##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---







FORM 10-Q





Quarterly Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934





For the Quarter Ended March 31, 2002 Commission File No. 1-14286





CONTOUR ENERGY CO.


(Exact name of registrant as specified in its charter)





Delaware (State or other jurisdiction of incorporation or organization)

76-0447267 (I.R.S. Employer Identification No.)1001 McKinney Suite 900 Houston, Texas

77002(Address of principal executive offices)

(Zip Code)





Registrants telephone number, including area code: (713) 652-5200





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ̈





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.





Title of Class

Outstanding at May 12, 2002Common Stock

17,311,710





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##### Table of Contents

CONTOUR ENERGY CO. AND SUBSIDIARIES





INDEX





PagePart I.    Financial InformationConsolidated Balance Sheets as of December 31, 2001 and March 31, 2002 (unaudited)

2Consolidated Statements of Operations for the three months ended March 31, 2001 and 2002 (unaudited)

3Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2002 (unaudited)

4Notes to Consolidated Financial Statements (unaudited)

5Managements Discussion and Analysis of Financial Condition and Results of Operations

13Part II.    
Other Information

18




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##### Table of Contents




PART I.    FINANCIAL INFORMATION





Item 1.Financial Statements





CONTOUR ENERGY CO. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)





December 31, 2001


March 31, 2002(Unaudited)Assets:Cash and cash equivalents

$
21,795


$
16,067Accounts receivable


13,756



13,111Accounts receivabledrilling programs


15



16Prepaid expenses and other current assets


4,468



4,174Total current assets


40,034



33,368Oil and gas properties, successful efforts method:Unproved properties, net


17,450



17,103Properties subject to amortization


435,142



435,905Pipelines and other transportation assets, at cost


1,582



1,582Furniture, fixtures and equipment


3,792



3,829457,966



458,419Less: Accumulated depreciation, depletion and amortization


(328,446
)


(334,023
)Total property and equipment, net


129,520



124,396Restricted cash


6,400



6,700Other non-current assets, net


5,579



5,047Total assets

$
181,533


$
169,511Liabilities:Accounts payable and accrued expenses

$
26,931


$
23,394Accounts payabledrilling programs


130



145Current portion of long-term debt


4,200



6,300Total current liabilities


31,261



29,839Long-term debt


253,856



252,125Total liabilities


285,117



281,964Stockholders deficit:Preferred stock, $1.50 par value, 2,000,000 shares authorized at December 31, 2001 and March 31, 2002; zero shares issued and
outstanding at December 31, 2001 and March 31, 2002, respectively






Common stock, $.10 par value, 20,000,000 shares authorized at December 31, 2001 and March 31, 2002; 17,311,710 shares issued and
outstanding both at December 31, 2001 and March 31, 2002


1,731



1,731Additional paid-in capital


293,241



293,241Accumulated deficit


(410,867
)


(415,301
)Accumulated other comprehensive income


12,311



7,876Total stockholders deficit


(103,584
)


(112,453
)Total liabilities and stockholders deficit

$
181,533


$
169,511





See Notes to Consolidated Financial Statements.




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CONTOUR ENERGY CO. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)


(Unaudited)





Three Months Ended March 31,2001


2002Revenues:Oil and gas revenues

$
30,324


$
16,532Interest and other income


408



129Unrealized gain on derivative instruments


916



38Total revenues


31,648



16,699Costs and expenses:Production expenses


3,386



3,392Exploration expenses


5,104



2,118General and administrative expenses


2,166



1,394Interest and other debt expenses


8,570



8,644Depreciation, depletion and amortization


5,794



5,585Total expenses


25,020



21,133Income (loss) before income taxes


6,628



(4,434
)Income taxes






Net income (loss)


6,628



(4,434
)Less: cumulative preferred stock dividends


(896
)


Net income (loss) applicable to common stock

$
5,732


$
(4,434
)Basic and diluted income (loss) per common share

$
.43


$
(.26
)Weighted average common shares outstanding


13,211



17,312








See Notes to Consolidated Financial Statements.




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##### Table of Contents




CONTOUR ENERGY CO. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)





Three Months Ended March 31,2001


2002Operating Activities:Net income (loss)

$
6,628


$
(4,434
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation, depletion and amortization


5,794



5,585Unrealized gain and other non-cash derivative instrument adjustments


(916
)


(4,434
)Exploration expenses


5,104



2,118Accretion and amortization of debt expenses


871



949Changes in operating assets and liabilities:(Increase) decrease in accounts receivable


(1,722
)


644(Increase) decrease in prepaid expenses and other current assets


(81
)


294Increase in other non-current assets


(18
)


(48
)Increase (decrease) in accounts payable and accrued expenses


8,863



(3,522
)Net cash provided by (used in) operating activities


24,523



(2,848
)Investing Activities:Expenditures for exploration and development activities


(8,874
)


(2,585
)Proceeds from the sale of oil and gas properties






5Change in restricted cash


(300
)


(300
)Net cash used in investing activities


(9,174
)


(2,880
)Increase (decrease) in cash and cash equivalents


15,349



(5,728
)Cash and cash equivalents, beginning of period


18,431



21,795Cash and cash equivalents, end of period

$
33,780


$
16,067








See Notes to Consolidated Financial Statements.




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CONTOUR ENERGY CO. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE 1BASIS OF PRESENTATION





General.    The accompanying unaudited interim consolidated financial statements of Contour Energy
Co. (the Company) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission in accordance with accounting principles generally accepted in the United States of America for interim
financial information. These financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation in all material respects of the results for the interim periods presented. The results of
operations for the three months ended March 31, 2002 are not necessarily indicative of results to be expected for the full year. The accounting policies followed by the Company are set forth in Note 1 to the financial statements in its Annual Report
on Form 10-K for the year ended December 31, 2001. These unaudited consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys 2001 Annual Report on
Form 10-K.





Reference herein to Contour, we and our means Contour Energy Co.
with its subsidiaries and subsidiary partnerships. This Quarterly Report on Form 10-Q (the Report) includes various other capitalized terms that are defined when first used.





NOTE 2LIQUIDITY AND CAPITAL RESOURCES





Enron North America, et al.In 2001, Contour executed hedge contracts with Enron North America (ENA) that included 20,000 Mmbtu per day of its natural gas production in 2002. The 2002
contracts required ENA to pay Contour an average price of $4.58 per Mmbtu. On December 2, 2001, ENA filed for bankruptcy protection and defaulted on its obligations under the hedge contracts. The impact to Contour was a loss of price protection for
December 2001 totaling $1.3 million and for the period January 2002 through December 2002 equivalent to the difference in the hedge price and actual NYMEX monthly closing prices multiplied by the volumes hedged. For the first quarter 2002, the loss
of our price protection resulted in lost cash flows from operations of $5.1 million.





Restructuring
Negotiations.    The combination of an extended period of low commodity prices beginning the second half of 2001, the loss of natural gas price protection created by the bankruptcy of ENA, the uncertainty of prices in the
near-term, and the maturity of our 14% senior secured notes in 2003 (Senior Notes) have caused us to consider strategic corporate options. The final payment of $98.7 million on the Senior Notes is due on April 15, 2003. We do not
anticipate having sufficient cash to make the full redemption due in April 2003. Therefore, to avoid default under the indenture governing these notes, we must raise additional funds prior to that date sufficient to replace these notes. However, a
refinancing of this debt would be difficult to execute in the current environment given the amount of our total debt relative to our assets. As a result of these factors, we have engaged an investment banking firm to evaluate and advise on the
various alternatives that may be available to us including a conversion of debt to equity, a sale of assets, an infusion of equity, a merger with another industry company, or any combination thereof.





We are currently engaged in negotiations with certain holders of our 103/8% senior subordinated notes (Subordinated Notes) that may lead to a conversion of that debt to equity. On April 15, 2002, we informed the
trustees of the Senior Notes and the Subordinated Notes that payment of interest due on that date totaling $15.4 million on our two classes of debt would be deferred pending results of negotiations. On May 6, 2002 a forbearance agreement was
executed with holders of over 75% of the Subordinated Notes. The agreement states that while negotiations are ongoing, the signatories will forbear from enforcing certain default rights under the




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CONTOUR ENERGY CO. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)




indenture if interest due on the Subordinated Notes is not paid on or before May 15, 2002. The agreement expires on June 30, 2002. The interest due on April 15, 2002 on the Senior Notes was paid
on May 3, 2002.





Default under Debt Indentures.    Since the Company did not
make the interest payment due April 15, 2002 on the Subordinated Notes within the thirty-day grace period, an Event of Default has occurred under the indenture. An Event of Default under the indenture governing the Subordinated Notes triggers an
Event of Default under the indenture governing the Senior Notes. Each trustee of the two indentures, acting separately, or holders of more than 25% of the outstanding notes of each class of debt, acting separately, have the right to require that the
Company immediately pay each respective class of debt. The holders of more than 75% of the Subordinated Notes have agreed to temporarily forbear from enforcing these acceleration rights under the indenture. However, the remaining holders of the
Subordinated Notes and the holders of Senior Notes have not waived the right to accelerate payment.





At March 31,
2002, the Subordinated Notes and $97.0 million of the Senior Notes are classified as non-current debt. With default on both indentures occurring, all of the debt will be subsequently reclassified as a current liability.





We can provide no assurance that negotiations with our debt holders will result in a satisfactory outcome nor that the obligation to
pay our outstanding debt will not be accelerated. If we are unsuccessful in negotiations with debt holders, the Company may be forced to seek protection under federal bankruptcy regulations. Even a successful restructuring transaction may
require a bankruptcy filing in which the affected parties have agreed to a plan of reorganization. It is likely that a conversion of our Subordinated Notes to equity will result in severe dilution to existing holders of the Companys common
stock.





NOTE 3HEDGING ACTIVITIES





In accordance with the Companys Risk Management Policy and its commodity risk strategy, the Company periodically uses forward sales contracts, natural gas and crude
oil price swap agreements, collars and options to reduce exposure to downward price fluctuations on its natural gas and crude oil production. The Company does not engage in speculative transactions. Price swap agreements generally provide for the
Company to receive or make counter-party payments on the differential between a fixed price and a variable indexed price for natural gas and crude oil. Collars combine put and call options to establish a ceiling and a floor. The Company normally
employs the average NYMEX price for the last three days of the contract for natural gas and the monthly average of closing NYMEX prices for crude oil as the underlying index (Index Price). To the extent the Index Price closes above the
established ceiling the Company must make payments to the counter-party on the differential between the Index Price and the ceiling. Conversely, if the Index Price closes below the established floor, the counter-party must make payments to the
Company on the differential between the Index Price and the floor. If the Index Price closes between the ceiling and the floor, no settlement is due.





The Company reports the effects of its hedging activities in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) which it adopted on January 1, 2001.





Through natural gas collars, the
Company hedged 45,000 Mmbtu per day of its natural gas production for the three months ended March 31, 2001 at an average floor of $3.77 per Mmbtu and an average ceiling of $5.11 per Mmbtu, before transaction and transportation costs.




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CONTOUR ENERGY CO. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)




Through crude oil collars, the Company hedged 900 barrels per day of its crude oil production for the three months ended
March 31, 2001 at an average floor price of $26.11 per barrel and an average ceiling price of $32.21 per barrel, before transaction and transportation costs.





During the first quarter 2001, hedging activities decreased oil and gas revenues by $8.9 million and a $0.9 million unrealized gain on derivative instruments was reported on the Companys Consolidated Statements
of Operations. The $0.9 million unrealized gain represents the change in the time value, or the ineffective value, of the Companys derivative instruments. Additionally, in the first quarter 2001, the Company recorded a $21.1 million valuation
adjustment, including the $8.9 million reduction in reported oil and gas revenues, to OCI based on changes in the intrinsic value of its derivative instruments. Of this amount, $20.8 million relates to the $27.8 million transition adjustment from
adoption of SFAS 133 recorded on January 1, 2001.





In accordance with SFAS 133 and the result of the filing for bankruptcy
protection by ENA, the Companys counter-party, the ENA contracts no longer qualified for cash flow hedge accounting treatment. As a result, the contracts were adjusted to their fair market value in December 2001, estimated to be $3.5 million.
This treatment resulted in approximately $12.3 million, representing deferred revenues related to the hedge positions, to be reflected in the Companys December 31, 2001 Balance Sheet as accumulated other comprehensive income. This amount will
be reclassified to earnings monthly during 2002 as the hedge transactions were originally scheduled to occur, with $4.4 million reclassified to earnings during the first quarter 2002. These items are non-cash in nature. The Company believes $3.5
million is the estimated fair market value of the contracts as of March 31, 2002. This amount is classified on the Companys balance sheet as a current asset.





NOTE 4PREFERRED STOCK





The Company did not declare quarterly dividends of $0.65625
per preferred share for February 1, 1998 through November 1, 2001, aggregating approximately $14.3 million. Because the Company had not paid dividends on the preferred stock for a period of more than six quarters the holders of preferred stock, as a
group, elected two additional directors to the Companys Board of Directors in July 2000.





In November 2001, preferred
shareholders approved reclassification of the preferred stock so that each share of preferred stock was exchanged for $7.25 in cash and three shares of the Companys common stock. As a result, 4.1 million shares of common stock and $9.9 million
were distributed to the preferred shareholders. The reclassification resulted in extinguishment of the preferred stock and all accrued dividends. Trading for the preferred stock ceased on November 30, 2001. Following the reclassification of the
Preferred Stock, the two directors of the Company elected by the holders of preferred stock resigned from the Companys board and were not replaced.





NOTE 5EARNINGS PER SHARE / OTHER COMPREHENSIVE INCOME





The basic income (loss) per common share as shown
on the Consolidated Statements of Operations reflects net income (loss) less cumulative preferred stock dividends, whether or not declared, divided by the weighted average number of common shares outstanding during the respective periods. In
calculating diluted income (loss) per common share, common shares issuable under stock options and convertible preferred stock are added to the weighted average common shares outstanding when dilutive. For the three months ended March 31, 2001 and
2002, all potentially dilutive securities were either anti-dilutive or immaterial to the calculation and therefore are not included in the diluted earnings per share (EPS) calculation.




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CONTOUR ENERGY CO. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)







The Companys comprehensive loss for the three-month periods ended March 31,
2001 and 2002 was $(0.1) million and $(8.9) million, respectively. These comprehensive losses were derived by adjusting net income (loss) for each respective period for the impact of the Companys hedging activities flowing from accumulated
other comprehensive income into earnings.





NOTE 6NEW ACCOUNTING PRONOUNCEMENTS





In July 2001, the Financial Accounting Standards Board (FASB) issued two new pronouncements: Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS 142, effective for fiscal years beginning after December 15, 2001, addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, Intangible Assets.It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted
for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company has evaluated the
provisions of SFAS 141 and SFAS 142 and there was no impact on its financial statements from the adoption of these standards.





In August and October 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations and SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS 143 requires entities to record
the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset retirement costs should be allocated
to expense using a systematic and rational method. SFAS 143 is effective for fiscal years beginning after June 15, 2002. SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be
disposed of. It supersedes, with exceptions, SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and is effective for fiscal years beginning after December 15, 2001. The Company is
currently assessing the impact of SFAS No. 143 and cannot yet reasonably estimate the impact, if any, this statements will have on the Companys financial statements upon adoption. The Company had no impact on its financial statements from the
adoption of SFAS 144 on January 1, 2002.





NOTE 7STOCK OPTION AND STOCK AWARD PLAN





On March 22, 2001, the Companys board of directors adopted the Contour Energy Co. 2001 Stock Option and Stock Award Plan (the 2001 Plan). As of March 31, 2002, stock
options covering 995,000 shares of common stock have been granted with 105,000 additional shares available for grant under the 2001 Plan. These are seven-year options that are subject to a three-year vesting period. The Company also has 9,300
options outstanding related to prior year plans that are set to expire during 2002.




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CONTOUR ENERGY CO. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)







NOTE 8GUARANTOR FINANCIAL STATEMENTS





Contour Energy E&P, LLC, a wholly-owned subsidiary of the Company and Kelley Operating Company Ltd., an indirect wholly-owned partnership of the Company are guarantors of the
Companys Senior Notes due 2002-2003 and of the Companys Subordinated Notes due 2006. Concorde Gas Marketing, Inc. (Concorde), a wholly owned subsidiary of the Company, is also a guarantor of the Companys Senior Notes
due 2002-2003. The following guarantor consolidating condensed financial statements present:





| | 1. |  | Consolidating condensed balance sheets as of December 31, 2001 and March 31, 2002, consolidating condensed statements of operations for the three months ended March 31, 2001
and 2002 and consolidating condensed statements of cash flows for the three months ended March 31, 2001 and March 31, 2002.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 2. |  | Contour Energy Co. (the Parent), combined Guarantor Subsidiaries (other than Concorde), Concorde and combined Non-Guarantor Subsidiaries, all with their investments
in subsidiaries accounted for using the equity method.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Elimination entries necessary to consolidate the Parent and all of its subsidiaries.
| | -- |  | ------------------------------------------------------------------------------------




CONSOLIDATING CONDENSED BALANCE SHEET





December 31, 2001


(in thousands)





Parent


Combined Guarantor Subsidiaries


Concorde

Combined Non-Guarantor Subsidiaries

Eliminations


ConsolidatedAssets:Current assets

$
252,578


$
65,375


$
5,876

$
372

$
(284,167
)

$
40,034Property and equipment, net






122,039






5,015


2,466



129,520Restricted cash






6,400













6,400Other non-current assets, net


(91,686
)


10,517









86,748



5,579Total assets

$
160,892


$
204,331


$
5,876

$
5,387

$
(194,953
)

$
181,533Liabilities and Stockholders Deficit:Current liabilities

$
10,620


$
303,429


$
326

$
1,053

$
(284,167
)

$
31,261Long-term debt


253,856

















253,856Stockholders (deficit) equity


(103,584
)


(99,098
)


5,550


4,334


89,214



(103,584
)Total liabilities and stockholders (deficit) equity

$
160,892


$
204,331


$
5,876

$
5,387

$
(194,953
)

$
181,533







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##### Table of Contents



CONTOUR ENERGY CO. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)







CONSOLIDATING CONDENSED BALANCE SHEET





March 31, 2002


(in thousands)





Parent


Combined Guarantor Subsidiaries


Concorde

Combined Non-Guarantor Subsidiaries

Eliminations


ConsolidatedAssets:Current assets

$
252,537


$
53,583


$
6,050

$
513

$
(279,315
)

$
33,368Property and equipment, net






116,738






4,896


2,762



124,396Restricted cash






6,700













6,700Other non-current assets, net


(92,458
)


10,646









86,859



5,047Total assets

$
160,079


$
187,667


$
6,050

$
5,409

$
(189,694
)

$
169,511Liabilities and Stockholders Deficit:Current liabilities

$
20,407


$
287,253


$
436

$
1,058

$
(279,315
)

$
29,839Long-term debt


252,125

















252,125Stockholders (deficit) equity


(112,453
)


(99,586
)


5,614


4,351


89,621



(112,453
)Total liabilities and stockholders (deficit) equity

$
160,079


$
187,667


$
6,050

$
5,409

$
(189,694
)

$
169,511





CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS





For the three Months Ended March 31, 2001


(in thousands)





Parent


Combined Guarantor Subsidiaries


Concorde


Combined Non-Guarantor Subsidiaries


Eliminations


ConsolidatedRevenues

$



$
29,533


$
729


$
1,386


$



$
31,648Costs and expenses


(8,730
)


(16,560
)


(165
)


(393
)


828



(25,020
)Equity in earnings of subsidiaries


15,358



1,557











(16,915
)


Net income (loss)

$
6,628


$
14,530


$
564


$
993


$
(16,087
)

$
6,628





CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS





For the three Months Ended March 31, 2002


(in thousands)





Parent


Combined Guarantor Subsidiaries


Concorde


Combined Non-Guarantor Subsidiaries


Eliminations


ConsolidatedRevenues

$



$
16,153


$
227


$
319


$



$
16,699Costs and expenses


(8,678
)


(12,286
)


(163
)


(302
)


296



(21,133
)Equity in earnings of subsidiaries


4,244



81











(4,325
)


Net (loss) income

$
(4,434
)

$
3,948


$
64


$
17


$
(4,029
)

$
(4,434
)




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##### Table of Contents



CONTOUR ENERGY CO. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)







CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS





For the Three Months Ended March 31, 2001


(in thousands)





Parent


Combined Guarantor Subsidiaries


Concorde


Combined Non-Guarantor Subsidiaries


Eliminations


ConsolidatedOperating Activities:Net income (loss)

$
6,628


$
14,530


$
564


$
993


$
(16,087
)

$
6,628Non-cash income (loss) adjustments


(14,487
)


9,102







151



16,087



10,853Changes in operating assets and liabilities


7,859



876



(564
)


(1,129
)






7,042Net cash provided by operating activities






24,508







15







24,523Investing Activities:Expenditures for exploration and development activities






(8,859
)






(15
)






(8,874
)Change in restricted cash






(300
)














(300
)Distributions from partnerships






















Net cash used in investing activities






(9,159
)






(15
)






(9,174
)Increase in cash and cash equivalents






15,349















15,349Cash and cash equivalents, beginning of period






18,431















18,431Cash and cash equivalents, end of period

$



$
33,780


$



$



$



$
33,780




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##### Table of Contents



CONTOUR ENERGY CO. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)







CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS





For the Three Months Ended March 31, 2002


(in thousands)





Parent


Combined Guarantor Subsidiaries


Concorde


Combined Non-Guarantor Subsidiaries


Eliminations


ConsolidatedOperating Activities:Net (loss) income

$
(4,434
)

$
3,948


$
64


$
17


$
(4,029
)

$
(4,434
)Non-cash (loss) income adjustments


(3,295
)


3,364







120



4,029



4,218Changes in operating assets and liabilities


7,729



(10,161
)


(64
)


(136
)






(2,632
)Net cash (used in) provided by operating activities






(2,849
)






1







(2,848
)Investing Activities:Expenditures for exploration and development activities






(2,584
)






(1
)






(2,585
)Proceeds from sale of properties






5















5Change in restricted cash






(300
)














(300
)Distributions from partnerships






















Net cash used in investing activities






(2,879
)






(1
)






(2,880
)Increase in cash and cash equivalents






(5,728
)














(5,728
)Cash and cash equivalents, beginning of period






21,795















21,795Cash and cash equivalents, end of period

$



$
16,067


$



$



$



$
16,067




12




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##### Table of Contents




Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





General





The following review of operations for the three months ended March 31, 2001 and 2002 should be
read in conjunction with the Financial Statements of the Company and Notes thereto included elsewhere in this report on Form 10-Q and with the Financial Statements, Notes and Managements Discussion and Analysis for the year ended December 31,
2001 included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2001.





Hedging
Activities.    In accordance with the Companys Risk Management Policy and its commodity risk strategy, the Company periodically uses forward sales contracts, natural gas and crude oil price swap agreements, collars and
options to reduce exposure to downward price fluctuations on its natural gas and crude oil production. The Company does not engage in speculative transactions. Price swap agreements generally provide for the Company to receive or make counter-party
payments on the differential between a fixed price and a variable indexed price for natural gas and crude oil. Collars combine put and call options to establish a ceiling and a floor. The Company normally employs the average NYMEX price for the last
three days of the contract for natural gas and the monthly average of closing NYMEX prices for crude oil as the underlying index (Index Price). To the extent the Index Price closes above the established ceiling the Company must make
payments to the counter-party on the differential between the Index Price and the ceiling. Conversely, if the Index Price closes below the established floor, the counter-party must make payments to the Company on the differential between the Index
Price and the floor. If the Index Price closes between the ceiling and the floor, no settlement is due.





The Company reports the
effects of its hedging activities in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) which it adopted on January 1, 2001.





Through natural gas collars, the Company hedged 45,000 Mmbtu per day of its natural gas production for the three months ended
March 31, 2001 at an average floor of $3.77 per Mmbtu and an average ceiling of $5.11 per Mmbtu, before transaction and transportation costs.





Through crude oil collars, the Company hedged 900 barrels per day of its crude oil production for the three months ended March 31, 2001 at an average floor price of $26.11 per barrel and an average ceiling price of
$32.21 per barrel, before transaction and transportation costs.





During the first quarter 2001, hedging activities decreased oil
and gas revenues by $8.9 million and a $0.9 million unrealized gain on derivative instruments was reported on the Companys Consolidated Statements of Operations. The $0.9 million unrealized gain represents the change in the time value, or the
ineffective value, of the Companys derivative instruments. Additionally, in the first quarter 2001, the Company recorded a $21.1 million valuation adjustment, including the $8.9 million reduction in reported oil and gas revenues, to OCI based
on changes in the intrinsic value of its derivative instruments. Of this amount, $20.8 million relates to the $27.8 million transition adjustment from adoption of SFAS 133 recorded on January 1, 2001.





Contour lost its price protection relating to 20,000 Mmbtus of natural gas per day for 2002 when its counter-party, Enron North America
(ENA), filed for Bankruptcy protection on December 2, 2001. In accordance with SFAS 133 and the result of the filing for bankruptcy protection, the ENA contracts no longer qualified for cash flow hedge accounting treatment and were
adjusted to their fair market value in December 2001, estimated to be $3.5 million. This treatment resulted in approximately $12.3 million, representing deferred revenues related to the hedge positions, to be reflected in the Companys December
31, 2001 Balance Sheet as accumulated other comprehensive income. This amount will be reclassified to earnings monthly during 2002 as the hedge transactions were originally scheduled to occur, with $4.4 million reclassified to earnings during the
first quarter 2002. These items are non-cash in nature. The Company believes $3.5 million is the estimated fair market value of the contracts as of March 31, 2002. This amount is classified on the Companys balance sheet as a current asset.




13




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##### Table of Contents




Results of Operations





The following table sets forth certain operating data regarding net production, average sales prices, production expenses and revenues associated with the Companys oil and natural
gas operations for the periods indicated.





Three Months Ended March 31,2001

2002Net Production Data:Oil and other liquid hydrocarbons (Mbbls)


91.0


68.6Natural gas (Mmcf)


4,967


4,486Natural gas equivalent (Mmcfe)


5,513


4,898Average Sales Price per Unit (including the effects of hedging):Oil and other liquid hydrocarbons (per Bbl)

$
25.61

$
19.58Natural gas (per Mcf)(1)


5.62


3.38Natural gas equivalent (per Mcfe)(1)


5.49


3.37Cost per Mcfe:Production costs(2)

$
.52

$
.54Severance and ad valorem taxes


.09


.16General and administrative expenses


.39


.28Depreciation, depletion and amortization (oil and gas activities)


1.04


1.13Interest expense, excluding accretion and amortization


1.40


1.57


---

|(1) |  | Calculation for 2002 includes $4.4 million of non-cash derivative gains, resulting in increases in the average prices for natural gas and natural gas equivalents of $0.98/Mcf
and $0.90/Mcfe, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes lifting costs and transportation and compression expenses.
|--- |  | -------------------------------------------------------------------




Three Months Ended March 31, 2002 and 2001.    The Companys oil and gas revenues decreased from $30.3 million for the first quarter of 2001 to $16.5 million in the same period of 2002,
a decrease of 45%. This decrease was primarily the result of lower natural gas and crude oil production and lower associated prices. Natural gas production decreased by 10% in the first quarter of 2002 as compared to the same period in 2001. This
decrease was attributable primarily to lower entitlements received from our volumetric overriding royalty interest (VORI) beginning January 1, 2002. We also experienced lower crude oil production during the current quarter, the result of
natural declines in our producing areas. Overall, lower natural gas and crude oil production decreased revenues by $3.4 million in the first quarter 2002 compared to the same period in 2001. In the first quarter 2002, we experienced significantly
lower natural gas and crude oil prices compared to the first quarter 2001. Including $4.4 million in non-cash derivative gains during the first quarter 2002, our average equivalent price decreased by 39% effecting a decrease in oil and gas revenues
of $10.4 million compared to the same period of 2001.





Revenues in the first quarter 2001 included a $0.9 million unrealized gain relating to the Companys derivative instruments. This represents the change in the ineffective value (time value) of the Companys derivative contracts
during the first quarter 2001 in accordance with SFAS 133.





Production expenses for both the first quarter of 2001 and 2002 were
$3.4 million. Lower lifting costs and ad valorem taxes in the first quarter 2002 were offset by higher severance taxes. Higher severance taxes were the result of an increase in the tax rate for our Louisiana production.





Exploration expenses totaled $2.1 million in the first quarter of 2002 and $5.1 million in the corresponding period of 2001, a decrease of 59%. The
reduction in exploration expense was primarily due to a reduction in exploratory spending, partially offset by an increase in expense relating to unproven property abandonments.




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##### Table of Contents




General and administrative (G&A) expenses decreased by 36% to $1.4 million in
the first quarter of 2002 compared to $2.2 million in the corresponding period last year which included an $0.8 million charge for severance related to the retirement of the Companys CEO. On a unit basis, G&A expenses were $0.28 per Mcfe
for the first quarter of 2002.





Interest and other debt expenses were $8.6 million for both the first quarter of 2002 and 2001
as there was no change in our debt structure.





Depreciation, depletion and amortization (DD&A) expense decreased
4% from $5.8 million in the first quarter of 2001 to $5.6 million in the current period, primarily as a result of a lower equivalent production, mostly offset by a higher unit-of-production rate in 2002. The units-of-production DD&A rate was
$1.13 per Mcfe in the current period compared to $1.04 per Mcfe in the first quarter 2001. This higher composite DD&A rate in the first quarter 2002 is generally due to a higher proportion of production from fields with higher aggregate costs
compared to the first quarter 2001.





The Company recognized a net loss of $(4.4) million in the first quarter of 2002 and net
income of $6.6 million in the same period last year. The reasons for the decrease in earnings are described in the foregoing discussion.





The results of operations for the quarter ended March 31, 2002 are not necessarily indicative of results to be expected for the full year.





Liquidity and Capital Resources





General and
Capital Resources.    We have significant debt outstanding relative to our asset base and pay a high portion of our cash flow to service such debt. We currently have $260 million principal amount of debt outstanding ($258.4
million recorded on the balance sheet at March 31, 2002, including $6.3 million in current maturities). Approximately $35 million in cash interest and principal payments are due in 2002, including $4.2 million in early redemptions for our 14% senior
secured notes (Senior Notes). The Senior Notes mature on April 15, 2003 with a final payment of $98.7 million. We do not currently have access to a revolving credit facility to supplement our cash needs. The terms of the Senior Notes and
103/8% senior subordinated notes (Subordinated Notes) significantly limit the ability of the Company to incur
additional funded indebtedness. Accordingly, the Company anticipates that it will be required to meet its obligations during 2002 from cash on hand and cash flows from operations.





Liquidity.    We continued to experience weak commodity prices during the first quarter 2002 with average realized prices (before SFAS 133 adjustments) for
natural gas and crude oil of $2.40/Mcf and $19.58/Bbl, respectively. The loss of natural gas price protection due to the bankruptcy of our hedge counter-party resulted in lost cash flows from operations of $5.1 million in the first quarter 2002.
Operating cash flows (before changes in working capital) were $(0.2) million. Recently, prices have rebounded with the price for April natural gas approaching $3.40/Mmbtu. However, storage levels for natural gas are at historically high levels and
the strength and timing of improvement in demand for natural gas is uncertain. Our financial condition and results of operations will depend upon the prices received for our oil and natural gas production, as well as the costs of finding, acquiring,
developing and producing our reserves.





Net cash used in
operating activities during the first three months of 2002 aggregated $(2.8) million. Funds used in investing activities were comprised of $2.6 million for exploration and development activities and a $0.3 million increase in the Companys
escrow account for plugging and abandonment liabilities (restricted cash). As a result of these activities, cash and cash equivalents decreased from $21.8 million at December 31, 2001 to $16.1 million as of March 31, 2002. As of March 31, 2002, the
Company had working capital of $3.5 million (including current debt maturities), compared to working capital of $8.8 million at the end of 2001.





Restructuring Negotiations.    The combination of an extended period of low commodity prices beginning the second half of 2001, the loss of natural gas price protection created by the
bankruptcy of our hedge counter-




15




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##### Table of Contents

party, the uncertainty of prices in the near-term, and the maturity of our Senior Notes have caused us to consider strategic corporate options. The final payment of $98.7 million on the Senior
Notes is due on April 15, 2003 and we do not anticipate having sufficient cash to make the full redemption. A refinancing of this debt would be difficult to execute in the current environment given the amount of our total debt relative to our
assets. As a result of these factors, we have engaged an investment banking firm to evaluate and advise on the various alternatives that may be available to us including a conversion of debt to equity, a sale of assets, an infusion of equity, a
merger with another industry company, or any combination thereof.





We are currently engaged in
negotiations with certain holders of our Subordinated Notes that may lead to a conversion of that debt to equity. On April 15, 2002, we informed the trustees that payment of interest due on that date totaling $15.4 million on our two classes of debt
would be deferred pending results of negotiations. On May 6, 2002 a forbearance agreement was executed with holders of over 75% of the Subordinated Notes. The agreement states that while negotiations are ongoing, the signatories will forbear from
enforcing certain default rights under the indenture if interest due on the notes is not paid on or before May 15, 2002. The agreement expires on June 30, 2002. The interest due on April 15, 2002 on the Senior Notes was paid on May 3, 2002.





Default under Debt Indentures.    Since the Company did not make the interest payment
due April 15, 2002 on the Subordinated Notes within the thirty-day grace period, an Event of Default occurred under the indenture. An Event of Default under the indenture governing the Subordinated Notes triggers an Event of Default under the
indenture governing the Senior Notes. Each trustee of the two indentures, acting separately, or holders of more than 25% of the outstanding notes of each class of debt, acting separately, have the right to require that the Company immediately pay
each respective class of debt. The holders of more than 75% of the Subordinated Notes have agreed to temporarily forbear from enforcing these acceleration rights under the indenture. However, the remaining holders of Subordinated Notes and the
holders of Senior Notes have not waived the right to accelerate payment.





At March 31, 2002, the Subordinated
Notes and $97.0 million of the Senior Notes are classified as non-current debt. With default on both indentures occurring, all of the debt will be subsequently reclassified as a current liability.





We can provide no assurance that negotiations with our debt holders will result in a satisfactory outcome nor that the obligation to
pay our outstanding debt will not be accelerated. If we are unsuccessful in negotiations with debt holders, the Company may be forced to seek protection under federal bankruptcy regulations. Even a successful restructuring transaction may
require a bankruptcy filing in which the affected parties have agreed to a plan of reorganization. It is likely that a conversion of our Subordinated Notes to equity will result in severe dilution to existing holders of the Companys common
stock.





Capital Commitments.    The Companys 2002 capital expenditure budget
provides for $23.5 million to be expended on development and exploratory activities primarily in the gulf coast region of Louisiana and Texas. However, reduced cash flows caused by the combination of the severe downturn in commodity prices, the loss
of price protection because of the bankruptcy of our hedge counter-party, and the general downturn in economic conditions may cause our actual 2002 expenditures to be less than budgeted. Pending the outcome of negotiations with debt holders and
potential merger or sale discussions, capital expenditures will be limited to necessary projects. In the first three months of 2002, the Companys capital expenditures totaled $1.3 million, including $1.1 million for well completions and
recompletions and $0.2 million for seismic and leasehold acquisitions. An additional $1.2 million was expended in the first quarter 2002 for delay rentals and capitalized overhead.





Restricted Cash.    At March 31, 2002, the Company had a restricted cash balance of $6.7 million related to an established escrow account to meet
future plugging and abandonment liabilities. The Company is required to fund this account in the amount of $100,000 a month until the balance reaches $7.5 million.




16




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##### Table of Contents




Inflation and Changing Prices.    Oil and natural gas prices, as
with most commodities, are highly volatile, have fluctuated during recent years and generally have not followed the same pattern as inflation.





Accounting Pronouncements.    In July 2001, the Financial Accounting Standards Board (FASB) issued two new pronouncements: Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001
and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS 142, effective for fiscal years beginning after December 15, 2001, addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets.It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business
combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial
statements. The Company has evaluated the provisions of SFAS 141 and SFAS 142 with no impact on its financial statements from the adoption of these standards.





In August and October 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations and SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS 143
requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset
retirement costs should be allocated to expense using a systematic and rational method. SFAS 143 is effective for fiscal years beginning after June 15, 2002. SFAS 144 addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. It supersedes, with exceptions, SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and is effective for fiscal years beginning
after December 15, 2001. The Company is currently assessing the impact of SFAS No. 143 and cannot yet reasonably estimate the impact, if any, this statement will have on the Companys financial statements upon adoption. The Company has no
impact on its financial statements from the adoption of SFAS 144 on January 1, 2002.





Item 7A.Quantitative and
Qualitative Disclosure About Market Risk





Contour uses its senior and subordinated debt instruments to finance a
significant portion of its operations. We currently have no outstanding floating rate debt and therefore our earnings and cash flows are not subject to interest rate risk. However, the fair values of our fixed-rate debt instruments are subject to
interest-rate risk. Generally, the fair market value of debt with a fixed interest rate will increase as interest rates fall, and the fair market value will decrease as interest rates rise. Contour is also exposed to market risk from changes in
commodity prices. In the normal course of business we enter into hedging transactions, including forward sales contracts, natural gas and crude oil price swap agreements, collars and options to mitigate our exposure to commodity price movements, but
not for trading or speculative purposes. See Managements Discussion and Analysis of Financial Condition and Results of OperationsHedging Activities and Note 3 to the Consolidated Financial Statements for further discussion on the
Companys derivative instruments. For debt obligations the table below presents principal cash flows and weighted average interest rates by year of maturity.





Maturity Date




Fair Value @ 3/31/022002


2003


2004

2005

2006


TotalFixed Debt:14.00% (Maturity)(1)

$
4,200


$
100,800










$
105,000

$
102,30010.38% (Maturity)













$
155,000



155,000


78,120Total Maturity

$
4,200


$
100,800






$
155,000


$
260,000

$
180,420Blended weighted average interest rate


14.00
%


14.00
%






10.38
%


---

|(1) |  | The 14% notes mature in 2002 and 2003 at a premium of 105% of the stated principal amount.
|--- |  | ------------------------------------------------------------------------------------------



17




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##### Table of Contents




Forward-looking Statements





Statements contained in this Report and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral
or other written statements made or to be made by the Company or its representatives) that are forward-looking in nature are intended to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to matters such as anticipated operating and financial performance, business prospects, developments and results of the Company. Actual performance, prospects,
developments and results may differ materially from any or all anticipated results due to economic conditions and other risks, uncertainties and circumstances partly or totally outside the control of the Company, including rates of inflation,
natural gas prices, uncertainty of reserve estimates, rates and timing of future production of oil and gas, exploratory and development activities, acquisition risks, changes in the level and timing of future costs and expenses related to drilling
and operating activities and those risk factors described on pages 17, 18 and 19 of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2001.





Words such as anticipated, expect, estimate, project and similar expressions are intended to identify forward-looking statements.
Forward-looking statements include the risk factors described in the Companys Form 10-K mentioned above.





PART
II.    
OTHER INFORMATION





Item 3.Defaults Upon Senior Securities





As of the date of this report, Contour has not paid interest totaling $8.1 million due on its 103/8% senior subordinated notes (Subordinated Notes), resulting in an Event of Default under the indenture. The outstanding
principal balance on the Subordinated Notes is $155 million. Default under the Subordinated Notes also results in a cross-default under Contours 14% senior secured notes (Senior Notes). The outstanding principal balance on the
Senior Notes is $105 million.





Item
6.Exhibits and Reports on Form 8-K





(a) Exhibits:





Exhibit Number:

ExhibitNone





(b) Reports on Form 8-K:





No reports on Form 8-K were filed by the Registrant during the first quarter of 2002.




18




---

##### Table of Contents




SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.





Date: May 20, 2002


CONTOUR ENERGY CO.By:

/S/    RICK G. LESTERRick G. LesterExecutive Vice President andChief Financial Officer(Duly Authorized Officer)(Principal Accounting Officer)




19