<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1999
REGISTRATION NUMBER 333-84053
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION)
KELLEY OIL CORPORATION
KELLEY OPERATING COMPANY, LTD.
CONCORDE GAS MARKETING, INC.
(Exact name of registrants as specified in their charters)
<TABLE>
<S> <C> <C>
DELAWARE 1311 76-0447267
DELAWARE 1311 76-0082502
TEXAS 1311 76-0156485
DELAWARE 1311 76-0447267
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
JOHN F. BOOKOUT
CONTOUR ENERGY CO.
601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
CHARLES L. STRAUSS
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77010-3095
(713) 651-5151
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 10, 1999
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION)
$100,000,000
OFFER TO EXCHANGE
$100,000,000 14% SENIOR SECURED NOTES DUE 2003,
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT, SERIES A
FOR
$100,000,000 14% SENIOR SECURED NOTES DUE 2003,
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT, SERIES B
-------------------
The new notes:
- will be freely tradeable,
- are substantially identical to the outstanding notes,
- will accrue interest at the same rate per annum as the outstanding
notes, payable semiannually in cash in arrears on each April 15 and
October 15, beginning October 15, 1999,
- will be guaranteed by three of our subsidiaries: Kelley Oil Corporation,
Kelley Operating Company, Ltd. and Concorde Gas Marketing, Inc., as well
as any of our future subsidiaries,
- will be secured by a first lien on substantially all existing and future
collateral, which includes substantially all of our proved oil and gas
properties,
- will rank equally with outstanding notes that are not exchanged and all
other senior indebtedness and will be senior to all subordinated
indebtedness, and
- will not be listed on any securities exchange or on any automated dealer
quotation system.
The exchange offer:
- expires at 5:00 p.m., New York City time, on September 15, 1999, unless
extended, and
- is not conditioned on any minimum aggregate principal amount of
outstanding notes being tendered.
In addition, you should note that:
- all outstanding notes that are validly tendered and not validly
withdrawn will be exchanged for an equal principal amount of new notes
that are registered under the Securities Act of 1933,
- tenders of outstanding notes may be withdrawn at any time before the
expiration of the exchange offer, and
- the exchange of outstanding notes for new notes in the exchange offer
will not be a taxable event for U.S. federal income tax purposes.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 12 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is August , 1999.
-------------------
<PAGE> 3
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and in accordance with the Exchange Act file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information we file at the SEC's public reference rooms at
450 Fifth Street, N.W., Washington, D.C. 20549, Seven World Trade Center, New
York, New York 10048 and 500 West Madison, 14th Floor, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0300 for further information on the public
reference rooms. Our SEC filings also are available to the public from
commercial document retrieval services and at the world wide web site maintained
by the SEC at http://www.sec.gov. Our stock is traded on the Nasdaq SmallCap
Market under the ticker symbol "CONCC". You may also inspect such reports, proxy
statements and other information concerning our company at the offices of the
Nasdaq National Market, 9801 Washingtonian Boulevard, Gaithersburg, Maryland
20898.
CAUTIONARY STATEMENT
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission:
- You should rely only on the information or representations provided in
this prospectus.
- We have not authorized any person to provide you with information other
than that provided in this prospectus.
- We have not authorized anyone to provide you with different information.
- We are not making an offer of these securities in any jurisdiction where
the offer is not permitted.
- You should not assume that the information in this prospectus is accurate
as of any date other than the date on the front of this document.
2
<PAGE> 4
SUMMARY
This summary highlights some information from this prospectus, but does not
contain all information that is important to you. This prospectus includes
specific terms of the exchange offer, information about our business and
detailed financial data. We encourage you to read the detailed information and
financial statements and the related notes appearing elsewhere in this
prospectus in their entirety. The "Glossary of Industry Terms" included in this
prospectus defines certain oil and gas business terms used in this prospectus.
Capitalized terms used in this summary are defined below under "Description of
the New Notes -- Definitions Used in This Description of New Notes". Capitalized
terms not otherwise defined below or in the Description of the New Notes have
the meanings given to them in the indenture. In this prospectus, the word
"Company" refers to Contour Energy Co., formerly Kelley Oil & Gas Corporation,
and not to any of its subsidiaries, and references to "us" or "our" refer to the
Company and the Subsidiary Guarantors. References to "notes" are to the
outstanding notes together with the new notes.
OUR BUSINESS
We are engaged in the development, exploration, acquisition and production
of oil and natural gas properties, primarily in Louisiana and the shallow waters
of the Gulf of Mexico. Our activities have historically been concentrated on
lower-risk development drilling in north Louisiana and higher impact exploratory
drilling in south Louisiana. As of January 1, 1999, 74% of our estimated proved
reserves were located in north Louisiana.
We had proved reserves of 315 Bcfe at January 1, 1999 and produced 37.8
Bcfe in 1998. At January 1, 1999, we had a PV-10 Value of $234 million and
approximately 90% of our reserves were natural gas and 64% were proved
developed. As of January 1, 1999, we held an interest in:
- 174,556 gross (81,054 net) developed acres,
- 294,807 gross (90,703 net) undeveloped acres, and
- 584 gross (224.5 net) producing wells.
For 1998, our capital spending totaled $57 million, approximately 55% of which
was spent on development activities and acquisitions.
We continue to experience development and exploration success. In 1998, we
achieved a 98% success rate on development activities and an overall success
rate of 87% on the drilling of 62 total wells. We expect to spend approximately
$15 million on lower-risk drilling in 1999, substantially all of which is
discretionary.
In April 1999, we entered into an exploration and development agreement
with Phillips Petroleum Company relating to our interests in the Bryceland, West
Bryceland and Sailes fields in north Louisiana. As a result of this transaction,
we:
- sold approximately 114.4 Bcfe of proved reserves, including approximately
62.6 Bcfe of proved undeveloped reserves (based on January 1, 1999
reserve estimates),
- received an $83 million cash payment (subject to certain post-closing
adjustments),
- retained a 42 Bcf, 8-year volumetric overriding royalty interest and a 1%
override on the excess production above that royalty interest, and
- retained 25% of our working interest in the Cotton Valley formation.
In addition, Phillips will at its risk and expense, operate, develop, exploit
and explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The effective date of the
transaction was May 1, 1999, and it closed on May 17, 1999. Following the
closing of the Phillips transaction, approximately 85% of our reserves are
natural gas and 74% are proved developed.
In April 1999, we negotiated a private offering of $135 million principal
amount, 14% Senior Secured Notes due 2003, maturing at 105% of the principal
amount, Series A. As required pursuant to the terms of
3
<PAGE> 5
the indenture governing the notes, we repurchased $35 million principal amount
of the notes then outstanding at a repurchase price equal to 104% of their
principal amount. We also paid accrued and unpaid interest to the date of the
repurchase. Such repurchase closed on June 30, 1999.
Also in April 1999, we began an offer to repurchase the outstanding
principal amounts of our 7 7/8% Convertible Subordinated Notes due December 15,
1999 and our 8 1/2% Convertible Subordinated Debentures due April 1, 2000 at a
price equal to $590 per $1,000 principal amount. On May 17, 1999, we funded the
repurchase of $46.1 million aggregate principal amount of these securities.
We used the net proceeds from the combination of these transactions and
cash on hand to:
- repay all borrowings outstanding under our credit facility of $115.5
million plus accrued interest,
- fund cash collateral for a $1.5 million letter of credit which was
subsequently increased to $7.5 million,
- fund the repurchase of $46.1 million aggregate principal amount of our
7 7/8% Convertible Subordinated Notes due December 15, 1999 and our
8 1/2% Convertible Subordinated Debentures due April 1, 2000 under the
offer to purchase at a total cost of approximately $28.3 million, and
- repurchase the $35 million principal amount of the 14% notes then
outstanding at 104% of their principal amount.
We will use any remaining net proceeds and cash flow from operations for general
corporate purposes.
We will recognize an extraordinary gain of approximately $11.0 million in
the second quarter of 1999 related to repurchases and repayment of debt
described above.
On June 28, 1999, the Company began an offer to exchange 15 shares of its
common stock, or 1.5 shares after the reverse stock split described in the
following paragraph, for each outstanding share of its $2.625 Convertible
Exchangeable Preferred Stock. This offer expired at 12:01 a.m. New York City
Time on Tuesday, July 27, 1999. Pursuant to the offer, 368,633 shares,
representing approximately 21% of the shares of preferred stock outstanding
prior to the offer to exchange, were tendered.
The Company effected a 1 for 10 reverse stock split of its common stock on
July 30, 1999. As a result of the reverse split and the share exchange described
above, the total number of outstanding shares of its common stock was reduced
from approximately 132.1 million to approximately 13.2 million. All historical
share and per share data appearing in the prospectus have been retroactively
restated to reflect this reverse stock split.
Finally, effective July 30, 1999, the Company changed its name to Contour
Energy Co. and its Nasdaq ticker symbol to CONCC.
SUMMARY OF THE EXCHANGE OFFER
On May 17, 1999, we completed the private offering of the outstanding
notes. We entered into a registration rights agreement with the initial
purchasers in the private offering. We agreed to deliver this prospectus to you
and to use our best efforts to complete the exchange offer within 180 days after
the date we issued the outstanding notes. You are entitled to exchange your
outstanding notes for new notes with substantially identical terms.
You should read the discussion under the headings "-- Summary of Terms of
the New Notes" for further information regarding the new notes.
We summarize the terms of the exchange offer below. You should read the
discussion under the heading "The Exchange Offer" beginning on page 68 for
further information regarding the exchange offer and resale of the new notes.
The Exchange Offer......... We are offering to issue to you new 14% Senior
Secured Notes due 2003, maturing at 105% of the
stated principal amount, Series B, for
4
<PAGE> 6
your outstanding 14% Senior Secured Notes due 2003,
maturing at 105% of the stated principal amount,
Series A.
Expiration Date............ The exchange offer will expire at 5:00 p.m., New
York City, on September 15, 1999, or at a later
date and time to which we extend it.
Withdrawal of Tenders...... You may withdraw your tender of outstanding notes
at any time before the expiration date of the
exchange offer.
Conditions to the Exchange
Offer...................... We will not be required to accept outstanding notes
for exchange if the exchange offer would violate
applicable law or if any legal action has been
instituted or threatened that would impair our
ability to proceed with the exchange offer. Please
read the section "The Exchange Offer -- Conditions
to the Exchange Offer" beginning on page 70 for
more information regarding the conditions to the
exchange offer.
Procedures for Tendering
Outstanding Notes........ If you wish to participate in the exchange offer,
you must complete, sign and date the letter of
transmittal or a facsimile of the letter of
transmittal and mail or deliver the letter of
transmittal, together with the outstanding notes,
to the exchange agent. If your outstanding notes
are held through The Depository Trust Company you
may effect delivery of the outstanding notes by
book-entry transfer.
In the alternative, if your outstanding notes are
held through The Depository Trust Company and you
wish to participate in the exchange offer, you may
do so instead through the automated tender offer
program of The Depository Trust Company. If you
tender under this program, you will agree to bound
by the letter of transmittal that we are providing
with this prospectus as though you had signed the
letter of transmittal.
By signing or agreeing to be bound by the letter of
transmittal, you will represent to us, among other
things, that:
- any new notes you receive will be acquired in the
ordinary course of your business,
- you have no arrangement or understanding with any
person or entity to participate in the
distribution of the new notes,
- if you are not a broker-dealer, you are not
engaged in and do not intend to engage in the
distribution of the new notes,
- if you are a broker-dealer that will receive new
notes for your own account in exchange for
outstanding notes that were acquired as a result
of market-making activities, you will deliver a
prospectus, as required by law, in connection
with any resale of those new notes, and
- you are not our "affiliate", as defined in Rule
405 of the Securities Act of 1933, or, if you are
our affiliate, you will comply with any
applicable registration and prospectus delivery
requirements of the Securities Act of 1933.
5
<PAGE> 7
Guaranteed Delivery
Procedures................. If you wish to tender your outstanding notes and
cannot comply with the requirement to deliver the
letter of transmittal and notes or use the
applicable procedures under the automated tender
offer program of The Depository Trust Company,
before the expiration date, you must tender your
outstanding notes according to the guaranteed
delivery procedures described in "The Exchange
Offer -- Guaranteed Delivery Procedures" on page
74.
Federal Income Tax
Considerations........... The exchange of outstanding notes for new notes in
the exchange offer will not be a taxable event for
U.S. federal income tax purposes. Please read
"Federal Income Tax Considerations" on page 122.
Use of Proceeds............ We will not receive any cash proceeds from the
issuance of the new notes.
Plan of Distribution....... All broker-dealers who receive new notes in the
exchange offer have a prospectus delivery
obligation.
Broker-dealers who acquired the outstanding notes
as a result of market-making or other trading
activities may use this exchange offer prospectus,
as supplemented or amended, in connection with the
resales of the new notes.
Broker-dealers who acquired the outstanding notes
from the Company must comply with the registration
and prospectus delivery requirements of the
Securities Act -- including being named as selling
noteholders -- in order to resell the outstanding
notes or the new notes.
Exchange Agent............. Norwest Bank Minnesota, National Association is the
exchange agent for the exchange offer. The
addresses and telephone number of the exchange
agent can be found under the caption "The Exchange
Offer -- The Exchange Agent" on page 77.
SUMMARY OF TERMS OF THE NEW NOTES
Unlike the outstanding notes, the new notes will be freely tradeable and
will not have registration rights or provisions for additional interest.
Otherwise, the new notes are substantially identical to the outstanding notes.
The new notes will evidence the same debt as the outstanding notes, and the
outstanding notes and the new notes will be governed by the same indenture.
Securities Offered......... $100,000,000 aggregate stated principal amount of
14% Senior Secured Notes due 2003, maturing at 105%
of the stated principal amount, Series B.
Issuer..................... Contour Energy Co., formerly Kelley Oil & Gas
Corporation.
Maturity Date.............. April 15, 2003.
Interest Payment Dates..... Interest on the notes, will accrue from the Issue
Date and will be payable semi-annually in cash in
arrears on each April 15 and October 15, commencing
October 15, 1999.
Scheduled Quarterly
Redemption................. On the 15th day of each January, April, July and
October, commencing July 15, 2002, we will be
obligated to redeem
6
<PAGE> 8
$2.0 million of the stated principal amount of the
new notes (expressed as an integral multiple of
$1,000) at a redemption price equal to 103% of the
stated principal amount thereof plus accrued and
unpaid interest thereon to such date.
Repurchase following
Reserve Deficiency Event... We will be obligated to offer to repurchase a
portion of the new notes at a repurchase price
equal to 104% of the stated principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages (if any) to the date of
repurchase, following a Reserve Deficiency Event.
See "-- Certain Covenants -- Quarterly Reserve
Engineering Reports; Reserve Redemption Event".
Ranking; Collateral........ The new notes will be senior indebtedness secured
by a first lien on substantially all existing and
future Collateral the Company owns.
Guarantees; Collateral..... The new notes will be jointly and severally
guaranteed on a senior secured basis by each of the
Subsidiary guarantors, which initially will be
Kelley Oil, Kelley Operating and Concorde. The
guarantees will be senior obligations of the
guarantors secured by a first lien on substantially
all existing and future Collateral owned by the
guarantors, which initially includes substantially
all of the oil and natural gas properties of the
guarantors. See "Description of the New
Notes -- Subsidiary Guarantees" on page 79.
Optional Redemption........ The new notes will be redeemable, in whole or in
part, at our option on or after April 15, 2001, at
the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated Damages
(if any) to the date of redemption. In addition, at
any time prior to April 15, 2001, we may, at our
option, redeem up to 35% of the original aggregate
stated principal amount of the new notes with the
net cash proceeds of one or more Equity Offerings
at a redemption price equal to 114% of the
aggregate stated principal amount of the new notes
to be redeemed, plus accrued and unpaid interest
and Liquidated Damages (if any) to the date of
redemption; provided, however, that after giving
effect to any such redemption at least 65% of the
original aggregate stated principal amount of the
new notes remains outstanding or such redemption
retires the new notes in their entirety and the
redemption occurs within 60 days after the
consummation of such Equity Offering.
Change of Control.......... Upon a Change of Control, we are obligated to offer
to repurchase each holder's new notes at a
repurchase price equal to 101% of the stated
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages (if any) to the
date of repurchase.
Asset Sales................ We will be obligated to offer to repurchase a
portion of the new notes at a repurchase price
equal to 105% of the stated principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages (if any) to the date of
repurchase, in the event of an Asset Sale.
Certain Covenants.......... The indenture governing the notes contains
covenants that limit our ability to, among other
things, incur additional indebtedness, pay
dividends or make certain other restricted
payments, consummate certain asset sales, enter
into transactions with affiliates, incur liens,
merge or consolidate with any other person or sell,
assign, transfer,
7
<PAGE> 9
lease, convey or otherwise dispose of all or
substantially all of our assets.
Rights Under Registration
Rights Agreement......... If we fail to complete the exchange offer as
required by the registration rights agreement, we
will be obligated to pay additional interest to
holders of the outstanding notes.
Use of Proceeds............ We will not receive any cash proceeds from the
issuance of the new notes. In consideration for
issuing the new notes, we will receive in exchange
a like principal amount of outstanding notes. The
outstanding notes surrendered in exchange for the
new notes will be retired and canceled and cannot
be reissued. Accordingly, issuance of the new notes
will not result in any change in our
capitalization.
Restricted Payments........ We will not pay cash dividends, redeem capital
stock for cash, repay subordinated indebtedness for
cash or make any investment other than Permitted
Investments. However, we will not be prohibited
from
- purchasing stock or subordinated obligations
using the proceeds from the sale of stock,
- purchasing subordinated obligations using the
proceeds of indebtedness the Company is otherwise
permitted to incur under the indenture, which
indebtedness will be effectively junior to the
notes,
- repurchasing subordinated obligations, provided
that we may not use the proceeds of the sale of
the outstanding notes, Excess Proceeds from Asset
Dispositions and cash flows from operations
accruing after the Issue Date for the repurchase
if the amount from those sources would exceed the
greater of (1) $36.0 million and (2) the excess
PV-10 Value of our Oil and Gas Assets, using 1998
year-end pricing assumptions, over two times the
aggregate stated principal amount of the notes
then outstanding,
- repurchasing subordinated obligations using
Excess Proceeds that have previously been offered
to holders of the new notes, not sooner than 360
days after the relevant Asset Disposition, or
- other payments in an aggregate amount not to
exceed $5 million.
For additional information regarding the notes, see "Description of the New
Notes" on page 78.
RISK FACTORS
Please read "Risk Factors" beginning on page 12 and carefully consider the
risk factors before participating in the exchange offer.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 601 Jefferson, Suite 1100,
Houston, Texas 77002 and our telephone number is (713) 652-5200.
8
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
FINANCIAL INFORMATION
The following tables present summary historical consolidated financial data
and the unaudited pro forma consolidated financial data for the Company to give
effect to the Pro Forma Transactions, as defined below. The historical financial
information for the years ended December 31, 1996, 1997 and 1998 and the three
months ended March 31, 1999 is derived from the financial statements. The
unaudited pro forma data are derived from the Unaudited Pro Forma Consolidated
Financial Information included elsewhere in this prospectus. The unaudited pro
forma income statement data and other financial data give effect to the Pro
Forma Transactions as if they occurred on January 1, 1998. The unaudited pro
forma balance sheet data as of March 31, 1999 gives effect to the Pro Forma
Transactions as if they occurred on March 31, 1999. The pro forma financial
information presented below is unaudited and is not necessarily indicative of
financial results that would have occurred had the Pro Forma Transactions
occurred on January 1, 1998 (for income statement data) or March 31, 1999 (for
balance sheet data) and should not be viewed as indicative of operations in
future periods. For purposes hereof, "Pro Forma Transactions" means the sale of
the outstanding notes, the consummation of the Phillips transaction, the
Subordinated Repurchase, as defined below, the repayment of all borrowings
outstanding under our revolving credit facility, our repurchase of $35 million
stated principal amount of the outstanding notes and the offer to exchange 15
shares of our common stock for our $2.625 convertible exchangeable preferred
stock. "Subordinated Repurchase" means our purchase of an aggregate of
approximately $46.1 million aggregate principal amount of our 7 7/8% Convertible
Subordinated Notes due 1999 and our 8 1/2% Convertible Subordinated Debentures
due 2000 at a purchase price of $590 per $1,000 principal amount thereof
pursuant to an Offer to Purchase dated April 19, 1999, as amended. This
information should be read in conjunction with "Capitalization" on page 22,
"Selected Consolidated Financial Data" on page 22, "Unaudited Pro Forma
Consolidated Financial Information" on page 24 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 31.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -------------------------------
PRO FORMA 1999
1996 1997 1998 1998 1998 1999 PRO FORMA
-------- --------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues.............. $ 60,854 $ 75,864 $ 79,150 $ 55,338 $ 23,047 $ 15,507 $ 11,058
Interest and other income......... 1,429 274 505 1,139 24 161 338
-------- --------- -------- -------- -------- -------- --------
Total revenues........... 62,283 76,138 79,655 56,477 23,071 15,668 11,396
-------- --------- -------- -------- -------- -------- --------
Production expenses............... 10,709 10,955 19,878 17,022 4,898 5,284 4,567
Exploration expenses.............. 5,438 5,433 12,034 12,034 2,051 1,370 1,370
General and administrative
expenses........................ 8,953 6,875 7,077 7,077 1,909 1,374 1,374
Interest and other debt
expenses........................ 24,401 25,071 33,333 40,638 8,092 8,666 9,703
Restructuring expenses............ 4,276 -- -- -- -- -- --
Depreciation, depletion and
amortization.................... 20,440 25,853 38,602 33,032 10,944 9,960 8,078
Impairment of oil and gas
properties(1)................... -- -- 25,738 25,738 -- -- --
-------- --------- -------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item.......... $(11,934) $ 1,951 $(57,007) $(79,064) $ (4,823) $(10,986) $(13,696)
======== ========= ======== ======== ======== ======== ========
Net income (loss)................. $(28,964) $ 1,951 $(57,007) $(79,064) $ (4,823) $(10,986) $(13,696)
======== ========= ======== ======== ======== ======== ========
Basic and diluted loss per common
share........................... $ (3.72) $ (0.26) $ (4.89) $ (6.42) $ (0.47) $ (0.96) $ (1.11)
======== ========= ======== ======== ======== ======== ========
Book value per share.............. $ (3.11) $ (0.45) $ (5.31) $ (2.46) $ (0.83) $ (6.18) $ (3.31)
======== ========= ======== ======== ======== ======== ========
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -------------------------------
PRO FORMA 1999
1996 1997 1998 1998 1998 1999 PRO FORMA
-------- --------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of Earnings to Fixed
Charges(2)...................... N/A 1.1x N/A N/A N/A N/A N/A
EBITDAX(3)........................ $ 42,621 $ 58,308 $ 52,700 $ 32,378 $ 16,264 $ 9,010 $ 5,455
CASH FLOW DATA:
Cash provided by operating
activities...................... 9,262 39,604 22,302 N/A 9,686 4,098 N/A
Cash used in investing
activities...................... (53,392) (164,275) (39,216) N/A (12,881) (5,823) N/A
Cash provided by financing
activities...................... 41,848 120,763 25,187 N/A 3,073 -- N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET AND RELATED DATA:
Cash and cash equivalents................................... $ 6,710 $ 40,254
Total assets................................................ 278,239 259,120
Long-term debt, including current maturities................ 320,810 265,439
Stockholders' deficit....................................... (77,925) (41,673)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------
HISTORICAL PRO FORMA
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
PV-10 Value(4).............................................. $234,284 $178,319
</TABLE>
- ---------------
(1) Reflects non-cash impairment charges against the carrying value of proved
and unproved oil and natural gas properties under SFAS 121. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 31 and Note 2 to the financial statements contained in
this prospectus.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income from continuing operations, excluding interest
income of $0.9 million, $0.2 million, $0.2 million, $0.0 million and $0.2
million for the years ended December 31, 1996, 1997 and 1998, and the three
months ended March 31, 1998 and 1999, respectively, plus fixed charges.
Fixed charges consist of interest expense and other debt expenses and
interest within rental expense of $0.4 million, $0.3 million, $0.2 million,
$0.0 million and $0.1 million for the years ended December 31, 1996, 1997
and 1998 and the three months ended March 31, 1998 and 1999, respectively.
For the years ended December 31, 1996 and 1998, and the three months ended
March 31, 1998 and 1999, earnings were insufficient to cover fixed charges
by $13.2 million, $57.4 million, $4.8 million and $11.3 million,
respectively, and $51.8 million and $14.1 million for the year ended
December 31, 1998, Pro Forma and the three months ended March 31, 1999, Pro
Forma, respectively.
(3) EBITDAX is calculated as income (loss) before extraordinary items, excluding
interest expense and other debt expenses, income taxes, exploration
expenses, restructuring expense, depletion, depreciation, amortization and
impairment of oil and gas properties. EBITDAX is not a measure of
performance or cash flow as determined by generally accepted accounting
principles ("GAAP"). Certain items excluded from EBITDAX are significant
components in understanding and assessing a company's financial performance,
such as a company's cost of capital and tax structure, as well as historic
costs of depreciable assets, none of which are components of EBITDAX. The
Company uses EBITDAX as a measure to gauge its operating performance, with
emphasis placed on revenue and cost trends, changes from period to period
and variances from management forecasts. The Company has excluded
restructuring expenses, which management believes are nonrecurring, and
excluded exploration expenses, which management believes provides more
consistency in measuring operating performance of comparable companies,
regardless of whether such companies use full cost accounting (and therefore
do not expense exploration costs) or successful efforts accounting. In
conjunction with EBITDAX, the Company uses GAAP and other operating measures
to evaluate its operating performance. The Company does not, and did not
during any of the periods presented above, use any single specific measure,
including EBITDAX, to evaluate or modify the conduct of its operations. In
addition, EBITDAX is a measure used by certain investors in evaluating the
operating performance of comparable oil and gas exploration and production
companies. EBITDAX should not be considered as an alternative to, or more
meaningful than, net income or cash flow as determined in accordance with
GAAP or as an indicator of the Company's operating performance or liquidity.
EBITDAX is not necessarily comparable to a similarly titled measure of
another company.
(4) "PV-10 Value" means with respect to any oil and gas assets the aggregate net
present value of such oil and gas assets calculated before income taxes and
discounted at 10 percent in accordance with SEC guidelines (including using
pricing provisions based on the most recent year-end prices), as reported in
the most recently prepared or audited report of our independent petroleum
engineers. The PV-10 Value as of December 31, 1998 was calculated using
prices of $10.81 per barrel of oil and $2.07 per Mcf of natural gas. PV-10
Value is not necessarily indicative of actual future cash flows. See "Risk
Factors -- There are uncertainties in estimating reserves and future net
cash flows".
10
<PAGE> 12
SUMMARY RESERVE AND OPERATING DATA
The following table sets forth certain summary reserve and operating data
for each of the three years in the period ended December 31, 1998. Our estimated
net proved reserves for each of the three years in the period ended December 31,
1998 are based on a reserve report prepared by H.J. Gruy & Associates, Inc.,
independent petroleum engineers. Detailed additional information concerning our
oil and natural gas production activities is contained in the Supplementary
Information in Note 12 to the financial statements included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
ESTIMATED PROVED RESERVES (PERIOD-END):
Oil and other liquid hydrocarbons (Mbbls)................... 1,466 2,953 5,294
Natural gas (Mmcf).......................................... 297,634 354,867 283,559
Natural gas equivalent (Mmcfe).............................. 306,430 372,585 315,323
% proved developed.......................................... 59% 73% 64%
PV-10 Value(1) (in thousands)............................... $518,184 $378,811 $234,284
PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................... 232 226 375
Natural gas (Mmcf).......................................... 23,466 30,202 35,557
Natural gas equivalent (Mmcfe).............................. 24,858 31,558 37,807
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (per Bbl)................. $ 22.11 $ 19.34 $ 13.09
Natural gas (per Mcf)(2).................................... 2.30 2.27 2.09
Natural gas equivalent (per Mcfe)(2)........................ 2.37 2.31 2.10
AVERAGE PRODUCTION EXPENSES (PER MCFE)...................... $ 0.43 $ 0.35 $ 0.53
GENERAL AND ADMINISTRATIVE EXPENSES (PER MCFE).............. $ 0.36 $ 0.22 $ 0.19
INTEREST EXPENSE (PER MCFE)................................. $ 0.98 $ 0.79 $ 0.88
</TABLE>
- ---------------
(1) PV-10 Value is not necessarily indicative of actual future cash flows. See
"Risk Factors -- There are uncertainties in estimating reserves and future
net cash flows".
(2) Includes the effects of our hedging activities.
11
<PAGE> 13
RISK FACTORS
An investment in the new notes offered by this prospectus involves a high
degree of risk. Before you decide to invest in the new notes, you should
carefully consider the following risk factors which could affect our actual
financial condition and results of operations in the future.
WE HAVE A HIGH LEVEL OF DEBT.
We used part of the net cash proceeds from the issuance of the outstanding
notes to pay off the outstanding balance on our Amended and Restated Credit
Agreement dated as of December 1, 1997 among the Company, Kelley Oil and Kelley
Operating as borrowers, Concorde and certain other persons, as guarantors, each
of the lenders that is a signatory thereto, and Chase Bank of Texas, National
Association, as agent. As of March 31, 1999, we had $327.9 million principal
amount of debt outstanding, stockholders' deficit of approximately $78 million
and cash on hand of approximately $6.7 million. Including the outstanding notes,
we have scheduled principal and interest payments of approximately $21 million
due during the remainder of 1999 and an additional $25 million due during the
first four months of 2000. Giving pro forma effect to the Pro Forma Transactions
as of January 1, 1998, our interest expense for 1998 would have increased $7.3
million. We plan to fund these payments with the remaining cash proceeds from
the sale of the outstanding notes, from cash flow from operations and from cash
payments received from the Phillips transaction. However, we cannot give you any
assurance that we will have sufficient funds to make all of these payments.
WE MAY BE UNABLE TO REPAY OR REDEEM OUR SUBORDINATED DEBT OBLIGATIONS.
The indenture places substantial limitations on our ability to pay in full
our subordinated debt obligations coming due within the next nine months. Our
failure to repurchase, repay or otherwise refinance our subordinated debt
obligations at or before maturity will result in a default under the indentures
governing those subordinated debt obligations. A default under those indentures
would result in defaults under the indentures governing our other subordinated
debt obligations and under the indenture related to the notes. This could result
in all of our long-term debt being declared immediately due and payable. In that
circumstance, we would have no choice but to seek protection under bankruptcy
laws. This could substantially hinder, delay or prevent the holders of the new
notes from being repaid in full.
WE HAVE SUBSTANTIAL CAPITAL REQUIREMENTS.
We have limited cash flow for capital expenditures. Our ability to service
our debt levels and finance capital expenditures depends significantly on
various factors including a continuation of the recently improved oil and
natural gas commodity prices. After we repaid the credit facility, repurchased
$35 million principal amount of the outstanding notes and repurchased
approximately $46.1 million aggregate principal amount of our 7 7/8% Convertible
Subordinated Notes and our 8 1/2% Convertible Debentures at a total cost of
approximately $28.3 million, our cash proceeds from the Phillips transaction and
the sale of the outstanding notes were approximately $40.3 million. Now that we
have repaid the credit facility, we are not likely to have access to a revolving
credit facility to supplement our cash needs. We will continue to have
significant debt outstanding and will continue to be subject to various
commodity and economic factors beyond our control that may have an impact on our
ability to exploit our exploration prospects and develop proved undeveloped
reserves.
We are dependent upon our ability to obtain financing beyond our internally
generated cash flow for acquiring, exploring and developing oil and natural gas
properties. Historically, we have financed these activities:
- through the issuance of debt and equity securities,
- through various credit facilities, and
- with internally generated funds.
12
<PAGE> 14
In addition, the Minerals Management Service recently increased the bonding
requirements for plugging and abandoning operations on some of our offshore
platforms and facilities by a total of $7.5 million. To comply with the higher
requirements, we will place a total of $7.5 million of cash in restricted
certificates of deposit as collateral for the bonds. As long as the bonding
requirements are in effect, this cash is restricted from being used for other
purposes.
We currently have plans for substantial capital expenditures to continue
our development and exploration activities. Our ability to expend the capital
necessary to undertake or complete future activities may be limited. We cannot
assure you that we will have adequate funds available to carry out our strategy.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" on page 36.
THE COLLATERAL MAY NOT BE SUFFICIENT TO SATISFY ALL AMOUNTS DUE ON THE NOTES.
The new notes and the guarantees will be secured by a first lien on
substantially all of our proved oil and natural gas properties. The reserve data
with respect to such interests, however, represent estimates only. You should
not consider the estimates to be exact. Also, the standardized measures of
discounted future cash flows should not be construed as the current market value
of our estimated proved reserves. See "-- There are uncertainties in estimating
reserves and future net cash flows". As a result, there can be no assurance
that, upon an acceleration of the notes, the proceeds from the sale of the
collateral would be sufficient to satisfy all amounts due on the notes.
WE MAY NOT BE ABLE TO REPLACE OUR PROVED RESERVES OR ACQUIRE ADDITIONAL
RESERVES.
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. Our future oil and natural gas reserves and production, and,
therefore, cash flow and income, are highly dependent upon our success in
efficiently developing our current reserves and acquiring additional reserves
that are economically recoverable.
With the completion of the Phillips transaction, we have more drilling
opportunities in south Louisiana and offshore than in the north Louisiana area.
These areas provide the opportunity for higher reserve potential but at a higher
risk than north Louisiana. The drilling of more higher risk wells could result
in a lower drilling success rate. We cannot assure you that we will be able to
replace the proved reserves that are the subject of the Phillips transaction or
that any proved reserves will be discovered through higher risk drilling.
WE MAY NOT BE ABLE TO RAISE EQUITY CAPITAL IN THE FORESEEABLE FUTURE.
The market price for our common stock has been substantially depressed for
an extended period of time, which has prevented us from seeking additional
capital through sales of equity. Given the current prices for oil and natural
gas, our substantial leverage and other relevant market factors, it is unlikely
that we will be able to raise equity capital in the foreseeable future.
OUR LENDERS IMPOSE RESTRICTIONS ON US.
We are subject to a number of significant covenants that, among other
things, restrict our ability to:
- dispose of assets,
- incur additional indebtedness,
- repay other indebtedness,
- incur liens,
- enter into some investments or acquisitions,
- repurchase or redeem capital stock,
13
<PAGE> 15
- engage in mergers or consolidations,
- engage in some transactions with subsidiaries and affiliates, and
- engage in some other corporate activities.
We cannot assure you that these restrictions will not adversely affect our
ability to finance our future operations or capital needs or engage in other
business activities that may be in our best interest.
THERE ARE UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET CASH FLOWS.
There are numerous uncertainties in:
- acquiring valuable oil and natural gas prospects,
- successfully exploring and developing oil and natural gas prospects,
- estimating quantities of proved reserves believed to have been
discovered,
- projecting future rates of production, and
- the timing of development expenditures.
Many of these factors are beyond our control. The reserve data set forth in this
prospectus are only estimates. Reserve estimates are inherently imprecise and
may be expected to change as additional information becomes available.
Furthermore, estimates of oil and natural gas reserves, of necessity, are
projections based on engineering data. There are uncertainties inherent in:
- the interpretation of that data,
- the projection of future rates of production, and
- the timing of development expenditures.
Reservoir engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured exactly. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. Accordingly,
different engineers or even the same engineers at different times may give very
different opinions regarding:
- estimates of the economically recoverable quantities of oil and natural
gas attributable to any particular group of properties,
- classifications of such reserves based on risk of recovery, and
- estimates of the future net cash flows expected from those reserves.
We cannot give you any assurance that the reserves set forth in this
prospectus will ultimately be produced or that the proved undeveloped reserves
set forth in this prospectus will be developed within the periods anticipated.
It is likely that there will be material variances from the estimates given in
this prospectus. In addition, the estimates of future net cash flows from our
proved reserves and the present value of these cash flows are based upon certain
assumptions about future production levels, prices and costs that may not be
correct when judged against actual future experience. We emphasize that the
estimated future cash flows prepared by independent petroleum engineers should
not be construed as representative of the fair market value of our proved
reserves. These estimated future net cash flows are based upon projected cash
flows which do not provide for changes in oil and natural gas prices from those
in effect on the date indicated or for increased expenses and capital costs
after that date. The meaningfulness of such estimates is highly dependent upon
the accuracy of the assumptions upon which they were based. Actual results will
differ, and are likely to differ greatly, from the results estimated. Our
14
<PAGE> 16
operations in south Louisiana in recent years illustrate these uncertainties.
Accordingly, you are cautioned not to place undue reliance on the reserve data
included in this prospectus.
WE MAY BE UNABLE TO SATISFY THE NOTES IF WE HAVE TO FILE BANKRUPTCY.
An investment in the notes, as in any type of security, involves certain
insolvency and bankruptcy considerations that you should carefully consider. If
we or any of the subsidiary guarantors were to become a debtor subject to
insolvency proceedings under the United States Bankruptcy Code, you would likely
encounter delays in:
- payment of the notes, and
- enforcing remedies under the notes, any guarantee or the liens securing
the notes and the guarantees.
Provisions under the Bankruptcy Code or general principles of equity that
could result in the impairment of your rights include, but are not limited to:
- the automatic stay,
- avoidance of preferential transfers by a trustee or debtor-in-possession,
- substantive consolidation,
- limitations on collectability of unmatured interest,
- attorney fees, and
- forced restructuring of the notes.
Under the Bankruptcy Code, a trustee or debtor-in-possession may generally
recover payments or transfers of property of a debtor if such payment or
transfer was:
- to or for the benefit of a creditor,
- in payment of an antecedent debt owed before the transfer was made,
- made while the debtor was insolvent,
- within 90 days (or one year if the payment was to an "insider" of the
debtor) before the filing of the bankruptcy case that enabled the
creditor to receive more than it would have received in a liquidation
under Chapter 7 of the Bankruptcy Code if the transfer had not been made
and the creditor received payment of the debt as provided in the
Bankruptcy Code.
By way of example, if payments were made on the notes prior to the filing
of a bankruptcy case and a court subsequently determined that the value of the
collateral pledged by the entity making the payment was less than the debt owed,
such payments could be set aside by the court as a preferential transfer. See
"-- The collateral may not be sufficient to satisfy all amounts due on the
notes".
A financial failure by us could also result in our inability to pay the
notes if a bankruptcy court were to "substantively consolidate" us and our
subsidiaries. If a bankruptcy court substantively consolidated us and our
subsidiaries, the assets of each entity would be subject to the claims of
creditors for all entities. Such a consolidation would expose the holders of the
notes not only to the usual impairments arising from bankruptcy, but could also
decrease the amount you ultimately recover because of the larger creditor base.
Forced restructuring of the notes could occur through the "cram-down"
provision of the Bankruptcy Code. Under this provision, the notes could be
restructured over the objections of holders of the notes as to their general
terms, primarily interest rate and maturity. Additionally, the notes could be
split into secured debt and unsecured debt if a bankruptcy court were to find
that the debt we owed exceeded the value of the collateral. If this were to
occur, the unsecured portion of the debt could be treated differently
15
<PAGE> 17
than the secured portion of the debt. For example, the court could refuse to
allow payment of the interest on the notes that accrued after the filing of the
bankruptcy petition.
A COURT COULD RULE THAT THE ISSUANCE OF THE NOTES VIOLATES FRAUDULENT TRANSFER
LAWS.
Under federal or state fraudulent transfer laws, if a court of competent
jurisdiction were to find, in a lawsuit by an unpaid creditor or a
representative of creditors, such as a trustee in bankruptcy or a debtor-
in-possession, that we either:
- issued the notes with the intent to hinder, delay or defraud present or
future creditors, or
- received less than a reasonably equivalent value or fair consideration
for incurring such indebtedness, and
at the time we incurred the debt, we
- were insolvent,
- were rendered insolvent by reason of the debt incurrence,
- were engaged or about to engage in a business or transaction for which
our remaining assets constituted unreasonably small capital to carry on
our business, or
- intended to incur, or believed or reasonably should have believed that
we would incur, debts beyond our ability to pay as such debts matured,
then the court could:
- avoid our obligations to you as a holder of the notes,
- subordinate our obligations to you to all of our other indebtedness, or
- take other action detrimental to you as a holder of the notes.
In that event, we cannot assure you that you could ever recover any
repayment on the notes. Any guarantee also may be subject to challenge under
fraudulent transfer laws. In any case, the guarantees will be limited to amounts
that any guarantor can guarantee without violating those laws. See "Description
of the New Notes -- Definitions Used in This Description of New
Notes -- Guarantee" on page 92.
The measure of insolvency for purposes of fraudulent transfer
considerations will vary depending upon the law applied in any insolvency
proceeding. Generally, however, we or one of our subsidiary guarantors may be
considered insolvent either:
(a) if the sum of our debts, including contingent liabilities, was greater than
the fair market value or fair saleable value of all of our assets at a fair
valuation or if the present fair market value or fair saleable value of our
assets was less than the amount that would be required to pay our total
outstanding debts and liabilities including our probable liabilities on our
existing debts, including contingent liabilities, as they become absolute
and mature, or
(b) if we are incurring debts beyond our ability to pay as those debts mature.
Based upon financial and other information, we believe that:
- the guarantees are being incurred for proper purposes and in good faith,
and
- that we and each of our subsidiary guarantors:
- are solvent and will continue to be solvent after issuing the new notes
and guarantees,
- will have sufficient capital for carrying on our business after such
issuance, and
- will be able to pay our debts as they mature.
16
<PAGE> 18
However, we cannot assure you that a court passing on those standards would
agree with us. See "Description of the New Notes -- Subsidiary Guarantees" on
page 79 and "-- Security; Ranking" on page 80.
OIL AND NATURAL GAS PRICES ARE VOLATILE.
Our financial results are affected significantly by the prices we receive
for our oil, natural gas and natural gas liquids production. Historically, the
markets for oil, natural gas and natural gas liquids have been volatile.
Throughout 1998 and into the first quarter of 1999, the prices of oil and
natural gas fell sharply and reflected the volatility of commodity prices and
the industry generally. We cannot predict future prices of oil and natural gas.
Although both oil and natural gas prices recently have risen, should prices
decline, our results of operations and liquidity could be adversely impacted.
The prices we receive for our oil, natural gas and natural gas liquids
production and the levels of that production are subject to government
regulation, legislation and policies. Our future financial condition and results
of operations will depend primarily upon the prices we receive for our oil and
natural gas production, as well as the costs of finding, acquiring, developing
and producing reserves.
WE HAVE OPERATING HAZARDS AND UNINSURED RISKS.
Oil and natural gas drilling activities are subject to numerous risks, many
of which are beyond our control. In addition, many of these risks are
uninsurable.
- It is possible that we will be unable to obtain commercially viable oil
or natural gas production.
- The decision to purchase, explore or develop a prospect or property will
depend in part on the evaluation of data obtained through geophysical and
geological analyses, production data and engineering studies. The results
of these analyses and studies are often inconclusive or subject to
varying interpretations.
- The cost of drilling, completing and operating wells is often uncertain
and overruns in budgeted expenditures are common risks that can make a
particular project uneconomical.
- Technical problems encountered in actual drilling, completion and
workover activities can delay those activities and add substantial costs
to a project.
- Drilling may be curtailed, delayed or canceled as a result of many
factors, including:
- title problems,
- weather conditions,
- compliance with government permitting requirements,
- shortages of or delays in obtaining equipment,
- reductions in product prices, and
- limitations in the market for products.
The availability of a ready market for our oil and natural gas production
also depends on a number of factors, including the demand for and supply of oil
and natural gas and the proximity of reserves to pipelines or trucking and
terminal facilities. Natural gas wells may be partially or totally shut in for
lack of a market or because of inadequacy or unavailability of natural gas
pipeline or gathering system capacity.
Our oil and natural gas business also is subject to all of the operating
risks associated with drilling for and production of oil and natural gas,
including, but not limited to:
- uncontrollable flows of oil, natural gas, brine or well fluids into the
environment, including groundwater and shoreline contamination,
- blowouts,
17
<PAGE> 19
- cratering,
- mechanical difficulties,
- fires,
- explosions,
- pollution, and
- other risks.
Any of these operating risks could result in substantial losses to us.
Although we maintain insurance at levels that we believe are consistent with
industry practices, we are not fully insured against all risks. Losses and
liabilities arising from uninsured and underinsured events could have a material
adverse effect on our financial condition and operations.
WE FACE REGULATORY AND ENVIRONMENTAL RISKS.
Our operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by:
- price controls, taxes and other laws relating to the oil and natural gas
industry,
- changes in those laws, and
- changes in administrative regulations.
We cannot predict:
- how existing laws and regulations may be interpreted by enforcement
agencies or court rulings,
- whether additional laws and regulations will be adopted, or
- the effect any changes may have on our business or financial condition.
Our operations are subject to complex and constantly changing environmental
laws and regulations adopted by federal, state and local governmental
authorities. The discharge of oil, natural gas, oil and natural gas exploration
and production wastes or other pollutants into the air, soil or water may give
rise to liabilities on our part to the government and third parties. We may also
be required to incur costs of remediation related to any discharges. We cannot
assure you that existing environmental laws or regulations, as currently
interpreted or reinterpreted in the future, or future laws or regulations, will
not materially and adversely affect our operations and financial condition. We
also cannot assure you that material indemnity claims will not arise against us
with respect to properties we have acquired or sold. See "Description of Our
Business and Properties -- Regulation" on page 54.
OUR USE OF HEDGING TRANSACTIONS INVOLVES RISKS.
We regularly enter into hedging transactions for our natural gas and crude
oil production and likely will continue to do so in the future. Such
transactions may limit our potential gains if oil and natural gas prices were to
rise substantially over the price established by the hedges. Additionally,
hedging transactions may expose us to the risk of financial loss in certain
circumstances, including possibly instances where our production is less than
expected or there is an unexpected event materially affecting prices. The
natural gas and crude oil swap agreements generally provide for us to receive or
make counterparty payments on the differential between a fixed price and a
variable indexed price for natural gas. We are exposed to the credit risk of
nonperformance by our hedging counterparties, which generally can be quantified
as the amount of unrealized gains under the contracts. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Market Risk Disclosure" on page 40 and Note 10 to the financial
statements included in this prospectus.
18
<PAGE> 20
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, WHICH INCLUDES COMPETITORS WITH
GREATER FINANCIAL RESOURCES.
We operate in a highly competitive environment with respect to:
- acquiring reserves,
- marketing oil and natural gas, and
- securing trained personnel.
Many of our larger competitors have greater financial and personnel
resources than we have available. These competitors may be able to pay more for
productive oil and natural gas properties and to define, evaluate, bid for and
purchase a greater number of properties than we can. Our ability to acquire
additional reserves in the future will depend on our ability to evaluate and
select suitable properties and to complete transactions in a highly competitive
environment. In addition, substantial competition exists for capital available
for investment in the oil and natural gas industry. We cannot assure you that we
will be able to compete successfully in the future in:
- acquiring reserves,
- developing reserves,
- marketing hydrocarbons,
- attracting and retaining quality personnel, and
- raising additional capital.
WE DEPEND ON KEY PERSONNEL.
We believe that our current operations and future prospects are largely
dependent upon the efforts of several members of our senior management team. The
loss of the services of these key individuals could have an adverse effect on
us. We do not currently maintain insurance against the loss of any of these
individuals.
CONTOUR PRODUCTION COMPANY L.L.C. OWNS APPROXIMATELY 57% OF OUR OUTSTANDING
VOTING POWER.
Contour Production Company's significant ownership position allows it to
control:
- the election of our directors,
- our management, operations and affairs,
- the approval of any sale of all or substantially all of our assets,
including a merger or consolidation, and
- the outcome of any corporate transaction or other matter submitted to our
stockholders for approval.
Circumstances may occur in which the interests of Contour Production
Company, as our majority stockholder, may conflict with your interests as a
holder of the notes.
YOU MAY FIND IT DIFFICULT TO SELL YOUR NEW NOTES.
The new notes will constitute a new issue of securities with no established
trading market, and we cannot assure you as to:
- the development of any market for the new notes,
- the liquidity of any market for the new notes that may develop,
- your ability to sell your new notes, or
19
<PAGE> 21
- the price at which you would be able to sell your new notes.
We do not intend to apply for listing of the new notes on any national
securities exchange or for quotation through the Nasdaq National Market.
If a market for the new notes were to exist, the new notes could trade at
prices that may be higher or lower than their principal amount or purchase
price, depending on many factors, including prevailing interest rates, the
market for similar debentures and our financial performance. Historically, the
market for non-investment grade debt has been subject to disruptions that have
caused substantial volatility in the prices of securities similar to the new
notes. We cannot assure you that the market for the new notes, if any, will not
be subject to similar disruptions. Any disruption in the market for the new
notes may adversely affect you as a holder of the new notes.
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE
CONSEQUENCES.
The outstanding notes were not registered under the Securities Act or under
the securities laws of any state and you may not resell them, offer them for
resale or otherwise transfer them unless they are subsequently registered or
resold under an exemption from the registration requirements of the Securities
Act and applicable state securities laws. If you do not exchange your
outstanding notes for new notes pursuant to this exchange offer, or if you do
not properly tender your outstanding notes in this exchange offer, you will not
be able to resell, offer to resell or otherwise transfer the outstanding notes
unless they are registered under the Securities Act or unless you resell them,
offer to resell or otherwise transfer them under an exemption from the
registration requirements of, or in a transaction not subject to, the Securities
Act. In addition, you will no longer be able to obligate us to register the
outstanding notes under the Securities Act.
CERTAIN PERSONS WHO PARTICIPATE IN THE EXCHANGE OFFER MUST DELIVER A PROSPECTUS
IN CONNECTION WITH RESALES OF THE NEW NOTES.
Based on certain "no-action letters" issued by the staff of the SEC, we
believe that you may offer for resale, resell or otherwise transfer the new
notes without compliance with the registration and prospectus delivery
requirements of the Securities Act. However, in some instances described in this
prospectus under "The Exchange Offer" beginning on page 68, you will remain
obligated to comply with the registration and prospectus delivery requirements
of the Securities Act to transfer your new notes. In these cases, if you
transfer any new note without delivering a prospectus meeting the requirements
of the Securities Act or without an exemption from registration of your new
notes under this Act, you may incur liability under the Securities Act. We do
not and will not assume or indemnify you against this liability.
20
<PAGE> 22
CAUTION AS TO FORWARD-LOOKING STATEMENTS
Statements contained in this prospectus and other materials filed or to be
filed by us with the SEC (as well as information included in oral or other
written statements made or to be made by us or our representatives) that are
forward-looking in nature are intended to be "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, relating to
matters such as our anticipated operating and financial performance, business
prospects, developments and results.
Actual performance, prospects, developments and results may differ
materially from any or all anticipated performance, prospects, developments and
results due to economic conditions and other risks, uncertainties and
circumstances partly or totally outside of our control, including:
- rates of inflation,
- natural gas and crude oil prices,
- uncertainty of reserve estimates,
- rates and timing of future production of oil and natural gas,
- exploratory and development activities,
- acquisition risks and activities,
- changes in the level and timing of future costs and expenses related to
drilling and operating activities, and
- those risks described in the section entitled "Risk Factors" beginning on
page 12.
Words such as "anticipated", "expect", "estimate", "project" and similar
expressions are intended to identify forward-looking statements.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes.
In consideration for issuing the new notes, we will receive in exchange a like
principal amount of outstanding notes. The outstanding notes surrendered in
exchange for the new notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the new notes will not result in any change in our
capitalization.
We used the net proceeds from the sale of the outstanding notes to:
- repay all borrowings outstanding under our credit facility of $115.5
million plus accrued interest, and
- fund cash collateral for a $1.5 million letter of credit which was
subsequently increased to $7.5 million.
We intend to use the remainder of the net proceeds from the sale of the
outstanding notes for additional working capital for general corporate purposes,
including the payment of interest on outstanding subordinated indebtedness.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth our consolidated capitalization as of March
31, 1999 on a historical basis and pro forma to give effect to the Pro Forma
Transactions as if they had occurred on March 31, 1999. You should read this in
conjunction with "Unaudited Pro Forma Consolidated Financial Information",
"Selected Consolidated Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
included in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------
HISTORICAL PRO FORMA
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 6,710 $ 40,254
======== ========
Long-term debt, including current maturities:
Credit Facility........................................... $111,500 --
14% Senior Secured Notes due 2003......................... -- $100,000
13 1/2% Senior Notes due 1999............................. 435 435
10 3/8% Senior Subordinated Notes due 2006................ 150,818 150,818
7 7/8% Convertible Subordinated Notes due 1999............ 32,416 4,930
8 1/2% Convertible Subordinated Debentures due 2000....... 25,641 9,256
-------- --------
Total long-term debt, including current
maturities...................................... 320,810 265,439
-------- --------
Stockholders' deficit....................................... (77,925) (41,673)
-------- --------
Total capitalization.............................. $242,885 $223,766
======== ========
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial data for the
Company, which are derived from the financial statements included in this
prospectus, or in the case of the fiscal 1994 and 1995 data, from financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995. The historical financial information for the year ended
December 31, 1995 reflects the Consolidation (as defined herein) in February
1995. The financial information for periods prior to the Consolidation reflects
Kelley Oil's historical results of operations. The impact of the acquisition of
the SPR properties (as defined herein) is reflected in the selected financial
data as of December 1, 1997. All earnings per share and share data have been
restated to retroactively reflect the 1 for 10 reverse stock split of common
stock that occurred on July 30, 1999. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements included in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
-------- --------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues....................... $ 16,822 $ 36,998 $ 60,854 $75,864 $ 79,150 $23,047 $ 15,507
Interest and other income.................. 1,416 1,763 1,429 274 505 24 161
-------- --------- -------- ------- -------- ------- --------
Total revenues......................... 18,238 38,761 62,283 76,138 79,655 23,071 15,668
-------- --------- -------- ------- -------- ------- --------
Production expenses........................ 3,760 10,835 10,709 10,955 19,878 4,898 5,284
Exploration expenses....................... 7,404 23,387 5,438 5,433 12,034 2,051 1,370
General and administrative expenses........ 5,172 7,030 8,953 6,875 7,077 1,909 1,374
Interest and other debt expenses........... 4,571 21,956 24,401 25,071 33,333 8,092 8,666
Restructuring expenses..................... 1,814 1,115 4,276 -- -- -- --
Depreciation, depletion and amortization... 20,474 35,591 20,440 25,853 38,602 10,944 9, 960
Impairment of oil and gas properties(1).... -- 150,138 -- -- 25,738 -- --
-------- --------- -------- ------- -------- ------- --------
Income (loss) before income taxes and
extraordinary item....................... (24,957) (211,291) (11,934) 1,951 (57,007) (4,823) (10,986)
Provision for taxes........................ -- -- -- -- -- -- --
-------- --------- -------- ------- -------- ------- --------
Income (loss) before extraordinary item.... (24,957) (211,291) (11,934) 1,951 (57,007) (4,823) (10,986)
Extraordinary loss(2)...................... -- -- (17,030) -- -- -- --
-------- --------- -------- ------- -------- ------- --------
Net income (loss).......................... $(24,957) $(211,291) $(28,964) $ 1,951 $(57,007) $(4,823) (10,986)
======== ========= ======== ======= ======== ======= ========
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
-------- --------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Basic and diluted loss per common share
before extraordinary item(3)............. $ (15.79) $ (53.10) $ (1.83) $ (.26) $ (4.89) $ (.47) $ (.96)
Basic and diluted loss per common
share(3)................................. $ (15.79) $ (53.10) $ (3.72) $ (.26) $ (4.89) $ (.47) $ (.96)
Weighted average common shares
outstanding.............................. 1,765 4,103 9,011 10,076 12,578 12,571 12,602
OTHER FINANCIAL DATA:
EBITDAX(4)................................. $ 9,306 $ 20,896 $ 42,621 $58,308 $ 52,700 $16,264 $ 9,010
Capital expenditures, including
acquisitions............................. 44,976 52,240 59,195 164,275 56,579 $12,881 $ 5,823
CASH FLOW DATA:
Net cash (used in) provided by operating
activities............................... $ (1,672) $ (1,806) $ 9,262 $39,604 $ 22,302 $ 9,686 $ 4,098
Net cash used in investing activities...... (44,976) (43,224) (53,392) (164,275) (39,216) (12,881) (5,823)
Net cash provided by financing
activities............................... 44,944 42,114 41,848 120,763 25,187 3,073 --
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 9,268 $ 6,352 $ 4,070 $ 162 $ 8,435 $ 40 $ 6,710
Total assets............................... 106,513 151,342 189,227 322,602 286,197 321,277 278,239
Long term debt, including current
maturities............................... 39,713 164,980 184,253 286,183 319,751 290,269 320,810
Stockholders' equity (deficit)............. 45,180 (45,568) (30,535) (5,621) (66,939) (10,443) (77,925)
Property and equipment, net................ 74,912 128,642 158,468 293,613 256,455 293,499 250,964
</TABLE>
- ---------------
(1) Reflects non-cash impairment charges against the carrying value of proved
and unproved oil and natural gas properties under SFAS 121. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 to the Financial Statements.
(2) Incurred in connection with the refinancing of the 13 1/2% Senior Notes and
represents the excess of the aggregate purchase price of the 13 1/2% Senior
Notes (including consent payments) over their carrying value as of the date
the refinancing was consummated.
(3) Dividends on the Company's cumulative preferred stock are deducted from
"Income (loss) before extraordinary item" and "Net income (loss)" in
calculating related per share amounts, whether or not declared, and amounted
to $2.9 million, $6.6 million, $4.6 million, $4.6 million and $4.6 million
for the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
respectively and $1.1 million and $1.1 million for the three months ended
March 31, 1998 and 1999, respectively.
(4) EBITDAX is calculated as income (loss) before extraordinary items, excluding
interest expense and other debt expenses, income taxes, exploration
expenses, restructuring expense, depletion, depreciation, amortization and
impairment of oil and gas properties. EBITDAX is not a measure of
performance or cash flow as determined by generally accepted accounting
principles ("GAAP"). Certain items excluded from EBITDAX are significant
components in understanding and assessing a company's financial performance,
such as a company's cost of capital and tax structure, as well as historic
costs of depreciable assets, none of which are components of EBITDAX. The
Company uses EBITDAX as a measure to gauge its operating performance, with
emphasis placed on revenue and cost trends, changes from period to period
and variances from management forecasts. The Company has excluded
restructuring expenses, which management believes are nonrecurring and
excluded exploration expenses, which management believes provides more
consistency in measuring operating performance of comparable companies,
regardless of whether such companies use full cost accounting (and therefore
do not expense exploration costs) or successful efforts accounting. In
conjunction with EBITDAX, the Company uses GAAP and other operating measures
to evaluate its operating performance. The Company does not, and did not
during any of the periods presented above, use any single specific measure,
including EBITDAX, to evaluate or modify the conduct of its operations. In
addition, EBITDAX is a measure used by certain investors in evaluating the
operating performance of comparable oil and gas exploration and production
companies. EBITDAX should not be considered as an alternative to, or more
meaningful than, net income or cash flow as determined in accordance with
GAAP or as an indicator of the Company's operating performance or liquidity.
EBITDAX is not necessarily comparable to a similarly titled measure of
another company.
23
<PAGE> 25
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated statements of operations for
the year ended December 31, 1998 and for the three months ended March 31, 1999
give effect to the Pro Forma Transactions as if each had occurred on January 1,
1998. The following unaudited pro forma consolidated balance sheet as of March
31, 1999 gives effect to the Pro Forma Transactions as if each had occurred on
March 31, 1999. The unaudited pro forma consolidated balance sheet as of March
31, 1999 and statement of operations for the year ended December 31, 1998 and
for the three months ended March 31, 1999 are based upon the financial
statements included in this prospectus.
The pro forma adjustments are based upon available information and certain
assumptions that we believe are reasonable. The pro forma financial information
does not purport to represent what our results of operations would actually have
been had the Pro Forma Transactions in fact occurred on the assumed dates,
particularly in light of the nature of the Phillips transaction regarding
volumes that are contracted to be delivered in certain years. See footnote 3 to
the Pro Forma Statements of Operations. In addition, the unaudited pro forma
consolidated financial statements are not necessarily indicative of the results
of our future operations and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 31.
24
<PAGE> 26
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
-------------------------------------------------------
OFFER TO
SALE OF THE EXCHANGE
OUTSTANDING PHILLIPS SUBORDINATED PREFERRED
HISTORICAL NOTES TRANSACTION REPURCHASE STOCK PRO FORMA
---------- ----------- ----------- ------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........... $ 6,710 $ 15,250(1) $ 46,600(4) $(28,306)(8) $ 40,254
Accounts receivable................. 17,926 17,926
Accounts receivable -- drilling
programs.......................... 573 573
Prepaid expenses and other current
assets............................ 768 768
--------- --------- -------- -------- ------- ---------
Total current assets.............. 25,977 15,250 46,600 (28,306) 59,521
--------- --------- -------- -------- ------- ---------
Unproved properties................. 38,455 38,455
Properties subject to
amortization...................... 500,980 (57,505)(5) 443,475
Pipelines and other transportation
assets, at cost................... 1,582 1,582
Furniture, fixtures and equipment... 3,567 3,567
--------- --------- -------- -------- ------- ---------
Total property and equipment...... 544,584 (57,505) 487,079
Less: Accumulated depreciation,
depletion and amortization........ (293,620) (293,620)
--------- --------- -------- -------- ------- ---------
Total property and equipment,
net............................. 250,964 (57,505) 193,459
--------- --------- -------- -------- ------- ---------
Other non-current assets, net....... 1,298 6,981(2) (2,139)(6) 6,140
--------- --------- -------- -------- ------- ---------
Total assets................ $ 278,239 $ 22,231 $(13,044) $(28,306) $ 259,120
========= ========= ======== ======== ======= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable and accrued
expenses.......................... $ 35,078 $ 35,078
Accounts payable -- drilling
programs.......................... 276 276
Current portion of long-term debt... 32,851 (27,486)(8) 5,365
--------- --------- -------- -------- ------- ---------
Total current liabilities......... 68,205 (27,486) 40,719
--------- --------- -------- -------- ------- ---------
Credit Facility..................... 111,500 (111,500)(3) --
14% Senior Secured Notes............ -- 135,000(3) (35,000)(4) 100,000
10 3/8% Senior Subordinated Notes... 150,818 150,818
8 1/2% Convertible Subordinated
Debentures........................ 25,641 (16,385)(8) 9,256
--------- --------- -------- -------- ------- ---------
Total long-term debt.............. 287,959 23,500 (35,000) (16,385) 260,074
--------- --------- -------- -------- ------- ---------
Total liabilities........... 356,164 23,500 (35,000) (43,871) 300,793
--------- --------- -------- -------- ------- ---------
Preferred stock..................... 2,600 $ (553)(9) 2,047
Common stock........................ 1,260 55(9) 1,315
Additional paid-in capital.......... 300,653 498(9) 301,151
Retained earnings................... (382,438) (1,269)(2) 21,956(7) 15,565(10) (346,186)
--------- --------- -------- -------- ------- ---------
Total stockholders'
deficit................... (77,925) (1,269) 21,956 15,565 (41,673)
--------- --------- -------- -------- ------- ---------
Total liabilities and
stockholders' deficit..... $ 278,239 $ 22,231 $(13,044) $(28,306) $ 259,120
========= ========= ======== ======== ======= =========
</TABLE>
- ---------------
(1) To record the cash proceeds from the sale of the outstanding notes in
excess of the repayment of the credit facility.
(2) To record the debt issuance costs associated with the sale of the
outstanding notes and the extraordinary loss associated with writeoff of
the remaining capitalized issuance costs associated with the credit
facility.
(3) To record the aggregate stated principal amount of the outstanding notes
sold and the application of a portion of the net proceeds from the sale of
the outstanding notes to repay all outstanding borrowings under the credit
facility.
(4) To record cash proceeds from the conveyance of oil and gas properties
pursuant to the Phillips transaction in excess of the repurchase of $35
million stated principal amount of outstanding notes at 104% of their
stated principal.
(5) To record the adjustment to oil and gas properties pursuant to the Phillips
transaction. We have not completed our analysis of specific costs of oil
and gas properties and related accumulated depreciation, depletion and
amortization being sold and, accordingly, the reduction of properties
subject to amortization is presented net of estimated accumulated
depreciation, depletion and amortization.
(6) To record the writeoff of debt issuance costs associated with the
repurchase of the outstanding notes.
25
<PAGE> 27
(7) The pro forma adjustment to retained earnings resulting from the Phillips
transaction includes the following:
<TABLE>
<S> <C>
Gain on the conveyance of the oil and gas properties
pursuant to the Phillips transaction...................... $25,495
Writeoff of a proportionate amount of debt issuance costs
associated with the repurchase of the outstanding notes... (2,139)
Extraordinary loss on the repurchase of the outstanding
notes..................................................... (1,400)
-------
Net gain.................................................... $21,956
=======
</TABLE>
(8) To record the repurchase, net of deferred debt expenses, of the $46.1
million aggregate principal amount of subordinated debt repurchased
pursuant to the Subordinated Repurchase.
(9) Reflects the conversion of 368,633 shares of preferred stock at the
conversion rate of 1.5:1, into 552,950 shares of the Company's common
stock, after giving effect to the 1 for 10 reverse stock split.
(10) The pro forma adjustment to retained earnings resulting from the
Subordinated Repurchase includes the following:
<TABLE>
<S> <C>
Extraordinary gain resulting from the extinguishment of
subordinated debt......................................... $16,663
Commissions................................................. (1,098)
-------
Net gain.................................................... $15,565
=======
</TABLE>
26
<PAGE> 28
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------------------------------------
OFFER
TO EXCHANGE
SALE OF THE PHILLIPS SUBORDINATED PREFERRED
HISTORICAL OUTSTANDING NOTES TRANSACTION(5) REPURCHASE STOCK PRO FORMA
---------- ----------------- -------------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenues.......... $ 79,150 $(23,812)(3) $ 55,338
Interest and other income..... 505 $ 370(1) 264(4) 1,139
-------- -------- -------- ------- ----- --------
Total revenues.............. 79,655 370 (23,548) 56,477
-------- -------- -------- ------- ----- --------
Production expenses........... 19,878 (2,856)(6) 17,022
Exploration expenses.......... 12,034 12,034
General and administrative
expenses.................... 7,077 7,077
Interest and other debt
expenses.................... 33,333 16,529(2) (5,484)(7) $(3,740)(9) 40,638
Depreciation, depletion and
amortization................ 38,602 (5,570)(8) 33,032
Impairment of oil and gas
properties.................. 25,738 25,738
-------- -------- -------- ------- ----- --------
Total expenses.............. 136,662 16,529 (13,910) (3,740) 135,541
-------- -------- -------- ------- ----- --------
Loss before income taxes...... (57,007) (16,159) (9,638) 3,740 (79,064)
Income taxes..................
-------- -------- -------- ------- ----- --------
Net loss(11).................. (57,007) (16,159) (9,638) 3,740 (79,064)
Preferred stock dividends..... (4,550) (624)(10) (5,174)
-------- -------- -------- ------- ----- --------
Net loss applicable to common
stock....................... $(61,557) $(16,159) $ (9,638) $ 3,740 (624) $(84,238)
======== ======== ======== ======= ===== ========
Basic and diluted loss per
common share................ $ (4.89) $ (6.42)
-------- --------
Weighted average common shares
outstanding................. 12,578 553(10) 13,131
======== ===== ========
</TABLE>
- ---------------
(1) To record interest income on the net cash proceeds from the sale of the
outstanding notes in excess of the repayment of the credit facility.
(2) The pro forma adjustment to interest expense includes the following:
<TABLE>
<S> <C>
Outstanding notes........................................... $21,172
Amortization of costs from the sale of the outstanding
notes..................................................... 2,063
Credit facility............................................. (8,170)
Writeoff of remaining debt issuance costs associated with
credit facility........................................... 1,464
-------
$16,529
=======
</TABLE>
(3) Pursuant to the Phillips transaction, we received an $83 million cash
payment, retained a 42 Bcfe volumetric overriding royalty interest (VORI)
and retained 25% of our interest in the Cotton Valley formation. Actual
revenues generated by the properties included in the Phillips transaction
totaling approximately $34.5 million on 16.1 Bcfe of production were
removed. Revenues generated by the VORI of approximately $10.7 million were
included based on the percentage of actual 1999 VORI production to
estimated 1999 production from the properties, multiplied by the actual
1998 production from the properties. This agreement also will allow us to
forego an estimated $40 million in capital expenditures and an estimated
$40 million in operating costs over the next ten years. The VORI is
projected to peak at an average net production level of 26.5 million cubic
feet of gas per day during 2001, building up from a level of 9.5 million
cubic feet per day in 1999, as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bcf........................................ 2.29 4.22 9.60 7.78 6.35 3.66 4.63 3.37
</TABLE>
In the aggregate, we expect the contracted volumes to approximate the actual
volumes we would have received from our proved producing reserves over the
contract period had the Phillips transaction not been consummated.
To record the reduction in 1998 gas revenues resulting from us receiving
only 2.29 Bcf from the retained overriding royalty interest between May 1,
1999 (the effective date of the Phillips transaction) and December 31, 1999.
Pro forma rules require that the specific terms of the transaction be
reflected. However, management believes that if the Phillips transaction had
27
<PAGE> 29
actually occurred on January 1, 1998, the transaction would have resulted in
us retaining significantly more volumes than are to be received in 1999 and,
consequently, than are reflected in the 1998 pro forma financial statements,
because of both the significant 1998 production from these properties and
the significant capital investment required to achieve such production.
(4) To record interest income on the net cash proceeds from the Phillips
transaction in excess of the repurchase of $35 million principal amount of
the outstanding notes at 104% of their stated principal amount.
(5) Excludes the estimated gain of $25.5 million on conveyance of oil and gas
properties pursuant to the Phillips transaction. We have not completed our
analysis of the specific costs of the oil and gas properties and related
accumulated depreciation, depletion and amortization being sold, and,
accordingly, the gain is subject to further adjustment.
(6) To record the reduction in lease operating expenses pursuant to the
Phillips transaction.
(7) To record the reduction in interest expense related to the repurchase of
the outstanding notes.
(8) To record the reduction in depreciation, depletion and amortization
pursuant to the Phillips transaction.
(9) The pro forma adjustment to interest expense includes the following:
<TABLE>
<S> <C>
7 7/8% Convertible Subordinated Notes....................... $(2,281)
8 1/2% Convertible Subordinated Debentures.................. (1,459)
-------
$(3,740)
=======
</TABLE>
(10) Reflects the conversion of 368,633 shares of preferred stock at the
conversion rate of 1.5:1, into 552,950 shares of the Company's common
stock, after giving effect to the 1 for 10 reverse stock split. Also
reflects the excess of the fair value of the exchange offer over the fair
value of the original conversion terms. The entry may be summarized as
follows:
<TABLE>
<S> <C>
Reduction of dividends...................................... $ 968
Excess fair value........................................... (1,592)
-------
Additional reduction of earnings available to common
stockholders.............................................. $ (624)
=======
</TABLE>
(11) Net loss from continuing operations excludes the extraordinary loss of
$3,539, from the repurchase of $35 million principal amount of the
outstanding notes at 104% of the stated principal amount, the extraordinary
loss of $1,269 from repayment of the credit facility; and the extraordinary
gain of $15,565 from the repurchase of $46.1 million of the aggregate
outstanding principal amount of the 7 7/8% Convertible Subordinated Notes
and 8 1/2% Convertible Subordinated Debentures.
28
<PAGE> 30
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------------------------------
SALE OF THE OFFER TO
OUTSTANDING PHILLIPS SUBORDINATED EXCHANGE
HISTORICAL NOTES TRANSACTION REPURCHASE PREFERRED STOCK PRO FORMA
---------- ----------- ----------- ------------ --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenues.............. $ 15,507 $(4,449)(3) $ 11,058
Interest and other income......... 161 $ 80(1) 97(4) 338
-------- ------ ------- ------------ ------ --------
Total revenues.................. 15,668 80 (4,352) 11,396
-------- ------ ------- ------------ ------ --------
Production expenses............... 5,284 (717)(5) 4,567
Exploration expenses.............. 1,370 1,370
General and administrative
expenses........................ 1,374 1,374
Interest and other debt
expenses........................ 8,666 3,338(2) (1,371)(6) $ (930)(8) 9,703
Depreciation, depletion and
amortization.................... 9,960 (1,882)(7) 8,078
-------- ------ ------- ------------ ------ --------
Total expenses.................. 26,654 3,338 (3,970) (930) 25,092
-------- ------ ------- ------------ ------ --------
Loss before income taxes.......... (10,986) (3,258) (382) 930 (13,696)
Income taxes
-------- ------ ------- ------------ ------ --------
Net loss.......................... (10,986) (3,258) (382) 930 (13,696)
Preferred stock dividends......... (1,137) $ 242(9) (895)
-------- ------ ------- ------------ ------ --------
Net loss applicable to common
stock........................... $(12,123) (3,258) $ (382) $ 930 $ 242 $(14,591)
======== ====== ======= ============ ====== ========
Basic and diluted loss per common
share........................... $ (0.96) $ (1.11)
======== ========
Weighted average common shares
outstanding..................... 12,602 553(9) 13,155
======== ====== ========
</TABLE>
- ---------------
(1) To record interest income on the net cash proceeds from the sale of the
outstanding notes in excess of the repayment of the credit facility.
(2) The pro forma adjustment to interest expense includes the following:
<TABLE>
<S> <C>
Outstanding notes........................................... $ 5,293
Amortization of costs from the sale of the outstanding
notes..................................................... 516
Credit facility, including amortization of debt issuance
costs..................................................... (2,471)
-------
$ 3,338
=======
</TABLE>
(3) Pursuant to the Phillips transaction, we received an $83 million cash
payment, retained a 42 Bcfe volumetric overriding royalty interest (VORI)
and retained 25% of our interest in the Cotton Valley formation. This
agreement also will allow us to forego an estimated $40 million in capital
expenditures and an estimated $40 million in operating costs over the next
ten years. The VORI is projected to peak at an average net production level
of 26.5 million cubic feet of gas per day during 2001, building up from a
level of 9.5 million cubic feet per day in 1999, as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bcf............................................ 2.29 4.22 9.60 7.78 6.35 3.66 4.63 3.37
</TABLE>
In the aggregate, we expect the contracted volumes to approximate the actual
volumes we would have received from our proved producing reserves over the
contract period had the Phillips transaction not been consummated.
To record the reduction in gas revenues for the first quarter of 1999
resulting from us receiving only 0.9 Bcf from the retained overriding
royalty interest from January 1, 1999 to March 31, 1999. The gas volumes
represent the first quarter's production retained through the VORI. Actual
revenues generated by the properties included in the Phillips transaction
totaling approximately $5.9 million on 3.4 Bcfe of production were removed.
Revenues generated by the VORI of approximately $1.5 million were included
based on the percentage of actual 2000 VORI production to estimated 2000
production from the properties, multiplied by the actual 1999 production
from the properties.
(4) To record interest income on the net cash proceeds from the Phillips
transaction in excess of the repurchase of $35 million principal amount of
the outstanding notes at 104% of their stated principal amount.
(5) To record the reduction in lease operating expenses pursuant to the Phillips
transaction.
29
<PAGE> 31
(6) To record the reduction in interest expense related to the repurchase of the
outstanding notes.
(7) To record the reduction in depreciation, depletion and amortization pursuant
to the Phillips transaction.
(8) The pro forma adjustment to interest expense includes the following:
<TABLE>
<S> <C>
7 7/8% Convertible Subordinated Notes....................... $(570)
8 1/2% Convertible Subordinated Debentures.................. (360)
-----
$(930)
=====
</TABLE>
(9) Reflects the conversion of 368,633 shares of preferred stock, at the
conversion rate of 1.5:1, into 552,950 shares of the Company's common stock,
after giving effect to the 1 for 10 reverse stock split.
30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a description of our business affairs. You should read it
in conjunction with the historical financial statements and the notes to those
statements, which are included in this prospectus.
GENERAL
Introduction. We are engaged in oil and natural gas exploration,
development, production and acquisition. Our 1998 operational activities were
focused primarily on:
- exploiting our north Louisiana properties, and
- exploration activities on our south Louisiana acreage.
In 1998, we drilled or participated in drilling:
- 47 gross (21.2 net) development wells, of which 46 gross (20.7 net) were
completed as producing wells, and
- 15 gross (5.8 net) exploratory wells, of which 8 gross (2.5 net) were
completed as producing wells.
Our most significant event was the drilling of the Harry S. Bourg #1
discovery well in Terrebonne Parish, Louisiana which added 21.4 bcfe of proved
reserves to our reserve base at year-end. We have a 50% working interest in this
well. In the first three months of 1999, we participated in drilling 2 gross
(0.5 net) wells, both of which were completed in the first quarter of 1999.
General Conditions of the Oil and Natural Gas Industry and Commodity
Prices. Through the first quarter of 1999, the prices of oil and natural gas
have fallen sharply. The decline in prices reflects the volatility of commodity
prices and the industry generally. As a result, we cannot predict future prices
of oil and natural gas. Although both oil and natural gas prices have recovered,
should prices decline, our results of operations and liquidity could be
negatively impacted. Our success is partially dependent on factors outside of
our control, including capital market conditions and highly volatile oil and
natural gas prices. Still, these factors directly affect our financial
condition. Due to recent industry conditions, we and others in the industry have
been required to:
- reconsider our capital expenditures budgets, which could negatively
impact production levels, and
- evaluate various financing and strategic alternatives.
Hedging Activities. To reduce exposure to downward price fluctuations on
our natural gas and crude oil production, we periodically use:
- forward sales contracts,
- natural gas and crude oil price swap agreements,
- natural gas basis swap agreements, and
- options.
We do not engage in speculative transactions.
During 1998, we used price and basis swap agreements. Price swap agreements
generally provide for us to receive or make counterparty payments on the
difference between a fixed price and a variable indexed price for natural gas.
Basis swap agreements generally provide for us to receive or make counterparty
payments on the difference between a variable indexed price and the price we
receive from the sale of natural gas production. Basis swap agreements are used
to hedge against unfavorable price movements in the relationship between the
variable indexed price and the price received for such production. We include
the gains and losses we realize from hedging activities in oil and gas revenues
and
31
<PAGE> 33
average sales prices in the period that the related production is sold. Our
hedging activities also cover the oil and gas production attributable to the
interest in such production of the public unitholders in our subsidiary
partnerships.
Through natural gas price swap agreements, we hedged:
- approximately 49% of our natural gas production for 1998, at an average
NYMEX quoted price of $2.31 per Mmbtu, and
- approximately 66% our natural gas production for the three month period
ended March 31, 1999, at an average NYMEX quoted price of $2.27 per
Mmbtu.
As of December 31, 1998:
- 5,400,000 Mmbtus of natural gas production for 1999 has been hedged by
natural gas price swap agreements at an average NYMEX quoted price of
$2.36 per Mmbtu before transaction and transportation costs,
- 16,380,000 Mmbtus of natural gas production for 1999 has been hedged by
natural gas basis swap agreements, and
- the unrealized gain on our existing hedging instruments for future
production months in 1999 approximated $2.5 million.
As of March 31, 1999:
- 5,630,000 Mmbtus of natural gas production for April through October 1999
has been hedged by natural gas price swap agreements at an average NYMEX
quoted price of $2.03 per Mmbtu before transaction and transportation
costs,
- 10,980,000 Mmbtus of natural gas production for April through September
1999 has been hedged by natural gas basis swap agreements, and
- the unrealized loss on our existing hedging instruments for the future
production months in 1999 approximated $1.4 million.
All numbers included above are before transaction and transportation costs.
Hedging activities increased revenues by approximately $3.5 million in 1998 and
$2.5 million in the first quarter of 1999, as compared to estimated revenues had
we not engaged in hedging activities.
The credit risk exposure from counterparty nonperformance on natural gas
forward sales contracts and derivative financial instruments is generally the
amount of unrealized gains under the contracts. We have not experienced
counterparty nonperformance on these agreements and do not anticipate any in
future periods.
32
<PAGE> 34
RESULTS OF OPERATIONS
The following table sets forth certain operating data regarding net
production, average sales prices, production expenses and revenues associated
with our oil and natural gas operations for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................. 102 82.8
Natural gas (Mmcf)........................................ 10,165 7,247
Natural gas equivalent (Mmcfe)............................ 10,777 7,744
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (Mbbls)................. $14.26 $11.63
Natural gas (Mmcf)........................................ 2.12 1.97
Natural gas equivalent (per Mcfe)......................... 2.13 1.97
COST PER MCFE:
Lifting costs............................................. $ 0.34 $ 0.59
Severance and ad valorem taxes............................ 0.12 0.10
General and administrative expenses....................... 0.18 0.18
Depreciation, depletion and amortization (oil and gas
activities)............................................ 1.00 1.20
Interest expense, excluding accretion and amortization.... 0.62 0.96
</TABLE>
Our oil and gas revenues were $15.5 million for the first quarter of 1999.
This represents a decrease of 33% compared to $23.0 million in the same period
of 1998. This decrease is a result of:
- decreased natural gas production (29%),
- decreased oil production (19%),
- lower natural gas prices (7%), and
- lower oil prices (18%).
Interest and other income increased from $0.02 million in the first quarter
of 1998 to $0.2 million in the first quarter of 1999 due to higher average cash
balances in the current period.
Production expenses for the first quarter of 1999 increased 8% to $5.3
million from $4.9 million in the same period last year. This increase is
primarily due to higher workover expenses on Gulf of Mexico properties,
partially offset by lower current period severance, and ad valorem taxes.
Lifting costs (production expenses less severance and ad valorem taxes) per
Mmcfe for the first quarter of 1999 increased 74% compared to the first quarter
of 1998. The increase in lifting costs is primarily due to:
- the higher workover expenses, and
- a decrease in production volumes.
Exploration expenses totaled $1.4 million in the first quarter of 1999 and
$2.1 million in the first period of 1998. This 33% decrease was due to lower dry
hole expenses of $0.7 million and lower seismic expenses of $0.3 million, both
of which were partially offset by higher lease rental expenses.
General and administrative ("G&A") expenses of $1.4 million in the first
quarter of 1999 decreased 26% compared to $1.9 million in the first quarter of
last year. On a unit basis, G&A expenses of $0.18 per Mcfe were level with the
corresponding period in 1998 because the lower G&A expenses were offset by a
decline in production volumes.
33
<PAGE> 35
Interest and other debt expenses of $8.7 million in the first quarter of
1999 increased 7% from $8.1 million in the first quarter of 1998. The increase
in interest expense resulted primarily from higher average debt levels during
the current period. In addition to our 1999 interest expense of $7.4 million, we
recorded non-cash charges in the first quarter of 1999 of:
- $0.5 million for amortization of debt issuance costs,
- $0.3 million for accretion of note discount, and
- $0.5 million for accretion of debt valuation discount.
Depreciation, depletion and amortization ("DD&A") expense decreased 8% from
$10.9 million in the first quarter of 1998 to $10.0 million in the current
period. This decrease was primarily a result of lower first quarter 1999
production partially offset by an increase in the units-of-production DD&A rate
for oil and gas activities. This units-of-production DD&A rate increased from
$1.00 per Mcfe in the first quarter of 1998 to $1.20 per Mcfe in the current
period. This increase in rate was primarily a result of negative reserve
revisions at year end 1998.
We recognized a net loss of $11 million in the first quarter of 1999 and a
net loss of $4.8 million in the same period last year. The reasons for the
decline in earnings are described in the previous discussion.
The results of operations for the quarter ended March 31, 1999 are not
necessarily indicative of results to be expected for the full year.
Years Ended December 31, 1998 and 1997. Our oil and gas revenues of $79.2
million for 1998 increased 4% compared to $75.9 million in 1997 primarily as a
result of an increase in gas production 18%, which was partially offset by lower
oil prices (32%) and lower gas prices (8%). The increase in gas production was
primarily due to the acquisition of properties from SCANA Petroleum Resources,
Inc. ("SPR") in December 1997, and drilling activities in north Louisiana.
Interest and other income increased from $0.3 million in 1997 to $0.5
million in 1998 primarily due to business interruption insurance proceeds
related to hurricane disruptions on offshore properties.
Production expenses for 1998 increased 81% to $19.9 million from $11.0
million in the prior year, resulting primarily from the SPR properties acquired
during the fourth quarter of 1997 and higher current period workover expenses.
Higher-cost production from the Gulf of Mexico properties acquired in the SPR
acquisition contributed to a 78% increase in lifting costs (production expenses
less ad valorem and severance taxes) per Mcfe to $0.41 in 1998 as compared to
$0.23 in 1997.
Exploration expenses increased 122% from $5.4 million in 1997 to $12.0
million in 1998 due to increased dry hole, seismic and unproved property
abandonment expenses and higher overhead allocated to exploration activities.
General and administrative expenses of $7.1 million in 1998 increased 3%
compared to $6.9 million last year. On a unit of production basis, general and
administrative expenses were $0.19 per Mcfe in 1998 compared to $0.22 per Mcfe
in 1997.
Interest and other debt expenses of $33.3 million in 1998 increased 33%
from $25.1 million in 1997. The increase in interest expense resulted primarily
from higher average debt levels during the current period due to increased
borrowings under our credit facility and issuance of $30 million principal
amount of 10 3/8% Senior Subordinated Notes due 2006. In addition to our 1998
interest expense of $28.1 million, we recorded non-cash charges in 1998 of:
- $2.2 million for amortization of debt issuance costs,
- $1.0 million for accretion of note discount, and
- $2.0 million for accretion of debt valuation discount.
34
<PAGE> 36
Depreciation, depletion and amortization ("DD&A") expense increased 49%
from $25.9 million in 1997 to $38.6 million in 1998. This increase was a result
of higher 1998 production levels and an increase in the units-of-production DD&A
rate for oil and gas activities from $0.80 per Mcfe in 1997 to $1.01 in 1998.
In 1998, under Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", we recognized noncash impairment charges of $25.7 million
against the carrying values of our proved and unproved oil and gas properties,
aggregating $21.6 million and $4.1 million, respectively, for the year ended
December 31, 1998 (see "Property Impairment under SFAS No. 121" in the "Notes to
Consolidated Financial Statements" included in this prospectus).
We recognized a net loss of $(57.0) million in 1998 and net income of $2.0
million in the prior year. The reasons for the earnings changes are described in
this discussion of the years ended December 31, 1998 and 1997.
Years Ended December 31, 1997 and 1996. Our oil and gas revenues of $75.9
million for 1997 increased 25% compared to $60.9 million in 1996. This increase
occurred primarily as a result of an increase in gas production (29%), which was
partially offset by lower oil prices (13%) and lower gas prices (1%). The
increase in gas production is primarily due to our drilling activities in north
Louisiana and the addition of one month of production from the SPR properties,
partially offset by the sale of one-half of our interest in 23 wells and related
facilities in the Houma Embayment in Terrebonne Parish, Louisiana in the fourth
quarter of 1996.
Interest and other income decreased 79% from $1.4 million in 1996 to $0.3
million in 1997 primarily due to higher 1996 interest income resulting from:
- invested funds received from the sale of common stock in February 1996,
and
- gains on the sale of assets recognized in 1996.
Production expenses for 1997 increased 3% to $11.0 million from $10.7
million in the prior year, primarily reflecting higher overall production
levels. On a unit basis, lifting costs (production expenses less ad valorem and
severance taxes) decreased to $0.23 per Mcfe in 1997 compared to $0.31 per Mcfe
in 1996. This decrease reflects lower average costs on north Louisiana
production, which is increasing in proportion to other higher cost production.
Exploration expenses remained constant from 1996 to 1997 at $5.4 million.
Increased dry hole expenses were offset by a reduction in lease rental expense
reflecting the joint exploration agreement effective December 1996 in south
Louisiana with The Williams Companies, Inc.
General and administrative expenses of $6.9 million in 1997 decreased 23%
compared to $9.0 million in 1996, reflecting efficiencies obtained in the
realignment of the workforce. This decrease was somewhat offset by a reduction
in 1997 in the level of general and administrative expenses either being
capitalized or allocated to exploration expense. On a unit basis, general and
administrative expenses were $0.22 per Mcfe in 1997 compared to $0.36 per Mcfe
in 1996.
Interest and other debt expenses of $25.1 million in 1997 increased 3% from
$24.4 million in 1996. The increase in interest expense resulted primarily from:
- higher average debt levels during the current period, and
- the payment of interest associated with the settlement of a lawsuit.
These were partially offset by:
- lower interest rates under the 10 3/8% Senior Subordinated Notes than
under the 13 1/2% Senior Notes retired in October 1996, and
35
<PAGE> 37
- lower debt amortization expenses as a result of the refinancing of the
13 1/2% Senior Notes and the bank credit facility. See "-- Liquidity and
Capital Resources".
In addition to our 1997 interest expense of $20.9 million, we recorded non-cash
charges in 1997 of:
- $1.3 million for amortization of debt issuance costs,
- $0.9 million for accretion of note discount, and
- $2.0 million for accretion of debt valuation discount.
Restructuring expense in 1996 was $4.3 million. There was no restructuring
expense in 1997.
DD&A expense increased 27% from $20.4 million in 1996 to $25.9 million in
1997, primarily as a result of higher 1997 production levels. The
units-of-production DD&A rate for oil and gas activities was $0.80 per Mcfe in
both 1996 and 1997.
We recognized net income of $2.0 million in 1997 and a net loss before
extraordinary item of $(11.9) million in the prior year. The reasons for the
earnings improvement are described in this discussion of the years ended
December 31, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
General. During 1998 and through the first quarter of 1999, the oil and gas
industry experienced a worldwide excess of supply over demand for oil and
natural gas resulting in sharply reduced prices. As a result, many companies in
the oil and gas industry, including us, experienced reduced profitability and
cash flows which, in turn, created significant liquidity problems. To address
these liquidity issues, we have taken the measures discussed in the following
paragraphs.
In April 1999, we entered into an Exploration and Development Agreement
with Phillips relating to certain of our interests in the Bryceland, West
Bryceland and Sailes fields in north Louisiana. Pursuant to the agreement, we:
- sold approximately 114.4 Bcfe of proved reserves, including approximately
62.6 Bcfe of proved undeveloped reserves (based on January 1, 1999
reserve estimates),
- received an $83 million cash payment, subject to certain post-closing
adjustments,
- retained a 42 Bcf, 8-year volumetric overriding royalty interest and a 1%
override on the excess of production above that royalty interest, and
- retained 25% of our working interest in the Cotton Valley formation.
In addition, Phillips will, at its risk and expense, operate, develop, exploit
and explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The effective date of the
transaction was May 1, 1999, and it closed on May 17, 1999. We anticipate
recognition of a gain of approximately $25.5 million in the second quarter of
1999. We have not completed our analysis of the specific costs of the oil and
gas properties and related accumulated depreciation, depletion and amortization
being sold. Therefore, the gain is subject to further adjustment.
In April 1999, we negotiated a private offering of the outstanding notes.
The notes are:
- secured by a first lien on substantially all of our proved oil and
natural gas properties remaining after the sale to Phillips, and
- guaranteed by three of our wholly owned subsidiaries.
With the consummation of the Phillips transaction, we were obligated to
repurchase $35 million principal amount of the outstanding notes at a repurchase
price equal to 104% of their principal amount. We also paid accrued and unpaid
interest to the date of the repurchase. Such repurchase closed on June 30, 1999.
36
<PAGE> 38
Also in April 1999, we began an offer to purchase the outstanding principal
amounts of our 7 7/8% Convertible Subordinated Notes due December 15, 1999 and
our 8 1/2% Convertible Subordinated Debentures due April 1, 2000 at a price
equal to $590 per $1,000 principal amount. On May 17, 1999, we funded the
repurchase of $46.1 million aggregate principal amount of these securities.
We used the net proceeds from the combination of these transactions and
cash on hand to:
- repay all borrowings outstanding under our credit facility of $115.5
million plus accrued interest,
- fund cash collateral for a $1.5 million letter of credit, which letter of
credit was subsequently increased to $7.5 million,
- fund the repurchase of $46.1 million aggregate principal amount of 7 7/8%
Convertible Subordinated Notes due December 15, 1999 and our 8 1/2%
Convertible Subordinated Debentures due April 1, 2000 under the offer to
purchase at a total cost of approximately $28.3 million, and
- repurchase $35 million principal amount of the notes then outstanding at
104% of their principal amount.
We will use any remaining net proceeds and cash flow from operations for
general corporate purposes.
We will recognize an extraordinary gain of approximately $11.0 million in
the second quarter of 1999 related to these repurchases and refinancings.
On June 28, 1999, the Company began an offer to exchange 15 shares of its
common stock for each outstanding share of its $2.625 Convertible Exchangeable
Preferred Stock. This offer expired at 12:01 a.m. New York City Time on Tuesday,
July 27, 1999. Pursuant to the offer, 368,633 shares, representing approximately
21% of the shares of preferred stock outstanding prior to the offer to exchange,
were tendered.
The Company effected a 1 for 10 reverse stock split of its common stock on
July 30, 1999. As a result of the reverse split and the share exchange described
above, the total number of outstanding shares of its common stock was reduced
from approximately 132.1 million shares to approximately 13.2 million shares.
While industry conditions cannot be predicted with certainty and are
dependent upon a number of commodity and economic factors which are beyond our
control, we believe that the cash on hand subsequent to the consummation of the
above transactions and the recent increase in oil and natural gas prices, if
continued, will sustain our operations over the short-term. However, we will
continue to have significant debt outstanding and limited ability to incur
further indebtedness, which, combined with industry conditions beyond our
control, may negatively affect our financial condition, results of operations
and cash flows.
Liquidity. Net cash provided by operating activities, before working
capital adjustments, during the first three months of 1999 aggregated $1.6
million. Funds used in investing activities were comprised of capital
expenditures of $5.8 million. As a result of these activities, cash and cash
equivalents decreased from $8.4 million at December 31, 1998 to $6.7 million as
of March 31, 1999. As of March 31, 1999, we had a working capital deficit of
$42.2 million, compared to a working capital deficit of $37.4 million at the end
of 1998.
Capital Resources. At March 31, 1999, $111.5 million of borrowings and $1.5
million of letters of credit were outstanding under our credit facility. In
April 1999, we borrowed an additional $4 million under this credit facility,
raising our total outstanding borrowings to $115.5 million as of April 30, 1999.
Our typical monthly cash flow cycle is such that we usually receive a
substantial portion of our proceeds from operations near the end of each month.
Accordingly, outstanding balances under the credit facility may be higher on any
given day during the month than at the end of the month.
After we paid all amounts outstanding under the credit facility, the credit
facility was terminated. We are not likely to have access to a revolving credit
facility to supplement our cash needs. The terms of the
37
<PAGE> 39
notes and subordinated obligations significantly limit our ability to incur
additional funded indebtedness. Accordingly, we anticipate that we will be
required to meet our obligations during the remainder of 1999 from:
- the net proceeds of the transactions described above,
- cash on hand, and
- cash flows from operations.
While we anticipate that we will be able to meet our obligations in 1999, we
cannot assure you that we will be able to do so.
We had $327.9 million principal amount of debt outstanding as of March 31,
1999 ($321 million recorded on the balance sheet), requiring $29.8 million in
annual cash interest payments. On a pro forma basis at March 31, 1999, we had
$270 million of debt outstanding ($265 million per balance sheet presentation),
which would require $32 million of annual cash interest payments. In June 1999,
the Company began an offer to exchange 15 shares of its common stock for each
outstanding share of its $2.625 Convertible Exchangeable Preferred Stock. This
offer expired at 12:01 a.m. New York City Time on Tuesday, July 27, 1999.
Approximately 368,633 shares, representing approximately 21% of the shares of
preferred stock outstanding prior to the offer to exchange, were tendered in the
offer. Our outstanding $2.625 Convertible Exchangeable Preferred Stock is
cumulative, requiring dividends to accumulate, currently at the rate of $3.6
million annually. The preferred stock carries liquidation preferences over the
Company's common stock totaling $49.8 million at March 31, 1999, including
dividend arrearages. After giving effect to the exchange of 368,633 preferred
shares for common stock, on August 1, 1999, the preferred stock carries
liquidation preferences over the Company's common stock totaling $40.4 million,
including dividend arrearages. We have not declared the quarterly dividend of
$0.65625 per preferred share for February 1, 1998, May 1, 1998, August 1, 1998,
November 1, 1998, February 1, 1999, May 1, 1999 and August 1, 1999, aggregating
approximately $6.3 million, covering seven quarters. Further dividends are
restricted under the indentures governing our 10 3/8% Senior Subordinated Notes
and the new notes offered in this prospectus. If we do not pay dividends on the
preferred stock for a period of six quarters, whether or not consecutive, the
holders of the preferred stock, as a group, have the right to elect two
additional directors to our Board of Directors.
Capital Commitments. Our 1999 capital expenditure budget provides for:
- $10 million to be expended on development drilling primarily in north and
south Louisiana, and
- $5 million to be expended on exploratory prospects primarily in south
Louisiana, the shallow waters of the Gulf of Mexico, Texas and New
Mexico.
In the first three months of 1999, we participated in drilling 2 gross (.5 net)
wells, both of which wells were completed in the first quarter of 1999. As of
the end of the first quarter of 1999, we were participating in the drilling of 3
gross (.7 net) wells.
Year 2000. We have begun reviews and evaluations in response to Year 2000
issues. These issues involve the potential disruption to systems, processes, and
business practices that may occur if system hardware and software utilized by
us, our vendors, and our customers are unable to process year 2000 data.
We have worked closely with our information systems and technology vendors
to install updated software, where appropriate, that will be Year 2000
compliant. All of the critical Year 2000 internal systems issues have been
tested and corrected, where necessary.
We have identified those vendors and others that we believe provide
material services or are vital to our business. Discussions with these companies
to determine their Year 2000 readiness have begun and are expected to be
completed in the third quarter 1999.
38
<PAGE> 40
The cost of reviewing and implementing corrective measures for Year 2000
issues to date has not been material to us and has been limited to our use and
the use of vendor personnel for review and implementation of corrective
measures. We do not expect the remainder of the Year 2000 review and corrective
measures to involve significant costs.
Based on assessments to date and compliance plans in progress, nothing has
come to the attention of management to cause it to believe that Year 2000
issues, including the cost of implementing corrective measures, will have an
adverse material impact on our business or operations. Nevertheless, as
indicated above, achieving Year 2000 readiness is subject to risk and
uncertainties, especially regarding third parties, and there can be no assurance
we will not be negatively affected by Year 2000 issues.
The foregoing statements are intended to be and are hereby designated "Year
2000 Readiness Disclosures" within the meaning of the Year 2000 Information and
Readiness Act.
Inflation and Changing Prices. Oil and natural gas prices, as with most
commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation. The following table
shows the changes in the average oil and natural gas prices we received during
the periods indicated.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
OIL PRICE GAS PRICE
($/BBL) ($/MCF)(1)
--------- ----------
<S> <C> <C>
YEAR ENDED:
December 31, 1998....................................... $13.09 $2.09
December 31, 1997....................................... 19.34 2.27
December 31, 1996....................................... 22.11 2.30
</TABLE>
- ---------------
(1) Includes the effects of our hedging activities.
39
<PAGE> 41
MARKET RISK DISCLOSURE
We are exposed to market risk from changes in interest rates and commodity
prices. We have used our credit facility and use our senior and subordinated
debt instruments to finance a significant portion of our operations (see Note
1). Our exposure to market risk for interest rates was subject to change related
to our credit facility variable rate debt (see Note 1). In the normal course of
business we enter into hedging transactions, including natural gas and crude oil
price and basis swap agreements, to mitigate our exposure to commodity price
movements, but not for trading or speculative purposes. In the first three
months of 1999, we used price and basis swap agreements to reduce exposure to
downward price fluctuations for our natural gas production. For debt obligations
the table below presents principal cash flows and weighted average interest
rates by year of maturity. For natural gas and crude oil price and basis swap
agreements, the table presents notional amounts in Mmbtu's and weighted average
prices for contracts in place at March 31, 1999. The information presented below
should be read in conjunction with Note 4 and Note 10 to the Consolidated
Financial Statements included in this prospectus. Amounts below are in thousands
unless otherwise indicated.
<TABLE>
<CAPTION>
MATURITY DATE
------------------------------------------------------- FAIR VALUE
DEBT (DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 3/31/99
- --------------------------- ----------- -------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable:
Credit Facility 7.03%(1)
(Maturity)............ $111,500 $111,500 $111,500
Fixed:
13.50% (Maturity)....... $ 435 435 435
7.88% (Maturity)........ 34,147 34,147 20,147
8.50% (Maturity)........ 26,856 26,856 15,845
10.38% (Maturity)....... $155,000 155,000 97,650
----------- -------- -------- -------- -------- -------- -------- --------
Total Maturity.... $ 34,582 $138,356 $155,000 $327,938 $245,577
=========== ======== ======== ======== ======== ======== ======== ========
Blended weighted average
interest rate........... 7.95% 8.5% 10.38%
COMMODITY PRICE DERIVATIVES
Price swaps:
Notional amounts
(Mmbtu's)............. 5,630,000
Weighted average price... $ 2.03
Fair value at
3/31/99(2)............ $ (1,050)
Basis swaps:
Notional amounts
(Mmbtu's)............. 10,980,000
Margin differential(3)... $ (0.03)
Fair value at
3/31/99(2)............ $ (335)
</TABLE>
- ---------------
(1) Reflects the weighted average interest rate on borrowings outstanding at
March 31, 1999.
(2) Represents estimated amounts to settle the contracts at March 31, 1999.
(3) Estimated weighted average margin differential at March 31, 1999.
40
<PAGE> 42
DESCRIPTION OF OUR BUSINESS AND PROPERTIES
THE COMPANY
We are engaged in the development, exploration, acquisition and production
of oil and natural gas properties, primarily in Louisiana and the shallow waters
of the Gulf of Mexico. Our activities have historically been concentrated on:
- lower-risk development drilling in north Louisiana, and
- higher impact exploratory drilling in south Louisiana.
As of January 1, 1999:
- 74% of our estimated proved reserves were located in north Louisiana (59%
after adjusting for the Phillips transaction),
- we had proved reserves of 315 Bcfe (201 bcfe after adjusting for the
Phillips transaction),
- we had a PV-10 Value of $234 million, ($178 million after adjusting for
the Phillips transaction),
- we held an interest in:
- 174,556 gross (81,054 net) developed acres,
- 294,807 gross (90,703 net) undeveloped acres, and
- 584 gross (224.5 net) producing wells, and
- approximately 90% of our reserves were natural gas and 64% were proved
developed (85% and 74%, respectively, after adjusting for the Phillips
transaction).
For 1998, we produced 37.8 Bcfe, and spent $57 million in capital
expenditures, approximately 55% of which was spent on development activities and
acquisitions.
We continue to experience development and exploration success. In 1998, we
achieved a 98% success rate on development activities and an overall success
rate of 87% on the drilling of 62 total wells. We expect to spend approximately
$15 million on lower-risk drilling in 1999, substantially all of which is
discretionary.
In April 1999, we entered into an exploration and development agreement
with Phillips relating to our interests in the Bryceland, West Bryceland and
Sailes fields in north Louisiana. As a result of this transaction, we:
- sold 114.4 Bcfe of proved reserves, including 62.6 Bcfe of proved
undeveloped reserves,
- received an $83 million cash payment, subject to certain post-closing
adjustments,
- retained a 42 Bcf, 8-year volumetric overriding royalty interest and a 1%
override on the excess production above that royalty interest, and
- retained 25% of our working interest in the Cotton Valley formation.
In addition, Phillips will at its risk and expense, operate, develop, exploit
and explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The effective date of the
transaction was May 1, 1999, and it closed on May 17, 1999. Following the
closing of the Phillips transaction, approximately 85% of our reserves are
natural gas and 74% are proved developed.
In April 1999, we negotiated a private offering of $135 million principal
amount of the outstanding notes. As required pursuant to the terms of the
indenture governing the notes, we repurchased $35 million principal amount of
the notes then outstanding at a repurchase price equal to 104% of their
principal amount. We also paid accrued and unpaid interest to the date of the
repurchase. The repurchase closed on June 30, 1999.
Also in April 1999, we began an offer to repurchase the outstanding
principal amounts of our 7 7/8% Convertible Subordinated Notes due December 15,
1999 and our 8 1/2% Convertible Subordinated
41
<PAGE> 43
Debentures due April 1, 2000 at a price equal to $590 per $1,000 principal
amount. On May 17, 1999, we funded the repurchase of $46.1 million aggregate
principal amount of these securities.
We used the net proceeds from the combination of these transactions and
cash on hand to:
- repay all borrowings outstanding under our credit facility of $115.5
million plus accrued interest,
- fund cash collateral for a $1.5 million letter of credit which was
subsequently increased to $7.5 million,
- fund the repurchase of $46.1 million aggregate principal amount of our
7 7/8% Convertible Subordinated Notes due December 15, 1999 and our
8 1/2% Convertible Subordinated Debentures due April 1, 2000 under the
offer to purchase at a total cost of approximately $28.3 million, and
- repurchase the $35 million principal amount of the outstanding notes at
104% of their principal amount.
We will use any remaining net proceeds and cash flow from operations for
general corporate purposes.
We will recognize an extraordinary gain of approximately $11.0 million in
the second quarter of 1999 related to these repurchases and refinancings.
On June 28, 1999, the Company began an offer to exchange 15 shares of its
common stock for each outstanding share of its $2.625 Convertible Exchangeable
Preferred Stock. This offer expired at 12:01 a.m. New York City Time on Tuesday,
July 27, 1999. Pursuant to the offer, 368,633 shares, representing approximately
21% of the shares of preferred stock outstanding prior to the offer to exchange,
were tendered in the offer.
The Company effected a 1 for 10 reverse stock split of its common stock on
July 30, 1999. As a result of the reverse split and the share exchange described
above, the total number of outstanding shares of its common stock was reduced
from approximately 132.1 million to approximately 13.2 million.
Finally, effective July 30, 1999, the Company changed its name to Contour
Energy Co. and its Nasdaq ticker symbol to CONCC.
COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths.
Balanced Portfolio of Drilling Opportunities. We hold a balanced portfolio
of lower-risk development properties and higher-impact exploratory prospects.
Our development properties and production attributable to the volumetric
overriding royalty interest ("VORI") retained in the Phillips transaction
provide us with cash flow to help support our operations and capital expenditure
budget. Our exploratory prospects offer the potential for larger reserves and
greater production.
Operational Efficiencies. Substantially all of our proved reserves and a
majority of our operating activities are concentrated in Louisiana and in the
shallow waters of the Gulf of Mexico. We believe that this geographic focus has
enabled our operating personnel to develop expertise by concentrating on areas
with similar operating and technical characteristics. Additionally, the
concentration of properties we operate enables us to achieve cost and
operational efficiencies.
Long-Lived Proved Reserves. Our proved reserves in north Louisiana (which
currently constitute 74% of our estimated proved reserves) are long-lived and
support cash flow through their low lease operating expenses and development
costs. We believe the relatively long lives and low costs of our north Louisiana
wells plus the cash flows provided by the VORI provide a solid base from which
to pursue our acquisition and exploration strategy. As of January 1, 1999:
- our reserves to production ratio in north Louisiana was approximately
12.0:1 (11.7:1 as adjusted for the Phillips transaction), and
42
<PAGE> 44
- our overall reserves to production ratio was approximately 10.2:1 (8.7:1
as adjusted for the Phillips transaction).
High Operating Margins. Our oil and natural gas reserves are located close
to pipeline transportation and key market locations. Therefore, we are generally
able to command more favorable wellhead prices. Production from our south
Louisiana properties generally is sold at a premium to NYMEX prices because it
has a higher BTU content. In addition, production generated by the VORI is not
burdened by development or lease operating costs. Our production and general and
administrative expenses for 1998 were $0.53 and $0.19 per Mcfe, respectively,
resulting in a cash operating margin of $1.38 per Mcfe.
Effective Use of Technology. We apply advanced technology to lower the
risks and costs of exploration and development activities. We constantly
re-evaluate and refine our 3-D seismic databases to improve drilling results.
These databases cover over 1,300 square miles, including all presently
identified exploration prospects. We have invested in computer-aided exploration
and development hardware and software. Additionally, we have an experienced
technical staff, including seven engineers, five geologists and three
geophysicists.
Experienced and Proven Management Team. Our senior management team has been
together since February 1996 and has extensive experience in the oil and natural
gas industry. In addition, we have adopted employee incentive programs designed
to align the interests of management and investors.
BUSINESS STRATEGY
Our strategy is to increase reserves, production and cash flow in a
cost-effective manner. We plan to implement this strategy through a program of
balanced development and exploration activities in our current areas of
operation.
Improve Liquidity. The sale of the outstanding notes and the Phillips
transaction have provided us with additional liquidity. We have historically
funded our operations primarily through cash flow from operations and
borrowings. As a result of sale of the outstanding notes, our ability to incur
additional indebtedness is substantially limited. Therefore, in the current
environment of depressed oil and natural gas prices, we will rely on the
following to fund oil and natural gas development and exploitation activities
and acquisitions:
- cash on hand,
- cash flow from operations, and
- asset sales.
Complete Strategic Transactions. We plan to complete sales of certain oil
and natural gas assets and similar transactions to provide additional liquidity
for redeployment in development and exploration projects. We expect these
transactions will increase cash flow, proved reserves and production. Consistent
with this strategy, we entered into the Phillips transaction.
Focus Capital Expenditures. Following this exchange offer and to the extent
capital is available, we intend to focus our capital expenditures on:
- the development of our existing south Louisiana properties,
- the continued development of our north Louisiana properties, and
- exploratory drilling.
By focusing on development projects in our core areas of operation, we expect to
increase our current levels of production with reduced levels of capital
expenditures.
43
<PAGE> 45
OUR HISTORY
The Consolidation. We were formed in 1994 to consolidate the equity
ownership (the "Consolidation") of Kelley Oil & Gas Partners, Ltd. ("Kelley
Partners") and Kelley Oil Corporation. Before the Consolidation in 1995, Kelley
Partners and Kelley Oil's developmental drilling partnership subsidiaries
("DDPs") jointly conducted drilling activities. Kelley Oil was the managing
general partner of Kelley Partners. Historically, Kelley Oil participated
proportionately in these operations. Kelley Partners retained one-third of its
working interest in each prospect and assigned drilling rights for the balance
of its interest to a DDP. In addition to serving as managing general partner of
each DDP, Kelley Oil purchased for its own investment account all units in DDPs
that were not already subscribed to by other investors in Kelley Partners. In
the Consolidation, we acquired Kelley Oil's interests in the remaining DDPs
sponsored during 1994 and 1992. These interests aggregated 92.2% and 84.3%,
respectively. The Consolidation was completed on February 7, 1995 following
approval by investors in Kelley Partners and Kelley Oil.
In the Consolidation, the outstanding capital stock of Kelley Oil and units
in Kelley Partners held by investors other than Kelley Oil and its subsidiaries
("Public Unitholders") were converted into:
- 4.4 million shares of the Company's common stock,
- 2.4 million shares of the Company's $2.625 convertible exchangeable
preferred stock, and
- 2.2 million shares of cumulative convertible preferred stock held by the
Company's Employee Stock Ownership Plan ("ESOP preferred stock").
As a result of the Consolidation, Kelley Oil became our wholly owned subsidiary,
and Kelley Partners became a 99.99%-owned subsidiary partnership. For financial
accounting purposes, we treated the Consolidation as a purchase of the Public
Unitholders' interests in Kelley Partners. In 1996, Kelley Partners was merged
into the Company and each of the then outstanding shares of ESOP preferred stock
was redeemed for one share of the Company's common stock.
Effective July 30, 1999, the Company changed its name to Contour Energy Co.
Contour Transaction. In January 1996, we entered into financing and related
agreements with Contour Production Company L.L.C. Pursuant to these agreements,
on February 15, 1996, Contour Production Company purchased:
- 4.8 million newly issued shares of the Company's common stock for $48.0
million, and
- an option to purchase an additional 2.7 million shares of the Company's
common stock for $27.0 million.
Contour Production Company exercised its option on December 1, 1997. In February
1996, in connection with the first stage of Contour Production Company's
investment in the Company, John F. Bookout was appointed Chairman, President and
Chief Executive Officer of the Company, and certain other experienced oil
industry executives were appointed to senior management positions within the
Company.
In connection with the Contour transaction, the Company also:
- amended its Certificate of Incorporation to increase its authorized
common stock from 10 million shares to 20 million shares,
- entered into employment agreements with John F. Bookout and other new
executives elected by its Board of Directors,
- reduced the size of its Board to seven members,
- reconstituted the Board with three continuing directors and four
designees of Contour Production Company, and
- replaced its existing lines of credit.
44
<PAGE> 46
Acquisition of Oil and Gas Properties. Effective as of December 1, 1997,
the Company purchased substantially all of the assets of SCANA Petroleum
Resources, Inc. for approximately $110 million. The assets acquired include:
- interests in proved oil and natural gas reserves primarily located in
Louisiana, the shallow waters of the Gulf of Mexico, and east Texas, and
- exploratory leasehold acreage in those areas.
We financed this acquisition with $27 million of proceeds received upon the
exercise of the Contour Production Company option and borrowings under our
credit facility. In July 1998, we sold, for $17.4 million, our interests in the
Waskom field (located in east Texas) acquired from SPR.
OPERATIONS AND PROPERTIES
Operation Activities. Our production is derived primarily from:
- two fields in the Vacherie Salt Dome region of north Louisiana,
- south Louisiana, and
- the shallow waters of the Gulf of Mexico.
Development Activities. During 1998, we continued development drilling
activities within our existing properties in the Vacherie Salt Dome region of
north Louisiana. At December 31, 1998, approximately 71% of our proved reserves
were located on 46,460 gross (21,514 net) acres in this region. In north
Louisiana, we drilled or participated in drilling 44 gross (21.1 net)
development wells. Of these 44 wells, 43 gross (20.7 net) were completed as
producing wells. At year-end 1998, 156 locations included in the Gruy reserve
report were defined as proved undeveloped locations totaling 114.6 Bcfe of
reserves.
As a part of the Phillips transaction, we sold approximately 114.4 bcfe of
proved reserves, including approximately 62.6 bcfe of proved undeveloped
reserves (based on January 1, 1999 reserve estimates). As a result, our
remaining reserves (201 bcfe) are 74% proved developed, including those
associated with the VORI.
Exploration Activities. We focus our exploration activities primarily on
our existing leaseholdings in Terrebonne and LaFourche Parishes, Louisiana. We
believe these leaseholdings have, with higher risk, the potential for larger
reserve and production increases than development activity in north Louisiana.
Additional exploration activities include our existing blocks located in the
shallow waters of the Gulf of Mexico and properties located in the Permian Basin
in west Texas. We have approximately 273,460 gross undeveloped acres of
exploratory properties principally in these regions on which we have identified
over 30 prospective exploratory well sites. However, the number, type and timing
of these proposed wells is subject to continued revision as a result of many
factors, including:
- test and drilling results on these properties and others,
- the price of oil and natural gas,
- availability of capital funds and drilling rigs,
- weather, and
- general economic factors.
See "Caution as to Forward-Looking Statements" on page 21 and "Risk Factors"
beginning on page 12.
45
<PAGE> 47
We are utilizing sophisticated technologies to identify exploration
prospects. We are also utilizing advanced geophysical techniques to continue to
develop and refine interpretations of our 3-D seismic database, which covers:
- 600 square miles, a major portion of our existing leaseholdings in
Terrebonne and LaFourche Parishes, in south Louisiana,
- 50 square miles offshore Texas, and
- 600 square miles of our Permian Basin exploratory prospects.
In 1998, we drilled 15 gross (5.8 net) exploratory wells, of which 8 gross
(2.5 net) were completed as producing wells. Included in these amounts are 3
gross (0.8 net) exploratory wells that were drilled and completed as producing
wells on acreage acquired in the SPR acquisition.
Description of Properties. Our properties are located in:
- Louisiana,
- the Gulf of Mexico,
- Texas,
- New Mexico, and
- Arkansas.
As of January 1, 1999, we owned interests in a total of 584 gross (224.5
net) producing wells, accounting for 74% of our current production. We operated
298 of these wells. We also had leaseholdings covering 174,556 gross (81,054
net) developed acres and 294,807 gross (90,703 net) undeveloped acres. In May,
we conveyed interests in 284 wells (127 net) to Phillips.
As of March 31, 1999, after adjusting for the Phillips transaction:
- approximately 85% of our proved oil and natural gas reserves was natural
gas on an energy content basis, and
- the reserves to production ratio for these properties, based on first
quarter 1999 production was estimated to be 8.7.
Significant Properties. Our natural gas properties in north Louisiana are
located primarily in the Sibley and Ada fields located in the Webster and
Bienville Parishes.
Our properties in south Louisiana are concentrated in these fields in Terrebonne
Parish:
- Orange Grove/Humphreys,
- Lirette,
- Lake Pagie,
- Ouiski Bayou, and
- Bayou Sauveur (Bourg prospect).
Production is primarily from the Hosston (north Louisiana) and Miocene
(south Louisiana) formations. Our other properties are located primarily in the
shallow waters of the Gulf of Mexico, south Louisiana and Texas. Substantially
all of our oil and natural gas properties are pledged to secure the notes. The
following table sets forth information as of the dates indicated regarding our
interests by major
46
<PAGE> 48
geographic region. See "-- Estimated Proved Reserves -- Uncertainties in
Estimating Reserves and Future Net Cash Flows" on page 49.
<TABLE>
<CAPTION>
PROVED RESERVES AT JANUARY 1, 1999
----------------------------------------------- PRODUCTION
PRESENT VALUE FOR THE
OF ESTIMATED YEAR ENDED DECEMBER 31, 1998
FUTURE NET -----------------------------
GAS CASH GAS
OIL GAS EQUIVALENT FLOWS(1)(2) OIL GAS EQUIVALENT
(MBBLS) (MMCF) (MMCFE) (IN THOUSANDS) (MBBLS) (MMCF) (MMCFE)
------- ------- ---------- -------------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
North Louisiana................... 604 229,565 233,189 $169,938 93 24,293 24,851
South Louisiana................... 3,735 26,555 48,965 40,369 113 4,798 5,476
Offshore.......................... 475 23,976 26,826 18,955 52 5,584 5,896
Other............................. 480 3,463 6,343 5,022 117 882 1,584
----- ------- ------- -------- --- ------ ------
Totals.................... 5,294 283,559 315,323 $234,284 375 35,557 37,807
===== ======= ======= ======== === ====== ======
</TABLE>
- ---------------
(1) The estimates were prepared in accordance with SEC regulations using market
or contract prices at the end of each reported period. Prices and operating
and development costs are held constant over the estimated life of the
reserves. A discount factor of 10% was used to reflect the timing of future
net cash flow. See "-- Estimated Proved Reserves -- Uncertainties in
Estimating Reserves and Future Net Cash Flows" and Note 12 to the financial
statements included in this prospectus.
(2) Before the effects of income taxes. See "Glossary of Industry Terms".
In April 1999, we entered into an exploration and development agreement
with Phillips relating to certain of our proved behind pipe and undeveloped
interests in the Bryceland, West Bryceland and Sailes fields in north Louisiana.
Pursuant to the agreement, we:
- sold approximately 114.4 Bcfe of proved reserves, including approximately
62.6 Bcfe of proved undeveloped reserves (based on January 1, 1999
reserve estimates),
- received an $83 million cash payment, subject to certain post-closing
adjustments,
- retained a 42 Bcf, 8-year volumetric overriding royalty interest and a 1%
override on the excess production above that royalty interest, and
- retained 25% of our working interest in the Cotton Valley formation.
In addition, Phillips will at its risk and expense, operate, develop, exploit
and explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The effective date of the
transaction was May 1, 1999, and it closed on May 17, 1999. Following the
closing of the Phillips transaction, approximately 85% of our reserves are
natural gas and 74% are proved developed.
Additional information regarding these regions is set forth below. Unless
otherwise noted, acreage and well information is provided as of December 31,
1998 and reserve information is provided as of January 1, 1999.
North Louisiana. Our reserves in this region are 64% proved developed, and
our wells are typically drilled to a maximum depth of approximately 10,500 feet.
Our reserves to production ratio in north Louisiana is approximately 9.4:1. Our
lifting costs in this region are generally low (approximately $0.17 per Mcfe in
1998) as a result of relatively low formation pressures and minimal liquid
hydrocarbon and salt water production. In the past three years, completed wells
in north Louisiana had an average development cost of $0.69 per Mcfe and added
gross average reserves per well of 2.4 Bcfe. At December 31, 1998, we were
operating an aggregate of 222 gross (122.0 net) wells in this region and were
drilling or completing 1 gross (0.34 net) well in the region, which was
completed in the first quarter of 1999. Our weighted average working interest in
these properties based on estimated proved reserves is approximately 51%.
As a part of the Phillips transaction we sold 114.4 bcfe, retaining 42 bcf
associated with the VORI, reducing our proved reserves in north Louisiana to 119
bcfe.
47
<PAGE> 49
South Louisiana. Our operations in this region primarily are focused on
five fields in the Houma Embayment and Terrebonne Trough areas. These areas
contain high-quality reservoir rock, which contribute to high production rates.
Wells are typically drilled to a depth of approximately 11,000 to 19,000 feet.
Production from our south Louisiana properties generally receives premium
wellhead prices because of:
- the proximity of the properties to transportation and market locations,
and
- the rich condensate content.
We believe these factors partially offset the higher operating costs associated
with higher formation pressures, salt water disposal and inland water well
locations associated with the region. At December 31, 1998, we were operating an
aggregate of 23 gross (13.4 net) wells and were drilling 1 gross (0.50 net) well
in this region, which was completed in the first quarter of 1999. Our weighted
average working interest in these properties based on estimated proved reserves
is approximately 56%.
In 1998, the Harry S. Bourg #1 deep exploratory test was drilled to total
depth. The well has been designated as a new completion in the Bayou Sauveur
field. Development of the field began in the second quarter of 1999 with the
drilling of the first appraisal well, the Harry S. Bourg #2, which reached total
depth in August 1999. Preliminary evaluation of the well logs indicates no
commercially productive zones in the Bourg #2 well bore. The well and the
potential impact for the development potential of the field is currently under
evaluation.
Offshore. Our operations in this region are primarily focused in the
shallow waters of the Gulf of Mexico, offshore Texas, Louisiana and Alabama. At
December 31, 1998, we operated an aggregate of 34 gross (30.6 net) wells in this
region and had an interest in 67 gross (37.7 net) wells with a weighted average
working interest based on estimated proved reserves of approximately 74%.
JOINT VENTURE PARTNERSHIPS
We participate in joint ventures with industry partners to accelerate the
exploration and evaluation of our properties and to mitigate the risks
associated with exploratory drilling projects.
In December 1996, we entered into a joint venture with Williams Production,
Gulf Coast Company, a unit of The Williams Companies, Inc., relating to our
south Louisiana properties. Under the terms and conditions of this joint
venture, effective December 1, 1996, Williams purchased a 50% interest in our
27,000 net acreage position in the Houma Embayment, including 50% of our
interest in 23 wells and related facilities in the Orange Grove/Humphreys and
Ouiski Bayou fields, for a total purchase price of $20.5 million. A portion of
this purchase price was committed under the joint venture to drill up to eight
exploration wells in those areas. Together with Williams, we drilled 3 gross
(1.5 net) wells in south Louisiana in 1998, of which 2 gross (1.0 net) were
completed and are producing and 1 gross (0.5 net) resulted in a dry hole.
Pursuant to the joint venture, the Company and Williams are expected to continue
exploratory drilling on these south Louisiana properties. However, our
participation in drilling these wells is in our discretion.
We are involved in other joint ventures with third-party interest holders,
including:
- Fina Oil and Chemical Company, a subsidiary of FINA, Inc., and
- Cobra Oil and Gas Corporation.
The Fina joint venture represents a joint exploration and development agreement
covering an area of mutual interest of approximately 400,000 acres in south
Louisiana. The agreement provides for the parties to obtain 3-D seismic coverage
over all mutually agreeable prospective lands within the area of mutual
interest. To date, the Company and Fina have acquired 3-D seismic data covering
approximately 450
48
<PAGE> 50
square miles within the area of mutual interest. The Cobra program involves
exploitation of approximately 68,000 acres in Texas, New Mexico, Arkansas,
Louisiana and Alabama and includes 3-D seismic data covering approximately 975
square miles.
ESTIMATED PROVED RESERVES
The following table sets forth the estimated quantities of proved and
proved developed reserves of oil (including condensate and natural gas liquids)
and natural gas owned by us for each of the three years in the period ended
December 31, 1998. This table is based on reserve estimates prepared by Gruy.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1997 1998
----------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
Beginning balance.................................. 1,387 196,273 1,466 297,634 2,953 354,867
Revisions of previous estimates.................... (89) (30,519) 106 21,831 (79) (31,674)
Purchases of reserves in place..................... 57 30,844 1,351 51,712 -- --
Extensions and discoveries......................... 477 128,692 256 13,892 3,082 9,512
Sale of reserves in place.......................... (134) (4,190) -- -- (287) (13,589)
Production....................................... (232) (23,466) (226) (30,202) (375) (35,557)
----- ------- ----- ------- ----- -------
Ending balance................................... 1,466 297,634 2,953 354,867 5,294 283,559
===== ======= ===== ======= ===== =======
PROVED DEVELOPED RESERVES:
Producing.......................................... 608 113,831 1,856 180,307 1,062 129,787
Non-producing...................................... 369 59,634 576 77,493 919 59,037
----- ------- ----- ------- ----- -------
Total proved developed....................... 977 173,465 2,432 257,800 1,981 188,824
===== ======= ===== ======= ===== =======
</TABLE>
These estimates of proved reserves were prepared in accordance with SEC
regulations using market or contract prices at the end of each reported period.
Prices and operating and development costs are held constant over the estimated
life of the reserves.
Estimated proved developed reserves are reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserves that are expected to be
recovered from:
- new wells drilled to known reservoirs on undrilled acreage for which the
existence and recoverability of reserves can be estimated with reasonable
certainty, or
- existing wells where a relatively major expenditure is required for
recompletion.
Uncertainties in Estimating Reserves and Future Net Cash Flows. There are
numerous uncertainties in estimating quantities of proved reserves believed to
have been discovered and in projecting future rates of production and the timing
of development expenditures. Many of these factors are beyond our control. The
reserve data set forth in this prospectus are only estimates. Reserve estimates
are inherently imprecise and may be expected to change as additional information
becomes available. Furthermore, estimates of oil and natural gas reserves, of
necessity, are projections based on engineering data. There are uncertainties
inherent in:
- the interpretation of this engineering data,
- the projection of future rates of production, and
- the timing of development expenditures.
Reservoir engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured exactly. The
accuracy of any reserve estimate depends on the quality
49
<PAGE> 51
of available data and of engineering and geological interpretation and judgment.
Accordingly, different engineers or even the same engineers at different times
may give very different opinions regarding:
- estimates of the economically recoverable quantities of oil and natural
gas attributable to any particular group of properties,
- classifications of such reserves based on risk of recovery, and
- estimates of the future net cash flows expected from those reserves.
We cannot assure you that the reserves described in this prospectus will
ultimately be produced or that the proved undeveloped reserves set forth in this
prospectus will be developed within the periods anticipated. It is likely that
there will be material variances from the estimates given in this prospectus. In
addition, the estimates of future net cash flows from our proved reserves and
the present value of these cash flows are based upon certain assumptions about
future production levels, prices and costs that may not be correct when judged
against actual future experience. We emphasize that the estimated future net
cash flows prepared by independent petroleum engineers should not be construed
as representative of the fair market value of our proved reserves. These
estimated future net cash flows are based upon projected cash flows which do not
provide for changes in oil and natural gas prices from those in effect on the
date indicated or for increased expenses and capital costs after that date. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based. Actual results will differ, and are
likely to greatly differ, from the results estimated. Accordingly, you are
cautioned not to place undue reliance on the reserve data included in this
prospectus.
We have not filed any estimates of reserves with any federal authority or
agency during the past year other than estimates contained in filings with the
SEC.
PRODUCTION, PRICE AND COST HISTORY
The following table includes production data, average sales prices, average
production expenses and general and administrative expenses attributable to our
properties for 1996, 1997 and 1998. Detailed additional information concerning
our oil and natural gas production activities is contained in the Supplementary
Information in Note 12 to the financial statements included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................. 232 226 375
Natural gas (Mmcf)........................................ 23,466 30,202 35,557
Natural gas equivalent (Mmcfe)............................ 24,858 31,558 37,807
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (per Bbl)............... $ 22.11 $ 19.34 $ 13.09
Natural gas (per Mcf)(1).................................. 2.30 2.27 2.09
Natural gas equivalent (per Mcfe)(1)...................... 2.37 2.31 2.10
AVERAGE PRODUCTION EXPENSES (PER MCFE)...................... $ 0.43 $ 0.35 $ 0.53
GENERAL AND ADMINISTRATIVE EXPENSES (PER MCFE).............. $ 0.36 $ 0.22 $ 0.19
</TABLE>
- ---------------
(1) Includes the effects of our hedging activities.
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1998, we had leaseholdings comprising 174,556 gross
(81,054 net) developed acres and 294,807 gross (90,703 net) undeveloped acres,
all located within the continental United States. The oil and natural gas leases
in which we have an interest are for varying primary terms and many,
particularly in south Louisiana, require the payment of delay rentals in lieu of
drilling operations. In north Louisiana, most of our leasehold interests are
held by production. This means that as long as oil or natural gas is produced
from the properties covered by these leases, the leases continue indefinitely.
The leases
50
<PAGE> 52
may be surrendered at any time by notice to the lessors, by the cessation of
production or by failure to make timely payment of delay rentals, if applicable.
The following table details our ownership interests in our leaseholds as of
December 31, 1998.
<TABLE>
<CAPTION>
DEVELOPED(1) UNDEVELOPED(2)
----------------------- -----------------------
GROSS ACRES NET ACRES GROSS ACRES NET ACRES
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Louisiana.................................. 78,683 33,085 234,427 70,112
Texas...................................... 24,055 4,366 19,429 3,162
Offshore................................... 58,840 38,772 2,830 1,054
Other states............................... 12,978 4,831 38,121 16,375
------- ------ ------- ------
Total............................ 174,556 81,054 294,807 90,703
======= ====== ======= ======
</TABLE>
- ---------------
(1) Acres spaced or assignable to productive wells.
(2) Acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and natural gas,
regardless of whether that acreage contains proved reserves.
As of December 31, 1998, we had working interests in 514 gross (213.0 net)
productive natural gas wells and 70 gross (11.5 net) productive oil wells,
including producing wells and wells capable of production. In May 1999, we
conveyed interests in 284 gross wells (127 net) to Phillips and reduced our net
developed acreage by 11,930 acres.
51
<PAGE> 53
EXPLORATION AND DEVELOPMENT
The following table illustrates the number of gross and net productive and
dry exploratory and development wells we have drilled.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
NORTH LOUISIANA:
Exploratory wells:
Oil.................................. -- -- -- -- -- --
Natural gas.......................... -- -- -- -- 2 0.72
Dry.................................. -- -- -- -- -- --
-- ----- -- ----- -- -----
Total........................... -- -- -- -- 2 0.72
== ===== == ===== == =====
Development wells:
Oil.................................. 1 0.03 -- -- -- --
Natural gas.......................... 65 31.63 82 34.96 43 20.68
Dry.................................. 3 1.74 -- -- 1 0.46
-- ----- -- ----- -- -----
Total........................... 69 33.40 82 34.96 44 21.14
== ===== == ===== == =====
Total north Louisiana:
Producing............................ 66 31.66 82 34.96 45 21.40
Dry.................................. 3 1.74 -- -- 1 0.46
-- ----- -- ----- -- -----
Total........................... 69 33.40 82 34.96 46 21.86
== ===== == ===== == =====
SOUTH LOUISIANA AND OTHER:
Exploratory wells:
Oil.................................. -- -- -- -- -- --
Natural gas.......................... -- -- 9 3.50 6 1.81
Dry.................................. -- -- 1 0.50 7 3.22
-- ----- -- ----- -- -----
Total........................... -- -- 10 4.00 13 5.03
== ===== == ===== == =====
Development wells:
Oil.................................. -- -- -- -- 3 0.04
Natural gas.......................... -- -- -- -- -- --
Dry.................................. -- -- -- -- -- --
-- ----- -- ----- -- -----
Total........................... -- -- -- -- 3 0.04
== ===== == ===== == =====
Total south Louisiana and other:
Producing............................ -- -- 9 3.50 9 1.85
Dry.................................. -- -- 1 0.50 7 3.22
-- ----- -- ----- -- -----
Total........................... -- -- 10 4.00 16 5.07
== ===== == ===== == =====
</TABLE>
As of December 31, 1998, we had 1 gross (0.34 net) development well in
progress in north Louisiana and 1 gross (0.50 net) exploratory well in progress
in south Louisiana. Subsequent to year-end 1998, the south Louisiana exploratory
well (Bourg discovery) was completed as a well.
MARKETING OF OIL AND NATURAL GAS
We do not refine or process any of the oil and natural gas we produce.
Substantially all of our natural gas is sold under:
- term contracts,
- contracts providing for periodic price adjustments, or
- in the spot market.
52
<PAGE> 54
Our revenue streams are therefore sensitive to changes in current market
prices. Our sales of oil, condensate and natural gas liquids generally are made
at prices related to posted field prices.
In addition to marketing our natural gas production, we:
- secure gas transportation arrangements,
- provide nomination and gas control services,
- supervise gas aggregation operations, and
- perform revenue receipt and disbursement services, as well as regulatory
filing, recordkeeping, inspection, testing, monitoring and marketing
functions.
We believe that our activities are not currently restrained by a lack of
adequate transportation systems or system capacity. We do not anticipate any
significant disruption in available transportation for our production. However,
we cannot give you any assurance that we will not encounter these difficulties
in the future. In that event, we would be forced to seek alternate sources of
transportation and may face increased costs.
HEDGING OF NATURAL GAS
To reduce exposure to downward price fluctuations on our natural gas
production, we periodically use:
- forward sales contracts,
- natural gas and crude oil price swap agreements,
- natural gas basis swap agreements, and
- options.
We do not engage in speculative transactions. During 1998, we used price
and basis swap agreements to hedge our exposure to possible declines in natural
gas prices. Additional information concerning our hedging activities during 1998
is set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 31 and in Note 10 to the financial
statements included in this prospectus.
COMPETITION
We operate in a highly competitive environment with respect to:
- acquiring reserves,
- marketing oil and natural gas, and
- securing trained personnel.
Many of our larger competitors have greater financial and personnel
resources than we have available. These competitors may be able to pay more for
productive oil and natural gas properties and to define, evaluate, bid for and
purchase a greater number of properties than we can. Our ability to acquire
additional reserves in the future will depend on our ability to evaluate and
select suitable properties and to complete transactions in a highly competitive
environment. In addition, substantial competition exists for capital available
for investment in the oil and natural gas industry. We cannot assure you that we
will be able to compete successfully in the future in:
- acquiring reserves,
- developing reserves,
- marketing hydrocarbons,
53
<PAGE> 55
- attracting and retaining quality personnel, or
- raising additional capital.
TITLE TO PROPERTIES
Our properties are mortgaged to secure the outstanding notes and, following
this exchange offer, will be mortgaged to secure the new notes. In addition, our
properties are subject to:
- royalty interests,
- liens incident to operating agreements,
- liens for current taxes, and
- other customary burdens, including other mineral encumbrances and
restrictions.
We do not believe that any mortgage, lien or other burden materially
interferes with the use of our properties in the operation of our business.
We believe that we have satisfactory title to or rights in all of our
producing properties. As is customary in the oil and natural gas industry,
minimal investigation of title is made at the time we acquire undeveloped
properties. Title investigation is made, and title opinions of local counsel are
generally obtained, before (i) we begin drilling operations or (ii) when we
prepare division orders when production is obtained and the revenues are
allocated.
EMPLOYEES
As of June 30, 1999, we had 54 permanent employees. Our staff includes
employees experienced in:
- acquisitions,
- geology,
- geophysics,
- petroleum engineering,
- land acquisition, and
- management, finance and accounting.
None of our employees is represented by a union. We have not experienced an
interruption in our operations due to any labor dispute. We believe that our
working relationships with our employees are satisfactory.
REGULATION
Our operations are subject to extensive and continually changing regulation
because legislation affecting the oil and natural gas industry is under constant
review for amendment and expansion. Many departments and agencies, both federal
and state, are authorized by statute to issue and have issued rules and
regulations binding on the oil and natural gas industry and its individual
participants. The failure to comply with such rules and regulations can result
in large penalties. The regulatory burden on this industry increases our cost of
doing business and, therefore, affects our profitability. However, we do not
believe that we are affected in a significantly different way by these
regulations than our competitors are. Because of the many complex federal and
state statutes and regulations that may affect us, you should not rely upon the
following discussion of these statutes and regulations as a complete review of
all matters affecting our operations.
54
<PAGE> 56
Transportation and Production
Transportation and Sale of Oil and Natural Gas. We can make sales of oil,
natural gas and condensate at market prices which are not subject to price
controls at this time. The price that we receive from the sale of these products
is affected by our ability to transport and the cost of transporting these
products to market. Under applicable laws, the Federal Energy Regulatory
Commission ("FERC") regulates:
- the construction of natural gas pipeline facilities, and
- the rates for transportation of these products in interstate commerce.
Our sales of natural gas are affected by the availability, terms and cost
of pipeline transportation. The price and terms for access to pipeline
transportation remain subject to extensive federal and state regulation. Several
major regulatory changes have been implemented by Congress and the FERC from
1985 to the present. These changes affect the economics of natural gas
production, transportation and sales. In addition, the FERC is continually
proposing and implementing new rules and regulations affecting these segments of
the natural gas industry that remain subject to the FERC's jurisdiction. The
most notable of these are natural gas transmission companies.
The FERC's more recent proposals may affect the availability of
interruptible transportation service on interstate pipelines. These initiatives
may also affect the intrastate transportation of gas in some cases. The stated
purpose of many of these regulatory changes is to promote competition among the
various sectors of the natural gas industry. These initiatives generally reflect
more light-handed regulation of the natural gas industry. The ultimate impact of
the complex rules and regulations issued by the FERC since 1985 cannot be
predicted. In addition, some aspects of these regulatory developments have not
become final but are still pending judicial and FERC final decisions. We cannot
predict what further action the FERC will take on these matters. However, we do
not believe that any action taken will affect us much differently than it will
affect other natural gas producers, gatherers and marketers with which we
compete.
The Outercontinental Shelf Lands Act requires that all pipelines operating
on or across the Outer Continental Shelf provide open-access, non-discriminatory
service. The FERC has chosen not to impose regulations on gatherers and other
non-jurisdictional entities under Order No. 509, in which the FERC implemented
the Outercontinental Shelf Lands Act. However, the FERC has retained the
authority to exercise jurisdiction over those entities if necessary to permit
non-discriminatory access to service on the Outer Continental Shelf.
Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transportation rates for oil. These
regulations could increase the cost of transporting oil to the purchaser. We do
not believe that these regulations will affect us any differently than other oil
producers and marketers with which we compete.
Regulation of Drilling and Production. Our drilling and production
operations are subject to regulation under a wide range of state and federal
statutes, rules, orders and regulations. Among other matters, these statutes and
regulations govern:
- the amounts and types of substances and materials that may be released
into the environment,
- the discharge and disposition of waste materials,
- the reclamation and abandonment of wells and facility sites, and
- the remediation of contaminated sites,
and require:
- permits for drilling operations,
55
<PAGE> 57
- drilling bonds, and
- reports concerning operations.
The federal leases are administered by the Bureau of Land Management and
the Minerals Management Service. The Bureau of Land Management, the Minerals
Management Service and the Bureau of Indian Affairs are administered by the
federal Department of the Interior. These leases contain relatively standard
terms and require compliance with detailed Minerals Management Service and
Bureau of Land Management regulations and orders, which are subject to change.
In addition to permits required by other federal agencies (such as the Coast
Guard, the Army Corps of Engineers and the Environmental Protection Agency),
lessees must also obtain a permit from the Minerals Management Service or the
Bureau of Land Management prior to beginning offshore or onshore drilling.
The Minerals Management Service has put in place regulations which require
offshore production facilities located on the Outer Continental Shelf to meet
stringent engineering and construction specifications. The Minerals Management
Service also has regulations restricting the flaring or venting of natural gas,
and has proposed to amend such regulations to prohibit the flaring of liquid
hydrocarbons and oil without prior authorization. Similarly, the Minerals
Management Service has promulgated other regulations governing plugging and
abandonment of wells located offshore and the removal of all production
facilities.
To cover the various obligations of lessees on the Outer Continental Shelf,
the Minerals Management Service generally requires that lessees have a
substantial net worth or post bonds or other acceptable assurances that such
obligations will be met. Under certain circumstances, the Minerals Management
Service may require any of our operations on federal leases to be suspended or
terminated. Any such suspension or termination could significantly and
negatively affect our financial condition, cash flows and operations.
States in which we own and operate properties have varying laws and
regulations governing conservation matters, including:
- provisions for the unitization or pooling of oil and natural gas
properties,
- the establishment of maximum rates of production from oil and natural gas
wells, and
- the regulation of the spacing, plugging and abandonment of wells.
Many states also restrict production to the market demand for oil and natural
gas, and several states have indicated interest in revising applicable
regulations. The effect of these regulations is to limit the amount of oil and
natural gas we can produce from our wells and to limit the number of wells or
the locations at which we can drill. In addition, each state generally imposes
an ad valorem, production or severance tax with respect to the production and
sale of oil, natural gas and gas liquids within its jurisdiction.
Environmental Regulations
General. Our operations are affected by the various state, local and
federal environmental laws and regulations, including the:
- National Environmental Policy Act,
- Clean Air Act,
- Oil Pollution Act of 1990,
- Federal Water Pollution Control Act,
- Resource Conservation and Recovery Act ("RCRA"),
- Toxic Substances Control Act, and
- Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA").
56
<PAGE> 58
These laws and regulations govern the discharge of materials into the
environment or the disposal of waste materials, or otherwise relate to the
protection of the environment. In particular, the following activities are
subject to stringent environmental regulations:
- drilling,
- development and production operations,
- activities in connection with storage and transportation of oil and other
liquid hydrocarbons, and
- use of facilities for treating, processing or otherwise handling
hydrocarbons and wastes.
Violations are subject to reporting requirements, civil penalties and criminal
sanctions. As with the industry generally, compliance with existing regulations
increases our overall cost of business. The increased costs cannot be easily
determined. Such areas affected include:
- unit production expenses primarily related to the control and limitation
of air emissions and the disposal of produced water,
- capital costs to drill exploration and development wells resulting from
expenses primarily related to the management and disposal of drilling
fluids and other oil and natural gas exploration wastes, and
- capital costs to construct, maintain and upgrade equipment and facilities
and remediate, plug and abandon inactive well sites and pits.
Environmental regulations historically have been subject to frequent change
by regulatory authorities. Therefore, we are unable to predict the ongoing cost
of compliance with these laws and regulations or the future impact of such
regulations on our operations. However, we do not believe that changes to these
regulations will have a significant negative affect on our competitive position
because our competitors will be similarly affected.
A discharge of hydrocarbons or hazardous substances into the environment
could subject us to substantial expense, including both the cost to comply with
applicable regulations pertaining to the clean up of releases of hazardous
substances into the environment and claims by neighboring landowners and other
third parties for personal injury and property damage. We maintain insurance,
which may provide some protection against certain types of environmental
liabilities. However, we cannot predict the coverage of such insurance and the
amount of protection afforded by it with respect to any particular possible
environmental liability. This insurance may not be adequate to protect us from
substantial expense.
The Oil Pollution Act and regulations thereunder impose a variety of
regulations on "responsible parties" related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. A
"responsible party" includes the owner or operator of an onshore facility,
vessel or pipeline, or the lessee or permittee of the area in which an offshore
facility is located. The Oil Pollution Act assigns liability to each responsible
party for oil removal costs and a variety of public and private damages. The Oil
Pollution Act also requires certain categories of responsible parties to
maintain evidence of financial responsibility to cover liabilities related to a
crude oil spill. The Federal Water Pollution Control Act imposes restrictions
and strict controls regarding the discharge of produced waters and other oil and
natural gas wastes into navigable waters. State laws for the control of water
pollution also provide varying civil, criminal and administrative penalties and
impose liabilities in the case of a discharge of petroleum or its derivatives,
or other hazardous substances, into state waters. In addition, the U.S.
Environmental Protection Agency ("EPA") has promulgated regulations that require
many oil and natural gas production operations to obtain permits to discharge
storm water runoff.
The Clean Air Act requires or will require most industrial operations in
the United States to incur capital expenditures in order to meet air emission
control standards developed by the EPA and state environmental agencies.
Although no assurances can be given, we believe Clean Air Act requirements will
not have a material adverse effect on our financial condition or results of
operations.
57
<PAGE> 59
RCRA is the principal federal statute governing the treatment, storage and
disposal of hazardous wastes. RCRA imposes stringent operating requirements, and
liability for failure to meet such requirements, on a person who is either:
- a "generator" or "transporter" of hazardous waste, or
- an "owner" or "operator" of a hazardous waste treatment, storage or
disposal facility.
At present, RCRA includes a statutory exemption that allows oil and natural gas
exploration and production wastes to be classified as non-hazardous waste. As a
result, we are not subject to many of RCRA's requirements because our operations
generate minimal quantities of hazardous wastes.
CERCLA, also known as "Superfund", imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include:
- the "owner" or "operator" of the site where hazardous substances have
been released, and
- companies that disposed or arranged for the disposal of the hazardous
substances found at the site.
CERCLA also authorizes the EPA and, in some instances, third parties to act in
response to threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they incur. In the
course of our ordinary operations, we may generate waste that may fall within
CERCLA's definition of a "hazardous substance". As a result, we may be jointly
and severally liable under CERCLA or under analogous state laws for all or part
of the costs required to clean up sites at which such wastes have been disposed.
We currently own or lease, and have in the past owned or leased, numerous
properties that for many years have been used for the exploration and production
of oil and natural gas. Although we have utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or other
wastes may have been disposed of or released on or under the properties owned or
leased by us or on or under other locations where such wastes have been taken
for disposal. In addition, many of these properties have been operated by third
parties whose actions with respect to the treatment and disposal or release of
hydrocarbons or other wastes were not under our control. These properties and
wastes disposed thereon may be subject to the corrective action or remediation
requirements imposed by CERCLA, RCRA and analogous state laws. Under such laws,
we could be required to:
- remove or remediate previously disposed wastes, including wastes disposed
of or released by prior owners or operators,
- clean up contaminated property, including contaminated groundwater, or
- perform remedial plugging operations to prevent future contamination.
We could also be subject to other damage claims by governmental authorities or
third parties related to such contamination.
58
<PAGE> 60
MANAGEMENT
Set forth below are the names, ages and positions of the Company's
executive officers and directors. All directors are elected for a term of one
year and serve until their successors are duly elected and qualified. All
executive officers hold office until their successors are duly appointed and
qualified or their earlier resignation or removal.
<TABLE>
<S> <C>
John F. Bookout................ President, Chief Executive Officer and Chairman of the
Board
Dallas D. Laumbach............. Senior Vice President -- Exploration and Production
(retired effective June 15, 1999)
Rick G. Lester................. Senior Vice President and Chief Financial Officer
John J. Conklin, Jr. .......... Director
Ralph P. Davidson.............. Director
Adam P. Godfrey................ Director
William J. Murray.............. Director
Ogden M. Phipps................ Director
Ward W. Woods.................. Director
</TABLE>
John F. Bookout, age 76, has served as Chairman of the Board, President and
Chief Executive Officer since February 1996. He was appointed to these positions
in connection with the Contour transaction. He had served as Chairman of the
Board and President of Contour Production Company since its formation in 1993.
Before joining Contour Production Company as a founder, Mr. Bookout served in
positions of increasing responsibility for 38 years at Shell Oil Company,
starting in 1950 as a geologist and culminating as President, Chief Executive
Officer and a director from 1976 through June 1988. From 1988 through 1993, he
served as a member of the Supervisory Board of Royal Dutch Petroleum. He
currently serves on the board of trustees of the United States Counsel for
International Business and various civic and educational bodies.
Dallas D. Laumbach, age 62, has served as Senior Vice
President -- Exploration and Production since February 1996. He served as Senior
Vice President of Contour Production Company from December 1993 to February
1996. Before joining Contour Production Company, Mr. Laumbach served in
positions of increasing responsibility at Shell Oil Company, concluding as
Manager -- Business Development within the exploration and production segment.
Mr. Laumbach retired effective June 15, 1999.
Rick G. Lester, age 47, was elected Senior Vice President and Chief
Financial Officer by our Board in October 1998. Previously, he was Vice
President and Chief Financial Officer of Domain Energy Corporation from 1996
until 1998 and was with Tenneco Inc. from 1981 to 1996.
John J. Conklin, Jr., age 68, has served as a director of the Company or
its predecessor since November 1993. Mr. Conklin has been a private investor
since his retirement in 1989 as a senior partner of Conklin, Cahill & Co., a
member firm of the New York Stock Exchange, where he was active for over 35
years. He has also served as a member of the Board of Governors of the New York
Stock Exchange, the Board of Directors of the New York Futures Exchange and the
National Market Advisory Board.
Ralph P. Davidson, age 71, served as our Chairman of the Board from October
1995 through February 1996 and has served as a director of the Company or its
predecessor since November 1993. Mr. Davidson provides consulting services to
nonprofit organizations as President of Davidson Associates. From 1980 through
1987, he was Chairman of the Board of Time, Inc., where he spent 21 years with
Time Magazine in various executive capacities. Mr. Davidson is a member of the
Board of Trustees of Phoenix House, the National Council for Adoption, the
Emeritus Foundation and The American University in Bulgaria.
Adam P. Godfrey, age 36, has served as a director of the Company since
March 19, 1998. Since January 1, 1998, he has been the sole shareholder and
president of a corporation that serves as a manager of the limited liability
company that is the general partner of Bessemer Holdings, L.P. and other
affiliated investment partnerships including the investment partnerships that
comprise the BH Group. The
59
<PAGE> 61
BH Group owns a majority of the membership interests in Contour Production
Company. Mr. Godfrey is also the sole shareholder and president of a corporation
that is a general partner of Bessemer Partners & Co., an affiliate of Bessemer
Holdings, L.P. From July 1993 to December 1997, Mr. Godfrey was a principal with
Bessemer Partners & Co., and a member of the general partner of Bessemer
Holdings, L.P. Mr. Godfrey is a director of several private companies.
William J. Murray, age 84, has served as a director of the Company or its
predecessor since March 1984. Mr. Murray has been an independent petroleum
consultant for more than the past five years. He served on the Texas Railroad
Commission for 16 years, during six of which he served as Chairman. Mr. Murray
currently serves on a number of industry committees, including as Chairman of
the Industry Advisory Committee on Natural Gas Ratable Take and Chairman of the
Industry Voluntary Allocation Committee.
Ogden M. Phipps, age 58, has served as a director of the Company since his
election in February 1996. He was Chairman of the Board of Bessemer Securities
Corporation from 1982 through 1994 and of The Bessemer Group, Incorporated from
1991 through 1994. Mr. Phipps continues to serve as a director of Bessemer
Securities Corporation and The Bessemer Group, Incorporated and is also a
manager of Bessemer Securities, LLC. Bessemer Securities Corporation is the
principal limited partner of Bessemer Holdings, L.P. Bessemer Securities
Corporation and Bessemer Securities, LLC are principal limited partners in
another partnership in the BH Group. He also serves as a director of several
private companies and an officer and director of several nonprofit
organizations.
Ward W. Woods, age 56, has served as a director of the Company since his
election in February 1996. Since 1989, he has been the sole stockholder and
president of corporations that serve as the managing general partner or
principal manager of the general partner of Bessemer Holdings, L.P. and other
affiliated investment partnerships including those comprising the BH Group. He
is also the sole stockholder and president of a corporation that is a managing
general partner of Bessemer Partners & Co. Mr. Woods is the President and Chief
Executive Officer of Bessemer Securities, LLC and Bessemer Securities
Corporation, which he joined in 1989. He is a director of Boise Cascade
Corporation and several private companies.
60
<PAGE> 62
EXECUTIVE COMPENSATION
Summary Compensation Table. The following summary compensation table sets
forth compensation paid during the last three fiscal years to the Company's
Chief Executive Officer and the Company's other executive officers whose
compensation exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
----------------------- ------------ ALL OTHER
SALARY OPTIONS/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS($)(5) AWARDS(#) ($)(2)
- --------------------------- ---- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
David C. Baggett(4)(6)................. 1998 126,666 77,344 -- 8,284
Former Senior Vice President and 1997 148,000 -- 57,500 9,500
Chief Financial Officer 1996 -- -- -- --
Thomas E. Baker(7)..................... 1998 91,538 76,834 9,800 3,991
Former General Counsel and 1997 175,000 -- -- 9,500
Corporate Secretary 1996 80,681 -- -- 3,500
John F. Bookout(3)..................... 1998 800,000 -- -- 10,000
Chairman, President and CEO 1997 800,000 -- -- 8,000
1996 700,000 -- -- 2,667
Dallas D. Laumbach(3).................. 1998 190,000 -- -- 10,000
Senior Vice President -- 1997 190,000 -- -- 9,500
Exploration and Production 1996 166,250 -- 86,250 3,800
Rick G. Lester(6)...................... 1998 43,750 50,000 38,100 2,625
Senior Vice President and
Chief Financial Officer
William C. Rankin(3)(4)................ 1997 37,500 -- -- 167,063
Former Senior Vice President and 1996 144,375 -- 86,250 3,300
Chief Financial Officer
</TABLE>
- ---------------
(1) Perquisites and other benefits did not exceed 10% of any named officer's
total annual salary and bonus and therefore are excluded.
(2) Amounts include matching contributions by the Company to the named executive
officer's 401(k) account.
(3) In February 1996, Mr. Bookout was appointed Chairman, President and CEO of
the Company. Mr. Laumbach was appointed Senior Vice President -- Exploration
and Production, and Mr. Rankin was appointed Senior Vice President and Chief
Financial Officer.
(4) In March 1997, Mr. Baggett was appointed Senior Vice President and Chief
Financial Officer after Mr. Rankin left the employment of the Company. Mr.
Rankin was paid $165,000 in severance payments in accordance with his
employment agreement.
(5) Amounts include annual performance awards granted in respect of 1997 and
paid in 1998 under the 1997 Annual Long-Term Incentive-Performance Plan.
(6) In October 1998, Mr. Lester was appointed Senior Vice President and Chief
Financial Officer after Mr. Baggett left the employment of the Company.
(7) Mr. Baker resigned as an employee on July 31, 1998 and his option
terminated, and as General Counsel and Corporate Secretary on March 3, 1999.
STOCK OPTION PLANS
The Company maintains stock option plans providing for the authority to
grant options intended to be:
- not qualified under section 422 of the Internal Revenue Code of 1986, as
amended,
- qualified under section 422 of the Internal Revenue Code, or
- either not qualified or qualified.
61
<PAGE> 63
Stock option plans covering the grant of qualified stock options only were
adopted in:
- 1987 (the "1987 Plan"), covering the grant of options for 50,000 shares
of the Company's common stock,
- 1991 (the "1991 Plan"), covering the grant of options for 50,000 shares
of the Company's common stock,
- 1995 (the "1995 Plan"), covering the grant of options for 150,000 shares
of the Company's common stock, and
- 1996 (the "1996 Plan"), covering the grant of options for 100,000 shares
of the Company's common stock.
In February 1996, a stock option plan covering the grant of non-qualified
stock options only (the "1996 NQSO Plan") was adopted in accordance with the
terms of the Contour Agreements and provides for the grant of options to
purchase a total of 250,000 shares of the Company's common stock to senior
executives designated by Mr. Bookout.
In March 1997, our Board of Directors adopted, subject to stockholder
approval, our 1997 Annual and Long-Term Incentive-Performance Plan (the "1997
Plan"). Our stockholders approved the 1997 Plan on May 29, 1997. The 1997 Plan
amended the 1996 Plan in its entirety, with effect from January 1, 1997, except
as to the 1,000 outstanding grant of options. Awards granted under the 1997 Plan
may be:
- annual performance awards,
- stock options designated as either non-qualified stock options or
qualified stock options, or
- other forms of stock-based performance awards.
The total number of shares authorized for issuance under the 1997 Plan is
4,200,000 shares.
The exercise price for non-qualified stock options granted under the 1997
Plan and qualified stock options are fixed either by the Compensation Committee
of the Board or the Board at the fair market value of our common stock at the
time of the grant. Options granted under the 1987, 1991 and 1995 Plans are
exercisable during the term of the optionee's employment and three years
thereafter for up to ten years from the date of grant. Options granted under the
1996 Plan, the 1996 NQSO Plan, and the 1997 Plan are exercisable after vesting
(generally, at the annual rates of 100%, 33 1/3%, 25%, respectively) during the
term of the optionee's employment and six months thereafter for up to ten years
from the date of grant. The exercise price for options granted under the 1996
NQSO Plan was fixed in the plan. The qualified stock option plans and 1996 NQSO
Plan will terminate upon the earlier of (i) the date on which all shares
available for issuance have been issued upon the exercise of options granted
thereunder, or (ii) ten years from the date of adoption. Under the 1997 Plan, no
award may be granted after May 29, 2001.
Under the 1987 Plan, options were granted to purchase a total of 18,500
shares of common stock of Kelley Oil Corporation (the Company's predecessor) at
$11.00 per share during 1988 and 31,500 shares at $20.00 per share during 1989.
Under the 1991 Plan, options were granted to purchase a total of:
- 21,900 shares of Kelley Oil's common stock at $76.25 per share during
1991,
- 1,500 shares of Kelley Oil's common stock at $70.00 per share during
1993,
- 26,600 shares of the Company's common stock at $23.75 per share during
1995, and
- 1,400 shares of the Company's common stock at $21.88 per share during
1997.
The options granted under the 1991 Plan with an exercise price of $76.25 and
$70.00 per share were repriced in 1995, to the extent then outstanding, at
$41.25 per share.
62
<PAGE> 64
Under the 1995 Plan, options to purchase a total of 150,000 shares of the
Company's common stock were granted during 1995 at exercise prices ranging from
$17.50 to $23.75 per share. Under the 1996 Plan, options were granted to
purchase a total of 2,000 shares of the Company's common stock at $27.85 per
share during 1996, and 2,500 shares of common stock at $25.63 per share in
February 1997.
Under the 1996 NQSO Plan, options were granted to purchase a total of:
- 250,000 shares of the Company's common stock at the exercise price of
$10.00 per share in 1996,
- 57,500 shares of the Company's common stock at $10.00 per share in 1997,
and
- 38,100 shares of the Company's common stock at $10.00 per share in 1998.
Under the 1997 Plan, non-qualified stock options were granted in 1997 to
purchase a total of 44,250 shares of the Company's common stock at prices
ranging from $25.63 to $32.50 per share. In 1998, non-qualified stock options
under the 1997 Plan were granted to purchase a total of 72,700 shares of the
Company's common stock at prices ranging from $6.88 to $22.19 per share.
Options were exercised for a total of:
- 27,217 shares in 1998,
- 41,540 shares in 1997, and
- 3,560 shares in 1996,
at prices from $10.00 to $23.75 per share during 1997.
At December 31, 1998, the following options were issued and outstanding to
purchase shares of our common stock:
- 11,100 shares under the 1987 Plan,
- 44,821 shares under the 1991 Plan,
- 139,380 shares under the 1995 Plan,
- 1,000 shares under the 1996 Plan,
- 168,017 shares under the 1996 NQSO Plan, and
- 85,350 shares under the 1997 Plan,
for a total of 449,667 shares of our common stock subject to options under all
of the plans.
Mr. Bookout has not participated in any of the stock option plans or in the
1997 Plan.
63
<PAGE> 65
The following table provides information about non-qualified stock options
granted during 1998 under the 1996 NQSO Plan and the 1997 Plan to the following
Named Executive Officers.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN BASE PRICE ----------------------
NAME GRANTED FISCAL YEAR ($/SH) EXPIRATION DATE 5%($) 10%($)
- ---- ------------ ------------ ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rick G. Lester......... 38,100(2) 34.39% 10.00 10/19/2008 239,609 607,216
Thomas E. Baker........ 9,800(3) 8.84% 22.19 07/31/1998(3) 136,748(3) 346,547(3)
</TABLE>
- ---------------
(1) Potential realizable value is based on an assumption that the stock price of
the Company's common stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the 10-year option term.
These numbers are calculated based on the requirements promulgated by the
SEC and do not reflect the Company's future stock price growth, which is
dependent on future performance and stock market conditions.
(2) This was granted on October 19, 1998 by the Board in accordance with the
1996 NQSO Plan.
(3) This was granted on March 19, 1998 in accordance with the 1997 Plan; Mr.
Baker resigned as an employee on July 31, 1998, and the option terminated on
that date.
The following table sets forth information on stock options exercised in
1998, unexercised stock options held, and option values held by the Named
Executive Officers as of December 31, 1998.
AGGREGATE OPTION EXERCISES IN 1998 AND 1998 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT YEAR END(#) AT YEAR END($)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- ----------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
David C. Baggett......... 19,167 75,239 None/None(2) --/--
Thomas E. Baker.......... None -- 2,950/None(2) --(3)/--
John F. Bookout.......... None -- None/None --/--
Dallas D. Laumbach....... None -- 57,500/28,750 --(3)/--(3)
Rick G. Lester........... None -- None/38,100 --/--(3)
</TABLE>
- ---------------
(1) Calculated utilizing the closing price of the Company's common stock listed
on the NASDAQ National Market System on December 31, 1998.
(2) Mr. William C. Rankin left the employment of the Company in March 1997 and
at such time, forfeited 57,500 options in accordance with the terms and
conditions of the 1996 NQSO Plan. Those 57,500 options were granted to David
C. Baggett on March 20, 1997. Mr. Baggett resigned from the Company on
August 31, 1998. At such time, 19,167 options had vested. The remaining
38,333 options were forfeited in accordance with the terms and conditions of
the NQSO Plan, and 38,100 options were granted to Mr. Lester. Mr. Baker
resigned as an employee on July 31, 1998.
(3) The exercise price exceeded the closing price of the Company's common stock
at year end.
EMPLOYEE SECTION 401(K) AND STOCK OWNERSHIP PLAN
In 1984 an employee stock ownership plan ("ESOP") was established for the
benefit of substantially all of the employees. Effective September 1, 1996, the
ESOP was converted into a Section 401(k) Plan. All employees are eligible to
participate in the 401(k) Plan. We previously contributed to the ESOP an annual
amount equal to 15% of each employee's compensation (up to a specified level) to
enable the ESOP to purchase qualifying securities for the accounts of employees.
Qualifying securities were allocated to employees' accounts in the ESOP in
amounts that were proportionate to the ESOP's repayment of borrowings incurred
to purchase those securities, all of which are currently allocated following
repayment of ESOP borrowings in 1995.
Employees become fully vested in their accounts in the 401(k) Plan after
two years of service. Prior to converting the ESOP into a Section 401(k) Plan,
the ESOP held preferred stock which the Board redeemed in exchange for the same
number of shares of the Company's common stock. Effective with the
64
<PAGE> 66
conversion of the ESOP into a Section 401(k) Plan, participants have the
opportunity to invest their accounts in various mutual funds and in the
Company's common stock. We match 100% of the employees' contributions to the
401(k) Plan in an amount up to 6% of the employee's salary, subject to limits
required by the Internal Revenue Code.
EMPLOYMENT AGREEMENTS
In connection with the Contour transactions, we entered into three-year
employment agreements with John F. Bookout and Dallas D. Laumbach at base
salaries of $800,000 and $190,000, respectively. In October 1998, we entered
into a one-year evergreen employment agreement with Rick G. Lester at a base
salary of $175,000 and an initial bonus of $50,000. Each of the agreements
provides for a lump sum severance payment if we terminate the covered executive
without cause or as otherwise permitted, as defined in the agreements. The
severance payment would be equal to one year's compensation as defined in the
respective agreements, except that:
- Mr. Bookout would be entitled to a payment covering the balance of the
three-year term, and
- In the case of a change of control, Mr. Lester's severance payment would
be equal to eighteen months' salary plus annual performance awards as
defined in the agreement.
Each of the agreements provides for various other benefits and for
indemnification of the covered executive under certain conditions. In 1999, the
Board extended the agreement with Mr. Bookout for an additional three-year term
on the same compensation terms.
CHANGE OF CONTROL AGREEMENTS AND SEVERANCE PAYMENTS
In November 1995, we entered into change of control agreements with 16
management and professional personnel, entitling them to severance benefits in
the event their employment with us was terminated prior to February 15, 1998.
For this purpose, the Contour transactions constituted a change of control. The
severance benefits amount to salary continuation for twelve months, based on the
employee's highest compensation rate during the two years prior to termination,
for all covered employees other than three specified persons, who were entitled
upon termination of employment to salary continuation for periods of 36, 24 and
18 months, respectively. Pursuant to the employment agreement with Mr. Rankin,
we became obligated upon his departure in 1997 to make payments to him of
$165,000 in 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the directors serving on the Board's Compensation Committee has
ever served as an officer or employee of the Company or any of its subsidiaries,
and are not eligible to participate in the 1997 Plan.
65
<PAGE> 67
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
As of August 4, 1999, approximately 13.2 million shares of the Company's
common stock were outstanding, and approximately 1.4 million shares of
convertible preferred stock were outstanding. Each share of the Company's common
stock and each share of convertible preferred stock is entitled to one vote,
voting as a single class, on all matters submitted to a vote by stockholders.
The following table sets forth information as of June 18, 1999 (after giving
effect to the 1 for 10 reverse split of common stock previously discussed), with
respect to the Company's common stock and convertible preferred stock
beneficially owned, directly or indirectly, by persons known by us to own
beneficially more than five percent of any class of the Company's capital stock,
each of the Company's directors, the Company's five most highly compensated
executive officers during 1998 and by all of the Company's directors and
executive officers as a group.
<TABLE>
<CAPTION>
COMMON PERCENT OF PREFERRED PERCENT OF
NAME OF BENEFICIAL OWNER STOCK CLASS(%) STOCK CLASS(%)
- ------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Contour Production Company L.L.C.(1)................ 7,214,405 57.2 -- --
David C. Baggett(2)................................. -- -- -- --
Thomas E. Baker(3).................................. -- -- -- --
John F. Bookout(4).................................. 298,095 2.4 -- --
John J. Conklin, Jr. ............................... 9,104 * -- --
Ralph P. Davidson(5)................................ 15,486 * -- --
Adam P. Godfrey(6).................................. -- -- -- --
Dallas D. Laumbach(7)............................... 98,750 * -- --
Rick G. Lester...................................... 12,500 * -- --
William J. Murray(8)................................ 8,181 * 2,000 *
Ogden M. Phipps..................................... -- -- -- --
Ward W. Woods(6).................................... -- -- -- --
All current directors and executive officers as a
group (8 persons)(9).............................. 343,366 2.7 2,000 *
</TABLE>
- ---------------
* Less than 1%
(1) Contour Production Company's address is 630 Fifth Avenue, 39th Floor, New
York, New York 10111. Bessemer Holdings, L.P. owns a majority of the
membership interests in Contour Production Company. Based on a Statement on
Schedule 13-D filed with the SEC, Contour Production Company and Bessemer
are each deemed to beneficially own the shares of common stock held of
record by Contour Production Company. Three other investment partnerships
having the same general partner as Bessemer own the remaining interests in
Contour Production Company and may be deemed to beneficially own the common
stock held by Contour Production Company. Contour Production Company has
agreed, subject to certain limitations, to vote for the election of Mr.
Bookout as a director of the Company.
(2) Mr. Baggett left the Company in August 1998.
(3) Mr. Baker resigned as an employee of the Company in July 1998.
(4) Represents shares held directly as well as shares held by JFB Squared, Ltd.
and Bevairohn, Ltd., partnerships controlled by Mr. Bookout.
(5) Includes 12,225 shares of the Company's common stock held by Mr. Davidson's
wife and 61 shares of the Company's common stock held by his daughter.
(6) Excludes 7,214,405 shares of the Company's common stock held by Contour
Production Company, in which Messrs. Godfrey and Woods have an indirect
interest and as to which each of Messrs. Godfrey and Woods have disclaimed
beneficial ownership.
(7) Includes unexercised options to purchase 86,250 shares. Mr. Laumbach left
the Company effective June 15, 1999.
(8) Includes 2,000 shares of convertible preferred stock held in Mr. Murray's
defined benefit pension plan.
(9) See notes 4, 5, 6 and 8.
66
<PAGE> 68
CERTAIN TRANSACTIONS
Pursuant to the Contour transaction, Contour Production Company purchased
4.8 million newly issued shares of the Company's common stock on February 15,
1996, for $48.0 million, and an option to purchase an additional 2.7 million
shares of the Company's common stock for $27.0 million. The option was exercised
December 1, 1997 to fund a portion of the purchase price of the SPR acquisition.
In connection with the Contour transaction, the Company granted certain
registration rights to Contour Production Company with respect to the Company's
common stock held or acquired by Contour Production Company.
In connection with the Contour transaction, the Company entered into an
Advisory Agreement with Bessemer Partners & Co., an affiliate of Bessemer
Holdings, L.P. The Advisory Agreement provided for the engagement of Bessemer
Partners & Co. to provide us with financial advisory services. Under the
Advisory Agreement, Bessemer Partners & Co. has assisted us in arranging credit
facilities and negotiating the related agreements and is assisting us in
restructuring our capital structure. For its services under the Advisory
Agreement, Bessemer Partners & Co. received or will receive:
- an advisory fee of $2.0 million at the closing of the Contour
transaction,
- $500,000 in each of December 1996, 1997 and 1998, and
- $500,000 in each December of 1999, 2000 and 2001.
In addition, Bessemer Partners & Co. is entitled to reimbursement of expenses
incurred in connection with rendering advisory services. We also have agreed to
indemnify Bessemer Partners & Co. and its affiliates against certain liabilities
under the Advisory Agreement.
It is our policy that we will only enter into a transaction between us and
our officers, directors, principal stockholders or other affiliates, if such
transaction:
- is on terms no less favorable to us than terms that could be obtained on
an arms-length basis from unrelated parties, and
- has been approved by a majority of our independent and disinterested
directors.
67
<PAGE> 69
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We entered into a registration rights agreement with the initial purchasers
of the outstanding notes in which we agreed to file a registration statement
relating to our offer to exchange the outstanding notes for new notes. We also
agreed to use our best efforts to complete the offer within 180 days after May
17, 1999. We are offering the new notes under this prospectus to satisfy those
obligations under the registration rights agreement.
However, the SEC has recently proposed the repeal of its interpretations
permitting the use of a registration statement in connection with an exchange
offer such as ours. We cannot predict whether the SEC will act on this proposal
before completion of the exchange offer. If those interpretations are repealed
before the exchange offer is completed, holders of outstanding notes will not be
able to receive new notes under the exchange offer. Rather, we will be required
to register the outstanding notes under a shelf registration statement, in
connection with resales by the holders. Holders will be required to deliver a
prospectus to the purchasers and will be subject to civil liability provisions
under the Securities Act in connection with their resales.
We will file with the SEC a shelf registration statement to cover resales
of outstanding notes if any of the following occur:
- any changes in law or applicable interpretations by the staff of the SEC
do not permit us to effect the exchange offer as contemplated by the
registration rights agreement,
- any holder of outstanding notes so requests because it may not resell its
new notes to the public without delivering a prospectus, and this
prospectus is not available for resales by that holder, or
- any applicable law or interpretations do not permit any holder of
outstanding notes to participate in the exchange offer.
If we are required to file a shelf registration statement, we will use our
best efforts to cause the SEC to declare effective the shelf registration
statement. We will also use our best efforts to keep the shelf registration
statement effective for up to two years.
If we fail to comply with deadlines for completion of the exchange offer,
we will be required to pay additional interest to holders of the outstanding
notes. Please read the section captioned "Description of the New
Notes -- Registration Rights; Liquidated Damages" on page 81 for more details
regarding the registration rights agreement.
To exchange an outstanding note for transferable new notes in the exchange
offer, the holder of that outstanding note will be required to make all of the
following representations:
- any new note the holder receives will be acquired in the ordinary course
of business,
- the holder has no arrangements or understandings with any person to
participate in the distribution of the outstanding notes or the new notes
within the meaning of the Securities Act,
- if the holder is not a broker-dealer, that holder is not engaged in and
does not intend to engage in the distribution of the new notes,
- if the holder is a broker-dealer that will receive new notes in exchange
for outstanding notes acquired for its own account as a result of
market-making activities or other trading activities, that holder will
deliver a prospectus, as required by law, in connection with any resale
of the new notes, and
- the holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
68
<PAGE> 70
RESALE OF NEW NOTES
Based on interpretations of the SEC staff in "no action letters" issued to
third parties, we believe that each new note issued under the exchange offer may
be offered for resale and be resold and otherwise transferred by the holder of
that new note without compliance with the registration and prospectus delivery
provisions of the Securities Act if all of the following apply:
- the holder is not our "affiliate" within the meaning of Rule 405 under
the Securities Act,
- the new note is acquired in the ordinary course of the holder's business,
and
- the holder does not intend to participate in the distribution of new
notes.
If a holder of outstanding notes tenders in the exchange offer with the
intention of participating in any manner in a distribution of the new notes,
that holder both:
- cannot rely on these interpretations by the SEC staff, and
- must comply with the registration and prospectus delivery requirements of
the Securities Act including being named as selling noteholders in
connection with a secondary resale transaction.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K under the Securities
Act. This prospectus may be used for an offer to resell, a resale or other
retransfer of new notes only as specifically described in this prospectus. Only
broker-dealers that acquired the outstanding notes as a result of market-making
activities or other trading activities may participate in the exchange offer.
Please read the section captioned "Plan of Distribution" beginning on page 122
for more details regarding the transfer of new notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes properly tendered and not withdrawn before the expiration date. We will
issue $1,000 principal amount of new notes in exchange for each $1,000 principal
amount of outstanding notes surrendered under the exchange offer. Outstanding
notes may be tendered only in integral multiples of $1,000. The exchange offer
is not conditioned upon any minimum aggregate principal amount of outstanding
notes being tendered for exchange.
As of the date of this prospectus, $100 million aggregate principal amount
of the notes are outstanding. This prospectus and the letter of transmittal are
being sent to all registered holders of outstanding notes. There will be no
fixed record date for determining registered holders of outstanding notes
entitled to participate in the exchange offer.
We intend to conduct the exchange offer according to the provisions of the
registration rights agreement, the applicable requirements of the Securities Act
and the Securities Exchange Act of 1934 and the rules and regulations of the
SEC. Outstanding notes that are not tendered for exchange in the exchange offer
will remain outstanding and continue to accrue interest and will be entitled to
the rights and benefits the holders have under the indenture relating to the
notes and the registration rights agreement.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance to
the exchange agent and complied with the applicable provisions of the
registration rights agreement. The exchange agent will act as agent for the
tendering holders for the purposes of receiving the new notes.
Holders tendering outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to
69
<PAGE> 71
the exchange of outstanding notes. We will pay all charges and expenses, other
than some applicable taxes as described below, in connection with the exchange
offer. It is important for holders to read the section labeled "-- Fees and
Expenses" for more details regarding fees and expenses incurred in the exchange
offer.
We will return any outstanding notes that we do not accept for exchange for
any reason without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
EXPIRATION DATE
The exchange offer will expire at 5:00 p.m., New York City time, on
September 15, 1999, unless, in our sole discretion, we extend the exchange
offer.
EXTENSIONS, DELAY IN ACCEPTANCE, TERMINATION OR AMENDMENT
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. During any
extensions, all outstanding notes previously tendered will remain subject to the
exchange offer, and we may accept them for exchange.
To extend an exchange offer, we will notify the exchange agent orally or in
writing of any extension. We will also make a public announcement of the
extension no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
If any of the conditions described below under "-- Conditions to the
Exchange Offer" have not been satisfied, we reserve the right, in our sole
discretion to either:
- delay accepting for exchange any outstanding notes,
- extend the exchange offer, or
- terminate the exchange offer
by giving oral or written notice of a delay, extension or termination to the
exchange agent. Subject to the terms of the registration rights agreement, we
also reserve the right to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed, as promptly as practicable, by oral or written notice to the
registered holders of the outstanding notes. If we amend the exchange offer in a
manner we determine to constitute a material change, we will promptly disclose
the amendment by means of a prospectus supplement and, if required, a
post-effective amendment to the registration statement. The supplement will be
distributed to the registered holders of the outstanding notes. Depending upon
the significance of the amendment and the manner of disclosure to the registered
holders, we will extend the exchange offer if the exchange offer would otherwise
expire during that period.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we will have no obligation to publish, advertise or
otherwise communicate any public announcement, other than by making a timely
press release to the Dow Jones News Service.
CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, if in our reasonable judgment
the exchange offer, or the making of any exchange by a holder of outstanding
notes, would violate applicable law or any applicable interpretation of the
staff of the SEC:
- we will not be required to accept for exchange, or exchange any new notes
for, any outstanding notes, and
70
<PAGE> 72
- we may terminate the exchange offer as provided in this prospectus before
accepting any outstanding notes for exchange.
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made:
- the representations described under "-- Purpose and Effect of the
Exchange Offer," "-- Procedures for Tendering" and "Plan of
Distribution", and
- other representations as may be reasonably necessary under applicable SEC
rules, regulations or interpretations to make available to us an
appropriate form for registration of the new notes under the Securities
Act.
We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions to the exchange offer
specified above. We will give oral or written notice of any extension,
amendment, nonacceptance or termination to the holders of the outstanding notes
as promptly as practicable. These conditions are for our sole benefit, and we
may assert them or waive them in whole or in part at any time or at various
times in our sole discretion. If we fail at any time to exercise any of these
rights, this failure will not mean that we have waived our rights. Each right
will be deemed an ongoing right that we may assert at any time or at various
times. In addition, we will not accept for exchange any outstanding notes
tendered and will not issue new notes in exchange for any outstanding notes if,
at that time, any stop order has been threatened or is in effect with respect to
(1) the registration statement of which this prospectus is a part or (2) the
qualification of the indenture relating to the notes under the Trust Indenture
Act of 1939.
PROCEDURES FOR TENDERING
How to Tender Generally. Only a holder of outstanding notes may tender
their outstanding notes in the exchange offer. To tender in the exchange offer,
a holder must comply with all of the following:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal, have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires, and mail or deliver
the letter of transmittal or a facsimile of the letter of transmittal to
the exchange agent before the expiration date, or
- comply with the automated tender offer program procedures of DTC
described below.
In addition, one of the following must occur:
- the exchange agent must receive outstanding notes along with the letter
of transmittal,
- the exchange agent must receive, before the expiration date, a timely
confirmation of book-entry transfer of the outstanding notes into the
exchange agent's account at DTC according to the procedure for book-entry
transfer described below or a properly transmitted agent's message, and
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address provided above under "-- The Exchange Agent" before the expiration date.
The tender by a holder that is not withdrawn before the expiration date will
constitute an agreement between the holder and us according to the terms and
subject to the conditions described in this prospectus and in the letter of
transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send
71
<PAGE> 73
the letter of transmittal or outstanding notes to us. Holders may request their
broker-dealers, commercial banks, trust companies or other nominees to effect
the above transactions on their behalf.
Tendering Through DTC's Automated Tender Offer Program. The exchange agent
and DTC have confirmed that any financial institution that is a participant in
DTC's system may use DTC's automated tender offer program to tender.
Participants in the program may, instead of physically completing and signing
the letter of transmittal and delivering it to the exchange agent, transmit
their acceptance of the exchange offer electronically. They may do so by causing
DTC to transfer the outstanding notes to the exchange agent according to its
procedures for transfer. DTC will then send an agent's message to the exchange
agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, stating
that:
- DTC has received an express acknowledgment from a participant in its
automated tender offer program that is tendering outstanding notes that
are the subject of book-entry confirmation,
- the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery, and
- the agreement may be enforced against the participant.
How to Tender if You Are a Beneficial Owner. If you beneficially own
outstanding notes that are registered in the name of a broker-dealer, commercial
bank, trust company or other nominee and you wish to tender those notes, you
should contact the registered holder promptly and instruct it to tender on your
behalf. If you are a beneficial owner and wish to tender on your own behalf, you
must, before completing and executing the letter of transmittal and delivering
your outstanding notes, either:
- make appropriate arrangements to register ownership of the outstanding
notes in your name, or
- obtain a properly completed bond power from the registered holder of
outstanding notes.
The transfer of registered ownership may take considerable time and may not be
completed before the expiration date.
Signatures and Signature Guarantees. You must have signatures on a letter
of transmittal or a notice of withdrawal described below guaranteed by:
- a member firm of a registered national securities exchange,
- a member of the National Association of Securities Dealers, Inc.,
- a commercial bank or trust company having an office or correspondent in
the United States, or
- an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934.
The above must be a member of one of the recognized signature guarantee programs
identified in the letter of transmittal, unless the outstanding notes are
tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal, and the new notes are being issued directly to the
registered holder of the outstanding notes tendered in the exchange for
those new notes, or
- for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution.
72
<PAGE> 74
When Endorsements or Bond Powers are Needed. If the letter of transmittal
is signed by a person other than the registered holder of any outstanding notes,
the outstanding notes must be endorsed or accompanied by a properly completed
bond power. The bond power must be signed by the registered holder as the
registered holder's name appears on the outstanding notes and a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an eligible guarantor institution must
guarantee the signature on the bond power.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing. They should also submit
evidence of their authority to deliver the letter of transmittal satisfactory to
us unless we waive this requirement.
Determinations Under the Exchange Offer. We will determine in our sole
discretion all questions as to the validity, form, eligibility, time of receipt,
acceptance of tendered outstanding notes and withdrawal of tendered outstanding
notes. Our determination will be final and binding. We reserve the absolute
right to reject any outstanding notes not properly tendered or any outstanding
notes our acceptance of which would, in the opinion of our counsel, be unlawful.
We also reserve the right to waive any defects, irregularities or conditions of
tender as to particular outstanding notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of outstanding notes must
be cured within the time we shall determine. Neither we, the exchange agent nor
any other person will be under any duty to give notification of defects or
irregularities with respect to tenders of outstanding notes, and none of the
aforementioned will incur liability for failure to give notification. Tenders of
outstanding notes will not be deemed made until any defects or irregularities
have been cured or waived. Any outstanding notes received by the exchange agent
that are not properly tendered and the defects or irregularities of which have
not been cured or waived will be returned to the tendering holder, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
When We Will Issue New Notes. In all cases, we will issue new notes for
outstanding notes that we have accepted for exchange under the exchange offer
only after the exchange agent timely receives both:
- outstanding notes or a timely book-entry confirmation of the outstanding
notes into the exchange agent's account at DTC, and
- a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
Return of Outstanding Notes Not Accepted or Exchanged. If we do not accept
any tendered outstanding notes for exchange for any reason described in the
terms and conditions of the exchange offer or if outstanding notes are submitted
for a greater principal amount than the holder desires to exchange, the
unaccepted or nonexchanged outstanding notes will be returned without expense to
their tendering holder. In the case of outstanding notes tendered by book-entry
transfer into the exchange agent's account at DTC according to the procedures
described below, the nonexchanged outstanding notes will be credited to an
account maintained with DTC. These actions will occur as promptly as practicable
after the expiration or termination of the exchange offer.
Your Representations to Us. By signing or agreeing to be bound by the
letter of transmittal, you will represent that, among other things:
- any new notes that the holder receives will be acquired in the ordinary
course of its business,
- the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the new notes,
- if the holder is not a broker-dealer, the holder is not engaged in and
does not intend to engage in the distribution of the new notes,
73
<PAGE> 75
- if the holder is a broker-dealer that will receive new notes for its own
account in exchange for outstanding notes that were acquired as a result
of market-making activities, the holder will deliver a prospectus, as
required by law, in connection with any resale of the new notes, and
- that holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if the holder is an affiliate, that holder will
comply with any applicable registration and prospectus delivery
requirements of the Securities Act.
Book-Entry Transfer. The exchange agent will make a request to establish an
account with respect to the outstanding notes at DTC for purposes of the
exchange offer promptly after the date of this prospectus. Any financial
institution participating in DTC's system may make book-entry delivery of
outstanding notes by causing DTC to transfer the outstanding notes into the
exchange agent's account at DTC according to DTC's procedures for transfer.
Holders of outstanding notes who are unable to deliver confirmation of the
book-entry tender of their outstanding notes into the exchange agent's account
at DTC or all other documents required by the letter of transmittal to the
exchange agent on or before the expiration date must tender their outstanding
notes according to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Any holder wishing to tender its outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver its outstanding notes,
the letter of transmittal or any other required documents to the exchange agent
or comply with the applicable procedures under DTC's automated tender offer
program before the expiration date may tender if:
- the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor institution,
- before the expiration date, the exchange agent receives from the member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bank or trust company
having an office or correspondent in the United States, or eligible
guarantor institution either a properly completed and duly executed
notice of guaranteed delivery by facsimile transmission, mail or hand
delivery or a properly transmitted agent's message and notice of
guaranteed delivery:
- stating the holder's name and address, the registered number(s) of the
holder's outstanding notes and the principal amount of outstanding notes
tendered,
- stating that the tender is being made, and
- guaranteeing that, within five business days after the expiration date,
the letter of transmittal or a facsimile of the letter of transmittal,
together with the outstanding notes or a book-entry confirmation, and
any other documents required by the letter of transmittal will be
deposited by the eligible guarantor institution with the exchange agent,
and
- the exchange agent receives the properly completed and executed letter of
transmittal or a facsimile of the letter of transmittal, as well as all
tendered outstanding notes in proper form for transfer or a book-entry
confirmation, and all other documents required by the letter of
transmittal, within five business days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to a holder if it wishes to tender its outstanding notes according to the
guaranteed delivery procedures described above.
74
<PAGE> 76
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, any holder may withdraw
its tender at any time before 5:00 p.m., New York City time, on the expiration
date unless previously accepted for exchange. For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at one of
the addresses listed under "-- The Exchange Agent", and
- the withdrawing holder must comply with the appropriate procedures of
DTC's automated tender offer program system.
Any notice of withdrawal must comply with all of these requirements:
- specify the name of the person who tendered the outstanding notes to be
withdrawn (the "Depositor"),
- identify the outstanding notes to be withdrawn, including the
registration number or numbers and the principal amount of the
outstanding notes,
- be signed by the Depositor in the same manner as the original signature
on the letter of transmittal used to deposit those outstanding notes or
be accompanied by documents of transfer sufficient to permit the trustee
for the outstanding notes to register the transfer into the name of the
Depositor withdrawing the tender, and
- specify the name in which the outstanding notes are to be registered, if
different from that of the Depositor.
If outstanding notes have been tendered under the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn outstanding notes
and otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination shall be final
and binding on all parties. We will deem any outstanding notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.
Any outstanding notes that have been tendered for exchange but are not
exchanged for any reason will be returned to their holder without cost to the
holder, or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, the outstanding notes will be credited to an account maintained with DTC
for the outstanding notes. This return or crediting will take place as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. Holders may retender properly withdrawn outstanding notes by following
one of the procedures described under the caption "-- Procedures for Tendering"
above at any time on or before the expiration date.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by telecopy,
telephone or in person by our officers and regular employees and the officers
and regular employees of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses. We may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this prospectus, letter of transmittal
and related documents to the beneficial owners of the outstanding notes and in
handling or forwarding tenders for exchange.
75
<PAGE> 77
We will pay the cash expenses to be incurred in connection with the exchange
offer, including:
- SEC registration fees,
- fees and expenses of the exchange agent and trustee,
- accounting and legal fees and printing costs, and
- related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:
- certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered,
- tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal, or
- a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to that tendering holder.
TRANSFER TAXES
If a holder tenders its outstanding notes for exchange, it will not be
required to pay any transfer taxes. However, if a holder instructs us to
register new notes in the name of, or requests that outstanding notes not
tendered or not accepted in the exchange offer be returned to, a person other
than that holder, in that holder's capacity as the registered tendering holder,
that holder will be required to pay any applicable transfer tax.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders who do not exchange their outstanding notes for new notes under the
exchange offer will remain subject to the existing restrictions on transfer of
the outstanding notes. In general, a holder may not offer or sell the
outstanding notes unless they are registered under the Securities Act or if the
offer or sale is exempt from registration under the Securities Act and
applicable state securities laws. Except as required by the registration rights
agreement, we do not intend to register resales of the outstanding notes under
the Securities Act. Based on interpretations of the SEC staff, holders may offer
for resale, or may resell or otherwise transfer new notes issued in the exchange
offer without compliance with the registration and prospectus delivery
provisions of the Securities Act, if they:
- are not our "affiliate" within the meaning of Rule 405 under the
Securities Act,
- acquired the new notes in the ordinary course of their business, and
- have no arrangement or understanding with respect to the distribution of
the new notes to be acquired in the exchange offer.
If a holder tenders in the exchange offer for the purpose of participating
in a distribution of the new notes, it both:
- cannot rely on the applicable interpretations of the SEC, and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
76
<PAGE> 78
ACCOUNTING TREATMENT
We will not recognize a gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize expenses of the exchange
offer over the term of the new notes under generally accepted accounting
principles.
THE EXCHANGE AGENT
We have appointed Norwest Bank Minnesota, National Association as exchange
agent for this exchange offer. You should direct all questions and requests for
assistance on the procedures for tendering and all requests for additional
copies of this prospectus or the letter of transmittal to the exchange agent as
follows:
By regular mail or overnight courier:
Norwest Bank Minnesota, National Association
N9303-120
Corporate Trust
Sixth and Marquette
Minneapolis, MN 55479
By hand delivery only:
Norwest Bank Minnesota, National Association
Northstar East Building - 12th Floor
Corporate Trust
608 Second Avenue South
Minneapolis, MN 55402
By Registered or Certified Mail:
Norwest Bank Minnesota, National Association
N9303-121
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480
Facsimile: 612/667-9825 (Administration) or 612/667-4927 (Operations)
Phone: 612/667-9165 (Administration) or 612/667-9764 (Customer Service)
OTHER
Participation in the exchange offer is voluntary, and holders of
outstanding notes should carefully consider whether to accept. Those holders are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
We may, in the future, seek to acquire untendered outstanding notes in
open-market or privately negotiated transactions, through subsequent exchange
offers or otherwise. We have no present plans to acquire any outstanding notes
that are not tendered in the exchange offer or to file a registration statement
to permit resales of any untendered outstanding notes.
77
<PAGE> 79
DESCRIPTION OF THE NEW NOTES
GENERAL
We will issue the new notes, and we issued the outstanding notes, under an
indenture dated as of April 15, 1999, that the Company along with Kelley Oil
Corporation, Kelley Operating Company, Ltd. and Concorde Gas Marketing, Inc., as
the initial subsidiary guarantors, entered into with Norwest Bank Minnesota,
National Association, as trustee. The terms of the new notes include those
stated in the indenture and those made part of the indenture by the Trust
Indenture Act of 1939, as amended. We urge you to read the indenture, the
subsidiary guarantees, the Security Documents and the registration rights
agreement because they, not this description, define your rights as a holder of
the notes.
We have summarized below material selected provisions of the notes and the
indenture. For a complete description, you should refer to the indenture, the
notes and the subsidiary guarantees filed as exhibits to this registration
statement which includes this prospectus. See "Available Information".
Most of the capitalized terms used in this summary are defined below under
"-- Definitions Used in This Description of New Notes". Capitalized terms not
otherwise defined below or elsewhere in this Description of the New Notes have
the meanings given to them in the indenture. In this description, the word
"Company" refers to Contour Energy Co. (formerly Kelley Oil & Gas Corporation)
and not to any of its subsidiaries, and references to "we", "us" or "our" refer
to the Company and the subsidiary guarantors. References to "notes" are to the
outstanding notes together with the new notes.
Like the outstanding notes, the new notes:
- will be senior secured obligations of the Company,
- will be secured by a first Lien, subject only to Permitted Liens, on
substantially all of the proved oil and natural gas reserves of the
Company,
- will rank equally in contractual right of payment with all of the
Company's current and future senior Indebtedness,
- will rank senior to all of the Company's current and future Subordinated
Obligations, and
- will be unconditionally guaranteed by the subsidiary guarantors, which
guarantees will be secured by a first Lien, subject only to Permitted
Liens, on substantially all of the proved oil and natural gas reserves of
each subsidiary guarantor.
The aggregate stated principal amount of notes we may issue is limited to
an amount equal to the Borrowing Base. The notes mature on April 15, 2003 at a
price of 105% of the stated principal amount thereof, with a partial quarterly
mandatory redemption. See "-- Scheduled Quarterly Redemption". We will pay
interest on the notes at the rate of 14% per year on 105% of the stated
principal amount from the Issue Date, payable semiannually to the persons
registered as the owners of the notes at the close of business on the April 1 or
October 1 immediately preceding the interest payment date on April 15 and
October 15 of each year, commencing on October 15, 1999. We will also pay
interest on overdue principal and (to the extent permitted by law) on overdue
installments of interest at the rate of 1% per annum in excess of the stated
rate of 14% per year on 105% of the stated principal amount on the notes. We
will compute interest based on a 360-day year of twelve 30-day months. Interest
shall accrue and be payable before and after the filing of a bankruptcy petition
at the rate and on the dates set forth above.
We will issue the new notes only in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple of $1,000. You will pay no
service charge for any registration of transfer or exchange of the notes, but we
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection therewith.
78
<PAGE> 80
The form and term of the new notes are the same as the form and term of the
outstanding notes they will replace, except that:
- we will register the new notes under the Securities Act,
- the new notes, once registered, will not bear legends restricting
transfer, and
- holders of the new notes will not be entitled to some rights under the
registration rights agreement, including our payment of additional
interest for failure to meet specified deadlines, which terminate when
the exchange offer is consummated.
We will issue the new notes solely in exchange for an equal principal
amount of outstanding notes. As of the date of this prospectus, $100 million
aggregate principal amount of notes are outstanding. See "The Exchange Offer".
SCHEDULED QUARTERLY REDEMPTION
On the 15th day of each January, April, July and October, commencing July
15, 2002, we will be obligated to redeem $2.0 million of the stated principal
amount of the notes, expressed as an integral multiple of $1,000, at a
redemption price equal to 103% of the stated principal amount, plus accrued and
unpaid interest thereon to the date of redemption.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Company may not redeem
the notes prior to April 15, 2001. After that date, the Company may redeem the
notes, at its option, in whole or in part, at any time or from time to time,
upon not less than 30 nor more than 60 days' prior notice mailed to you by
first-class mail, at 105% of stated principal amount, plus accrued interest to
the redemption date (subject to your right, if you are a holder of record on the
relevant record date, to receive interest due on the relevant interest payment
date), if redeemed on or after April 15, 2001.
In addition, at any time and from time to time prior to April 15, 2001, the
Company may redeem in the aggregate up to 35% of the original stated principal
amount of the notes with the proceeds of one or more Equity Offerings at a
redemption price of 114% of stated principal amount, plus accrued interest to
the redemption date, subject to your right, if you are registered as a holder on
the relevant record date, to receive interest due on the relevant interest
payment date; provided, however, that either at least 65% of the original stated
principal amount of the notes must remain outstanding after each such redemption
or such redemption must retire the notes in their entirety and the redemption
occurs within 60 days after the consummation of such Equity Offering.
In the case of any partial redemption, selection of the notes for
redemption will be made by the trustee on a pro rata basis, by lot or by another
method that the trustee, in its sole discretion, shall deem to be fair and
appropriate, although no note of $1,000 in original principal amount or less
shall be redeemed in part. If any note is to be redeemed in part only, the
notice of redemption relating to such note shall state the portion of the
principal amount thereof to be redeemed. We will issue another note in your name
in principal amount equal to the unredeemed portion thereof upon cancellation of
your original note.
SUBSIDIARY GUARANTEES
The Company's Restricted Subsidiaries (other than the Programs), which are
initially Kelley Oil Corporation, Kelley Operating Company, Ltd. and Concorde
Gas Marketing, Inc. (all such Restricted Subsidiaries being the subsidiary
guarantors) will guarantee the Company's obligations under the notes. Each
subsidiary guarantor will pledge substantially all of its Oil and Gas Assets to
secure its obligations under its subsidiary guarantee. Each subsidiary
guarantor's subsidiary guarantee will rank equally in contractual right of
payment with all of its current and future senior Indebtedness, and senior to
all of its current and future Subordinated Obligations.
79
<PAGE> 81
Each subsidiary guarantor, as primary obligor and not merely as surety,
will irrevocably and unconditionally guarantee, on a joint and several basis,
the performance and the punctual payment when due, whether at Stated Maturity,
by acceleration, by redemption or otherwise, of all the obligations of the
Company under the indenture and the notes. Each subsidiary guarantee will be
limited in amount to an amount not to exceed the maximum amount that can, after
giving effect to all other contingent and fixed liabilities of the applicable
subsidiary guarantor, be guaranteed by such subsidiary guarantor without
rendering such subsidiary guarantee voidable under applicable law relating to
fraudulent transfer or fraudulent conveyance or similar laws affecting the
rights of creditors generally. Each subsidiary guarantor will agree to pay, in
addition to the amount stated above, any and all expenses, including reasonable
counsel fees and expenses, incurred by the holders of the notes and the trustee
in enforcing any rights under the subsidiary guarantee with respect to that
subsidiary guarantor.
Each subsidiary guarantee is a continuing guarantee and shall:
- remain in full force and effect until payment in full of all the
guaranteed obligations,
- be binding upon the relevant subsidiary guarantor, and
- inure to the benefit of and be enforceable by the trustee, the holders of
the notes and their successors, transferees and assigns as provided in
the indenture. See "-- Defaults".
Under the indenture, any subsidiary guarantor may consolidate with, merge
with or into, or transfer all or substantially all its assets to any other
Person to the same extent the Company may consolidate with, merge with or into,
or transfer all or substantially all its assets to, any other Person; provided,
however, that if the other Person is not the Company or a subsidiary guarantor,
that subsidiary guarantor's obligations under the indenture and its subsidiary
guarantee must be expressly assumed by the other Person. However, upon the sale
or disposition (by merger or otherwise) of any subsidiary guarantor to a Person
(other than to the Company or a subsidiary guarantor) permitted by the
indenture, that subsidiary guarantor will be released and relieved from all its
obligations under the indenture and its subsidiary guarantee. See "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock".
SECURITY; RANKING
All of the Company's obligations and the subsidiary guarantors' guaranteed
obligations will be secured by a first Lien, subject only to Permitted Liens, on
substantially all of the Oil and Gas Assets of the Company and its Restricted
Subsidiaries owned on the Issue Date, and by a first Lien, subject only to
Permitted Liens, on substantially all of the Oil and Gas Assets acquired or
developed thereafter; provided however that, with respect to any property
securing Acquired Indebtedness, the Company's and each subsidiary guarantor's
obligation to provide Liens to the trustee on that property will be limited to
the extent that granting a Lien on that property is not prohibited by the terms
of the instruments creating that Acquired Indebtedness (including any
refinancing thereof); and provided further that such Lien, if not otherwise
prohibited, may be inferior to the Lien securing the Acquired Indebtedness. See
"-- Certain Covenants -- Lien on Additional Collateral." In addition, the
obligations will be secured by a first priority Lien on the general partnership
interests of the Company and the subsidiary guarantors in the Programs.
The Oil and Gas Assets that will initially secure the obligations and the
guaranteed obligations represent approximately 95% of the PV-10 Value of the Oil
and Gas Properties of the Company and subsidiary guarantors as of December 31,
1998. The general partnership interests of the Company and the subsidiary
guarantors in the Programs represent approximately 10% of that value.
If the notes become due and payable prior to the Stated Maturity or we do
not pay the notes in full at the Stated Maturity, the trustee may take all
actions it deems necessary or appropriate, including, but not limited to,
foreclosing upon the Collateral in accordance with the indenture, the Security
Documents and applicable law. The trustee will apply the proceeds received from
the sale of any Collateral that is the subject of a foreclosure or collection
suit first to pay the expenses of such foreclosure or suit and amounts then
payable to the trustee and thereafter to pay the principal of and interest on
the notes. The trustee has
80
<PAGE> 82
the power to institute and maintain any suits and proceedings as it may deem
expedient to prevent impairment of, or to preserve or protect its and your
interest in, the Collateral.
We cannot assure you that the trustee will be able to sell the Collateral
without substantial delays or that the proceeds obtained will be sufficient to
pay all amounts owing to you. See "Risk Factors -- The collateral may not be
sufficient to satisfy all amounts due on the notes."
The collateral release provisions of the indenture will permit the release
of Collateral without substitution of collateral of equal value in some
circumstances. See "-- Possession, Use and Release of Collateral".
As secured obligations of the Company and the relevant subsidiary
guarantors, the obligations and the guaranteed obligations, respectively, will
be senior to all of our Subordinated Obligations and rank equally in contractual
right of payment to all of our other current and future senior Indebtedness. The
notes and any subsidiary guarantee will effectively, however, be senior as to
other senior Indebtedness on the basis of the Liens granted under the indenture
and the Security Documents to the extent of the value of the Collateral.
Substantially all the Company's operations are currently conducted through
its subsidiaries. Claims of creditors of any subsidiaries that have not executed
a subsidiary guarantee, including trade creditors, secured creditors and
creditors holding guarantees issued by those subsidiaries, and claims of
preferred stockholders (if any) of those subsidiaries generally will have
priority with respect to the assets and earnings of those subsidiaries over the
claims of our creditors, including you as a holder of notes. The notes and each
subsidiary guarantee, therefore, will be effectively subordinated to creditors
(including trade creditors) and preferred stockholders (if any) of subsidiaries
of the Company, other than the relevant subsidiary guarantor. The Company's
subsidiaries (other than the subsidiary guarantors) currently have no
liabilities to any Person other than the Company and its subsidiaries. Although
the indenture limits the incurrence of Indebtedness and the issuance of
preferred stock of certain of the Company's subsidiaries, that limitation is
subject to a number of significant qualifications; moreover, the indenture does
not impose any limitation on the incurrence by those subsidiaries of liabilities
that are not considered Indebtedness under the indenture. See "-- Certain
Covenants -- Limitation on Indebtedness".
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
In connection with the issuance of the outstanding notes, we entered into a
registration rights agreement. Under the registration rights agreement, we
agreed to
- file a registration statement with the SEC on or within 75 days after May
17, 1999,
- use our best efforts to cause the registration statement to be declared
effective under the Securities Act within 135 days after May 17, 1999,
- use our best efforts to cause the exchange offer to be consummated within
180 days after May 17, 1999,
- keep the exchange offer open for acceptance for a period of not less than
20 business days after the date notice of the exchange offer is mailed to
holders of the outstanding notes, and
- accept for exchange all outstanding notes duly tendered and not validly
withdrawn under the exchange offer according to the terms of the
registration statement and letter of transmittal.
As soon as practicable after the exchange offer registration statement
becomes effective, we will offer the holders of outstanding notes who are not
prohibited by any law or policy of the SEC from participating in the exchange
offer the opportunity to exchange their outstanding notes for new notes
registered under the Securities Act that are substantially identical to the
outstanding notes, except that the new notes will not contain terms with respect
to transfer restrictions, registration rights and additional interest.
81
<PAGE> 83
The registration rights agreement also provides that we
- shall make available for a period of 180 days after the consummation of
the exchange offer a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any resale
of any new notes, and
- shall pay all expenses incident to the exchange offer, including the
expense of one counsel to the holders of the notes, and will indemnify
some holders of the notes, including any broker-dealer, against
liabilities including liabilities under the Securities Act.
A broker-dealer that delivers a prospectus to purchasers in connection with
resales will be subject to various civil liability provisions under the
Securities Act and will be bound by the provisions of the registration rights
agreement, including some of the indemnification rights and obligations.
We will use our best efforts to file with the SEC a shelf registration
statement to cover resales of the outstanding notes by those holders who provide
required information in connection with that shelf registration statement under
each of the following circumstances:
- if any changes in law, SEC rules or regulations or applicable
interpretations of these laws, rules or regulations by the staff of the
SEC do not permit us to effect the exchange offers as contemplated by the
registration rights agreement,
- if SEC rules or regulations or applicable interpretations prohibit any
initial purchaser of the outstanding notes from participating in the
exchange offer, or
- if any holder of the outstanding notes notifies us that it may not resell
the new notes without delivering a prospectus and the prospectus included
in this registration statement is not available for those resales.
We will use our best efforts to keep the shelf registration statement, if
filed, effective for a period of two years after it is filed.
If a registration default occurs, we will be obligated to pay additional
interest to each holder of outstanding notes at a rate equal to 0.5% per annum.
If a registration default is not cured within six months, the interest rate
increases by an additional 0.5% per annum, but the additional interest may not
exceed an aggregate of 1% per year at any one time. A registration defaults
occurs if
- the registration statement is not filed with the SEC within 75 days after
May 17, 1999,
- we receive notice of a requirement to file a shelf registration statement
but do not do so within 60 days after receipt of that notice,
- the registration statement or shelf registration statement is not
declared effective within 60 days after filing,
- the exchange offer is not consummated within 180 days after May 17, 1999,
or
- the shelf registration statement is filed and declared effective, but
subsequently ceases to be effective.
Following the cure of a registration default, additional interest will cease to
accrue.
If you desire to tender your outstanding notes, you will be required to
make to us the representations described under "The Exchange Offer -- Purpose
and Effect of the Exchange Offer" and "The Exchange Offer -- Procedures for
Tendering" to participate in the exchange offers. In addition, we may require
you to deliver information to be used in connection with the shelf registration
statement to have your notes included in the shelf registration statement and to
benefit from the provisions regarding additional interest described in the
preceding paragraphs. A holder who sells outstanding notes under the shelf
registration statement generally will be required to be named as a selling
security holder in the related prospectus and
82
<PAGE> 84
to deliver a prospectus to purchasers. A holder will also be subject to the
civil liability provisions under the Securities Act in connection with the sales
and will be bound by the provisions of the registration rights agreement that
are applicable to a holder, including indemnification obligations.
The description of the registration rights agreement contained in this
section is a summary of the terms we believe are material at this time and is
qualified in its entirety by reference to all provisions of the registration
rights agreement. The registration rights agreement is filed as an exhibit to
the registration statement of which this prospectus is a part.
DEFINITIONS USED IN THIS DESCRIPTION OF NEW NOTES
"Acquired Indebtedness" means Indebtedness of the Company or any of its
Restricted Subsidiaries of the types described under clauses (b)(5), (b)(7),
(b)(11) and (b)(12) of the covenant "Limitation on Indebtedness."
"Additional Assets" means
(i) any property or assets (other than Indebtedness and Capital Stock)
used or useful in the Oil and Gas Business;
(ii) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock by the
Company or another Restricted Subsidiary or
(iii) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clauses (ii)
or (iii) above is primarily engaged in the Oil and Gas Business.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination,
(a) the sum of
(i) discounted future net revenues from proved oil and gas reserves
of the Company and its Restricted Subsidiaries calculated in accordance
with SEC guidelines before any state or federal income taxes, as
estimated in a reserve report prepared as of the end of the Company's
most recently completed fiscal year, which reserve report is prepared or
reviewed by independent petroleum engineers, as increased by, as of the
date of determination, the discounted future net revenues of (A)
estimated proved oil and gas reserves of the Company and its Restricted
Subsidiaries attributable to any material acquisition consummated since
the date of such year-end reserve report, and (B) estimated oil and gas
reserves of the Company and its Restricted Subsidiaries attributable to
material extensions, discoveries and other additions and upward
determinations of estimates of proved oil and gas reserves due to
exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the date of such year-end reserve
report which would, in the case of determinations made pursuant to
clauses (A) and (B), in accordance with standard industry practice,
result in such additions or revisions, in each case calculated in
accordance with SEC guidelines (utilizing the prices utilized in such
year-end reserve report), and decreased by, as of the date of
determination, the discounted future net revenues of (C) estimated
proved oil and gas reserves of the Company and its Restricted
Subsidiaries produced or disposed of since the date of such year-end
reserve report and (D) reductions in the estimated oil and gas reserves
of the Company and its Restricted Subsidiaries since the date of such
year-end reserve report attributable to material downward determinations
of estimates of proved oil and gas reserves due to exploration,
development or exploitation, production or other activities conducted or
otherwise occurring since the date of such year-end reserve report which
would, in the case of determinations made pursuant to clauses (C) and
(D), in accordance with standard industry practice, result in such
determinations, in each case calculated in accordance with SEC
guidelines (utilizing the prices
83
<PAGE> 85
utilized in such year-end reserve report); provided that, in the case of
each of the determinations made pursuant to clauses (A) through (D),
such increases and decreases shall be as estimated by the Company's
engineers, except that if as a result of such acquisitions,
dispositions, discoveries, extensions or revisions, there is a Material
Change, then such increases and decreases in the discounted future net
revenue shall be confirmed in writing by an independent petroleum
engineer,
(ii) the capitalized costs that are attributable to oil and gas
properties of the Company and its Restricted Subsidiaries to which no
proved oil and gas reserves are attributed, based on the Company's books
and records as of a date no earlier than the date of the Company's
latest annual or quarterly financial statements,
(iii) the Net Working Capital on a date no earlier than the date of
the Company's latest annual or quarterly financial statements and
(iv) the greater of (I) the net book value on a date no earlier
than the date of the Company's latest annual or quarterly financial
statements and (II) the appraised value, as estimated by independent
appraisers, of other tangible assets of the Company and its Restricted
Subsidiaries as of a date no earlier than the date of the Company's
latest audited financial statements (provided that the Company shall not
be required to obtain such an appraisal of such assets if no such
appraisal has been performed), minus
(b) the sum of
(i) minority interests,
(ii) any gas balancing liabilities of the Company and its
Restricted Subsidiaries reflected in the Company's latest audited
financial statements,
(iii) the discounted future net revenue, calculated in accordance
with SEC guidelines (utilizing the same prices utilized in the Company's
year-end reserve report), attributable to reserves subject to
participation interests, overriding royalty interests or other interests
of third parties, pursuant to participation, partnership, vendor
financing or other agreements then in effect, or which otherwise are
required to be delivered to third parties,
(iv) the discounted future net revenues, calculated in accordance
with SEC guidelines (utilizing the same prices utilized in the Company's
year-end reserve report), attributable to reserves that are required to
be delivered to third parties to fully satisfy the obligations of the
Company and its Restricted Subsidiaries with respect to Volumetric
Production Payments on the schedules specified with respect thereto and
(v) the discounted future net revenues, calculated in accordance
with SEC guidelines, attributable to reserves subject to
Dollar-Denominated Production Payments that, based on the estimates of
production included in determining the discounted future net revenues
specified in the immediately preceding clause (a)(i) (utilizing the same
prices utilized in the Company's year-end reserve report), would be
necessary to satisfy fully the obligations of the Company and its
Restricted Subsidiaries with respect to Dollar-Denominated Production
Payments on the schedules specified with respect thereto.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the preceding. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments," "-- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock" and "-- Certain Covenants -- Limitation on Affiliate
Transactions" only, "Affiliate" shall also mean any beneficial owner of Capital
Stock representing 5% or more of the total voting power of the Voting Stock
84
<PAGE> 86
(on a fully diluted basis) of the Company or of rights or warrants to purchase
such Capital Stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof. Shareholders and Affiliates of Bessemer Securities Corporation
("BSC") that would not be Affiliates of the Company other than by reason of
being shareholders or Affiliates of BSC and that neither in fact participate in
the management of any of BSC, Bessemer Partners & Co. ("Bessemer"), Bessemer
Holdings, L.P. ("Holdings") or the Company nor are controlled by BSC, Bessemer,
Holdings, the Company, or any of their respective Affiliates who in fact
participate in the management of any of BSC, Bessemer, Holdings or the Company,
shall not be deemed to be "Affiliates" of the Company.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of
(i) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary),
(ii) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary. Notwithstanding the preceding, none of the following
shall be deemed to be an Asset Disposition: (1) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (2) the sale or transfer (whether
or not in the ordinary course of business) of oil and gas properties or
direct or indirect interests in real property; provided, however, that at
the time of such sale or transfer such properties do not have associated
with them any proved reserves, (3) the abandonment, farm-out, lease or
sublease of developed or undeveloped oil and gas properties in the ordinary
course of business, (4) the trade or exchange by the Company or any
Restricted Subsidiary of any oil and gas property owned or held by the
Company or such Restricted Subsidiary for any oil and gas property owned or
held by another Person, provided that if any property so traded or
exchanged contains proved reserves, then the property received therefor
contains a reasonably equivalent value of proved reserves, (5) the trade or
exchange by the Company or any Restricted Subsidiary of any oil and gas
property owned or held by the Company or such Restricted Subsidiary for any
Investment in equity interests of a Person engaged in the Oil and Gas
Business, provided that if any property so traded or exchanged contains
proved reserves, then (A) the Company's or such Restricted Subsidiary's pro
rata Investment in such Person shall represent a reasonably equivalent
value of proved reserves and (B) such Person is or becomes by virtue of
such Investment a Restricted Subsidiary or a Permitted Joint Venture, or
(6) the sale or transfer of hydrocarbons or other mineral products or
surplus or obsolete equipment all in the ordinary course of business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the Sale/Leaseback Transaction, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Available Borrowing Base" means, as of any date, the Borrowing Base minus
the outstanding principal amount of the notes as of such date.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
85
<PAGE> 87
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Borrowing Base" means $135.0 million.
"Business Day" means each day which is not a legal holiday (as defined in
the indenture).
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity and any
warrants or options granted to directors, officers or employees of the Company
in the ordinary course of business.
"Cash Balance Amount" means, as of any date, the amount equal to the
aggregate amount of cash and Temporary Cash Investments held by the Company and
its Restricted Subsidiaries as of the close of business on the immediately
preceding Business Day divided by 1.04, minus $5,000.000.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company; provided, however,
that the Permitted Holders beneficially own (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of the
Company than such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other person is
the beneficial owner (as defined in this clause (i)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
such parent corporation and the Permitted Holders beneficially own (as
defined in this proviso), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
(ii) during any period of two consecutive years from and after the
Closing Date, individuals who at the beginning of such period constituted
the Board of Directors (together with any new directors whose election by
such Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority
of the Board of Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the
86
<PAGE> 88
Company to another Person (other than a Person that is controlled by the
Permitted Holders), and, in the case of any such merger or consolidation,
the securities of the Company that are outstanding immediately prior to
such transaction and which represent 100% of the aggregate voting power of
the Voting Stock of the Company are changed into or exchanged for cash,
securities or property, unless pursuant to such transaction such securities
are changed into or exchanged for, in addition to any other consideration,
securities of the surviving corporation that represent immediately after
such transaction, at least a majority of the aggregate voting power of the
Voting Stock of the surviving corporation.
"Closing Date" means the date on which the indenture is executed.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means, collectively, all of the property and assets
(including, without limitation, Trust Moneys) that are from time to time subject
to, or purported to be subject to, the Lien of the indenture or any of the
Security Documents.
"Collateral Account" has the meaning given to it in the section described
herein under the heading "Possession, Use and Release of Collateral -- Deposit,
Use and Release of Trust Moneys."
"Collateral Maintenance Tender Offer Amount" means, with respect to any
Asset Disposition other than the Designated Transaction, an amount equal to the
excess of (i) the outstanding principal balance of the notes over (ii) quotient
obtained by dividing (a) the PV-10 Value of all of the Oil and Gas Assets of the
Company and its Restricted Subsidiaries immediately after giving effect to such
Asset Disposition by (b) 1.75.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the discharge
of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if the Company or any Restricted Subsidiary
has repaid, repurchased, defeased or otherwise discharged any Indebtedness since
the beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged on the date of the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and
Consolidated Interest Expense for such period shall be calculated on a pro forma
basis as if such discharge had occurred on the first day of such period and as
if the Company or such Restricted Subsidiary has not earned the interest income
actually earned during such period in respect of cash or Temporary Cash
Investments used to repay, repurchase, defease or otherwise discharge such
Indebtedness, (3) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition (other than an Asset
Disposition involving assets having a fair market value of less than the greater
of one percent (1%) of Adjusted Consolidated Net Tangible Assets as of the end
of the Company's then most recently completed fiscal year and $2.0 million),
then EBITDA for such period shall be reduced by an amount equal to EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to EBITDA (if
negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent the Company and its
87
<PAGE> 89
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (4) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition (including by way of lease) of assets, including any
acquisition of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto (including
the Incurrence of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period and (5) if since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(3) or (4) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition,
Investment or acquisition occurred on the first day of such period. For purposes
of this definition, whenever pro forma effect is to be given to an acquisition
or disposition of assets, the amount of income or earnings relating thereto and
the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred or repaid in connection therewith, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting officer of the
Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest of such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
"Consolidated Current Liabilities" as of the date of determination means
the aggregate amount of liabilities of the Company and its consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), on a consolidated basis, after
eliminating (i) all intercompany items between the Company and any Restricted
Subsidiary and (ii) all current maturities of long-term Indebtedness, all as
determined in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP, plus, to the
extent not included in such total interest expense, and to the extent incurred
by the Company or its Restricted Subsidiaries, without duplication,
(i) interest expense attributable to capital leases and imputed
interest with respect to Attributable Debt,
(ii) capitalized interest,
(iii) non-cash interest expenses,
(iv) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing,
(v) net costs (including amortization of fees and upfront payments)
associated with interest rate caps and other interest rate and currency
options that, at the time entered into, resulted in the Company and its
Restricted Subsidiaries being net payees as to future payouts under such
caps or options, and interest rate and currency swaps and forwards for
which the Company or any of its Restricted Subsidiaries has paid a premium,
(vi) Preferred Stock dividends in respect of all Preferred Stock held
by Persons other than the Company or a Wholly Owned Subsidiary, to the
extent that, by the terms of the Preferred Stock, failure to pay such
dividends would result in a bankruptcy of the issuer thereof and
(vii) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by the Company or any Restricted
Subsidiary or secured by a Lien on assets of the Company or any Restricted
Subsidiary to the extent such Indebtedness constitutes Indebtedness of
88
<PAGE> 90
the Company or any Restricted Subsidiary (whether or not such Guarantee or
Lien is called upon); provided, however, "Consolidated Interest Expense"
shall not include any (w) amortization of costs relating to debt issuances
(including the amortization of debt discount) other than the amortization
of debt discount related to the issuance of securities with an original
issue price of not more than 90% of the principal thereof, (x) amortization
of debt discount to the extent it relates to revaluations of financial
instruments recognized in connection with the Consolidation, and (y)
noncash interest expense Incurred in connection with interest rate caps and
other interest rate and currency options that, at the time entered into,
resulted in the Company and its Restricted Subsidiaries being either
neutral or net payors as to future payouts under such caps or options.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that (A) subject to the
exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted Subsidiary,
to the limitations contained in clause (iii) below) and (B) the Company's
equity in a net loss of any such Person for such period shall be included
in determining such Consolidated Net Income;
(ii) any net income (or loss) of any Person acquired by the Company or
a Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject
to the exclusion contained in clause (iv) below, the Company's equity in
the net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period to
the Company or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid
to another Restricted Subsidiary, to the limitation contained in this
clause) and (B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(iv) any gain or loss realized upon the sale or other disposition of
any assets of the Company or its consolidated Subsidiaries (including
pursuant to any sale-and-leaseback arrangement) which is not sold or
otherwise disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Capital Stock of
any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting principles.
"Consolidated Net Tangible Assets," as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet of
the Company and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving effect to purchase
accounting and after deducting therefrom Consolidated Current Liabilities and,
to the extent otherwise included, the amounts of:
(i) minority interests in consolidated Subsidiaries held by Persons
other than the Company or a Restricted Subsidiary;
89
<PAGE> 91
(ii) excess of cost over fair value of assets of businesses acquired,
as determined in good faith by the Board of Directors;
(iii) any revaluation or other write-up in book value of assets
subsequent to the Issue Date as a result of a change in the method of
valuation in accordance with GAAP consistently applied;
(iv) unamortized debt discount and expenses and other unamortized
deferred charges, goodwill, patents, trademarks, service marks, trade
names, copyrights, licenses, organization or developmental expenses and
other intangible items;
(v) treasury stock;
(vi) cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of Capital
Stock to the extent such obligation is not reflected in Consolidated
Current Liabilities; and
(vii) Investments in and assets of Unrestricted Subsidiaries.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as
(i) the par or stated value of all outstanding Capital Stock of the
Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock
plus
(iii) any retained earnings or earned surplus less (A) any accumulated
deficit and (B) any amounts attributable to Disqualified Stock.
"Consolidation" means the conversion in 1994 of Capital Stock of Kelley Oil
and units in Kelley Oil & Gas Partners, Ltd., a Texas limited partnership, into
shares of common stock, Convertible Exchangeable Preferred Stock and cumulative
convertible stock of the Company.
"Convertible Exchangeable Preferred Stock" means the $2.625 Convertible
Exchangeable Preferred Stock of the Company.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans, term
loans, production payments, receivables financings (including through the sale
of receivables to such lenders or to special purpose entities formed to borrow
from such lenders against such receivables) or letters of credit, in each case,
as amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
to the extent that by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event, it
(i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified
Stock or
(iii) is redeemable, in whole or in part, at the option of the holder
thereof, in each case described in the immediately preceding clauses (i),
(ii) or (iii), on or prior to the Stated Maturity of the notes; provided,
however, that any Capital Stock that would not constitute Disqualified
Stock but
90
<PAGE> 92
for provisions thereof giving holders thereof the right to require such
Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the Stated Maturity
of the notes shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not
more favorable to the holders of such Capital Stock than the provisions
described under "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" and "-- Certain Covenants -- Change of Control"; provided
further, however, that the Company's Convertible Exchangeable Preferred
Stock outstanding on the Issue Date shall not be deemed Disqualified Stock.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income:
(a) provision for taxes based on income or profits, (b) depletion and
depreciation expense,
(c) amortization expense,
(d) exploration costs and
(e) all other non-cash charges (excluding any such non-cash charge to
the extent that it represents an accrual of or reserve for cash charges in
any future period or amortization of a prepaid cash expense that was paid
in a prior period except such amounts as the Company determines in good
faith are nonrecurring),
and less, to the extent included in calculating such Consolidated Net Income and
in excess of any costs or expenses attributable thereto and deducted in
calculating such Consolidated Net Income, the sum of
(x) the amount of deferred revenues that are amortized during such
period and are attributable to reserves that are subject to Volumetric
Production Payments and
(y) amounts recorded in accordance with GAAP as repayments of
principal and interest pursuant to Dollar-Denominated Production Payments.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash
charges of, a Subsidiary of the Company shall be added to Consolidated Net
Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of such Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by
such Subsidiary without prior approval (that has not been obtained)
pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Subsidiary or its stockholders.
"Equity Offering" means a primary offering, whether public or private, of
shares of common stock of the Company.
"Excess Proceeds" has the meaning given such term in the covenant
"-- Limitation on Sales of Assets and Subsidiary Stock".
"Excess Proceeds Offer" has the meaning given such term in the covenant
"-- Limitation on Sales of Assets and Subsidiary Stock".
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
91
<PAGE> 93
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date, including those set forth in
(i) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants,
(ii) statements and pronouncements of the Financial Accounting
Standards Board,
(iii) such other statements by such other entity as approved by a
significant segment of the accounting profession, and
(iv) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means, without duplication, any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of
any other Person and any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Indebtedness of such other Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning. The
term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Oil and Gas Hedging Contract, Interest Rate Agreement or
Currency Agreement.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness, Capital Stock or Lien of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such
Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property (which purchase price is due more than six
months after the date of taking delivery of title to such property),
including all obligations of such Person for the deferred purchase price of
property under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through (iii)
above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn
92
<PAGE> 94
upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person the liquidation preference
with respect to, any Preferred Stock (but excluding, in each case, any
accrued dividends);
(vi) all obligations of such Person relating to any Production Payment
or in respect of production imbalances (but excluding production imbalances
arising in the ordinary course of business);
(vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee (including, with respect to any Production Payment, any
warranties or Guarantees of production or payment by such Person with
respect to such Production Payment but excluding other contractual
obligations of such Person with respect to such Production Payment);
(viii) all obligations of the type referred to in clauses (i) through
(vii) of other Persons secured by any Lien on any property or asset of such
first-mentioned Person (whether or not such obligation is assumed by such
first-mentioned Person), the amount of such obligation being deemed to be
the lesser of the value of such property or assets or the amount of the
obligation so secured and
(ix) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The "amount" or "principal amount" of Indebtedness at any time of
determination as used herein represented by:
(1) any Capital Lease Obligation shall be the amount determined in
accordance with the definition thereof,
(2) any Interest Rate Agreements included in the definition of
Permitted Indebtedness shall be zero,
(3) all other unconditional obligations shall be the amount of the
liability thereof determined in accordance with GAAP, and
(4) all other contingent obligations shall be the maximum liability at
such date of such Person.
It is understood that none of the following shall constitute Indebtedness:
(i) indebtedness arising from agreements providing for indemnification
or adjustment of purchase price or from Guarantees securing any obligations
of the Company or any of its Subsidiaries pursuant to such agreements,
incurred or assumed in connection with the disposition of any business,
assets or Subsidiary of the Company, other than Guarantees or similar
credit support by the Company or any of its Subsidiaries of Indebtedness
incurred by any Person acquiring all or any portion of such business,
assets or Subsidiary for the purpose of financing such acquisition;
(ii) any trade payables and other accrued current liabilities incurred
in the ordinary course of business as the deferred purchase price of
property;
(iii) obligations arising from Guarantees to suppliers, lessors,
licensees, contractors, franchisees or customers incurred in the ordinary
course of business;
(iv) obligations (other than express Guarantees of indebtedness for
borrowed money) in respect of Indebtedness of other Persons arising in
connection with (A) the sale or discount of accounts receivable, (B) trade
acceptances and (C) endorsements of instruments for deposit in the ordinary
course of business,
93
<PAGE> 95
(v) obligations in respect of performance bonds provided by the
Company or its Subsidiaries in the ordinary course of business and
refinancings thereof;
(vi) obligations arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business, provided, however,
that such obligation is extinguished within two business days of its
incurrence; and
(vii) obligations in respect of any obligations under workers'
compensation laws and similar legislation.
"Initial Purchaser" means the initial purchaser from the Company of the
outstanding notes.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers or joint interest partners or drilling
partnerships sponsored by the Company or any Restricted Subsidiary in the
ordinary course of business that are recorded as accounts receivable on the
balance sheet of the lender) or other extensions of credit (including by way of
Guarantee or similar arrangement) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary," the definition of
"Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means May 17, 1999.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Liquidated Damages" has the meaning given such term in the section
"Registration Rights; Liquidated Damages".
"Limited Recourse Indebtedness" means, with respect to any Production
Payments, Indebtedness, the terms of which limit the liability of the Company
and its Restricted Subsidiaries solely to the hydrocarbons covered by such
Production Payments; provided, however, that no default with respect to such
Indebtedness would permit any holder of any other Indebtedness of the Company or
any Restricted Subsidiary to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 15% during a fiscal quarter
in the discounted future net revenues from proved oil and gas reserves of the
Company and its Restricted Subsidiaries, calculated in accordance with clause
(a)(i) of the definition of Adjusted Consolidated Net Tangible Assets; provided,
however, that the following will be excluded from the calculation of Material
Change: (i) any acquisitions during the fiscal quarter of oil and gas reserves
that have been estimated by independent petroleum engineers and with respect to
which a report or reports of such engineers exist and (ii) any disposition of
properties existing at
94
<PAGE> 96
the beginning of such fiscal quarter that have been disposed of in compliance
with the covenant described under "-- Certain Covenants -- Limitation on Sales
of Assets and Subsidiary Stock".
"Minimum Reserve Amount" means, as of any date, an amount of Oil and Gas
Assets expressed as a volumetric equivalent equal to 180 Bcfe less the aggregate
of all revisions to reserves resulting from sales of reserves in place as
reflected in all Reserve Reports delivered pursuant to the indenture.
"Mortgage" means mortgage (or deed of trust), assignment of production,
security agreement, fixture filing and financing statement granted by the
Company or any Subsidiary Guarantor for the benefit of the trustee and the
holders of the notes and pursuant to which one or more Liens on Oil and Gas
Assets or interests therein are created, as the same may be amended,
supplemented or modified from time to time in accordance with the terms thereof
and of the indenture.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of
(i) all legal, title and recording tax expenses, commissions and other
fees (including financial and other advisory fees) and expenses incurred,
and all Federal, state, provincial, foreign and local taxes required to be
accrued as a liability under GAAP, as a consequence of such Asset
Disposition,
(ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of
the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition and
(iv) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Present Value" means, with respect to any proved hydrocarbon reserves,
the discounted future net revenues associated with such reserves, determined in
accordance with the rules and regulations (including interpretations thereof) of
the SEC in effect on the Closing Date.
"Net Working Capital" means (a) all current assets of the Company and its
Restricted Subsidiaries minus (b) all current liabilities of the Company and its
Restricted Subsidiaries, except current liabilities included in Indebtedness,
determined in accordance with GAAP.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the indenture and other documentation governing the notes.
"Oil and Gas Assets" means all proved oil and gas reserves and natural gas
processing facilities of the Company and/or any Restricted Subsidiary.
"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, acquisition, production, processing (but not
refining), marketing, storage and transportation of, hydrocarbons, and other
related energy and natural resource businesses.
95
<PAGE> 97
"Oil and Gas Hedging Contract" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed to
provide protection against oil and gas price fluctuations.
"Permitted Business Investment" means any Investment made in the ordinary
course of, and of a nature that is or shall have become customary in, the Oil
and Gas Business as a means of actively exploiting, exploring for, acquiring,
developing, producing, processing, gathering, marketing or transporting oil and
gas through agreements, transactions, interests or arrangements which permit one
to share risks or costs, comply with regulatory requirements regarding local
ownership or satisfy other objectives customarily achieved through the conduct
of Oil and Gas Business jointly with third parties, including (i) ownership
interests in oil and gas properties, processing facilities, gathering systems or
ancillary real property interests and (ii) Investments in the form of or
pursuant to operating agreements, processing agreements, farm-in agreements,
farm-out agreements, development agreements, area of mutual interest agreements,
unitization agreements, pooling agreements, joint bidding agreements, service
contracts, joint venture agreements, partnership agreements (whether general or
limited), subscription agreements, stock purchase agreements and other similar
agreements with third parties.
"Permitted Holders" means
(i) the members of Contour Production Company L.L.C., a Delaware
limited liability company ("Contour"), as of the Closing Date (the "Contour
Group"),
(ii) Contour, so long as Contour is controlled (as defined in the
definition of "Affiliate" above), directly or indirectly, by the Contour
Group,
(iii) officers, principals, employees, direct or indirect owners or
Affiliates of Persons described in clauses (i) or (ii),
(iv) Persons who beneficially own Voting Stock of the Company on the
Closing Date and
(v) officers or employees of the Company or any of its Subsidiaries as
of the Closing Date.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in
(i) a Restricted Subsidiary or a Person that will, upon the making of
such Investment, become a Restricted Subsidiary; provided, however, that
the primary business of such Restricted Subsidiary is an Oil and Gas
Business;
(ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is an Oil and Gas
Business;
(iii) Temporary Cash Investments;
(iv) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(v) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(vi) loans or advances to employees made in the ordinary course of
business;
(vii) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
96
<PAGE> 98
(viii) any Person to the extent such Investment represents the
non-cash portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
(ix) Permitted Business Investments.
"Permitted Joint Venture" means any Person engaged in the Oil and Gas
Business in which the Company or a Restricted Subsidiary makes a Permitted
Business Investment and which cannot, by the terms of such Person's constituent
documents, Incur or Guarantee Indebtedness.
"Permitted Liens" means, with respect to any Person,
(a) pledges or deposits by such Person under worker's compensation
laws, unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for the
payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person or
deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business;
(b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in
good faith by appropriate proceedings;
(c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings;
(d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of
credit do not constitute Indebtedness;
(e) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar purposes,
or zoning or other restrictions as to the use of real property or Liens
incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially impair their use
in the operation of the business of such Person;
(f) Liens securing Indebtedness Incurred under clauses (b)(7) and
(b)(11) of the covenant "Limitation on Indebtedness"; provided, however,
that the Lien may not extend to any other property owned by such Person or
any of its Subsidiaries at the time the Lien is Incurred, and the
Indebtedness secured by the Lien may not be Incurred more than 365 days
after the later of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property
subject to the Lien;
(g) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been incurred in accordance with the
provisions of the indenture; provided, that: (1) such Liens are expressly
junior to the Liens securing the Obligations and the Subsidiary Guarantees,
(2) such Refinancing results in an improvement on a pro forma basis in the
Company's Consolidated Coverage Ratio, and (3) the instruments creating
such Liens expressly subject the foreclosure rights of the holders of the
Indebtedness being Refinanced to a stand-still of not less than 179 days;
(h) Liens existing on the Closing Date;
(i) Liens on property or shares of Capital Stock of another Person at
the time such other Person becomes a Subsidiary of such Person; provided,
however, that such Liens are not created, incurred or assumed in connection
with, or in contemplation of, such other Person becoming such a Subsidiary;
provided further, however, that such Lien may not extend to any other
property owned by such Person or any of its Subsidiaries;
97
<PAGE> 99
(j) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
merger or consolidation with or into such Person or a Subsidiary of such
Person; provided, however, that such Liens are not created, incurred or
assumed in connection with, or in contemplation of, such acquisition;
provided further, however, that the Liens may not extend to any other
property owned by such Person or any of its Subsidiaries;
(k) Liens securing Indebtedness or other obligations of a Subsidiary
of such Person owing to such Person or a wholly owned Subsidiary of such
Person (or, in the case of the Company, to a Wholly Owned Subsidiary);
(l) Liens securing Hedging Obligations so long as such Hedging
Obligations relate to Indebtedness that is, and is permitted to be under
the indenture, secured by a Lien on the same property securing such Hedging
Obligations;
(m) Liens arising in the ordinary course of business in favor of the
United States, any state thereof, any foreign country or any department,
agency, instrumentality or political subdivision of any such jurisdiction,
to secure partial, progress, advance or other payments pursuant to any
contract or statute;
(n) Liens to secure any Refinancing (or successive Refinancing) as a
whole, or in part, of any Indebtedness secured by any Lien referred to in
the preceding clauses (f), (g), (h), (i) and (j); provided, however, that
(x) such new Lien shall be limited to all or part of the same property that
secured the original Lien (plus improvements to or on such property) and
(y) the Indebtedness secured by such Lien at such time is not increased to
any amount greater than the sum of (A) the outstanding principal amount or,
if greater, committed amount of the Indebtedness described under clause
(g), (f), (h), (i) or (j) at the time the original Lien became a Permitted
Lien and (B) an amount necessary to pay any fees and expenses, including
premiums, related to such Refinancing;
(o) Liens on, or related to, properties to secure all or part of the
costs incurred in the ordinary course of business of exploration, drilling,
development or operation thereof;
(p) Liens on pipeline or pipeline facilities which arise out of
operation of law;
(q) Liens reserved in oil and gas mineral leases for bonus or rental
payments and for compliance with the terms of such leases;
(r) Liens arising under partnership agreements, oil and gas leases,
farm-out agreements, division orders, contracts for the sale, purchase,
exchange, transportation or processing (but not the refining) of oil, gas
or other hydrocarbons, unitization and pooling declarations and agreements,
development agreements, operating agreements, area of mutual interest
agreements, and other similar agreements which are customary in the Oil and
Gas Business;
(s) Liens arising out of judgments or awards against such Person with
respect to which such Person shall then be proceeding with an appeal or
other proceedings for review; and
(t) Liens arising pursuant to the Indenture or any Security Document
or otherwise securing the Obligations and/or the Subsidiary Guarantees.
Notwithstanding the preceding, (1) "Permitted Liens" will not include any Lien
described in clause (f), (i) or (j) above to the extent (A) such Lien applies to
any Additional Assets or Permitted Business Investment acquired directly or
indirectly from Net Available Cash pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
(B) the fair value of such Additional Assets or Permitted Business Investment is
less than the sum of (x) the amount of Indebtedness secured by such Lien plus
(y) the amount of Net Available Cash so invested in such Additional Assets or
Permitted Business Investment; (2) "Permitted Liens" as such term relates to
encumbrances on property constituting Collateral shall not include Liens of the
type described in clauses (a), (d), (h), (l) and (n) (in so far as it relates to
clause (h)); and (3) Liens Incurred pursuant to clauses (f), (i) and (j) shall
not secure Indebtedness in a principal amount at any one time outstanding
98
<PAGE> 100
in excess of the greater of (A) $5.0 million or (B) an amount equal to 33.33% of
the fair market value of the property acquired (which shall be deemed to be the
PV-10 Value of any Oil and Gas Assets) subject of such Lien as of the date such
Lien is created or assumed.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Pledge Agreement" means that certain Pledge Agreement dated as of the
Issue Date pursuant to which the Capital Stock of the Programs owned by the
Company and its Restricted Subsidiaries is pledged to the trustee for the
benefit of the holders of the notes, as the same may be amended, modified or
supplemented from time to time.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"principal" of a note means the principal of the note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Programs" means Kelley Partners 1992 Development Drilling Program, a Texas
limited partnership, and Kelley Partners 1994 Development Drilling Program, a
Texas limited partnership, together with Kelley Partners 1992 Development
Drilling Joint Venture, a Texas general partnership, Kelley Partners 1994
Development Drilling Joint Venture, a Texas general partnership, and each of
their respective successors.
"PV-10 Value" means with respect to any Oil and Gas Assets the aggregate
net present value of such Oil and Gas Assets calculated before income taxes and
discounted at 10 percent in accordance with SEC guidelines (including using
pricing provisions based on the most recent year-end prices), as reported in the
most recently prepared or audited report of the Company's independent petroleum
engineers.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness (including an
Incurrence pursuant to clause (ii) of the first or third paragraph of the
covenant described under "-- Certain Covenants -- Merger and Consolidation").
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Closing
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness and Indebtedness that is deemed to be
Incurred at the time of a merger or consolidation pursuant to clause (ii) of the
first or third paragraph of the covenant described under "-- Certain
Covenants -- Merger and Consolidation," provided, however, that
(i) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced,
(ii) such Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being Refinanced and
(iii) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided
further, however, that Refinancing Indebtedness shall not
99
<PAGE> 101
include (x) Indebtedness of a Subsidiary (other than a Subsidiary
Guarantor) that Refinances Indebtedness of the Company or another
Subsidiary or (y) Indebtedness of the Company or a Restricted Subsidiary
that Refinances Indebtedness of an Unrestricted Subsidiary.
"Reserve Report" shall mean a reserve engineering report, setting forth, as
of the most recent January 1, April 1, July 1 and October 1, the oil and gas
reserves attributable to the Company's and its Restricted Subsidiaries' Oil and
Gas Assets included in the Collateral together with a projection of the rate of
production and future net income, severance and production taxes, operating
expenses and capital expenditures with respect thereto as of such date, based
upon the pricing assumptions consistent with SEC reporting requirements at the
time.
"Restricted Payment" with respect to any Person means
(i) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of its Capital
Stock (other than (x) dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock), (y) dividends or
distributions payable solely to the Company or a Restricted Subsidiary, and
(z) pro rata dividends or other distributions made by a Subsidiary that is
not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other
than a corporation)),
(ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated
Obligations,
(iv) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of the Company's 7 7/8% Convertible
Subordinated Notes due 1999 and the Company's 8 1/2% Convertible
Subordinated Notes due 2000, or
(v) the making of any Investment in any Person (other than a Permitted
Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Documents" means, collectively, the Mortgages, the Pledge
Agreement and all security agreements, mortgages, deeds of trust, collateral
assignments or other instruments evidencing or creating any security interests
in favor of the trustee or any predecessor trustee in all or any portion of the
Collateral, in each case as amended, supplemented or modified from time to time
in accordance with their terms and the terms of the indenture.
"Shelf Registration Statement" has the meaning given such term in the
section "Registration Rights; Liquidated Damages".
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
100
<PAGE> 102
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision, but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred.
"Subordinated Obligations" means any Indebtedness or Preferred Stock of the
Company or any Subsidiary Guarantor, whether outstanding on the Closing Date or
thereafter Incurred, which is subordinate or junior in right of payment to the
notes or any subsidiary guarantee, as the case may be, pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person. Unless otherwise indicated, references to
Subsidiaries in this Description of the New Notes refers to Subsidiaries of the
Company.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the United
States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50.0
million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as used in
the Securities Act and the Exchange Act and the rules promulgated
thereunder) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above,
(iv) investments in commercial paper, maturing not more than 180 days
after the date of acquisition, issued by a Person (other than an Affiliate
of the Company) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is
made of "P-2" (or higher) according to Moody's Investors Service, Inc. or
"A-2" (or higher) according to Standard & Poor's Ratings Services, and
(v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Ratings Services or "A" by Moody's Investors Service,
Inc.
"Trust Moneys" means all cash or Temporary Cash Investments received by the
trustee:
(1) upon the release of Collateral from the Lien of the indenture and
the Security Documents, including investment earnings thereon;
(2) pursuant to the provisions of any Mortgage;
101
<PAGE> 103
(3) as proceeds of any Asset Disposition or other sale or other
disposition of all or any part of the Collateral by or on behalf of the
trustee or any collection, recovery, receipt, appropriation or other
realization of or from all or any part of the Collateral pursuant to the
indenture or any of the Security Documents or otherwise; or
(4) for application under the indenture as provided for in the
indenture or the Security Documents, or whose disposition is not elsewhere
specifically provided for in the indenture or in the Security Documents;
provided, however, that Trust Moneys shall not include any property
deposited with the trustee pursuant to any Change of Control offer, Excess
Proceeds Offer or redemption or defeasance of any notes.
"Unrestricted Subsidiary" means
(i) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below and
(ii) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary is a Subsidiary Guarantor, such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any
property of, the Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that the
Subsidiary to be so designated has total assets of $1,000 or less. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation
(x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and
(y) no Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced by the
Company to the Trustee by promptly filing with the Trustee a copy of the board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the preceding provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of a Person means all classes of Capital Stock of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
102
<PAGE> 104
CERTAIN COVENANTS
The indenture limits our ability to do the following:
Limitation on Indebtedness
(a) The Company may not, and may not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that we may
Incur Indebtedness if, on the date of such Incurrence and after giving effect
thereto, the Consolidated Coverage Ratio equals or exceeds
(i) 2.0 to 1.0, if such Indebtedness is Incurred on or prior to
September 30, 1999,
(ii) 2.25 to 1.0, if such Indebtedness is Incurred after September 30,
1999 and on or prior to September 30, 2001, and
(iii) 2.5 to 1.0 if such Indebtedness is Incurred after September 30,
2001.
(b) These limitations in the indenture do not, however, prohibit
(1) Indebtedness of the Company Incurred pursuant to any Credit
Facility, so long as the aggregate principal amount of all Indebtedness
outstanding under all Credit Facilities does not at any one time exceed the
then Available Borrowing Base,
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness, other than to the Company or another Wholly Owned Subsidiary,
shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the issuer thereof,
(3) the notes and the subsidiary guarantees,
(4) Indebtedness outstanding on the Closing Date (other than
Indebtedness described in clause (1), (2) or (3) above)
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred in connection with, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by the Company); provided, however, that on the date of such
acquisition and after giving effect thereto, the Consolidated Coverage
Ratio equals or exceeds
(i) 1.8 to 1.0, if such Indebtedness is Incurred on or prior to
September 30, 1999,
(ii) 2.05 to 1.0, if such Indebtedness is Incurred after September
30, 1999 and on or prior to September 30, 2001, and
(iii) 2.3 to 1.0, if such Indebtedness is Incurred after September
30, 2001.
(6) Refinancing Indebtedness in respect of Indebtedness Incurred under
paragraph (a) above or under clause (3), (4) or (5) above, clause (7) or
(12) below; provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Restricted Subsidiary described in clause (5), such Refinancing
Indebtedness shall be Incurred only by such Restricted Subsidiary or the
Company,
(7) Indebtedness of the Company or a Restricted Subsidiary represented
by Capital Lease Obligations, mortgage financings or purchase money
obligations, in each case Incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of
property used in its Oil and Gas Business and in each case Incurred no
later than 365 days after the date of such acquisition or the date of
completion of such construction or improvement; provided, however,
103
<PAGE> 105
that the principal amount of any Indebtedness Incurred pursuant to this
clause (7) in any single calendar year shall not exceed $15.0 million,
(8) Indebtedness consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company and its
Restricted Subsidiaries pursuant to the indenture,
(9) Indebtedness under Oil and Gas Hedging Contracts and Currency
Agreements entered into in the ordinary course of business for the purpose
of limiting risks that arise in the ordinary course of business of the
Company,
(10) Indebtedness in respect of letters of credit issued for the
benefit of the Company or any of its Restricted Subsidiaries to the extent
they are issued in connection with the ordinary course of business of the
Company and its Restricted Subsidiaries, Incurred in an aggregate principal
amount which, when taken together with the principal amount of all other
Indebtedness Incurred under this clause (10) and then outstanding, does not
exceed $15.0 million,
(11) Indebtedness of the Company or a Restricted Subsidiary Incurred
to finance capital expenditures (or Refinancings thereof) in an aggregate
principal amount which, when taken together with the principal amount of
all other Indebtedness Incurred pursuant to this clause (11) and then
outstanding, does not exceed $10.0 million,
(12) Indebtedness of the Company or a Restricted Subsidiary Incurred
for the purpose of financing all or any part of the cost of acquiring oil
and gas reserves of another Person (other than a Person that was,
immediately prior to such acquisition, a Subsidiary of the Company) engaged
in the Oil and Gas Business or all or substantially all the assets of such
a person; provided, however, that on the date of such Incurrence and after
giving effect thereto, the Consolidated Coverage Ratio equals or exceeds
(i) 1.8 to 1.0, if such Indebtedness is Incurred on or prior to
September 30, 1999,
(ii) 2.05 to 1.0, if such Indebtedness is Incurred after September 30,
1999 and on or prior to September 30, 2001, and
(iii) 2.3 to 1.0 if such Indebtedness is Incurred after September 30,
2001, and
(13) Indebtedness in an aggregate principal amount which, together
with the principal amount of all other Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of such Incurrence (other
than Indebtedness permitted by clauses (1) through (12) above or paragraph
(a) above) does not exceed the greater of 6% of Adjusted Consolidated Net
Tangible Assets as of the end of the most recent fiscal year ending at
least 90 days prior to the date of such Incurrence and $15.0 million.
(c) Notwithstanding the preceding, the Company shall not Incur any
Indebtedness pursuant to the preceding paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the notes to at least the same extent
as such Subordinated Obligations; provided, however, that this paragraph (c)
shall not prohibit the Company from Refinancing any of its Subordinated
Obligations outstanding on the Closing Date.
(d) For purposes of determining compliance with the provisions of
"Limitation on Indebtedness", (i) if an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, the Company, in
its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the above
clauses and (ii) we may divide an item of Indebtedness and classify it in more
than one of the types of Indebtedness described above.
Limitation on Restricted Payments
(a) The Company shall not make, and shall not permit any Restricted
Subsidiary to make, directly or indirectly, a Restricted Payment.
104
<PAGE> 106
(b) Paragraph (a) does not prohibit:
(i) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Capital Stock of the Company, other
than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit of
their employees,
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness which the Company is permitted to Incur under the
provisions described under "-- Limitation on Indebtedness"; provided that
such Indebtedness is effectively junior to the notes, matures no less than
180 days after the Stated Maturity of the notes and does not result in an
increase in the total amount of the Company's Indebtedness,
(iii) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations; provided
that the Company may not use the proceeds from the sale of the notes, any
Excess Proceeds or the cash flows from operations accumulated after the
Issue Date to purchase, repurchase, redeem, defease, acquire or retire for
value any of the Subordinated Obligations if the aggregate amount so
purchased, repurchased, redeemed, defeased, acquired or retired using any
or all of the proceeds from the sale of the notes, any Excess Proceeds or
the cash flows from operations accumulated after the Issue Date would
exceed the greater of (1) $36.0 million and (2) the excess of the PV-10
Value of the Company's and its Restricted Subsidiaries' Oil and Gas Assets,
using 1998 year-end pricing assumptions, over two times the aggregate
stated principal amount of the notes then outstanding,
(iv) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made with
any Excess Proceeds remaining after an Excess Proceeds Offer in which the
Company purchased all notes duly tendered thereunder; provided, such
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value occurs no sooner than 360 days after the last Asset
Disposition giving rise to an obligation to offer to purchase such
Subordinated Obligations, or
(v) further Restricted Payments in an aggregate amount not to exceed
$5.0 million.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company shall not, and shall not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary
(a) to pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness owed to the Company or a Restricted
Subsidiary,
(b) to make any loans or advances to the Company or a Restricted
Subsidiary,
(c) to transfer any of its property or assets to the Company or a
Restricted Subsidiary, or
(d) grant to the trustee a Lien on any of its Property, except
(i) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Closing Date,
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary under an agreement relating to any Indebtedness Incurred by
such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to
105
<PAGE> 107
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by the Company) and outstanding on such date,
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred under an agreement
referred to in clause (i) or (ii) above or this clause (iii) or
contained in any amendment to an agreement referred to in clause (i) or
(ii) above or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are no less
favorable to the holders of the notes than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in such agreements,
(iv) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the
property leased thereunder,
(v) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages,
(vi) any restriction with respect to a Restricted Subsidiary
imposed under an agreement entered into for the sale or disposition of
all or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition, and
(vii) in the case of clause (d) above, restrictions contained in
instruments related to or creating Permitted Liens under clauses (f),
(i), (j) and (n) of the definition of "Permitted Liens," provided such
restrictions relate only to the property subject to such Permitted
Liens.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company shall not, and shall not cause or permit any of the
Restricted Subsidiaries to, consummate an Asset Disposition unless
(1) the Company or the applicable Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Disposition at
least equal to the fair market value of the assets sold or otherwise
disposed of (as determined in good faith by the Company's Board of
Directors or senior management of the Company), and
(2) (A) at least 75% of the consideration received by the Company or
such Restricted Subsidiary, as the case may be, from such Asset Disposition
shall be in the form of cash or Temporary Cash Investments and is received
at the time of such disposition, and
(B) at least 15% of such consideration received if in a form
other than cash or Temporary Cash Investments is converted into or
exchanged for cash or Temporary Cash Investments within 90 days of such
disposition.
If and to the extent that the Net Available Cash received by the Company or
any Restricted Subsidiary from one or more Asset Dispositions occurring on or
after the Closing Date in any period of 12 consecutive months exceeds $5.0
million, then the Company shall
(i) within 180 days after the date such Net Available Cash so received
exceeds such $5.0 million invest an amount equal to such excess in
Additional Assets or in one or more Permitted Joint Ventures or Permitted
Business Investments, or
(ii) apply an amount equal to such excess (to the extent not applied
pursuant to the clause above) as provided in the following paragraphs
describing this covenant. The amount of such excess Net Available Cash
required to be applied during the applicable period and not applied (or
designated by the Company as not to be so applied) as so required by the
end of such period shall constitute "Excess Proceeds".
106
<PAGE> 108
Notwithstanding the foregoing paragraph, if the Company consummates any
Asset Disposition, then the Company
(i) shall, on a date which is not less than 15 nor more than 30 days
after the date on which such Asset Disposition is consummated, offer to
purchase from all holders of notes an amount not less than the Collateral
Maintenance Tender Offer Amount (expressed as an integral multiple of
$1,000) of the notes at a purchase price equal to 105% of the stated
principal amount thereof plus accrued and unpaid interest thereon to the
date of purchase (subject to the right of holders of notes on the relevant
record date to receive interest on the relevant interest payment date) and
purchase any notes tendered in response to such offer (up to an amount
equal to the Collateral Maintenance Tender Offer Amount), and
(ii) may use the Net Available Cash received from such Asset
Disposition less an amount equal to the amount required to repurchase notes
tendered in response to the offer made under the immediately preceding
clause in a manner contemplated by clause (b)(iii) of the covenant
described under "-- Limitation on Restricted Payments".
Any remaining Net Available Cash received from such Asset Disposition and
not used pursuant to the two immediately preceding clauses shall be applied in
accordance with the immediately preceding paragraph.
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $5.0 million, the Company must, not later than the
fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer")
to purchase from the holders of notes on a pro rata basis an aggregate stated
principal amount of notes equal to the Excess Proceeds (rounded down to the
nearest multiple of $1,000) on such date, at a purchase price equal to 105% of
the stated principal amount of such notes, plus, in each case, accrued interest
(if any) to the date of purchase (the "Excess Proceeds Payment"). We will
comply, to the extent applicable, with the requirements of Section 14(e) of the
Exchange Act and any other securities laws or regulations thereunder in the
event that we receive such Excess Proceeds under this provision and we are
required to repurchase notes as described above. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this covenant, we shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached our obligations under this
covenant by virtue thereof.
(b) If the Company transfers substantially all (but not all) of its
property and assets as an entirety to a Person in a transaction permitted by the
covenant described under "-- Merger and Consolidation", the Successor Company
(as defined therein) shall be deemed to have sold the properties and assets of
the Company not so transferred for purposes of this covenant, and shall comply
with the provisions of this covenant with respect to such deemed sale as if it
were an Asset Disposition and the Successor Company shall be deemed to have
received Net Available Cash in an amount equal to the fair market value (as
determined in good faith by the Board of Directors) of the properties and assets
not so transferred or sold.
(c) All Net Available Cash shall constitute Trust Moneys and shall be
delivered by the Company to the trustee and shall be deposited in the Collateral
Account in accordance with the indenture. Net Available Cash so deposited may be
withdrawn from the Collateral Account for application by the Company in
accordance with this covenant or otherwise under the indenture as summarized in
"-- Possession, Use and Release of Collateral -- Deposit, Use and Release of
Trust Moneys".
Limitation on Affiliate Transactions
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee
107
<PAGE> 109
compensation arrangements or the rendering of any service) with any Affiliate of
the Company (an "Affiliate Transaction") unless the terms thereof
(i) are no less favorable to the Company or such Restricted Subsidiary
than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate,
(ii) if such Affiliate Transaction involves an amount in excess of
$1.0 million, are set forth in writing and have been approved by a majority
of the members of the Board of Directors having no personal stake in such
Affiliate Transaction, or
(iii) if such Affiliate Transaction involves an amount in excess of
$10.0 million, have been determined by a nationally recognized investment
banking firm to be fair, from a financial standpoint, to the Company and
its Restricted Subsidiaries.
(b) The provisions of the preceding paragraph (a) shall not prohibit
(i) any sale of hydrocarbons or other mineral products or the entering
into or performance of Oil and Gas Hedging Contracts, gas gathering,
transportation or processing contracts or oil or natural gas marketing or
exchange contracts, in each case, entered into in the ordinary course of
business, so long as the terms of any such transaction are approved by a
majority of the members of the Board of Directors who are disinterested
with respect to such transaction as being the most favorable of at least
(x) two bids, quotes or proposals, at least one of which is from a Person
that is not an Affiliate of the Company (in the event that the Company
determines in good faith that it is able to obtain only two bids, quotes or
proposals with respect to such transaction) or (y) three bids, quotes or
proposals, at least two of which are from Persons that are not Affiliates
of the Company (in all other circumstances),
(ii) the sale to an Affiliate of the Company of Capital Stock of the
Company that does not constitute Disqualified Stock,
(iii) transactions contemplated by any employment agreement or other
compensation plan or arrangement that we enter into in the ordinary course
of business and consistent with industry practice,
(iv) transactions between or among the Company and its Restricted
Subsidiaries,
(v) Restricted Payments and Permitted Investments that are permitted
by the provisions of the indenture described above under the caption
"-- Limitation on Restricted Payments",
(vi) the transactions described in this prospectus under the caption
"Certain Transactions", and
(vii) loans or advances to our employees in the ordinary course of
business and approved by the Company's Board of Directors in an aggregate
principal amount not to exceed $1.0 million outstanding at any one time.
Change of Control
(a) Upon the occurrence of a Change of Control, you will have the right to
require that the Company repurchase your notes at a purchase price in cash equal
to 101% of the stated principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase, subject to the right of holders on the relevant
record date to receive interest on the relevant interest payment date, in
accordance with the terms contemplated in paragraph (b) below.
(b) Within 30 days following any Change of Control, we will mail a notice
to you with a copy to the trustee stating
(1) that a Change of Control has occurred and that you have the right
to require the Company to purchase your notes at a purchase price in cash
equal to 101% of the stated principal amount
108
<PAGE> 110
thereof plus accrued and unpaid interest, if any, to the date of purchase,
subject to the right of holders on the relevant record date to receive
interest on the relevant interest payment date,
(2) the circumstances and relevant facts regarding such Change of
Control, including information with respect to pro forma historical income,
cash flow and capitalization after giving effect to such Change of Control,
(3) the repurchase date, which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed, and
(4) the instructions determined by the Company, consistent with this
covenant, that you must follow in order to have your notes purchased.
(c) We will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of this covenant, we will comply with the applicable securities
laws and regulations and we will not be deemed to have breached our obligations
under this covenant by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. We have no present intention to engage in
a transaction involving a Change of Control, although it is possible that we
would decide to do so in the future. Subject to the limitations discussed below,
we could, in the future, enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the indenture, but that could increase the amount of
Indebtedness outstanding at such time or otherwise affect our capital structure
or credit ratings. Restrictions on our ability to incur additional Indebtedness
are contained in the covenants described under "-- Limitation on Indebtedness,"
"-- Limitation on Liens" and "-- Limitation on Sale/ Leaseback Transactions".
Except for the limitations contained in such covenants, however, the indenture
does not contain any covenants or provisions that may afford you protection in
the event of a highly leveraged transaction.
The provisions under the indenture relating to our obligation to make an
offer to repurchase the notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the notes.
We will not be required to make an offer to purchase the notes as a result
of a Change of Control if a third party
- makes an offer in the manner, at the times and otherwise in compliance
with the requirements set forth in the indenture relating to our
obligations to make the offer, and
- purchases all notes validly tendered and not withdrawn under the offer.
Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries
The Company will not sell or otherwise dispose of any shares of Capital
Stock of a Restricted Subsidiary, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell or otherwise dispose of any shares of
its Capital Stock except
(i) to the Company or a Wholly Owned Subsidiary,
(ii) if, immediately after giving effect to such issuance, sale or
other disposition, we would own less than 20% of the Voting Stock of such
Restricted Subsidiary and have no greater economic interest in such
Restricted Subsidiary,
(iii) if, immediately after giving effect to such issuance, sale or
other disposition, we would own greater than 80% of the Voting Stock of
such Restricted Subsidiary and have no lesser economic interest in such
Restricted Subsidiary, or
109
<PAGE> 111
(iv) to the extent such shares represent directors' qualifying shares
or shares required by applicable law to be held by a person other than the
Company or Restricted Subsidiary;
provided that in the case of clauses (ii) and (iii), the Company complies with
the provisions of the covenant described under the caption "-- Limitation on
Sales of Assets and Subsidiary Stock". If we dispose of all of the Capital Stock
of any subsidiary guarantor, such subsidiary guarantor shall be released from
the obligations under its subsidiary guarantee.
Limitation on Liens
The Company will not, and will not cause or permit any its our Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist or remain in effect any Liens other than Permitted Liens.
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale/ Leaseback Transaction with respect to any property unless
(i) the Company or that Restricted Subsidiary would be entitled to (A)
Incur Indebtedness in an amount equal to the Attributable Debt with respect
to that Sale/Leaseback Transaction under the covenant described under
"-- Limitation on Indebtedness" and (B) create a Lien on the property
securing that Attributable Debt under the covenant described under
"-- Limitation on Liens",
(ii) the net proceeds received by the Company or any Restricted
Subsidiary in connection with the Sale/Leaseback Transaction are at least
equal to the fair value, as determined by the Board of Directors) of the
property, and
(iii) we apply the proceeds of that transaction in compliance with the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock".
Future Subsidiary Guarantors
From and after the Issue Date, the Company will cause each of its
Subsidiaries that is or becomes a Restricted Subsidiary, other than the
Programs, to issue a subsidiary guarantee for the benefit of the holders of the
notes.
Merger and Consolidation
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all its assets to any Person, unless
(i) the resulting, surviving or transferee Person (the "Successor
Company") is a Person organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and the
Successor Company, if not the Company, shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the trustee, in
form satisfactory to the trustee, all the obligations under the indenture
and the notes,
(ii) immediately after giving effect to that transaction, and treating
any Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary as a result of that transaction as having been Incurred by the
Successor Company or the Subsidiary at the time of the transaction, no
Default shall have occurred and be continuing,
(iii) immediately after giving effect to the transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness under paragraph (a) or, if applicable, paragraph (b)(5), of
the covenant described under "-- Limitation on Indebtedness",
110
<PAGE> 112
(iv) immediately after giving effect to the transaction, the Successor
Company shall have Adjusted Consolidated Net Tangible Assets in an amount
that is not less than the Adjusted Consolidated Net Tangible Assets of the
Company immediately prior to the transaction, and
(v) the Company has delivered to the trustee an officers' certificate
and an opinion of counsel, each stating that the consolidation, merger or
transfer and the supplemental indenture, if any, comply with the indenture;
provided, however, that clauses (iii) and (iv) shall not be applicable to any
transaction solely between the Company and any Restricted Subsidiary.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the indenture, but the predecessor Company in the case of a
conveyance, transfer or lease of all or substantially all its assets shall not
be released from the obligation to pay the principal of and interest on the
notes.
The Company will not permit any subsidiary guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or series
of transactions, all or substantially all its assets to any person unless
(i) the resulting, surviving or transferee Person shall expressly
assume by a supplemental indenture, in a form acceptable to the trustee,
all the obligations of that subsidiary guarantor, if any, under its
subsidiary guarantee,
(ii) immediately after giving effect to that transaction or
transactions on a pro forma basis, and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person as a
result of the transaction as having been issued by that Person at the time
of that transaction, no Default shall have occurred and be continuing, and
(iii) the Company delivers to the trustee an officers' certificate and
an opinion of counsel, each stating that consolidation, merger or transfer
and the guaranty agreement, if any, complies with the indenture.
Notwithstanding the preceding, upon any consolidation, merger, conveyance,
transfer or lease of all or substantially all its assets, a subsidiary guarantor
and its successor or transferee shall be released from all of that subsidiary
guarantor's obligations under the indenture and its subsidiary guarantee as
described in the definition of "Guarantee".
SEC Reports
Notwithstanding that the Company may not at any time be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall file with the SEC and provide the trustee and holders of the notes with
such annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act, excluding however
information with respect to benefit plans and long-term compensation
arrangements, and applicable to a U.S. corporation subject to those Sections,
the information, documents and other reports to be so filed and provided at the
times specified for the filing of that information, documents and reports under
those Sections.
Limitation on Impairment of Lien
Neither the Company nor any of its Subsidiaries will take or omit to take
any action which action or omission would have the result of adversely affecting
or impairing the Lien in favor of the trustee or any predecessor, on behalf of
itself and the holders or the priority thereof, with respect to the Collateral,
and neither the Company nor any of its Subsidiaries will grant to any Person, or
suffer any Person, other than the Company and its Restricted Subsidiaries, to
have, other than to the trustee on behalf of the trustee and the holders of
notes, any interest whatsoever in the Collateral other than Permitted Liens.
Neither the Company nor any of its Subsidiaries will enter into any agreement or
instrument that by its terms requires
111
<PAGE> 113
the proceeds received from any sale of Collateral to be applied to repay,
redeem, defease or otherwise acquire or retire any Indebtedness, other than
pursuant to the indenture and the Security Documents.
Limitation on Conduct of Business
The Company will not, and will not permit any of our Restricted
Subsidiaries to, engage in the conduct of any business other than the Oil and
Gas Business.
Limitation on Capital Expenditures
During the period of eight fiscal quarters, commencing with the fiscal
quarter during which the Issue Date occurs, the Company will not, and will not
permit any of its Restricted Subsidiaries to, make any expenditures for fixed or
capital assets if, after giving effect thereto, the aggregate of all such
expenditures during any such fiscal quarter would exceed $5.0 million plus the
excess of EBITDA for such fiscal quarter over $12.5 million; provided that this
covenant will not limit expenditures for fixed or capital assets to the extent
those expenditures are made with the Net Cash Proceeds of any sale or issuance
of Capital Stock, other than Disqualified Capital Stock, of the Company, other
than sales or issuances to any of its Subsidiaries. Notwithstanding the
foregoing, (i) if any amount which the Company would have been permitted to
spend during a given fiscal quarter on fixed or capital assets under this
covenant is not spent during such fiscal quarter, the Company may spend such
amounts during the next succeeding fiscal quarter, and (ii) if the Company
spends an amount in a given fiscal quarter on fixed or capital assets which
exceeds 120% of the maximum amount permitted under this covenant for that fiscal
quarter, that action shall not be considered a breach of this covenant if the
aggregate amount spent on fixed and capital assets during that fiscal quarter
and the next succeeding fiscal quarter does not exceed the sum of the maximum
permitted expenditures for both those fiscal quarters.
Lien on Additional Collateral
(a) If, after the Issue Date, the Company or any of its Restricted
Subsidiaries (i) acquire any Oil and Gas Assets or other assets as non-cash
consideration for any Asset Disposition or (ii) engage in successful drilling
and exploration activities resulting in the creation of material new proved oil
and gas reserves, then the Company will, and will cause each of its Restricted
Subsidiaries to, execute and file in the appropriate filing offices additional
Security Documents granting to the trustee for the benefit of the holders of the
notes a first Lien, subject only to Permitted Liens, or in the case of property
securing Acquired Indebtedness, to the extent not prohibited by the terms of the
instruments creating the Acquired Indebtedness, a junior Lien, as is necessary
or appropriate to ensure that the Lien of the indenture and the Security
Documents covers substantially all of the PV-10 Value of the new assets.
(b) Without limiting clause (a), on the date any Oil and Gas Assets or
interests in a Permitted Joint Venture shall be acquired in exchange for or
replacement of any Collateral, the Company will, and will cause each of its
Restricted Subsidiaries to, execute and file in the appropriate filing offices
additional Security Documents granting to the trustee, for the benefit of the
holders of the notes, a first Lien, subject only to Permitted Liens (or in the
case of property securing Acquired Indebtedness, to the extent not prohibited by
the terms of the instruments creating such Acquired Indebtedness, a junior
Lien), on that portion of the assets as is necessary to ensure that the Lien of
the indenture and the Security Documents covers substantially all of the PV-10
Value of the assets received in exchange or trade or on the interests in the
Permitted Joint Venture.
(c) In connection with any Security Documents executed and filed under
clause (a) or (b), we will also comply with the terms of the Trust Indenture Act
to the extent applicable.
(d) On March 15th in each year, beginning with March 15, 2000, the Company
will review its and its Restricted Subsidiaries' Oil and Gas Assets as of the
preceding January 1st to ascertain whether substantially all of the PV-10 Value
of the Company's and its Restricted Subsidiaries' Oil and Gas Assets as of that
January 1st are then subject to the Lien of the indenture and the Security
Documents, provided that to the extent Oil and Gas Assets secure Acquired
Indebtedness, the discounted future net revenues
112
<PAGE> 114
attributable to such Oil and Gas Assets may be excluded from this calculation to
the extent the instruments securing the Acquired Indebtedness prohibit the
Incurrence of a Lien on those assets. If substantially all of the PV-10 Value of
the assets are not then subject to the Lien of the indenture and the Security
Documents, then the Company will, and will cause its Restricted Subsidiaries to,
execute and file in the appropriate filing offices additional Security Documents
granting to the trustee for the benefit of the holders of the notes a first
Lien, subject only to Permitted Liens, or in the case of property securing
Acquired Indebtedness, to the extent not prohibited by the terms of instruments
creating that Acquired Indebtedness, a junior Lien, as is necessary or
appropriate to encumber substantially all those assets.
Quarterly Reserve Engineering Reports; Reserve Redemption Event
Not later than the first day of each March, June, September and December of
each year commencing June 1, 1999, we will furnish to the trustee and we will
make available to any holder of notes upon request a Reserve Report dated as of
the January 1, April 1, July 1 or October 1 immediately preceding such date.
Each such Reserve Report of each year shall be prepared (i) by certified
independent petroleum engineers or consultants or (ii) under the supervision of
the chief engineer of the Company and audited by that certified independent
petroleum engineers or consultant(s) of national standing in accordance with the
Company's reserve engineering practices as of the Issue Date.
If as of the date any Reserve Report under this covenant is delivered, we
report that the volumetric equivalent of our Oil and Gas Assets is less than the
Minimum Reserve Amount (a "Reserve Deficiency Event") then we will, not later
than the fifth Business Day following that event, make an offer (a "Reserve
Deficiency Offer") to purchase from the holders of notes on a pro rata basis an
aggregate stated principal amount of notes equal to the Cash Balance Amount,
rounded down to the nearest multiple of $1,000, on the date of such Reserve
Deficiency Offer, at a purchase price equal to 104% of the stated principal
amount of those notes, plus, in each case, accrued interest (if any) to the date
of purchase (the "Reserve Deficiency Payment").
If (i) within 90 days following such Reserve Deficiency Event, we have not
entered into one or more definitive agreements for one or more Asset
Dispositions, such that, after giving effect to any of those Asset
Disposition(s) and the assumed redemption of the notes following an Excess
Proceeds Offer under the covenant "-- Certain Covenants -- Limitation of Sale of
Assets and Subsidiary Stock," the PV-10 Value of the Oil and Gas Assets of the
Company and its Restricted Subsidiaries is greater than or equal to 1.75 times
the aggregate stated principal amount of the notes then outstanding or (ii) if
within that period that ratio is not otherwise met without the need for any such
Asset Disposition, then we will be obligated on the 91st day following such
Reserve Deficiency Event to offer to redeem (a "Reserve Deficiency Redemption
Offer") all of the notes then outstanding at a purchase price equal to 104% of
the stated principal amount of those notes, plus, in each case, accrued interest
(if any) to the date of purchase.
We will commence a Reserve Deficiency Offer or Reserve Deficiency
Redemption Offer with respect to the notes by mailing a notice to the trustee
and each holder of notes stating: (i) that the offer is being made under this
covenant and that all notes validly tendered will be accepted for payment on a
pro rata basis; (ii) the purchase price and the date of purchase (which shall be
a Business Day no earlier than 30 days nor later than 60 days from the date the
notice is mailed) (the "Reserve Deficiency Payment Date"); (iii) that any note
not tendered will continue to accrue interest pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the Reserve Deficiency Payment,
any notes accepted for payment under the Reserve Deficiency Offer shall cease to
accrue interest on and after the Reserve Deficiency Payment Date; (v) that
holders electing to have a note purchased pursuant to the offer will be required
to surrender the note, together with the form entitled "Option of Holder to
Elect Purchase" on the reverse side of the note completed, to the Paying Agent
at the address specified in the notice prior to the close of business on the
Business Day immediately preceding the Reserve Deficiency Payment Date; (vi)
that holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Reserve Deficiency Payment Date, a telegram, facsimile
transmission or letter setting forth the name of that holder, the principal
amount of
113
<PAGE> 115
notes delivered for purchase and a statement that the holder is withdrawing his
election to have those notes purchased; and (vii) that holders whose notes are
being purchased only in part will be issued new notes equal in principal amount
to the unpurchased portion of the notes surrendered; provided however, that each
note purchased and each new note issued shall be in a principal amount of $1,000
or integral multiples thereof.
On the Reserve Deficiency Payment Date, the Company shall
(A) accept for payment on a pro rata basis notes or portions thereof
tendered pursuant to the Reserve Deficiency Offer or Reserve Deficiency
Redemption Offer,
(B) deposit with the Paying Agent money sufficient to pay the purchase
price of all notes or portions thereof so accepted, and
(C) deliver, or cause to be delivered, to the trustee all notes or
portions thereof so accepted together with an Officers' Certificate
specifying the notes or portions thereof so accepted for payment by the
Company.
The Paying Agent shall promptly mail to the holders of notes so accepted payment
in an amount equal to the purchase price, and the trustee shall promptly
authenticate and mail to those holders a new note equal in principal amount to
any unpurchased portion of the note surrendered; provided, however; that each
note purchased and each new note issued shall be in a principal amount of $1,000
or integral multiples thereof. The Company will publicly announce the results of
the Reserve Deficiency Offer or Reserve Deficiency Redemption Offer as soon as
practicable after the Reserve Deficiency Payment Date. For purposes of this
covenant, the trustee shall act as the Paying Agent.
We will comply, to the extent applicable, with the requirements of this
covenant, of the Exchange Act and any other securities laws or regulations
thereunder in the event that a Reserve Deficiency Event occurs under this
covenant and the Company is required to repurchase notes as described above. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of this covenant, we will comply with the applicable
securities laws and regulations and shall not be deemed to have breached our
obligations under this covenant by virtue thereof.
DEFAULTS
An Event of Default is defined in the indenture as
(i) a default in the payment of interest on the notes when due,
continued for 20 days,
(ii) a default in the payment of principal of any note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise,
(iii) the Company's failure to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above,
(iv) the Company's failure to comply for 20 days after notice with any
of its obligations in the covenants described above under "-- Certain
Covenants: -- Limitation on Indebtedness", "-- Limitation on Restricted
Payments", "-- Limitation on Restrictions on Distributions from Restricted
Subsidiaries", "-- Limitation on Sales of Assets and Subsidiary Stock"
(other than a failure to purchase notes), "-- Limitation on Affiliate
Transactions", "-- Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries", "-- Change of Control" (other than a failure to
purchase notes), "-- Limitation on Liens", "-- Limitation on Sale/Leaseback
Transactions", "-- Future Subsidiary Guarantors", "-- SEC Reports",
"-- Limitation on Impairment of Lien", "-- Limitation on Capital
Expenditures", or "-- Quarterly Reserve Engineering Reports; Reserve
Redemption Event", (other than a failure to purchase notes),
(v) the failure by the Company or any Subsidiary Guarantor to comply
for 60 days after notice with its other agreements contained in the
indenture or any Security Document,
114
<PAGE> 116
(vi) principal of, or interest on, any Indebtedness of the Company or
any Significant Subsidiary, other than Limited Recourse Indebtedness, in
excess of $10.0 million is not paid when due, after giving effect to any
applicable grace period, or any default shall occur and be continuing under
any Indebtedness of the Company or any Significant Subsidiary, other than
Limited Recourse Indebtedness, in excess of $10.0 million and the maturity
thereof is accelerated by the holders thereof (the "cross acceleration
provision"),
(vii) certain events of bankruptcy, insolvency or reorganization of
the Company or a Significant Subsidiary (the "bankruptcy provisions"),
(viii) any judgment or decree for the payment of money in excess of
$10.0 million is rendered against the Company or a Significant Subsidiary,
remains outstanding for a period of 60 days following such judgment and is
not discharged, waived or stayed within 10 days after notice (the "judgment
default provision"), or
(ix) a subsidiary guarantee or any Security Document ceases to be in
full force and effect, other than in accordance with the terms of such
subsidiary guarantee or such Security Document, or the Company or a
subsidiary guarantor denies or disaffirms its obligations under any
Security Document to which it is a party or its subsidiary guarantee, as
applicable, if that default continues for a period of 10 days after notice
thereof to the Company.
However, a default under clauses (iv), (v) and (viii) will not constitute an
Event of Default until the trustee or the holders of 25% in stated principal
amount of the notes notifies the Company of the default and the Company does not
cure that default within the time specified after receipt of the notice.
If an Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the notes then outstanding may declare
the principal of and accrued but unpaid interest on all the notes to be due and
payable. Upon such a declaration, that principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company or any Significant
Subsidiary occurs and is continuing, the principal of and interest on all the
notes will become and be immediately due and payable without any declaration or
other act on the part of the trustee or any holders of notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
notes may rescind an acceleration with respect to the notes and its
consequences.
Subject to the provisions of the indenture relating to the duties of the
trustee, if an Event of Default occurs and is continuing, the trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the holders of notes unless those holders
have offered to the trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal or interest when due, no holder of notes may pursue any remedy with
respect to the indenture, the notes, any subsidiary guarantee or Security
Document unless
(i) that holder has previously given the trustee notice that an Event
of Default is continuing,
(ii) holders of at least 25% in principal amount of the notes then
outstanding have requested the trustee to pursue the remedy,
(iii) the holders have offered the trustee reasonable security or
indemnity against any loss, liability or expense,
(iv) the trustee has not complied with that request within 60 days
after the receipt thereof and the offer of security or indemnity, and
(v) the holders of a majority in principal amount of the notes then
outstanding have not given the trustee a direction inconsistent with that
request within that 60-day period.
Subject to some restrictions, the holders of a majority in principal amount of
the notes then outstanding are given the right to direct the time, method and
place of conducting any proceeding for any remedy
115
<PAGE> 117
available to the trustee or of exercising any trust or power conferred on the
trustee. The trustee, however, may refuse to follow any direction that conflicts
with law or the indenture or that the trustee determines is unduly prejudicial
to the rights of any other holder of a note or that would involve the trustee in
personal liability.
The indenture provides that if a Default occurs and is continuing and is
known to the trustee, the trustee must mail to you notice of the Default within
90 days after it occurs. Except in the case of a Default in the payment of
principal of or interest on any note, the trustee may withhold notice if and so
long as a committee of its trust officers determines that withholding notice is
not opposed to the interest of the holders of notes. In addition, the Company is
required to deliver to the trustee, within 120 days after the end of each fiscal
year, an officers' certificate indicating whether the signers thereof know of
any Default that occurred during that fiscal year. The Company also is required
to deliver to the trustee, within 30 days after the occurrence thereof, written
notice of any event which would constitute certain Defaults, their status and
what action the Company is taking or proposes to take in respect thereto.
AMENDMENTS AND WAIVERS
Subject to some exceptions, the indenture, the subsidiary guarantees and
any Security Document may be amended with the consent of the holders of a
majority in principal amount of the notes then outstanding, including consents
obtained in connection with a tender offer or exchange for the notes, and any
past default or noncompliance with any provisions may also be waived with the
consent of the holders of a majority in principal amount of the notes then
outstanding. However, without the consent of each holder of an outstanding note
affected thereby, no amendment may, among other things,
(i) reduce the amount of notes whose holders must consent to an
amendment,
(ii) reduce the rate of or extend the time for payment of interest on
any note,
(iii) reduce the principal of or extend the Stated Maturity of any
note,
(iv) reduce the premium payable upon the redemption of any note or
change the time at which any note may be redeemed as described under
"-- Optional Redemption",
(v) make any note payable in any currency other than that stated in
the note,
(vi) impair the right of any holder to receive payment of principal of
and interest and any Liquidated Damages on that holder's notes on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to that holder's notes,
(vii) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions,
(viii) make any change in any subsidiary guarantee or any Security
Document that could adversely affect that holder, or
(ix) release any Collateral from the Liens created under the indenture
and the Security Documents or release any subsidiary guarantor from any of
its obligations under its subsidiary guarantee, in any case otherwise than
in accordance with the terms of the indenture.
Without notice to or the consent of any holder of notes, the Company and
trustee may amend the indenture, any subsidiary guarantee or Security Document
- to cure any ambiguity, omission, defect or inconsistency,
- to provide for the assumption by a Successor Company of the
obligations of the Company under the indenture or of a subsidiary
guarantor under a subsidiary guarantee,
- to provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are
issued in registered form for purposes of Section 163(f) of the
116
<PAGE> 118
Code, or in a manner such that the uncertificated notes are described
in Section 163(f)(2)(B) of the Code),
- to add guarantees with respect to the notes,
- to further secure the notes,
- to add to the covenants of the Company for the benefit of the
holders of notes or
- to surrender any right or power conferred upon the Company or any
Subsidiary Guarantor,
- to make any change that does not adversely affect the rights of any
holder of notes or
- to comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
The consent of the holders of notes is not necessary under the indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the indenture, any subsidiary guarantee or
Security Document becomes effective, the Company is required to mail to you a
notice briefly describing that amendment. However, the failure to give that
notice to all holders of notes, or any defect therein, will not impair or affect
the validity of the amendment.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, the
Company and the Restricted Subsidiaries will have the right to remain in
possession and retain exclusive control of the Collateral securing the notes
(other than any cash, securities, obligations and Temporary Cash Investments
constituting part of the Collateral and deposited with the trustee in the
Collateral Account and other than as set forth in the Security Documents), to
freely operate the Collateral and to collect, invest and dispose of any income
thereon or therefrom.
Release of Collateral
Upon compliance by the Company with the conditions set forth below in
respect of any sale, lease, transfer or other disposition to any Person
involving Collateral, including the disposition of all of the Capital Stock of a
subsidiary guarantor, the trustee will release the Released Interests (as
defined below) from the Lien of the indenture and the Security Documents and
reconvey the Released Interests to the Company or any other Person as the
Company may direct in writing. The Company will have the right to obtain a
release of items of Collateral subject to any sale, lease, transfer or other
disposition or owned by a subsidiary guarantor all of the Capital Stock of which
is subject of a disposition (the "Released Interests") upon compliance with the
condition that the Company deliver to the trustee the following:
(1) a notice from the Company requesting the release of Released
Interests:
(A) describing the proposed Released Interests,
(B) specifying the value of those Released Interests on a date
within 60 days of the Company notice (the "Valuation Date"),
(C) stating that the purchase price or other property to be
received in consideration for those Released Interests is at least equal
to the fair market value of the Released Interests,
(D) stating that the release of those Released Interests will not
interfere with the trustee's ability to materially realize the value of
the remaining Collateral and will not materially impair the maintenance
and operation of the remaining Collateral,
(E) confirming the sale, lease, transfer or other disposition of,
or an agreement to sell, lease, transfer or dispose of, those Released
Interests in a bona fide transaction to a Person that is not
117
<PAGE> 119
an Affiliate of the Company or, in the event that such disposition is to
a Person that is an Affiliate, confirming that such disposition is made
in compliance with the provisions set forth in "-- Certain
Covenants -- Limitation on Affiliate Transactions", and
(F) in the event there is to be a substitution of property for the
Collateral subject to the sale, lease, transfer or other disposition,
specifying the property intended to be substituted for the Collateral to
be disposed of;
(2) an officers' certificate of the Company stating that:
(A) such sale, lease, transfer or other disposition complies with
the terms and conditions of the indenture with respect to Asset
Dispositions and Restricted Payments to the extent applicable,
(B) all Net Available Cash from the sale, lease, transfer or other
disposition will be applied pursuant to the provisions of the indenture
to the extent applicable,
(C) there is no Event of Default in effect or continuing on the
date thereof or the date of the sale, lease, transfer or other
disposition,
(D) the release of the Collateral will not result in an Event of
Default under the indenture, and
(E) upon the delivery of the officers' certificate, all conditions
precedent in the indenture relating to the release in question will have
been complied with, and
(3) all other documentation required by the Trust Indenture Act, if
any, prior to the release of Collateral by the trustee and, in the event
there is to be a contemporaneous substitution of property for the
Collateral subject to the sale, lease, transfer or other disposition, all
documentation necessary to effect the substitution of those new Collateral.
Notwithstanding the provisions of "-- Release of Collateral" above, so long
as no Event of Default shall have occurred and be continuing, the Company may
engage in any number of ordinary course activities in respect of the Collateral,
in limited dollar amounts specified by the Trust Indenture Act, upon
satisfaction of certain conditions. For example, among other things, subject to
such dollar limitations and conditions, the Company would be permitted to:
(1) sell or otherwise dispose of any property subject to the Lien of
the indenture and the Security Documents, which may have become worn out or
obsolete,
(2) abandon, terminate, cancel, release or make alterations in or
substitutions of any leases or contracts subject to the Lien of the
indenture or any of the Security Documents,
(3) surrender or modify any franchise, license or permit subject to
the Lien of the indenture or any of the Security Documents which it may own
or under which it may be operating,
(4) alter, repair, replace, change the location or position of and add
to its structures, machinery, systems, equipment, fixtures and
appurtenances,
(5) demolish, dismantle, tear down or scrap any Collateral or abandon
any thereof, and
(6) grant farm-outs, leases or sub-leases in respect of real property
to the extent any of the preceding does not constitute an Asset
Disposition.
Deposit, Use and Release of Trust Moneys
The Net Available Cash from any Asset Disposition involving Collateral
shall be deposited into a securities account maintained by the trustee at its
corporate trust offices or at any securities intermediary selected by the
trustee having a combined capital and surplus of at least $250.0 million and
having a long-term debt rating of at least "A3" by Moody's Investor Service,
Inc. and at least "A -- " by Standard &
118
<PAGE> 120
Poor's Ratings Services styled the "Kelley Oil Collateral Account" (such account
being the "Collateral Account") which shall be under the exclusive dominion and
control of the trustee. All amounts on deposit in the Collateral Account shall
be treated as financial assets and cash funds on deposit in the Collateral
Account may be invested by the trustee, at the direction of the Company, in
Temporary Cash Investments; provided, however, in no event shall the Company
have the right to withdraw funds or assets from the Collateral Account except in
compliance with the terms of the indenture and all assets credited to the
Collateral Account shall be subject to a Lien in favor of the trustee and the
holders of notes.
Any of those funds will be released to the Company by its delivering to the
Trustee an officers' certificate stating that:
(1) no Event of Default has occurred and is continuing as of the date
of the proposed release,
(2) (A) if those Trust Moneys represent Net Available Cash in respect
of an Asset Disposition, that those funds will be applied in accordance
with the covenant "Limitation on Sales of Assets and Subsidiary Stock"
above, or (B) if those Trust Moneys do not represent Net Available Cash,
that those amounts will be utilized in connection with the business of the
Company and its Restricted Subsidiaries in compliance with the terms of the
indenture,
(3) all other conditions precedent in the indenture relating to the
release in question have been complied with, and
(4) all documentation required by the Trust Indenture Act, if any,
prior to the release of those Trust Moneys by the trustee has been
delivered to the trustee.
Notwithstanding the preceding, (A) if the maturity of the notes has been
accelerated, which acceleration has not been rescinded as permitted by the
indenture, the trustee shall apply the Trust Moneys credited to the Collateral
Account to pay the principal of, premium, if any, and accrued and unpaid
interest on the notes to the extent of such Trust Moneys, (B) if the Company so
elects, by giving written notice to the trustee, the trustee shall apply Trust
Moneys credited to the Collateral Account to the payment of interest due on any
interest payment date, and (C) if the Company so elects, by giving written
notice to the trustee, the trustee shall apply Trust Moneys credited to the
Collateral Account to the payment of the principal of, and premium, if any, and
accrued and unpaid interest on any notes on the Stated Maturity or upon
redemption or to the purchase of notes upon tender or in the open market or at
private sale or upon any exchange or in any one or more of such ways, in each
case in compliance with the indenture and at the direction of the Company.
TRANSFER
The notes will be issued in registered form and will be transferable only
upon the surrender of the notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
DEFEASANCE
We at any time may terminate all our obligations under the notes and the
indenture and all of the obligations of the subsidiary guarantors under the
subsidiary guarantees and the indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the notes, to replace mutilated, destroyed,
lost or stolen notes and to maintain a registrar and paying agent in respect of
the notes. The Company at any time may terminate its obligations under the
covenants described under "-- Certain Covenants" (other than the covenant
described under "-- Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "-- Defaults"
above and the limitations contained in clauses (iii) and (iv) under "-- Certain
Covenants -- Merger and Consolidation" above ("covenant defeasance").
119
<PAGE> 121
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the notes may not be accelerated because of an Event of Default
specified in clause (iv), (vi), (vii) (with respect only to Significant
Subsidiaries) or (viii) under "-- Defaults" above or because of the failure of
the Company to comply with clause (iii) or (iv) under the first of paragraph of
"-- Certain Covenants -- Merger and Consolidation" above. If we exercise our
legal defeasance option or our covenant defeasance option each subsidiary
guarantor, if any, will be released from all its obligations with respect to its
subsidiary guarantee.
In order to exercise either defeasance option, we must irrevocably deposit
in trust (the "defeasance trust") with the trustee money or U.S. Government
Obligations for the payment of principal and interest on the notes to redemption
or maturity, as the case may be, and must comply with certain other conditions,
including delivery to the trustee of an opinion of counsel to the effect that
holders of notes will not recognize income, gain or loss for Federal income tax
purposes as a result of the deposit and defeasance and will be subject to
Federal income tax on the same amount and in the same manner and at the same
times as would have been the case if the deposit and defeasance had not occurred
(and, in the case of legal defeasance only, the opinion of counsel must be based
on a ruling of the Internal Revenue Service or other change in applicable
Federal income tax law).
CONCERNING THE TRUSTEE
Norwest Bank Minnesota, National Association is to be the trustee under the
indenture and has been appointed by the Company as the initial Registrar and
initial Paying Agent with regard to the notes.
The holders of a majority in principal amount of the notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that if an Event of Default occurs
and is not cured, the Trustee will be required, in the exercise of its power, to
use the degree of care of a prudent person in the conduct of that person's own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless that holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the indenture.
BOOK-ENTRY; DELIVERY AND FORM
The notes initially will be represented by one or more permanent global
notes in definitive, fully registered form without interest coupons
(collectively, the "Global Note") and will be deposited with the trustee as
custodian for, and registered in the name of, a nominee of DTC.
Ownership of beneficial interests in the Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or the nominee, as the case may be, will be considered the sole
owner or holder of the notes represented by the Global Note for all purposes
under the indenture and the notes. No beneficial owner of an interest in a
Global Note will be able to transfer that interest except in accordance with
DTC's applicable procedures, in addition to those provided for under the
indenture and, if applicable, those of a participant through which the note is
held.
Payments of the principal of, and interest on, the Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither we, the trustee nor any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of
120
<PAGE> 122
beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest in respect of the Global Note, will credit participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of the Global Note as shown on the records of DTC or its
nominee. We also expect that payments by participants to owners of beneficial
interests in the Global Note held through those participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for those customers. Those payments will be the responsibility of those
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
We expect that DTC will take any action permitted to be taken by a Holder,
including the presentation of Notes for exchange as described below, only at the
direction of one or more participants to whose account the DTC interests in the
Global Note is credited and only in respect of that portion of the aggregate
principal amount of any Note as to which that participant or participants has or
have given that direction. However, if there is an Event of Default under the
Notes, DTC may exchange the applicable Global Note for Certificated Notes, which
it will distribute to its participants.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code and a "Clearing Agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participants and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC is expected to follow the preceding procedures in order to
facilitate transfers of interests in the Global Note among participants of DTC,
it is under no obligation to perform or continue to perform those procedures,
and those procedures may be discontinued at any time. Neither the Company nor
the Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NOTES
The indenture requires that payments in respect of notes (including
principal and interest) be made by wire transfer of immediately available funds
to the account specified by the holders thereof or, if no account is specified,
by mailing a check to each holder's registered address.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes in exchange for the
Global Note.
GOVERNING LAW
The indenture provides that it, the subsidiary guarantees and the notes
will be governed by, and construed in accordance with, the laws of the State of
New York. The Security Documents will be governed by, and construed in
accordance with, the laws of the State of New York, except to the extent the law
of another jurisdiction otherwise mandatorily applies to certain issues.
121
<PAGE> 123
FEDERAL INCOME TAX CONSIDERATIONS
The following summary fairly describes the material United States federal
income tax consequences expected to apply to the exchange of outstanding notes
for new notes. This summary is based upon the provisions of the Internal Revenue
Code of 1986, as amended, the final, temporary and proposed regulations
promulgated under the Internal Revenue Code, and administrative rulings and
judicial decisions now in effect. All of the above are subject to change or to
different interpretations, possibly with retroactive effect. This discussion is
for general information only and does not purport to address all of the possible
federal income tax consequences or any other federal, or any state, local or
foreign, tax consequences of the acquisition, ownership and disposition of the
outstanding notes or new notes. It is limited to investors who hold the
outstanding notes and the new notes as capital assets and does not address the
federal income tax consequences that may be relevant to particular investors in
light of their unique circumstances or to particular investors, such as dealers
in securities, insurance companies, financial institutions, foreign
corporations, partnerships or trusts, nonresident alien individuals, and
tax-exempt entities, who may be subject to special treatment under the federal
income tax law.
An exchange of the outstanding notes for the new notes under the exchange
offer will not constitute a taxable event for federal income tax purposes. As a
result, holders who exchange their outstanding notes for new notes will not
recognize in income any accrued and unpaid interest on the new notes by reason
of the exchange. An exchanging holder will have the same adjusted basis and
holding period in the new notes as it had in the outstanding notes immediately
before the exchange.
Holders of notes should consult their own tax advisor as to the particular
tax consequences for them of exchanging outstanding notes for new notes in the
exchange offer, including the applicability and effect of any state, local, or
foreign tax laws and or recent or possible future changes in the tax laws.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC in "no action letters"
issued to third parties, we believe that you may transfer new notes issued under
the exchange offer in exchange for the outstanding notes if you both:
- acquire the new notes in the ordinary course of your business, and
- are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of new notes.
Broker-dealers receiving new notes in the exchange offer will be subject to
a prospectus delivery requirement with respect to resales of the new notes. The
letter of transmittal states that by acknowledging and delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for outstanding notes where the
outstanding notes were acquired by the broker-dealer as a result of market-
making activities or other trading activities.
We believe that you may not transfer new notes issued under the exchange
offer in exchange for the outstanding notes if you are either:
- our "affiliate" within the meaning of Rule 405 under the Securities Act,
- a broker-dealer that acquired outstanding notes directly from us, or
- a broker-dealer that acquired outstanding notes as a result of
market-making or other trading activities without compliance with the
registration and prospectus delivery provisions of the Securities Act.
122
<PAGE> 124
To date, the staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange offer,
other than a resale of an unsold allotment from the original sale of the
outstanding notes, with the prospectus contained in the exchange offer
registration statement. Broker-dealers who acquired the outstanding notes from
us may not rely on SEC staff interpretations. They must comply with the
registration and prospectus delivery requirements of the Securities
Act -- including being named as selling noteholders -- in order to resell the
outstanding notes or the new notes. In the registration rights agreement, we
have agreed to permit participating broker-dealers use of this prospectus in
connection with the resale of new notes. We have agreed that, for a period up to
180 days after the expiration of the exchange offer, we will make this
prospectus, and any amendment or supplement to this prospectus, available to any
broker-dealer that requests these documents in the letter of transmittal. In
addition, until, September 20, 1999, all dealers effecting transactions in the
new notes may be required to deliver a prospectus.
If you wish to exchange your outstanding notes for new notes in the
exchange offer, you will be required to make representations to us as described
in "The Exchange Offer -- Purpose and Effect of the Exchange Offer" and "The
Exchange Offer -- Procedures for Tendering -- Your Representations to Us" of
this prospectus and in the letter of transmittal. In addition, if you are a
broker-dealer who receives new notes for your own account in exchange for
outstanding notes that were acquired by you as a result of market-making
activities or other trading activities, you will be required to acknowledge that
you will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale by you of new notes.
We will not receive any proceeds from any sale of new notes by
broker-dealers. Broker-dealers who receive new notes for their own account in
the exchange offer may sell them from time to time in one or more transactions
either:
- in the over-the-counter market,
- in negotiated transactions,
- through the writing of options on the new notes or a combination of
methods of resale,
- at market prices prevailing at the time of resale, or
- at prices related to prevailing market prices or negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any new notes. Any broker-dealer
that resells new notes it received for its own account in the exchange offer and
any broker or dealer that participates in a distribution of new notes may be
deemed to be an "underwriter" within the meaning of the Securities Act. Any
profit on any resale of new notes and any commissions or concessions received by
any persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers. We will indemnify
holders of the outstanding notes, including any broker-dealers, against some
liabilities, including liabilities under the Securities Act, as provided in the
registration rights agreement.
LEGAL MATTERS
Certain legal matters related to the new notes offered hereby will be
passed upon for the Company by Fulbright & Jaworski L.L.P.
123
<PAGE> 125
EXPERTS
The consolidated financial statements of the Company included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report thereon appearing herein, and are included in reliance
upon the report of that firm given their authority as experts in accounting and
auditing.
ENGINEERS
The estimated reserve evaluations and related calculations of H. J. Gruy &
Associates, Inc., independent petroleum engineers, have been included herein in
reliance upon the authority of that firm as an expert in petroleum engineering.
124
<PAGE> 126
GLOSSARY OF INDUSTRY TERMS
3-D seismic. (Three-Dimensional Seismic) Seismic reflections from the
subsurface used to map strata in three dimensions.
Bbl. One stock tank barrel, or 42 U.S. Gallons liquid volume, used herein
in reference to oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas.
Bcfe. One billion cubic feet of natural gas equivalent (see Mcfe for
equivalency).
Condensate. A hydrocarbon mixture that becomes liquid and separates from
natural gas when the natural gas is produced.
Development costs. The costs incurred in preparing proved reserves for
production, i.e., costs incurred to obtain access to proved reserves and to
provide facilities for extracting, treating, gathering, and storing oil and
natural gas, but not including exploration costs.
Development well. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
EBITDAX. Income before extraordinary items, interest expense and other debt
expenses, income taxes, exploration costs, restructuring expense, depletion,
depreciation, amortization, and impairment of oil and natural gas properties
expenses.
Estimated future net cash flows. The estimated net cash flows expected to
be derived upon production and sale from proved oil and natural gas reserves at
a date indicated. Estimated future net cash flows are computed after giving
effect to estimated future development and production costs at a date indicated
and assuming the continuation of existing economic conditions. The calculation
does not take into account the effect of various cash outlays, including general
and administrative costs and interest expense, and does not give effect to
estimated future income taxes.
Exploration costs. Costs incurred in exploring property. Exploration
involves identifying areas that may warrant examination and examining specific
areas, including drilling exploratory wells.
Gross acres. The total number of acres in which a working interest is
owned.
Gross wells. The total number of wells in which a working interest is
owned.
Lease operating expenses. The expenses of lifting oil and natural gas from
a producing formation to the surface, and the transportation and marketing
thereof, constituting part of the current operating expenses of a working
interest, and also including labor, superintendence, supplies, repairs,
maintenance, allocated overhead costs, ad valorem taxes and other expenses
incidental to production, but not including severance taxes or capital costs.
MBbls. One thousand barrels of oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcfe. One thousand cubic feet of natural gas equivalent (converting one
barrel of oil to six Mcf of natural gas based on commonly accepted rough
equivalency of energy content).
MMBtu. One million British Thermal Units, a standard measure of energy
content.
Mmcf. One million cubic feet of natural gas.
Mmcfe. One million cubic feet of natural gas equivalent (see Mcfe for
equivalency).
Net acres. The sum of acres determined by adding the products of gross
acres in which there is an interest multiplied by our fractional working
interests therein.
Net wells. The sum of the fractional working interests we own in gross
wells.
125
<PAGE> 127
NYMEX. New York Mercantile Exchange.
PV-10 Value or present value of estimated future net cash flows. An
estimate of the present value of the estimated future net cash flows is
calculated by discounting estimated future net cash flows before income taxes at
an annual rate of 10%, in accordance with SEC practice, to determine their
"present value". The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties. Estimates of future net cash revenues are made
using oil and natural gas prices and costs at the date indicated and held
constant for the life of the reserves.
Producing well or productive well. A well that is producing oil or natural
gas or that is capable of producing commercial quantities without further
capital expenditure.
Production expenses. Lease operating expenses plus severance taxes.
Proved developed reserves. Proved developed reserves are those quantities
of oil, natural gas and natural gas liquids that, upon analysis of geological
and engineering data, can be expected with reasonable certainty to be
recoverable in the future from known oil and natural gas reservoirs under
existing economic and operating conditions. This classification includes those:
(a) which are expected to be recovered from currently open and producing zones
under continuation of existing equipment and operating methods (proved developed
producing reserves); and (b) which consist of (i) reserves from wells that have
been completed and tested but are not yet producing due to lack of market or
minor completion problems that reasonably can be expected to be corrected, and
(ii) reserves currently behind pipe in existing wells which reasonably can be
expected to be productive due to both the well log characteristics and analogous
production in the immediate vicinity of the well (proved developed nonproducing
reserves).
Proved reserves. Proved reserves are those estimated quantities of oil,
natural gas and other hydrocarbon liquids which, by analysis of geological and
engineering data, can be estimated with reasonable certainty to be commercially
recoverable in future years from known reservoirs and under current economic
conditions, operating methods and government regulations.
Proved undeveloped reserves. Proved undeveloped reserves are reserves that
are expected to be recovered from (a) new wells on undrilled acreage, (b)
deepening existing wells to a different reservoir or (c) where a relatively
large expenditure is required to (i) recomplete an existing well or (ii) install
production or transportation facilities for primary or improved recovery
projects.
Reserves to production ratio. Calculated by dividing the total proved
reserves as of a specific date by production for the twelve-month period
immediately preceding such date. This term is sometimes referred to as "average
reserve life" (in years) or "estimated reserve life" (in years) by industry
participants or followers.
Working interest. The interest in an oil and natural gas property (normally
a leasehold interest) that gives the owner the right to drill, produce and
conduct oil and natural gas operations on the property and to a share of
production, subject to all royalties, overriding royalties and other burdens and
to all costs of exploration, development and operations and all risks in
connection therewith.
126
<PAGE> 128
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONTOUR ENERGY CO. (FORMERLY KELLEY OIL & GAS CORPORATION)
AND SUBSIDIARIES:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- December 31, 1997, 1998 and
March 31, 1999............................................ F-3
Consolidated Statements of Income (Loss) -- For the years
ended December 31, 1996, 1997 and 1998, the three months
ended March 31, 1998 (unaudited) and 1999................. F-4
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1996, 1997 and 1998, the three months ended
March 31, 1998 (unaudited) and 1999....................... F-5
Consolidated Statements of Changes in Stockholders'
Deficit -- For the years ended December 31, 1996, 1997 and
1998, and for the three months ended March 31, 1999....... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 129
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Contour Energy Co.:
We have audited the accompanying consolidated balance sheets of Contour
Energy Co. (formerly Kelley Oil & Gas Corporation) and subsidiaries (the
"Company") as of December 31, 1997 and 1998 and March 31, 1999, and the related
consolidated statements of income (loss), cash flows, and changes in
stockholders' deficit for each of the three years in the period ended December
31, 1998 and the three months ended March 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1997 and 1998 and March 31, 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 and the
three months ended March 31, 1999, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
May 17, 1999
(August 5, 1999 as to the effects of the reverse stock split described in Note
14)
F-2
<PAGE> 130
CONTOUR ENERGY CO. (FORMERLY KELLEY OIL & GAS CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents............................... $ 162 $ 8,435 $ 6,710
Accounts receivable..................................... 24,566 18,071 17,926
Accounts receivable -- drilling programs................ 718 624 573
Prepaid expenses and other current assets............... 1,412 1,121 768
--------- --------- ---------
Total current assets................................. 26,858 28,251 25,977
--------- --------- ---------
Oil and gas properties, successful efforts method:
Unproved properties, net............................. 49,854 38,293 38,455
Properties subject to amortization................... 463,263 496,686 500,980
Pipelines and other transportation assets, at cost...... 4,690 1,582 1,582
Furniture, fixtures and equipment....................... 2,969 3,554 3,567
--------- --------- ---------
520,776 540,115 544,584
Less: Accumulated depreciation, depletion and
amortization......................................... (227,163) (283,660) (293,620)
--------- --------- ---------
Total property and equipment, net.................... 293,613 256,455 250,964
Other non-current assets, net........................... 2,131 1,491 1,298
--------- --------- ---------
Total assets......................................... $ 322,602 $ 286,197 $ 278,239
========= ========= =========
LIABILITIES:
Accounts payable and accrued expenses................... $ 41,474 $ 33,113 $ 35,078
Accounts payable -- drilling programs................... 566 272 276
Current portion of long-term debt....................... -- 32,251 32,851
--------- --------- ---------
Total current liabilities............................ 42,040 65,636 68,205
--------- --------- ---------
Long-term debt.......................................... 286,183 287,500 287,959
--------- --------- ---------
Total liabilities.................................... 328,223 353,136 356,164
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 2,000,000 shares
authorized at December 31, 1997, 1998 and March 31,
1999; 1,745,443, 1,733,628 and 1,733,628 shares
issued and outstanding at December 31, 1997, 1998 and
March 31, 1999, respectively (liquidation value
$48,977, $48,633 and $49,771, respectively).......... 2,618 2,600 2,600
Common stock, $.10 par value, 20,000,000 shares
authorized at December 31, 1997, 1998 and March 31,
1999; 12,570,909, 12,602,224 and 12,602,224 shares
issued and outstanding at December 31, 1997, 1998 and
March 31, 1999, respectively......................... 1,257 1,260 1,260
Additional paid-in capital.............................. 300,367 300,653 300,653
Accumulated deficit..................................... (309,863) (371,452) (382,438)
--------- --------- ---------
Total stockholders' deficit.......................... (5,621) (66,939) (77,925)
--------- --------- ---------
Total liabilities and stockholders' deficit.......... $ 322,602 $ 286,197 $ 278,239
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 131
CONTOUR ENERGY CO. (FORMERLY KELLEY OIL & GAS CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ----------------------
1996 1997 1998 1998 1999
-------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas revenues.................. $ 60,854 $75,864 $ 79,150 $23,047 $ 15,507
Interest and other income............. 1,429 274 505 24 161
-------- ------- -------- ------- --------
Total revenues........................ 62,283 76,138 79,655 23,071 15,668
-------- ------- -------- ------- --------
COSTS AND EXPENSES:
Production expenses................... 10,709 10,955 19,878 4,898 5,284
Exploration expenses.................. 5,438 5,433 12,034 2,051 1,370
General and administrative expenses... 8,953 6,875 7,077 1,909 1,374
Interest and other debt expenses...... 24,401 25,071 33,333 8,092 8,666
Restructuring expenses................ 4,276 -- -- -- --
Depreciation, depletion and
amortization....................... 20,440 25,853 38,602 10,944 9,960
Impairment of oil and gas
properties......................... -- -- 25,738 -- --
-------- ------- -------- ------- --------
Total expenses........................ 74,217 74,187 136,662 27,894 26,654
-------- ------- -------- ------- --------
Income (loss) before income taxes and
extraordinary item.................... (11,934) 1,951 (57,007) (4,823) (10,986)
Income taxes.......................... -- -- -- -- --
-------- ------- -------- ------- --------
Net income (loss) before extraordinary
item.................................. (11,934) 1,951 (57,007) (4,823) (10,986)
Extraordinary item.................... (17,030) -- -- -- --
-------- ------- -------- ------- --------
Net income (loss)....................... (28,964) 1,951 (57,007) (4,823) (10,986)
Less: cumulative preferred stock
dividends.......................... (4,582) (4,582) (4,550) (1,145) (1,137)
-------- ------- -------- ------- --------
Net loss applicable to common stock..... $(33,546) $(2,631) $(61,557) $(5,968) $(12,123)
======== ======= ======== ======= ========
Basic and diluted loss per common share
before extraordinary item............. $ (1.83) $ (.26) $ (4.89) $ (.47) $ (.96)
======== ======= ======== ======= ========
Basic and diluted loss per common
share................................. $ (3.72) $ (.26) $ (4.89) $ (.47) $ (.96)
======== ======= ======== ======= ========
Weighted average common shares
outstanding........................... 9,011 10,076 12,578 12,571 12,602
======== ======= ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 132
CONTOUR ENERGY CO. (FORMERLY KELLEY OIL & GAS CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..................... $ (28,964) $ 1,951 $ (57,007) $ (4,823) $(10,986)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation, depletion and
amortization..................... 20,440 25,853 38,602 10,944 9,960
Impairment of oil and gas
properties....................... -- -- 25,738 -- --
Gain on sale of properties.......... (176) -- -- -- --
Exploration expenses................ 5,438 5,433 12,034 2,051 1,370
Accretion and amortization of other
debt expenses.................... 5,170 4,297 5,236 1,394 1,233
Restructuring expenses.............. 4,276 -- -- -- --
Extraordinary loss.................. 17,030 -- -- -- --
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable and other current
assets........................... (9,054) (1,297) 6,880 676 549
(Increase) decrease in other
non-current assets............... (1,945) (1,203) (526) 33 3
Increase (decrease) in accounts
payable and accrued expenses..... (2,953) 4,570 (8,655) (589) 1,969
--------- --------- --------- -------- --------
Net cash provided by operating
activities.......................... 9,262 39,604 22,302 9,686 4,098
--------- --------- --------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures.................. (47,601) (53,140) (56,579) (12,881) (5,823)
Acquisition of oil and gas
properties.......................... (11,594) (111,135) -- -- --
Proceeds from sale of properties...... 5,803 -- 17,363 -- --
--------- --------- --------- -------- --------
Net cash used in investing
activities.......................... (53,392) (164,275) (39,216) (12,881) (5,823)
--------- --------- --------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings.... 50,000 180,500 119,100 34,100 --
Principal payments on long-term
borrowings.......................... (58,500) (82,700) (118,900) (30,800) --
Proceeds from sale of notes, net...... 120,938 -- 29,526 -- --
Debenture conversion costs............ (1,100) -- -- -- --
Proceeds from sale of common stock,
net................................. 43,998 27,545 273 1 --
Proceeds from conversion of preferred
stock............................... -- -- (2) -- --
Retirement of notes................... (113,488) -- (228) (228) --
Dividends on preferred stock.......... -- (4,582) (4,582) -- --
--------- --------- --------- -------- --------
Net cash provided by financing
activities.......................... 41,848 120,763 25,187 3,073 --
--------- --------- --------- -------- --------
(Decrease) increase in cash and cash
equivalents........................... (2,282) (3,908) 8,273 (122) (1,725)
Cash and cash equivalents, beginning of
period................................ 6,352 4,070 162 162 8,435
--------- --------- --------- -------- --------
Cash and cash equivalents, end of
period................................ $ 4,070 $ 162 $ 8,435 $ 40 $ 6,710
========= ========= ========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 133
CONTOUR ENERGY CO. (FORMERLY KELLEY OIL & GAS CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
--------- ------ ---------- -----------
<S> <C> <C> <C> <C>
Stockholders' deficit at January 1, 1996............ $ 6,456 $ 440 $225,804 $(278,268)
Issuance of 4,800 shares of common stock in Contour
Transaction....................................... -- 480 47,520 --
Conversion of 697 shares of preferred stock into 436
shares of common stock............................ (1,045) 44 1,001 --
Conversion of 1,862 shares of preferred stock into
186 shares of common stock........................ (2,793) 19 2,774 --
Issuance of 4 shares of common stock pursuant to
employee incentive stock options.................. -- -- 62 --
Syndication costs................................... -- -- (4,065) --
Net loss............................................ -- -- -- (28,964)
------- ------ -------- ---------
BALANCE AT DECEMBER 31, 1996...................... 2,618 983 273,096 (307,232)
------- ------ -------- ---------
Issuance of 2,700 shares of common stock in Contour
Transaction....................................... -- 270 26,730 --
Issuance of 42 shares of common stock pursuant to
employee incentive stock options.................. -- 4 541 --
Preferred stock dividends........................... -- -- -- (4,582)
Net income.......................................... -- -- -- 1,951
------- ------ -------- ---------
BALANCE AT DECEMBER 31, 1997...................... 2,618 1,257 300,367 (309,863)
------- ------ -------- ---------
Conversion of 11,815 shares of preferred stock into
4,098 shares of common stock...................... (18) 1 17 --
Issuance of 27,217 shares of common stock pursuant
to employee incentive stock options............... -- 2 269 --
Preferred stock dividends........................... -- -- -- (4,582)
Net loss............................................ -- -- -- (57,007)
------- ------ -------- ---------
BALANCE AT DECEMBER 31, 1998...................... 2,600 1,260 300,653 (371,452)
------- ------ -------- ---------
Net loss............................................ -- -- -- (10,986)
------- ------ -------- ---------
BALANCE AT MARCH 31, 1999......................... $ 2,600 $1,260 $300,653 $(382,438)
======= ====== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 134
CONTOUR ENERGY CO. (FORMERLY KELLEY OIL & GAS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- INDUSTRY CONDITIONS AND LIQUIDITY
During 1998 and through the first quarter of 1999, the oil and gas industry
experienced a worldwide excess of supply over demand for oil and natural gas
resulting in sharply reduced prices. As a result, many companies in the oil and
gas industry, including Contour Energy Co. (formerly Kelley Oil & Gas
Corporation) ("the Company"), experienced reduced profitability and cash flows
which, in turn, created significant liquidity problems. To address these
liquidity issues, the Company has taken the measures discussed in the following
paragraphs.
In April 1999, the Company entered into an Exploration and Development
Agreement with Phillips Petroleum Company ("Phillips") relating to certain of
the Company's interests in the Bryceland, West Bryceland and Sailes fields in
north Louisiana. Pursuant to the agreement, the Company (1) received an $83
million cash payment (subject to certain post-closing adjustments), (2) retained
a 42 Bcf, 8-year volumetric overriding royalty interest and a 1% override on the
excess of production above such royalty interest and (3) retained 25% of its
working interest in the Cotton Valley formation. In addition, Phillips, will at
its risk and expense, operate, develop, exploit and explore the properties
thereby relieving the Company of significant operating, exploration and
development costs in the future. The effective date of the transaction was May
1, 1999 and it closed on May 17, 1999. The Company anticipates recognition of a
gain ranging from approximately $24 million to $28 million in the second quarter
of 1999. The Company has not completed its analysis of the specific costs of the
oil and gas properties and related accumulated depreciation, depletion and
amortization being sold, and accordingly, the gain is subject to further
adjustment.
In April 1999, the Company negotiated a private offering of $135 million
principal amount, 14% Senior Secured Notes (the "Notes"). The Notes are secured
by a first lien on substantially all of the Company's proved oil and natural gas
properties remaining after the sale to Phillips and guaranteed by three entities
wholly-owned by the Company. With the consummation of the Phillips transaction,
the Company is obligated to offer to repurchase $35 million principal amount of
the Notes at a repurchase price equal to 104% of the principal amount, plus
accrued and unpaid interest to the date of the repurchase within 30 days of such
closing.
In April 1999, the Company began an offer to purchase ("Offer to Purchase")
the outstanding principal amounts of its 7 7/8% Convertible Subordinated Notes
due December 15, 1999 and its 8 1/2% Convertible Subordinated Debentures due
April 1, 2000 (collectively, the "Securities") at a price equal to $590 per
$1,000 principal amount. On May 17, 1999, the Company funded the repurchase of
$46.1 million of the Securities through the Offer to Purchase, at a total cost
of approximately $28.3 million, and will recognize an extraordinary gain of
approximately $15.6 million in the second quarter of 1999.
The net proceeds from the combination of these transactions and cash on
hand were used by the Company to repay all borrowings outstanding under its
Credit Facility of $115.5 million plus accrued interest, to fund cash collateral
for a $1.5 million letter of credit, and to fund the repurchase of $46.1 million
of Securities under the Offer to Purchase, at a total cost of approximately
$28.3 million, all at May 17, 1999. The remaining net proceeds and cash flow
from operations will be used to repurchase up to $35 million of Notes at 104% of
their principal amount and for general corporate purposes.
While industry conditions cannot be predicted with certainty and are
dependent upon a number of commodity and economic factors which are beyond the
company's control, the Company believes that the cash on hand subsequent to the
consummation of the above transactions and the recent increase in oil and
natural gas prices, if continued, will sustain its operations over the
short-term. However, the Company will continue to have significant debt
outstanding and limited ability to incur further indebtedness, which,
F-7
<PAGE> 135
combined with industry conditions beyond its control, may adversely affect its
financial condition, results of operations and cash flows.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations. Contour Energy Co. (formerly Kelley Oil & Gas
Corporation) (a Delaware Corporation), its corporate subsidiaries and
proportionate partnership interests are referred to herein as the "Company". The
Company is an independent oil & gas company engaged in the exploration,
development and acquisition of domestic oil and gas properties, principally in
the Gulf Coast region and northern Louisiana.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents. Cash payments attributable to interest on all indebtedness
aggregated $19.2 million, $19.6 million and $26.5 million for the years ended
December 31, 1996, 1997 and 1998, respectively, and $2.3 million and $2.0
million for the periods ended March 31, 1998 (unaudited) and March 31, 1999,
respectively.
Financial Instruments. The Company's financial instruments consist of cash
and cash equivalents, receivables, payables and long term debt. As of December
31, 1998 and March 31, 1999, the estimated fair value of the Company's long-term
debt was $251 million and $246 million, respectively. The fair value of such
long-term debt has been estimated based on quoted market prices. The carrying
amount of the Company's other financial instruments approximates fair value.
Oil and Gas Properties. All of the Company's interests in its oil and gas
properties are located in the United States and are accounted for using the
successful efforts method. Under the successful efforts method, the costs of
successful wells, development dry holes and leases containing productive
reserves are capitalized and amortized on a unit-of-production basis over the
life of the related reserves. Estimated future abandonment and site restoration
costs, net of anticipated salvage values, are amortized on a unit-of-production
basis over the life of the related reserves. Exploratory drilling costs are
initially capitalized pending determination of proved reserves but are charged
to expense if no proved reserves are found. Other exploration costs, including
geological and geophysical expenses, leasehold expiration costs and delay
rentals, are expensed as incurred. Unproved leasehold costs are capitalized and
are not amortized pending an evaluation of the exploration results. Unproved
properties are periodically assessed for impairment in value, with any
impairment charged to expense.
Property Impairment under SFAS 121. Under Financial Accounting Standards
Board's Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), certain assets are
required to be reviewed periodically for impairment whenever circumstances
indicate their carrying amount exceeds their fair value and may not be
recoverable. As a result of a decline in its proved reserves at January 1, 1999
from year-earlier levels, the Company performed an assessment of the fair value
of its oil and gas properties indicating an impairment should be recognized as
of year end. Under this analysis, the fair value for the Company's proved oil
and gas properties was estimated using escalated pricing and present value
discount factors reflecting risk assessments. The fair value of the Company's
unproved properties was predicated on current acreage cost estimates. Based on
this analysis, the Company recognized noncash impairment charges against the
carrying values of its proved and unproved oil and gas properties under SFAS 121
aggregating $21.6 million and $4.1 million, respectively, at December 31, 1998.
Prices of oil and natural gas have increased since December 31, 1998 so that no
additional impairment was required at March 31, 1999.
Other Property and Equipment. The costs of pipelines and other
transportation assets are depreciated using the straight-line method over the
estimated useful lives of the related assets. Furniture, fixtures and equipment
are recorded at cost and depreciated using the straight-line method over the
estimated useful lives of three to five years. Maintenance and repairs are
charged to expense as incurred.
Other Non-Current Assets. Other non-current assets consist primarily of
debt issue costs, net of accumulated amortization. These costs are amortized
over the anticipated term of the related debt.
F-8
<PAGE> 136
Oil and Gas Revenues. The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold is not significantly different from the Company's
production entitlement. Revenues from gas marketing, net of cost of gas sold,
are included in oil and gas revenues and amounted to $1.8 million, $2.8 million
and $1.3 million for the years ended December 31, 1996, 1997 and 1998,
respectively, and $0.5 million and $0.6 million, for the periods ended March 31,
1998 (unaudited) and March 31, 1999, respectively.
Earnings per Share. In 1997, the Company implemented the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 establishes standards for computing
and presenting earnings per share ("EPS") and is effective for financial
statements issued for periods ending after December 15, 1997. This statement
requires restatement for all prior-period EPS data presented. The basic loss per
common share before extraordinary item and basic loss per common share as shown
on the Consolidated Statements of Income (Loss) reflects net income (loss)
before extraordinary item and net income (loss), respectively, less cumulative
preferred stock dividends, whether or not declared, divided by the weighted
average number of common shares outstanding during the respective years. The
extraordinary loss per common share for the year ended 1996 was $1.89. In
calculating diluted income (loss) per share, common shares issuable under stock
options and upon conversion of convertible subordinated debentures and
convertible preferred stock are added to the weighted average common shares
outstanding when dilutive. For the years ended December 31, 1996, 1997 and 1998,
and for the periods ended March 31, 1998 (unaudited) and 1999, all potentially
dilutive securities are anti-dilutive and therefore are not included in the EPS
calculations. As of March 31, 1999, potentially dilutive securities which could
impact EPS in the future include stock options granted to employees to purchase
400,000 common shares, the Company's 7 7/8% Convertible Subordinated Notes and
8 1/2% Convertible Subordinated Debentures which can be converted into 250,000
and 140,000 common shares, respectively, and the Company's $2.625 Convertible
Preferred Stock which can be converted into 600,000 shares. See Note 1 regarding
the Company's purchase of a portion of the outstanding 7 7/8% Convertible
Subordinated Notes and 8 1/2% Convertible Subordinated Debentures.
Stock Based Compensation. The Company applies Accounting Principles Board
Opinion No. 25 ("APB 25") and related Interpretations in accounting for stock
option and purchase plans. Under APB 25, compensation expense, if any, is based
on the intrinsic value of the equity instrument at the measurement date. The
Company has not recognized any compensation expense because the exercise price
of employee stock options equals the market price of the underlying stock on the
date of the grant.
Derivatives and Hedging Activities. See Note 10 for a discussion of the
Company's accounting policies related to hedging activities. In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and hedging activities that require an
entity to recognize all derivatives as an asset or liability measured at its
fair value. Depending on the intended use of the derivatives, changes in its
fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application of SFAS 133 is encouraged, but not
prior to the beginning of any fiscal quarter that begins after issuance of the
Statement. Retroactive application to periods prior to adoption is not allowed.
Comprehensive Income. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
and displaying comprehensive income and its components. SFAS 130 is effective
for periods beginning after December 15, 1997. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as owners.
For all applicable periods through March 31, 1999, there are no adjustments
("Other Comprehensive Income") to net income in deriving comprehensive income.
F-9
<PAGE> 137
Risks and Uncertainties. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Presentation. The accompanying consolidated interim financial
statements and disclosures for 1998 (unaudited) and 1999, have been prepared by
the Company in accordance with generally accepted accounting principles and, in
the opinion of management, reflect all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation in all material
respects of the results for the interim periods. The interim financial
statements for the three months ended March 31, 1998 (unaudited) and 1999 should
be read in conjunction with the Company's annual consolidated financial
statements contained in its Annual Report on Form 10-K for the year ended
December 31, 1998. The results of operations for the three months ended March
31, 1999 are not necessarily indicative of results to be expected for the full
year.
Changes in Presentation. Certain financial statement items in 1996, 1997
and 1998 have been reclassified to conform to the 1999 presentation.
NOTE 3 -- ACQUISITION OF OIL AND GAS PROPERTIES
SPR Acquisition. On December 1, 1997, the Company purchased from SCANA
Petroleum Resources, Inc. ("SPR") substantially all of SPR's assets, including
its oil and gas properties, exploratory leasehold interests and associated
obligations, in exchange for approximately $110 million ("SPR Acquisition"),
subject to adjustment as provided by the Purchase and Sale Agreement between the
Company and SPR. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired based on estimated fair values at the date of acquisition. The
operating results of the assets acquired from SPR have been included in Kelley's
Consolidated Statements of Income (Loss) since December 1, 1997. The pro forma
information shown below assumes that the acquisition occurred at the beginning
of each year presented. Adjustments have been made to reflect changes in the
Company's results from the revenues and direct operating expenses of the
producing properties acquired from SPR, additional interest expense to finance
the acquisition, depreciation, depletion and amortization based on assigned fair
values to the assets acquired and general and administrative expenses incurred
from hiring additional employees. The unaudited pro forma financial data are not
necessarily indicative of financial results that would have occurred had the SPR
Acquisition occurred on January 1, 1996 and January 1, 1997, and should not be
viewed as indicative of operations in future periods.
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---------- ----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues.................................................... $112,936 $112,142
Income (loss) before extraordinary item..................... (12,484) 1,315
Net income (loss)........................................... (29,514) 1,315
Loss per common share....................................... (3.78) (0.32)
</TABLE>
F-10
<PAGE> 138
NOTE 4 -- LONG-TERM DEBT
Long-Term Debt. The Company's long-term debt at December 31, 1997 and 1998
and March 31, 1999 is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Bank credit facilities............................... $111,300 $111,500 $111,500
13 1/2% Senior Notes................................. 435 435 435
10 3/8% Senior Subordinated Notes.................... 120,615 150,662 150,818
7 7/8% Convertible Subordinated Notes................ 29,710 31,816 32,416
8 1/2% Convertible Subordinated Debentures........... 24,123 25,338 25,641
-------- -------- --------
286,183 319,751 320,810
Less current maturities............................ -- (32,251) (32,851)
-------- -------- --------
$286,183 $287,500 $287,959
======== ======== ========
</TABLE>
Bank Credit Facilities. The Company replaced its prior credit facility with
a new credit facility effective as of December 12, 1996 (the "Credit Facility")
that was subsequently amended and restated in connection with the SPR
Acquisition effective December 1, 1997. The borrowers under the Credit Facility
are the Company, Kelley Oil Corporation ("Kelley Oil") and Kelley Operating
Company, Ltd., with Concorde Gas Marketing, Inc. (a wholly-owned subsidiary of
the Company) and the Company's subsidiary partnerships as guarantors.
The Credit Facility provides for a maximum $140 million revolving credit
loan and matures, with all amounts owed thereunder becoming due and payable on
December 1, 2000. Availability under the Credit Facility is limited to a
borrowing base determined by, among other things, the proved oil and natural gas
reserves and other assets of the borrowers and the value of those reserves based
on the underlying prices for oil and natural gas. The Borrowing Base is
redetermined at least semiannually by the Agent under the Credit Facility, with
the consent of 100% of the lenders, and may be redetermined more frequently at
the election of the lenders or the borrowers. On April 14, 1998, the Borrowing
Base was set at $138 million and the threshold amount (the "Threshold Amount"),
which is the amount that would ordinarily be made available by the lenders to a
similar borrower under a borrowing base, was set at $125 million. Following the
Company's sale of its interest in the Waskom field in July 1998, the Borrowing
Base and Threshold Amount were reduced to $130 million and $117 million,
respectively. As provided in the Credit Facility, on November 1, 1998 the
Borrowing Base was reduced to equal the Threshold Amount of $117 million.
On December 29, 1998 the Borrowing Base under the Credit Facility was
maintained at $117 million and certain terms were amended, including: (i) an
increase in the margin borrowing rate to 250 basis points over LIBOR, (ii) a
reduction in the grace periods available under certain default provisions, (iii)
a change in the definition of majority banks for purposes of setting the
semi-annual Borrowing Base and implementing other provisions from 75% to 100%,
and (iv) a reduction in the time allowed to cure a Borrowing Base deficiency to
30 days.
At December 31, 1998 and March 31, 1999, $111.5 million of borrowings and
$1.5 million of letters of credit were outstanding under the Credit Facility. In
April 1999 the Company borrowed an additional $4 million under the Credit
Facility, raising its total outstanding borrowings to $115.5 million as of April
30, 1999. The Company's typical monthly cash flow cycle is such that the Company
usually receives a substantial portion of its proceeds from operations near the
end of each month. Accordingly, outstanding balances under the Credit Facility
may be higher on any given day during the month than at the end of the month.
The weighted average interest rates on borrowings outstanding at December 31,
1998 and March 31, 1999 under the Credit Facility were 7.03% and 6.78%,
respectively.
As of March 31, 1999, the Company was in default on certain covenants under
the Credit Facility. In addition, a review of the Borrowing Base was scheduled
for May 1, 1999, at which time the Company
F-11
<PAGE> 139
expected the current $117 million Borrowing Base to be lowered. The excess of
the amounts outstanding over the new Borrowing Base would have been due and
payable within 30 days. The Company received waivers of these defaults through
May 17, 1999, at which time all amounts due under the Credit Facility were
repaid and the Credit Facility was terminated (see Note 1). Following the sale
of the Notes, the Company's ability to negotiate a new revolving credit facility
will be severely limited.
1996 Fourth Quarter Extraordinary Loss. Pursuant to an offer to purchase
and consent solicitation, dated September 24, 1996, as amended, the Company
offered to purchase for cash up to the aggregate principal amount of $100
million of its 13 1/2% Senior Notes at a cash price equal to $1,110 per $1,000
principal amount, plus interest accrued and unpaid through the payment date. In
conjunction with the offering, the Company also solicited consents to the
adoption of certain amendments to the 13 1/2% Senior Notes indenture pursuant to
which the 13 1/2% Senior Notes were issued, and offered to pay each consenting
holder of the 13 1/2% Senior Notes, $30 for each $1,000 principal amount of the
13 1/2% Senior Notes consenting. The Company received the requisite consents
which allowed it to amend the 13 1/2% Senior Notes indenture on October 28,
1996. The Company also received tenders from holders of approximately $99.6
million principal amount of the 13 1/2% Senior Notes. These transactions
resulted in an extraordinary loss in the fourth quarter of 1996 of $17.0
million, representing the excess of the aggregate purchase price of the 13 1/2%
Notes (including Consent Payments) over their carrying value as of the date of
the consummation of the refinancing.
10 3/8% Senior Subordinated Notes. In connection with the refinancing of
the 13 1/2% Senior Notes, the Company issued an aggregate principal amount of
$125.0 million of 10 3/8% Senior Subordinated Notes due 2006 (the "10 3/8%
Senior Subordinated Notes"). The 10 3/8% Senior Subordinated Notes are
redeemable at the option of the Company, in whole or in part, at redemption
prices declining from 105.19% in 2001 to 100% in 2003 and thereafter. The
Company may redeem up to 35% of the principal amount of the 10 3/8% Senior
Subordinated Notes before October 15, 1999 with the proceeds of an equity
offering (provided that either at least $75.0 million aggregate principal amount
of such notes remains outstanding or such redemption retires such notes in their
entirety). The 10 3/8% Senior Subordinated Notes represent unsecured obligations
of the Company and are subordinate in right of payment to all existing and
future senior indebtedness. The indenture for the notes contains conditions and
limitations, including but not limited to restrictions on additional
indebtedness, payment of dividends, redemption of capital stock, and certain
mergers and consolidations. The holder of the 10 3/8% Senior Subordinated Notes
also can require the Company to repurchase the notes at 101% of the principal
amount upon a Change of Control, as defined. Kelley Oil Corporation, a
wholly-owned subsidiary of the Company and Kelley Operating Company, Ltd., an
indirect wholly-owned partnership of the Company are guarantors of the 10 3/8%
Senior Subordinated Notes.
On February 3, 1997, the Company completed an exchange of $125.0 million
aggregate principal amount of publicly registered 10 3/8% Senior Subordinated
Notes, Series B, for all of the then outstanding Series A notes. The Series B
notes were substantially identical to the Series A notes.
In May 1998, the Company sold $30.0 million principal amount of the
Company's 10 3/8% Senior Subordinated Notes due 2006, Series C ("Series C
Notes") at a cash price of $1,015 per $1,000 principal amount. The net proceeds
received were used to reduce outstanding borrowings under the Company's bank
credit facility ("Credit Facility"). The Series C Notes are redeemable at the
option of the Company, in whole or in part, at redemption prices declining
ratably from 105.19% on October 15, 2001 to 100% at October 15, 2003 and
thereafter. The Company may redeem up to 35% of the original principal amount of
the Series C Notes before October 15, 1999 at 110.38% with the proceeds of an
equity offering (provided that either at least $18.0 million aggregate principal
amount of such notes remains outstanding or such redemption retires such notes
in their entirety). The Series C Notes represent unsecured obligations of the
Company and are subordinate in right of payment to all existing and future
senior indebtedness. The indenture for the notes contains conditions and
limitations, including but not limited to restrictions on additional
indebtedness, payment of dividends, redemption of capital stock, and certain
mergers and consolidations. The holders of the Series C Notes also can require
the Company to repurchase the notes at 101% of the principal amount upon a
Change of Control, as defined. Kelley Oil Corporation, a wholly
F-12
<PAGE> 140
owned subsidiary of the Company, and Kelley Operating Company, Ltd., an indirect
wholly owned partnership of the Company, are guarantors of the Series C Notes.
The Series C Notes were sold pursuant to Rule 144A of the Securities Act of
1933. In issuing the Series C Notes, the Company agreed to use its best efforts
to register under the Securities Act notes identical in terms to the Series C
Notes ("Series D Notes"). The Company completed the exchange of the Series C
Notes for the Series D Notes on November 12, 1998.
7 7/8% Convertible Subordinated Notes and 8 1/2% Convertible Subordinated
Debentures. The Company has outstanding 7 7/8% Convertible Subordinated Notes
due December 1999 (the "7 7/8% Subordinated Notes") in the aggregate principal
amount at maturity of $34.1 million and 8 1/2% Convertible Subordinated
Debentures due April 1, 2000 (the "8 1/2% Subordinated Debentures") in the
aggregate principal amount of $26.9 million (together, the "Subordinated Debt").
Each $1,000 face value amount of the 7 7/8% Subordinated Notes is convertible
into 7.126 shares of the Company's Common Stock or 3.563 shares of the Company's
Common Stock and 7.435 shares of Preferred Stock. Each $1,000 face value amount
of the 8 1/2% Subordinated Debentures is convertible into 5.186 shares of the
Company's Common Stock or 2.593 shares of the Company's Common Stock and 5.411
shares of Preferred Stock.
Under the Indenture for the 7 7/8% Subordinated Notes, as amended, a
"Change in Control" is defined to occur if, among other things, any person
becomes the beneficial owner of securities representing 50% or more of the
equity interests in the Company. With the purchase by Contour of 2.7 million
shares on December 1, 1997, each holder of 7 7/8% Subordinated Notes, was
afforded the right, at the holder's option, subject to terms and conditions of
the Indenture, to require the Company to redeem all or any part of the holder's
notes by January 22, 1998 at a specified cash price. Holders redeemed $0.2
million of the 7 7/8% Subordinated Notes under the Change of Control provision.
See Note 1 regarding the Company's purchase of a portion of the outstanding
7 7/8% Convertible Subordinated Notes and 8 1/2% Convertible Subordinated
Debentures.
14% Senior Secured Notes Due 2003. On April 16, 1999, the Company issued
$135,000,000 of Senior Secured Notes due 2003, maturing at 105% of the stated
principal amount. Interest will accrue from the issue date and will be payable
semi-annually in cash in arrears on each April 15 and October 15, commencing
October 15, 1999. As a result of the consummation of the Phillips transaction,
by June 16, 1999, the Company must offer to redeem $35 million of the Notes at
104% of par. The remaining Notes are redeemable by the Company on or after April
15, 2001. Scheduled mandatory redemptions of $2,000,000 per quarter begin July
15, 2002. In addition, the indenture contains covenants that restrict the
Company's ability to incur additional indebtedness, pay dividends, incur capital
expenditures, sell assets, merge or consolidate and redeem subordinated
indebtedness.
Debt Maturities. At December 31, 1998 and March 31, 1999, the Company has
aggregate debt maturities of $34.6 million in 1999, $138.4 million in 2000 and
$155.0 million in 2006.
NOTE 5 -- STOCKHOLDERS' DEFICIT
Contour Stock Purchase. In February 1996, the Company issued 4.8 million
shares of its Common Stock at $10.00 per share to Contour Production Company
L.L.C. ("Contour") upon the closing of a Stock Purchase Agreement between the
Company and Contour (the "Contour Transaction"). The newly issued shares
represented 49.8% of the Company's voting power. In connection with the Contour
Transaction, the Company (i) entered into an option agreement with Contour (the
"Contour Option Agreement"), (ii) obtained consents from its principal
stockholders, subject to compliance with applicable securities law, to amend its
Certificate of Incorporation to increase its authorized Common Stock from 10
million shares to 20 million shares, (iii) entered into employment agreements
with John F. Bookout, President of Contour, and three other new executives named
by him, (iv) adopted a nonqualified stock option plan for the new executives
other than Mr. Bookout, (v) amended its existing incentive stock option plans,
(vi) reduced the size of its board of directors (the "Board") to seven members
and reconstituted
F-13
<PAGE> 141
the Board with three continuing directors and four designees of Contour and
(vii) replaced its credit facility.
Contour Option. Under the Contour Option Agreement, the Company granted
Contour an option (the "Contour Option") to purchase up to 2.7 million shares
(the "Maximum Option Number") of Common Stock at $10.00 per share (subject to
antidilution adjustments) upon satisfaction of certain conditions, including the
absence of any Company debt repurchase or redemption obligations as a result of
the purchase. Contour voluntarily exercised its option in full on December 1,
1997 to partially fund the SPR Acquisition.
Preferred Stock. In May 1994, Kelley Oil completed a public offering of
1,380,000 shares of $2.625 Preferred Stock ("KOIL Preferred Stock") at $25 per
share. Each outstanding share of KOIL Preferred Stock was converted in the
Consolidation into one share of the Company's Preferred Stock, which has the
same terms as the KOIL Preferred Stock, except for expanded voting rights. The
Company issued 649,807 shares of its Preferred Stock to Public Unitholders in
the Consolidation, resulting in a total of 2,442,323 outstanding shares of
Preferred Stock after giving effect to the shares issued to holders of KOIL
Preferred Stock.
In January 1996, the Company suspended the payment of the quarterly
Preferred Stock dividend scheduled for February 1, 1996 to conserve cash. On
April 15, 1997, the Board of Directors of the Company declared a dividend of
$2.625 per preferred share (approximately $4.6 million), which was paid on May
1, 1997. On April 14, 1998, the Company declared a dividend of $2.625 per share
of Preferred Stock (approximately $4.6 million), which was paid on April 30,
1998. The Company has not declared the quarterly dividends of $0.65625 per
preferred share for February 1, 1998, May 1, 1998, August 1, 1998, November 1,
1998, February 1, 1999 and May 1, 1999 aggregating approximately $6.8 million,
covering 6 quarters. Further dividends are restricted under the Company's
indentures governing its 10 3/8% Senior Subordinated Notes and its 14% Senior
Secured Notes. No interest is payable on Preferred Stock arrearages; however,
the terms of the Preferred Stock enable holders, voting separately as a class,
to elect two additional directors to the Board at each meeting of stockholders
at which directors are to be elected during any period when Preferred Stock
dividends are in arrears in an aggregate amount equal to at least six quarterly
dividends, whether or not consecutive.
Each share of Preferred Stock is convertible, at the holder's option, into
0.347 shares of Common Stock, equivalent to a conversion price of $72.00 per
share of Common Stock relative to the $25 per share liquidation preference of
the Preferred Stock (the "Preferred Conversion Price"). Under the terms of the
Certificate of Designation governing the Preferred Stock, the Contour
Transaction triggered a special conversion right under which the Preferred Stock
conversion price was reduced to $4.00 for a period of 45 days commencing March
12, 1996. On April 25, 1996, 696,823 shares of Preferred Stock were converted
into 435,504 shares of Common Stock under the special conversion right.
ESOP Preferred Stock. As of December 31, 1995, 1,861,619 shares of ESOP
Preferred Stock were outstanding and held by the Company's Employee Stock
Ownership Plan ("ESOP"). In June 1996, each of the 1,861,619 shares of ESOP
Preferred Stock was redeemed for .10 share of the Company's Common Stock.
NOTE 6 -- EMPLOYEE STOCK PLANS
Employee Stock Options. The Company has both qualified and nonqualified
stock option plans that provide for granting of options for the purchase of
common stock to key employees. These stock options may be granted for periods up
to ten years and are generally subject to vesting periods up to three years,
except options granted during 1997 and 1998 which are subject to a four year
vesting period.
F-14
<PAGE> 142
Stock option activity for the Company during 1996, 1997, 1998 and the three
month period ended March 31, 1999, was as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
1996 1997 1998 MARCH 31, 1999
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS IN THOUSANDS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- -------------------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock options outstanding,
beginning of year............. 211 $23.80 459 $16.30 461 $17.50 450 $18.70
Granted....................... 252 10.10 48 26.10 72 22.00 -- --
Exercised..................... (4) 23.80 (42) 13.10 (27) 10.00 -- --
Surrendered or expired........ -- -- (6) 26.20 (56) 17.30 (48) 11.50
--- --- --- ---
Stock options outstanding, end
of year/period................ 459 $16.30 460 $17.50 450 $18.70 402 $19.60
=== ====== === ====== === ====== === ======
</TABLE>
In February 1995, all previously issued options to the extent outstanding,
aggregating options to acquire 23,400 shares at prices ranging from $70.00 to
$76.25, were repriced at $41.25 per share. In February 1996, in connection with
the Contour Transaction, all unvested options then held by employees were fully
vested. Additionally, the then-existing plans were amended to extend the period
during which a terminated employee may exercise vested options to three years
after termination of employment.
At December 31, 1998 and March 31, 1999, approximately 360,000 and 410,000
shares, respectively, were available for future option grants.
The following table summarizes information about the options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
EXERCISE PRICE (THOUSANDS) (YEARS) PRICE (THOUSANDS) PRICE
- -------------- ----------- ---------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 6.90-10.00 169 7.8 $10.00 79 $10.00
$17.50-25.60 253 7.2 22.50 181 22.30
$27.20-41.30 28 4.0 37.80 23 39.80
</TABLE>
The following table summarizes information about the options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
EXERCISE PRICE (THOUSANDS) (YEARS) PRICE (THOUSANDS) PRICE
- -------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 6.90-10.00 125 7.2 $10.00 86 $10.00
$17.50-25.60 249 7.0 22.40 193 22.22
$27.20-41.30 27 3.6 38.10 22 39.90
</TABLE>
The weighted average fair value of options granted during 1996, 1997 and
1998 was $5.90, $15.10 and $14.60, respectively. There were no options granted
in the first quarter of 1999. The fair value of the options granted was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: weighted average risk-free interest rate of 6.8% for
1996, 6.4% for 1997 and 5.2% for 1998; an expected volatility of 60% for 1996
and 1997 and 78% for 1998; expected life of five years and no dividend yield for
all three years.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for stock option and purchase plans. Accordingly,
no compensation cost has been recognized for the stock option plans. Had
compensation cost been recognized based upon the fair market value at the
F-15
<PAGE> 143
grant dates for awards under those plans consistent with the method of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
compensation", the Company's net loss and earnings per share for the years ended
December 31, 1996, 1997, 1998 and the three month period ended March 31, 1999,
would have been as reflected in the pro forma amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1996 1997 1998 1999
-------- ------ -------- ------------
<S> <C> <C> <C> <C>
Net income (loss) before extraordinary item (in
thousands)...................................... $(14,512) $1,319 $(57,708) $(11,079)
Loss per common share before extraordinary item... (2.12) (.32) (4.95) (.97)
Net income (loss) (in thousands).................. (31,542) $1,319 $(57,708) $(11,079)
Loss per common share............................. (4.01) (.32) (4.95) (.97)
</TABLE>
ESOP/401K. Kelley Oil established the ESOP effective January 1, 1984 for
the benefit of substantially all of its employees. No ESOP contributions were
made in 1996. Effective September 1, 1996, the ESOP was amended to include a
401(k) feature whereby the Company is obligated to make matching contributions
up to 6% of each employee's salary. The plan also provides for additional
discretionary contributions. For the years ended 1996, 1997, 1998 and the
periods ended March 31, 1998 (unaudited) and 1999, the Company made matching
contributions totaling $0.1 million, $0.2 million, $0.3 million, $58,000 and
$67,000, respectively.
NOTE 7 -- INCOME TAXES
The following table sets forth a reconciliation of the statutory federal
income tax for the years ended December 31, 1996, 1997 and 1998 and for the
three month period ended March 31, 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1996 1997 1998 1999
-------- ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) before income taxes................ $(28,965) $ 1,951 $(57,007) $(10,986)
-------- ------- -------- --------
Income tax expense (benefit) computed at
statutory rates................................ (9,848) 663 (19,382) (3,735)
Increase in valuation allowance................ 16,322 301 16,272 5,297
Adjustment to net operating loss carryforward
and other................................... (7,209) (1,459) 2,463 (1,778)
Permanent differences:
Nondeductible expenses......................... 735 708 700 216
Other-net...................................... -- (213) (53) --
-------- ------- -------- --------
Tax expense (benefit)....................... $ -- $ -- $ -- $ --
======== ======= ======== ========
</TABLE>
No federal income taxes were paid for the years ended December 31, 1996,
1997 and 1998 or for the three months ended March 31, 1998 (unaudited) and 1999.
F-16
<PAGE> 144
The Company's deferred tax position reflects the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting.
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1996 1997 1998 1999
--------- --------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Tax over book depletion, depreciation and
capitalization methods on oil and gas
properties.............................. $ -- $ -- $ -- $ --
Deferred tax assets:
Book over tax depletion, depreciation and
capitalization method on oil and gas
properties.............................. 42,696 32,210 43,730 44,096
Net operating loss carryforwards........... 62,179 72,992 77,741 82,672
Charitable contribution carryforwards...... 78 52 54 54
Alternative minimum tax credit
carryforwards........................... 21 21 21 21
Valuation allowance........................ (104,974) (105,275) (121,546) (126,843)
--------- --------- --------- ---------
Total deferred tax assets.................. -- -- -- --
--------- --------- --------- ---------
Net deferred tax liability................. $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
Net Operating Loss Carryforwards and Alternative Minimum Tax Credits. As of
December 31, 1998, the Company had cumulative net operating loss carryforwards
("NOL") for federal income tax purposes of approximately $228 million, which
expire in 2000 through 2018, and net operating loss carryforwards for
alternative minimum tax purposes of approximately $218 million, which expire in
2008 through 2018. Due to previous ownership changes, future utilization of the
net operating loss carry forwards will be limited by Internal Revenue Code
section 382.
NOTE 8 -- RELATED PARTY TRANSACTIONS
The 1994 DDP. In February 1994, the 1994 DDP completed a public offering of
20.9 million units of its limited and general partner interests at $3.00 per
unit. As of March 31, 1999, the Company owned 19.2 million units (91.9%) in the
1994 DDP, together with its 3.94% general partner interest.
The 1994 DDP's partnership agreement provides that any contributions of the
partners not used or committed to be used for drilling activities during the
two-year period from the commencement of operations through February 29, 1996
(the "Commitment Period") shall be distributed to the partners on a pro rata
basis as a return of capital. In 1997, Kelley Oil reduced the estimate for
Committed Expenditures to $58.0 million based on the amount of committed capital
actually used and committed or allocated to drilling activities by the end of
the Commitment Period. In accordance with the 1994 DDP's partnership agreement,
the 1994 DDP distributed the Outside Share of uncommitted capital to its
unitholders other than Kelley Oil aggregating $0.3 million in March 1996 and
$0.1 million in July 1997.
The 1992 DDP. During November 1992, the 1992 DDP completed a public
offering of 16.0 million units of limited and general partner interests at $3.00
per unit. As of March 31, 1999, Kelley Oil owned 13.4 million units (83.7%) in
the 1992 DDP, together with its 3.94% general partner interest. As of March 31,
1999, the 1992 DDP was indebted to Kelley Oil for loans aggregating $2.3 million
($0.4 million, net of intercompany eliminations). The Company recorded interest
income on this indebtedness of $10,000 in the first three months of 1999, net of
intercompany eliminations.
Reimbursements from Affiliated Programs. The Company is reimbursed for
administrative and overhead expenses incurred in connection with the management
and administration of each of these affiliated programs. Such amounts, net of
intercompany eliminations, aggregated $0.2 million, $0.1 million, $21,000,
$24,000 and $18,000 in 1996, 1997, 1998, and the three months ended March 31,
1998 (unaudited) and 1999, respectively.
F-17
<PAGE> 145
Interest on DDP Commitments. During 1996, 1997, 1998, the first three
months of 1998 (unaudited) and 1999, the Company paid or accrued interest at a
market rate in the amounts, net of intercompany elimination, of $91,000,
$11,000, zero, zero and zero, respectively, on deferred subscription commitments
to DDPs.
Advisory Fees. In connection with the Contour Transaction, the Company
entered into an agreement (the "Advisory Agreement") with Bessemer Partners &
Co. ("BPCO"), an affiliate of Bessemer, providing for the engagement of BPCO to
provide the Company with financial advisory services. Under the Advisory
Agreement, BPCO has assisted the Company in arranging a new credit facility and
negotiating the related agreements and is assisting the Company in restructuring
its current capital structure. For its services under the Advisory Agreement,
BPCO received an advisory fee of $2.0 million at the closing of the Contour
Transaction and $500,000 in each of December 1996, 1997 and 1998, and will
receive an additional $500,000 in each December of 1999, 2000 and 2001. In
addition, BPCO is entitled to reimbursement of expenses incurred in connection
with rendering advisory services. The Company also has agreed to indemnify BPCO
and its affiliates against certain liabilities under the Advisory Agreement.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Significant Customers. Substantially all of the Company's receivables are
due from a limited number of natural gas transmission companies and other gas
purchasers. During 1998 and the three month period ended March 31, 1999, natural
gas sales to three purchasers accounted for 48%, 22% and 18% and 50%, 25% and
17%, respectively, of the Company's total sales. To date, this concentration has
not had a material adverse effect on the consolidated financial condition of the
Company.
Litigation. As previously disclosed, following Kelley Oil's announcement of
the initial proposal for the Consolidation in August 1994, four separate
lawsuits were filed against Kelley Oil and its directors relating to the
Consolidation. In November 1994, Kelley Oil entered into a memorandum of
understanding with the plaintiffs in three of the lawsuits, providing for a
proposed settlement based on a revised Consolidation proposal negotiated by a
special committee of Kelley Oil's non-management directors and the settling
plaintiffs. A stipulation and agreement of compromise, settlement and release
reflecting the terms of the proposed settlement was filed in the United States
District Court for the Southern District of Texas on November 23, 1994. At a
hearing held on the same date, the court approved the Consolidation of all four
lawsuits and the certification of a Unitholder class requested by the settling
parties. On March 3, 1995, following a hearing on the fairness of the
settlement, the court entered a final order approving the settlement, dismissing
the consolidated lawsuits with prejudice and reducing the award of attorneys'
fees and disbursements contemplated by the stipulation to $1.5 million, plus
interest from March 3, 1995 through the payment date. On April 29, 1997, the
U.S. Court of Appeals for the Fifth Circuit affirmed the final judgement and
order of the District Court. On August 4, 1997, the Company made a cash payment
of $1.7 million which included $0.2 million of interest.
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, the ultimate liability thereunder, if
any, will not have a material effect on the financial statements of the Company.
Restructuring Expenses. In 1996, the Company incurred restructuring
expenses of $4.3 million associated primarily with staff reductions, related
severance settlements and reorganization costs. Accrued expenses on the balance
sheet include $0.9 million, $0.2 million and $0.1 million at December 31, 1997
and 1998 and March 31, 1999, respectively, related to the unpaid portion of
these charges.
Leases. The Company leases office space and equipment under operating
leases with options to renew. Rental expenses related to these leases for the
years ended December 31, 1996, 1997 and 1998 and for the three month periods
ended March 31, 1998 (unaudited) and 1999 were $1.3 million, $0.8 million,
F-18
<PAGE> 146
$0.6 million, $0.1 million and $0.2 million, respectively. For the balance of
the lease terms, minimum rentals are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999.................................................. $ 667
2000.................................................. 636
2001.................................................. 341
2002.................................................. 39
2003.................................................. 7
------
Total....................................... $1,690
======
</TABLE>
The terms of the Company's office space lease provide that the Company may
terminate its rental obligation upon six months notice and incurring a maximum
obligation of $0.2 million.
NOTE 10 -- HEDGING ACTIVITIES
The Company periodically uses forward sales contracts, natural gas price
swap agreements, natural gas basis swap agreements and options to reduce
exposure to downward price fluctuations on its natural gas production. The
Company does not engage in speculative transactions. During 1998, the Company
used price and basis swap agreements. Price swap agreements generally provide
for the Company to receive or make counterparty payments on the differential
between a fixed price and a variable indexed price for natural gas. Basis swap
agreements generally provide for the Company to receive or make counterparty
payments on the differential between a variable indexed price and the price it
receives from the sale of natural gas production, and are used to hedge against
unfavorable price movements in the relationship between such variable indexed
price and the price received for such production. Gains and losses realized by
the Company from hedging activities are included in oil and gas revenues and
average sales prices in the period that the related production is sold. The
Company's hedging activities also cover the oil and gas production attributable
to the interest in such production of the public unitholders in its subsidiary
partnerships.
Through natural gas price swap agreements, the Company hedged approximately
49% and 66% of its natural gas production for 1998 and the three month period
ended March 31, 1999, respectively, at average NYMEX quoted prices of $2.31 per
Mmbtu and $2.27 per Mmbtu, respectively, before transaction and transportation
costs. As of December 31, 1998, 5,400,000 Mmbtus of natural gas production for
1999 has been hedged by natural gas price swap agreements at an average NYMEX
quoted price of $2.36 per Mmbtu before transaction and transportation costs. As
of March 31, 1999, 5,630,000 Mmbtus of natural gas production for April through
October 1999 has been hedged by natural gas price swap agreements at an average
NYMEX quoted price of $2.03 per Mmbtu before transaction and transportation
costs. As of December 31, 1998, 16,380,000 Mmbtu's of natural gas production for
1999 has been hedged by natural gas basis swap agreements. As of March 31, 1999,
10,980,000 Mmbtus of natural gas production for April through September 1999 has
been hedged by natural gas basis swap agreements. Hedging activities increased
revenues by approximately $3.5 million in 1998 and $2.5 million in the first
quarter of 1999, as compared to estimated revenues had no hedging activities
been conducted. At December 31, 1998, the unrealized gain on the Company's
existing hedging instruments for future production months in 1999 approximated
$2.5 million. As of March 31, 1999, the unrealized loss on the Company's
existing hedging instruments for the future production months in 1999
approximated $1.4 million.
The credit risk exposure from counterparty nonperformance on natural gas
forward sales contracts and derivative financial instruments is generally the
amount of unrealized gains under the contracts. The Company has not experienced
counterparty nonperformance on these agreements and does not anticipate any in
future periods.
F-19
<PAGE> 147
NOTE 11 -- GUARANTOR FINANCIAL STATEMENTS
Kelley Oil Corporation, a wholly-owned subsidiary of the Company and Kelley
Operating Company Ltd., an indirect wholly-owned partnership of the Company are
guarantors of the Company's Series B and Series D 10 3/8% Senior Subordinated
Notes due 2006. The following guarantor consolidating condensed financial
statements present:
1. Consolidating condensed balance sheets as of December 31, 1997 and
1998 and March 31, 1999, consolidating condensed statements of income
(loss) for each of the years ended December 31, 1996, 1997 and 1998 and for
the three month periods ended March 31, 1998 (unaudited) and 1999 and
consolidating condensed statements of cash flows for each of the years
ended December 31, 1996, 1997 and 1998 and for the three month periods
ended March 31, 1998 (unaudited) and 1999.
2. Kelley Oil & Gas Corporation (the "Parent"), combined Guarantor
Subsidiaries and combined Non-Guarantor Subsidiaries, all with their
investments in subsidiaries accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of
its subsidiaries.
F-20
<PAGE> 148
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets................. $ 427,445 $ 212,780 $18,926 $(632,293) $ 26,858
Property and equipment, net.... -- 276,744 17,698 (829) 293,613
Other non-current assets,
net......................... (141,957) 24,418 -- 119,670 2,131
--------- --------- ------- --------- --------
Total assets........... $ 285,488 $ 513,942 $36,624 $(513,452) $322,602
========= ========= ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities............ $ 4,926 $ 657,128 $12,279 $(632,293) $ 42,040
Long-term debt................. 286,183 -- -- -- 286,183
Stockholders' deficit.......... (5,621) (143,186) 24,345 118,841 (5,621)
--------- --------- ------- --------- --------
Total liabilities and
stockholders'
deficit.............. $ 285,488 $ 513,942 $36,624 $(513,452) $322,602
========= ========= ======= ========= ========
</TABLE>
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets................. $ 424,609 $ 212,946 $10,859 $(620,163) $ 28,251
Property and equipment, net.... -- 243,927 14,008 (1,480) 256,455
Other non-current assets,
net......................... (165,642) 18,611 -- 148,522 1,491
--------- --------- ------- --------- --------
Total assets........... $ 258,967 $ 475,484 $24,867 $(473,121) $286,197
========= ========= ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities............ $ 38,406 $ 641,113 $ 6,281 $(620,164) $ 65,636
Long-term debt................. 287,500 -- -- -- 287,500
Stockholders' deficit.......... (66,939) (165,629) 18,586 147,043 (66,939)
--------- --------- ------- --------- --------
Total liabilities and
stockholders'
deficit.............. $ 258,967 $ 475,484 $24,867 $(473,121) $286,197
========= ========= ======= ========= ========
</TABLE>
F-21
<PAGE> 149
CONSOLIDATING CONDENSED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets................. $ 422,192 $ 206,289 $ 8,166 $(610,670) $ 25,977
Property and equipment, net.... -- 239,052 13,589 (1,677) 250,964
Other non-current assets,
net......................... (168,126) 18,476 -- 150,948 1,298
--------- --------- ------- --------- --------
Total assets........... $ 254,066 $ 463,817 $21,755 $(461,399) $278,239
========= ========= ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities............ $ 44,032 $ 631,533 $ 3,310 $(610,670) $ 68,205
Long-term debt................. 287,959 -- -- -- 287,959
Stockholders' deficit.......... (77,925) (167,716) 18,445 149,271 (77,925)
--------- --------- ------- --------- --------
Total liabilities and
stockholders'
deficit.............. $ 254,066 $ 463,817 $21,755 $(461,399) $278,239
========= ========= ======= ========= ========
</TABLE>
F-22
<PAGE> 150
CONSOLIDATING CONDENSED STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ -- $ 39,248 $ 24,784 $ (1,749) $ 62,283
Costs and expenses................ (22,397) (39,293) (13,150) 623 (74,217)
Equity in earnings of
subsidiaries.................... 10,463 11,634 -- (22,097) --
Extraordinary item................ (17,030) -- -- -- (17,030)
-------- -------- -------- -------- --------
Net income (loss)................. $(28,964) $ 11,589 $ 11,634 $(23,223) $(28,964)
======== ======== ======== ======== ========
</TABLE>
CONSOLIDATING CONDENSED STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 8 $ 57,064 $ 19,508 $ (442) $ 76,138
Costs and expenses................ (27,196) (36,975) (10,329) 313 (74,187)
Equity in earnings of
subsidiaries.................... 29,139 9,179 -- (38,318) --
-------- -------- -------- -------- --------
Net income (loss)................. $ 1,951 $ 29,268 $ 9,179 $(38,447) $ 1,951
======== ======== ======== ======== ========
</TABLE>
CONSOLIDATING CONDENSED STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $ (18) $ 69,958 $ 9,715 $ -- $ 79,655
Costs and expenses............... (33,893) (94,457) (7,742) (570) (136,662)
Equity in earnings (loss) of
subsidiaries................... (23,096) 1,973 -- 21,123 --
-------- -------- ------- ------- ---------
Net income (loss)................ $(57,007) $(22,526) $ 1,973 $20,553 $ (57,007)
======== ======== ======= ======= =========
</TABLE>
F-23
<PAGE> 151
CONSOLIDATING CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $ (18) $ 19,962 $ 3,194 $ (67) $ 23,071
Expenses........................... (8,260) (17,940) (1,940) 246 (27,894)
Equity in earnings of
subsidiaries..................... 3,455 1,254 -- (4,709) --
------- -------- ------- ------------ ------------
Net income (loss).................. $(4,823) $ 3,276 $ 1,254 $ (4,530) $ (4,823)
======= ======== ======= ============ ============
</TABLE>
CONSOLIDATING CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ -- $ 13,732 $ 1,990 $ (54) $ 15,668
Expenses.......................... (8,701) (16,684) (1,125) (144) (26,654)
Equity in earnings (loss) of
subsidiaries.................... (2,285) 865 -- 1,420 --
-------- -------- ------- ------------ ------------
Net income (loss)................. $(10,986) $ (2,087) $ 865 $ 1,222 $ (10,986)
======== ======== ======= ============ ============
</TABLE>
F-24
<PAGE> 152
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................... $ (28,964) $ 11,589 $ 11,634 $(23,223) $ (28,964)
Non-cash income (loss)
adjustments...................... 10,133 12,280 6,542 23,223 52,178
Changes in operating assets and
liabilities...................... (31,460) 26,767 (9,259) -- (13,952)
--------- -------- -------- -------- ---------
Net cash provided by (used in)
operating activities................ (50,291) 50,636 8,917 -- 9,262
--------- -------- -------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures................ -- (35,203) (12,398) -- (47,601)
Acquisition of oil and gas
properties....................... -- (11,594) -- -- (11,594)
Proceeds from sale of properties.... -- 3,811 1,992 -- 5,803
--------- -------- -------- -------- ---------
Net cash used in investing
activities.......................... -- (42,986) (10,406) -- (53,392)
--------- -------- -------- -------- ---------
FINANCING ACTIVITIES:
Net payments on long term
borrowings....................... -- (8,500) -- -- (8,500)
Proceeds from sale of notes, net.... 120,938 -- -- -- 120,938
Debenture conversion costs.......... (1,100) -- -- -- (1,100)
Proceeds from sale of common stock,
net.............................. 43,998 -- -- -- 43,998
Retirement of senior notes.......... (113,488) -- -- -- (113,488)
--------- -------- -------- -------- ---------
Net cash provided by (used in)
financing activities................ 50,348 (8,500) -- -- 41,848
--------- -------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents......................... 57 (850) (1,489) -- (2,282)
Cash and cash equivalents, beginning
of period........................... 1 3,654 2,697 -- 6,352
--------- -------- -------- -------- ---------
Cash and cash equivalents, end of
period.............................. $ 58 $ 2,804 $ 1,208 $ -- $ 4,070
========= ======== ======== ======== =========
</TABLE>
F-25
<PAGE> 153
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.......................... $ 1,951 $ 29,268 $ 9,179 $(38,447) $ 1,951
Non-cash income (loss)
adjustments...................... (24,842) 16,880 5,098 38,447 35,583
Changes in operating assets and
liabilities...................... (97,813) 105,584 (5,701) -- 2,070
--------- --------- -------- -------- ---------
Net cash provided by (used in)
operating activities................ (120,704) 151,732 8,576 -- 39,604
--------- --------- -------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures................ -- (51,592) (1,548) -- (53,140)
Acquisition of oil and gas
properties....................... -- (111,135) -- -- (111,135)
Capital contributed to
partnerships..................... -- (5,819) -- 5,819 --
Distributions from partnerships..... -- 14,014 -- (14,014) --
--------- --------- -------- -------- ---------
Net cash used in investing
activities.......................... -- (154,532) (1,548) (8,195) (164,275)
--------- --------- -------- -------- ---------
FINANCING ACTIVITIES:
Net proceeds on long term
borrowings....................... 97,800 -- -- -- 97,800
Proceeds from sale of common stock,
net.............................. 27,545 -- -- -- 27,545
Distributions to partners........... -- -- (14,014) 14,014 --
Capital contributed by partners..... -- -- 5,819 (5,819) --
Dividends on preferred stock........ (4,582) -- -- -- (4,582)
--------- --------- -------- -------- ---------
Net cash provided by (used in)
financing activities................ 120,763 -- (8,195) 8,195 120,763
--------- --------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents......................... 59 (2,800) (1,167) -- (3,908)
Cash and cash equivalents, beginning
of period........................... 58 2,804 1,208 -- 4,070
--------- --------- -------- -------- ---------
Cash and cash equivalents, end of
period.............................. $ 117 $ 4 $ 41 $ -- $ 162
========= ========= ======== ======== =========
</TABLE>
F-26
<PAGE> 154
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................... $ (57,007) $(22,526) $ 1,973 $ 20,553 $ (57,007)
Non-cash income (loss)
adjustments...................... 28,109 70,144 3,687 (20,553) 81,387
Changes in operating assets and
liabilities...................... 3,869 (7,976) 2,029 -- (2,078)
--------- -------- ------- -------- ---------
Net cash provided by (used in)
operating activities................ (25,029) 39,642 7,689 -- 22,302
--------- -------- ------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures................ -- (56,579) -- -- (56,579)
Proceeds from sale of property...... -- 17,363 -- -- 17,363
Distributions from partnerships..... -- 7,730 -- (7,730) --
--------- -------- ------- -------- ---------
Net cash used in investing
activities.......................... -- (31,486) -- (7,730) (39,216)
--------- -------- ------- -------- ---------
FINANCING ACTIVITIES:
Payments on long term borrowings.... (118,900) -- -- -- (118,900)
Net proceeds on long term
borrowings....................... 119,100 -- -- -- 119,100
Redemption on subordinated notes.... (228) -- -- -- (228)
Proceeds from sale of common
stock............................ 273 -- -- -- 273
Proceeds from conversion of
preferred........................ (2) -- -- -- (2)
Proceeds from sale of common stock,
net.............................. 29,526 -- -- -- 29,526
Distributions to partners........... -- -- (7,730) 7,730 --
Dividends on preferred stock........ (4,582) -- -- -- (4,582)
--------- -------- ------- -------- ---------
Net cash provided by (used in)
financing activities................ 25,187 -- (7,730) 7,730 25,187
--------- -------- ------- -------- ---------
Increase (decrease) in cash and cash
equivalents......................... 158 8,156 (41) -- 8,273
Cash and cash equivalents, beginning
of period........................... 117 4 41 -- 162
--------- -------- ------- -------- ---------
Cash and cash equivalents, end of
period.............................. $ 275 $ 8,160 $ -- $ -- $ 8,435
========= ======== ======= ======== =========
</TABLE>
F-27
<PAGE> 155
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................... $ (4,823) $ 3,276 $ 1,254 $(4,530) $ (4,823)
Non-cash income adjustments.......... (2,061) 11,041 879 4,530 14,389
Changes in operating assets and
liabilities....................... 3,721 (3,848) 247 -- 120
-------- -------- ------- ------- --------
Net cash provided by (used in)
operating activities................. (3,163) 10,469 2,380 -- 9,686
-------- -------- ------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures................. -- (12,675) (206) -- (12,881)
Capital contributed to
partnerships...................... -- -- -- -- --
Distributions from partnerships...... -- 2,202 -- (2,202) --
-------- -------- ------- ------- --------
Net cash used in investing
activities........................... -- (10,473) (206) (2,202) (12,881)
-------- -------- ------- ------- --------
FINANCING ACTIVITIES:
Net proceeds on long term
borrowings........................ 34,100 -- -- -- 34,100
Net payments on long term
borrowings........................ (30,800) -- -- -- (30,800)
Redemption of notes.................. (228) -- -- -- (228)
Proceeds from sale of common stock,
net............................... 1 -- -- -- 1
Distributions to partners............ -- -- (2,202) 2,202 --
Capital contributed by partners...... -- -- -- -- --
Dividends on preferred stock......... -- -- -- -- --
-------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities................. 3,073 -- (2,202) 2,202 3,073
-------- -------- ------- ------- --------
Decrease in cash and cash
equivalents.......................... (90) (4) (28) -- (122)
Cash and cash equivalents, beginning of
period............................... 117 4 41 -- 162
-------- -------- ------- ------- --------
Cash and cash equivalents, end of
period............................... $ 27 $ -- $ 13 $ -- $ 40
======== ======== ======= ======= ========
</TABLE>
F-28
<PAGE> 156
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............... $(10,986) $(2,087) $ 865 $ 1,222 $(10,986)
Non-cash income (loss)
adjustments.................. 3,517 9,835 433 (1,222) 12,563
Changes in operating assets and
liabilities.................. 7,188 (4,370) (297) -- 2,521
-------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities............ (281) 3,378 1,001 -- 4,098
-------- ------- ------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures............ -- (5,823) -- -- (5,823)
Proceeds from sale of
property..................... -- -- -- -- --
Distributions from
partnerships................. -- 1,001 -- (1,001) --
-------- ------- ------- ------- --------
Net cash used in investing
activities...................... -- (4,822) -- (1,001) (5,823)
-------- ------- ------- ------- --------
FINANCING ACTIVITIES:
Net payments on long term
borrowings................... -- -- -- -- --
Proceeds from sale of notes,
net.......................... -- -- -- -- --
Redemption of subordinated
notes........................ -- -- -- -- --
Proceeds from sale of common
stock, net................... -- -- -- -- --
Proceeds from conversion of
preferred stock.............. -- -- -- -- --
Distributions to partners....... -- -- (1,001) 1,001 --
Dividends on preferred stock.... -- -- -- -- --
-------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities............ -- -- (1,001) 1,001 --
-------- ------- ------- ------- --------
Increase (Decrease) in cash and
cash equivalents................ (281) (1,444) -- -- (1,725)
Cash and cash equivalents,
beginning of period............. 275 8,160 -- -- 8,435
-------- ------- ------- ------- --------
Cash and cash equivalents, end of
period.......................... $ (6) $ 6,716 $ -- $ -- $ 6,710
======== ======= ======= ======= ========
</TABLE>
F-29
<PAGE> 157
NOTE 12 -- SUPPLEMENTARY FINANCIAL AND OPERATING INFORMATION ON OIL AND GAS
EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities".
Capitalized Costs. Capitalized costs and accumulated depreciation,
depletion and amortization relating to the Company's oil and gas producing
activities, all of which are conducted within the continental United States, are
summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Unevaluated properties............................ $ 12,521 $ 49,854 $ 38,293
Properties subject to amortization................ 338,794 463,263 496,686
--------- --------- ---------
Capitalized costs................................. 351,315 513,117 534,979
Accumulated depreciation, depletion and
amortization.................................... (194,367) (221,729) (280,640)
--------- --------- ---------
Net capitalized costs............................. $ 156,948 $ 291,388 $ 254,339
========= ========= =========
</TABLE>
Costs Incurred. Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisition costs:
Proved............................................... $11,594 $ 73,190 $ 2,338
Unproved(1).......................................... 2,160 40,997 1,405
Exploration costs...................................... 5,438 9,525 25,414
Development costs...................................... 41,790 40,713 27,875
------- -------- -------
Total costs incurred......................... $60,982 $164,425 $57,032
======= ======== =======
</TABLE>
- ---------------
(1) Includes $40 million in unproved assets acquired from SPR on December 1,
1997.
Reserves. The following table summarizes the Company's net ownership
interests in estimated quantities of proved oil and gas reserves and changes in
net proved reserves, all of which are located in the continental United States,
for the years ended December 31, 1996, 1997 and 1998. This table is based on
reserves estimates prepared by H.J. Gruy & Associates, Inc. ("Gruy"),
independent petroleum engineers.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS LIQUIDS NATURAL GAS
(MBBLS) (MMCF)
------------------------ ---------------------------
1996 1997 1998 1996 1997 1998
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year....................... 1,387 1,466 2,953 196,273 297,634 354,867
Revisions of previous estimates......... (89) 106 (79) (30,519) 21,831 (31,674)
Purchases of reserves in place.......... 57 1,351 -- 30,844 51,712 --
Extensions and discoveries.............. 477 256 3,082 128,692 13,892 9,512
Sale of reserves in place............... (134) -- (287) (4,190) -- (13,589)
Production.............................. (232) (226) (375) (23,466) (30,202) (35,557)
----- ----- ----- ------- ------- -------
End of year............................. 1,466 2,953 5,294 297,634 354,867 283,559
===== ===== ===== ======= ======= =======
Proved developed reserves at end of
year.................................... 977 2,432 1,981 173,465 257,800 188,824
===== ===== ===== ======= ======= =======
</TABLE>
F-30
<PAGE> 158
Standardized Measure. The following table of the Standardized Measure of
Discounted Future Net Cash Flows concerning the standardized measure of future
cash flows from proved oil and gas reserves are presented in accordance with
Statement of Financial Accounting Standards No. 69. As prescribed by this
statement, the amounts shown are based on prices and costs at the end of each
period, and assume continuation of existing economic conditions. Future income
taxes are based on year-end statutory rates, adjusted for operating loss
carryforwards and tax credits. A discount factor of 10% was used to reflect the
timing of future net cash flow. Extensive judgments are involved in estimating
the timing of production and the costs that will be incurred throughout the
remaining lives of the fields. Accordingly, the estimates of future net revenues
from proved reserves and the present value thereof may not be materially correct
when judged against actual subsequent results. Further, since prices and costs
do not remain static, and no price or cost changes have been considered, and
future production and development costs are estimates to be incurred in
developing and producing the estimated proved oil and gas reserves, the results
are not necessarily indicative of the fair market value of estimated proved
reserves, and the results may not be comparable to estimates disclosed by other
oil and gas producers.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows............................... $1,099,089 $ 930,357 $ 643,473
Future production costs........................... (113,178) (196,048) (159,378)
Future development costs.......................... (81,932) (106,123) (93,321)
Future income tax expenses........................ (162,887) (37,050) (1,627)
---------- --------- ---------
Future net cash flows........................... 741,092 591,136 389,147
10% annual discount for estimating timing of cash
flows........................................... (307,321) (227,249) (155,677)
---------- --------- ---------
Standardized measure of discounted future net
cash flows................................... $ 433,771 $ 363,887 $ 233,470
========== ========= =========
</TABLE>
The standardized measure of discounted future net cash flows as of December
31, 1996, 1997 and 1998 was calculated using prices in effect as of those dates,
which averaged $25.18, $16.93 and $10.81, respectively, per barrel of oil and
$3.66, $2.49 and $2.07, respectively, per Mcf of natural gas.
F-31
<PAGE> 159
Change in Standardized Measure. Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Changes due to current year operations:
Sales of oil and gas, net of production costs.... $(48,307) $ (62,080) $ (57,940)
Sale of reserves in place........................ (6,836) -- (15,424)
Extensions and discoveries....................... 192,174 21,945 20,097
Purchases of reserves in place................... 11,594 91,034 --
Future development costs incurred................ 24,500 21,806 9,218
Changes due to revisions in standardized variables:
Prices and production costs...................... 159,292 (243,851) (94,569)
Revisions of previous quantity estimates......... (50,594) 25,345 (29,853)
Estimated future development costs............... 3,254 (17,413) (29,240)
Income taxes..................................... (82,831) 69,489 (14,110)
Accretion of discount............................ 17,575 51,818 24,903
Production rates (timing) and other.............. 42,898 (27,977) 56,501
-------- --------- ---------
Net increase (decrease)....................... 262,719 (69,884) (130,417)
Beginning of year................................ 171,052 433,771 363,887
-------- --------- ---------
End of year................................... $433,771 $ 363,887 $ 233,470
======== ========= =========
</TABLE>
Sales of oil and gas, net of production costs, are based on historical
pre-tax results. Extensions and discoveries, purchases of reserves in place and
the changes due to revisions in standardized variables are reported on a pre-tax
discounted basis, while the accretion of discount is presented after tax.
Extensions and discoveries include proved undeveloped reserves attributable to
Kelley Oil's interests in drill sites assigned to DDPs.
NOTE 13 -- QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
------------------------------------- -------------------------------------
1ST 2ND 3RD 4TH(1) 1ST 2ND 3RD 4TH(2)
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $18,947 16,178 17,105 23,634 $23,047 21,162 18,630 16,311
Operating profit........................... 7,368 4,892 6,121 8,367 3,245 (1,251) (85) (26,087)
Net income (loss).......................... 1,703 (1,248) 59 1,437 (4,823) (9,433) (8,411) (34,340)
Basic and diluted income (loss) per
common share............................. $ 0.10 (0.20) (0.10) -- $ (0.50) (0.80) (0.80) (2.80)
</TABLE>
- ---------------
(1) Reflects the acquisition of SPR on December 1, 1997.
(2) Reflects non-cash impairment charges against the carrying value of proved
and unproved oil and natural gas properties under SFAS 121 (see Note 2).
NOTE 14 -- REVERSE STOCK SPLIT
On July 30, 1999, the Company effected a 1 for 10 reverse stock split of its
common stock. Accordingly, all references in the financial statements to common
share and per share amounts have been retroactively restated for all periods
presented to reflect the effects of the reverse stock split.
NOTE 15 -- SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, the Company was obligated to offer to repurchase
$35 million principal amount of the Notes at a repurchase price equal to 104% of
the principal amount. On June 30, 1999, the Company completed such repurchase
and will recognize an extraordinary loss of approximately $3.5 million in the
second quarter of 1999.
On June 28, 1999, the Company began an offer (the "Tender Offer") to
exchange 15 shares (1.5 shares after this reverse stock split) of its Common
Stock for each outstanding share of its $2.625 Convertible Exchangeable
Preferred Stock. On July 27, 1999, the Company closed the Tender Offer and
exchanged 368,633 shares of preferred stock for 552,950 shares of common stock.
With the exchange, the Company eliminated dividend arrearages on the preferred
stock of approximately $1.5 million.
F-32
<PAGE> 160
================================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING TO EXCHANGE NOTES IN ANY JURISDICTION WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS AS OF
ANY DATE OTHER THAN THE DATE STATED ON THE COVER.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information.... 2
Cautionary Statement................... 2
Summary................................ 3
Risk Factors........................... 12
Caution as to Forward-Looking
Statements........................... 21
Use of Proceeds........................ 21
Capitalization......................... 22
Selected Consolidated Financial Data... 22
Unaudited Pro Forma Consolidated
Financial Information................ 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 31
Description of Our Business and
Properties........................... 41
Management............................. 59
Executive Compensation................. 61
Voting Securities and Principal
Stockholders......................... 66
Certain Transactions................... 67
The Exchange Offer..................... 68
Description of the New Notes........... 78
Federal Income Tax Considerations...... 122
Plan of Distribution................... 122
Legal Matters.......................... 123
Experts................................ 124
Engineers.............................. 124
Glossary of Industry Terms............. 125
Financial Statements................... F-1
</TABLE>
================================================================================
================================================================================
LOGO
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION)
$100,000,000
OFFER TO EXCHANGE
14% SENIOR SECURED NOTES
DUE 2003,
MATURING AT 105% OF
THE STATED PRINCIPAL AMOUNT,
SERIES A
FOR
14% SENIOR SECURED NOTES
DUE 2003,
MATURING AT 105% OF
THE STATED PRINCIPAL AMOUNT,
SERIES B
------------------------
PROSPECTUS
------------------------
August , 1999
================================================================================
<PAGE> 161
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Bylaws of Contour Energy Co. (formerly Kelley Oil & Gas
Corporation) (the "Company") provides for the Company's indemnification of
officers, directors and controlling persons to the full extent provided in the
General Corporation Law of the State of Delaware (the "GCLD"). Section 145 of
the GCLD provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed proceeding (other than a proceeding by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation in a similar position with another entity, against expenses
(including attorneys' fees), judgments, fines and settlements incurred by him in
connection with the proceeding if he acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification under
Section 145 of the GCLD is limited in a proceeding by or in the right of the
corporation to expenses (including attorneys' fees) incurred in connection with
the proceeding. In either case, no indemnification shall be made if the
indemnified person has been adjudged to be liable for negligence or misconduct
in the performance of this duty to the corporation, unless, and to the extent
the Delaware court of Chancery or other court in which the proceeding was
brought, despite the adjudication of liability determines such person is
entitled to indemnity.
Section 145 of the GCLD provides that the indemnity obligations of a
corporation shall only arise if authorized by (i) a majority of a quorum of
directors who are not a party to the proceeding, (ii) independent legal counsel
to the corporation if a quorum of directors is not obtainable, (iii) independent
legal counsel to the corporation if a quorum if directors is obtainable and the
directors direct counsel to make the determination or (iv) the stockholders. The
board of directors of the corporation may authorize expenses in connection with
a proceeding to be paid in advance of the final disposition upon receipt of an
undertaking by the person on whose behalf the expenses are to be paid to repay
the expenses in the event he is not entitled to indemnity.
Pursuant to Section 102(b) of the GCLD, the Certificate of Incorporation of
the Company provides that a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) in connection with certain illegal dividend
payments and stock redemptions or (iv) for any transaction from which the
director derived an improver personal benefit.
Delaware corporations also are authorized under the GCLD to obtain
insurance to protect officers and directors from certain liabilities, including
liabilities against which the corporation cannot indemnify its directors and
officers. The Company currently has no directors' and officers' liability
insurance in effect.
II-1
<PAGE> 162
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
2.1 -- Agreement and Plan of Consolidation among the Company,
Kelley Oil Corporation, Kelley Oil & Gas Partners, Ltd.
("Kelley Partners") and the other parties named therein
(incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement (the "Consolidation
Registration Statement") on Form S-4 (Reg No. 33-84338)
filed September 26, 1994, as amended).
3.1 -- Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Consolidation
Registration Statement).
3.2 -- Certificate of Amendment to Certificate of Incorporation
of the Company dated December 20, 1994 (incorporated by
reference to Exhibit 3.2 to the Consolidation
Registration Statement).
3.3 -- Certificate of Correction to Certificate of Incorporation
of the Company dated February 12, 1996 (incorporated by
reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K (File No. 0-25214) dated February 15, 1996).
3.4 -- Certificate of Designation of $2.625 Convertible
Exchangeable Preferred Stock of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K (File No. 0-25214) dated February 10,
1995).
3.5 -- Certificate of Designations of Cumulative $2.625
Preferred Stock of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Current Report on Form
8-K (File No. 0-25214) dated February 10, 1995).
3.6 -- Certificate of Merger of Kelley Oil & Gas Partners, Ltd.
into Kelley Oil & Gas Corporation dated March 28, 1996
(incorporated by reference to Exhibit 3.6 to the
Company's Annual Report on Form 10-K (File No. 0-25214)
for the year ended December 31, 1997).
3.7 -- Certificate of Amendment to Certificate of Incorporation
of the Company dated April 26, 1996 (incorporated by
reference to Exhibit 3.7 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1997).
3.8* -- Certificate of Amendment of Certificate of Incorporation
of the Company dated July 12, 1999.
3.9 -- Bylaws of the Company (incorporated by reference to
Exhibit 3.5 to the Consolidation Registration Statement).
4.1 -- Certificate representing Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the
Consolidation Registration Statement).
4.2 -- Certificate representing $2.625 Convertible Exchangeable
Preferred Stock of the Company (incorporated by reference
to Exhibit 4.2 to the Consolidation Registration
Statement).
4.3 -- Supplemental Indenture dated February 7, 1995 among the
Company, Kelley Partners and United States Trust Company
of New York, relating to Kelley Partners' 8 1/2%
Convertible Subordinated Debentures (the "8 1/2%
Debentures") due 2000 (incorporated by reference to
exhibit 4.1 to the Company's Current Report on Form 8-K
(File No. 0-25214) dated February 10, 1995).
</TABLE>
II-2
<PAGE> 163
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.4 -- Supplemental Indenture dated March 29, 1996 between the
Company and the United States Trust Company of New York,
relating to the 8 1/2% Debentures (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1995).
4.5 -- Supplemental Indenture dated February 7, 1995 among the
Company, Kelley Partners and United States Trust Company
of New York, relating to Kelley Partners' 7 7/8%
Convertible Subordinated Notes (the "7 7/8% Notes") due
1999 (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 10, 1995).
4.6 -- Supplemental Indenture dated March 29, 1996 between the
Company and the United States Trust Company of New York,
relating to the 7 7/8% Notes (incorporated by reference
to Exhibit 4.6 to the Company's Annual Report on Form
10-K (File No. 0-25214) for the year ended December 31,
1995).
4.7 -- Indenture dated as of June 15, 1995 among the Company, as
issuer, Kelley Partners, Kelley Operating Company, Ltd.
and Kelley Oil Corporation, as guarantors, and Chemical
Bank, as trustee, relating to the Company's 13 1/2%
Senior Notes due 1999 (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on
Form S-3 (Reg. No. 33-92214) dated June 9, 1995.
4.8 -- Supplemental Indenture dated as of October 28, 1996,
among the Company, as issuer, Kelley Operating Company,
Ltd. and Kelley Oil Corporation, as guarantors, and The
Chase Manhattan Bank (formerly Chemical Bank), as
trustee, relating to the Company's 13 1/2% Senior Notes
due 1999 (incorporated by reference to Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q (File No.
0-25214) for the quarterly period ended September 20,
1996).
4.9 -- Indenture dated as of October 15, 1996, among the
Company, as issuer, Kelley Oil Corporation and Kelley
Operating Company, Ltd., as guarantors, and United States
Trust Company of New York, relating to the Company's
10 3/8% Senior Subordinated Notes due 2006 (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
4.10 -- Form of the Company's 10 3/8% Senior Subordinated Note
Due 2006, Series B (incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-4
(Reg. No. 333-18481) filed December 20, 1996, as
amended).
4.11 -- Indenture dated as of May 29, 1998, among the Company, as
issuer, Kelley Oil Corporation and Kelley Operating
Company, Ltd., as guarantors, and United States Trust
Company of New York, relating to the Company's 10 3/8%
Senior Subordinated Notes due 2006 (incorporated by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-61681) filed August
17, 1998).
4.12 -- Form of the Company's 10 3/8% Senior Subordinated Note
Due 2006, Series D (incorporated by reference to Exhibit
4.8 to the Company's Registration Statement on Form S-4
(Reg. No. 333-61681) filed August 17, 1998).
4.13* -- Indenture dated as of April 15, 1999, among Company,
Kelley Oil Corporation, Kelley Operating Company, Ltd.
and Concorde Gas Marketing, Inc., as guarantors, and
Norwest Bank Minnesota, National Association, relating to
the Company's 14% Senior Secured Notes due 2003, maturing
at 105% of the stated principal amount.
4.14 -- Form of the Company's 14% Senior Secured Notes Due 2003,
maturing at 105% of the stated principal amount (included
as Exhibit B to Exhibit 4.13).
</TABLE>
II-3
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.15* -- Registration Rights Agreement dated as of April 16, 1999,
by and among the Company, Kelley Oil Corporation, Kelley
Operating Company, Ltd., Concorde Gas Marketing, Inc. and
Jefferies & Company, Inc.
5.1* -- Opinion of Fulbright & Jaworski L.L.P.
10.1 -- Amended and Restated Employee Stock Ownership Plan of
Kelley Oil Corporation effective as of January 1, 1989
(incorporated by reference to Exhibit 10.15 to Kelley Oil
Corporation's Annual Report on Form 10-K (File No.
0-17585) for the year ended December 31, 1991).
10.2 -- 1987 Incentive Stock Option Plan (the "1987 Plan") of
Kelley Oil Corporation (incorporated by reference to
Kelley Oil Corporation's Annual Report on Form 10-K (File
No. 0-17585) for the year ended December 31, 1988).
10.3 -- 1991 Incentive Stock Option Plan (the "1991 Plan") of
Kelley Oil Corporation (incorporated by reference to
Exhibit 10.3 to Kelley Oil Corporation's Annual Report on
Form 10-K (File No. 0-175850) for the year ended December
31, 1991).
10.4 -- 1995 Incentive Stock Option Plan of the Company (the
"1995 Plan") (incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1995).
10.5 -- Amendment to the 1987 Plan, 1991 Plan and 1995 Plan
(incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 15, 1996).
10.6 -- 1996 Nonqualified Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 15, 1996).
10.7 -- Employment Agreement dated as of February 15, 1996
between the Company and John F. Bookout, Jr.
(incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 15, 1996).
10.8 -- Form of Employment Agreements dated as of February 15,
1996 between the Company and each of Dallas Laumbach and
William Albrecht (incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
10.9 -- Employment Agreement dated as of October 1, 1998 with
Rick G. Lester (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1998).
10.10 -- Purchase and Sale Agreement, dated October 21, 1997,
between the Company and SCANA Petroleum Resources, Inc.
(incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated December 1, 1997).
10.11 -- 1996 Incentive Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K (File No. 0-25214)
for the year ended December 31, 1996).
10.12 -- 1997 Annual and Long-Term Incentive-Performance Plan of
the Company (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1997).
21.1 -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K
(File No. 0-25214) for the year ended December 31, 1996).
23.1+ -- Consent of Deloitte & Touche LLP.
</TABLE>
II-4
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
23.2* -- Consent of H.J. Gruy & Associates, Inc.
23.3 -- Consent of Fulbright & Jaworski L.L.P. (included in
Exhibit 5.1).
24.1 -- Powers of Attorney (contained on pages II-6 through II-9
of this registration statement as filed on July 30,
1999).
25.1* -- Statement of Eligibility Under Trust Indenture Act of
1939 of a Corporation Designated to Act as Trustee on
Form T-1.
99.1+ -- Letter of Transmittal, Notice of Guaranteed Delivery, and
Substitute W-9 Instructions.
</TABLE>
- ---------------
+ Filed herewith.
* Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in applicable accounting
regulations of the SEC have been omitted as the schedules are either not
required under the related instructions, are not applicable or the information
required thereby is set forth in the Company's Consolidated Financial Statements
or the Notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE> 166
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused amendment no. 1 to this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on August 9, 1999.
CONTOUR ENERGY CO.
By: /s/ JOHN F. BOOKOUT
----------------------------------
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, amendment no. 1
to this Registration Statement has been signed as of the 9th, day of August,
1999 by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. BOOKOUT Chairman of the Board, August 9, 1999
- ----------------------------------------------------- President and Chief Executive
John F. Bookout Officer (Principal Executive
Officer), Director
/s/ RICK G. LESTER Senior Vice President and Chief August 9, 1999
- ----------------------------------------------------- Financial Officer (Principal
Rick G. Lester Financial and Accounting
Officer)
/s/ JOHN J. CONKLIN, JR.* Director August 9, 1999
- -----------------------------------------------------
John J. Conklin, Jr.
Director August 9, 1999
- -----------------------------------------------------
Ralph P. Davidson
/s/ ADAM P. GODFREY* Director August 9, 1999
- -----------------------------------------------------
Adam P. Godfrey
Director August 9, 1999
- -----------------------------------------------------
William J. Murray
/s/ OGDEN M. PHIPPS* Director August 9, 1999
- -----------------------------------------------------
Ogden M. Phipps
/s/ WARD W. WOODS* Director August 9, 1999
- -----------------------------------------------------
Ward W. Woods
*By: /s/ RICK G. LESTER
-------------------------------
Rick G. Lester
Attorney-in-fact
</TABLE>
II-6
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused amendment no. 1 to this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on August 9, 1999.
KELLEY OIL CORPORATION
By: /s/ JOHN F. BOOKOUT
----------------------------------
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, amendment no. 1
to this Registration Statement has been signed as of the 9th day of August, 1999
by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. BOOKOUT Chairman of the Board, August 9, 1999
- ----------------------------------------------------- President and Chief Executive
John F. Bookout Officer (Principal Executive
Officer), Director
/s/ RICK G. LESTER Senior Vice President and Chief August 9, 1999
- ----------------------------------------------------- Financial Officer (Principal
Rick G. Lester Financial and Accounting
Officer)
</TABLE>
II-7
<PAGE> 168
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused amendment no. 1 to this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on August 9, 1999.
KELLEY OPERATING COMPANY, LTD.
By: KELLY OIL CORPORATION,
its General Partner
By: /s/ JOHN F. BOOKOUT
----------------------------------
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, amendment no. 1
to this Registration Statement has been signed as of the 9th day of August, 1999
by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. BOOKOUT Chairman of the Board, August 9, 1999
- ----------------------------------------------------- President and Chief Executive
John F. Bookout Officer (Principal Executive
Officer), Director
/s/ RICK G. LESTER Senior Vice President and Chief August 9, 1999
- ----------------------------------------------------- Financial Officer (Principal
Rick G. Lester Financial and Accounting
Officer)
</TABLE>
II-8
<PAGE> 169
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused amendment no. 1 to this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on August 9, 1999.
CONCORDE GAS MARKETING, INC.
By: /s/ JOHN F. BOOKOUT
----------------------------------
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, amendment no. 1
to this Registration Statement has been signed as of the 9th day of August, 1999
by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. BOOKOUT Chairman of the Board, August 9, 1999
- ----------------------------------------------------- President and Chief Executive
John F. Bookout Officer (Principal Executive
Officer), Director
/s/ RICK G. LESTER Senior Vice President and Chief August 9, 1999
- ----------------------------------------------------- Financial Officer (Principal
Rick G. Lester Financial Officer)
/s/ ROBERT J. PANACCIONE Controller (Principal August 9, 1999
- ----------------------------------------------------- Accounting Officer)
Robert J. Panaccione
</TABLE>
II-9
<PAGE> 170
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
2.1 -- Agreement and Plan of Consolidation among the Company,
Kelley Oil Corporation, Kelley Oil & Gas Partners, Ltd.
("Kelley Partners") and the other parties named therein
(incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement (the "Consolidation
Registration Statement") on Form S-4 (Reg No. 33-84338)
filed September 26, 1994, as amended).
3.1 -- Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Consolidation
Registration Statement).
3.2 -- Certificate of Amendment to Certificate of Incorporation
of the Company dated December 20, 1994 (incorporated by
reference to Exhibit 3.2 to the Consolidation
Registration Statement).
3.3 -- Certificate of Correction to Certificate of Incorporation
of the Company dated February 12, 1996 (incorporated by
reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K (File No. 0-25214) dated February 15, 1996).
3.4 -- Certificate of Designation of $2.625 Convertible
Exchangeable Preferred Stock of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K (File No. 0-25214) dated February 10,
1995).
3.5 -- Certificate of Designations of Cumulative $2.625
Preferred Stock of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Current Report on Form
8-K (File No. 0-25214) dated February 10, 1995).
3.6 -- Certificate of Merger of Kelley Oil & Gas Partners, Ltd.
into Kelley Oil & Gas Corporation dated March 28, 1996
(incorporated by reference to Exhibit 3.6 to the
Company's Annual Report on Form 10-K (File No. 0-25214)
for the year ended December 31, 1997).
3.7 -- Certificate of Amendment to Certificate of Incorporation
of the Company dated April 26, 1996 (incorporated by
reference to Exhibit 3.7 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1997).
3.8* -- Certificate of Amendment of Certificate of Incorporation
of the Company dated July 12, 1999.
3.9 -- Bylaws of the Company (incorporated by reference to
Exhibit 3.5 to the Consolidation Registration Statement).
4.1 -- Certificate representing Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the
Consolidation Registration Statement).
4.2 -- Certificate representing $2.625 Convertible Exchangeable
Preferred Stock of the Company (incorporated by reference
to Exhibit 4.2 to the Consolidation Registration
Statement).
4.3 -- Supplemental Indenture dated February 7, 1995 among the
Company, Kelley Partners and United States Trust Company
of New York, relating to Kelley Partners' 8 1/2%
Convertible Subordinated Debentures (the "8 1/2%
Debentures") due 2000 (incorporated by reference to
exhibit 4.1 to the Company's Current Report on Form 8-K
(File No. 0-25214) dated February 10, 1995).
4.4 -- Supplemental Indenture dated March 29, 1996 between the
Company and the United States Trust Company of New York,
relating to the 8 1/2% Debentures (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1995).
</TABLE>
<PAGE> 171
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.5 -- Supplemental Indenture dated February 7, 1995 among the
Company, Kelley Partners and United States Trust Company
of New York, relating to Kelley Partners' 7 7/8%
Convertible Subordinated Notes (the "7 7/8% Notes") due
1999 (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 10, 1995).
4.6 -- Supplemental Indenture dated March 29, 1996 between the
Company and the United States Trust Company of New York,
relating to the 7 7/8% Notes (incorporated by reference
to Exhibit 4.6 to the Company's Annual Report on Form
10-K (File No. 0-25214) for the year ended December 31,
1995).
4.7 -- Indenture dated as of June 15, 1995 among the Company, as
issuer, Kelley Partners, Kelley Operating Company, Ltd.
and Kelley Oil Corporation, as guarantors, and Chemical
Bank, as trustee, relating to the Company's 13 1/2%
Senior Notes due 1999 (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on
Form S-3 (Reg. No. 33-92214) dated June 9, 1995.
4.8 -- Supplemental Indenture dated as of October 28, 1996,
among the Company, as issuer, Kelley Operating Company,
Ltd. and Kelley Oil Corporation, as guarantors, and The
Chase Manhattan Bank (formerly Chemical Bank), as
trustee, relating to the Company's 13 1/2% Senior Notes
due 1999 (incorporated by reference to Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q (File No.
0-25214) for the quarterly period ended September 20,
1996).
4.9 -- Indenture dated as of October 15, 1996, among the
Company, as issuer, Kelley Oil Corporation and Kelley
Operating Company, Ltd., as guarantors, and United States
Trust Company of New York, relating to the Company's
10 3/8% Senior Subordinated Notes due 2006 (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
4.10 -- Form of the Company's 10 3/8% Senior Subordinated Note
Due 2006, Series B (incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-4
(Reg. No. 333-18481) filed December 20, 1996, as
amended).
4.11 -- Indenture dated as of May 29, 1998, among the Company, as
issuer, Kelley Oil Corporation and Kelley Operating
Company, Ltd., as guarantors, and United States Trust
Company of New York, relating to the Company's 10 3/8%
Senior Subordinated Notes due 2006 (incorporated by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-61681) filed August
17, 1998).
4.12 -- Form of the Company's 10 3/8% Senior Subordinated Note
Due 2006, Series D (incorporated by reference to Exhibit
4.8 to the Company's Registration Statement on Form S-4
(Reg. No. 333-61681) filed August 17, 1998).
4.13* -- Indenture dated as of April 15, 1999, among Company,
Kelley Oil Corporation, Kelley Operating Company, Ltd.
and Concorde Gas Marketing, Inc., as guarantors, and
Norwest Bank Minnesota, National Association, relating to
the Company's 14% Senior Secured Notes due 2003, maturing
at 105% of the stated principal amount.
4.14 -- Form of the Company's 14% Senior Secured Notes Due 2003,
maturing at 105% of the stated principal amount (included
as Exhibit B to Exhibit 4.13).
4.15* -- Registration Rights Agreement dated as of April 16, 1999,
by and among the Company, Kelley Oil Corporation, Kelley
Operating Company, Ltd., Concorde Gas Marketing, Inc. and
Jefferies & Company, Inc.
5.1* -- Opinion of Fulbright & Jaworski L.L.P.
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.1 -- Amended and Restated Employee Stock Ownership Plan of
Kelley Oil Corporation effective as of January 1, 1989
(incorporated by reference to Exhibit 10.15 to Kelley Oil
Corporation's Annual Report on Form 10-K (File No.
0-17585) for the year ended December 31, 1991).
10.2 -- 1987 Incentive Stock Option Plan (the "1987 Plan") of
Kelley Oil Corporation (incorporated by reference to
Kelley Oil Corporation's Annual Report on Form 10-K (File
No. 0-17585) for the year ended December 31, 1988).
10.3 -- 1991 Incentive Stock Option Plan (the "1991 Plan") of
Kelley Oil Corporation (incorporated by reference to
Exhibit 10.3 to Kelley Oil Corporation's Annual Report on
Form 10-K (File No. 0-175850) for the year ended December
31, 1991).
10.4 -- 1995 Incentive Stock Option Plan of the Company (the
"1995 Plan") (incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1995).
10.5 -- Amendment to the 1987 Plan, 1991 Plan and 1995 Plan
(incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 15, 1996).
10.6 -- 1996 Nonqualified Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 15, 1996).
10.7 -- Employment Agreement dated as of February 15, 1996
between the Company and John F. Bookout, Jr.
(incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated February 15, 1996).
10.8 -- Form of Employment Agreements dated as of February 15,
1996 between the Company and each of Dallas Laumbach and
William Albrecht (incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
10.9 -- Employment Agreement dated as of October 1, 1998 with
Rick G. Lester (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1998).
10.10 -- Purchase and Sale Agreement, dated October 21, 1997,
between the Company and SCANA Petroleum Resources, Inc.
(incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K (File No. 0-25214)
dated December 1, 1997).
10.11 -- 1996 Incentive Stock Option Plan of the Company
(incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K (File No. 0-25214)
for the year ended December 31, 1996).
10.12 -- 1997 Annual and Long-Term Incentive-Performance Plan of
the Company (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1997).
21.1 -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K
(File No. 0-25214) for the year ended December 31, 1996).
23.1+ -- Consent of Deloitte & Touche LLP.
23.2* -- Consent of H.J. Gruy & Associates, Inc.
23.3 -- Consent of Fulbright & Jaworski L.L.P. (included in
Exhibit 5.1).
24.1 -- Powers of Attorney (contained on pages II-6 through II-9
of this registration statement as filed on July 30,
1999).
25.1* -- Statement of Eligibility Under Trust Indenture Act of
1939 of a Corporation Designated to Act as Trustee on
Form T-1.
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
99.1+ -- Letter of Transmittal, Notice of Guaranteed Delivery, and
Substitute W-9 Instructions.
</TABLE>
- ---------------
+ Filed herewith.
* Previously filed.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-84053 of Contour Energy Co. (formerly Kelley Oil & Gas Corporation) of our
report dated May 17, 1999 (August 5, 1999 as to the effects of the reverse stock
split described in Note 14) appearing in the Prospectus, which is a part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
August 5, 1999
<PAGE> 1
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION)
LETTER TO CLIENTS
FOR
TENDER OF ALL OUTSTANDING
14% SENIOR SECURED NOTES DUE 2003, MATURING AT 105% OF THE STATED PRINCIPAL
AMOUNT, SERIES A
IN EXCHANGE FOR
14% SENIOR SECURED NOTES DUE 2003, MATURING AT 105% OF THE STATED PRINCIPAL
AMOUNT, SERIES B
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE").
NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE BUSINESS DAY PRIOR TO THE EXPIRATION DATE
UNLESS PREVIOUSLY ACCEPTED FOR EXCHANGE.
To Our Clients:
We are enclosing herewith a Prospectus, dated , 1999, of
Contour Energy Co., a Delaware corporation (the "Company"), and a related Letter
of Transmittal, which together constitute the Company's offer (the "Exchange
Offer") to exchange its 14% Senior Secured Notes due 2003, maturing at 105% of
the stated principal amount, Series B (the "New Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for a like principal amount of its issued and outstanding 14% Senior Secured
Notes due 2003, maturing at 105% of the stated principal amount, Series A (the
"Old Notes"), upon the terms and subject to the conditions set forth in the
Exchange Offer.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
We are the holder of record of Old Notes held by us for your own account. A
tender of such Old Notes can be made only by us as the record holder and
pursuant to your instructions. The Letter of Transmittal is furnished to you for
your information only and cannot be used by you to tender Old Notes held by us
for your account.
We request instructions as to whether you wish to tender any or all of the
Old Notes held by us for your account pursuant to the terms and conditions of
the Exchange Offer. We also request that you confirm that we may on your behalf
make the representations and warranties contained in the Letter of Transmittal.
Very truly yours,
PLEASE RETURN YOUR INSTRUCTIONS TO US IN THE ENCLOSED ENVELOPE WITHIN AMPLE TIME
TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION DATE.
<PAGE> 2
INSTRUCTION TO REGISTERED HOLDER AND/OR BOOK
ENTRY TRANSFER PARTICIPANT
To Registered Holder and/or Participant of the Book-Entry Transfer
Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1999 (the "Prospectus") of Contour Energy Co., a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer") to exchange its 14% Senior Secured Notes due 2003, maturing at
105% of the stated principal amount, Series B (the "New Notes"), for all of its
outstanding 14% Senior Secured Notes due 2003, maturing at 105% of the stated
principal amount, Series A (the "Old Notes"). Capitalized terms used but not
defined herein have the meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Old Notes held by you for the account of the
undersigned.
The aggregate face amount of the Old Notes held by you for the account of
the undersigned is (FILL IN AMOUNT):
$__________ of the 14% Senior Secured Notes due 2003, maturing at 105% of
the stated principal amount, Series A.
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
[ ] To TENDER the following Old Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF OLD NOTES TO BE TENDERED) (IF ANY):
$____________.
[ ] NOT to TENDER any Old Notes held by you for the account of the undersigned.
If the undersigned instructs you to tender the Old Notes held by you for
the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations, that (i) the
New Notes acquired in exchange for Old Notes pursuant to the Exchange Offer are
being acquired in the ordinary course of business of the person receiving such
New Notes, whether or not the undersigned, (ii) the undersigned is not engaging
in and does not intend to engage in a distribution of the New Notes, (iii) the
undersigned does not have any arrangement or understanding with any person to
participate in the distribution of New Notes, and (iv) neither the undersigned
nor any such person is an "affiliate" (within the meaning of Rule 405 under the
Securities Act of 1933, as amended) of the Company. If the undersigned is a
broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, it acknowledges that it will deliver a prospectus in connection with
any resale of such New Notes.
SIGN HERE
Name of beneficial owner(s):
- --------------------------------------------------------------------------------
SIGNATURE(S)
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Address:
- --------------------------------------------------------------------------------
Telephone number:
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security Number:
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
<PAGE> 3
CONTOUR ENERGY CO.
(FORMALLY KELLEY OIL & GAS CORPORATION)
LETTER TO REGISTERED HOLDERS AND
DEPOSITORY TRUST COMPANY PARTICIPANTS
FOR
TENDER OF ALL OUTSTANDING
14% SENIOR SECURED NOTES DUE 2003, MATURING AT 105% OF THE STATED PRINCIPAL
AMOUNT, SERIES A
IN EXCHANGE FOR
14% SENIOR SECURED NOTES DUE 2003, MATURING AT 105% OF THE STATED PRINCIPAL
AMOUNT, SERIES B
THE EXCHANGE OFFER WILL EXPIRE AT , NEW YORK CITY TIME, ON
, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE").
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE BUSINESS DAY PRIOR TO THE EXPIRATION DATE
UNLESS PREVIOUSLY ACCEPTED FOR EXCHANGE.
To Registered Holders and Depository Trust Company Participants:
We are enclosing herewith the material listed below relating to the offer
by Contour Energy Co., a Delaware corporation (the "Company"), to exchange its
14% Senior Secured Notes due 2003, maturing at 105% of the stated principal
amount, Series B (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like principal
amount of its issued and outstanding 14% Senior Secured Notes due 2003, maturing
at 105% of the stated principal amount, Series A (the "Old Notes") upon the
terms and subject to the conditions set forth in the Company's Prospectus, dated
, 1999, and the related Letter of Transmittal (which together
constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated , 1999;
2. Letter of Transmittal (together with accompanying Substitute Form
W-9 Guidelines);
3. Notice of Guaranteed Delivery;
4. Letter which may be sent to your clients for whose account you hold
Old Notes in your name or in the name of your nominee; and
5. Letter which may be sent from your clients to you with such
client's instruction with regard to the Exchange offer.
We urge you to contact your clients promptly. Please note that the Exchange
Offer will expire on the Expiration Date unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the New Notes acquired in exchange for Old
Notes pursuant to the Exchange Offer are being acquired in the ordinary course
of business of the person receiving such New Notes, whether or not the
undersigned, (ii) the undersigned is not engaging in and does not intend to
engage in a distribution of the New Notes, (iii) the undersigned does not have
any arrangement or understanding with any person to participate in the
distribution of New Notes, and (iv) neither the undersigned nor any such other
person is an "affiliate" (within the meaning of Rule 405 under the Securities
Act of 1933, as amended) of the Company. If the holder is a broker-dealer that
will receive New Notes for its own account in exchange for Old Notes, it
acknowledges that it will deliver a prospectus in connection with any resale of
such New Notes.
<PAGE> 4
The enclosed Letter to Clients contains an authorization by the beneficial
owners of the Old Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer or
to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
CONTOUR ENERGY CO.
<PAGE> 5
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL AND GAS CORPORATION)
LETTER OF TRANSMITTAL
FOR
OFFER TO EXCHANGE
14% SENIOR SECURED NOTES DUE 2003,
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT, SERIES B
FOR ALL OUTSTANDING
14% SENIOR SECURED NOTES DUE 2003,
MATURING AT 105% OF THE STATED PRINCIPAL AMOUNT, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON 1999, UNLESS EXTENDED BY
CONTOUR ENERGY CO. (THE "EXPIRATION DATE").
THE EXCHANGE AGENT
FOR THE EXCHANGE OFFER IS:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Hand: By Overnight
Delivery:
N9303-121 Northstar East Building -- 12th Floor N9303-120
Corporate Trust Operations Corporate Trust Corporate Trust
P.O. Box 1517 608 Second Avenue South Sixth and Marquette
Minneapolis, MN 55480 Minneapolis, MN 55402 Minneapolis, MN 55479
</TABLE>
By Facsimile Transmission (for Eligible Institutions only):
(612) 667-4927
(Facsimile Confirmation)
(612) 667-9764
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A
NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE
INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
The undersigned hereby acknowledges receipt and review of the Prospectus
dated , 1999 (the "Prospectus") of Contour Energy Co., a Delaware
corporation (the "Company"), Kelley Oil Corporation, a Delaware corporation,
Kelley Operating Company, Ltd., a Texas limited partnership, and Concorde Gas
Marketing, Inc., a Delaware corporation (collectively, the "Guarantors"), and
this Letter of Transmittal (the "Letter of Transmittal"), which together
describe the Company's offer (the "Exchange Offer") to exchange its 14% Senior
Secured Notes due 2003, maturing at 105% of the stated principal amount, Series
B (the "New Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), for a like principal amount of its
issued and outstanding 14% Senior Secured Notes due 2003, maturing at 105% of
the stated principal amount, Series A (the "Old Notes"). Capitalized terms used
but not defined herein have the respective meaning given to them in the
Prospectus.
1
<PAGE> 6
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest date to which the Exchange Offer is extended. The Company
shall notify the Exchange Agent and each registered holder of the Old Notes of
any extension by oral or written notice prior to 9.00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Date.
This Letter of Transmittal is to be used by a holder of Old Notes if
original Old Notes, if available, are to be forwarded herewith. An Agent's
Message (as defined in the next sentence) is to be used if delivery of Old Notes
is to be made by book-entry transfer to the account maintained by the Exchange
Agent at the Depository Trust Company (the "Book-Entry Transfer Facility")
pursuant to the procedures set forth in the Prospectus under the caption "The
Exchange Offer -- Procedures for Tendering." The term "Agent's Message" means a
message, transmitted by the Book-Entry Transfer Facility and received by the
Exchange Agent and forming a part of the confirmation of a book-entry transfer
("Book-Entry Confirmation"), which states that the Book-Entry Transfer Facility
has received an express acknowledgment from a participant tendering Old Notes
which are the subject of such Book-Entry Confirmation and that such participant
has received and agrees to be bound by the terms of the Letter of Transmittal
and that the Company may enforce such agreement against such participant.
Holders of Old Notes whose Old Notes are not immediately available, or who are
unable to deliver their Old Notes and all other documents required by this
Letter of Transmittal to the Exchange Agent on or prior to the Expiration Date,
or who are unable to complete the procedure for book-entry transfer on a timely
basis, must tender their Old Notes according to the guaranteed delivery
procedures set forth in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures." See Instruction 2. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
The term "holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
TIRE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE
FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
2
<PAGE> 7
List below the Old Notes to which this Letter of Transmittal relates. If
the space below is inadequate, list the registered numbers and principal amount
on a separate signed schedule and affix the list to this Letter of Transmittal.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED
- --------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF
REGISTERED OWNER(S) AS (IT/THEY)
APPEAR(S) ON THE 14% SENIOR
SECURED NOTES DUE 2003, MATURING
AT 105% OF THE STATED PRINCIPAL
AMOUNT, SERIES A (THE "OLD NOTES") AGGREGATE PRINCIPAL AMOUNT REPRESENTED BY OLD NOTES
- --------------------------------------------------------------------------------------------------------------
CERTIFICATE NUMBER(S) AMOUNT OF PRINCIPAL AMOUNT
OF OLD NOTES* OLD NOTES TENDERED TENDERED
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL**
- --------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Unless otherwise indicated, any tendering holder of Old Notes will be deemed to have tendered the entire
aggregate principal amount represented by such Old Notes. All tenders must be in integral multiples of
$1,000.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(If additional space is required, attach a continuation sheet in substantially
the above form.)
METHOD OF DELIVERY
[ ] Check here if tendered Old Notes are enclosed herewith.
[ ] Check here if tendered Old Notes are being delivered by book-entry transfer
made to an account maintained by the Exchange Agent with a Book-Entry
Transfer Facility and complete the following:
Name of Tendering Institution:
Account Number:
Transaction Code Number:
[ ] Check here if tendered Old Notes are being delivered pursuant to a Notice of
Guaranteed Delivery and complete the following:
Name(s) of Registered Holder(s):
Date of Execution of Notice of Guaranteed Delivery:
Window Ticket Number (if available):
Name of Eligible Institution that guaranteed delivery:
Account Number (If delivered by book-entry transfer):
3
<PAGE> 8
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
1. The undersigned hereby tenders to the Company the Old Notes described
above pursuant to the Company's offer of $1,000 principal amount of registered
New Notes, in exchange for each $1,000 principal amount of the Old Notes, upon
the terms and subject to the conditions contained in the Prospectus, receipt of
which is hereby acknowledged, and this Letter of Transmittal.
2. The undersigned hereby represents and warrants that it has full
authority to tender, exchange, assign and transfer the Old Notes described
above. The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of Old Notes.
3. The undersigned understands that the tender of the Old Notes pursuant to
all of the procedures set forth in the Prospectus will constitute an agreement
between the undersigned and the Company as to the terms and conditions set forth
in the Prospectus.
4. The undersigned acknowledge(s) that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the "SEC"),
including Exxon Capital Holdings Corporation, SEC No-Action (available April 13,
1989), Morgan Stanley & Co. Inc., SEC No-Action Letter (available June 5, 1991)
and Mary Kay Cosmetics, Inc.; SEC No-Action Letter (available June 5, 1991),
that the New Notes issued in exchange for the Old Notes pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by holders
thereof (other than a broker-dealer who purchased Old Notes exchanged for such
New Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act and any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders are not
participating in, and have no arrangement with any person to participate in, the
distribution of such New Notes.
5. Unless the box under the heading "Special Registration Instructions" is
checked, the undersigned hereby represents and warrants that:
(i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the holder;
(ii) the holder is not engaging in and does not intend to engage in a
distribution of such New Notes;
(iii) the holder does not have an arrangement or understanding with
any person to participate in the distribution of such New Notes; and
(iv) the holder is not an "affiliate," as such term is defined under
Rule 405 promulgated under the Securities Act, of the Company.
6. The undersigned may, if, and only if, unable to make all of the
representations and warranties contained in Item 5 above, elect to have its Old
Notes registered in the shelf registration statement described in the
registration rights agreement (the "Registration Rights Agreement") dated as of
April 16, 1999 among the Company, the Guarantors and the Initial Purchaser. Such
election may be made by checking the box under "Special Registration
Instructions" on page 7. By making such election, the undersigned agrees, as a
holder of Transfer Restricted Securities participating in a shelf registration,
to indemnify and hold harmless the Company, each of the Guarantors and each
person, if any, who controls the Company or any of the Guarantors within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and each of
their respective officers, directors, employees, partners, representatives and
agents from and against any and all losses, liabilities, claims, damages and
expenses whatsoever (including but not limited to reasonable attorneys' fees and
any and all reasonable
4
<PAGE> 9
expenses whatsoever incurred in investigating, preparing or defending against
any investigation or litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement or Prospectus, or in any
supplement thereto or amendment thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; but only with respect
to information relating to the undersigned furnished in writing by or on behalf
of the undersigned expressly for use in the Registration Statement, the
Prospectus or any amendments or supplements thereto. Any such indemnification
shall be governed by the terms and subject to the conditions set forth in the
Registration Rights Agreement, including, without limitation, the provisions
regarding notice, retention of counsel, contribution and payment of expenses set
forth therein. The above summary of the indemnification provision of the
Registration Rights Agreement is not intended to be exhaustive and is qualified
in its entirety by the Registration Rights Agreement.
7. If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a distribution of
New Notes. If the undersigned is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and delivering a prospectus, the undersigned will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. If the undersigned is a broker-dealer and Old Notes held for its
own account were not acquired as a result of market-making or other trading
activities, such Old Notes cannot be exchanged pursuant to the Exchange Offer.
8. Any obligation of the undersigned hereunder shall be binding upon the
successors, assigns, executors, administrators, trustees in bankruptcy and legal
and personal representatives of the undersigned.
9. Unless otherwise indicated herein under "Special Delivery Instructions,"
please issue the certificates for the New Notes in the name of the undersigned.
5
<PAGE> 10
================================================================================
SPECIAL ISSUANCE INSTRUCTION
(SEE INSTRUCTIONS 5 AND 6)
To be completed only (i) if Old Notes in a principal amount not tendered, or New
Notes issued in exchange for Old Notes accepted for exchange, are to be issued
in the name of someone other than the undersigned, or (ii) if Old Notes tendered
by book-entry transfer which are not exchanged are to be returned by credit to
an account maintained at the Book-Entry Transfer Facility. Issue New Notes
and/or Old Notes to:
Name
---------------------------------------------------------------------------
(TYPE OR PRINT)
- --------------------------------------------------------------------------------
Address
------------------------------------------------------------------------
(ZIP CODE)
- --------------------------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(COMPLETE SUBSTITUTE FORM W-9)
CREDIT UNEXCHANGED OLD NOTES DELIVERED BY BOOK-ENTRY
TRANSFER TO THE BOOK-ENTRY TRANSFER FACILITY SET FORTH BELOW:
- --------------------------------------------------------------------------------
BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER:
- --------------------------------------------------------------------------------
================================================================================
================================================================================
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY if the New Notes are to be issued or sent to someone other
than the undersigned or to the undersigned at an address other than as indicated
above.
Mail [ ] Issue [ ] (check appropriate boxes)
Certificates to:
Name
---------------------------------------------------------------------------
(TYPE OR PRINT)
Address
------------------------------------------------------------------------
(ZIP CODE)
- --------------------------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
================================================================================
6
<PAGE> 11
SPECIAL REGISTRATION INSTRUCTIONS
To be completed ONLY if (i) the undersigned satisfies the conditions set
forth in Item 6 above, (ii) the undersigned elects to register its Old Notes in
the shelf registration statement described in the Registration Rights Agreement
and (iii) the undersigned agrees to indemnify certain entities and individuals
as set forth in Item 6 above. (See Item 6).
[ ] By checking this box the undersigned hereby (i) represents that it is unable
to make all of the representations and warranties set forth in Item 5 above,
(ii) elects to have its Old Notes registered pursuant to the shelf
registration statement described in the Registration Rights Agreement and
(iii) agrees to indemnify certain entities and individuals identified in,
and to the extent provided in, Item 6 above.
SPECIAL BROKER-DEALER INSTRUCTIONS
[ ] Check here if you are a broker-dealer and wish to receive 10 additional
copies of the Prospectus and 10 copies of any amendments or supplements
thereto.
Name
---------------------------------------------------------------------------
Address
---------------------------------------------------------------------------
(Zip Code)
---------------------------------------------------------------------------
IMPORTANT
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
(Complete Accompanying Substitute Form W-9 on Reverse Side)
(Signature(s) of Registered Holders of Old Notes)
-------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Dated
--------------------------------- , 1999
(The above lines must be signed by the registered holder(s) of Old Notes as
name(s) appear(s) on the Old Notes or on a security position listing, or by
person(s) authorized to become registered holder(s) by a properly completed bond
power from the registered holder(s), a copy of which must be transmitted with
this Letter of Transmittal. If Old Notes to which this Letter of Transmittal
relate are held of record by two or more joint holders, then all such holders
must sign this Letter of Transmittal. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, then such person must
(i) set forth his or her full title below and (ii) unless waived by the Company,
submit evidence satisfactory to the Company of such person's authority so to
act. See Instruction 5 regarding completion of this Letter of Transmittal,
printed below.)
Name(s)
---------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Capacity:
---------------------------------------------------------------------------
Address:
---------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number:
----------------------------------------------------------------
7
<PAGE> 12
MEDALLION SIGNATURE GUARANTEE
(If Required by Instruction 5)
Certain signatures must be Guaranteed by an Eligible Institution
Signature(s) Guaranteed by an Eligible Institution:
(Authorized Signature)
(Title)
(Name of Firm)
(Address, Include Zip Code)
(Area Code and Telephone Number)
Dated: ____________________________ , 1999
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES OR BOOK-ENTRY
CONFIRMATIONS.
All physically delivered Old Notes or any confirmation of a book-entry
transfer to the Exchange Agent's account at the Book-Entry Transfer Facility of
Old Notes tendered by book-entry transfer (a "Book-Entry Confirmation"), as well
as a properly completed and duly executed copy of this Letter of Transmittal or
Agent's Message or facsimile hereof, and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. The
method of delivery of the tendered Old Notes, this Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holder and, except as otherwise provided below, the delivery will be deemed
made only when actually received or confirmed by the Exchange Agent. If such
delivery is by mail, it is recommended that registered mail, properly insured,
with return receipt requested, be used. Instead of delivery by mail, it is
recommended that the holder use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure delivery to the Exchange
Agent before the Expiration Date. No Letter of Transmittal or Old Notes should
be sent to the Company.
2. GUARANTEED DELIVERY PROCEDURES.
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, this Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to the Expiration Date or who cannot complete the procedure for book-entry
transfer on a timely basis and deliver an Agent's Message, must tender their Old
Notes according to the guaranteed delivery procedures set forth in the
Prospectus. Pursuant to such procedures a tender may be effected if the Exchange
Agent has received at its office, on or prior to the Expiration Date, a letter,
telegram or facsimile transmission from an Eligible Institution setting forth
the name and address of the tendering holder, the name(s) in which the Old Notes
are registered and the certificate number(s) of the Old Notes to be tendered,
and stating that the tender is being made thereby and guaranteeing that, within
three Nasdaq National Market trading days after the date of execution of such
letter, telegram or facsimile transmission by the Eligible Institution, such Old
Notes, in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC), will be delivered by
such Eligible Institution together with a properly completed and duly executed
Letter of Transmittal (and any other required documents). Unless Old Notes being
tendered by the above-described method are deposited with the Exchange Agent
within the time period set forth above (accompanied or preceded by a properly
completed Letter of Transmittal and any other required documents), the Company
may, at its option, reject the tender.
8
<PAGE> 13
Any holder of Old Notes who wishes to tender Old Notes pursuant to the
guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York
City time, on the Expiration Date. Upon request of the Exchange Agent, a Notice
of Guaranteed Delivery will be sent to holders who wish to tender their Old
Notes according to the guaranteed delivery procedures set forth above. See "The
Exchange Offer -- Guaranteed Delivery Procedures" section of the Prospectus.
3. TENDER BY HOLDER.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
Any beneficial holder of Old Notes who is not the registered holder and who
wishes to tender should arrange with the registered holder to execute and
deliver this Letter of Transmittal on his or her behalf or must, prior to
completing and executing this Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such holder's name or obtain a properly completed bond power from the
registered holder.
4. PARTIAL TENDERS.
Tenders of Old Notes will be accepted only in integral multiples of $1,000.
If less than the entire principal amount of any Old Notes is tendered, the
tendering holder should fill in the principal amount tendered in the third
column of the box entitled "Description of Old Notes Tendered" above. The entire
principal amount of Old Notes delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated. If the entire principal amount of
all Old Notes is not tendered, then Old Notes for the principal amount of Old
Notes not tendered and New Notes issued in exchange for any Old Notes accepted
will be sent to the holder at his or her registered address, unless a different
address is provided in the appropriate box on this Letter of Transmittal,
promptly after the Old Notes are accepted for exchange.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES.
If this Letter of Transmittal (or facsimile hereof) is signed by the record
holder(s) of the Old Notes tendered hereby, the signature must correspond with
the name(s) as written on the face of the Old Notes without alteration,
enlargement or any change whatsoever. If this Letter of Transmittal (or
facsimile hereof) is signed by a participant in the Book-Entry Transfer
Facility, the signature must correspond with the name as it appears on the
security position listing as the holder of the Old Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Old Notes listed and tendered hereby and the New
Notes issued in exchange therefor are to be issued (or any untendered principal
amount of Old Notes is to be reissued) to the registered holder, the said holder
need not and should not endorse any tendered Old Notes, nor provide a separate
bond power. In any other case, such holder must either properly endorse the Old
Notes tendered or transmit a properly completed separate bond power with this
Letter of Transmittal, with the signatures on the endorsement or bond power
guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered holder or holders of any Old Notes listed, such Old
Notes must be endorsed or accompanied by appropriate bond powers, in each case
signed as the name of the registered holder or holders appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, evidence satisfactory to the Company of their
authority to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
9
<PAGE> 14
No signature guarantee is required if (i) this Letter of Transmittal (or
facsimile hereof) is signed by the registered holder(s) of the Old Notes
tendered herein (or by a participant in the Book-Entry Transfer Facility whose
name appears on a security position listing as the owner of the tendered Old
Notes) and the New Notes are to be issued directly to such registered holder(s)
(or, if signed by a participant in the Book-Entry Transfer Facility, deposited
to such participant's account at such Book-Entry Transfer Facility) and neither
the box entitled "Special Delivery Instructions" nor the box entitled "Special
Registration Instructions" has been completed, or (ii) such Old Notes are
tendered for the account of an Eligible Institution. In all other cases, all
signatures on this Letter of Transmittal (or facsimile hereof) must be
guaranteed by an Eligible Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS.
Tendering holders should indicate, in the applicable box or boxes, the name
and address (or account at the Book-Entry Transfer Facility) to which New Notes
or substitute Old Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
Tax law requires that a holder of any Old Notes which are accepted for
exchange must provide the Company (as payor) with its correct taxpayer
identification number ("TIN"), which, in the case of a holder who is an
individual is his or her social security number. If the Company is not provided
with the correct TIN, the holder may be subject to a $50 penalty imposed by
Internal Revenue Service. (If withholding results in an over-payment of taxes, a
refund may be obtained). Certain holders (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Old Notes are registered in more than one name or are not in the name of
the actual owner, see the enclosed "Guidelines for Certification of Taxpayer
Identification Number of Substitute Form W-9" for information on which TIN to
report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligations regarding backup
withholding.
7. VALIDITY OF TENDERS.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Company, in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any or all tenders
not in proper form or the acceptance for exchange of which may, in the opinion
of counsel for the Company, be unlawful. The Company also reserves the absolute
right to waive any of the conditions of the Exchange Offer or any defect or
irregularity in the tender of any Old Notes. The Company's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent, nor any other person
shall be under any duty to give notification of any defects or irregularities in
tenders or incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be
10
<PAGE> 15
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
8. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive, in whole or part, any of
the conditions to the Exchange Offer set forth in the Prospectus.
9. NO CONDITIONAL TENDER.
No alternative, conditional, irregular or contingent tender of Old Notes on
transmittal of this Letter of Transmittal will be accepted.
10. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Requests for assistance or for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address or
telephone number set forth on the cover page of this Letter of Transmittal.
Holders may also contact their broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
12. WITHDRAWAL.
Tenders may be withdrawn only pursuant to the limited withdrawal rights set
forth in the Prospectus under the caption "The Exchange Offer -- Withdrawal of
Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
(TOGETHER WITH THE OLD NOTES DELIVERED BY BOOK-ENTRY TRANSFER OR IN ORIGINAL
HARD COPY FORM) MUST BE RECEIVED BY THE EXCHANGE AGENT, OR THE NOTICE OF
GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT, PRIOR TO THE
EXPIRATION DATE.
11
<PAGE> 16
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION)
NOTICE OF GUARANTEED DELIVERY OF 14% SENIOR SECURED NOTES DUE 2003, MATURING AT
105% OF THE STATED PRINCIPAL AMOUNT, SERIES A
As set forth in the Prospectus dated , 1999 (as the same may be
amended or supplemented from time to time, the "Prospectus") of Contour Energy
Co. (the "Issuer") and certain of its subsidiaries under the caption "The
Exchange Offer -- Procedures for Tendering" and in the Letter of Transmittal for
Offer to Exchange 14% Senior Secured Notes due 2003, maturing at 105% of the
stated principal amount, Series B (the "Letter of Transmittal"), this form or
one substantially equivalent hereto must be used to accept the Exchange Offer
(as defined below) of the Issuer if: (i) certificates for the above-referenced
Notes (the "Old Notes") are not immediately available, (ii) time will not permit
all required documents to reach the Exchange Agent (as defined below) on or
prior to the Expiration Date (as defined in the Prospectus) or (iii) the
procedures for book-entry transfer cannot be completed on or prior to the
Expiration Date. Such form may be delivered by hand or transmitted by telegram,
telex, facsimile transmission or letter to the Exchange Agent.
To: Norwest Bank Minnesota, National Association (the "Exchange Agent")
<TABLE>
<CAPTION>
By Registered or Certified Mail: By Hand: By Overnight Courier:
<S> <C> <C>
Norwest Bank Minnesota, Norwest Bank Minnesota, Norwest Bank Minnesota,
National Association National Association National Association
N9303-121 Northstar East Building -- 12(th) N9303-120
Floor
Corporate Trust Operations Corporate Trust Corporate Trust
P.O. Box 1517 608 Second Avenue South Sixth and Marquette
Minneapolis, MN 55402 Minneapolis, MN 55402 Minneapolis, MN 55479
</TABLE>
By Facsimile Transmission (for Eligible Institutions only):
(612) 667-4927
(Facsimile Confirmation)
(612) 667-9764
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR NUMBER OTHER THAN THOSE SHOWN
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tenders to the Issuer, upon the terms and conditions
set forth in the Prospectus and the Letter of Transmittal (which together
constitute the "Exchange Offer"), receipt of which are hereby acknowledged, the
principal amount of Old Notes set forth below pursuant to the guaranteed
delivery procedures described in the Prospectus and the Letter of Transmittal.
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1999, unless extended
by the Issuer. With respect to the Exchange Offer, "Expiration Date" means such
time and date, or if the Exchange Offer is extended, the latest time and date to
which the Exchange Offer is so extended by the Issuer.
<PAGE> 17
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
DESCRIPTION OF OLD NOTES TENDERED
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL AMOUNT
CERTIFICATE NUMBER(S) (IF KNOWN) OF OLD NOTES OR REPRESENTED BY PRINCIPAL
ACCOUNT NUMBER AT THE BOOK-ENTRY FACILITY OLD NOTES AMOUNT TENDERED
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total:
- ------------------------------------------------------------------------------------------------------
</TABLE>
PLEASE SIGN AND COMPLETE
Signature(s): Name(s):
Capacity (full title), if signing
Address: in a representative capacity:
(Zip Code)
Area Code and Telephone Number:
Taxpayer Identification or Social
Dated: Security Number:
GUARANTEE OF DELIVERY
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended, hereby guarantees (a) that the above-named person(s) own(s)
the above-described securities tendered hereby within the meaning of Rule 14e-4
under the Securities Exchange Act of 1934, (b) that such tender of the
above-described securities complies with Rule 14e-4, and (c) that delivery to
the Exchange Agent of certificates tendered hereby, in proper form for transfer,
or delivery of such certificates pursuant to the procedure for book-entry
transfer, in either case with delivery of a properly completed and duly executed
Letter of Transmittal (or facsimile thereof) and any other required documents,
is being made within three Nasdaq National Market trading days after the date of
execution of a Notice of Guaranteed Delivery of the above-named person.
(Name of Firm)
Sign here:
(Authorized Signature)
Name:
(Please type or print)
(Area Code and Telephone Number)
Address Zip Code
Dated: , 1999
<PAGE> 18
<TABLE>
<C> <S> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Social Security Number OR
PART 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT Employer Identification Number
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW.
---------------------------------------
SUBSTITUTE
---------------------------------------------------------------------------------------------
FORM W-9 PART 2-- Certification Under penalties of perjury, I certify that:
DEPARTMENT OF THE TREASURY--
INTERNAL REVENUE SERVICE (1) The number shown on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me) and
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN) (2) I am not subject to backup withholding either because I have not been notified by the
Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of
failure to report all interest or dividends, or the IRS has notified me that I am no
longer subject to backup withholding.
Certificate Instructions--You must cross out item (2) in Part 2 above if you have been
notified by the IRS that you are subject to backup withholding because of under reporting
interest or dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from the IRS
stating that you are no longer subject to backup withholding, do not cross out item (2).
---------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN PART 3 --
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU
PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED Awaiting TIN [ ]
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. Please complete the
Certificate of Awaiting
Taxpayer
SIGNATURE --------------------------- DATE---------- , 1999 Identification Number below.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF
THE SUBSTITUTE FORM W-9
<PAGE> 19
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number to the payor within 60
days, 31% of all reportable payments made to me thereafter will be withheld
until I provide a number.
<TABLE>
<S> <C>
- ----------------------------------------------------- ---------------------------------------------- , 1999
Signature Date
</TABLE>
CERTIFICATE FOR FOREIGN RECORD HOLDERS
Under penalties of perjury, I certify that I am not a United States citizen
or resident (or I am signing for a foreign corporation, partnership, estate or
trust).
<TABLE>
<S> <C>
- ----------------------------------------------------- ---------------------------------------------- , 1999
Signature Date
</TABLE>
