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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2003
[ ] Transition report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from __________ to _______________
Commission file no. 000-33439
CONTINENTAL SOUTHERN RESOURCES, INC.
------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 88-0448389
- ------------------------------------------ --------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
111 PRESIDENTIAL BOULEVARD, SUITE 158A
BALA CYNWYD, PA 19004
------------------------------------------------
(Address of Principal Executive Offices)
(610) 771- 0680
------------------------------------------------
(Issuer's Telephone Number, including Area Code)
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12,13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: There were 36,192,478
issued and outstanding shares of the registrant's common stock, par value $.001
per share, as of August 13, 2003.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
CONTINENTAL SOUTHERN RESOURCES, INC.
(A Development Stage Entity)
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 2
Condensed Consolidated Statements of Operations - (unaudited) 3
Condensed Consolidated Statements of Cash Flows - (unaudited) 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis 21
Item 3. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 27
Item 5. Other Events 29
Item 6. Exhibits and Reports on Form 8-K 32
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Balance Sheets
ASSETS
June 30, December 31,
2003 2002
------------ ------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 994,367 $ 329,768
Notes receivable - related party 1,750,678 483,117
Notes receivable -- 152,500
Interest receivables 157,474 6,942
Marketable securities - related party 361,955 245,020
Marketable securities 440,000 600,000
Prepaid expenses and advance payments to operators 149,176 325,772
------------ ------------
Total Current Assets 3,853,650 2,243,119
------------ ------------
Oil and Gas Properties, Costs Not Being Amortized 22,818,459 15,077,643
Marketable Securities - Related Party 1,361,644 2,417,021
Equity Interests in Oil and Gas Properties 2,342,942 1,373,491
Property and Equipment, Net and Deposits 9,730 7,608
------------ ------------
$ 30,386,425 $ 21,118,882
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,743,940 $ 767,917
Accounts payable and accrued expenses - related party 94,087 787,808
Payables for oil and gas interest 2,171,082 1,164,135
Convertible debenture 1,996,226 737,839
Notes payable 1,000,000 --
Notes payable - related party 227,840 --
Deferred revenue 40,286 --
------------ ------------
Total Current Liabilities 7,273,461 3,457,699
------------ ------------
Minority Interest 93,140 85,773
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, Series A; $.001 par value; authorized - 9,500,000 shares;
4,090,713 shares at 2003 and 2002 (Liquidation preference: $4,445,241) 4,091 4,091
Preferred stock, Series B; $.001 par value; authorized - 500,000 shares;
143,427 shares at 2003 and 2002 (Liquidation preference: $15,011,967) 144 144
Preferred stock, Series C; $.001 par value; authorized - 1,500,000 shares;
447,500 shares at 2003 and 0 shares at 2002 and 10,000 shares issuable at
2003 and 0 at 2002 (Liquidation preference: $4,497,375) 448 --
Common stock; $.001 par value; authorized - 150,000,000 shares;
issued and outstanding - 34,777,144 shares at 2003 and 31,699,834 shares at
2002 and 1,315,334 shares issuable at 2003 and 1,017,644 at 2002 36,093 32,718
Additional paid-in capital 47,494,480 30,962,327
Less stock subscription receivables (350,000) (2,480,000)
Less stock subscription receivable - related party (480,000) (1,156,250)
Deferred compensation (493,360) --
Accumulated other comprehensive loss (1,581,688) (999,750)
Deficit accumulated during the development stage (21,610,384) (8,787,870)
------------ ------------
Total Stockholders' Equity 23,019,824 17,575,410
------------ ------------
$ 30,386,425 $ 21,118,882
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30, January 13, 2000
---------------------------- ---------------------------- (Inception) to
2003 2002 2003 2002 June 30, 2003
------------ ------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ -- $ 16,532
Expenses
Operating expenses 192,150 -- 802,405 -- 1,060,965
Unproved property impairment 220,068 -- 6,113,859 -- 9,771,995
Bad debt expense - related party -- -- 900,000 -- 900,000
General and administrative 712,065 594,148 939,420 708,961 2,742,399
General and administrative - related party 18,000 -- 36,000 -- 126,000
------------ ------------ ------------ ------------ ------------
Total Expenses 1,142,283 594,148 8,791,684 708,961 14,601,359
------------ ------------ ------------ ------------ ------------
Loss From Operations (1,142,283) (594,148) (8,791,684) (708,961) (14,584,827)
------------ ------------ ------------ ------------ ------------
Other (Income) Expense
Loss on partnership investment 33,479 -- 52,854 -- 80,576
Interest income (80,288) (140,393) (148,657) (160,706) (608,672)
Interest expense 1,088,988 1,047,416 1,935,013 1,189,751 5,246,776
Gain on sale of oil and gas interest - related -- -- (1,235,248) -- (1,235,248)
party
(Gain) Loss on sale of marketable securities -
related party 4,589 -- 29,043 -- (135,946)
------------ ------------ ------------ ------------ ------------
Total Other (Income) Expense 1,046,768 907,023 633,005 1,029,045 3,347,486
------------ ------------ ------------ ------------ ------------
Loss Before Minority Interest (2,189,051) (1,501,171) (9,424,689) (1,738,006) (17,932,313)
Minority Interest 6,498 82 14,797 82 18,849
------------ ------------ ------------ ------------ ------------
Net Loss $ (2,182,553) $ (1,501,089) $ (9,409,892) $ (1,737,924) $(17,913,464)
Preferred Stock Dividends (3,041,793) -- (3,412,622) -- (3,696,920)
------------ ------------ ------------ ------------ ------------
Net Loss to Common Stockholders $ (5,224,346) $ (1,501,089) $(12,822,514) $ (1,737,924) $(21,610,384)
============ ============ ============ ============ ============
Net Loss Per Common Share - Basic and Diluted $ (0.15) $ (0.12) $ (0.39) $ (0.22)
============ ============ ============ ============
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted 34,315,555 12,202,975 33,537,920 7,934,730
------------ ------------ ------------ ------------
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months
Ended June 30, January 13, 2000
---------------------------- (Inception) to
2003 2002 June 30, 2003
------------ ------------ ------------
Cash Flows From Operating Activities
Net Cash Used in Operating Activities $ (2,726,326) $ (302,963) $ (4,201,414)
------------ ------------ ------------
Cash Flows From Investing Activities
Notes receivable - related party (136,000) -- (136,000)
Notes receivable (20,000) (12,500) (1,448,117)
Repayment of notes receivable - related party 381,000 -- 381,000
Repayment of notes receivable 152,500 -- 945,000
Purchases of oil and gas interests and drilling costs (4,639,709) (15,907,375) (21,712,827)
Investment in Limited Partnership (819,640) -- (2,220,903)
Proceeds from sale of oil and gas interests 146,821 -- 146,821
Purchase of marketable securities (5,031) (3,550,000) (4,309,067)
Proceeds from sale of marketable securities 107,493 -- 107,493
Purchases of equipment (2,397) -- (15,255)
------------ ------------ ------------
Net Cash Used in Investing Activities (4,834,963) (19,469,875) (28,261,855)
------------ ------------ ------------
Cash Flows From Financing Activities
Advances from stockholder -- -- 300,000
Repayments to stockholder -- -- (300,000)
Repayment of loan - related party (666,000) -- (666,000)
Proceeds from borrowings 1,347,840 11,858,799 16,783,640
Proceeds from borrowings - related party 546,000 -- 546,000
Loan costs -- (15,000) (245,000)
Receipts of subscription receivable 1,430,000 -- 1,430,000
Receipts of subscription receivable - related party 1,476,250 -- 1,476,250
Proceeds from common and preferred stock
issued and issuable 4,091,798 7,909,201 14,132,746
------------ ------------ ------------
Net Cash Provided by Financing Activities 8,225,888 19,753,000 33,457,636
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 664,599 (19,838) 994,367
Cash and Cash Equivalents, Beginning of Period 329,768 39,318 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 994,367 $ 19,480 $ 994,367
============ ============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been prepared
by Continental Southern Resources, Inc. (the "Company" or "CSOR"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The financial statements reflect all adjustments that are, in the
opinion of management, necessary to fairly present such information. All such
adjustments are of a normal recurring nature except for two impairment charges
made in connection with the Company's Hell Hole mineral interest and note
receivable from Touchstone Resources, Ltd. (see Notes 5 and 7). Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, certain information and footnote disclosures,
including a description of significant accounting policies normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted
pursuant to such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2002 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2003.
NOTE 2 - DESCRIPTION OF BUSINESS
The Company is engaged in the business of acquiring, exploring, developing and
producing natural gas and oil properties. The Company is generally not involved
as the operator of the projects in which it participates. Instead, the Company
relies on third parties for drilling, delivering any gas or oil reserves that
are discovered, and assisting in the negotiation of all sales contracts with
such purchasing parties. With the assistance of such third parties, the Company
plans to explore and develop these prospects and sell on the open market any gas
or oil that is discovered. The Company relies on Touchstone Resources USA, Inc.,
a related party, to assist and advise the Company regarding the identification
and leasing of properties on favorable terms. The Company also relies on
Touchstone Resources USA, Inc. to provide additional reserve assessment analysis
and engineering services in connection with the exploration and development of
the prospects. Touchstone Resources USA, Inc. has a significant level of
experience in exploring and developing gas and oil properties in the regions
where the prospects are located. This strategy is intended to reduce the level
of overhead and capital expenditures required to maintain drilling and
production operations. The Company does not own any drilling rigs, and
independent drilling contractors conduct all of the drilling activities. The
Company's properties are located in Louisiana, Mississippi, Oklahoma, and
Thailand.
5
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - STOCK-BASED COMPENSATION
The Company applies the intrinsic value method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting For Stock Issued To
Employees, and related interpretations, in accounting for its stock-based grants
to employees. Under the intrinsic value method of accounting, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. Statement of Financial Accounting
Standards ("SFAS") No. 148, Accounting For Stock Based Compensation - Transition
and Disclosure - an Amendment of SFAS 123, established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
compensation. The Company applies SFAS No. 123 in accounting for stock-based
grants to non-employees and provides the disclosure requirement of SFAS No. 148
for stock-based grants to employees.
NOTE 4 - NOTES RECEIVABLE
RELATED
In August and October 2002, the Company loaned an aggregate of $425,000 and
$220,000 to BPK Resources, Inc. ("BPK"), a related party, and its subsidiary,
CSR - Hackberry Partners, L.P., respectively. The Company received various
promissory notes due on demand with annual interest rates of 10% and 12%. The
outstanding balances of these notes at June 30, 2003 was $125,000 and $25,000,
respectively. Unpaid accrued interest totaled $20,962. The Company and BPK have
one common director who is also president of BPK.
On January 15, 2003, the Company sold its 99% Limited Partnership Interest in
CSR-WAHA Partners, LP, a Delaware Limited Partnership (the "LP Interest") to BPK
and in return, received a cash payment of $150,000, a $1,500,000 promissory note
due on April 30, 2003, and 600,000 shares of common stock of BPK. This resulted
in a gain of $1,235,248. On April 14, 2003, the Company agreed to extend the due
date of the $1,500,000 promissory note to June 30, 2004. In consideration for
this extension, BPK will reduce the note by paying the Company one-half of funds
it receives from any debt or equity offering as well as all proceeds received
from the sale of Ocean Resources Capital Holdings, PLC securities. In addition,
BPK issued 100,000 shares of its common stock to the Company. As of June 30,
2003, $1,400,000 of principal remained outstanding along with $67,841 in accrued
interest, of which $730,000 was paid in July 2003. (See Note 15.)
On February 21, 2003, Knox Miss Partners, L.P. ("Knox Miss") loaned $10,000 to
Touchstone Resources, Ltd. ("Touchstone") for which it received a 10% unsecured
demand promissory. As of June 30, 2003, the principal remained outstanding with
accrued interest of $357.
On March 4, 2003, the Company loaned $136,000 to FEQ Investments, Inc. ("FEQ")
for which it received a 10% unsecured demand promissory note. The note was paid
on May 29, 2003.
On May 30, 2003, the Company loaned $30,000 to PH Gas, L.P. in exchange for a
demand promissory note. This note was paid on June 4, 2003.
OTHER
On June 13, 2003, Knox Miss received a promissory note in exchange for a $10,000
loan from an unrelated party. As of June 30, 2003, the principal remained
outstanding.
6
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 5 - OIL AND GAS PROPERTIES
HELL HOLE BAYOU
From February through August 2002, the Company acquired various working
interests in the leases underlying the North Hell Hole Prospect (the
"Prospect"). The Prospect is subject to the terms and conditions of an A.A.P.L.
Form 610 - Model Form Operating Agreement - 1989 with certain revisions. The
purpose of the Prospect is to explore, develop and produce certain oil and gas
interests it possesses in a contracted area, which contains Louisiana State
Lease Nos. 16141, 16142, 17289, 17441, 17442 and 17443 known as Hell Hole Bayou
located in Vermillion Parish, Louisiana. The Company acquired these interests
from various leaseholders, including Touchstone Resources USA, Inc. ("Touchstone
USA"), a related party. The Company's various interests are subject to various
terms and specifications including restrictions, overriding royalty interests,
specific drilling depths, future wells, specific locations, and other parties
with priority in recovering their costs in certain net profits in the interests.
As of June 30, 2003, the Company owned an aggregate working interest of 37.9%
and an additional 10% back-in interest.
In December 2002, it was determined by the Company's outside engineer and
operator that the initial hole was dry. It was decided to sidetrack the hole
1,000 feet to the east to a depth of approximately 16,800 feet. Drilling on the
sidetrack project commenced in January 2003. In April 2003, after testing all
zones it was determined that the sidetracking well was a dry hole also. Leases
Nos. 16141 and 16142 require the Company to commence new exploration within 90
days of the determination of the dry hole, approximately April 12, 2003, in
order for the Company to retain its rights under these leases. Management has
decided not to pursue additional exploration within these lease areas.
Consequently, these leases were allowed to lapse. The Company has recorded
impairment charges of $3,635,136 in the fourth quarter of 2002 and $6,113,859 in
the first quarter of 2003. The aggregate amount of these impairments is
$9,748,995 which is comprised of all drilling costs incurred to date plus 50% of
the lease acquisition costs for the entire Hell Hole Prospect. The Company is
subject to receiving Authorization for Expenditure ("AFE") invoices for costs of
additional land acquisition, exploration, drilling, etc.
In order for the Company to retain its rights under Louisiana State Lease Nos.
17289, 17441, 17442 and 17443, the Company and its other co-investors will be
required to make a rental payment in November 2003 equal to 50% of the original
lease payment. Management anticipates the Company's portion of this amount to be
$106,000. If these rental payments are not paid when due, the Company's rights
under these leases will expire.
KNOX MISS PARTNERS, L.P.
On March 23, 2002, the Company entered into a limited partnership agreement with
Knox Miss, LLC and formed Knox Miss. Partners, L.P., a Delaware limited
partnership. The Company is the sole limited partner with a 99% interest and
Knox Miss, LLC is the general partner. As of June 30, 2003, the Company
contributed $4,429,500 and the general partner contributed $27,325 to the
limited partnership. Knox Miss. Partners, L.P. was formed to acquire interests
in gas, oil and mineral leases of properties located in Mississippi.
During 2002, Knox Miss entered into exploration agreements with SK Exploration,
Inc., SKH Energy Partners II, LP and Clayton Williams Energy, Inc. ("Clayton")
to jointly cooperate and participate in the exploration and development of oil
and gas leases in the Livingston Transform Area, Longview and Osborn prospects
which cover several counties in Mississippi. During the first and second quarter
of 2003, the Company acquired additional mineral leases for $1,161,528 and
incurred $794,905 of exploration expenses.
7
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 5 - OIL AND GAS PROPERTIES (Continued)
BWP GAS, LLC
On May 20, 2003, the Company entered into a Membership Purchase Agreement with
BWP Gas, LLC ("BWP") whereby the Company acquired all of the Class B membership
interest of BWP from HBA Gas, Inc. ("HBA") (the "Acquisition"). The Company
became the sole Class B member and the managing member with a 99% interest in
BWP. Oklahoma Hills Gas, LLC ("Oklahoma Hills") is the Class A member with a 1%
interest. HBA is the managing member of Oklahoma Hills and Ernest Bartlett is
the president of HBA and also the president of FEQ. FEQ is a principal holder of
the Company's Series A and Series B Preferred stock as well as interests in
certain entities which serve as the general partner of certain oil and gas
limited partnerships in which the Company has interests. In consideration for
the Acquisition, the Company issued 3,300,000 shares of the Company's common
stock and warrants to purchase an additional 1,650,000 common shares at an
exercise price of $2.00 per share expiring in May 2006 to HBA and its designees.
The shares were valued at $6,600,000. The warrants were valued at $2,046,000
using the Black-Scholes Model. The Company paid an investment banker $172,500 in
connection with the Acquisition. The Company also contributed $2,500,000 to BWP
at the time of the Acquisition in order for BWP to complete its funding
commitment under the exploration agreement which was defined below. Therefore,
the total purchase price for the Acquisition amounted to $11,318,500. BWP's sole
asset at the time of the Acquisition was a 4.5% working interest in the Mary
#2-34 Well ("Mary Well") in the Potato Hills Deep Prospect ("Potato Hills")
located in Latimer and Pushmataha Counties, Oklahoma.
In February 2003, BWP entered into an exploration agreement ("Exploration
Agreement") with GHK Company, LLC ("GHK") and its affiliate, which was amended
in May 2003, to jointly cooperate and participate in the exploration and
development of oil and gas leases in the contract area of Township 3 North,
Range 19-21 East and Township 2 North, Range 19-21 East in Potato Hills.
Pursuant to the Exploration Agreement, BWP acquired 6% interest from GHK in Mary
Well for a total of $6,000,000. BWP later transferred 1% of its interest in Mary
Well to one of its creditors to settle an outstanding loan in the amount of
$1,000,000. BWP also transferred 0.5% of its interest to an affiliate of HBA.
Under the Exploration Agreement, BWP also has the right to participate in a 4.5%
interest of all additional wells drilled in Potato Hills and the right to
purchase up to a 10% interest in all wells identified by GHK in the future. In
the event that the total costs for the drilling of the Mary No. 2-34 Well as
reflected in the AFE exceed one hundred and ten percent (110%) of the budgeted
amount, BWP is obligated to pay its proportionate share of such costs. BWP's
working interest in Potato Hills is subject to various terms and specifications
including restrictions, overriding royalty interests, specific drilling depths,
future wells, specific locations, and other parties with priority in recovering
their costs in certain net profits in the interests. Potato Hills is subject to
the terms and conditions of an A.A.P.L. Form 610-1989 Operating Agreement with
certain revisions. GHK is the operator. As of June 30, 2003, BWP was not liable
for any AFE related to its interest in Potato Hills.
After the Acquisition, BWP invested $254,693 to acquire a 5% working interest in
Indian Prospect located in Roger Mills County, Oklahoma. The Indian Prospect is
also subject to the terms and conditions of the A.A.P.L. Form 610-1989 Operating
Agreement, of which GHK is the operator. BWP's share of drilling cost in the
India Prospect was $258,058 as of June 30, 2003.
The following pro forma presentation assumes the acquisition of BWP took place
at January 1, 2003 and shows the pro forma effect on loss from operations. Since
BWP commenced operation in April 2003, there is no pro forma impact on the
Company's statement of operations for the year ended December 31, 2002.
8
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 5 - OIL AND GAS PROPERTIES (Continued)
Six Months Ending Year Ended
June 30, 2003 (unaudited) December 31, 2002
-------------------------------------- ------------------
Historical Pro Forma Historical
------------------- ----------------- ------------------
Revenue $ - $ - $ 16,142
Loss form operations (8,791,684) (8,791,684) (5,676,415)
Other (income) expense 633,005 1,832,337 2,714,481
Interest expense 1,935,013 3,134,345 3,311,763
Net loss (9,409,892) (10,609,224) (8,386,844)
Net loss to common stockholders (12,822,514) (14,021,846) (8,671,142)
Net loss per common share -
Basic and diluted (0.38) (0.42) (0.43)
Following is the condensed balance sheet of BWP at the date of the Acquisition:
Cash $ 790
Unproved oil and gas property 4,500,000
----------
Total Assets $4,500,790
==========
Oil and gas interest payable $2,500,000
----------
Net Assets Acquired $2,000,790
==========
As of June 30, 2003, oil and gas properties consisted of the following:
Hell Hole Bayou Knox-Miss BWP Total
-------------------- ----------------- ----------------- -------------------
Unproved properties acquisition costs $ 10,675,197 $ 5,345,839 $11,423,193 $ 27,444,229
Drilling costs - - 258,058 258,058
Other capitalized costs 410,207 297,279 156,493 863,979
Allowance for impairment (5,747,807) - - (5,747,807)
-------------------- ----------------- ----------------- -------------------
Net capitalized oil and gas properties $ 5,337,597 $ 5,643,118 $11,837,744 $ 22,818,459
==================== ================= ================= ===================
9
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 6 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES
PHT PARTNERS, L.P.
On June 26, 2002, the Company entered into a limited partnership agreement with
PHT Gas, LLC and formed PHT Partners, L.P. ("PHT"). The Company is the sole
limited partner with a 99% interest and PHT Gas, LLC is the general partner. On
August 4, 2002, the limited partnership agreement was amended to allow an
additional partner. This decreased the Company's interest to 94.9%. As of June
30, 2003, the Company contributed $1,486,800 to PHT. PHT has invested $883,000
in APICO, LLC, a limited liability company, in return for 883 units out of a
total of 4,100 units outstanding.
The business of APICO, LLC is (i) to farm-in to certain concessions (the
"Concessions") in Phu Horm Gas Field Project located in Khorat and Udon in the
Kingdom of Thailand, which are controlled by Amerada Hess Limited (Thailand),
which is acting as the operator; (ii) to acquire and own property interests and
other rights in the Concessions; (iii) to participate in exploring the
Concessions; (iv) in developing and operating oil and gas wells in the
Concessions; (v) in financing its operations, in selling production from such
wells and in selling interests in the Property and/or the Concessions; (vii) and
to take all other actions necessary, appropriate or advisable in connection with
such business.
The Company is not subject to capital calls in connection with its limited
partnership interest in PHT. However, as explained below, PHT is subject to cash
calls from its investment in APICO, LLC. If PHT does not meet its cash calls,
then the Company's investment in PHT may become impaired. Pursuant to the APICO
membership agreement, PHT and the other APICO members will be called upon from
time to time for additional contributions so as to meet the reasonable capital
requirements of APICO. If PHT or any other member fails to make required capital
contributions or meet the required cash calls in the amounts and at the times
specified in the membership agreement, then they would be in default. If the
default is not cured within 45 days, then APICO has the right to repurchase the
defaulting members' shares for 1% of their original purchase price. In the
second quarter of 2003, PHT funded its proportional share of capital calls
totaling $500,805. PHT expects to receive additional capital call of
approximately $200,000 over the next twelve months.
LOUISIANA SHELF PARTNERS, L.P.
On December 31, 2002, the Company entered into a limited partnership agreement
with LS Gas, LLC and formed Louisiana Shelf Partners, L.P. ("LSP"), of which the
Company is a limited partner with an approximate 25% interest and LS Gas, LLC is
the general partner. The Company contributed $240,000 to LSP in 2002 and
$521,500 in the first quarter of 2003. As of June 30, 2003, LSP acquired various
geological and geophysical data and interests in oil, gas and mineral leases
located in Cameron Parish, Louisiana for an aggregate purchase price of
$4,369,161.
Pursuant to the partnership agreement, the Company and the other LSP members
will be called upon from time to time for additional contributions so as to meet
the reasonable capital requirements of LSP. In July 2003, LSP received an AFE
from its operator for approximately $4,800,000 related to proposed exploration
in the Cameron Parish prospect. The Company was required to make a capital
contribution of approximately $1,200,000 to LSP for the payment of this AFE. In
July and August 2003, the Company contributed a total of $875,000 and expects to
make additional contribution in the amount of $636,000
The following table summarized the Company's investment in oil and gas
non-public limited partnerships accounted for under the equity method of
accounting as of June 30, 2003.
10
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 6 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)
June 30, 2003 (unaudited)
---------------------------------------
Excess of
Carrying Value
Carrying Value Over Net Assets
----------------- ------------------
PHT Investment in APICO $ 1,610,901 $ 268,725
Louisiana Shelf Partners 732,041 -
----------------- ------------------
$ 2,342,942 $ 268,725
================= ==================
The following table summarizes financial information for APICO and LSP, which
were accounted for under the equity method of accounting at June 30, 2003 and
have been compiled from the financial statements of the respective entities:
June 30, 2003
-------------------------
(Unaudited)
Total Assets $ 12,130,333
=========================
Total Liabilities $ 35,265
=========================
Six Months Ended
June 30, 2003
-------------------------
(Unaudited)
Results of Operations:
Revenue $ -
Loss from operations $ (211,412)
Net Loss $ (211,412)
NOTE 7 - MARKETABLE SECURITIES - RELATED PARTIES
In connection with the February 2002 acquisition of various working interests in
the North Hell Hole Prospect, the Company purchased, for the sum of $2,000,000,
a 10% secured convertible promissory note in the principal amount of $2,000,000
and a detached warrant to purchase 1,063,830 shares of common stock at an
exercise price of US$1.88 from Touchstone, a Canadian Exchange listed company
and the parent company of Touchstone USA. The secured convertible promissory
note, which matures August 22, 2004, has an initial conversion price of US$1.88
and is secured by the working interests in Hell Hole Bayou still owned by
Touchstone. The fair values of the note receivable and warrants on the date the
note was issued, valued by using the Black-Scholes Model, were $787,234 and
$1,212,766, respectively. Consequently, a discount in the amount of $1,212,766
was recorded in connection with this note. In addition, as described below, an
impairment charge was recorded against this note. At June 30, 2003, this note is
reflected in these financial statements at a carrying value of $400,000. The
face value of this note is $2,000,000. The fair market value of the warrant was
$127,660 as of June 30, 2003.
11
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 7 - MARKETABLE SECURITIES - RELATED PARTIES (Continued)
In June 2002 the Company purchased, for the sum of $1,600,000, an additional 10%
convertible promissory note in the principal amount of $1,600,000 and a detached
warrant to purchase 2,000,000 shares of common stock at an exercise price of
US$1.00 until December 28, 2002 from Touchstone. The secured convertible
promissory note, which matured December 28, 2002, had an initial conversion
price of US$.80. The fair values of the note receivable and warrants on the date
the note was issued, valued by using the Black-Scholes Model, were $1,220,000
and $380,000, respectively. Consequently, a discount in the amount of $380,000
was recorded in connection with this note. On March 20, 2003, the Company
renegotiated the $1,600,000 promissory note receivable from Touchstone. The
principal amount of the new note increased to $1,725,586, which included accrued
interest of $125,586. The note earns interest at 10% per annum and is due
February 28, 2005. The note may be converted at any time into shares of
Touchstone at one share for each $0.62 of principal amount. Interest due may
also be satisfied by the issuance of shares of Touchstone valued as at the date
of issuance. In addition, as described below, an impairment charge was recorded
against this note. At June 30, 2003, this note is reflected in these financial
statements at a carrying value of $500,000. The face value of this note is
$1,725,586. The original expiration date to purchase 2,000,000 shares of stock
in Touchstone was extended until February 28, 2005.
The Company's marketable convertible debt securities and warrants can be
converted into and exercised for shares of Touchstone, which have a readily
determinable fair market value. Management determined the appropriate
classification of its investment using SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" at the time of purchase, and
re-evaluates such determinations at each balance sheet date.
Under SFAS No. 114 "Accounting by Creditors for Impairment of a Loan," amended
by SFAS No. 118, management has evaluated the collectibility of the loan from
Touchstone and believes that Touchstone may not be able to fully repay the
loans. Therefore, the Company has measured and recorded impairment charges of
$900,000 and $550,601 against these loans and accrued interest as of June 30,
2003 and December 31, 2002, respectively. The loans had a significant discount,
which reduced their carrying value. In connection with the impairment charge the
Company has stopped amortizing the loan discount and accruing interest as of the
fourth quarter of 2002. Consequently the carrying value of the $2,000,000 and
the $1,600,000 face value loans at June 30, 2003 is $500,000 and $400,000,
respectively, which is based on the fair market value of the underlying loan
collateral.
On January 15, 2003, the Company received 600,000 shares of the common stock of
BPK as part of the consideration for the Company's sale of its 99% Limited
Partnership Interest in CSR-WAHA Partners, LP to BPK.
In March 2003, the Company sold 141,500 shares of BPK. The Company incurred a
loss of $24,454 as a result of this transaction.
In April 2003, the Company sold 23,000 shares of BPK. The Company incurred a
loss of $4,589 as a result of this transaction.
As of June 30, 2003, the Company owned 864,500 shares of BPK common stock with a
fair market value of $337,155, which represented approximately 6% of ownership
in BPK. The Company and BPK have one common director who is also president of
BPK.
The marketable securities reflected in these financial statements are deemed by
management to be "available-for-sale" and, accordingly, are reported at fair
value, with unrealized gains and losses reported in other comprehensive income
and reflected as a separate component within the Statement of Stockholders'
Equity. Realized gains and losses on securities available-for-sale are included
in other income/expense and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method.
12
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 7 - MARKETABLE SECURITIES - RELATED PARTIES (Continued)
Available-for-sale securities consist of the following at June 30, 2003:
Current
---------------------------------------------------------
Gross
Unrealized
Cost Loss Fair Value
----------------- --------------- ----------------
Stock $ 560,000 $ (120,000) $ 440,000
Stock - related party 692,521 (330,566) 361,955
----------------- --------------- ----------------
Total Current $ 1,252,521 $ (450,566) $801,955
================= =============== ================
Long Term
------------------------------------------------------------------------
Gross Allowance
Amortized Unrealized For
Cost Loss Impairment Fair Value
-------------- --------------- --------------- ---------------
Convertible debt Due 02/28/2005 $ 1,416,134 $ - $ (916,134) $ 500,000
Convertible debt Due 08/22/2004 934,467 (534,467) 400,000
-
Warrants Expires 02/28/2005 380,000 (46,016) - 333,984
Warrants Expires 08/22/2004 1,212,766 (1,085,106) - 127,660
-------------- --------------- --------------- ---------------
Total Non-Current - Related Party $ 3,943,367 $(1,131,122) $(1,450,601) $ 1,361,644
============== =============== =============== ===============
NOTE 8 - NOTES PAYABLE
RELATED PARTY
In 2003, the Company borrowed a total of $256,000 from SPH Investments, Inc.
("SPH") and issued various 10% demand notes. As of June 30, 2003, $80,000 of
principal remained outstanding along with $9,354 in accrued interest.
In January 2003, the Company borrowed $100,000 from SPH Investments, Inc. Profit
Sharing Plan and issued a 10% demand note. This note with accrued interest of
$3,956 was repaid in June 2003.
13
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 8 - NOTES PAYABLE (Continued)
OTHER
In April 2002 the Company entered into a loan agreement to borrow $1,500,000
from Gemini Growth Fund, LP ("Gemini"), a Delaware limited partnership. Gemini
subsequently changed its name to Trident Growth Fund, LP ("Trident"). The note
is a 12% secured convertible promissory note. The note is secured by
substantially all of the assets of the Company. The note matures on October 31,
2003, however the Company has the option to redeem the note at 100% of par prior
at any time up to the maturity date. Trident has the option to convert the
principal amount of the note into common stock of the Company. As additional
incentive to make the $1,500,000 loan Trident was issued a warrant to purchase
150,000 shares of the Company's common stock. The warrants expire on the earlier
of April 30, 2012 or the date all of the convertible notes are converted to
common stock. The initial conversion price of the note and warrant is the lesser
of $2.00 or 60% of the closing bid price of the Company's common stock for the
first trading session subsequent to the effective date of a reverse split of the
Company's common stock, which took place on May 31, 2002. However, the
conversion price was reduced to $1.60 as a result of a subsequent private
offering and is subject to other adjustments according to the provisions of the
note. The Company paid loan commitment and origination fees of 1% and 4%,
respectively, which were recorded as loan costs of which $45,000 was amortized
to interest expense in 2002. On July 29, 2003, the loan was amended to extend
the maturity date to July 31, 2004 and increase the principal amount to
$2,100,000. As consideration for Trident's increasing of the original loan to
$2,100,000, the Company granted Trident warrants to purchase 150,000 shares of
common stock at an exercise price of $1.60 per share. The warrants are
exercisable immediately and will expire on April 30, 2012.
Interest is payable in cash unless Trident elects to have the interest paid in
common stock of the Company. Repayment of the principal amount of the note has
been guaranteed by a subsidiary of the Company. As described in the loan
agreement, the Company is required to comply with various financial covenants.
Any failure to comply with such covenants may be deemed a default on the loan by
Trident. The Company did not meet three of the financial loan covenants as of
December 31, 2002, however, Trident waived the specific covenants for six
months. In consideration for this waiver, the Company granted Trident warrants
to purchase 25,000 shares of common stock at an exercise price of $1.60 per
share. The warrants are exercisable immediately and will expire on April 30,
2012. As of June 30, 2003, the Company failed to meet the loan covenants again
and Trident waived the covenant for another six months until December 2003. As
consideration for Trident's second waiver of the loan covenants and extension of
the maturity date of the original $1,500,000 note, on July 29, 2003, the Company
granted Trident warrants to purchase 100,000 shares of common stock at an
initial exercise price of $1.60 per share. The warrants are exercisable
immediately and will expire on April 30, 2012.
Under Emerging Issues Task Force ("EITF") 00-27, "Application of Issue No. 98-5
to Certain Convertible Instruments," the Company has allocated the proceeds from
issuance of the convertible Gemini promissory note and warrants based on a fair
value basis of each item. Consequently, the convertible Gemini promissory note
was recorded with a discount of $383,451 based on the ascribed value of the
warrants as determined by using the Black-Scholes Model. Under EITF 00-27 the
note discount for the warrant will be amortized over the period from the date of
issuance to the stated maturity date of the note. An additional beneficial
conversion discount of $1,116,549 was recorded since the Gemini promissory note
was convertible into common shares of stock at a rate of $1.60 per share while
the prevailing common stock share price was $3.10. This discount is also being
amortized over the term of the loan. As of June 30, 2003, the Company has
amortized a total of $1,051,747 of the discount.
Under the terms of the loan agreement, the Company is required to register the
resale of all shares of its common stock issuable upon conversion of the note or
exercise of the warrants, within 180 days of the date of the closing of the
loan. The Company was originally required to fully register the common stock by
October 2002. The Company would have been subject to a monthly penalty of either
25,000 shares of its common stock or $10,000, at the option of the lender.
However, the Company was granted a six-month waiver regarding this requirement.
14
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 8 - NOTES PAYABLE (Continued)
On October 18, 2002 and October 30, 2002, the Company issued two unsecured 12%
convertible promissory notes to a lender in the amount of $750,000 and $800,000,
respectively. Both notes mature on October 15, 2003. In the event of default,
the notes bear interest at 15% per annum. The lender has the option to convert
the principal amount of the note into common stock of the Company at a
conversion price of $3.25. The lender was issued a warrant to purchase a total
of 232,500 shares of the Company's common stock at an exercise price of $5.00
per share as an additional incentive to make the loans. The warrants expire on
October 15, 2005. Interest is payable in cash or common stock of the Company.
Under EITF 00-27, the Company has allocated the proceeds from issuance of the
convertible promissory notes and warrants based on a fair value basis of each
item. Consequently, the convertible promissory notes were recorded with a
discount of $341,349 and $378,406, respectively, based on the ascribed value of
the warrants as determined by using the Black-Scholes Model. Under EITF 00-27
the note discount for the warrant will be amortized over the period from the
date of issuance to the stated maturity date of the note. An additional
beneficial conversion discount of $408,651 and $421,594 was recorded for the
$750,000 and $800,000 promissory notes, respectively, since the notes were
convertible into common shares of stock at a rate of $3.25 per share while the
prevailing common stock share price was $4.90 and $5.05, respectively. This
discount will also be amortized over the term of the loan. As of June 30, 2003,
the Company had amortized a total discount of $461,024 and $483,456,
respectively, for the $750,000 and $800,000 notes.
On February 19, 2003, Knox Miss borrowed $1,200,000 from Gibralt US, Inc. and
issued a promissory note bearing interest at 12%. The note is payable the
earlier of June 30, 2003 or upon closing of $2,000,000 of equity financing by
the Company. The lender also received 75,000 shares of common stock in the
Company for making the loan. The loan is guaranteed by the Company and FEQ. As
of June 30, 2003, $1,000,000 in principal remained outstanding, which was paid
in July 2003.
During June 2003, PHT borrowed $143,900 from Louisiana X Investors, LLC and
issued a 10% demand note.
NOTE 9 - LOSS PER SHARE
Loss per common share is calculated in accordance with SFAS No. 128, Earnings
Per Share. Basic loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted loss per share is computed similarly to basic loss
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued and if the additional common shares were
dilutive. Shares associated with stock options, warrants and convertible debt
are not included because their inclusion would be antidilutive (i.e., reduce the
net loss per share). At June 30, 2003 and December 31, 2002, the Company had
potentially dilutive shares of 7,059,423 and 2,696,923, respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
On May 20, 2003, the Company issued to the former Class B member of BWP and its
designee (consisting of creditors and consultants of BWP) 3,300,000 shares of
common stock and 1,650,000 warrants at an exercise price of $2.00 per share
expiring in three years as consideration for its purchase of the 100% of the
Class B Membership interests in BWP.
On May 22, 2003, the Company authorized and designated 1,500,000 shares of
Series C Convertible Preferred Stock with a par value $.001 per share.
15
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
During May and June 2003, the Company sold 447,500 shares of Series C
Convertible Preferred Stock in a private placement for $10.00 per share of which
10,000 shares were issuable as of June 30, 2003. The Company is required to
register the resale of all shares of the common stock upon conversion of the
Series C Preferred Stock, within 90 days of the date of termination of the
offering. The Company recorded $283,200 in offering costs related to this
offering.
SERIES C CONVERTIBLE PREFERRED STOCK
The Series C Preferred Stock is to pay dividends of 6% of original issue price
($10.00) per share per annum, which are cumulative prior to any dividends on the
common stock and on parity with the payment of any dividend or other
distribution on the Series A Preferred Stock, Series B Preferred Stock, and any
other series of preferred stock that has similar characteristics. The holders of
each share of Series C Convertible Preferred Stock are entitled to be paid out
of available funds prior to any distributions to holders of common stock in the
amount of $10.00 per outstanding share plus all accrued dividends. The holders
of each share of Series C Preferred Stock may convert their shares to common
stock at an initial conversion price of $2.00. This conversion price may be
adjusted and reset as set forth in the Certificate of Designation of Series C
Preferred Stock ("Certificate of Designation").
The Company may redeem all or a portion of the outstanding shares of Series C
Convertible Preferred Stock at a cost of the liquidation preference and all
accrued and unpaid dividends. The redemption may occur at any time at the
Company's sole discretion upon thirty days' written notice to the holders of the
Series C Convertible Preferred Stock provided that (i) the average of the
closing bid prices of the Company's Common Stock during the twenty trading days
preceding the date of the "Redemption notice" as reported on the primary market
or exchange on which the Corporation's Common Stock is then trading equals or
exceeds $6.00 per share, and (ii) the shares of Common Stock issuable upon
conversion of the Series C Convertible Preferred Stock are subject to an
effective registration statement permitting the public resale of such shares
under the Securities Act of 1933, as amended (the "Act"). In the event that the
Corporation redeems less than all of the outstanding Series C Convertible
Preferred Stock, it shall redeem such shares pro rata among all the holders of
the Series C Convertible Preferred Stock.
The preferred dividends accrued at June 30, 2003 amounted to $1,046,170 in
total, of which $354,258, $669,267, and $22,375 pertained to Series A, B and C,
respectively.
Since the Company's common stock price exceeded the initial conversion price of
the Series C Preferred Stock there was a beneficial conversion feature recorded
as a preferred stock dividend in the amount of $2,650,750 as of June 30, 2003.
STOCK WARRANTS
The Company had the following outstanding warrants to purchase its common stock
at June 30, 2003:
Expiration Date Exercise Price Shares
---------------- --------------- --------------
Warrants 2/20/2005 $ 2.25 300,000
8/7/2005 $ 2.25 100,000
10/18/2005 $ 5.00 112,500
10/30/2005 $ 5.00 120,000
5/20/2006 $ 2.00 1,650,000
4/30/2012 $ 1.60 175,000
--------------- --------------
2,457,500
==============
16
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
These warrants were issued in connection with the acquisition of Hell Hole,
Potato Hills, and Waha/Lockridge interests and with the issuance of convertible
promissory notes.
STOCK OPTIONS
In May 2003, the Company granted 250,000 options to Sunrise Financial Group,
Inc. ("Sunrise") as compensation for the consulting service Sunrise will provide
for a minimum of five months, of which 100,000 vested immediately and 150,000
vest in six months. The option is exercisable at $3.00 per share and expires in
five years. As of June 30, 2003, the Company has recorded a total of $493,360
deferred compensation for the options, net of $123,340 of amortization.
NOTE 11 - RELATED PARTY TRANSACTIONS - NOT DESCRIBED ELSEWHERE / CONCENTRATIONS
During March 2003, the Company paid investment-banking fees of $60,000 to FEQ.
The investment banking fees related to certain debt placements for the benefit
of Knox Miss.
On January 7, 2003, LSP loaned FEQ (the former managing member of PHT Gas, LLC
and CSR, LLC) $1,220,000 and received a 10% promissory note. As of June 30,
2003, principal in the amount of $520,000 remained outstanding along with
$49,636 in accrued interest.
In January 2003, SPH paid the full balance of its outstanding subscription
agreements amounting to $906,250.
In May 2003, FEQ paid the full balance of its outstanding promissory note
amounting to $139,204, which included $3,204 of accrued interest.
In June 2003, Shannon M. Harrington Trust paid the full balance of its
outstanding subscription agreement amounting to $76,834, which included $1,834
of accrued interest.
In June 2003, SPH Investments Profit Sharing Plan paid the full balance of its
outstanding subscription agreement amounting to $25,611, which included $611 of
accrued interest.
In June 2003, Tara J. Harrington Trust paid the full balance of its outstanding
subscription agreement amounting to $76,834, which included $1,834 of accrued
interest.
In June 2003, W. Stephen Harrington Trust paid the full balance of its
outstanding subscription agreement amounting to $76,834, which included $1,834
of accrued interest.
As of June 30, 2003, Lancer Offshore, Inc., Michael Lauer and Lancer Partners,
L.P. are the record and beneficial owners of 18,990,626 shares of the Company's
common stock, representing 52% of the Company's outstanding shares, and 123,213
shares of the Company's Series B Preferred Stock, representing approximately 86%
of the outstanding shares of that class. On or about July 8, 2003, the United
States Securities and Exchange Commission filed an emergency civil injunctive
action against Lancer Management Group, LLC, Michael Lauer and Lancer Management
II, LLC, in the United States District Court for the Southern District of
Florida seeking a temporary restraining order, the freezing of assets,
disgorgement, civil penalties and other relief based on alleged violations of
the federal securities laws. On July 17, 2003, the District Court issued an
order granting a preliminary injunction to restrain Lancer Management Group,
LLC, Michael Lauer and Lancer Management II, LLC from violating the anti-fraud
provisions of the federal securities laws, freezing the assets of Lancer
Offshore, Inc., Michael Lauer and other entities affiliated with Michael Lauer,
and appointing a receiver to take control of and marshal and safeguard such
assets.
17
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 12 - LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared in accordance with U.S.
GAAP, which contemplates continuation of the Company as a going concern. The
Company is in the development stage and has significant debt obligations to
repay in future years and its current liabilities exceed its current assets.
Additionally, the Company will need significant funds to meet its cash calls on
its various interests in oil and gas prospects to explore, produce, develop, and
eventually sell the underlying natural gas and oil products under its interests
and to acquire additional properties. The Company believes that collections of
its current subscription and notes receivable and sale of marketable securities
will provide sufficient funds to fund its operations through December 2003. In
the event that the Company locates additional prospects for acquisitions,
experiences cost overruns at its prospects, or fails to generate projected
revenues, the Company will be required to raise funds through additional
offerings of its securities in order to have the funds necessary to complete
these acquisitions and continue its operations.
If the Company is unable to obtain additional funds when they are required or if
the funds cannot be obtained on terms favorable to the Company, management may
be required to delay, scale back or eliminate its well development program or
even be required to relinquish its interest in the properties. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE 13 - COMPREHENSIVE LOSS
Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:
Six Months Ended June 30,
------------------------------------------
2003 2002
------------------ -------------------
Net loss $ (12,822,514) $ (1,737,841)
Unrealized loss, net (581,938) (153,600)
------------------ -------------------
Comprehensive loss $ (13,404,452) $ (1,891,441)
================== ===================
NOTE 14 - COMMITMENTS AND CONTINGENCIES
GENERAL
The oil and gas industry is subject to regulation by federal, state and local
authorities. In particular, environmental protection statutes, tax statutes and
other laws and regulations relating to the petroleum industry affect gas and oil
production operations and economics. The Company believes it is in compliance
with all federal, state and local laws, regulations applicable to the Company
and its properties and operations, the violation of which would have a material
adverse effect on the Company or its financial condition.
18
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
OPERATING HAZARDS AND INSURANCE
The gas and oil business involves a variety of operating risks, including the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formation, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
There can be no assurance that insurance, if any, will be adequate to cover any
losses or exposure to liability. Although the Company believes these policies
provide coverage in scope and in amounts customary in the industry, they do not
provide complete coverage against all operating risks. An uninsured or partially
insured claim, if successful and of significant magnitude, could have a material
adverse effect on the Company and its financial condition via its contractual
liability to the Prospect.
POTENTIAL LOSS OF OIL AND GAS INTERESTS/ PAYMENTS DUE
If the Company does not pay its share of future AFE invoices it may have to
forfeit all of its rights in certain of its interests in the Prospect and any
related profits. If one or more of the other members of the Prospect fails to
pay their share of the Prospect costs, the Company may need to pay additional
funds to protect its investment.
Under the Exploration Agreement the Company entered with GHK Company, LLC
("GHK"), on the Potato Hills Deep Prospect ("Potato Hills"), the Company is
required to issue 2,500,000 additional shares of common stock to GHK and its
affiliates upon the completion of Mary No. 2-34 Well and placement of the well
into commercial production, the commencement of the next exploration or
development well in the Potato Hills, and the presentation of a development plan
to drill the remaining Potato Hills.
NOTE 15 - SUBSEQUENT EVENTS
During July 2003, Knox Miss paid the remaining $1,000,000 in principal related
to a promissory note due to Gibralt USA, Inc.
In July, 2003, the Company issued options to purchase 25,000 shares of the
Company's common stock for $3.00 per share to the designees of Stern & Co., Inc.
in connection with his assistance in obtaining D&O insurance.
On July 1, 2003, the Company received $275,000 of subscription receivable from
FEQ.
On July 1, 2003, the Company invested an additional $143,090 in PHT. On July 1,
2003, PHT repaid a promissory note of $143,090 to Louisiana X Investors, Inc.
On July 1, 2003, the Company invested an additional $800,000 in Knox Miss.
On July 2, 2003, BWP issued a promissory note in the amount of $370,000 to
Louisiana X Investors, Inc. BWP Gas has subsequently repaid $235,000 in
principal related to the note.
On July 2, 2003, BWP paid the remaining balance of an AFE for the drilling work
commenced on the India Prospect in the amount of $334,251 to GHK.
19
CONTINENTAL SOUTHERN RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 15 - SUBSEQUENT EVENTS (Continued)
On July 2, 2003, the Company received $300,000 for a subscription to 30,000
shares of the Company's Series C Convertible Preferred stock.
On July 2, 2003, the Company invested an additional $235,000 in BWP.
On July 3, 2003, the Company paid $50,000 in principal related to the $250,000
promissory note due to SPH.
On July 3, 2003, Knox Miss issued a promissory note for $200,000 to Louisiana X
Investors, Inc. Knox Miss has subsequently paid $50,000 in principal related to
the note.
On July 29, 2003, the Company granted Trident warrants to purchase a total of
250,000 shares of common stock at an exercise price of $1.60 per share expiring
on April 30, 2012. The warrants were issued in consideration for Trident's
increasing of the original note principal from $1,500,000 to $2,100,000,
extension of the maturity date of the original note, and granting of an
additional waiver of the Company's failure to meet the loan covenants (See Note
8).
In July 2003, the Company recovered the remaining balance of $125,000 on the
$425,000 note receivable due from BPK.
On August 1, 2003, LSP signed a drilling contract with Parker Drilling,
utilizing a jack-up rig, to commence drilling on the exploration project located
in Cameron Parish offshore Louisiana. The rig is being barged to the drilling
location and the anticipated spud date for the well is August 4, 2003. The well,
S.L. 17743 No. 1, is permitted to a drill depth of 15,500 feet. The project
operator, LS Gas, LLC, projects the drilling operation to take approximately 40
days to drill and log to total drill depth, with an anticipated additional 10
days for completion of the well.
On August 3, 2004, the Company issued 100,000 shares of common stock and granted
options to purchase 200,000 shares of common stock to a newly appointed
director. The options vest immediately at an exercise price of $3.00 per share
and will expire on August 3, 2008.
During July and August, the Company received a total of $730,000 from BPK as
partial payment for the $1,400,000 outstanding loan due from BPK related to the
sale of CSR-WAHA Partners, L.P. (see Note 4).
Effective August 8, 2003, the Company reduced the exercise price from $5.00 to
$2.30 per share and extended the expiration date from November 4, 2004 until
August 4, 2008 of the 500,000 options issued to its directors on or about
November 4, 2002.
20
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
The information contained in this Report on Form 10-QSB and in other
public statements by the Company and Company officers include or may contain
certain forward-looking statements. The words "may", "intend", "will", "expect",
"anticipate", "believe", "estimate", "project", and similar expressions used in
this Report are intended to identify forward-looking statements within the
meaning of Section 27A of the U.S. Securities Act of 1933 and Sections 21E of
the U.S. Securities Exchange of 1934. You should not place undue reliance on
these forward-looking statements, which speak only as of the date made. We
undertake no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events. You should
also know that such statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. These factors include, but are
not limited to, those risks described in detail in the Company's Annual Report
on Form 10-KSB under the caption "Risk Factors" and other filings with the
Securities and Exchange Commission. Should any of these risks or uncertainties
materialize, or should any of our assumptions prove incorrect, actual results
may differ materially from those included within the forward-looking statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Unless the context otherwise requires, references to the "Company",
"CSOR", "we", "us" or "our", mean Continental Southern Resources, Inc. or any of
our consolidated subsidiaries or partnership interests. The following discussion
should be read in conjunction with our Condensed Consolidated Financial
Statements and related Notes thereto included elsewhere in this Report.
We are in the oil and gas exploration and development business. We
target high-potential oil and gas assets primarily in Mississippi, Louisiana,
Oklahoma and other traditional oil producing states in the southwestern United
States and Thailand. Our operations are focused on exploration activities to
find and evaluate prospective oil and gas properties and providing capital to
participate in these projects. We participate in projects directly, through our
consolidated subsidiaries, and as equity participants in limited partnerships.
We currently have leasehold interests in prospects in Louisiana, Mississippi,
Oklahoma and Thailand.
We are generally not involved as the operator of the projects in which
we participate. Instead, we rely on third parties for most operational
activities. We rely on Touchstone Resources USA, Inc. to assist and advise us
regarding the identification and leasing of properties on favorable terms. We
also rely upon Touchstone Resources USA, Inc. to provide us with additional
reserve assessment analysis and engineering services in connection with the
exploration and development of our prospects. Touchstone Resources USA, Inc. has
a significant level of experience in exploring and developing gas and oil
properties in the regions where our prospects are located. We rely upon various
other third parties for drilling wells, delivering any gas or oil reserves which
are discovered through pipelines to the ultimate purchasers and assisting in the
21
negotiation of all sales contracts with any purchasing parties. With the
assistance of such third parties, we plan to explore and develop our prospects
and sell on the open market any gas or oil that we discover.
BUSINESS STRATEGY
We play an active role in evaluating prospects and providing financial
and other management functions with respect to the operations at each of our
properties. We rely on third parties for most operational activities. This
strategy is intended to reduce the level of overhead and capital expenditures
required to maintain drilling and production operations. As we subcontract the
performance of substantially all of the physical operations at our properties,
we do not anticipate incurring a substantial amount of expenses related to the
purchase of plant, machinery or equipment in connection with the exploration and
development of our properties. Similarly, we do not anticipate any substantial
increase in the number of persons that we employ.
Our strategy also includes selling all or part of our interests in
various partnerships or all or part of leasehold interests we own to realize
immediate proceeds and limit or eliminate future risk associated with such
projects. In January 2003, we sold our limited partnership interest in CSR-Waha
Partners, L.P. In March 2003, we assigned rights to purchase up to 20% of our
partnership interest in Knox Miss. Partners, L.P. These rights have expired and
were not exercised.
Our strategy is to develop reserves and increase our cash flow
through the exploration of our Louisiana, Mississippi, Oklahoma and Thailand
prospects and through the selective acquisition of additional properties both
offshore and onshore in these and other states. We consider our current
leasehold portfolio to contain both high potential exploratory drilling
prospects and lower risk exploitation and development drilling prospects.
Prospects are identified, acquired, and developed through extensive geological
and geophysical interpretation. Although our primary strategy is to grow our
reserves through drilling, in the next twelve months we anticipate making
opportunistic acquisitions in Louisiana, Mississippi, Oklahoma or Texas with
exploratory potential and in core areas of operation with exploitation and
development potential. We may increase or decrease our planned activities for
2003, depending upon drilling results, product prices, the availability of
capital resources, and other factors affecting the economic viability of such
activities. We do not attempt to forecast our potential success rate on
exploratory drilling.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2003 As Compared To Three and Six Months
Ended June 30, 2002.
Revenues
We did not generate any revenue during the three and six months ended
June 30, 2003 or during the corresponding period in 2002.
22
Operating Expenses and Unproved Property Impairment Expenses
Operating expenses were $192,150 and $802,405 during the three and six
month periods ended June 30, 2003, respectively. We did not incur any operating
expenses during the three and six month periods ended June 30, 2002. The
operating expenses consisted primarily of expenses incurred by Knox Miss., L.P.
in connection with exploration activities in the Black Warrior Basin,
Mississippi pursuant to an exploration agreement with Clayton Williams Energy,
Inc.
Unproved property impairment expenses were $220,068 and $6,113,859
during the three and six month periods ended June 30, 2003, respectively. The
unproved property impairment expenses resulted from impairment of our interests
in State Lease Nos. 16141 and 16142 in our North Hell Hole Bayou Prospect after
it was determined that State Lease 16141 No. 2 well in the prospect was a dry
hole. This amount consisted primarily of 50% of the acquisition costs of the
prospect and all drilling costs incurred during the six months ended June 30,
2003. We expect to incur additional impairment expenses during the remainder of
2003 in connection with our leasehold interests in the North Hell Hole Bayou
Prospect.
General And Administrative Expenses; Bad Debt Expenses
General and administrative expenses increased $135,917 to $730,065
during the three months ended June 30, 2003 as compared to $594,198 for the
corresponding period in 2002. These expenses consisted primarily of professional
fees, officer compensation and consulting fees. General and administrative
expenses increased $266,459 to $975,420 during the six months ended June 30,
2003 as compared to $708,961 for the corresponding period in 2002. These
expenses consisted primarily of professional fees, officer compensation and
consulting fees.
Bad debt expenses were $900,000 during the six month periods ended June
30, 2003, and consisted of impairment charges related to our investment in
Touchstone Resources, Ltd. We did not incur any bad debt expense during the
corresponding period in 2002.
Other (Income) Expense
Other expense increased $139,745 to $1,046,768 during the three months
ended June 30, 2003 as compared to $907,023 during the corresponding period in
2002. The expense consisted of interest expense of $1,088,988 incurred primarily
on our outstanding promissory notes, a $33,479 loss in connection with our
investments in APICO, LLC and Louisiana Shelf Partners, L.P. and a $4,589 loss
in connection with the sale of common shares of BPK Resources, Inc. These
amounts were offset by interest income of $80,288 earned on outstanding notes
and subscription receivables. The increase in other expenses resulted primarily
from a decrease in interest income resulting from the impairment on our
investment in Touchstone Resources Ltd. and an increase in interest expense
resulting from advances under the loan from Trident Growth Fund L.P. and
incurring additional indebtedness.
Other expense decreased $396,040 to $633,005 during the six months
ended June 30, 2003 as compared to $1,029,045 during the corresponding period in
2002. The expense consisted of interest expense of $1,935,013 incurred primarily
23
on our outstanding promissory notes, a $52,854 loss in connection with our
investments in APICO, LLC and Louisiana Shelf Partners, L.P. and a $29,043 loss
in connection with the sale of common shares of BPK Resources, Inc. These
amounts were offset by a $1,235,248 gain in connection with the sale of our
partnership interest in CSR-Waha Partners, L.P. and interest income of $148,657
earned on outstanding notes and subscription receivables. The decrease in other
expenses resulted primarily from a gain on the sale of our partnership interest
in CSR-Waha Partners, L.P., which was partially offset by an increase of
interest expense of $745,262 resulting from advances under the loan from Trident
Growth Fund L.P. and incurring additional indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ended June
30, 2003 was $2,726,326 as compared to $302,963 during the six months ended June
30, 2002. The primary use of cash during both periods was for professional fees
and to fund our net loss. Net cash used in investing activities for the six
months ended June 30, 2003 was $4,834,963 as compared to $19,469,875 during the
six months ended June 30, 2002 and consisted primarily of the purchase of
$4,639,709 of oil and gas interests and drilling costs and the purchase of
limited partnership interests and additional capital contributions of $819,640
in Louisiana Shelf Partners, L.P. and APICO, LLC. These amounts were offset by
$146,821 realized from the sale of our limited partnership interest in CSR-Waha
Partners, L.P., $107,493 realized from the sale of common shares of BPK
Resources, Inc. and repayment of $533,500 of notes receivable. Net cash provided
by financing activities during the six months ended June 30, 2003 was $8,225,888
compared to $19,753,000 for the corresponding period in 2002 and consisted
primarily of proceeds from borrowings of $1,893,940, $4,091,798 from sales of
shares of our Series C Convertible Preferred Stock and collection of
subscription receivables of $2,906,250. These amounts were offset by repayment
of $666,000 of loans.
Our working capital decreased $2,205,232 during the six months ended
June 30, 2003 to a deficit of $3,419,812 as compared to a deficit of $1,214,580
at December 31, 2002. This decrease is primarily due to increases in accounts
payable for oil and gas interests of $1,006,947, outstanding convertible
debentures and notes payable of $2,486,226 which was partially offset by a
$1,400,000 note receivable from BPK Resources, Inc. in connection with the sale
of our limited partnership interesting CSR-Waha Partners, L.P. and a $664,599
increase in cash as a result of our recent sales of securities.
During February 2002, we obtained $10,000,000 through the issuance of
unsecured promissory notes in the aggregate principal amount of $9,857,149. On
December 30, 2002, the full principal amount of the notes were converted into
98,571 shares of our Series B Preferred Stock, $.001 par value per share (the
"Series B Shares"). On June 13, 2002, the lender and its assignees exercised
their option to invest an additional $4,000,000 and we received an additional
$3,000,000 of funding on the terms described above and a subscription receivable
with respect to the remaining $1,000,000. On September 30, 2002, the full
principal amount of the notes was converted into 39,429 Series B Shares. The
Series B Shares accrue a cumulative dividend of 8% of the $100 original issue
price of such shares which is payable prior to any dividend or other
distribution on shares of our common stock. In the event of a liquidation,
dissolution or winding up of the Company, the holders of our Series B Shares
have a liquidation preference of $100 per share plus accrued and unpaid
24
dividends prior to any payment or distribution to holders of shares of our
common stock. Unless waived by the holders of a majority of the outstanding
Series B Shares, a merger in which we are not the surviving entity or the sale
of all or substantially all of our assets is considered a liquidation event
entitling the holders of shares of our Series B Shares to their liquidation
preference.
In March 2002, we issued an aggregate of $4,150,000 of unsecured
convertible promissory notes. In September 2002, the full principal amount of
the notes were converted into 5,928,797 shares of our common stock and 4,090,713
shares of our Series A Preferred Stock, $.001 par value per share (the "Series A
Shares"). The Series A Shares accrue a cumulative dividend equal to 8% of the $1
original issue price of such shares which is payable prior to any dividend or
other distribution on shares of our common stock. In the event of a liquidation,
dissolution or winding up of the Company, the holders of the Series A Shares
have a liquidation preference of $1 per share plus accrued and unpaid dividends
prior to any payment or distribution to holders of shares of our common stock.
Unless waived by the holders of a majority of the outstanding Series A Shares, a
merger in which we are not the surviving entity or the sale of all or
substantially all of our assets is considered a liquidation event entitling the
holders of shares of our Series A Shares to their liquidation preference.
In April 2002, we issued a $1,500,000 convertible promissory note (the
"Convertible Note") to Trident Growth Fund f/k/a Gemini Growth Fund, LP
("Trident"). We also issued warrants to Trident to purchase 150,000 shares of
our common stock at an exercise price of $1.60 per share. The Convertible Note
was initially due October 31, 2003, accrues interest at 12% per annum payable
monthly in arrears, is secured by substantially all of our assets, is
convertible at the option of Trident into shares of our common stock at a
conversion price of $1.60 per share (subject to anti dilution price adjustment)
and is redeemable at our option at 100% of par prior to maturity. Interest is
payable in cash unless Trident elects to have it paid in shares of common stock.
The Convertible Note contains various financial covenants which we are required
to comply with. We failed to comply with three financial covenants as of
December 31, 2002 and have received a six month waiver from Trident in
consideration of the issuance of a warrant to purchase 25,000 shares of common
stock at an exercise price of $1.60 per share.
On or about July 29, 2003, we exercised our option to extend the
maturity date of the Convertible Note until July 31, 2004 and received another
six month waiver from Trident for failure to comply with the financial
covenants. In consideration for the extension of the Convertible Note and waiver
of compliance with the financial covenants from Trident, we issued warrants to
Trident to purchase 100,000 shares of common stock at an exercise price of $1.60
per share. We also entered into an amendment to our loan agreement with Trident
to obtain an additional $600,000 from Trident on terms substantially similar to
those set forth in the Convertible Note. In connection with the amendment, we
issued warrants to Trident to purchase 150,000 shares of common stock at an
exercise price of $1.60 per share. We are required to file a registration
statement with the Securities and Exchange Commission to cover the public resale
of all shares issuable upon conversion of the convertible notes and exercise of
warrants issued to Trident.
From June through August, 2002, we obtained $4,260,000 through private
placements of our common stock.
25
In October 2002, we obtained $1,550,000 of funding through the issuance
of 12% unsecured convertible promissory notes and warrants to purchase 232,500
shares of common stock at $5.00 per share. The notes are due October 15, 2003
and accrue interest from the date of issuance. Interest is payable upon the
earlier of conversion or maturity. The notes may be prepaid in whole or in part
and are convertible into shares of our common stock at the option of the holder
at a conversion price of $3.25 per share.
In November 2002, we obtained gross proceeds of $250,000 through the
issuance of 76,923 shares of common stock.
On January 15, 2003, we sold our limited partnership interest in CSR
Waha Partners, L.P., for $2,000,000 of which $1,650,000 is payable in cash. Of
this amount, we received $150,000 at closing and $1,500,000 through the receipt
of a promissory note that is due June 30, 2004. As of the date of this Report,
$830,000 principal amount of the Note has been repaid.
On February 19, 2003, Knox Miss. Partners, L.P., our subsidiary,
borrowed $1,200,000 from Gibralt USA, Inc. and issued a 12% promissory note due
on the earlier on June 30, 2003 or our completion of an equity financing
resulting in gross proceeds of at least $2,000,000. We issued 75,000 shares of
common stock to the lender. The loan is guaranteed by the Company and FEQ
Investments, Inc., a principal stockholder of the Company. The loan was repaid
in full on or about July 3, 2003.
Between May 21, 2003 and the date of this Report, we have raised gross
proceeds of $4,775,000 through the issuance of 477,500 shares of our Series C
Convertible Preferred Stock ("Series C Shares") at an original issue price of
$10.00 per share. The Series C Shares are convertible into shares of our common
stock at a conversion price of $2.00 per share of common stock, subject to
adjustment, at anytime at the option of the holder.
The foregoing constitutes our principal sources of financing during the
past twelve months. We do not currently maintain a line of credit or term loan
with any commercial bank or other financial institution. Our capital needs have
been, and continue to be principally met through proceeds from the sale of our
equity and debt securities. We have used these funds to acquire leasehold
interests in prospects located in Louisiana, Mississippi, Texas, Oklahoma and
Thailand and to purchase our investment in Touchstone Resources, Ltd.
We estimate that we will incur approximately $3.5 million in
expenditures related to the development of our leasehold interests in our
Louisiana, Mississippi, Oklahoma and Thailand prospects and for general and
administrative expenses during the next twelve months. Specifically, we are
currently required to make a capital contribution of $636,000 to Louisiana Shelf
Partners, L.P. and expect additional capital calls during the next twelve
months. In addition, we expect to receive capital calls from PHT Partners, L.P.
during the next twelve months of approximately $200,000, and to make a $106,000
lease payment in November 2003 with respect to our leasehold interests in the
North Hell Hole Bayou Prospect. We believe that our projected revenues from
operations and our collection of subscriptions receivable and notes receivable
will be sufficient to satisfy our cash requirements for the next twelve months,
including budgeted expenses for our existing leasehold interests. In addition to
26
the foregoing, a $1.55 million principal amount note and $2.1 million aggregate
principal amount of notes payable to Trident are due and payable October 31,
2003 and July 31, 2004, respectively.
In the event that we do not generate the amount of revenues we have
projected or revenues are not generated at the same pace that we receive
authorizations for expenditures from the operators of our prospects or as our
outstanding indebtedness becomes due, we will be required to raise additional
funds through offerings of our securities in order to have the funds necessary
to develop these prospects repay our outstanding indebtedness and continue our
operations. Furthermore, in the event that we locate additional prospects for
acquisition, receive authorizations for expenditures from the operators at our
prospects in excess of budgeted amounts, or experience cost overruns at our
prospects, we will be required to raise funds through additional offerings of
our securities in order to have the funds necessary to complete these
acquisitions and continue our operations. If we are unable to obtain additional
funds when they are required or if the funds cannot be obtained on terms
favorable to us, then we may be required to delay, scale back or eliminate some
or all of our well development programs or even be required to relinquish our
interest in certain properties. If one or more of the other owners of leasehold
interests in our prospects fail to pay their equitable portion of development or
operation costs, then we may need to pay additional funds to protect our
ownership interests in our leasehold interests.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a or 15d of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) was carried out by us
under the supervision and with the participation of our Chief Executive Officer
("CEO") and Treasurer ("Treasurer"). Based upon that evaluation, our CEO and
Treasurer concluded that, as of the end of the period covered by this quarterly
report, our disclosure controls and procedures were effective to ensure that
information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.
There has been no change in our internal control over financial reporting
identified in connection with that evaluation that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Series C Convertible Preferred Stock
On or about May 22, 2003, our Board of Directors authorized the
designation of 1,500,000 shares of preferred stock as "Series C Convertible
Preferred Stock" of which 477,500 shares are outstanding as of the date of this
Report. The following describes the material provisions of the Series C
27
Convertible Preferred Stock (the "Series C Shares") which are more fully set
forth in the Certificate of Designation on file with the Nevada Secretary of
State.
The Series C Shares have an original issue price of $10.00 per share
and provide for a 6% cumulative dividend payable prior to and in preference to
the payment of any dividend on our common stock (except for dividends payable
solely in shares of our common stock) or ay other series of preferred stock
(other than our 8% Series A Preferred Stock and 8% Series B Preferred Stock or
any other series of preferred stock which by its terms is pari passu with the
Series C Shares). The Series C Shares have a liquidation preference of $10.00
per share plus accrued and unpaid dividends payable prior to and in preference
to any payment with respect to any shares of common stock or any series of
preferred stock (other than our 8% Series A Preferred Stock and 8% Series B
Preferred Stock or any other series of preferred stock which by its terms is
pari passu with the Series C Shares).
Each Series C Share is immediately convertible, at the option of the
holder, into that number of shares of common stock determined by dividing the
original issue price of the Series C Shares ($10.00) by the "Conversion Price".
The initial Conversion Price is $2.00 and is subject to proportional adjustment
for stock splits, stock dividends or reclassifications. In the event that we
issue shares of common stock at a price per share less than the then current
Conversion Price, or issue securities convertible or exercisable into shares of
common stock at conversion or exercise price per share less than the then
current Conversion Price at any time prior to the effective date of a
registration statement covering the public resale of shares of common stock
issuable upon conversion of the Series C Shares, the Conversion Price will be
reduced to such lower price.
We have the option to redeem all Series C Shares at any time by payment
of an amount per share equal to $10.00 plus all accrued and unpaid dividends so
long as (i) the resale of the shares of common stock issuable upon conversion of
the Series C Shares are subject to an effective registration statement and (ii)
the average closing bid price of our common stock during the 20 trading days
preceding the date of redemption is at least $6.00. Other than as provided by
applicable law, holders of the Series C Shares have no voting rights.
Recent Sales of Unregistered Securities
1. Between May 22, 2003 and the date of this Report, we have issued
477,500 shares of our Series C Convertible Preferred Stock to a limited number
of accredited investors at a purchase price of $10.00 per share raising gross
proceeds of $4,775,000. We paid finder's fees in the amount of $192,000 in
connection with this offering. The shares were issued in a private placement
transaction exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder.
2. On May 27, 2003, we issued 3,300,000 shares of common stock and
warrants to purchase an additional 1,650,000 shares of common stock at an
exercise price of $ 2.00 per share to HBA Gas, Inc and its designees to purchase
all of the Class B Membership Interests in BWP Gas, LLC. The warrants are
immediately exercisable and terminate three (3) years from the date of grant.
The securities were issued to HBA Gas, Inc and a limited number of accredited
28
investors consisting of creditors of and consultants to BWP, LLC, in a private
placement transaction exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder, without
payment of underwriting discounts or commissions to any person.
3. On May 27, 2003, we issued options to purchase 250,000 shares of
common stock at an exercise price of $3.00 per share to Sunrise Financial Group,
Inc. in consideration for investor relations services. Options to purchase
100,000 shares vested upon issuance and the balance vest on November 27, 2003.
The options terminate five (5) years from the date of grant. The options were
issued in a private placement transaction exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereunder, without payment of underwriting discounts or commissions to any
person.
4. On July 15, 2003, we issued options to purchase 25,000 shares of
common stock at an exercise price of $3.00 per share to designees of Stern &
Co., Inc. in consideration of consulting services. The options are immediately
exercisable and terminate three (3) years from the date of grant. The options
were issued in a private placement transaction exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereunder, without payment of underwriting discounts or commissions to any
person.
5. On July 29, 2003, we issued warrants to purchase an aggregate of
250,000 shares of common stock at an exercise price of $1.60 per share and a
convertible promissory note in the principal amount of $600,000 to Trident
Growth Fund, L.P. The note is due July 31, 2004 and immediately convertible into
shares of common stock at a conversion price of $1.60 per share. The warrants
were issued in consideration of Trident extending the maturity date of our
outstanding $1.5 million convertible note from October 31, 2003 until July 31,
2004, amending our loan agreement to provide $600,000 of additional funding, and
waiver of our failure to meet the financial covenants in the outstanding note.
The warrants are immediately exercisable and terminate April 30, 2012. The
securities were issued in a private placement transaction exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereunder, without payment of underwriting discounts or
commissions to any person.
ITEM 5. OTHER EVENTS
Hell Hole Impairment
As described in our Annual Report on SEC Form 10-KSB for the year ended
December 31, 2002 and our Quarterly Report on SEC Form 10-QSB for the period
ended March 31, 2003, the initial hole drilled on State Lease 16141 No. 2 well
in our North Hell Hole Bayou Prospect (the "Prospect") was determined to be dry.
In April 2003, after the testing of all zones of a sidetracking well, it was
determined that the sidetracking well was also a dry hole. As leases 16141 and
16142 in the Prospect are past primary term and held by operations at the
present time, the leases were subject to termination on or about July 14, 2003
unless further operations were commenced. We decided not to pursue additional
exploration within these lease areas and accordingly, these leases have lapsed.
As a result, as of June 30, 2003 we have recorded an impairment of $9,748,955
related to all drilling costs incurred to date and 50% of the lease acquisition
29
cost of the entire Prospect. In order to retain rights under the remaining State
Leases which comprise the Prospect, we will be required to make a lease payment
of approximately $106,000 in November 2003. If payment is not made, our rights
under these leases will lapse.
Purchase of BWP, LLC; Exploration Agreement with GHK
On May 20, 2003, we purchased all of the issued and outstanding Class B
Membership Interests of BWP Gas, LLC, a Delaware limited liability company
("BWP"), for 3,300,000 shares of common stock and warrants to purchase an
additional 1,650,000 shares. As the sole Class B Member, we will serve as the
sole manager of BWP. Oklahoma Hills Gas, LLC is the sole Class A Member. The BWP
Operating Agreement provides for distributions of profits to be allocated 99% to
the Class B Member and 1% to the Class A Member until all capital has been
returned to the members. Thereafter, distributions are allocated 75% to the
Class B Member and 25% to the Class A Member. HBA Gas, Inc. ("HBA") is the
managing member Oklahoma Hills Gas, LLC, and was the sole Class B Member of BWP
prior to the sale of its membership interest to the Company. Ernest Bartlett is
the President of HBA and is also the president of FEQ Investments, Inc. ("FEQ").
FEQ is the beneficial owner of 13.2% of the outstanding shares of our Series A
Preferred Stock and owns interests in certain entities that serve as the general
partner of certain of the oil and gas limited partnerships in which we have an
interest.
BWP is a party to an Exploration Agreement dated February 27, 2003 and
amended May 19, 2003 with The GHK Company, LLC ("GHK") and GHK/Potato Hills
Limited Partnership ("GHK LP") (the "Exploration Agreement"). Prior to the
closing of our purchase, BWP was indebted to various third parties in the amount
of $3,650,000, of which $2,650,000 was satisfied by HBA Gas, Inc, and the
balance by the transfer of certain rights under the Exploration Agreement. As a
result, upon completion of the purchase, BWP had no assets or liabilities other
than its rights and obligations under the Exploration Agreement. We also made a
capital contribution to BWP of $2,500,000 at the time of the acquisition to
satisfy BWP's funding obligation under the Exploration Agreement.
The Exploration Agreement provides for BWP to have the right to
participate in drilling and exploration activity in a Contract Area consisting
of approximately 26,000 acres located in Latimer, and Pushmataha Counties,
Oklahoma known as the Potato Hills Deep Gas Prospect. Under the Exploration
Agreements, BWP has the right to purchase a 4.5% interest in the GHK Mary No.
2-34 Well (after giving effect to BWP's transfer of a 1.0%. interest to Wells
Wei Corp. in satisfaction of $1,000,000 of outstanding indebtedness and a 0.5%
interest to Mar Gas, LLC, an affiliate of HBA). The Mary No. 2-34 Well is
located in Section 34, Township 3 North, Range 20 East, Latimer County, Oklahoma
and is within Contract Area. The Exploration Agreement also provides for BWP to
participate for 4.5% of the interests available to the GHK group on all
subsequent wells and operations undertaken within the Contract Area, and for up
to ten percent (10%) of the interest of any additional projects generated or
identified by GHK.
All operations conducted within the Contract Area will be conducted
pursuant to a Joint Operating Agreement (the "JOA"). The JOA is a modified
A.A.P.L. Form 610-1989 Model Form Operating Agreement. GHK serves as the
operator in the Contract Area.
30
In order to obtain its 4.5% working interest in the Mary Well, BWP was
required to provide a total of $4,500,000 of funding, all of which has been
advanced. In the event that the total costs for the drilling of the Mary No.
2-34 Well as reflected in the Authority For Expenditure ("AFE") exceed one
hundred and ten percent (110%) of the budgeted amount, BWP is obligated to pay
its proportionate share of such costs.
Under the Exploration Agreement, we are required to issue 2,500,000
additional shares of common stock to GHK and its affiliates upon satisfaction of
the following conditions: (i) the completion of the Mary No. 2-34 Well and
placement of the well into commercial production; (ii) the commencement of the
next exploration or development well in the Potato Hills Deep Gas Prospect
project; and (iii) the presentation of a development plan to drill the remaining
Potato Hills Deep Gas Prospect.
Lancer Offshore, Inc. and Michael Lauer
On or about July 8, 2003, the United States Securities and Exchange
Commission filed an emergency civil injunctive action against Lancer Management
Group, LLC, Michael Lauer and Lancer Management II, LLC, in the United States
District Court for the Southern District of Florida seeking a temporary
restraining order, the freezing of assets, disgorgement, civil penalties and
other relief based on alleged violations of the federal securities laws. On July
17, 2003, the District Court issued an order granting a preliminary injunction
to restrain Lancer Management Group, LLC, Mr. Lauer and Lancer Management II,
LLC from violating the anti-fraud provisions of the federal securities laws,
freezing the assets of Lancer Offshore, Inc., Mr. Lauer and other entities
affiliated with Mr. Lauer, and appointing a receiver to take control of and
marshal and safeguard such assets. As of the date of this Report, Lancer
Offshore, Inc., Mr. Lauer and Lancer Partners, L.P. are the record and
beneficial owners of 18,990,626 shares of our common stock, representing 52% of
our outstanding shares, and 123,213 shares of our Series B Preferred Stock,
representing approximately 86% of the outstanding shares of that class.
Appointment of Joseph M. Fioravanti to Board of Directors
On August 1, 2003, Joseph M. Fioravanti, 55, was appointed to serve as
a director of the Company until his successor is duly elected and qualified. Mr.
Fioravanti is a practicing attorney and member of the Pennsylvania Bar. He is
admitted to practice in a number of courts including the Pennsylvania Supreme
Court, the United States Court of Appeals for the Third Circuit and the Supreme
Court of the United States. Mr. Fioravanti has been in private practice for the
past 20 years and is an accomplished trial attorney specializing in financial,
business and commercial litigation matters. Mr. Fioravanti began his career as a
law clerk to the Chief Justice of the Pennsylvania Supreme Court. He served as
an Assistant United States Attorney for the Eastern District of Pennsylvania
from 1973 to 1976 and as First Assistant United States Attorney for the Eastern
District of Pennsylvania from 1979 to 1981. Mr. Fioravanti earned a Bachelor of
Arts in Economics from the University of Virginia and a Juris Doctor from the
University of California Hastings College of Law.
31
Upon his appointment to the Board, we issued Mr. Fioravanti 100,000
shares of restricted common stock and options to purchase 200,000 shares of
common stock at an exercise price of $3.00 per share which are immediately
exercisable and terminate 5 years from the date of grant.
Mr. Fioravanti will be responsible for regulatory and compliance issues
for the Company. In consideration of the additional services he will be
providing to the Company, we have agreed to compensate Mr. Fioravanti based on
the number of hours of such services performed for the Company.
Repricing of Options
Effective August 8, 2003, we reduced the exercise price from $5.00 to
$2.30 per share and extended the expiration date from November 4, 2004 until
August 4, 2008 of the 500,000 options issued to our directors on or about
November 4, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
- -------------------- -------------------------------------------- -----------------------------------------------
Exhibit No. Exhibit Method of Filing
- -------------------- -------------------------------------------- -----------------------------------------------
3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 of
our Form SB-1, Registration Number 333-38976
("Registration Statement")
- -------------------- -------------------------------------------- -----------------------------------------------
3.2 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1 of
Incorporation our Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
3.3 Bylaws Incorporated by reference to Exhibit 3.2 to
the Registration Statement
- -------------------- -------------------------------------------- -----------------------------------------------
3.4 Certificate of Designation of Series A Incorporated by reference to Exhibit 3.3 of
Preferred Stock our Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
3.5 Certificate of Designation of Series B Incorporated by reference to Exhibit 3.4 of
Preferred Stock our Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
3.6 Certificate of Designation of Series C Filed herewith
Preferred Stock
- -------------------- -------------------------------------------- -----------------------------------------------
10.1 Purchase and Sale Agreement dated February Incorporated by reference to Exhibit 10.1 of
17, 2002, by and between SKH Management, our Current Report on Form 8-K dated February
L.P. and Touchstone Resources USA, Inc. 20, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
32
- -------------------- -------------------------------------------- -----------------------------------------------
10.2 Purchase and Sale Agreement dated February Incorporated by reference to Exhibit 10.2 of
17, 2002, by and between SKH Management, our Current Report on Form 8- K dated
L.P. and Touchstone Resources USA, Inc. February 20, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.3 Assignment Agreement by and between Incorporated by reference to Exhibit 10.3 of
Touchstone Resources USA, Inc. and the our Current Report on Form 8- K dated
Company dated February 20, 2002 February 20, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.4 Exploration Agreement dated March 23, 2002 Incorporated by reference to Exhibit 10.1 of
by and between SK Exploration, Inc. and our Current Report on Form 8-K dated April 8,
Knox Miss. Partners, L.P. 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.5 Exploration Agreement dated March 23, 2002 Incorporated by reference to Exhibit 10.2 of
by and between SKH Energy Partners II, our Current Report on Form 8-K dated April 8,
L.P. and Knox Miss. Partners, L.P. 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.6 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.6 of
Common Stock issued to Stephen P. our Annual Report on Form 10-KSB for the year
Harrington ended December 31, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.7 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.7 of
Common Stock issued to Humbert B. Powell, our Annual Report on Form 10-KSB for the year
III ended December 31, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.8 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.8 of
Common Stock issued to Gary Krupp our Annual Report on Form 10-KSB for the year
ended December 31, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.9 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.9 of
Common Stock issued to Thomas M. Curran our Annual Report on Form 10-KSB for the year
ended December 31, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.10 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.10 of
Common Stock issued to John B. Connally, our Annual Report on Form 10-KSB for the year
III ended December 31, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
33
- -------------------- -------------------------------------------- -----------------------------------------------
10.11 Exploration and Development Agreement Incorporated by reference to Exhibit 10.12 of
dated May 23, 2002 between Clayton our Annual Report on Form 10-KSB for the
Williams Energy, Inc. and Knox Miss. quarter ended March 31, 2003
Partners, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.12 Loan Agreement dated April 5, 2002, by and Incorporated by reference to Exhibit 10.3 of
between the Company and Gemini Growth our Quarterly Report on Form 10-QSB for the
Fund, L.P. quarter ended June 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.13 12% Secured Convertible Note dated April Incorporated by reference to Exhibit 4.5 of
5, 2002, in the principal amount of our Quarterly Report on Form 10-QSB for the
$1,500,000 issued to Gemini Growth Fund, quarter ended June 30, 2002
L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.14 Security Agreement dated April 5, 2002, by Incorporated be reference to Exhibit 10.4 of
and between the Company and Gemini Growth our Quarterly Report on Form 10-QSB for the
Fund, L.P. quarter ended June 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.15 Warrants to purchase 750,000 shares of Incorporated by reference to Exhibit 4.6 of
common stock issued to Gemini Growth Fund, our Quarterly Report on Form 10-QSB for the
L.P. in April 2002 quarter ended June 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.16 Limited Partnership Agreement of PHT Incorporated by reference to Exhibit 10.13 of
Partners, L.P. dated August 14, 2002 our Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.17 Limited Partnership Agreement of Knox Incorporated by reference to Exhibit 10.14 of
Miss. Partners, L.P. dated our Quarterly Report on Form 10-QSB for the
March 23, 2002 quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.18 Limited Partnership Agreement of Louisiana Incorporated by reference to Exhibit 10.15 of
Shelf Partners, LP dated December 31, 2002 our Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.19 Operating Agreement of BWP Gas, LLC dated Filed herewith
July 21, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
34
- -------------------- -------------------------------------------- -----------------------------------------------
10.20 Exploration Agreement dated May 19, 2003 Filed herewith
by and among BWP Gas, LLC, The GHK Company,
LLC and GHK Potato Hills Limited Partnership
- -------------------- -------------------------------------------- -----------------------------------------------
10.21 Membership Purchase Agreement dated May Filed herewith
27, 2003 by and among BWP Gas, LLC, HBA
Gas, Inc. and the Registrant
- -------------------- -------------------------------------------- -----------------------------------------------
10.22 First Amendment to Loan Agreement dated Filed herewith
July 29, 2003, by and between the
Company and Trident Growth Fund, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.23 12% Secured Convertible Note dated July Filed herewith
29, 2003, in the principal amount of
$600,000 issued to Trident Growth Fund,
L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.24 First Amended Security Agreement dated Filed herewith
July 29, 2003, by and between the
Company and Trident Growth Fund, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.25 Form of Amended and Restated Option to Filed herewith
Purchase 100,000 shares of Common Stock
issued to each of John B. Connally, III,
Thomas M. Curran, Gary Krupp, Humbert B.
Powell, III and Stephen P. Harrington
- -------------------- -------------------------------------------- -----------------------------------------------
10.26 Option to Purchase 200,000 shares of Filed herewith
Common Stock issued to Joseph M. Fioravanti
- -------------------- -------------------------------------------- -----------------------------------------------
31.1 Certification of President of the Company Filed herewith
required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
- -------------------- -------------------------------------------- -----------------------------------------------
31.2 Certification of Treasurer of the Company Filed herewith
required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
- -------------------- -------------------------------------------- -----------------------------------------------
32.1 Certification of President of the Company Filed herewith
Pursuant to 18 USC Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- -------------------- -------------------------------------------- -----------------------------------------------
35
- -------------------- -------------------------------------------- -----------------------------------------------
32.2 Certification of Treasurer of the Company Filed herewith
Pursuant to 18 USC Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- -------------------- -------------------------------------------- -----------------------------------------------
(b) Current Reports on Form 8-K filed during the three month period ended
June 30, 2003:
None.
36
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONTINENTAL SOUTHERN RESOURCES, INC.
Date: August 14 , 2003 /s/ Stephen P. Harrington
------------------------------------
Stephen P. Harrington
President
37
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.6 Certificate of Designation of Series C Preferred Stock
10.19 Operating Agreement of BWP Gas, LLC dated July 21, 2003
10.20 Exploration Agreement dated May 19, 2003 by and among BWP Gas, LLC, The GHK Company, LLC
and GHK Potato Hills Limited Partnership
10.21 Membership Purchase Agreement dated May 27, 2003 by and among BWP Gas, LLC, HBA Gas, Inc.
and the Registrant
10.22 First Amendment to Loan Agreement dated July 29, 2003, by and between the Company and
Trident Growth Fund, L.P.
10.23 12% Secured Convertible Note dated July 29, 2003, in the principal amount of $600,000
issued to Trident Growth Fund, L.P.
10.24 First Amended Security Agreement dated July 29, 2003, by and between the Company and
Trident Growth Fund, L.P.
10.25 Form of Amended and Restated Option to Purchase 100,000 shares of Common Stock issued to
each of John B. Connally, III, Thomas M. Curran, Gary Krupp, Humbert B. Powell, III and
Stephen P. Harrington
10.26 Option to Purchase 200,000 shares of Common Stock issued to Joseph M. Fioravanti
31.1 Certification of President of the Company required by Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended
31.2 Certification of Treasurer of the Company required by Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended
38
32.1 Certification of President of the Company Pursuant to 18 USC Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Treasurer of the Company Pursuant to 18 USC Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
39