FORM 10-K CONTANGO OIL & GAS COMPANY

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
In June 2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payments Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-
1 addresses whether instruments granted in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under
the two-class method described in SFAS No. 128, “Earnings per Share”. The provisions of FSP EITF 03-6-1 are
effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods
within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with the provisions of FSP EITF 03-6-1.
Early application is not permitted. We do not expect FSP EITF 03-6-1 to have a material effect on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”) and
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). These statements
require most identifiable assets, liabilities and noncontrolling interests to be recorded at full fair value and require
noncontrolling interests to be reported as a component of equity. Both statements are effective for periods beginning
on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141(R) will be applied to business
combinations occurring after the effective date and SFAS 160 will be applied prospectively to all noncontrolling
interests, including any that arose before the effective date. We are currently evaluating the provisions of SFAS
141(R) and SFAS 160 and assessing the impact, if any, they may have on our financial position and results of
operations.
Stock-Based Compensation. The Company applies the fair value based method prescribed in SFAS No.
123 (“SFAS 123”), “Accounting for Stock Based Compensation”. Under this method, compensation cost is
measured at the grant date based on the fair value of the award and is recognized over the award vesting period. The
fair value of each award is estimated as of the date of grant using the Black-Scholes options-pricing model.
Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based
Payment”. SFAS 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for
the options (excess tax benefit) to be classified as financing cash flows. The fair value of each option is estimated as
of the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions
were used for the 60,000 options granted during the fiscal year ended June 30, 2009: (i) risk-free interest rate of 3.01
percent; (ii) expected life of five years; (iii) expected volatility of 53 percent and (iv) expected dividend yield of zero
percent. No options were granted for the fiscal year ended June 30, 2008. For the fiscal year ended June 30, 2007,
the following weighted-average assumptions were used: (i) risk-free interest rate of 5.0 percent; (ii) expected life of
five years; (iii) expected volatility of 56 percent and (iv) expected dividend yield of zero percent.
Under the Company’s 1999 Stock Incentive Plan, as amended (the “1999 Plan” or the “Option Plan”), the
Company’s board of directors may also grant restricted stock awards to officers or other employees of the Company.
Restricted stock awards made under the 1999 Plan are subject to such restrictions, terms and conditions, including
forfeitures, if any, as may be determined by the board. Grants of service-based restricted stock awards are valued at
our common stock price at the date of grant. During the fiscal year ended June 30, 2009, 2008 and 2007, the
Company granted 3,088 shares, 4,140 shares and 8,416 shares of restricted stock, respectively, to its Board of
Directors as part of its annual compensation. The shares of restricted stock granted to the board of directors vest
over a period of one year. Also for the fiscal year ended June 30, 2007, the Company granted 16,750 shares of
restricted stock to its employees. The shares of restricted stock granted to employees vest over a period of three
years. Additionally, on February 7, 2007, the Company granted 200,000 options to the Chairman and Chief
Executive Officer at a fair value of $11.25 per option, to be expensed over the vesting period.
During the fiscal years ended June 30, 2009, 2008 and 2007, the Company recorded stock-based
compensation charges of $1.4 million, $1.5 million, and $1.5 million, respectively, to general and administrative
expense for restricted stock and option awards. These amounts do not reflect compensation actually received by the
individuals, but rather represent expense recognized in the Company’s consolidated financial statements that relate
to restricted stock and option awards granted in current and previous fiscal years, in accordance with SFAS 123(R),
excluding any assumption for future forfeitures.
DB2/21043537.7 F-12