred stock and
the Series B preferred stock for all quarterly dividend periods for those
series ending on or prior to the date of the redemption of the Series C
preferred stock.
Voting Rights. Except as indicated below, or except as expressly required by
applicable law, holders of the Series C preferred stock will not be entitled to
vote.
If the equivalent of six quarterly dividends payable on the Series C
preferred stock have not been paid (whether or not declared or consecutive),
holders of the Series C preferred stock (voting as a class with all other
series of preferred stock ranking on a parity with the Series C preferred stock
with respect to the payment of dividends and having similar rights to elect a
director that are then exercisable) will be entitled, at the next annual or
special meeting of our stockholders, to elect one additional director. Upon the
election of such a director, the number of directors constituting the board
will be increased by one. The voting rights and the term of any director so
elected will continue until all accumulated and unpaid dividends have been paid
or declared and set apart for payment.
The affirmative vote or consent of the holders of at least a majority of the
outstanding shares of the Series C preferred stock, voting as a single class,
will be required to authorize or issue any shares of any class or series of
shares senior to the Series C preferred stock with respect to the payment of
dividends or amounts upon our liquidation, dissolution or winding-up. The
affirmative vote or consent of the holders of at least a majority of the
outstanding shares of the Series C preferred stock will be required to amend or
repeal any provision of or add any provision to, our certificate of
incorporation, including the certificate of designations, if that action would
adversely alter or change the rights, preferences or privileges of the Series C
preferred stock.
No consent or approval of the holders of shares of the Series C preferred
stock will be required for the issuance from our authorized, but unissued,
preferred stock of other shares of any series of preferred stock ranking on a
parity with or junior to the Series C preferred stock as to payment of
dividends and the distribution of assets upon our liquidation, dissolution or
winding-up, including other shares of Series C preferred stock.
Depositary Shares
The following is a summary of the terms of the depositary shares. The
complete terms of the depositary shares will be set forth in the deposit
agreement (including the form of depositary receipt contained therein), the
form of which is filed as an exhibit to the registration statement of which
this prospectus constitutes a part.
Dividends. The depositary will distribute all cash dividends or other cash
distributions received in respect of the Series C preferred stock to the record
holders of depositary receipts in proportion to the number of depositary shares
owned by such holders on the relevant record date, which will, to the extent
practicable, be the same date as the record date fixed by us for the Series C
preferred stock.
57
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary receipts
entitled thereto, in proportion, as nearly as may be practicable, to the number
of depositary shares owned by such holders on the relevant record date, unless
the depositary determines that it is not lawful and feasible to make such
distribution, in which case the depositary may adopt any other method for such
distribution as it deems equitable and practicable, including the sale of such
property (at such place or places and upon such terms as it may deem equitable
and practicable) and distribution of the net proceeds from the sale to the
holders of depositary receipts.
The deposit agreement will contain provisions relating to how any
subscription or similar rights offered by us to holders of the Series C
preferred stock will be made available to, or sold for the benefit of, the
holders of depositary shares.
Liquidation Preference. In the event of the liquidation, dissolution or
winding-up of our affairs, whether voluntary or involuntary, the holder of each
depositary share will be entitled to one tenth of the liquidation preference
accorded each share of the Series C preferred stock. Accordingly, if the full
liquidation preference of $250.00 per share (plus unpaid accumulated and
accrued dividends) is paid on the Series C preferred stock, holders of
depositary shares will be entitled to receive $25.00 per depositary share (plus
their share of unpaid accumulated and accrued dividends) upon our liquidation,
dissolution or winding-up.
Conversion. The depositary shares, as such, are not convertible into common
stock or any other securities or property. Nevertheless, at any time at which
shares of Series C preferred stock are convertible at the option of the holder
into common stock, the record holder of any depositary receipt may surrender
the depositary receipt to the depositary with written instructions to convert
the shares of Series C preferred stock represented by the holder's depositary
shares. Upon receipt of the depositary receipt with instructions to convert the
Series C preferred stock, the depositary will exercise the conversion rights
with respect to the Series C preferred stock represented by the depositary
receipt, or any portion thereof indicated on the instruction to convert and
will instruct us or our agent to deliver the common stock and any cash
deliverable in lieu of fractional shares of common stock in accordance with the
instructions received by the depositary from the surrendering holder.
If we exercise our right to convert all the Series C preferred stock, the
depositary will surrender all the shares of Series C preferred stock held by it
under the deposit agreement for that conversion and, as soon as practicable
after receipt of the shares of common stock issuable upon conversion of Series
C preferred stock and any cash in lieu of fractional shares of common stock,
the depositary will deliver the common stock and cash to the holders of the
depositary receipts upon surrender of their depositary receipts.
Because the depositary will be able to convert only whole shares of Series C
preferred stock into common stock and each depositary share represents one-
tenth of a share of Series C preferred stock, holders of the depositary shares
may only cause the exercise of conversion rights as provided in the first
paragraph of this section entitled "Conversion" with respect to ten depositary
shares or integral multiples of ten depositary shares. If the conversion rights
are to be exercised with respect to less than all of the depositary shares
represented by a depositary receipt, the depositary will execute and deliver a
new depositary receipt evidencing the number of depositary shares formerly
represented by the surrendered depositary receipt with respect to which
conversion rights are not being exercised.
Redemption. Whenever we redeem any Series C preferred stock held by the
depositary, the depositary will redeem, as of the same redemption date, the
number of depositary shares representing the Series C preferred stock so
redeemed. The depositary will mail a notice of redemption of the depositary
shares containing the same type of information and in the same manner as our
notice of redemption as promptly as practicable after receipt of the notice
from us and not less than 20 nor more than 60 days prior to the date fixed for
redemption of the Series C preferred stock and the depositary shares to the
record holders of the depositary receipts.
Voting. Promptly upon receipt of notice of any meeting at which the holders
of the Series C preferred stock are entitled to vote, the depositary will, if
we ask it to, mail the information contained in the notice of
58
meeting to the record holders of the depositary receipts as of the record date
for the meeting. Each such record holder of depositary receipts will be
entitled to instruct the depositary as to the exercise of the voting rights
pertaining to the number of shares of Series C preferred stock represented by
the record holder's depositary shares. The depositary will endeavor, insofar as
practicable, to vote the Series C preferred stock represented by the record
holder's depositary shares in accordance with the record holder's instructions.
The depositary will abstain from voting any of the Series C preferred stock to
the extent that it does not receive specific instructions from the holders of
depositary receipts.
Withdrawal of Preferred Stock. Upon surrender of depositary receipts at the
corporate trust office of the depositary, upon payment of any unpaid amount due
the depositary, and subject to the terms of the deposit agreement, the owner of
the depositary shares evidenced thereby is entitled to delivery of the number
of whole shares of Series C preferred stock and all money and other property,
if any, represented by such depositary shares. Partial shares of Series C
preferred stock will not be issued. Accordingly, because each depositary share
represents one-tenth of a share of Series C preferred stock, holders of
depositary shares may exercise withdrawal rights only with respect to ten
depositary shares or integral multiples of ten depositary shares. If the
depositary receipts delivered by the holder evidence a number of depositary
shares in excess of the number of depositary shares representing the number of
whole shares of Series C preferred stock to be withdrawn, the depositary will
deliver to the holder at the same time a new depositary receipt evidencing such
excess number of depositary shares. Holders of shares of Series C preferred
stock thus withdrawn will not thereafter be entitled to deposit the shares
under the deposit agreement or to receive depositary receipts evidencing
depositary shares therefor.
Amendment and Termination of Deposit Agreement. The form of depositary
receipt evidencing the depositary shares and any provision of the deposit
agreement may at any time and from time to time be amended by agreement between
us and the depositary. However, any amendment that adversely alters any
substantial right of the holders of depositary shares will not be effective
until 30 days after the depositary notifies holders of the amendment. No such
amendment may impair the right, subject to the terms of the deposit agreement,
of any owner of any depositary shares to surrender the depositary receipt
evidencing the depositary shares with instructions to the depositary to deliver
to the holder the Series C preferred stock and all money and other property, if
any, represented thereby, except in order to comply with mandatory provisions
of applicable law. The deposit agreement may be terminated by the depositary at
our direction if but only if:
. all outstandingno depositary shares have been redeemed,
. all shares of Series C preferred stock represented by depositary shares
have been converted into common stock and all shares of common stock and
cash in lieu of shares of common stock issued on conversion have been
distributed to holders of depositary sharesare outstanding, or
. there has been a final distribution in respect of the Series C preferred
stock in connection with any liquidation, dissolution or winding-up of
Contango and the distribution has been made to all the holders of depositary
shares.shares entitled to them.
Charges of Depositary. We will pay all transfer and other taxes and
governmental charges arising solely from the existence of the depositary
arrangements. We will pay charges of the depositary in connection with the
initial deposit of the Series C preferred stock and the initial issuance of the
depositary shares, redemption of the Series C preferred stock, conversion of
the Series C preferred stock and all withdrawals of Series C preferred stock by
owners of depositary shares. Holders of depositary receipts will pay transfer,
income and other taxes and governmental charges and certain other charges as
are provided in the deposit agreement to be for their accounts. In certain
circumstances, the depositary may refuse to transfer depositary shares, may
withhold dividends and distributions and may sell the depositary shares
evidenced by depositary receipts if these charges are not paid.
59
Miscellaneous. The depositary will forward to the holders of depositary
receipts all reports and communications from us that are delivered to the
depositary and which we are required to furnish to the holders of the Series C
preferred stock. In addition, the depositary will make available for inspection
by holders of depositary receipts at the principal office of the depositary,
and at such other places as it may from time to time deem advisable, any
reports and communications received from us which are received by the
depositary as the holder of Series C preferred stock.
59
Neither the depositary nor any depositary's agent (as defined in the deposit
agreement), nor the registrar (as defined in the deposit agreement) nor
Contango assumes any obligation or will be subject to any liability under the
deposit agreement to holders of depositary receipts other than forexcept that it agrees to
perform its grossduties specifically set forth in the deposit agreement without
negligence willful misconduct or bad faith. Neither the depositary, any depositary's agent, the
registrar nor Contango will be liable if it is prevented or delayed by law or
any circumstance beyond its control in performing its obligations under the
deposit agreement. Contango and the depositary are not obligated to prosecute
or defendappear in any legal proceeding in respect of any depositary shares,
depositary receipts or Series C preferred stock unless reasonably satisfactory indemnity is furnished.on behalf of any owner or
beneficial owner of depositary receipts or other person. We and the depositary
may rely on written advice of counsel or accountants, on information provided
by holders of depositary receipts or other persons believed in good faith to be
competent to give such information and on documents believed to be genuine and
to have been signed or presented by the proper party or parties.
Resignation and Removal of Depositary. The depositary may resign at any time
by delivering to us notice of its election to do so, and we may at any time
remove the depositary upon 120 days' prior notice, any such resignation or
removal to take effect upon the appointment of a successor depositary and its
acceptance of the appointment (but, in the case of removal, not before the 120-
day period runs).
60
DESCRIPTION OF OUR OTHER CAPITAL STOCK
Common Stock
Our certificate of incorporation authorizes us to issue 50,000,000 shares of
common stock. As of April 30, 2002, 8,930,382 shares of common stock were
issued and outstanding, all of which are fully paid and non-assessable.
Holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders and are not entitled to
cumulative voting for the election of directors. Upon the liquidation,
dissolution or winding up of our business, after payment of all liabilities and
payment of preferential amounts to the holders of preferred stock, the shares
of common stock are entitled to share equally in our remaining assets. Pursuant
to our certificate of incorporation, no stockholder has any preemptive rights
to subscribe for our securities. The common stock is not subject to redemption.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings in excess of preferred stock
dividends, if any, for operations and to develop and expand our business. We do
not anticipate paying any dividends on our common stock in the foreseeable
future. Any future determination with respect to the payment of dividends on
the common stock will be at the discretion of the board and will depend on,
among other things, operating results, financial condition and capital
requirements, the terms of then-existing indebtedness, general business
conditions and other factors the board deems relevant.
Preferred Stock
Our certificate of incorporation authorizes us to issue 125,000 shares of
preferred stock, par value $.04 per share, in one or more series with such
voting powers, full or limited, or no voting powers and such designations,
preferences and relative participation, optional or other special rights, and
the qualifications, limitations or restrictions thereof as shall be stated in
the resolutions of the board providing for their issuance. As of April 30,
2002, the shares of preferred stock designated as to series and issued and
outstanding were as follows:
Shares Shares
Authorized Issued and
Series for Issuance Outstanding
------ ------------ -----------
Series A senior convertible cumulative
preferred stock.............................. 5,000 2,500
Series B senior convertible cumulative
preferred stock.............................. 10,000 5,000
The entire issue of Series A preferred stock, par value $0.04 per share, is
owned by Trust Company of the West, as investment manager for a client, and the
entire issue of Series B preferred stock, par value $0.04 per share, is owned
by Aquila Energy Capital Corporation. The Series A preferred stock and Series B
preferred stock rank prior to the Series C preferred stock and the common stock
and on a parity with each other with respect to payment of dividends,
redemption and distributions upon liquidation, dissolution or winding-up.
Holders of Series A preferred stock are entitled to receive quarterly
dividends at a dividend rate equal to 8% per annum if paid in cash on a current
quarterly basis or otherwise at a rate of 10% per annum if not paid on a
current quarterly basis or if paid in shares of Series A preferred stock, in
each case, computed on the basis of $1,000 per share. Holders of Series A
preferred stock may, at their discretion, elect to convert their shares into
shares of common stock at a conversion price of $2.50 per share. In addition,
upon the occurrence of certain events, we may elect to convert all of the
outstanding shares of Series A preferred stock at a conversion price of $2.50
per share. As part of the terms of the Series A preferred stock, if Trust
Company of the West, as the sole holder of Series A preferred stock, has not
appointed or nominated for election at least one member of the board and shares
of the Series A preferred stock remain outstanding, then, in its capacity as
the holder of Series A preferred stock, Trust Company of the West shall be
entitled to designate a person to attend any 61
meetings of the board for the sole
purpose of observing such meeting for and on behalf of Trust Company of the
West.
61
Holders of Series B preferred stock are entitled to receive quarterly
dividends at a dividend rate equal to 8% per annum if paid in cash on a current
quarterly basis or otherwise at a rate of 10% per annum if not paid on a
current quarterly basis or if paid in shares of Series B preferred stock, in
each case, computed on the basis of $1,000 per share. Holders of Series B
preferred stock may, at their discretion, elect to convert such shares to
shares of the common stock at a conversion price of $4.40 per share. In
addition, upon the occurrence of certain events, we may elect to convert all of
the outstanding shares of Series B preferred stock at a conversion price of
$4.40 per share.
If at any time Aquila, as the sole holder of the Series B preferred stock,
has not appointed or nominated for election at least one of the members of the
board and it holds at least 5% of our outstanding common stock or a sufficient
number of shares of Series B preferred stock which, if converted, would
constitute at least 5% of our outstanding common stock (or a combination of the
foregoing), Aquila shall be entitled to designate a person to attend any
meetings of the board for the sole purpose of observing such meeting for and on
behalf of Aquila. Aquila selected Jay D. Brehmer as its director designee. The
board appointed Mr. Brehmer as a director on October 2, 2000. See "Directors,
Director Designees and Observers" under "Certain Relationships and Related
Transactions."
The shares of Series A and Series B preferred stock are subject to
provisions which provide anti-dilution protection. The Series A preferred stock may, at the holder's election, be converted
into common stock at an initial conversion price of $2.50 per share, with the
number of shares of common stock into which the Series A preferred stock being
convertible at an amount equal to the liquidation preference. For purposes of
the Series A preferred stock, liquidation preference means the sum of (i)
$1,000 per share of Series A preferred stock and (ii) the accrued and unpaid
dividends on the applicable conversion date (as defined in the Series A
certificate of designation) for Series A preferred stock calculated in
accordance with the provisions of the Series A certificate of designation. The
Series B preferred stock may, at the holder's election, be converted into
common stock at an initial conversion price of $4.40 per share, with the number
of shares of common stock into which the Series B preferred stock being
convertible at an amount equal to the liquidation preference. For purposes of
the Series B preferred stock, liquidation preference means the sum of (i)
$1,000 per share of Series B preferred stock and (ii) the accrued and unpaid
dividends on the applicable conversion date (as defined in the Series B
certificate of designation) for Series B preferred stock calculated in
accordance with the provisions of the Series B certificate of designation.
The conversion prices for the Series A preferred stock and the Series B
preferred stock are subject to anti-dilution adjustment in certain
circumstances, including upon our issuance of securities convertible into our
common stock where the conversion price at the date of issuance is lower than
the greater of (i) the current market price of our common stock and (ii) the
conversion prices then in effect for the Series A or the Series B preferred
stock, respectively. It is possible that the conversion price for the Series C
preferred stock will be below the current conversion price for the Series B
preferred stock. If that occurs, the number of the shares of our common stock
issuable upon conversion of the Series B preferred stock will be increased.
Upon the sale, conveyance or disposition of all or substantially all of our
assets, or a sale, a conveyance or disposition of a majority of the outstanding
shares of our common stock in a transaction or series of related transactions
(except for a merger or consolidation after the consummation of which our
stockholders prior to such merger or consolidation own a majority of the voting
securities of the surviving corporation or its parent company), each holder of
the Series A and Series B preferred stock would have the right to require us to
redeem all or any part of such holder's Series A or Series B preferred stock
for cash out of legally available funds at a price equal to each of the Series
A and Series B preferred stock's liquidation preference. If on the date of such
sale, conveyance or disposition there are insufficient funds to redeem all of
the outstanding shares of Series A or Series B preferred stock held by the
holders who have elected to have their shares redeemed, the holders of the
Series A and Series B preferred stock would share ratably any redemption.
Upon liquidation, the Series A and Series B preferred stock are entitled to
preferential liquidation of $1,000 per share plus an amount equal to all
accrued but unpaid dividends thereon to date fixed for distribution before any
distributions are made to holders of common stock. If upon liquidation there
are insufficient funds, the holders of Series A and Series B preferred stock
would share ratably any distribution.
62
The holders of Series A and Series B preferred stock are entitled to vote on
all matters presented to the holders of common stock as if the Series A and
Series B preferred stock were converted into common stock.
62
Additionally,
actions which would adversely affect the rights of the holders of Series A and
Series B preferred stock and certain other matters require at least a majority
of each such series voting as separate classes. Such actions include:
. Any amendment to the rights, limitations and restrictions of the Series
A preferred stock or the Series B Preferred Stock
. The issuance or authorization to issue any senior stock
. The issuance or authorization to issue any class or series of stock or
securities convertible into our equity securities ranking on a parity
with the holders of the Series A preferred stock or the Series B
preferred stock with respect to certain rights, or any increase in the
authorization or designated number of any such class or series
. Any amendment, alteration or repeal of any provisions to our articles of
incorporation, including the certificate of designation of any class or
series of stock
. The purchase, or the setting aside of money or property to purchase any
shares or our common stock or any other junior stock
. The consolidation or merger with any other corporation where we are not
the surviving corporation, or where we would issue to any person as
consideration in respect of such consolidation or merger any capital
stock representing 20% or more of our then outstanding capital stock
. The sale or conveyance of substantially all of our assets, or any action
causing our dissolution of liquidation
. The incurrence of indebtedness in excess of 50% of the net present value
of our proved reserves.
Stock Options and Warrants
As of April 30, 2002, we had granted stock options to purchase 1,202,834
shares of common stock at prices between $2.00 and $5.87 per share and warrants
to purchase 1,915,185 shares of common stock at prices between $2.00 and $4.12
per share.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. Federal income tax
consequences to U.S. holders (as defined below) of the purchase, ownership, and
disposition of the depositary shares, the Series C preferred stock and any
common stock received upon conversion. This discussion is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
final, temporary and proposed Treasury Regulations promulgated thereunder, and
administrative rulings and judicial decisions in effect as of the date of this
prospectus, all of which are subject to change (possibly with retroactive
effect) or different interpretations. This summary does not purport to deal
with all aspects of U.S. Federal income taxation that may be relevant to an
investor's decision to purchase depositary shares, nor any tax consequences
arising under the laws of any state, locality or foreign jurisdiction. This
summary is not intended to be applicable to all categories of investors, such
as dealers in securities, banks, insurance companies, tax-exempt organizations,
foreign persons, persons that hold the depositary shares, Series C preferred
stock or common stock as part of a straddle or conversion transaction, or
holders subject to the alternative minimum tax, which may be subject to special
rules. In addition, this discussion is limited to persons who hold the
depositary shares, Series C preferred stock or common stock as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the Code. As used in this section, a "U.S. holder" is a beneficial owner of
depositary shares, Series C preferred stock or common stock that is for U.S.
Federal income tax purposes:
. an individual U.S. citizen or resident alien;
63
. a corporation, or entity taxable as a corporation that was created or
organized under U.S. law (federal or state);
. an estate whose world-wide income is subject to U.S. Federal income tax;
or
. a trust if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the
trust.
If a partnership holds depositary shares, Series C preferred stock or common
stock, the tax treatment of a partner will generally depend upon the status of
the partner and upon the activities of the partnership.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL,
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, CONVERSION, AND
DISPOSITION OF DEPOSITARY SHARES, SERIES C PREFERRED STOCK AND COMMON STOCK
RECEIVED AS A RESULT OF A CONVERSION OF SERIES C PREFERRED STOCK.
Taxation of Holders of Depositary Shares
General. Owners of the depositary shares will be treated for federal income
tax purposes as if they were owners of the Series C preferred stock represented
by such depositary shares. Accordingly, such owners will be entitled to take
into account, for federal income tax purposes, income and deductions to which
they would be entitled if they were holders of such Series C preferred stock as
described below in "Consequences to Holders of Series C Preferred Stock or
Common Stock." Withdrawals of Series C preferred stock for depositary shares
are not taxable events for federal income tax purposes.
Sale or Exchange of Depositary Shares. Upon the sale, exchange or other
disposition of depositary shares to a party other than us, a holder of
depositary shares will realize capital gain or loss measured by the difference
between the amount realized on the sale, exchange or other disposition of the
depositary shares and such shareholder's adjusted tax basis in the depositary
shares (provided the depositary shares are held as a capital asset). Gain
recognized by a shareholder who is an individual, estate or trust upon a sale,
exchange or other disposition of depositary shares that have been held for more
than 12 months will generally be subject to tax at a rate not to exceed 20%.
Gain recognized from the sale, exchange or other disposition of depositary
shares that have been held for 12 months or less will be subject to tax at
ordinary income tax rates. In addition, capital gain recognized by a corporate
shareholder will continue to be subject to tax at the ordinary income tax rates
applicable to corporations.
Redemption of Depositary Shares. Whenever we redeem any Series C preferred
stock held by the depositary, the depositary will redeem as of the same
redemption date the number of depositary shares representing the Series C
preferred stock so redeemed. The federal income tax treatment to a holder of
depositary shares resulting from any redemption by us (as distinguished from a
sale, exchange or other disposition) of Series C preferred stock held by the
depositary and corresponding redemption of depositary shares can only be
determined on the basis of particular facts as to the holder of depositary
shares at the time of redemption. In general, a holder of depositary shares
will recognize capital gain or loss measured by the difference between the
amount received upon the redemption and the holder of the depositary shares'
adjusted tax basis in the depositary shares redeemed (provided the depositary
shares are held as a capital asset) if such redemption (i) results in a
"complete termination" of a holder's interest in all classes of our stock under
Section 302(b)(3) of the Code or (ii) is "not essentially equivalent to a
dividend" with respect to the holder under Section 302(b)(1) of the Code. In
applying these tests, there must be taken into account not only any depositary
shares owned by the holder, but also such holder's ownership of common stock,
equity stock, other series of preferred stock and any options (including stock
purchase rights) to acquire any of the foregoing. The holder also must take
into account any such securities (including options) which are considered to be
owned by such holder by reason of the constructive ownership rules set forth in
Sections 318 and 302(c) of the Code.
64
If a particular holder of depositary shares owns (actually or
constructively) no shares of our common stock or equity stock or an
insubstantial percentage of the outstanding shares of our common stock, equity
stock or preferred stock, based upon current law, it is probable that the
redemption of depositary shares from such a holder would be considered "not
essentially equivalent to a dividend." However, whether a distribution is "not
essentially equivalent to a dividend" depends on all of the facts and
circumstances, and a holder of depositary shares intending to rely on any of
these tests at the time of redemption should consult its tax advisor to
determine their application to its particular situation.
If the redemption does not meet any of the tests under Section 302 of the
Code, then the redemption proceeds received from the depositary shares will be
treated as a distribution on the depositary shares as described below under
"Consequences to Holders of Series C Preferred Stock or Common Stock." If the
redemption is taxed as a dividend, the holder of depositary shares' adjusted
tax basis in the redeemed depositary shares will be transferred to any of its
other stockholdings in Contango. If the holder of depositary shares owns no
other stockholdings in Contango, under certain circumstances, such basis may be
transferred to a related person, or it may be lost entirely.
Consequences to Holders of Series C Preferred Stock or Common Stock
Distributions. The amount of any distribution to you with respect to the
Series C preferred stock or common stock will be treated as a dividend, taxable
as ordinary income to you, to the extent of our current or accumulated earnings
and profits ("earnings and profits") as determined under U.S. Federal income
tax principles. To the extent the amount of such distribution exceeds our
earnings and profits, the excess will be applied against and will reduce your
tax basis (on a dollar-for-dollar basis) in the Series C preferred stock or
common stock, as the case may be. Any amount in excess of your tax basis will
be treated as capital gain. If we are not able to pay dividends on the Series C
preferred stock, the accreted liquidation preference of the Series C preferred
stock will increase and such increase may give rise to deemed dividend income
to holders of the Series C preferred stock in the amount of all, or a portion
of, such increase.
Dividends to Corporate Shareholders. In general, a distribution which is
treated as a dividend for U.S. Federal income tax purposes and is made to a
corporate shareholder with respect to the Series C preferred stock or common
stock will qualify for the 70% dividends-received deduction under Section 243
of the Code. Corporate shareholders should note, however, that the amount of
distributions made with respect to the Series C preferred stock or the common
stock may exceed the amount of our earnings and profits in the future.
Accordingly, there, can be no assurance that the dividends-received deduction
will be available in respect of distributions on the Series C preferred stock
or common stock.
In addition, there are many exceptions and restrictions relating to the
availability of such dividends-received deduction such as restrictions relating
to:
. the holding period of stock the dividends on which are sought to be
deducted;
. debt-financed portfolio stock;
. dividends treated as "extraordinary dividends" for purposes of Section
1059 of the Code; and
. taxpayers that pay corporate alternative minimum tax.
Corporate shareholders should consult their own tax advisors regarding the
extent, if any, to which such exceptions and restrictions may apply to their
particular factual situation.
Sale or Other Disposition; Redemption. Upon a sale or other disposition of
Series C preferred stock or common stock (other than an exchange of Series C
preferred stock for common stock pursuant to the conversion privilege), you
generally will recognize capital gain or loss equal to the difference between
the amount of cash and the fair market value of property you receive on the
sale or other disposition and your adjusted tax basis in the Series C preferred
stock or common stock. Such capital gain or loss will be long-term
65
capital gain or loss if your holding period for the Series C preferred stock or
common stock, as applicable, is more than one year.
If, following a change of control, a holder of the Series C preferred stock
exercises the option described in "Description of Series C Preferred Stock and
Depositary Shares--Series C Preferred Stock -- Change of Control" and we elect
to satisfy payment in cash, the transaction will generally be treated as a
redemption for U.S. Federal income tax purposes. The U.S. Federal income tax
treatment of such a redemption to a holder will depend on the particular facts
relating to such holder at the time of the redemption. The receipt of cash in
connection with such redemption will be treated as gain or loss from the sale
or other disposition of the Series C preferred stock (as discussed in the
preceding paragraph), if, taking into account stock that is actually or
constructively owned as determined under Section 318 of the Code:
. your interest in our Series C preferred stock and common stock is
completely terminated as a result of such redemption;
. your percentage ownership in our voting stock immediately after such
redemption is (i) less than 80% of your percentage ownership immediately
before such redemption and (ii) less than 50% of our voting stock; or
. such redemption is "not essentially equivalent to a dividend" (within
the meaning of Section 302(b)(1) of the Code).
If none of the above tests giving rise to sale treatment is satisfied, then
a payment made in redemption of the Series C preferred stock will be treated as
a distribution that is taxable in the same manner as described above under "--
Distributions," and your adjusted tax basis in the redeemed Series C preferred
stock will be transferred to any remaining shares you hold in us. If you do not
retain any stock ownership in us following such redemption, then you may lose
your basis completely.
Treatment of Redemption Premium. Under Section 305 of the Code and related
Treasury Regulations, if the redemption price of redeemable preferred stock
exceeds its issue price, the redemption premium is more than de minimis and the
redemption premium is not considered reasonable, the premium may be taxable as
a constructive dividend taken into account generally in the same manner as
original issue discount would be taken into account were the preferred stock
treated as a debt instrument for federal income tax purposes (the "Economic
Accrual Rule"). Any such constructive dividends would be subject to the same
rules applicable to dividends as described in the discussion under "--
Distributions" above. A redemption premium is more than de minimis if it
exceeds % of the issue price times the number of years before redemption. Since
the redemption premium for the Series C preferred stock is 5% of the issue
price, and the Series C preferred stock may be called in less than 5 years, the
premium would not be considered de minimis.
The Economic Accrual Rule applies to preferred stock that is callable by the
issuer if, based on all the facts and circumstances at the issue date,
redemption pursuant to the issuer's call right is more likely than not to
occur. A safe harbor from the constructive distribution rule applies if: (i)
the issuer and a holder are not related within the meaning of either Section
267(b) or Section 707(b) of the Code (applying a 20% ownership test rather than
a 50% ownership test), (ii) there are no plans, arrangements, or agreements
that effectively require, or are intended to compel the issuer to redeem the
preferred stock, and (iii) exercise of the redemption right would not reduce
the yield of the preferred stock, as determined under OID principles. The
Series C preferred stock should meet this safe harbor rule for other than
related parties, and consequently, the Economic Accrual Rule should not apply.
Conversion of Series C Preferred Stock in Exchange for Common Stock. You
generally will not recognize gain or loss by reason of receiving common stock
in exchange for Series C preferred stock upon conversion of the Series C
preferred stock, except gain or loss will be recognized with respect to any
cash received in lieu of fractional shares. The adjusted tax basis of the
common stock (including fractional share interests) so acquired
66
will be equal to the tax basis of the shares of Series C preferred stock
exchanged and the holding period of the common stock received will include the
holding period of the Series C preferred stock exchanged.
Adjustment of Conversion Price. Holders of Series C preferred stock may, in
certain circumstances, be deemed to have received constructive distributions of
stock if the conversion rate for the Series C preferred stock is adjusted.
Adjustments to the conversion price made pursuant to a bona fide reasonable
adjustment formula which has the effect of preventing the dilution of the
interest of the holders of the Series C preferred stock, however, generally
will not be considered to result in a constructive distribution of stock.
Certain of the possible adjustments provided in the anti-dilution provisions of
the Series C preferred stock, including, without limitation, adjustments in
respect of stock dividends or the distribution of rights to subscribe for
common stock should qualify as being pursuant to a bona fide reasonable
adjustment formula and should not result in a constructive distribution. In
contrast, adjustments in respect of distributions of our indebtedness or assets
to our stockholders, for example, will not qualify as being pursuant to a bona
fide reasonable adjustment formula. In addition, an adjustment triggered by a
change of control as described under "Description of Series C Preferred Stock
and Depositary Shares" may not so qualify. If such adjustments are made, the
holders generally will be deemed to have received constructive distributions in
amounts based upon the value of such holders' increased interests in our equity
resulting from such adjustments. The amount of the distribution will be treated
as a distribution to a holder with the tax consequences specified above under
"--Distributions." Accordingly, you could be considered to have received
distributions taxable as dividends to the extent of our earnings and profits
even though you did not receive any cash or property as a result of such
adjustments.
Conversion of Series C Preferred Stock After Dividend Record Date. If a
holder exercises its right to convert the Series C preferred stock into shares
of common stock after a dividend record date but before payment of the
dividend, then upon conversion, the holder generally will be required to pay to
us in cash an amount equal to the portion of such dividend attributable to the
current quarterly dividend period, which amount would increase the tax basis of
the common stock received. When the dividend is received, the holder would
recognize the dividend payment in accordance with the rules described under "--
Distributions" above.
Backup Withholding. Under the backup withholding provisions of the Code and
applicable Treasury Regulations, you may be subject to backup withholding at a
maximum rate of 31% with respect to dividends paid on, or the proceeds of sale,
exchange or redemption of, Series C preferred stock or common stock unless:
. you are a corporation or come within certain other exempt categories and
when required demonstrate this fact, or
. within a reasonable period of time, you provide a taxpayer
identification number, certify as to no loss of exemption from backup
withholding, and otherwise comply with applicable requirements of the
backup withholding rules.
The amount of any backup withholding from a payment to you will be allowed
as a credit against your U.S. Federal income tax liability and may entitle you
to a refund, provided that the required information is furnished to the
Service.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO YOU IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES
AND INCOME TAX SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES THAT WOULD RESULT FROM YOUR PURCHASE, OWNERSHIP AND
DISPOSITION OF THE SERIES C PREFERRED STOCK, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
67
UNDERWRITING
Under an underwriting agreement, Morgan Keegan & Company, Inc. has agreed to
purchase from us 800,000 depositary shares. The underwriting agreement provides
that the underwriter's obligation to purchase shares is subject to conditions
set forth in the underwriting agreement, and that if any of the shares are
purchased by the underwriter under the underwriting agreement, then all of the
shares that the underwriter has agreed to purchase under the underwriting
agreement must be purchased.
The underwriter has advised us that it proposes to offer the depositary
shares directly to the public at the public offering price set forth on the
cover page of this prospectus, and to dealers at the public offering price less
a selling concession not in excess of $ per share. The underwriter may also
allow, and dealers may re-allow, a concession not in excess of $ per share
to brokers and dealers. After the offering, the underwriter may change the
offering price and other selling terms.
We have granted to the underwriter an option to purchase up to an additional
120,000 depositary shares, exercisable solely to cover over-allotments, if any,
at the public offering price less the underwriting discounts and commissions
shown on the cover page of this prospectus. The underwriter may exercise this
option at any time until 30 days after the date of the underwriting agreement.
To the extent that the underwriter exercises this option, the underwriter will
be committed, subject to conditions, to purchase the additional shares, and we
will be obligated under the over-allotment option to sell the shares to the
underwriter.
The following table shows the per share and total public offering price, the
underwriting discount to be paid by us to the underwriter and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriter of its over-allotment option.
Per Share Without Option With Option
--------- -------------- -----------
Public offering price............... $25.00 $20,000,000 $23,000,000
Underwriting discount............... 1.75 1,400,000 1,610,000
------ ----------- -----------
Proceeds before expenses............ $23.25 $18,600,000 $21,390,000
We estimate our expenses relating to the offering to be $400,000. We will
pay to the underwriter underwriting discounts and commissions in an amount
equal to the public offering price per share of preferred stock less the amount
the underwriter pays to us for each share of preferred stock.
We have agreed to indemnify the underwriter against certain liabilities,
including liabilities under the Securities Act, or to contribute payments that
the underwriter may be required to make with respect to these liabilities.
For a period ending 90 days from the date of this prospectus, our executive
officers and directors and Trust Company of the West, Aquila Energy Capital
Corporation and JEX have agreed that, without the prior written consent of the
underwriter, we will not:
. offer, pledge, contract to sell or sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of preferred stock, common stock or
any securities convertible into or exercisable or exchangeable for
preferred stock or common stock, or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any
preferred stock or common stock, whether any such transaction described
above is to be settled by delivery of preferred stock, common stock or
other securities, in cash or otherwise.
In addition, during this 90-day period, we have also agreed not to file any
registration statement for the registration of any shares of preferred stock,
common stock or any securities convertible into or exercisable or exchangeable
for preferred stock or common stock without the prior written consent of the
underwriter.
68
In connection with this offering, the underwriter may engage in transactions
that stabilize, maintain or otherwise affect the price of the depositary shares
and/or the common stock. Specifically, the underwriter may create a short
position by making short sales of our depositary shares and may purchase
depositary shares on the open market to cover short positions created by short
sales. Short sales involve the sale by the underwriter of a greater number of
shares than the underwriter is required to purchase in the offering. Short
sales can be either "covered" or "naked." "Covered" short sales are sales made
in an amount not greater than the underwriter's over-allotment option to
purchase additional shares in the offering. "Naked" short sales are sales in
excess of the over-allotment option. A naked short position is more likely to
be created if the underwriter is concerned that there may be a downward
pressure on the price of the depositary shares or common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering. The underwriter may close out any covered short position by either
exercising its over-allotment or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriter will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. The underwriter would close
out any naked short position by purchasing shares in the open market. The
underwriter may reclaim selling concessions if it repurchases previously
distributed shares in covering transactions, in stabilization transactions or
in some other way or if the underwriter receives a report that indicates
clients of the underwriter have "flipped" the shares. These activities may have
the effect of raising or maintaining the market price of our depositary shares
or common stock or preventing or retarding a decline in the market price of our
depositary shares or common stock. As a result, the price of our depositary
shares or common stock may be higher than the price that might otherwise exist
in the open market. The underwriter is not required to engage in these
activities and may end any of these activities at any time.
Neither we nor the underwriter make any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the shares. In addition, neither we nor the
underwriter make any representation that the underwriter will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
At our request, the underwriter has reserved up to 5% of the depositary
shares offered hereby (the "Directed Shares") for sale, at the public offering
price, to some of our directors, officers and employees and other persons who
have a relationship with us who have advised us of their desire to purchase
such shares. The number of shares available for sale to the general public will
be reduced to the extent of sales of Directed Shares to any of the persons for
whom they have been reserved. Any Directed Shares not so purchased will be
offered by the underwriter on the same basis as all other shares of preferred
stock offered hereby.
Other than in the United States, no action has been taken by us or the
underwriter that would permit a public offering of the depositary shares
included in this offering in any jurisdiction where action for that purpose is
required. The depositary shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisements in connection with the offer and sales of any
depositary shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions to this
offering of our depositary shares and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of any offer to buy any
depositary shares included in this offering in any jurisdiction where that
would not be permitted or legal.
69
LEGAL MATTERS
Morgan, Lewis & Bockius, LLP, Los Angeles, California will pass on the
validity of the issuance of the depositary shares offered by this prospectus
and the Series C preferred stock underlying the depositary shares. Bracewell &
Patterson, L.L.P., Houston, Texas is acting for the underwriter in connection
with various legal matters relating to the depositary shares offered by this
prospectus.
EXPERTS
The audited financial statements included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing in giving said
reports.
All of the estimated reserve figures included in this prospectus, including
related calculations, have been prepared by either W. D. Von Gonten & Co. or
William M. Cobb & Associates, Inc. and have been included in reliance on the
authority of said firms as experts in petroleum engineering.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we have filed with the
SEC relating to the depositary shares, the Series C preferred stock and the
common stock into which the Series C preferred stock is convertible. As
permitted by SEC rules, this prospectus does not contain all of the information
we have included in the registration statement and the accompanying exhibits
and schedules we filed with the SEC. You may refer to the registration
statement, exhibits and schedules for more information about us and our capital
stock. You can read and copy the registration statement, exhibits and schedules
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You can obtain information about the operation of the SEC's Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
address of that site is http://www.sec.gov.
We are required to file current reports, quarterly reports, annual reports,
proxy statements and other information with the SEC. You may read and copy
those reports, proxy statement and other information at the SEC's Public
Reference Room or through its Internet site.
70
GLOSSARY OF NATURAL GAS AND OIL TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oilnatural gas and natural gasoil industry and this document:
3-D Seismic Data. The method by which a three dimensional image of the earth's
subsurface is created through the interpretation of reflection seismic data
collected over a surface grid. 3-D seismic data surveys allow for a more
detailed understanding of the subsurface than do conventional surveys and
contribute significantly to field appraisal, exploitation and production.
Bcfe. One billion cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 barrel of crude oil,
condensate or natural gas liquids.
Block. A block depicted on the Outer Continental Shelf Leasing and Official
Protraction Diagrams issued by the MMS or a similar depiction on official
protraction or similar diagrams issued by a state bordering on the Gulf of
Mexico.
Btu. British thermal unit. One British thermal unit is the amount of heat
required to raise the temperature of one pound of water one degree Fahrenheit.
Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled into a proved natural gas or oil reservoir to
the depth of a stratigraphic horizon known to be productive.
Dry Hole. A well found to be incapable of producing hydrocarbons in sufficient
quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
Exploration. The search for natural accumulations of natural gas and oil by any
geological, geophysical or other suitable means.
Exploratory Well. A well drilled to find and produce natural gas or oil
reserves not classified as proved, to find a new reservoir in a field
previously found to be productive of natural gas or oil in another reservoir or
to extend a known reservoir.
Farm-out. An agreement under which the owner of a working interest in a natural
gas and oil lease assigns the working interest or a portion of the working
interest to another party who desires to drill on the leased acreage.
Generally, the assignee is required to drill one or more wells in order to earn
its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."
Finding And Development Costs. Capital costs incurred in the acquisition,
exploration, development and revisions of proved oil and natural gas reserves
divided by proved reserve additions.
Gross Acres. The total acres in which we own a working interest.
Gross wells. The total wells in which we own a working interest.
Mcf. One thousand cubic feet of natural gas.
Mcfe. One thousand cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 Barrel of crude oil,
condensate or natural gas liquids.
71
Mineral Interest. The property interest that includes the right to explore for,
drill for, produce, store and remove natural gas and oil from the subject
lands, or to lease to another for those purposes.
Mmbtu. One million British thermal units.
Mmcf. One million cubic feet of natural gas at standard atmospheric conditions.
Mmcfe. One million cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 barrel of crude oil,
condensate or natural gas liquids.
MMS. The United States Minerals Management Service.
Net Acres. Gross acres multiplied by the percentage working interest owned by
us.
Net Wells. Gross wells multiplied by the percentage working interest owned by
us.
Operator. The individual or company responsible for drilling and production
operations of an oil or natural gas well.
Pre-Tax Net Present Value. The present value of estimated future revenues to be
generated from the production of proved reserves, net of estimated lease
operating expense, production taxes and future development costs, using prices
and costs as of the date of estimation without future escalation, without
giving effect to non-property related expenses such as general and
administrative expenses, debt service and depreciation, depletion and
amortization, or federal income taxes and discounted using an annual discount
rate of 10%.
Productive well. A well that is found to be capable of producing hydrocarbons
in sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
Prospect. A specific geographic area which, based on supporting geological,
geophysical or other data and also preliminary economic analysis using
reasonably anticipated prices and costs, is deemed to have potential for the
discovery of commercial hydrocarbons.
Proved Reserves. The estimated quantities of natural gas and crude oil, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Reserves. Proved reserves that are expected to be recovered
from new wells on undrilled acreage.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible natural gas and/or oil that is confined by
impermeable rock or water barriers.
Royalty. An interest in an oil and natural gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is
granted, or overriding royalties, which are often reserved by a prospect
generator.
Undeveloped Acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.
Working Interest. An interest in a natural gas and oil lease that gives the
owner of the interest the right to drill for and produce oil and natural gas on
the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations.
72
Appendix A
[W.D. Von Gonten & Co. Logo]
May 13, 2002
Mr. Kenneth Peak
Contango Oil & Gas Company
3700 Buffalo Speedway, Suite 960
Houston, Texas 77098
Re: Contango Oil & Gas Company
Estimated Reserves and Revenues
April 1, 2002 SEC Pricing Case
"As of" April 1, 2002
Mr. Peak:
At your request, we have prepared estimates of future reserves and projected
net revenues for certain oil and gas properties owned by Contango Oil & Gas
Company (Contango) "As of" April 1, 2002. This report was prepared utilizing
spot prices as posted on April 1, 2002, as per SEC guidelines.
Our conclusions, as of April 1, 2002 are as follows:
Net to Contango
Oil & Gas
----------------
Proved Developed
Producing
----------------
Reserve Estimates
Estimated Net Oil/Cond., bbl 613,113
Estimated Net Gas, MMcf 25,551.5
Future Gross Revenue
Oil Revenue, $ 12,262,265
Gas Revenue, $ 90,883,992
Total, $ 103,146,250
Expenditures
Ad Valorem Taxes, $ 2,872,407
Severance Taxes, $ 7,399,355
Operating Expenses, $ 13,251,977
Transportation Costs, $ 3,676,712
Total, $ 27,200,451
Abandonment Liability
Total, $ 119,572
Estimated Future Reserves
Estimated Future Revenue (FNR), $ 75,826,211
Estimated FNR, Discounted @ 10%, $ 55,734,738
- --------
* Due to computer rounding, numbers in the above table may not sum exactly.
A-1
Mr. Ken Peak
May 13, 2002
Page 2
Report Qualifications
Purpose of Report--The purpose of this report is to provide Contango with a
projection of future reserves and revenues for the assessment of the certain
assets owned by Contango and applicable to SEC reporting regulations.
Scope of Work--W.D. Von Gonten & Co. was engaged by Contango to estimate
and project the future reserves associated with the various properties
included in this report. Once reserves were estimated, future revenue
projections were made based on prices in effect on April 1, 2002.
Reporting Requirements--Securities and Exchange Commission (SEC) Regulation
S-K, Item 102 and Regulation S-X, Rule 4-10, and Financial Accounting
Standards Board (FASB) Statement No. 69 require oil and gas reserve
information to be reported by publicly held companies as supplemental
financial data. These regulations and standards provide for estimates of
Proved reserves and revenues discounted at 10% and based on unescalated prices
and costs. Revenues based on escalated product prices may be reported in
addition to the current pricing case. Probable reserves are prohibited from
use for SEC reporting purposes and should be excluded from such filings.
The Society of Petroleum Engineers (SPE) requires Proved reserves to be
economically recoverable with prices and costs in effect on the "as of" date
of the report. In addition, the SPE has issued Standards Pertaining to the
Estimating and Auditing of Oil and Gas Reserve Information which sets
requirements for the qualifications and independence of reserve estimators and
auditors.
The estimated Proved reserves herein have been prepared in conformance with
all SEC, SPE, and World Petroleum Congress (WPC) definitions and requirements.
Projections--The attached reserve and revenue projections are on a calendar
year basis with the first time period being April 1, 2002 through December 31,
2002.
Reserve Estimates
Estimates of future and ultimate reserves were based on a combination of
production performance and/or volumetrics and analogy. The first method, to
calculate future reserves, was the extrapolation of production performance.
Using this method, we extrapolated monthly and daily production histories. Due
to the hyperbolic nature of the production trend on certain properties and the
short production history for various properties, we relied mainly on the daily
production trends for a more detailed match of the production histories.
All reserve estimates, for the wells producing from the Queen City Sand,
were then overlaid on our field study hydrocarbon pore volume map to verify
the "reasonableness" of the reserve estimates. W. D. Von Gonten & Co. has
developed an extensive field study database covering the Queen City Sand in
the Mestena Grande Area of Jim Hogg County, Texas. We have processed over 90
digital well logs in the area and obtained conventional core data on 16 wells.
All of the available information has been processed into our interpretation of
the hydrocarbon pore volume. Our conclusions on the hydrocarbon pore volume
calculations indicate that there is a relationship between the hydrocarbon
pore volume and the productivity of the wells. The quantity of the hydrocarbon
pore volume and the relationship of each well in respect to areas of high
hydrocarbon pore volume has a correlation on the ultimate reserves assigned to
these wells.
Reserves and schedules of production included in this report are only
estimates. The amount of available data, reservoir and geological complexity,
reservoir drive mechanism, and mechanical aspects can have a material effect
on the accuracy of these reserve estimates.
A-2
Mr. Ken Peak
May 13, 2002
Page 3
Substantially more data was reviewed for properties having higher overall
value than marginal properties. Estimates for individual leases should be
considered in context with the overall or total estimated revenues.
Product Prices
The estimated revenues shown herein were based on product prices supplied
by Contango. Product prices utilized in this report represent the Koch South
Texas Crude Oil Posting and Houston Ship Channel posted prices "as of" April
1, 2002.
Pricing differentials and BTU factors were applied on an individual
property basis to reflect prices actually received at the wellhead. These
differentials were supplied directly by Contango. These prices were held
constant throughout the life of the properties in accordance with SEC
regulations.
A summary of the oil and gas spot prices utilized are as follows:
Oil,
$/bbl Gas, $/MMBtu
-------- ------------
2002 22.50 3.29
Thereafter Constant Constant
A summary of the average first year adjusted prices is as follows:
Oil,
$/bbl Gas, $/Mcf
-------- ----------
2002 20.00 3.56
Thereafter Constant Constant
Operating and Capital Costs
The monthly expense necessary to operate each well was estimated and
supplied directly by Contango. While we have no reason to question the
validity of these estimates, we have not independently verified the actual
expense values. For this reason, we make no warranties as to the accuracy of
the future expense and resultant revenue projections.
All operating costs were held constant throughout the life of the
properties as per SEC guidelines.
Severance taxes were deducted based on the statutory rates.
Other Considerations
Abandonment Costs--The cost required to abandon the offshore properties
were supplied by Contango. The costs necessary to abandon the remaining
properties were assumed to equal the salvage value of the surface and
subsurface equipment.
Additional Costs--Costs were not deducted for general and administrative
expenses, depletion, depreciation and/or amortization (a non-cash item), or
federal income tax.
Context--We specifically advise that any particular reserve estimate for a
specific property not be used out of context with the overall audit. The
revenues and present worth of future net revenues are not represented to be
market value either for individual properties or on a total property basis.
The estimation of fair market value for oil and gas properties requires
additional analysis other than evaluating undiscounted and discounted future
net revenues.
A-3
Mr. Ken Peak
May 13, 2002
Page 4
We have not inspected the properties included in this report, nor have we
conducted independent well tests. W.D. Von Gonten & Co. and our employees have
no direct ownership in any of the properties included in this report. Our fees
are based on hourly expense and are not related to the reserve and revenue
estimates produced in this report.
Thank you for the opportunity to assist Contango on this project.
Respectfully submitted,
/s/ William D. Von Gonten, Jr., P.E.
William D. Von Gonten, Jr., P.E.
TX# 73244
/s/ Matthew T. Thompson
Matthew T. Thompson
A-4
INDEX TO FINANCIAL STATEMENTS
Page
----
Contango Oil & Gas Company Consolidated Financial Statements:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of June 30, 2001, 2000 and March 31,
2002................................................................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 2001,
2000 and 1999 and
For the Nine Months Ended March 31, 2002 and 2001...................... F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 2001,
2000 and 1999 and
For the Nine Months Ended March 31, 2002 and 2001...................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended June
30, 2001, 2000 and 1999 and For the Nine Months Ended March 31, 2002... F-6
Notes to Consolidated Financial Statements.............................. F-7
Statement of Combined Revenues and Direct Operating Expenses of the Oil
and Gas Properties Purchased from Juneau Exploration, L.P., Other
Individuals and SUIT:
Report of Independent Public Accountants................................ F-21
Statement of Combined Revenues and Direct Operating Expenses............ F-22
Notes to Statement of Combined Revenues and Direct Operating Expenses... F-23
Contango Oil & Gas Company and Subsidiaries Unaudited Pro Forma Condensed
Consolidated Financial Statements:
Introduction............................................................ F-26
Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended June 30, 2001.................................................... F-27
Pro Forma Condensed Consolidated Statement of Operations for the Nine
Months Ended March 31, 2002............................................ F-28
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2002..... F-29
Notes to Pro Forma Condensed Consolidated Financial Statements.................................Statements.......... F-30
Pro Forma Supplemental Oil and Gas Disclosures.......................... F-31
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Contango Oil & Gas Company:
We have audited the accompanying consolidated balance sheets of Contango Oil
& Gas Company (a Delaware corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Contango
Oil & Gas Company and subsidiaries as of June 30, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
September 17, 2001
F-2
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
------------------------ March 31,
2001 2000 2002
----------- ----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 1,586,342 $ 3,770,906 $ 4,110,727
Accounts receivable, net............. 5,517,197 273,336 3,927,401
Advances to operators................ -- 1,056,817 --
Price hedge contracts................ 888,400 -- --
Other................................ 313,140 65,785 437,950
----------- ----------- ------------
Total current assets................ 8,305,079 5,166,844 8,476,078
----------- ----------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Natural gas and oil properties,
successful efforts method of
accounting:
Proved properties.................... 20,317,257 2,210,370 43,045,606
Unproved properties, not being
amortized........................... 2,587,354 61,919 3,555,157
Furniture and equipment.............. 120,388 22,806 198,634
Accumulated depreciation, depletion
and amortization.................... (4,866,732) (893,060) (10,535,370)
----------- ----------- ------------
Total property, plant and
equipment.......................... 18,158,267 1,402,035 36,264,027
----------- ----------- ------------
OTHER ASSETS:
Investment in Republic Exploration,
L.L.C............................... 5,047,476 -- 5,742,644
Investment in Magnolia Offshore
Exploration, L.L.C.................. -- -- 690,086
Other assets......................... 211,375 73,625 325,664
----------- ----------- ------------
Total other assets.................. 5,258,851 73,625 6,758,394
----------- ----------- ------------
TOTAL ASSETS........................... $31,722,197 $ 6,642,504 $ 51,498,499
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $ 131,929 $ 117,255 $ 2,487,248
Accrued exploration and development.. 2,837,181 -- 1,171,582
Accrued income taxes................. -- -- 1,061,925
Price hedge contracts................ -- -- 249,480
Other accrued liabilities............ 554,146 119,865 96,832
Current portion of long term debt.... -- -- 1,425,000
----------- ----------- ------------
Total current liabilities........... 3,523,256 237,120 6,492,067
----------- ----------- ------------
LONG TERM DEBT......................... -- -- 17,608,250
----------- ----------- ------------
DEFERRED INCOME TAXES.................. 3,179,248 -- 3,750,386
----------- ----------- ------------
SHAREHOLDERS' EQUITY:
Convertible preferred stock, 8%,
Series A, $0.04 par value, 5,000
shares authorized, 2,500 shares
issued and outstanding at June 30,
2001, liquidation preference of
$1,000 per share.................... 100 -- 100
Convertible preferred stock, 8%,
Series B, $0.04 par value, 10,000
shares authorized, 5,000 shares
issued and outstanding at June 30,
2001, liquidation preference of
$1,000 per share.................... 200 -- 200
Common stock, $0.04 par value,
50,000,000 shares authorized,
11,501,882 and 10,198,330 shares
issued and outstanding at June 30,
2001 and 2002, respectively,
11,505,182 shares issued and
8,930,182 shares outstanding at
March 31 2002....................... 460,076 407,933 460,207
Additional paid-in capital........... 20,959,549 9,660,137 20,968,735
Treasury stock at cost (2,575,000
shares)............................. -- -- (6,180,000)
Retained earnings (deficit).......... 3,599,768 (3,662,686) 8,398,554
----------- ----------- ------------
Total shareholders' equity.......... 25,019,693 6,405,384 23,647,796
----------- ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................ $31,722,197 $ 6,642,504 $ 51,498,499
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March
Year Ended June 30, 31,
----------------------------------- ------------------------
2001 2000 1999 2002 2001
----------- ----------- --------- ----------- -----------
(Unaudited)
REVENUES:
Natural gas and oil
sales................ $24,548,723 $ 298,339 $ -- $15,908,607 $16,811,345
Gain (loss) from
hedging activities... (557,654) -- -- 4,145,216 (1,678,813)
----------- ----------- --------- ----------- -----------
Total revenues...... 23,991,069 298,339 -- 20,053,823 15,132,532
----------- ----------- --------- ----------- -----------
EXPENSES:
Operating expenses.... 2,631,905 85,254 -- 2,525,620 1,686,836
Exploration expenses.. 4,167,427 604,136 -- 2,522,836 2,324,521
Depreciation,
depletion and
amortization......... 4,023,672 344,815 -- 6,044,823 2,742,883
Impairment of proved
natural gas and oil
properties........... 300,466 548,245 -- -- --
General and
administrative
expense.............. 2,356,421 763,576 107,725 1,331,146 1,677,778
----------- ----------- --------- ----------- -----------
Total expenses...... 13,479,891 2,346,026 107,725 12,424,425 8,432,018
----------- ----------- --------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS............. 10,511,178 (2,047,687) (107,725) 7,629,398 6,700,514
Interest expense........ (8,674) (10,341) -- (97,244) (5,555)
Interest income......... 414,403 141,049 23,407 169,156 323,376
Gain on sale of assets.. -- 70,235 -- 373,539 --
----------- ----------- --------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... 10,916,907 (1,846,744) (84,318) 8,074,849 7,018,335
Provision for income
taxes.................. 3,179,248 -- 800 2,826,063 1,810,057
----------- ----------- --------- ----------- -----------
NET INCOME (LOSS)....... 7,737,659 (1,846,744) (85,118) 5,248,786 5,208,278
Preferred stock
dividends.............. 475,205 -- 30,226 450,000 325,206
----------- ----------- --------- ----------- -----------
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCK.................. $ 7,262,454 $(1,846,744) $(115,344) $ 4,798,786 $ 4,883,072
=========== =========== ========= =========== ===========
NET INCOME (LOSS) PER
SHARE:
Basic................. $ 0.64 $ (0.37) $ (0.15) $ 0.42 $ 0.44
=========== =========== ========= =========== ===========
Diluted............... $ 0.54 $ (0.37) $ (0.15) $ 0.37 $ 0.37
=========== =========== ========= =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic................. 11,287,098 4,953,729 754,933 11,477,836 11,220,609
=========== =========== ========= =========== ===========
Diluted............... 14,381,124 4,953,729 754,933 14,301,024 14,161,895
=========== =========== ========= =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
Year Ended June 30, March 31,
----------------------------------- --------------------------
2001 2000 1999 2002 2001
------------ ----------- -------- ------------ ------------
(Unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ 7,737,659 $(1,846,744) $(85,118) $ 5,248,786 $ 5,208,278
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation,
depletion and
amortization......... 4,023,672 344,815 -- 6,044,823 2,742,883
Impairment expense.... 300,466 548,245 -- -- --
Exploration capital
expenditures......... 2,824,304 190,611 -- 2,285,599 881,865
Provision for deferred
income taxes......... 3,179,248 -- -- 571,138 1,810,057
Gain on sale of
assets............... -- (70,235) -- (373,539) --
Unrealized hedging
(gain) loss.......... (888,400) -- -- 1,137,880 (154,350)
Stock-based
compensation......... 131,738 -- -- 9,317 128,973
Changes in operating
assets and
liabilities:
(Increase) decrease
in accounts
receivable.......... (5,013,840) (257,639) (15,697) 1,368,778 (3,429,923)
(Increase) decrease
in prepaid
insurance........... (120,031) (57,782) 8,002 (74,015) (144,743)
Increase (decrease)
in accounts
payable............. 294 116,455 (100) 1,524,664 10,022
Increase (decrease)
in other accrued
liabilities......... 747,771 119,865 -- (537,732) 210,035
Increase in taxes
payable............. -- -- -- 1,061,925 --
Other................ 34,831 -- -- 106,721 62,269
------------ ----------- -------- ------------ ------------
Net cash provided by
(used in) operating
activities......... 12,957,712 (912,409) (92,913) 18,374,345 7,325,366
------------ ----------- -------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Natural gas and oil
exploration and
development
expenditures......... (21,425,847) (2,577,469) -- (6,594,817) (13,162,926)
Investment in Republic
Exploration, L.L.C... (6,666,051) -- -- -- (6,666,051)
Investment in Magnolia
Offshore Exploration,
L.L.C................ -- -- -- (1,000,000) --
Additions to furniture
and equipment........ (37,730) (22,806) -- (15,472) (33,705)
Decrease (increase) in
advances to
operators............ 1,056,696 (1,056,817) -- 110,807 1,047,408
Purchase of reserves.. -- -- -- (19,956,452) --
Increase in payables
for capital
expenditures......... 2,537,445 -- -- (144,075) 911,503
Proceeds from sale of
assets............... -- 151,179 -- 266,448 --
------------ ----------- -------- ------------ ------------
Net cash used in
investing
activities......... (24,535,487) (3,505,913) -- (27,333,561) (17,903,771)
------------ ----------- -------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowing under credit
facility............. -- -- -- 24,300,000 --
Repayments under
credit facility...... -- -- -- (6,100,000) --
Purchase of treasury
shares............... -- -- -- (6,180,000) --
Proceeds from issuance
of common stock,
preferred stock and
warrants............. 9,993,416 7,798,604 -- -- 9,962,418
Debt issue costs...... (125,000) -- -- (86,399) (50,000)
Preferred stock
dividends............ (475,205) (75,565) -- (450,000) (325,206)
------------ ----------- -------- ------------ ------------
Net cash provided by
financing
activities......... 9,393,211 7,723,039 -- 11,483,601 9,587,212
------------ ----------- -------- ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... (2,184,564) 3,304,717 (92,913) 2,524,385 (991,193)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 3,770,906 466,189 559,102 1,586,342 3,770,906
------------ ----------- -------- ------------ ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 1,586,342 $ 3,770,906 $466,189 $ 4,110,727 $ 2,779,713
============ =========== ======== ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for taxes... $ -- $ -- $ -- $ 1,200,000 $ --
============ =========== ======== ============ ============
Cash paid for
interest............. $ 9,142 $ -- $ -- $ 52,417 $ 5,555
============ =========== ======== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred
Stock Common Stock Retained Total
--------------- -------------------- Paid-in Treasury Earnings Shareholders'
Shares Amount Shares Amount Capital Stock (Deficit) Equity
------- ------ ---------- -------- ----------- ----------- ----------- -------------
Balance at June 30,
1999................... 16,792 $ 672 754,933 $ 30,197 $ 2,198,597 $ -- $(1,815,942) $ 413,524
Preferred stock
conversion............ (16,792) (672) 251,880 10,075 (9,403) -- -- --
Sale of shares......... -- -- 8,991,517 359,661 7,527,088 -- -- 7,886,749
Sale of warrants....... -- -- -- -- 24,600 -- -- 24,600
Issuance of shares..... -- -- 200,000 8,000 32,000 -- -- 40,000
Offering expenses...... -- -- -- -- (112,745) -- -- (112,745)
Net loss............... -- -- -- -- -- -- (1,846,744) (1,846,744)
------- ----- ---------- -------- ----------- ----------- ----------- -----------
Balance at June 30,
2000................... -- -- 10,198,330 407,933 9,660,137 -- (3,662,686) 6,405,384
Stock-based
compensation.......... -- -- 24,302 973 1,360,964 -- -- 1,361,937
Exercise of stock
options............... -- -- 29,250 1,170 56,830 -- -- 58,000
Sale of shares......... 7,500 300 1,250,000 50,000 9,949,700 -- -- 10,000,000
Offering expenses...... -- -- -- -- (68,082) -- -- (68,082)
Net income............. -- -- -- -- -- -- 7,737,659 7,737,659
Preferred stock
dividends............. -- -- -- -- -- -- (475,205) (475,205)
------- ----- ---------- -------- ----------- ----------- ----------- -----------
Balance at June 30,
2001................... 7,500 300 11,501,882 460,076 20,959,549 -- 3,599,768 25,019,693
Stock-based
compensation.......... -- -- 3,300 131 9,186 -- -- 9,317
Net income............. -- -- -- -- -- -- 5,248,786 5,248,786
Treasury stock
acquired.............. -- -- (2,575,000) -- -- (6,180,000) -- (6,180,000)
Preferred stock
dividends............. -- -- -- -- -- -- (450,000) (450,000)
------- ----- ---------- -------- ----------- ----------- ----------- -----------
Balance at March 31,
2002................... 7,500 $ 300 8,930,182 $460,207 $20,968,735 $(6,180,000) $ 8,398,554 $23,647,796
======= ===== ========== ======== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Contango Oil & Gas Company (the "Company" or "Contango") is an independent
natural gas and oil company engaged in the exploration, development and
acquisition of natural gas and oil properties in the United States. Contango's
entry into the natural gas and oil business began on July 1, 1999 when the
board appointed Kenneth R. Peak as president, chief executive officer, chief
financial officer, secretary and director of the company. At the annual
stockholders' meeting held on September 28, 1999, the stockholders elected a
new board of directors, including Kenneth R. Peak, president, chief executive
officer and chairman of the board. The Company's common stock commenced trading
on the American Stock Exchange in January 2001 under the symbol "MCF". Prior to
listing on the American Stock Exchange, the Company's common stock traded on
the Nasdaq over-the-counter bulletin board.
2. Summary of Significant Accounting Policies
Unaudited Interim Information. The accompanying unaudited interim
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all normal, recurring adjustments considered
necessary for a fair presentation have been included. All such adjustments are
of a normal recurring nature. The results of operations for the nine months
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the entire year.
Successful Efforts Method of Accounting. The Company follows the successful
efforts method of accounting for its oil and gas activities. Under the
successful efforts method, lease acquisition costs and all development costs
are capitalized. Proved oil and gas properties are reviewed when circumstances
suggest the need for such a review and, if required, the proved properties are
written down to their estimated fair value. Unproved properties are reviewed
quarterly to determine if there has been impairment of the carrying value, and
any such impairment is charged to expense in the period. Estimated fair value
includes the estimated present value of all reasonably expected future
production, prices and costs. Exploratory drilling costs are capitalized until
the results are determined. If proved reserves are not discovered, the
exploratory drilling costs are expensed. Other exploratory costs, such as
seismic costs and other geological and geophysical expenses, are expensed as
incurred. The provision for depreciation, depletion and amortization is based
on the capitalized costs as determined above, plus future costs to abandon
offshore wells and platforms. Depreciation, depletion and amortization is on a
cost center by cost center basis using the unit of production method, with
lease acquisition costs amortized over total proved reserves and other costs
amortized over proved developed reserves. The Company creates cost centers on a
well-by-well basis for natural gas and oil activities on our South Texas
Exploration Program ("STEP") properties and in the Gulf of Mexico.
When circumstances indicate that proved properties may be impaired, the
Company compares expected undiscounted future cash flows at a producing field
level to the unamortized capitalized cost of the asset. If the future
undiscounted cash flows, based on the Company's estimate of future natural gas
and oil prices and operating costs and anticipated production from proved
reserves, are lower than the unamortized capitalized cost, then the capitalized
cost is reduced to fair market value. During the fiscal years ended June 30,
2001 and 2000, the Company recorded an impairment loss of $300,466 and
$548,245, respectively, related to proved natural gas and oil properties.
Principles of Consolidation. Our consolidated financial statements include
the accounts of Contango Oil & Gas Company and its subsidiaries and affiliates,
after elimination of all intercompany balances and transactions. Majority-owned
subsidiaries are fully consolidated. Minority-owned natural gas and oil
affiliates, such as 33.3% owned Republic Exploration, L.L.C. ("Republic
Exploration") and 50% owned Magnolia Offshore
F-7
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Exploration, L.L.C. ("Magnolia Offshore Exploration"), are proportionately
consolidated. In the case of minority-owned affiliates that have
disproportionate allocations among the investors, our share of the affiliate's
net income or loss is based on how increases or decreases in the net assets of
the venture will ultimately affect cash payments to Contango. Since we are the
only member that contributed cash to Republic Exploration and Magnolia Offshore
Exploration, we consolidate 100% of all activities in a loss position into our
financial statements until we recoup our investment.
Recently Issued Accounting Standards. The FASB has recently issued two new
pronouncements, Statement of Accounting Standard No. 143 ("SFAS 143"),
"Accounting for Asset Retirement Obligations" and Statement of Financial
Accounting Standard No. 144 ("SFAS 144"), "Accounting for Impairment or
Disposal of Long-Lived Assets".
SFAS 143 requires companies to record a liability relating to the retirement
of tangible long-lived assets. When the liability is initially recorded, a
company increases the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. This standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The new standard requires entities to record a
cumulative effect of the change in accounting principle to earnings in the
period of adoption. Contango has not yet determined the impact SFAS 143 will
have upon adoption.
SFAS 144 addresses the financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 but retains its
fundamental provisions for the (a) recognition and measurement of impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. SFAS 144 also supersedes the accounting and
reporting portions of APS Opinion No. 30 for segments of a business to be
disposed of but retains the requirements to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of or is classified as "held for
sale".
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from
those estimates. Significant estimates with regard to these financial
statements include the estimate of proved natural gas and oil reserve
quantities and the related present value of estimated future net cash flows
therefrom (see "Supplemental Oil and Gas Disclosures").
Revenue Recognition. Revenues from the sale of natural gas and oil produced
are recognized upon the passage of title, net of royalties. Revenues from
natural gas production are recorded using the sales method. When sales volumes
exceed the Company's entitled share, an overproduced imbalance occurs. To the
extent the overproduced imbalance exceeds the Company's share of the remaining
estimated proved natural gas reserves for a given property, the Company records
a liability. At June 30, 2001, the Company had no overproduced imbalances.
Cash Equivalents. Cash equivalents are considered to be all highly liquid
debt investments having an original maturity of three months or less. The
carrying amounts approximated fair market value due to the short maturity of
these instruments.
Net Income (Loss) per Common Share. Basic and diluted net income (loss) per
common share have been computed in accordance with SFAS No. 128, "Earnings per
Share". Basic net income (loss) per common share
F-8
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
is computed by dividing income (loss) attributable to common stock by the
weighted average number of common shares outstanding for the period. Diluted
net income per common share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Diluted net loss per common share does not reflect dilution
from potential common shares, because to do so would be antidilutive. (See Note
5 for the calculations of basic and diluted net income (loss) per common
share.)
Income Taxes. The Company follows the liability method of accounting for
income taxes under which deferred tax assets and liabilities are recognized for
the future tax consequences of (i) temporary differences between the tax bases
of assets and liabilities and their reported amounts in the financial
statements and (ii) operating loss and tax credit carryforwards for tax
purposes. Deferred tax assets are reduced by a valuation allowance when, based
upon management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period.
Concentration of Credit Risk. Substantially all of the Company's accounts
receivable result from natural gas and oil sales or joint interest billings to
a limited number of third parties in the natural gas and oil industry. This
concentration of customers and joint interest owners may impact the Company's
overall credit risk in that these entities may be similarly affected by changes
in economic and other conditions.
Stock-Based Compensation. The Company accounts for employee stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the fair value of the Company's common
stock at the date of the grant over the amount an employee must pay to acquire
the common stock. Non-employee stock-based compensation is accounted for using
the fair value method in accordance with SFAS No. 123, "Accounting for Stock-
Based Compensation".
Derivative Instruments and Hedging Activities. Contango periodically enters
into commodity derivatives contracts. These contracts, which are usually placed
with large energy pipeline and trading companies, major petroleum companies or
financial institutions that the Company believes are a minimal credit risk, may
take the form of futures contracts, swaps or options. The natural gas and oil
reference prices upon which these commodity derivatives contracts are based
reflect various market indices that have a high degree of historical
correlation with actual prices received by the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 established accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts), as defined, be recorded in
the balance sheet as either an asset or liability measured at fair value and
requires that changes in fair value be recognized currently in earnings unless
specific hedge accounting criteria are met.
Although the Company's hedging transactions generally are designed as
economic hedges for a portion of future natural gas and oil production, the
Company has elected not to designate the derivative instruments as "hedges"
under SFAS No. 133. As a result, gains and losses, representing changes in
these derivative instruments' mark-to-market fair values, are recognized
currently in Contango's earnings. (See Note 8 for more information on hedging
activities.)
Reclassifications. Prior year financial statements have been reclassified
where appropriate to conform to current year presentation.
F-9
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Natural Gas and Oil Exploration Risk
Natural Gas and Oil Exploration Risk. The Company's future financial
condition and results of operations will depend upon prices received for its
natural gas and oil production and the cost of finding, acquiring, developing
and producing reserves. Substantially all of its production is sold under
various terms and arrangements at prevailing market prices. Prices for natural
gas and oil are subject to fluctuations in response to changes in supply,
market uncertainty and a variety of other factors beyond its control. Other
factors that have a direct bearing on the Company's prospects are uncertainties
inherent in estimating natural gas and oil reserves and future hydrocarbon
production and cash flows, particularly with respect to wells that have not
been fully tested and with wells having limited production histories; access to
additional capital; changes in the price of natural gas and oil; availability
and cost of services and equipment; and the presence of competitors with
greater financial resources and capacity.
4. Liquidity
Management believes that cash on hand, anticipated cash flow from operations
and availability under the Company's bank credit facility (see Note 7), will be
adequate to satisfy planned capital expenditures to fund drilling activities
and to satisfy general corporate needs over the next twelve months. The Company
may continue to seek additional equity or other financing to fund the Company's
exploration program and to take advantage of other opportunities that may
become available. The availability of such funds will depend upon prevailing
market conditions and other factors over which the Company has no control, as
well as the Company's financial condition and results of operations. There can
be no assurances that the Company will have sufficient funds available to
finance its intended exploration and development programs or acquisitions. The
Company's exploration drilling program could be adversely affected if
sufficient funds are unavailable.
5. Net Income (Loss) Per Common Share
A reconciliation of the components of basic and diluted net income (loss)
per common share for the fiscal years ended June 30, 2001 and 2000 and the nine
months ended March 31, 2002 and 2001 is presented below:
Year Ended June 30,
-----------------------------------------------------------------
2001 2000
------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share
---------- ---------- --------- ----------- ---------- ---------
Basic:
Net income (loss)
attributable to common
stock................. $7,262,454 11,287,098 $0.64 $(1,846,744) 4,953,729 $(0.37)
===== ======
Effect of Dilutive
Securities:
Stock options and
warrants.............. -- 1,384,664 -- --
Series A preferred
stock................. 170,822 847,826 -- --
Series B preferred
stock................. 304,383 861,536 -- --
---------- ---------- ----------- ----------
Diluted:
Net income (loss)
attributable to common
stock................. $7,737,659 14,381,124 $0.54 $(1,846,744) 4,953,729 $(0.37)
========== ========== ===== =========== ========== ======
Nine Months Ended
-----------------------------------------------------------------
March 31, 2002 March 31, 2001
------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share
---------- ---------- --------- ----------- ---------- ---------
(Unaudited)
Basic:
Net income attributable
to common stock....... $4,798,786 11,477,836 $0.42 $ 4,883,072 11,220,609 $ 0.44
===== ======
Effect of Dilutive
Securities:
Stock options and
warrants.............. -- 686,825 -- 1,374,259
Series A preferred
stock................. 150,000 1,000,000 120,822 797,100
Series B preferred
stock................. 300,000 1,136,363 204,384 769,927
---------- ---------- ----------- ----------
Diluted:
Net income attributable
to common stock....... $5,248,786 14,301,024 $0.37 $ 5,208,278 14,161,895 $ 0.37
========== ========== ===== =========== ========== ======
F-10
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to pretax
income as follows:
Year Ended June 30,
---------------------
2001 2000
---------- ---------
Provision (benefit) at the statutory tax rate........ $3,820,917 $(646,000)
Increase (decrease) in valuation allowance........... (646,000) 646,000
Other................................................ 4,331 --
---------- ---------
Income tax provision............................... $3,179,248 $ --
========== =========
The net deferred income tax liability is comprised of the following:
June 30,
------------------------
2001 2000
----------- -----------
Deferred income tax asset:
Net operating loss carryforwards............... $ 715,194 $ 1,309,000
Valuation allowance............................ -- (1,129,000)
----------- -----------
715,194 180,000
Deferred income tax liabilities:
Temporary basis differences in natural gas and
oil properties................................ (3,894,442) (180,000)
----------- -----------
Net deferred income tax liability............ $(3,179,248) $ --
=========== ===========
Realization of the net deferred tax asset is dependent on the Company's
ability to generate taxable earnings in the future. During the fiscal year
ended June 30, 2001, the Company recognized approximately $1.8 million of
previously unbenefitted net operating loss carryforwards. At June 30, 2001, the
Company had a U.S. federal net operating loss carryforward of approximately
$2.0 million that will expire beginning 2018.
7. Long-Term Debt
Effective December 1, 2000, Contango entered into a reducing revolving line
of credit of up to $10.0 million with Bank One, Texas, National Association.
The 18-month credit facility provided for a borrowing base of $5.0 million,
$3.0 million of which is unsecured, with the borrowing base redetermined semi-
annually. Interest was payable monthly at the bank's prime rate plus one and
one-fourth percent. Additionally, the Company paid a quarterly commitment fee
of one-fourth percent ( 1/(1/4%) per annum on the average availability under the
credit facility.
On June 29, 2001, Contango replaced its previous line of credit with a three
year, secured, reducing revolving line of credit with Guaranty Bank, FSB that
matures in June 2004 (the "Credit Facility"). The hydrocarbon borrowing base is
subject to semi-annual redeterminations based primarily on the value of the
Company's proved reserves. Borrowings under the Credit Facility bear interest,
at the option of the Company, at either (i) LIBOR plus two percent (2.0%) or
(ii) the bank's base rate plus one-fourth percent ( 1/(1/4%) per annum.
Additionally, the Company pays a quarterly commitment fee of three-eighths
percent ( 3/(3/8%) per annum on the average availability under the Credit
Facility. The Credit Facility requires the maintenance of certain ratios,
including those related to working capital, funded debt to EBITDAX and debt
service coverage as defined in Credit Facility. Additionally, the Credit
Facility contains certain negative covenants that, among
F-11
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
others, restrict or limit the Company's ability to incur indebtedness, sell
assets, pay dividends, reacquire or otherwise acquire or redeem capital stock.
Failure to maintain required financial ratios or comply with the Credit
Facility's covenants can result in a default and acceleration of all
indebtedness under the Credit Facility. As of June 30, 2001, there were no
borrowings under the credit facility, and the Company was in compliance with
its financial covenants, ratios and other provisions of the credit facility.
8. Commodity Price Hedges
Contango periodically enters into commodity derivative contracts. These
contracts, which are usually placed with large energy pipeline and trading
companies, major petroleum companies or financial institutions that the Company
believes are a minimal credit risk, may take the form of futures contracts,
swaps or options. The derivative contracts call for the Company to receive, or
make, payments based upon the differential between a fixed and a variable
commodity price as specified in the contract. As a result of these activities,
the Company recognized hedging losses of $557,654 in the fiscal year ended June
30, 2001. The Company had no hedging activity during the fiscal year ended June
30, 2000.
The following table sets forth the Company's pricing and notional volumes on
open commodity derivative contracts as of June 30, 2001 and March 31, 2002:
Strike
Contract Description Term Price(1) Quantity(2)
-------------------- --------------- ------------ -----------
June 30, 2001:
Natural gas call (purchased)......... 08/2001-12/2001 $ 12.00 100,000/mth
Crude oil collar (purchased)......... 07/2001-12/2001 22.00-32.00 5,000/mth
Natural gas put (purchased).......... 01/2002-12/2002 2.50 8,200/day
Natural gas swap (received fixed).... 09/2001-10/2001 4.005 8,000/day
Natural gas swap (received fixed).... 11/2001-12/2001 3.965 8,000/day
March 31, 2002 (Unaudited):
Natural gas put...................... 05/2002-10/2002 $ 3.00 8,000/day
Natural gas call..................... 07/2002-12/2002 4.02 8,000/day
Crude oil swap....................... 04/2002-10/2002 24.95 5,000/mth
- --------
(1) Per Mmbtu and barrel.
(2) Natural gas quantities in Mmbtu; oil in barrels.
9. Commitments and Contingencies
Contango leases its office space and certain other equipment. As of June 30,
2001, minimum future lease payments are as follows:
Fiscal Year Ending June 30, 2002................................... $ 76,522
2003............................................................. 77,188
2004............................................................. 30,638
2005............................................................. 7,363
Thereafter....................................................... 8,590
--------
Total.......................................................... $200,301
========
The amount incurred under operating leases during the year ended June 30,
2001 and 2000 was $64,076 and $23,000, respectively.
F-12
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Shareholders' Equity
Common Stock. On December 1, 2000, Contango changed its state of
incorporation from Nevada to Delaware and in connection with this
reincorporation affected a 2 for 1 reverse stock split. All common share and
per share amounts have been adjusted to reflect this 2 for 1 reverse stock
split.
Holders of the Company's common stock are entitled to one vote per share on
all matters to be voted on by shareholders and are entitled to receive
dividends, if any, as may be declared from time to time by the Board of
Directors of the Company. Upon any liquidation or dissolution of the Company,
the holders of common stock are entitled to receive a pro rata share of all of
the assets remaining available for distribution to shareholders after
settlement of all liabilities and liquidating preferences of preferred
stockholders.
On August 24, 2000, the Southern Ute Indian Tribe doing business as the
Southern Ute Indian Tribe Growth Fund exercised the option previously acquired
to purchase 1,250,000 shares of common stock for net proceeds of $2,500,000.
Preferred Stock. The Company's Board of Directors has authorized 125,000
shares of preferred stock, of which 2,500 shares of Series A convertible
preferred stock and 5,000 shares of Series B convertible preferred stock were
issued and outstanding as of June 30, 2001.
On August 24, 2000, Contango sold in a private placement transaction 2,500
shares of its Series A senior convertible cumulative preferred stock (the
"Series A Preferred Stock") to Trust Company of the West, as an investment
manager and custodian on behalf of a client, for net proceeds of $2,500,000.
Series A Preferred Stock ranks prior to the Company's common stock (and any
other junior stock) with respect to the payment of dividends or distributions
and upon liquidation, dissolution, winding-up or otherwise and is pari passu to
the Company's Series B senior convertible cumulative preferred stock. Holders
of Series A Preferred Stock are entitled to receive quarterly dividends at a
dividend rate equal to 8% per annum if paid in cash on a current quarterly
basis or otherwise at a rate of 10% per annum if not paid on a current
quarterly basis or if paid in shares of Series A Preferred Stock, in each case,
computed on the basis of $1,000 per share. Holders of Series A Preferred Stock
may, at their discretion, elect to convert such shares to shares of the
Company's common stock at a conversion price of $2.50 per share. In addition,
upon the occurrence of certain events, the Company may elect to convert all of
the outstanding shares of Series A Preferred Stock at a conversion price of
$2.50 per share.
On September 27, 2000, Contango sold in a private placement transaction
5,000 shares of its Series B senior convertible cumulative preferred stock (the
"Series B Preferred Stock") to Aquila Energy Capital Corporation for net
proceeds of $5,000,000. Series B Preferred Stock ranks prior to the Company's
common stock (and any other junior stock) with respect to the payment of
dividends or distributions and upon liquidation, dissolution, winding-up or
otherwise and is pari passu to the Company's Series A Preferred Stock. Holders
of Series B Preferred Stock are entitled to receive quarterly dividends at a
dividend rate equal to 8% per annum if paid in cash on a current quarterly
basis or otherwise at a rate of 10% per annum if not paid on a current
quarterly basis or if paid in shares of Series B Preferred Stock, in each case,
computed on the basis of $1,000 per share. Holders of Series B Preferred Stock
may, at their discretion, elect to convert such shares to shares of the
Company's common stock at a conversion price of $4.40 per share. In addition,
upon the occurrence of certain events, the Company may elect to convert all of
the outstanding shares of Series B Preferred Stock at a conversion price of
$4.40 per share.
F-13
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stock Options
In September 1999, the Company established the Contango Oil & Gas Company
1999 Stock Incentive Plan (the "Option Plan"). Under the Option Plan, the
Company may issue up to 2,500,000 shares of common stock with an exercise price
of each option equal to or greater than the market price of the Company's
common stock on the date of grant, but in no event less than $2.00 per share.
The Company may grant key employees both incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended, and
stock options that are not qualified as incentive stock options. Stock option
grants to non-employees, such as directors and consultants, can only be stock
options that are not qualified as incentive stock options. Options generally
expire after five years. The vesting schedule varies, but vesting generally
occurs either (a) immediately or (b) one-third immediately and one-third on the
next two anniversary dates of the grant. As of June 30, 2001, options under the
Option Plan to acquire 458,500 shares of common stock have been granted at
prices between $2.00 and $5.87 per share and were outstanding.
In addition to grants made under the Option Plan, the Company has granted
options to purchase common stock outside the Option Plan. These options
generally expire after five years. The vesting schedule varies, but vesting
generally occurs either (a) immediately, (b) one-third immediately and one-
third on the next two anniversary dates of the grant or (c) under a vesting
schedule that is tied to the payout and rate of return on specific projects for
which the option was granted. As of June 30, 2001, options to acquire 556,834
shares of common stock have been granted at prices between $2.00 and $5.87 per
share and were outstanding.
A summary of the status of the plans as of June 30, 2000 and 2001, and
changes during the fiscal years then ended, is presented in the table below:
Year Ended June 30,
---------------------------------------
2001 2000
------------------- -------------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Options Price Options Price
--------- -------- --------- --------
Outstanding, beginning of year (1).... 507,084 $2.18 50,000 $2.00
Granted............................... 537,500 3.51 557,084 2.16
Exercised............................. (29,250) 2.00 -- --
Cancelled............................. -- -- (100,000) 2.00
--------- ---------
Outstanding, end of year.............. 1,015,334 2.89 507,084 2.18
========= =========
Exercisable, end of year.............. 598,666 2.60 353,750 2.24
========= =========
Available for grant, end of year...... 2,024,750 2,349,751
========= =========
Weighted average fair value of options
granted during the year (2).......... $ 1.70 $ 0.58
========= =========
- --------
(1) Does not include the 90-day option granted to the Southern Ute Indian Tribe
Growth Fund on June 8, 2000 to acquire 1,250,000 shares of Company's common
stock that was exercised August 24, 2000.
(2) The fair value of each option is estimated as of the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the years ended June 30, 2001 and 2000,
respectively: (i) risk-free interest rate of 5.77 percent and 6.35 percent;
(ii) expected lives of five years for the Option Plan and other options;
(iii) expected volatility of 50 percent for both periods; and (iv) expected
dividend yield of zero percent.
F-14
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options that were
outstanding at June 30, 2001:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Number of Weighted Number of
Shares Average Weighted Shares Weighted
Under Remaining Average Under Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Price Options Life Price Options Price
----------------------- ----------- ----------- -------- ----------- --------
$2.00................... 545,334 3.7 $2.00 383,666 $2.00
3.00-3.81.............. 202,500 4.0 3.16 125,833 3.09
4.00-4.37.............. 237,500 4.4 4.36 79,167 4.36
5.00-5.87.............. 30,000 4.6 5.56 10,000 5.56
--------- -------
1,015,334 598,666
========= =======
The Company accounts for stock-based compensation for employees under APB
Opinion No. 25 and related interpretations, under which no compensation cost
has been recognized for the Option Plan. If compensation costs for these plans
had been determined in accordance with SFAS No. 123, the Company's net income
and net income per common share would approximate the following pro forma
amounts:
Year Ended June 30,
----------------------
2001 2000
---------- -----------
Income (Loss) Attributable to Common Stock:
As reported....................................... $7,262,454 $(1,846,744)
Pro forma......................................... 7,166,014 (1,873,437)
Net Income (Loss) per Common Share:
Basic:
As reported..................................... $ 0.64 $ (0.37)
Pro forma....................................... 0.63 (0.38)
Diluted:
As reported..................................... $ 0.54 $ (0.37)
Pro forma....................................... 0.53 (0.38)
12. Warrants
As of June 30, 2001, the Company had issued and outstanding warrants to
purchase 2,040,185 shares of the Company's common stock. All warrants were
exercisable at June 30, 2001. The Company has reserved an equal number of
shares of common stock for issuance upon the exercise of its outstanding
warrants. Warrants issued by the Company do not confer upon the holders any
voting or other rights of a shareholder of the Company. A summary of the
Company warrants as of June 30, 2001 and 2000, and changes during the fiscal
years then ended, is presented in the table below:
Year Ended June 30,
-----------------------------------------
2001 2000
-------------------- --------------------
Number of Number of
Shares Weighted Shares Weighted
Under Average Under Average
Outstanding Exercise Outstanding Exercise
Warrants Price Warrants Price
----------- -------- ----------- --------
Outstanding, beginning of year... 1,415,185 $2.00 -- $ --
Granted........................ 625,000 2.42 1,415,185 2.00
Exercised...................... -- -- -- --
Cancelled...................... -- -- -- --
--------- ----- --------- -----
Outstanding, end of year......... 2,040,185 $2.13 1,415,185 $2.00
========= ===== ========= =====
F-15
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about warrants that were
outstanding at June 30, 2001:
Warrants Outstanding
and Exercisable
-----------------------
Number of Weighted
Shares Average
Under Remaining
Outstanding Contractual
Exercise Price Warrants Life
-------------- ----------- -----------
$2.00................................................ 1,915,185 3.4
4.12................................................ 125,000 4.4
---------
2,040,185
=========
13. Major Purchasers
The Company is a natural gas and oil exploration and production company that
generally sells its natural gas and oil to a limited number of customers on a
month-to-month basis. For the year ended June 30, 2001, a single party
accounted for approximately 99% of the Company's natural gas and oil sales. For
the year ended June 30, 2000, a single party accounted for approximately 91% of
the Company's natural gas and oil sales.
14. Related Party Transactions
In August 1999, the Company completed a private placement of 3,230,000
shares of its common stock for $0.20 per share and warrants to purchase
1,230,000 shares of common stock for $2.00 per share. Gross proceeds of the
private placement totaled $670,600. Purchasers of stock and warrants in the
placement included Kenneth R. Peak, the Company's chairman, president and chief
executive officer, and John B. Juneau, Joseph Romano and Darrell Williams,
directors of the Company, who purchased an aggregate of 1,030,000 shares of
common stock and 1,030,000 warrants to purchase common stock.
Effective September 1, 1999, the Company entered into an exploration
agreement with Juneau Exploration Company, L.L.C. Pursuant to the agreement, as
amended, Juneau Exploration, L.P. ("JEX") received 200,000 shares of Contango
common stock as part of its remuneration upon execution of the agreement. As of
June 30, 2001, JEX also has received stock options to purchase a total of
200,000 shares of Company common stock at $2.00 per share in connection with
exploration successes and acquisitions. JEX receives a 25% proportionately
reduced back-in working interest after the Company achieves a defined payout.
Mr. Juneau is the sole manager of the general partner of JEX and is a director
of the Company.
In October 1999, the Company completed a private placement of 1,890,000
shares of its common stock for $0.60 per share for total proceeds of
$1,134,000. Purchasers of stock in the placement included Kenneth R. Peak, the
Company's chairman, president and chief executive officer, and Darrell
Williams, a director of the Company, who purchased an aggregate of 406,000
shares of common stock.
During the quarter ended March 31, 2000 as part of a private placement,
Contango sold 95,333 shares of its common stock at a price of $1.50 per share
for total proceeds of $71,500. Purchasers of stock included William H. Gibbons,
the Company's treasurer, who purchased an aggregate of 5,000 shares of common
stock.
During the fiscal year ended June 30, 2000, Contango issued 5,000 shares of
common stock at an average value of $1.75 to William H. Gibbons as partial
consideration for his services as Vice President and Treasurer of the Company.
F-16
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 24, 2000, as part of the formation of Republic Exploration,
Contango granted to JEX a five-year warrant to purchase 62,500 share of common
stock at an exercise price of $2.00 per share.
On November 10, 2000, in consideration for the consent to extend an option
to increase Contango's ownership in Republic Exploration from 10.0% to 33.3%,
Contango granted to JEX a five-year warrant to purchase 62,500 share of common
stock at an exercise price of $2.00 per share.
During the fiscal year ended June 30, 2001, Contango issued 6,600 shares of
common stock at an average value of $4.09 to William H. Gibbons as partial
consideration for his services as Vice President and Treasurer of the Company.
15. Non-Cash Investing and Financing Activities
A summary of non-cash investing and financing activities is presented below.
In August 1999, the Company converted each of its 16,792 shares of Series B
preferred stock into 30 fully paid and non-assessable shares of common stock.
In April 2000, the Company issued 200,000 shares of common stock to JEX in
connection with an exploration agreement.
For the year ended June 30, 2001, the Company issued options, warrants and
shares to certain individuals and companies as a result of (i) services
provided to the Company, (ii) sales of common and preferred stock and (iii)
exploration activities and, in connection with such issuances, recognized non-
cash costs of approximately $1.3 million.
16. Subsequent Events (Unaudited)
Purchase of Assets. Effective as of January 1, 2002, Contango entered into
separate Asset Purchase Agreements with JEX and other individuals to purchase
all of the working and revenue interests of JEX and other individuals in its
STEP properties. Contango paid approximately $12.9 million with cash on hand
and increased availability under its Credit Facility.
Effective January 1, 2002, Contango completed the acquisition from the
Southern Ute Indian Tribe ("SUIT") of additional ownership interests in its
STEP properties at a cost of approximately $7.0 million, subject to purchase
price adjustments. This acquisition was funded with cash on hand and increased
availability under the Company's Credit Facility.
Repurchase of Common Stock. On March 28, 2002, Contango repurchased
2,575,000 shares of Contango common stock owned by the SUIT Growth Fund for
$6,180,000. This share repurchase represents a 22%
F-17
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reduction in Contango's outstanding common shares. The SUIT Growth Fund
originally purchased these securities in private placements during June and
August 2000. In addition, the Company cancelled a warrant held by the SUIT
Growth Fund to purchase 125,000 shares of its common stock at $2.00 per share
and options to purchase 17,500 shares of its common stock at prices between
$2.70 and $5.87 per share. In connection with these transactions, Robert J.
Zahradnik, Director of Operations of the SUIT Growth Fund and a Contango
director, tendered his resignation as a director to the Company's Board of
Directors.
Purchase of Additional Assets. Effective April 1, 2002, Contango completed
the acquisition from JEX and other individuals of additional "Tranche 2"
ownership interests in its STEP properties at a cost of approximately $3.4
million. This acquisition was funded with increased availability under the
Company's Credit Facility. The Company plans to close an additional smaller
acquisition of STEP proved developed producing reserves in July 2002. The
actual acquisition price for this closing will be based on natural gas and
crude oil prices in effect at the time of the anticipated July 2002 closing.
Long Term Debt. Effective February 1, 2002, the hydrocarbon borrowing base
under the Credit Facility was increased to $20.0 million with $350,000 monthly
reductions in the hydrocarbon borrowing base commencing March 1, 2002, subject
to semi-annual redeterminations.
As of March 31, 2002, $18.2 million was outstanding under the Credit
Facility, approximately $1.4 million of which was current, and the Company was
in compliance with its financial covenants, ratios and other provisions of the
Credit Facility. Effective April 1, 2002, the hydrocarbon borrowing base under
the Credit Facility was increased to $22.0 million with $475,000 monthly
reductions in the hydrocarbon borrowing base commencing May 1, 2002, subject to
semi-annual redeterminations. Approximately $0.8 million of long term debt is
related to long term hedge payables.
Purchase of LNG Facility Option. On June 4, 2002, Contango purchased an
option to buy up to a 20% equity interest in the Cheniere Energy, Inc. proposed
Freeport, Texas LNG receiving and regasification terminal. The purchase price
for an initial 10% interest in the project is $1.5 million, consisting of a
$750,000 payment made at signing and the balance payable upon exercise of the
option. In the event Contango elects not to exercise the initial 10% option,
the $750,000 up-front payment will be repaid to Contango on or prior to
July 15, 2003. In the event the initial 10% option is exercised, Contango will
have the right to acquire an additional 10% interest in the project upon
payment of an additional $1.5 million. Contango would also be responsible for
its share of all project costs, subsequent to January 1, 2002.
F-18
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
The following disclosures provide unaudited information required by SFAS No.
69, "Disclosures About Oil and Gas Producing Activities". Prior to Contango's
fiscal year ended June 30, 2000, the Company had no natural gas and oil
operations nor did it have any proved reserves.
Costs Incurred. The following table sets forth the costs incurred in natural
gas and oil property acquisition, exploration and development activities for
the fiscal years ended June 30, 2001 and 2000:
Year Ended June 30,
----------------------
2001 2000
----------- ----------
Property acquisition costs:
Unproved........................................... $ 1,901,405 $ 143,367
Proved............................................. -- 418,531
Exploration costs.................................. 20,867,565 2,395,471
Development costs.................................. -- --
----------- ----------
Total costs incurred............................. $22,768,970 $2,957,369
=========== ==========
Natural Gas and Oil Reserves. Proved reserves are estimated quantities of
natural gas and oil that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
proved reserves that reasonably can be expected to be recovered through
existing wells with existing equipment and operating methods.
Proved natural gas and oil reserve quantities at June 30, 2001 and 2000, and
the related discounted future net cash flows before income taxes are based on
estimates prepared by William M. Cobb & Associates, Inc., independent petroleum
engineers. Such estimates have been prepared in accordance with guidelines
established by the Securities and Exchange Commission.
The Company's net ownership interests in estimated quantities of proved
natural gas and oil reserves and changes in net proved reserves as of June 30,
2001 and 2000, all of which are located in the continental United States, are
summarized below:
As of June 30, As of June 30,
2001 2000
------------------ ------------------
Oil and Natural Oil and Natural
Condensate Gas Condensate Gas
---------- ------- ---------- -------
(MBbls) (MMcf) (MBbls) (MMcf)
Proved developed and undeveloped
reserves:
Beginning of year................. 137 2,686 -- --
Purchases of natural gas and oil
properties....................... -- -- 7 17
Discoveries....................... 280 17,146 136 2,697
Recoveries........................ 40 (128) -- --
Production........................ (122) (3,570) (6) (28)
---- ------ --- -----
End of year....................... 335 16,134 137 2,686
==== ====== === =====
Proved developed reserves at end of
year............................... 300 14,013 70 1,206
==== ====== === =====
F-19
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)--(Continued)
Standardized Measure. The standardized measure of discounted future net cash
flows relating to the Company's ownership interests in proved natural gas and
oil reserves as of June 30, 2001 and 2000 are shown below:
As of June 30,
-------------------------
2001 2000
------------ -----------
Future cash flows................................ $ 73,861,851 $17,732,676
Future operating expenses........................ (19,352,469) (1,969,450)
Future development costs......................... (541,577) (829,092)
Future income tax expenses....................... (12,516,200) (2,870,500)
------------ -----------
Future net cash flows.......................... 41,451,605 12,063,634
10% annual discount for estimated timing of
cash flows.................................. (8,305,000) (1,837,000)
------------ -----------
Standardized measure of discounted future net
cash flows.................................... $ 33,146,605 $10,226,634
============ ===========
Future cash flows are computed by applying fiscal year-end prices of natural
gas and oil to year-end quantities of proved natural gas and oil reserves.
Future operating expenses and development costs are computed primarily by the
Company's petroleum engineers by estimating the expenditures to be incurred in
developing and producing the Company's proved natural gas and oil reserves at
the end of the year, based on year end costs and assuming continuation of
existing economic conditions.
Future income taxes are based on year-end statutory rates, adjusted for tax
basis and applicable tax credits. A discount factor of 10 percent was used to
reflect the timing of future net cash flows. The standardized measure of
discounted future net cash flows is not intended to represent the replacement
cost or fair value of the Company's natural gas and oil properties. An estimate
of fair value would also take into account, among other things, the recovery of
reserves not presently classified as proved, anticipated future changes in
prices and costs, and a discount factor more representative of the time value
of money and the risks inherent in reserve estimates of natural gas and oil
producing operations.
Change in Standardized Measure. Changes in the standardized measure of
future net cash flows relating to proved natural gas and oil reserves are
summarized below:
Year Ended June 30,
-------------------------
2001 2000
------------ -----------
Changes due to current year operation:
Sales of natural gas and oil, net of natural
gas and oil operating expenses............... $(21,916,818) $ (213,085)
Extensions and discoveries.................... 53,366,000 12,287,000
Net change in prices and production costs..... (2,794,442) --
Change in future development costs............ 327,231 --
Revisions of quantity estimates............... 1,181,000 --
Accretion of discount......................... 1,226,000 --
Change in the timing of production rates and
other........................................ (1,024,000) --
Purchases of natural gas and oil properties... -- 186,205
Changes in income taxes....................... (7,445,000) (2,033,486)
------------ -----------
Net change...................................... 22,919,971 10,226,634
Beginning of year............................... 10,226,634 --
------------ -----------
End of year..................................... $ 33,146,605 $10,226,634
============ ===========
F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Contango Oil & Gas Company:
We have audited the accompanying statement of combined revenues and direct
operating expenses of the oil and gas properties purchased by Contango Oil &
Gas Company (the "Company") from Juneau Exploration, L.P., Other Individuals
and SUIT (as described in Note 1) for the years ended June 30, 2001 and 2000.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statement
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
As disclosed in Note 2, the accompanying statement was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in Form S-1 of Contango Oil & Gas Company and
is not intended to be a complete financial presentation of the properties
described above.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the combined revenues and direct operating expenses
of the oil and gas properties purchased by Contango Oil & Gas Company from
Juneau Exploration, L.P., Other Individuals and SUIT for the years ended June
30, 2001 and 2000 in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
May 6, 2002
F-21
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
STATEMENT OF COMBINED REVENUES AND DIRECT OPERATING EXPENSES OF THE
OIL AND GAS PROPERTIES PURCHASED FROM JUNEAU EXPLORATION, L.P.,
OTHER INDIVIDUALS AND SUIT
For the Years Ended For the Nine Months
June 30, Ended March 31,
------------------- ---------------------
2001 2000 2002 2001
----------- ------- ---------- ----------
(Unaudited)
Revenues............................ $11,209,907 $19,839 $7,652,578 $7,123,125
Direct operating expenses........... 1,115,681 2,034 1,059,570 677,142
----------- ------- ---------- ----------
Excess of revenues over direct
operating expenses................. $10,094,226 $17,805 $6,593,008 $6,445,983
=========== ======= ========== ==========
The accompanying notes are an integral part of this financial statement.
F-22
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO STATEMENT OF COMBINED REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND GAS PROPERTIES PURCHASED FROM JUNEAU EXPLORATION, L.P.,
OTHER INDIVIDUALS AND SUIT
1. THE PROPERTIES
Effective January 1, 2002, Contango Oil & Gas Company ("Contango" or the
"Company") entered into an agreement with Juneau Exploration, L.P. ("JEX") to
purchase certain working and revenue interests of JEX in South Texas
Exploration Program properties ("STEP"). John B. Juneau is the Sole Manager of
Juneau GP, LLC, the General Partner of JEX, and is one of the directors of the
Company. Contango paid approximately $11 million in cash, subject to normal
post-closing adjustments, and funded the acquisition with cash on hand and
increased availability under an expanded $17 million secured revolving credit
facility provided by Guaranty Bank, FSB. Effective January 1, 2002, the Company
increased its ownership interest in STEP properties by paying $1.8 million for
an overriding royalty interest ("ORRI") to Other Individuals. Contango acquired
the JEX and ORRI interests in 22 onshore producing natural gas and oil wells,
located in Jim Hogg and Brooks Counties, Texas. Effective January 1, 2002, the
Company increased its working and net revenue interest ownership in STEP
properties by paying $7.0 million to the Southern Ute Indian Tribe ("SUIT").
Effective April 1, 2002, the Company increased its working interest, net
revenue interest and overriding royalty interest ownership in its STEP
properties by paying $3.4 million to JEX and Other Individuals. The properties
acquired are herein referred to as the "Acquisitions". At the time of the
acquisition from SUIT, SUIT owned approximately 22% of Contango's common stock
and was represented by one member of the Company's Board of Directors.
2. BASIS FOR PRESENTATION
During the periods presented, the Acquisitions were not accounted for or
operated as a separate division by JEX, by Other Individuals or by SUIT.
Certain costs, such as depreciation, depletion and amortization, exploration
expenses, general and administrative expenses, and corporate income taxes were
not allocated to the individual properties. Accordingly, full separate
financial statements prepared in accordance with generally accepted accounting
principles do not exist and are not practicable to obtain in these
circumstances.
Revenues and direct operating expenses included in the accompanying
statement represent Contango's acquired net working and revenue interests in
the properties and are presented on the accrual basis of accounting.
Depreciation, depletion and amortization, exploration expenses, general and
administrative expenses, and corporate income taxes have been excluded.
Accordingly, the financial statements and other information presented are not
indicative of the financial condition or results of operations of the
Acquisitions going forward due to the changes in the business and the omission
of various operating expenses.
3. COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of the Asset Purchase Agreements, JEX, Other
Individuals and SUIT retain any claims, litigation or disputes pending as of
the effective date of January 1, 2002 and April 1, 2002 or any matters arising
in connection with ownership of the Acquisitions prior to the effective date.
Notwithstanding this indemnification, Contango is not aware of any legal,
environmental or other commitments or contingencies that would have a material
effect on the statement of combined revenues and direct operating expenses.
F-23
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS INFORMATION OF THE OIL AND GAS PROPERTIES
PURCHASED FROM JUNEAU EXPLORATION, L.P., OTHER INDIVIDUALS AND SUIT
(UNAUDITED)
4. OIL AND GAS RESERVE INFORMATION
Proved oil and gas reserve quantities are based on estimates prepared by
William M. Cobb & Associates, Inc, independent petroleum engineers. Such
estimates have been prepared in accordance with guidelines established by the
Securities and Exchange Commission.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and projecting future rates of production. The following reserve data
related to the Acquisitions represent estimates only and should not be
construed as being exact.
Gas Oil
---------- -------
(Mcf) (Bbls)
Total Proved Reserves: (a)
Balance, June 30, 1999................................ -- --
Production.......................................... (3,317) (101)
Discoveries......................................... 1,831,873 82,385
---------- -------
Balance, June 30, 2000................................ 1,828,556 82,284
---------- -------
Production.......................................... (1,652,101) (50,013)
Discoveries......................................... 9,848,002 205,758
Revisions........................................... 222,126 (42,759)
---------- -------
Balance, June 30, 2001................................ 10,246,583 195,270
========== =======
- --------
(a)Substantially all proved reserves have been developed.
5. FUTURE NET CASH FLOWS
Future cash flows are computed by applying fiscal year-end prices of natural
gas and oil to year-end quantities of proved natural gas and oil reserves.
Future operating expenses and development costs are computed primarily by the
Company's petroleum engineers by estimating the expenditures to be incurred in
developing and producing the Acquisitions' proved natural gas and oil reserves
at the end of the year, based on year end costs and assuming continuation of
existing economic conditions.
Future income taxes are based on year-end statutory rates, adjusted for tax
basis and applicable tax credits and for 2001 is based on Contango's purchase
price. A discount factor of 10 percent was used to reflect the timing of future
net cash flows. The standardized measure of discounted future net cash flows is
not intended to represent the replacement costs or fair value of the
Acquisitions' natural gas and oil properties. An estimate of fair value would
take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs, and a
discount factor more representative of time value of money and the risks
inherent in reserve estimates of natural gas and oil producing operations.
June 30, June 30,
2001 2000
------------ -----------
(Unaudited)
Future cash flows............................... $ 46,555,773 $11,753,695
Future operating expenses....................... (12,141,668) (1,262,536)
Future development costs........................ (160,325) (226,633)
Future income tax expense....................... (1,996,193) (2,976,377)
------------ -----------
Future net cash flows........................... 32,257,587 7,288,149
10% discount rate............................... (7,528,007) (1,273,972)
------------ -----------
Standardized measure of discounted future net
cash flows..................................... $ 24,729,580 $ 6,014,177
============ ===========
F-24
Changes in the standardized measure of future net cash flows relating to
proved natural gas and oil reserves are summarized below:
For the Year For the
Ended Year Ended
June 30, June 30,
2001 2000
------------ -----------
(Unaudited)
Beginning of year................................ $ 6,014,177 $ --
Sales, net of production costs................... (10,094,226) (17,805)
Net change in price and production costs......... (2,927,877) --
Extensions and discoveries....................... 31,114,707 8,346,786
Changes in future development costs.............. 67,467 --
Revision of quantity estimated................... 274,904 --
Accretion of discount............................ 868,056 --
Change in timing of production rates and other... (1,639,318) --
Changes in income taxes.......................... 1,051,690 (2,314,804)
------------ -----------
End of year...................................... $ 24,729,580 $ 6,014,177
============ ===========
F-25
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Following are the unaudited pro forma condensed consolidated financial
statements of Contango Oil and Gas Company ("Contango") as of March 31, 2002
and for the year ended June 30, 2001 and the nine months ended March 31, 2002.
The unaudited pro forma condensed consolidated financial statements present the
effects of the acquisition of the working and net revenue interest of certain
properties purchased from Juneau Exploration, L.P. ("JEX") effective January 1,
2002 and April 1, 2002, the acquisition of the overriding royalty interest
("ORRI") purchased from other individuals effective January 1, 2002 and April
1, 2002, and the acquisition of the working and net revenue interest purchased
from the Southern Ute Indian Tribe ("SUIT") effective January 1, 2002
(collectively, the "Acquisitions"). The pro forma balance sheet assumes the
April 1, 2002 JEX and ORRI acquisitions occurred on March 31, 2002. The pro
forma statements of operations assume the Acquisitions occurred on July 1,
2000.
The pro forma balance sheet and the pro forma statements of operations were
derived by adjusting the historical financial statements of Contango. The
adjustments are based on currently available information and, therefore, the
actual adjustments may differ from the pro forma adjustments. However,
management believes that the assumptions provide a reasonable basis for
presenting the significant effects of the Acquisitions. The pro forma
adjustments give appropriate effect to those assumptions and are properly
applied in the pro forma financial statements. The unaudited pro forma
financial statements do not purport to present the financial position or
results of operations of Contango had the Acquisitions actually been
contemplated as of the dates indicated. Moreover, the statements do not project
the financial position or results of operations of Contango for any future date
or period.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the notes thereto, Contango's Annual Report on Form
10-KSB for the year ended June 30, 2001, its Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2002 and the Statement of Combined Revenues and
Direct Operating Expenses included elsewhere in this prospectus.
F-26
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended June 30, 2001
Contango Acquisitions Pro Forma
Historical Historical Adjustments Pro Forma
----------- ------------ ----------- -----------
REVENUES:
Natural gas and oil
sales................ $24,548,723 $11,209,907 $ -- $35,758,630
Loss from hedging
activities........... (557,654) -- -- (557,654)
----------- ----------- ----------- -----------
Total revenues...... 23,991,069 11,209,907 -- 35,200,976
----------- ----------- ----------- -----------
EXPENSES:
Operating expenses.... 2,631,905 1,115,681 -- 3,747,586
Exploration expenses.. 4,167,427 -- -- 4,167,427
Depreciation,
depletion and
amortization......... 4,023,672 -- 2,362,137 (a) 6,385,809
Impairment of proved
gas and oil
properties........... 300,466 -- -- 300,466
General and
administrative
expense.............. 2,356,421 -- -- 2,356,421
----------- ----------- ----------- -----------
Total expenses...... 13,479,891 1,115,681 2,362,137 16,957,709
----------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS............. 10,511,178 10,094,226 (2,362,137) 18,243,267
Interest expense........ (8,674) -- (685,136)(b) (693,810)
Interest income......... 414,403 -- -- 414,403
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... 10,916,907 10,094,226 (3,047,273) 17,963,860
Provision for income
taxes.................. 3,179,248 -- 2,466,434 (c) 5,645,682
----------- ----------- ----------- -----------
NET INCOME (LOSS)....... 7,737,659 10,094,226 (5,513,707) 12,318,178
Preferred stock
dividends.............. 475,205 -- -- 475,205
----------- ----------- ----------- -----------
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCK.................. $ 7,262,454 $10,094,226 $(5,513,707) $11,842,973
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic................. $ 0.64 $ 1.05
=========== ===========
Diluted............... $ 0.54 $ 0.86
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic................. 11,287,098 11,287,098
=========== ===========
Diluted............... 14,381,124 14,381,124
=========== ===========
The accompanying notes to unaudited pro forma condensed consolidated
financial statements are an integral part of these statements.
F-27
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 2002
Contango Acquisition Pro Forma
Historical Historical Adjustments Pro Forma
----------- ----------- ----------- -----------
REVENUES:
Natural gas and oil
sales................ $15,908,607 $6,350,075 $ -- $22,258,682
Gain from hedging
activities........... 4,145,216 -- -- 4,145,216
----------- ---------- ----------- -----------
Total revenues...... 20,053,823 6,350,075 -- 26,403,898
----------- ---------- ----------- -----------
EXPENSES:
Operating expenses.... 2,525,620 863,976 -- 3,389,596
Exploration expenses.. 2,522,836 -- -- 2,522,836
Depreciation,
depletion and
amortization......... 6,044,823 -- 3,223,683 (a) 9,268,506
General and
administrative
expense.............. 1,331,146 -- -- 1,331,146
----------- ---------- ----------- -----------
Total expenses...... 12,424,425 863,976 3,223,683 16,512,084
----------- ---------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS............. 7,629,398 5,486,099 (3,223,683) 9,891,814
Interest expense........ (97,244) -- (426,617)(b) (523,861)
Interest income......... 169,156 -- -- 169,156
Gain on sale of assets.. 373,539 -- -- 373,539
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... 8,074,849 5,486,099 (3,650,300) 9,910,648
Provision for income
taxes.................. 2,826,063 -- 642,530 (c) 3,468,593
----------- ---------- ----------- -----------
NET INCOME.............. 5,248,786 5,486,099 (4,292,830) 6,442,055
Preferred stock
dividends.............. 450,000 -- -- 450,000
----------- ---------- ----------- -----------
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCK.................. $ 4,798,786 $5,486,099 $(4,292,830) $ 5,992,055
=========== ========== =========== ===========
NET INCOME PER SHARE:
Basic................. $ 0.42 $ 0.52
=========== ===========
Diluted............... $ 0.37 $ 0.45
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic................. 11,477,836 11,477,836
=========== ===========
Diluted............... 14,301,024 14,301,024
=========== ===========
The accompanying notes to unaudited pro forma condensed consolidated
financial statements are an integral part of these statements.
F-28
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 2002
Contango Pro Forma
Historical Adjustments Pro Forma
----------- ----------- -----------
ASSETS
Cash and cash equivalents............. $ 4,110,727 $(3,342,478)(1) $ 768,249
Other current assets.................. 4,365,351 -- 4,365,351
Net property and equipment............ 36,264,027 3,342,478 (1) 39,656,505
50,000 (2)
Other assets.......................... 6,758,394 -- 6,758,394
----------- ----------- -----------
TOTAL ASSETS.......................... $51,498,499 $ 50,000 $51,548,499
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities................... $ 6,492,067 $ 50,000 (2) $ 6,542,067
Long-term debt........................ 17,608,250 -- 17,608,250
Deferred credits and other noncurrent
liabilities.......................... 3,750,386 -- 3,750,386
----------- ----------- -----------
Total liabilities..................... 27,850,703 50,000 27,900,703
Shareholders' equity.................. 23,647,796 -- 23,647,796
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................... $51,498,499 $ 50,000 $51,548,499
=========== =========== ===========
The accompanying notes to unaudited pro forma condensed consolidated
financial statements are an integral part of these statements.
F-29
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The unaudited pro forma statement of operations for the year ended June 30,
2001, is derived from the audited financial statements of Contango for the year
ended June 30, 2001, the audited statement of combined revenues and direct
operating expenses for certain properties purchased from Juneau Exploration,
L.P. ("JEX"), other individuals and the Southern Ute Indian Tribe ("SUIT") for
the year ended June 30, 2001, and the adjustments and assumptions described
below.
The unaudited pro forma statement of operations for the nine months ended
March 31, 2002 and the unaudited pro forma balance sheet as of December 31,
2001 are based on the unaudited financial statements of Contango as of and for
the nine months ended March 31, 2002, the unaudited statement of combined
revenues and direct operating expenses for properties purchased from JEX, other
individuals and from SUIT for the nine months ended March 31, 2002, and the
adjustments and assumptions described below.
Pro Forma Adjustments
The unaudited pro forma statements of operations reflect the following
adjustments:
a. Record incremental depletion and amortization expense ("DD&A") using
the units-of-production method, resulting from the purchase of properties
from JEX, other individuals and SUIT.
b. Record interest expense associated with debt of approximately $17.6
million incurred under Contango's revolving credit facility to fund a
portion of the purchase price. Applicable interest rates on the facility
were 3.9 percent for the year ended June 30, 2001 and for the nine months
ended March 31, 2002. The effect of debt financing is based on the current
interest rate for which Contango has a commitment.
c. Record a pro forma income tax provision, assuming a 35 percent rate,
based on the pro forma change in income (loss) before income taxes and tax
attributes of the properties purchased.
The unaudited pro forma balance sheet reflects the following adjustments:
1. Record the purchase price of certain properties acquired from JEX on
April 1, 2002.
2. Record transaction costs, primarily legal and accounting fees,
relating to the purchase of properties from JEX.
F-30
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURES
(Unaudited)
The following table sets forth certain unaudited pro forma information
concerning Contango's proved oil and gas reserves as of June 30, 2001, giving
effect to the purchase of properties from JEX, other individuals and SUIT as if
they had occurred on July 1, 2000. There are numerous uncertainties inherent in
estimating the quantities of proved reserves and projection of future rates of
production and timing of development expenditures. The following reserve data
represents estimates only and should not be construed as being exact.
Proved Oil and Natural Gas Reserves
Natural Gas
-------------------------------
Contango Acquisitions Pro Forma
-------- ------------ ---------
(MMcf)
Proved Developed and Undeveloped Reserves:
Balance, June 30, 2000................... 2,686 1,828 4,514
Discoveries............................ 17,146 9,850 26,996
Revisions.............................. (128) 222 94
Production............................. (3,570) (1,654) (5,224)
------ ------ ------
Balance, June 30, 2001................... 16,134 10,246 26,380
====== ====== ======
Proved Developed Reserves:
Balance, June 30, 2000................... 1,206 1,828 3,034
Balance, June 30, 2001................... 14,013 10,246 24,259
Oil
-------------------------------
Contango Acquisitions Pro Forma
-------- ------------ ---------
(MBbls)
Proved Developed and Undeveloped Reserves:
Balance, June 30, 2000................... 137 82 219
Discoveries............................ 280 206 486
Revisions.............................. 40 (43) (3)
Production............................. (122) (50) (172)
------ ------ ------
Balance, June 30, 2001................... 335 195 530
====== ====== ======
Proved Developed Reserves:
Balance, June 30, 2000................... 70 82 152
Balance, June 30, 2001................... 300 195 495
F-31
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURES--(Continued)
(Unaudited)
The following table sets forth unaudited pro forma information concerning
the discounted future net cash flows from proved oil and gas reserves of
Contango as of June 30, 2001, net of income tax expense, and giving effect to
the acquisition of the JEX, other individuals and SUIT properties as if they
had occurred on July 1, 2000. Income tax expense has been computed using
assumptions relating to the future tax rates and the permanent differences and
credits under the tax laws relating to oil and gas activities at June 30, 2001.
Cash flows relating to the Acquisitions are based on William M. Cobb &
Associates Inc., evaluation of reserves and on information provided by JEX,
other individuals and SUIT. Future income tax expense on the Acquisitions is
based on Contango's purchase price. The information should be viewed only as a
form of standardized disclosure concerning possible future cash flows that
would result under the assumptions used but should not be viewed as indicative
of fair market value. Reference should be made to Contango's financial
statements for the fiscal year ended June 30, 2001, and the Statement of
Combined Revenues and Direct Operating Expenses included herein, for a
discussion of the assumptions used in preparing the information presented.
Future Net Cash Flows Contango Acquisitions Pro Forma
--------------------- ------------ ------------ ------------
Cash inflows............ $ 73,861,851 $ 46,555,773 $120,417,624
Production and
development costs...... (19,894,046) (12,301,993) (32,196,039)
Income tax expense...... (12,516,200) (1,996,193) (14,512,393)
------------ ------------ ------------
Future net cash flows... 41,451,605 32,257,587 73,709,192
10% discount rate....... (8,305,000) (7,528,007) (15,833,007)
------------ ------------ ------------
Discounted future net
cash flows............. $ 33,146,605 $ 24,729,580 $ 57,876,185
============ ============ ============
The following table sets forth the principal sources of change in discounted
future net cash flows:
Future Net Cash Flows Contango Acquisitions Pro Forma
--------------------- ------------ ------------ ------------
Beginning of year................ $ 10,226,634 $ 6,014,177 $ 16,240,811
Sales, net of production
costs......................... (21,916,818) (10,094,226) (32,011,044)
Net change in price and
production costs.............. (2,794,442) (2,927,877) (5,722,319)
Extensions and discoveries..... 53,366,000 31,114,707 84,480,707
Change in future development
costs......................... 327,231 67,467 394,698
Revision of quantities
estimated..................... 1,181,000 274,904 1,455,904
Accretion of discount.......... 1,226,000 868,056 2,094,056
Change in timing of production
rates and other............... (1,024,000) (1,639,318) (2,663,318)
Changes in income taxes........ (7,445,000) 1,051,690 (6,393,310)
------------ ------------ ------------
End of year...................... $ 33,146,605 $ 24,729,580 $ 57,876,185
============ ============ ============
F-32
- --------------------------------------------------------------------------------
, 2002
[LOGO][CONTANGO OIL & GAS COMPANY LOGO]
800,000 Shares
Depositary Shares Each Representing 1/10 of a Share of %
Convertible Cumulative Preferred Stock, Series C
Liquidation Preference Equivalent To $25.00 Per Depositary Share
------------
PROSPECTUS
------------
Morgan Keegan & Company, Inc.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses in connection with the issuance and distribution of
the securities being registered are set forth in the following table. Each
amount, except for the commission registration fee, is estimated.
Commission registration fee........................................ $ 2,116
Transfer agent's and registrar's fees and expenses.................
Printing expense...................................................
Legal fees and expenses............................................
Accounting fees and expense........................................
NASD Fee........................................................... 2,800
--------
Total.......................................................... $400,000
========
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law and our certificate of
incorporation and bylaws contain provisions for indemnification of our officers
and directors, and under certain circumstances, our employees and other
persons. The bylaws require us to indemnify such persons to the fullest extent
permitted by Delaware law. Each such person will be indemnified in any
proceeding if such person acted in good faith and in a manner that such person
reasonably believed to be in, or not opposed to, our best interests. The
indemnification would cover expenses, including attorney's fees, judgments,
fines and amounts paid in settlement.
Our bylaws also provide that we may purchase and maintain insurance on
behalf of any of our present or past directors or officers insuring against any
liability asserted against such person incurred in their capacity as a director
or officer or arising out of such status, whether or not we would have the
power to indemnify such person. We have obtained and maintain director's and
officers' liability insurance.
Item 15. Recent Sales of Unregistered Securities
Between August 16, 1999 and August 24, 1999, we commenced and completed a
private placement of 3,230,000 shares of common stock for $0.20 per share and
warrants to purchase 1,230,000 shares of common stock at $2.00 per share,
raising gross proceeds of $670,600. The issuance of the securities was exempt
from registration pursuant to Rule 506 under Regulation D of the Securities
Act. There were no underwriting discounts, commissions or finder's fees paid in
connection with the placement.
Pursuant to an agreement we entered into with JEX, effective September 1,
1999 and amended August 14, 2000, JEX received 200,000 shares of common stock
as partial consideration under the agreement. The issuance of the securities
was exempt pursuant to Rule 506 under Regulation D of the Securities Act.
Between September 1, 1999 and September 20, 1999, we commenced and completed
a private placement of 1,890,000 shares of common stock for $0.60 per share,
raising gross proceeds of $1,134,000. The securities were offered and sold to
private investors pursuant to Rule 506 under Regulation D of the Securities
Act, and there were no underwriting discounts, commissions or finder's fees
paid in connection with the placement.
Between October 21, 1999 and January 17, 2000, we commenced and completed a
private placement of 722,000 shares of common stock at a gross price of $1.50
per share (net price of $1.44 per share after commissions) for net proceeds of
$1,035,250. Total commissions paid in the offering were $ 47,750. We also
granted to the purchasers an option for an aggregate total of 31,834 shares of
our common stock at $2.00 per share. All of the purchasers were "accredited
investors" as defined under Rule 501 of Regulation D of the
II-1
Securities Act, and the issuance of the securities was exempt from registration
pursuant to Rule 506 under Regulation D.
On December 29, 1999, we sold in a private placement 1,851,852 shares of
common stock and a warrant to purchase 185,185 shares of common stock at $2.00
per share to Trust Company of the West for net proceeds after discounts of
$2,500,000, or $1.35 per share. The issuance of the securities to Trust Company
of the West was exempt from registration under Section 4(2) of the Securities
Act, as it did not involve a public offering of securities. There were no
underwriting discounts, commissions or finder's fees paid in connection with
the placement.
Between December 30, 1999 and January 17, 2000, we commenced and completed a
private placement of 47,667 shares of its common stock at a price of $1.50 per
share for total proceeds of $71,500. All of the purchasers were "accredited
investors" as defined in Rule 501 of Regulation D of the Securities Act, and
the issuance of the securities was exempt from registration under Rule 506 of
Regulation D. There were no underwriting discounts, commissions or finder's
fees paid in connection with the placement.
On June 8, 2000, we sold to the Southern Ute Indian Tribe doing business as
the Southern Ute Indian Tribe Growth Fund 1,250,000 shares of common stock at a
price of $2.00 per share for proceeds of $2,500,000 and granted a 90-day option
to purchase an additional 1,250,000 shares of common stock at $2.00 per share.
The Southern Ute Indian Tribe was an "accredited investor", as defined in Rule
501 of Regulation D of the Securities Act, and the issuance of the securities
was exempt from registration pursuant to Rule 506 under Regulation D. There
were no underwriting discounts, commissions or finder's fees paid in connection
with the placement.
On August 24, 2000, we sold in a private placement transaction 2,500 shares
of its Series A preferred stock and a five-year warrant to purchase 250,000
shares of common stock at an exercise price of $2.00 per share to Trust Company
of the West, as an investment manager and custodian on behalf of a client, for
net proceeds of $2,500,000. The issuance of the securities to Trust Company of
the West was exempt from registration under Section 4(2) of the Securities Act,
as it did not involve a public offering of securities. There were no
underwriting discounts, commissions or finder's fees paid in connection with
the placement.
On August 24, 2000, the Southern Ute Indian Tribe doing business as the
Southern Ute Indian Tribe Growth Fund exercised the option it previously
acquired to purchase 1,250,000 shares of common stock for net proceeds of
$2,500,000. In order to induce the Southern Ute Indian Tribe Growth Fund to
exercise such option, we issued to the Southern Ute Indian Tribe Growth Fund a
five-year warrant to purchase 125,000 shares of common stock at an exercise
price of $2.00 per share. The issuance of securities to the Southern Ute Indian
Tribe Growth Fund was exempt from registration under Section 4(2) of the
Securities Act, as it did not involve a public offering of securities.
On August 24, 2000, as part of the formation of Republic Exploration, we
granted to each of JEX and a private company in separate private placement
transactions a five-year warrant to purchase 62,500 shares of common stock at
an exercise price of $2.00 per share. The issuance of these two five-year
warrants was exempt from registration under Section 4(2) of the Securities Act,
as it did not involve a public offering of securities. There were no
underwriting discounts, commissions or finder's fees paid in connection with
the placements.
On September 27, 2000, we sold in a private placement transaction 5,000
shares of its Series B preferred stock to Aquila Energy Capital Corporation for
net proceeds of $5,000,000. The issuance of the securities to Aquila Energy
Capital Corporation was exempt from registration under Section 4(2) of the
Securities Act, as it did not involve a public offering of securities. There
were no underwriting discounts, commissions or finder's fees paid in connection
with the placement.
On September 29, 2000, we issued 3,000 shares at a value of $4.88 per share
to William H. Gibbons as partial consideration for his services as treasurer.
The issuance of these securities was exempt from registration under Section
4(2) of the Securities Act, as it did not involve a public offering of
securities.
II-2
On September 29, 2000, we issued 2,500 shares at a value of $4.88 per share
to an outside consultant as consideration for consulting services. The issuance
of these securities was exempt from registration under Section 4(2) of the
Securities Act, as it did not involve a public offering of securities.
As of November 10, 2000, in consideration of the extension of the expiration
date from December 29, 2000 to March 15, 2001 of our option to purchase an
additional 23.3% of Republic Exploration, we granted to each of JEX and the
other member of Republic Exploration in separate private placement transactions
a five-year warrant to purchase 62,500 shares of common stock at an exercise
price of $4.12 per share. These two five-year warrants were exempt from
registration under Section 4(2) of the Securities Act, as they did not involve
public offerings of securities. There were no underwriting discounts,
commissions or finder's fees paid in connection with the placements.
On December 31, 2000, we issued 3,000 shares of common stock at values
ranging from $3.38 per share to $5.82 per share to William H. Gibbons as
partial consideration for his services as vice president and treasurer of
Contango. The issuance of these securities was exempt from registration under
Section 4(2) of the Securities Act, as it did not involve a public offering of
securities.
On December 31, 2000, we issued 100 shares of common stock at a value of
$5.82 per share to employees as consideration for their services provided to
Contango. The issuance of these securities was exempt from registration under
Section 4(2) of the Securities Act, as it did not involve a public offering of
securities.
On December 31, 2000, we issued 500 shares of common stock at an average
value of $4.54 per share to an outside consultant as consideration for
consulting services. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act, as it did not involve a
public offering of securities.
On March 31, 2001, we issued 400 shares of common stock to employees at
values ranging from $5.25 per share to $6.85 per share as partial consideration
for their services provided to Contango. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act, as it did
not involve a public offering of securities.
On March 31, 2001, we issued 500 shares of common stock at values ranging
from $5.25 per share to $6.85 per share to an outside consultant as
consideration for consulting services. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act, as it did
not involve a public offering of securities.
On June 30, 2001, we issued 600 shares of common stock to employees at
values ranging from $3.81 per share to $4.75 per share as partial consideration
for their services. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act, as it did not involve a
public offering of securities.
On June 30, 2001, we issued 750 shares of common stock at values ranging
from $3.81 per share to $4.74 per share to an outside consultant as
consideration for consulting services. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act, as it did
not involve a public offering of securities.
On September 30, 2001, we issued 600 shares of common stock to employees at
values ranging from $2.61 per share to $2.80 per share as partial consideration
for their services. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as
it did not involve a public offering of securities.
On September 30, 2001, we issued 750 shares of common stock at values
ranging from $2.61 per share to $2.80 per share to an outside consultant as
consideration for consulting services. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act, as it did
not involve a public offering of securities.
II-3
On December 31, 2002, we issued 800 shares of common stock to employees at
values ranging from $2.45 per share to $2.99 per share as partial consideration
for their services. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act, as it did not involve a
public offering of securities.
On December 31, 2001, we issued 1,000 shares of common stock at values
ranging from $2.45 per share to $2.99 per share to an outside consultant in
consideration for consulting services. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act, as it did
not involve a public offering of securities.
On March 31, 2002, we issued 600 shares of common stock to employees at
values ranging from $2.89 per share to $3.46 per share as partial consideration
for their services. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as
it did not involve a public offering of securities.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement between Contango Oil & Gas Company and
Morgan Keegan & Company, Inc.**
3.1 Certificate of Incorporation of Contango Oil & Gas Company, a Delaware
corporation. (8)
3.2 Bylaws of Contango Oil & Gas Company, a Delaware corporation. (8)
3.3 Agreement of Plan of Merger of Contango Oil & Gas Company, a Delaware
corporation, and Contango Oil & Gas Company, a Nevada corporation. (8)
4.1 Facsimile of common stock certificate of the Company. (1)
4.2 Certificate of Designations, Preferences and Relative Rights and
Limitations for Series A Senior Convertible Cumulative Preferred Stock
of Contango Oil & Gas Company, a Delaware corporation. (8)
4.3 Certificate of Designations, Preferences and Relative Rights and
Limitations for Series B Senior Convertible Cumulative Preferred Stock
of Contango Oil & Gas Company, a Delaware corporation. (8)
4.4 Form of Certificate of Designations, Preferences and Relative Rights
and Limitations for % Convertible Cumulative Preferred Stock, Series
C.**
4.5 Form of Deposit Agreement among Contango Oil & Gas Company, theThe Bank
of New York and the depositary stockholders.*Owners and Beneficial Owners of Depositary
Receipts.*
5.1 Opinion of Morgan, Lewis & Bockius LLP.**
10.1 Agreement, dated effective as of September 1, 1999, between Contango
Oil & Gas Company and Juneau Exploration, L.L.C. (2)
10.2 Securities Purchase Agreement between Contango Oil & Gas Company and
Trust Company of the West, dated December 29, 1999. (3)(15)
10.3 Warrant to Purchase Common Stock between Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999. (3)
10.4 Co-Sale Agreement among Kenneth R. Peak, Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999. (3)
10.5 Securities Purchase Agreement by and between Contango Oil & Gas
Company and the Southern Ute Indian Tribe doing business as the
Southern Ute Indian Tribe Growth Fund, dated June 8, 2000. (4)
10.6 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Trust Company of the West. (5)
10.7 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and the Southern Ute Indian Tribe doing
business as the Southern Ute Indian Tribe Growth Fund. (5)
II-4
Exhibit
Number Description
------- -----------
10.8 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Fairfield Industries Incorporated. (5)
10.9 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Juneau Exploration Company, L.L.C. (5)
10.10 Amendment dated August 14, 2000 to agreement between Contango Oil &
Gas Company and Juneau Exploration Company, LLC. dated effective as of
September 1, 1999. (6)
10.11 Securities Purchase Agreement dated September 27, 2000 by and between
Contango Oil & Gas Company and Aquila Energy Capital Corporation. (7)
10.12 Credit Agreement between Contango Oil & Gas Company and Guaranty Bank,
FSB, dated June 29, 2001. (9)
10.13 First Amendment dated as of January 8, 2002 to Credit Agreement
between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June
29, 2001. (10)
10.14 Asset Purchase Agreement by and among Juneau Exploration, L.P. and
Contango Oil & Gas Company dated January 4, 2002. (10)
10.15 Asset Purchase Agreement by and among Mark A. Stephens, John Miller,
The Hunter Revocable Trust, Linda G. Ferszt, Scott Archer and the
Archer Revocable Trust and Contango Oil & Gas Company dated January 9,
2002. (11)
10.16 Asset Purchase Agreement by and among the Southern Ute Indian Tribe
doing business as Red Willow Production Company and Contango Oil & Gas
Company dated January 28, 2002. (12)
10.17 Securities Repurchase Agreement by and among the Southern Ute Indian
Tribe doing business as Red Willow Production Company and Southern Ute
Indian Tribe Growth Fund and Contango Oil & Gas Company dated March
28, 2002. (14)
10.18 Second Amendment dated as of February 13, 2002 to Credit Agreement
between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June
29, 2001. (13)
10.19 Waiver dated as of March 25, 2002 to Credit Agreement between Contango
Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (13)
12 Ratio computation.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Arthur Andersen LLP relating to the financial statements of
Contango Oil & Gas Company.*
23.2 Consent of Arthur Andersen LLP relating to acquired properties.*
23.3 Consent of Morgan, Lewis & Bockius LLP.**
23.4 Consent of William M. Cobb & Associates, Inc.*
23.5 Consent of W.D. Von Gonten & Co.*
24.1 Power of Attorney (included on signature page).*
99.1 Letter to the SEC regarding Arthur Andersen LLP.* (16)
- --------
* Filed herewith.
** To be filed.
(1) Filed as an exhibit to the Company's Form 10-SB Registration Statement, as
filed with the Securities and Exchange Commission on October 16, 1998.
(2) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended June
30, 1999, as filed with the Securities and Exchange Commission on November
11, 1999.
(3) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
December 31, 1999, as filed with the Securities and Exchange Commission on
February 14, 2000.
(4) Filed as an exhibit to the Company's report on Form 8-K, dated June 8,
2000, as filed with the Securities and Exchange Commission on June 14,
2000.
(5) Filed as an exhibit to the Company's report on Form 8-K, dated August 24,
2000, as filed with the Securities and Exchange Commission of September 8,
2000.
(6) Filed as an exhibit to the Company's annual report on Form 10-KSB for the
fiscal year ended June 30, 2000, as filed with the Securities and Exchange
Commission on September 27, 2000.
(7) Filed as an exhibit to the Company's report on Form 8-K, dated September
27, 2000, as filed with the Securities and Exchange Commission on October
3, 2000.
II-5
(8) Filed as an exhibit to the Company's report on Form 8-K, dated December 1,
2000, as filed with the Securities and Exchange Commission on December 15,
2000.
(9) Filed as an exhibit to the Company's annual report on Form 10-KSB for the
fiscal year ended June 30, 2001, as filed with the Securities and Exchange
Commission on September 21, 2001.
(10) Filed as an exhibit to the Company's report on Form 8-K, dated January 4,
2002, as filed with the Securities and Exchange Commission on January 8,
2002.
(11) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
December 31, 2001, as filed with the Securities and Exchange Commission on
February 14, 2002.
(12) Filed as an exhibit to the Company's report on Form 8-K, dated March 8,
2002, as filed with the Securities and Exchange Commission on March 15,
2002.
(13) Filed as an exhibit to the Company's report filed on Form 10-QSB for the
quarter ended March 31, 2002, dated May 2, 2002, as filed with the
Securities and Exchange Commission.
(14) Filed as an exhibit to the Company's report on Form 8-K, dated March 28,
2002, as filed with the Securities and Exchange Commission on April 3,
2002.
(15) Filed as an exhibit to the Company's Form 10-QSB/A for the quarter ended
December 31, 1999, as filed with the Securities and Exchange Commission on
June 4, 2002.
(16) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-88252) as filed with the Securities and Exchange
Commission on May 15, 2002.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying accounts.
All other information for which provisions are made in the applicable
accounting regulations of the Securities and Exchange Commission is either
included in the financial statements or is not required under the related
instructions or is inapplicable, and therefore has been omitted.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10 (a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the formation in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation form the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424 (b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement relating to the securities
offered, and the offering of the securities at that time to the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant incurred or paid by a director,
officer of controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of Houston, State of
Texas, on May 15,June 5, 2002.
Contango Oil & Gas Company
Date: May 15,June 5, 2002 /s/ Kenneth R. Peak
By: _________________________________
Kenneth R. Peak
President,Chairman of the Board, Chief
Executive Officer,
Chief Financial Officer,
President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below in so signing also makes, constitutes and appoints Kenneth R. Peak and
William H. Gibbons and each of them acting alone, his true and lawful attorney-
in-fact and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to execute and
cause to be filed with the Securities and Exchange Commission any and all
amendments and post-effective amendments to this Registration Statement and a
related registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, and in each case to file the
same, with all exhibits thereto and other documents in connection therewith,
and hereby ratifies and confirms all that said attorney-in-fact or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Kenneth R. Peak Chairman of the Board, May 15,June 5, 2002
______________________________________ Chief Executive Officer,
Kenneth R. Peak Chief Financial Officer,
President and Secretary
/s/ John B. Juneau Director May 15,June 5, 2002
______________________________________
John B. Juneau
/s/ Joseph J. Romano Director May 15,June 5, 2002
______________________________________
Joseph J. Romano
/s/ Darrell W. WIlliamsWilliams Director May 15,June 5, 2002
______________________________________
Darrell W. Williams
/s/ Jay D. Brehmer Director May 15,June 5, 2002
______________________________________
Jay D. Brehmer
/s/ Lesia Bautina Controller (Principal June 5, 2002
______________________________________ Accounting Officer)
Lesia Bautina
II-7
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement between Contango Oil & Gas Company and
Morgan Keegan & Company, Inc.**
3.1 Certificate of Incorporation of Contango Oil & Gas Company, a Delaware
corporation. (8)
3.2 Bylaws of Contango Oil & Gas Company, a Delaware corporation. (8)
3.3 Agreement of Plan of Merger of Contango Oil & Gas Company, a Delaware
corporation, and Contango Oil & Gas Company, a Nevada corporation. (8)
4.1 Facsimile of common stock certificate of the Company. (1)
4.2 Certificate of Designations, Preferences and Relative Rights and
Limitations for Series A Senior Convertible Cumulative Preferred Stock
of Contango Oil & Gas Company, a Delaware corporation. (8)
4.3 Certificate of Designations, Preferences and Relative Rights and
Limitations for Series B Senior Convertible Cumulative Preferred Stock
of Contango Oil & Gas Company, a Delaware corporation. (8)
4.4 Form of Certificate of Designations, Preferences and Relative Rights
and Limitations for % Convertible Cumulative Preferred Stock, Series
C.**
4.5 Form of Deposit Agreement among Contango Oil & Gas Company, theThe Bank
of New York and the depositary stockholders.*Owners and Beneficial Owners of Depositary
Receipts.*
5.1 Opinion of Morgan, Lewis & Bockius LLP. **
10.1 Agreement, dated effective as of September 1, 1999, between Contango
Oil & Gas Company and Juneau Exploration, L.L.C. (2)
10.2 Securities Purchase Agreement between Contango Oil & Gas Company and
Trust Company of the West, dated December 29, 1999. (3)(15)
10.3 Warrant to Purchase Common Stock between Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999. (3)
10.4 Co-Sale Agreement among Kenneth R. Peak, Contango Oil & Gas Company
and Trust Company of the West, dated December 29, 1999. (3)
10.5 Securities Purchase Agreement by and between Contango Oil & Gas
Company and the Southern Ute Indian Tribe doing business as the
Southern Ute Indian Tribe Growth Fund, dated June 8, 2000. (4)
10.6 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Trust Company of the West. (5)
10.7 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and the Southern Ute Indian Tribe doing
business as the Southern Ute Indian Tribe Growth Fund. (5)
10.8 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Fairfield Industries Incorporated. (5)
10.9 Securities Purchase Agreement dated August 24, 2000 by and between
Contango Oil & Gas Company and Juneau Exploration Company, L.L.C. (5)
10.10 Amendment dated August 14, 2000 to agreement between Contango Oil &
Gas Company and Juneau Exploration Company, LLC. dated effective as of
September 1, 1999. (6)
10.11 Securities Purchase Agreement dated September 27, 2000 by and between
Contango Oil & Gas Company and Aquila Energy Capital Corporation. (7)
10.12 Credit Agreement between Contango Oil & Gas Company and Guaranty Bank,
FSB, dated June 29, 2001. (9)
10.13 First Amendment dated as of January 8, 2002 to Credit Agreement
between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June
29, 2001. (10)
10.14 Asset Purchase Agreement by and among Juneau Exploration, L.P. and
Contango Oil & Gas Company dated January 4, 2002. (10)
1
Exhibit
Number Description
------- -----------
10.15 Asset Purchase Agreement by and among Mark A. Stephens, John Miller,
The Hunter Revocable Trust, Linda G. Ferszt, Scott Archer and the
Archer Revocable Trust and Contango Oil & Gas Company dated January 9,
2002. (11)
10.16 Asset Purchase Agreement by and among the Southern Ute Indian Tribe
doing business as Red Willow Production Company and Contango Oil & Gas
Company dated January 28, 2002. (12)
10.17 Securities Repurchase Agreement by and among the Southern Ute Indian
Tribe doing business as Red Willow Production Company and Southern Ute
Indian Tribe Growth Fund and Contango Oil & Gas Company dated March
28, 2002.(14)
10.18 Second Amendment dated as of February 13, 2002 to Credit Agreement
between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June
29, 2001. (13)
10.19 Waiver dated as of March 25, 2002 to Credit Agreement between Contango
Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (13)
12 Document regarding ratio computation. *
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Arthur Andersen LLP relating to the financial statements of
Contango Oil & Gas Company. *
23.2 Consent of Arthur Andersen LLP relating to acquired properties. *
23.3 Consent of Morgan, Lewis & Bockius LLP. **
23.4 Consent of William M. Cobb & Associates, Inc. *
23.5 Consent of W.D. Von Gonten & Co. *
24.1 Power of Attorney (included on signature page). *
99.1 Letter to the SEC regarding Arthur Andersen LLP.* (16)
- --------
* Filed herewith.
** To be filed.
(1) Filed as an exhibit to the Company's Form 10-SB Registration Statement, as
filed with the Securities and Exchange Commission on October 16, 1998.
(2) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended June
30, 1999, as filed with the Securities and Exchange Commission on November
11, 1999.
(3) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
December 31, 1999, as filed with the Securities and Exchange Commission on
February 14, 2000.
(4) Filed as an exhibit to the Company's report on Form 8-K, dated June 8,
2000, as filed with the Securities and Exchange Commission on June 14,
2000.
(5) Filed as an exhibit to the Company's report on Form 8-K, dated August 24,
2000, as filed with the Securities and Exchange Commission of September 8,
2000.
(6) Filed as an exhibit to the Company's annual report on Form 10-KSB for the
fiscal year ended June 30, 2000, as filed with the Securities and Exchange
Commission on September 27, 2000.
(7) Filed as an exhibit to the Company's report on Form 8-K, dated September
27, 2000, as filed with the Securities and Exchange Commission on October
3, 2000.
(8) Filed as an exhibit to the Company's report on Form 8-K, dated December 1,
2000, as filed with the Securities and Exchange Commission on December 15,
2000.
(9) Filed as an exhibit to the Company's annual report on Form 10-KSB for the
fiscal year ended June 30, 2001, as filed with the Securities and Exchange
Commission on September 21, 2001.
(10) Filed as an exhibit to the Company's report on Form 8-K, dated January 4,
2002, as filed with the Securities and Exchange Commission on January 8,
2002.
(11) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
December 31, 2001, as filed with the Securities and Exchange Commission on
February 14, 2002.
(12) Filed as an exhibit to the Company's report on Form 8-K, dated March 8,
2002, as filed with the Securities and Exchange Commission on March 15,
2002.
(13) Filed as an exhibit to the Company's report filed on Form 10-QSB for the
quarter ended March 31, 2002, dated May 2, 2002, as filed with the
Securities and Exchange Commission.
(14) Filed as an exhibit to the Company's report on Form 8-K, dated March 28,
2002 as filed with the Securities and Exchange Commission on April 3,
2002.
(15) Filed as an exhibit to the Company's Form 10-QSB/A for the quarter ended
December 31, 1999, as filed with the Securities and Exchange Commission on
June 4, 2002.
(16) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-88252) as filed with the Securities and Exchange
Commission on May 15, 2002.
2