<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1996
FILE NO.: 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
KEY PRODUCTION COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1311 84-1089744
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NO.)
ONE NORWEST CENTER, 20TH FLOOR
1700 LINCOLN STREET
DENVER, COLORADO 80203-4520
(303) 837-0779
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CATHY L. ANDERSON, CONTROLLER
KEY PRODUCTION COMPANY, INC.
1700 LINCOLN STREET, 20TH FLOOR
DENVER, COLORADO 80203-4520
(303) 837-0779
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT
FOR SERVICE, SHOULD BE SENT TO:
THOMAS A. RICHARDSON, ESQ. WILLIAM B. MASTERS, ESQ.
HOLME ROBERTS & OWEN LLC JONES, WALKER, WAECHTER, POITEVENT,
1700 LINCOLN, SUITE 4100 CARRERE & DENEGRE, L.L.P.
DENVER, CO 80203 201 ST. CHARLES AVE.
TEL. (303) 861-7000 NEW ORLEANS, LOUISIANA 70170-5100
FAX (303) 866-0200 TEL. (504) 582-8000
FAX (504) 582-8012
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------
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: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.25 par
value................. 2.8 million shares $4.712 $13,194,142 $4,550(2)
=======================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(f) and (c) solely for the purpose of
calculating the registration fee.
(2) Of this amount, $2,639 was paid with the filing of confidential
preliminary proxy materials by the Registrant on January 10, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
KEY PRODUCTION COMPANY, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS IN PART I OF THE REGISTRATION STATEMENT
(FORM S-4) AND PROSPECTUS PURSUANT TO ITEM 501(B)
<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION IN PROSPECTUS
---------------- ----------------------
<C> <S> <C>
A.INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus....................... Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus........ Inside Front Cover Page of
Prospectus; Available Information;
Incorporation of Certain Documents
by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information...................... Summary
4. Terms of the Transaction.......... Outside Front Cover Page of
Prospectus; Summary; The Special
Meetings; The Merger; Certain Terms
of the Merger Agreement; Stockholder
Agreement; Description of Key
Production Capital Stock;
Comparative Rights of Key Production
and Brock Stockholders
5. Pro Forma Financial Information... Unaudited Pro Forma Condensed
Financial Information
6. Material Contacts with the Company
Being Acquired................... The Merger; Certain Terms of the
Merger Agreement; Stockholder
Agreement; Description of Key
Production Capital Stock
7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters..................... *
8. Interests of Named Experts and
Counsel.......................... *
9. Disclosure of Commission Position
on Indemnification For Securities
Act Liabilities.................. *
B.INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants...................... *
11. Incorporation of Certain
Information by Reference......... *
12. Information with Respect to S-2 or
S-3 Registrants.................. *
13. Incorporation of Certain
Information by Reference......... Incorporation of Certain Documents by
Reference; Description of Key
Production Capital Stock; Outside
Front Cover Page of Prospectus;
Summary; The Special Meetings; The
Merger; Certain Terms of the Merger
Agreement
14. Information with Respect to
Registrants other than S-3 or S-2
Registrants...................... *
C.INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3
Companies........................ *
16. Information with Respect to S-2 or
S-3 Companies.................... Incorporation of Certain Documents by
Reference; Outside Front Cover Page
of Prospectus; Summary; The Special
Meetings; The Merger; Certain Terms
of the Merger Agreement
17. Information with Respect to
Companies other than S-3 or S-2
Companies........................ *
D.VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents
or Authorizations are to be
Solicited........................ Outside Front Cover Page of
Prospectus; Summary; The Special
Meetings; The Merger; Certain Terms
of the Merger Agreement; Principal
Stockholders of Key Production and
Brock; Stockholders' Proposals
19. Information if Proxies, Consents
or Authorizations are not to be
Solicited in an Exchange Offer... *
</TABLE>
- -------
* Not applicable or answer is negative.
<PAGE>
KEY PRODUCTION COMPANY, INC.
ONE NORWEST CENTER, 20TH FLOOR
1700 LINCOLN STREET
DENVER, COLORADO 80203-4520
FEBRUARY 16, 1996
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of Key
Production Company, Inc. at the University Club, 1673 Sherman Street, Denver,
Colorado, on Thursday, March 28, 1996, at 10:00 a.m., local time.
At the Special Meeting, stockholders will be asked to approve the issuance
of Key Production Common Stock in connection with the proposed merger of a
subsidiary of Key Production with and into Brock Exploration Corporation,
pursuant to the Agreement and Plan of Merger dated December 21, 1995, among
Key Production, Brock and Key Acquisition One, Inc., a wholly-owned subsidiary
of Key Production. The Merger Agreement provides that, upon consummation of
the merger, each issued and outstanding share of common stock of Brock would
be converted into the right to receive .6897 shares of Key Production Common
Stock. The Merger Agreement and the proposed merger are discussed in more
detail in the accompanying Joint Proxy Statement/Prospectus. Please review and
consider the enclosed materials carefully.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE ISSUANCE OF THE KEY PRODUCTION
COMMON STOCK IN THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE
STOCKHOLDERS OF KEY PRODUCTION AND RECOMMENDS THAT YOU VOTE IN FAVOR OF SUCH
ISSUANCE.
If you have any questions prior to the Special Meeting or need further
assistance, please call Corporate Investor Communications, Inc., who will be
assisting in connection with the Special Meeting, at 1-800-346-7885.
Whether or not you plan to be at the Special Meeting, please be sure to
sign, date and return the enclosed proxy or voting instruction card in the
enclosed envelope as promptly as possible so that your shares may be
represented at the Special Meeting and voted in accordance with your wishes.
Your vote is important regardless of the number of shares you own.
Sincerely,
/s/ F. H. Merelli
_______________________________________________
F. H. MERELLI
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
KEY PRODUCTION COMPANY, INC.
ONE NORWEST CENTER, 20TH FLOOR
1700 LINCOLN STREET
DENVER, COLORADO 80203-4520
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 28, 1996
To the Stockholders of Key Production Company, Inc.:
A Special Meeting of Stockholders of Key Production Company, Inc., a
Delaware corporation ("Key Production"), will be held on Thursday, March 28,
1996 at 10:00 a.m., local time, at the University Club, 1673 Sherman Street,
Denver, Colorado, for the following purposes:
1. To consider and vote upon a proposal for the issuance and reservation
for issuance of up to 2,800,000 shares of common stock, $.25 par value, of
Key Production ("Key Production Common Stock") in connection with the
Agreement and Plan of Merger dated December 21, 1995 among Key Production,
Brock Exploration Corporation ("Brock") and Key Acquisition One, Inc.
("Merger Sub"), pursuant to which, among other things, Merger Sub would
merge with and into Brock and each issued and outstanding share of Brock
Common Stock, $.10 par value per share, would be converted in the merger
into the right to receive .6897 shares of Key Production Common Stock, all
as more fully set forth in the accompanying Joint Proxy
Statement/Prospectus and in the Merger Agreement, a copy of which is
included as Appendix I thereto; and
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on February 9, 1996
as the record date for the determination of stockholders entitled to notice of
and to vote at the meeting or any adjournment thereof. Only holders of record
of shares of Key Production Common Stock at the close of business on the
record date are entitled to notice of and to vote at the meeting. A complete
list of such stockholders will be available for examination at the offices of
Key Production in Denver, Colorado during normal business hours by any Key
Production Stockholder, for any purpose germane to the Special Meeting, for a
period of 10 days prior to the meeting.
STOCKHOLDERS ARE URGED, WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING, TO
SIGN, DATE AND MAIL THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD IN THE
POSTAGE-PAID ENVELOPE PROVIDED. If a stockholder who has returned a proxy
attends the meeting in person, such stockholder may revoke the proxy and vote
in person on all matters submitted at the meeting.
By Order of the Board of Directors
/s/ Monroe W. Robertson
_____________________________________
MONROE W. ROBERTSON
SECRETARY
Denver, Colorado
February 16, 1996
<PAGE>
BROCK EXPLORATION CORPORATION
225 BARONNE STREET, SUITE 700
NEW ORLEANS, LOUISIANA 70112-1707
FEBRUARY 16, 1996
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders to be
held at 10:00 a.m., local time, on Thursday, March 28, 1996 at the City Energy
Club of New Orleans, 1100 Poydras Street, New Orleans, Louisiana.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Merger dated December
21, 1995, providing for the merger of a wholly-owned subsidiary of Key
Production Company, Inc. with and into Brock Exploration Corporation. Under
the terms of the Merger Agreement, each outstanding share of common stock of
Brock would be converted into the right to receive .6897 shares of common
stock of Key Production Company, Inc. The Merger Agreement and the proposed
merger are discussed in more detail in the accompanying Joint Proxy
Statement/Prospectus.
The Board of Directors of Brock has retained the investment banking firm of
Stephens Inc. to advise it with respect to the fairness of the consideration
to be received by the Brock stockholders in the merger. Stephens Inc. has
advised the Board that, in its opinion, the consideration to be received by
the holders of Brock Common Stock in the merger is fair from a financial point
of view. A copy of the opinion of Stephens Inc. is included in the enclosed
Joint Proxy Statement/Prospectus as Appendix II thereto.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF BROCK AND ITS STOCKHOLDERS, AND RECOMMENDS THAT STOCKHOLDERS VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
The Merger Agreement and financial and other information concerning the
business of Key Production Company, Inc. and Brock are included in the
enclosed Joint Proxy Statement/Prospectus. Please review the Joint Proxy
Statement/Prospectus carefully.
Because of the significance of these matters to Brock, your participation in
the Special Meeting, in person or by proxy, is especially important. The
affirmative vote of the holders of two-thirds of the outstanding shares of
Brock Common Stock is required to approve and adopt the Merger Agreement, so
an abstention or failure to vote will have the same effect as a vote against
the Merger Agreement. Accordingly, we urge you to complete, sign and date the
enclosed proxy or voting instruction card and return it in the enclosed return
envelope, whether or not you plan to attend the meeting. Your vote is
important.
Sincerely,
/s/ Lawrence E. Brock
_____________________________________
LAWRENCE E. BROCK
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
<PAGE>
BROCK EXPLORATION CORPORATION
225 BARONNE STREET, SUITE 700
NEW ORLEANS, LOUISIANA 70112-1707
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 28, 1996
To the Stockholders of Brock Exploration Corporation:
A Special Meeting of Stockholders of Brock Exploration Corporation, a
Delaware corporation ("Brock"), will be held on Thursday, March 28, 1996 at
10:00 a.m., local time, at the City Energy Club of New Orleans, 1100 Poydras
Street, New Orleans, Louisiana, to consider the following matters:
1. The approval and adoption of the Agreement and Plan of Merger, dated
December 21, 1995 (the "Merger Agreement"), pursuant to which a wholly-
owned subsidiary of Key Production Company, Inc. will merge with and into
Brock and each outstanding share of Brock Common Stock, $.10 par value per
share, will be converted into the right to receive .6897 shares of common
stock, $.25 par value per share, of Key Production Company, Inc., as more
fully described in the accompanying Joint Proxy Statement/Prospectus and in
the Merger Agreement, a copy of which is included as Appendix I thereto;
and
2. The transaction of such other business as may properly come before the
Special Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on February 9, 1996
as the record date for the determination of stockholders entitled to notice of
and to vote at the meeting or any adjournment thereof. Only holders of record
of shares of Brock Common Stock at the close of business on the record date
are entitled to notice of and to vote at the meeting. Stockholders of Brock
are not entitled to any appraisal or dissenter's rights under the Delaware
General Corporation Law in respect of the transactions contemplated by the
Merger Agreement.
Because of the significance of these matters to Brock, your participation in
the Special Meeting, in person or by proxy, is especially important. The
affirmative vote of the holders of two-thirds of the outstanding shares of
Brock Common Stock is required for approval and adoption of the Merger
Agreement. Even if you plan to attend the meeting in person, we request that
you sign and return the enclosed proxy or voting instruction card and thus
ensure that your shares will be represented at the meeting if you are unable
to attend. If you do attend the meeting and wish to vote in person, you may
withdraw your proxy and vote in person.
By Order of the Board of Directors
/s/ Lorena Rowan Brock
_____________________________________
LORENA ROWAN BROCK
SECRETARY
New Orleans, Louisiana
February 16, 1996
<PAGE>
KEY PRODUCTION COMPANY, INC.
BROCK EXPLORATION CORPORATION
JOINT PROXY STATEMENT
----------------
KEY PRODUCTION COMPANY, INC.
PROSPECTUS
----------------
This Joint Proxy Statement/Prospectus relates to the proposed merger of Key
Acquisition One, Inc., a Delaware corporation ("Merger Sub"), which is a
wholly-owned subsidiary of Key Production Company, Inc., a Delaware
corporation ("Key" or "Key Production"), with and into Brock Exploration
Corporation, a Delaware corporation ("Brock"), pursuant to the Agreement and
Plan of Merger dated December 21, 1995 among Key Production, Merger Sub and
Brock (the "Merger Agreement"). The merger contemplated by the Merger
Agreement is referred to herein as the "Merger."
As a result of the Merger, (i) each share of common stock, $.10 par value
per share, of Brock ("Brock Common Stock") outstanding immediately prior to
the effective time of the Merger (other than Brock Common Stock held directly
or indirectly by Key Production or Brock) will be converted into the right to
receive .6897 shares of common stock, $.25 par value per share, of Key
Production ("Key Production Common Stock"), and (ii) Brock will become a
wholly-owned subsidiary of Key Production.
This Joint Proxy Statement/Prospectus is being furnished to holders of Key
Production Common Stock and Brock Common Stock in connection with the
solicitation of proxies by the respective Boards of Directors of Key
Production and Brock for use at special meetings of stockholders of Key
Production (the "Key Special Meeting") and of Brock (the "Brock Special
Meeting") to be held on March 28, 1996. This Joint Proxy Statement/Prospectus
and the accompanying forms of proxy are first being mailed to stockholders of
Key Production and Brock on or about February 16, 1996.
At the Brock Special Meeting, holders of Brock Common Stock will be asked to
approve and adopt the Merger Agreement. At the Key Special Meeting, holders of
Key Production Common Stock will be asked to approve the issuance and
reservation for issuance of up to 2,800,000 shares of Key Production Common
Stock pursuant to the Merger Agreement.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of Key
Production with respect to up to 2,800,000 shares of Key Production Common
Stock to be issued pursuant to the Merger Agreement in exchange for currently
outstanding shares of Brock Common Stock and additional shares of Brock Common
Stock which may become outstanding prior to the Merger pursuant to the
exercise of outstanding options to purchase Brock Common Stock ("Brock
Options").
On February , 1996, the closing prices of Key Production Common Stock and
Brock Common Stock, as reported on the Nasdaq National Market and the American
Stock Exchange, respectively, were $ and $ , respectively.
See "Summary--Risk Factors" for a discussion of certain risks to be
considered by stockholders of Key and Brock.
----------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY OTHER STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Joint Proxy Statement/Prospectus is February 13, 1996.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT/
PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF
SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY KEY
PRODUCTION OR BROCK. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/
PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF KEY PRODUCTION OR BROCK SINCE THE DATE HEREOF OR THAT THE
INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR
TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN
OFFER OR PROXY SOLICITATION.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. KEY PRODUCTION
AND BROCK EACH UNDERTAKE TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE), WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER,
TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR
ORAL REQUEST TO, IN THE CASE OF DOCUMENTS RELATING TO KEY PRODUCTION, KEY
PRODUCTION COMPANY, INC., ATTENTION: MONROE W. ROBERTSON, SECRETARY, ONE
NORWEST CENTER, 20TH FLOOR, 1700 LINCOLN STREET, DENVER, COLORADO 80203-4520
(TELEPHONE (303) 837-0779), AND, IN THE CASE OF DOCUMENTS RELATING TO BROCK,
LORENA ROWAN BROCK, SECRETARY, BROCK EXPLORATION CORPORATION, 225 BARONNE
STREET, SUITE 700, NEW ORLEANS, LOUISIANA 70112-1707 (TELEPHONE (504) 586-
1815). IN ORDER TO ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE APPLICABLE
STOCKHOLDERS MEETING, REQUESTS SHOULD BE RECEIVED BY MARCH 20, 1996.
2
<PAGE>
AVAILABLE INFORMATION
Key Production and Brock are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, file reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements and
other information filed by Key Production and Brock can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-
2511. Copies of such material can be obtained by mail from the Public
Reference Branch of the Commission at 450 West Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, reports, proxy statements and
other information concerning Key Production may be inspected at the offices of
the Nasdaq National Market, 1735 K Street, N.W.,Washington, D.C. 20006, and,
with respect to Brock, at the offices of the American Stock Exchange, 86
Trinity Place, New York, NY 10006.
Key Production has filed with the Commission a Registration Statement on
Form S-4 (together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Key Production Common Stock to be
issued pursuant to the Merger Agreement. The information contained herein with
respect to Key Production and its affiliates, including Merger Sub, has been
provided by Key Production, and the information contained herein with respect
to Brock and its affiliates has been provided by Brock. This Joint Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which were omitted in accordance with
the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of
such document so filed. Each such statement is qualified by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are incorporated herein by reference:
1. Key Production's Annual Report on Form 10-K for its fiscal year ended
December 31, 1994 (the "Key 1994 10-K").
2. Key Production's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1995 and June 30, 1995.
3. Key Production's Quarterly Report on Form 10-Q for the period ended
September 30, 1995 (the "Key Third Quarter 10-Q").
4. Key Production's Current Report on Form 8-K dated December 21, 1995.
5. Key Production's Form 8-A filed September 2, 1988.
6. Brock's Annual Report on Form 10-K for its fiscal year ended December
31, 1994 (the "Brock 1994 10-K").
7. Brock's Quarterly Reports on Form 10-Q for the periods ended March 31,
1995 and June 30, 1995.
8. Brock's Quarterly Report on Form 10-Q for the period ended September 30,
1995 (the "Brock Third Quarter 10-Q").
9. Brock's Current Report on Form 8-K dated December 21, 1995.
The Key 1994 10-K, the Key Third Quarter 10-Q, the Brock 1994 10-K and the
Brock Third Quarter 10-Q are attached to this Joint Proxy Statement/Prospectus
as Appendices III, IV, V and VI, respectively.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Joint Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Joint Proxy Statement/Prospectus.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents By Reference........................... 3
Summary................................................................... 6
The Companies........................................................... 6
The Special Meetings.................................................... 6
The Merger and the Merger Agreement..................................... 7
Risk Factors............................................................ 8
Opinion of Brock Financial Advisor...................................... 8
Effective Time of the Merger............................................ 8
Certain Conditions to the Consummation of the Merger.................... 8
Governmental Approvals.................................................. 9
No Solicitation......................................................... 9
Termination of the Merger Agreement..................................... 9
Termination Fee......................................................... 10
Brock Options........................................................... 10
Employee Benefits and Severance......................................... 10
Indemnification......................................................... 11
Stockholder Agreement................................................... 11
Certain Federal Income Tax Consequences................................. 11
Anticipated Accounting Treatment........................................ 12
No Appraisal Rights..................................................... 12
Exchange of Brock Common Stock Certificates............................. 12
Interests of Certain Persons in the Merger.............................. 12
Comparative Rights of Brock and Key Production Stockholders............. 12
Market Prices........................................................... 12
Selected Consolidated Financial Data of Key Production Company, Inc..... 14
Selected Consolidated Financial Data of Brock Exploration Corporation... 15
Selected Pro Forma Financial Information................................ 16
Comparative Per Share Data.............................................. 17
The Companies............................................................. 18
Key Production and Merger Sub........................................... 18
Brock................................................................... 18
Post-Merger Profile and Strategy........................................ 19
The Special Meetings...................................................... 23
Time, Date, Place and Purpose of Special Meetings....................... 23
Record Date and Outstanding Shares...................................... 23
Voting and Revocation of Proxies........................................ 23
Vote Required........................................................... 24
Solicitation of Proxies................................................. 24
Other Matters........................................................... 25
The Merger................................................................ 25
General Description of the Merger....................................... 25
Background.............................................................. 25
Key Production's Reasons for the Merger; Recommendation of Board of
Directors of Key Production............................................ 27
Brock's Reasons for the Merger; Recommendation of Board of Directors of
Brock.................................................................. 28
Opinion of Brock Financial Advisor...................................... 29
Interests of Certain Persons in the Merger.............................. 32
Certain Federal Income Tax Consequences................................. 33
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accounting Treatment..................................................... 34
Governmental and Regulatory Approvals.................................... 34
Restrictions on Resales by Affiliates.................................... 34
Rights of Dissenting Stockholders........................................ 34
Certain Terms of the Merger Agreement...................................... 35
Effective Time of the Merger............................................. 35
Manner and Basis of Converting Shares.................................... 35
Brock Options............................................................ 36
Conditions to the Merger................................................. 36
Representations and Warranties........................................... 37
Certain Covenants; Conduct of Business Prior to the Merger............... 37
No Solicitation.......................................................... 38
Certain Post-Merger Matters.............................................. 39
Termination or Amendment of the Merger Agreement......................... 39
Expenses and Termination Fee............................................. 40
Certain Benefit Plans and Severance...................................... 41
Indemnification.......................................................... 42
Stockholder Agreement...................................................... 42
Market Prices of Common Stock and Dividend Information..................... 43
Unaudited Pro Forma Condensed Financial Statements......................... 44
Principal Stockholders of Key Production and Brock......................... 50
Key Production........................................................... 50
Brock.................................................................... 51
Description of Key Production Capital Stock................................ 52
General.................................................................. 52
Common Stock............................................................. 52
Section 203 of the Delaware General Corporation Law...................... 52
Restrictions on Dividends.................................................. 52
Comparative Rights of Key Production and Brock Stockholders................ 53
Power to Call Special Meetings........................................... 53
Certain Matters Presented at Stockholders Meetings by Stockholders....... 53
Independent Public Accountants............................................. 53
Legal Matters.............................................................. 53
Experts.................................................................... 53
Stockholders' Proposals.................................................... 54
</TABLE>
Appendices:
<TABLE>
<C> <S>
I-- Merger Agreement
II-- Stephens Inc. Fairness Opinion
III-- Key 1994 10-K
IV-- Key Third Quarter 10-Q
V-- Brock 1994 10-K
VI-- Brock Third Quarter 10-Q
</TABLE>
5
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified by, the more detailed information contained in or incorporated by
reference in this Joint Proxy Statement/Prospectus and the Appendices hereto.
Stockholders are urged to carefully read this Joint Proxy Statement/Prospectus
and the Appendices hereto in their entirety. As used in this Joint Proxy
Statement/Prospectus, unless otherwise required by the context, the term "Key
Production" means Key Production Company, Inc. and its consolidated
subsidiaries and the term "Brock" means Brock Exploration Corporation and its
consolidated subsidiaries. Capitalized terms used herein without definition
are, unless otherwise indicated, defined in the Merger Agreement and used
herein with such meanings.
THE COMPANIES
Key Production and Merger Sub. Key Production is an independent oil and gas
company engaged in oil and gas exploration, development and production in the
continental United States. The Company's exploration interests are spread over
13 states with primary focus areas in the Anadarko Basin of Oklahoma, the Rocky
Mountain region, the Gulf Coast, and the Sacramento Basin in California. Merger
Sub is a wholly-owned subsidiary of Key Production incorporated on December 19,
1995. The principal executive offices of Key Production, a Delaware
corporation, are located at One Norwest Center, 20th Floor, 1700 Lincoln
Street, Denver, Colorado 80203-4520, and its telephone number at such offices
is (303) 837-0779.
Brock. Brock is an independent oil and gas company whose principal business
is the acquisition and development of producing oil and gas properties. The
principal executive offices of Brock, a Delaware corporation, are located at
225 Baronne Street, Suite 700, New Orleans, Louisiana 70112-1707, and its
telephone number at such offices is (504) 586-1815.
THE SPECIAL MEETINGS
Date, Time and Place
Key Production. The Key Special Meeting will be held on Thursday, March 28,
1996 at 10:00 a.m., local time, at the University Club, 1673 Sherman Street,
Denver, Colorado.
Brock. The Brock Special Meeting will be held on Thursday, March 28, 1996 at
10:00 a.m., local time, at the City Energy Club of New Orleans, 1100 Poydras
Street, New Orleans, Louisiana.
Purposes of the Special Meetings
Key Production. The purpose of the Key Production Special Meeting is to
consider and vote upon (i) a proposal to approve, as required by the rules of
the Nasdaq National Market, the issuance and reservation for issuance of up to
2,800,000 shares of Key Production Common Stock pursuant to the Merger
Agreement, and (ii) such other matters as may properly be brought before the
Key Production Special Meeting.
Brock. The purpose of the Brock Special Meeting is to consider and vote upon
(i) the approval and adoption of the Merger Agreement, and (ii) such other
matters as may properly be brought before the Brock Special Meeting.
RECORD DATES; SHARES ENTITLED TO VOTE
Key Production. Only holders of record of shares of Key Production Common
Stock at the close of business on February 9, 1996 (the "Record Date") are
entitled to notice of and to vote at the Key Production
6
<PAGE>
Special Meeting. On such date, there were 8,849,468 shares of Key Production
Common Stock outstanding, each of which will be entitled to one vote on each
matter to be acted upon at the Key Production Special Meeting.
Brock. Only holders of record of shares of Brock Common Stock at the close of
business on the Record Date are entitled to notice of and to vote at the Brock
Special Meeting. On such date, there were 3,815,181 shares of Brock Common
Stock outstanding and entitled to vote. Each such share of Brock Common Stock
will be entitled to one vote on each matter to be acted upon at the Brock
Special Meeting.
QUORUM; VOTE REQUIRED
Key Production. The presence, in person or by proxy, at the Key Production
Special Meeting of the holders of a majority of the shares of Key Production
Common Stock outstanding and entitled to vote at the Key Production Special
Meeting is necessary to constitute a quorum at the meeting. The affirmative
vote of the holders of a majority of the shares of Key Production Common Stock
present, in person or by proxy, and entitled to vote at the Key Production
Special Meeting is required to approve the issuance and reservation for
issuance of up to 2,800,000 shares of Key Production Common Stock pursuant to
the Merger Agreement.
Brock. The presence, in person or by proxy, at the Brock Special Meeting of
the holders of a majority of the shares of Brock Common Stock outstanding and
entitled to vote at the Brock Special Meeting is necessary to constitute a
quorum at the meeting. The affirmative vote of the holders of two-thirds of the
shares of Brock Common Stock outstanding and entitled to vote thereon at the
Brock Special Meeting is required to approve and adopt the Merger Agreement.
SECURITY OWNERSHIP OF MANAGEMENT
Key Production. As of the Record Date for the Key Production Special Meeting,
the directors and executive officers of Key Production beneficially owned
approximately 12.88% of the outstanding shares of Key Production Common Stock
entitled to vote at such meeting. Each of such directors and executive officers
has advised Key Production that he or she plans to vote or direct the vote of
all such shares of Key Production Common Stock entitled to vote in favor of the
proposal to approve the issuance and reservation for issuance of Key Production
Common Stock pursuant to the Merger Agreement.
Brock. The Lawrence E. Brock and Lorena Rowan Brock--Trust No. 2-A (the
"Brock Trust"), an affiliate of Lawrence E. Brock and Lorena Rowan Brock and
the holder of 8.5% of the outstanding Brock Common Stock entitled to vote at
the Brock Special Meeting, has executed with Key Production a Stockholder
Agreement with respect to an aggregate of 325,811 shares of Brock Common Stock
owned by it as of the Record Date agreeing to vote such shares in favor of the
proposal to approve and adopt the Merger Agreement. See "Stockholder
Agreement." As of the Record Date for the Brock Special Meeting, the directors
and executive officers of Brock including Lawrence E. Brock and Lorena Rowan
Brock held approximately 39.39% of the outstanding shares of Brock Common Stock
entitled to vote at the Brock Special Meeting. Each of such directors and
executive officers has indicated his or her present intention to vote or direct
the vote of all such shares of Brock Common Stock entitled to vote in favor of
the proposal to approve the Merger Agreement.
THE MERGER AND THE MERGER AGREEMENT
Terms of the Merger. At the Effective Time (as hereinafter defined), Merger
Sub will merge with and into Brock, with Brock being the surviving corporation
and a wholly-owned subsidiary of Key Production (the "Surviving Corporation").
In the Merger, each outstanding share of Brock Common Stock (other than shares
held directly or indirectly by Key Production or Brock, including the 285,221
shares of Brock Common Stock held in treasury by Brock on the Record Date),
will be converted into the right to receive .6897 shares of Key
7
<PAGE>
Production Common Stock (the "Exchange Ratio"). The full text of the Merger
Agreement is attached to this Joint Proxy Statement/Prospectus as Appendix I.
Based on the number of shares of Key Production Common Stock and Brock Common
Stock outstanding as of the Record Date for the Key Production Special Meeting
and the Brock Special Meeting, approximately 2,800,000 shares of Key Production
Common Stock will be issuable pursuant to the Merger Agreement (assuming
exercise prior to the Effective Time of the Brock Options), representing
approximately 24% of the total Key Production Common Stock to be outstanding
after such issuance.
Recommendations of the Boards of Directors. THE BOARD OF DIRECTORS OF KEY
PRODUCTION HAS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS
OF, THE STOCKHOLDERS OF KEY PRODUCTION AND RECOMMENDS THAT THE STOCKHOLDERS OF
KEY PRODUCTION APPROVE THE ISSUANCE AND RESERVATION FOR ISSUANCE OF KEY
PRODUCTION COMMON STOCK PURSUANT TO THE TERMS OF THE MERGER AGREEMENT. See "The
Merger--Background" and "Key Production's Reasons for the Merger;
Recommendation of Board of Directors of Key Production."
THE BOARD OF DIRECTORS OF BROCK HAS DETERMINED THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF BROCK AND RECOMMENDS THAT THE
STOCKHOLDERS OF BROCK APPROVE AND ADOPT THE MERGER AGREEMENT. See "The Merger--
Background" and "Brock's Reasons for the Merger; Recommendation of the Board of
Directors of Brock." In considering the recommendation of the Brock Board with
respect to the Merger, Brock stockholders should be aware that certain officers
and directors of Brock have certain interests respecting the Merger, apart from
their interests as stockholders of Brock. See "The Merger--Interests of Certain
Persons in the Merger."
RISK FACTORS
In determining whether to vote to approve the Merger, in the case of the
Brock stockholders, or to approve the issuance of Key Production Common Stock,
in the case of the Key stockholders, the stockholders should consider that the
Exchange Ratio was determined by negotiations between Brock and Key, and was
based on a number of factors. See "The Merger--Key Production's Reasons for the
Merger; Recommendations of Board of Directors of Key Production" and "--Brock's
Reasons for the Merger; Recommendations of Board of Directors of Brock." The
Exchange Ratio does not necessarily reflect the relative stock prices,
reserves, cash flow per share, earnings per share or other attributes of either
Key Production or Brock.
OPINION OF BROCK FINANCIAL ADVISOR
Stephens Inc. ("Stephens") delivered its written opinion dated December 21,
1995 to the Board of Directors of Brock that, as of such date, the
consideration to be received by the holders of Brock Common Stock pursuant to
the Merger Agreement is fair, from a financial point of view, to the holders of
Brock Common Stock. Stephens also delivered an opinion, dated the date of this
Joint Proxy Statement/Prospectus, that as of the date of such opinion, based
upon the assumptions made, the factors considered and the review undertaken,
and subject to the limitations and qualification as described in such opinion,
the consideration to be received by the holders of Brock Common Stock pursuant
to the Merger Agreement is fair from a financial point of view.
For information regarding the opinion of Stephens, including the assumptions
made, matters considered and limits of such opinions, see "The Merger--Opinion
of Brock Financial Advisor." Stockholders are urged to read in its entirety the
opinion of Stephens, attached as Appendix II to this Joint Proxy
Statement/Prospectus.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware (the "Effective Time"),
unless the certificate of merger specifies a later Effective Time. Assuming all
conditions to the Merger contained in the Merger Agreement are satisfied or
waived prior thereto, it is anticipated that the Effective Time of the Merger
will occur as soon as practicable following the Special Meetings.
CERTAIN CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of Key Production and Brock to consummate the
Merger are subject to the satisfaction of certain conditions, including the
following: (i) approval by the stockholders of Key Production of
8
<PAGE>
the issuance of Key Production Common Stock pursuant to the Merger Agreement,
and approval and adoption of the Merger Agreement by the stockholders of Brock;
(ii) the absence of any order making the Merger illegal or otherwise
prohibiting consummation of the Merger; (iii) the accuracy of the
representations and warranties of each party and compliance with all agreements
and covenants by each party; (iv) the absence of certain regulatory conditions;
(v) the receipt of certain tax opinions; (vi) the effectiveness of the
Registration Statement of which this Joint Proxy Statement/Prospectus is a
part; (vii) the approval for listing on the Nasdaq National Market of the Key
Production Common Stock to be issued in the Merger; and (viii) the absence of
certain material adverse changes.
Key Production and Brock anticipate that all of the conditions to the
consummation of the Merger (other than obtaining the required approvals of the
stockholders of Key Production and Brock) will be satisfied prior to or at the
time of the Key Production Special Meeting and the Brock Special Meeting.
Either Key Production or Brock may extend the time for performance of any of
the obligations of the other party or may waive compliance with those
obligations at its discretion. See "Certain Terms of the Merger Agreement--
Conditions to the Merger."
GOVERNMENTAL APPROVALS
Key Production and Brock are aware of no governmental or regulatory approvals
required for consummation of the Merger, other than compliance with applicable
securities laws.
NO SOLICITATION
The Merger Agreement provides that Brock will not initiate, solicit or
encourage any inquiries or the making of any proposal relating to any Competing
Transaction (as defined below), or enter into discussions or negotiations with
any person in furtherance of a Competing Transaction, or agree to endorse a
Competing Transaction; provided, however, that Brock may furnish information or
enter into discussions or negotiations with respect to an unsolicited bona fide
proposal in writing to acquire Brock pursuant to a merger, consolidation, share
exchange, business combination or similar transaction or to acquire a
substantial portion of the assets of Brock if, and only to the extent that, the
Board of Directors of Brock, after consultation with and based upon the advice
of independent legal counsel, determines in good faith that such action is
necessary for such Board to comply with its fiduciary duties to stockholders
under applicable law. Further, the Board of Directors of Brock may determine
not to solicit proxies in favor of the approval and adoption of the Merger
Agreement if such Board determines in good faith after consultation with and
based upon the advice of independent legal counsel that other action is
necessary due to applicable fiduciary duties of the directors of Brock. A
"Competing Transaction" is defined to mean any of the following (other than the
transactions contemplated by the Merger Agreement) involving Brock or any of
its subsidiaries: (i) any merger, consolidation, share exchange, business
combination or similar transaction; (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of 20% or more of the assets of Brock and
its subsidiaries, taken as a whole; (iii) any tender offer or exchange offer
for 20% or more of the outstanding shares of capital stock of Brock or the
filing of a registration statement under the Securities Act in connection
therewith; (iv) any person having acquired beneficial ownership of, or any
group (as such term is defined under Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder) having been formed which
beneficially owns or has the right to acquire beneficial ownership of, 20% or
more of the outstanding shares of capital stock of Brock; or (v) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing. See "Certain Terms of the Merger
Agreement--No Solicitation."
TERMINATION OF THE MERGER AGREEMENT
By Either Party. The Merger Agreement may be terminated prior to the
Effective Time (i) by mutual consent of Key Production and Brock, or (ii) by
either party if (a) the Merger has not been consummated on or before June 30,
1996 (or September 30, 1996, if the Merger shall not have been consummated as a
result of
9
<PAGE>
either party having failed by June 30, 1996 to receive all required regulatory
approvals or consents with respect to the Merger), (b) any court or
governmental order shall have prohibited consummation of the Merger or (c) the
required approvals of the stockholders of Key Production or Brock are not
received at the applicable meeting of stockholders.
By Key Production. Key Production may terminate the Merger Agreement (i) upon
a breach of any representation, warranty, covenant or agreement on the part of
Brock set forth in the Merger Agreement, or if any such representation or
warranty shall have become untrue, in either case such that Key Production's
conditions to closing of the Merger would be incapable of being satisfied by
June 30, 1996 (or as otherwise extended as described above), or (ii) if the
Board of Directors of Brock withdraws, modifies or changes its recommendation
of the Merger in a manner adverse to Key Production or recommends to the
stockholders of Brock any Competing Transaction, or resolves to do so, or (iii)
if a tender or exchange offer for 20% or more of the outstanding shares of
capital stock of Brock is commenced, and the Board of Directors of Brock does
not recommend that stockholders not tender their shares into such offer, or
(iv) if any person (other than Key Production or its affiliates) acquires
beneficial ownership of, or any group shall have been formed which beneficially
owns, 20% or more of the outstanding capital stock of Brock.
By Brock. Brock may terminate the Merger Agreement (i) upon a breach of any
representation, warranty, covenant or agreement on the part of Key Production
set forth in the Merger Agreement, or if any such representation or warranty
shall have become untrue, in either case such that Brock's conditions to
closing of the Merger would be incapable of being satisfied by June 30, 1996
(or as otherwise extended as described above), or (ii) if the Board of
Directors of Brock fails to make or withdraws its recommendation of the Merger
Agreement if there exists at such time a Competing Transaction, or recommends
to Brock's stockholders approval or acceptance of a Competing Transaction, in
each case only if, after consultation with and based upon the advice of
independent legal counsel, Brock's Board of Directors determines in good faith
that such action is necessary for such Board to comply with its fiduciary
duties to stockholders under applicable law.
See "Certain Terms of the Merger Agreement--Termination or Amendment of the
Merger Agreement."
TERMINATION FEE
If the Merger Agreement is terminated pursuant to certain of the reasons
described above, and if as a result of such termination a Trigger Event (as
described under the caption "Certain Terms of the Merger Agreement--
Termination or Amendment of the Merger Agreement") has occurred, Brock will pay
to Key Production an amount equal to $1,000,000, which amount is inclusive of
all of Key Production's expenses in connection with the transactions
contemplated by the Merger Agreement.
BROCK OPTIONS
All options to purchase Brock Common Stock will become fully vested prior to
the Effective Time and will expire upon the Effective Time unless exercised
prior to the Effective Time. See "Certain Terms of the Merger Agreement--Brock
Options."
EMPLOYEE BENEFITS AND SEVERANCE
The Merger Agreement provides that Key will honor all of Brock's severance
arrangements; provided, however, that prior to the Effective Time Key will
notify Brock of the employees of Brock that Key desires to retain following the
Effective Time and if such persons are retained as employees on a full-time
basis by Key or any subsidiary in any capacity and at their then-current
salaries for a period longer than one year after the Effective Time (and, in
the case of Kenneth J. Stucke, Michael R. Barham and Robin A. Seibert, they are
offered an employment agreement with Key having a term of at least two years at
their then current salaries) and without
10
<PAGE>
any requirements that they relocate their personal residence from the New
Orleans, Louisiana metropolitan area, no severance payments will be due to such
persons, except for certain bonuses due to Messrs. Stucke, Barham and Seibert.
Brock's stock option plan will be amended to provide that all options to
purchase Brock Common Stock will become fully vested prior to the Effective
Time and will then expire unless exercised. The Merger Agreement requires that
Brock amend its pension plan to provide that all accruals under such plan will
cease 30 days after the Effective Time of the Merger and that Key will initiate
procedures to terminate such plan under the provisions of ERISA. The Merger
also provides that participants in Brock's Supplemental Executive Retirement
Plan will be 100% vested in and will receive the present value of the benefits
under such plan in a single lump sum payment prior to the Effective Time, and
that such plan will be terminated prior to the Effective Time. All individuals
employed by Brock at the Effective Time and who are employed by Brock on the
day after the Effective Time will be offered group health plan coverage under
Key's group health plan effective the day after the Effective Time. Brock
employees who are covered under the Brock group health plan immediately before
the Effective Time and who are terminated at the Effective Time will be offered
COBRA continuation coverage under the Key group health plan. See "Certain Terms
of the Merger Agreement--Certain Benefit Plans and Severance."
INDEMNIFICATION
The Merger Agreement also provides that, for a period of five years after the
Effective time, Key Production (i) will not amend certain indemnification and
liability limitation provisions of Brock's charter and bylaws in a manner that
would adversely affect the rights of individuals who were officers or directors
of Brock, and (ii) will guarantee the performance by Brock of its obligations
under the indemnification provisions of Brock's bylaws, subject to certain
limitations. See "Certain Terms of the Merger Agreement--Indemnification."
STOCKHOLDER AGREEMENT
In consideration for Key Production's and Merger Sub's execution of the
Merger Agreement, the Brock Trust, the holder of 8.5% of the Brock Common Stock
outstanding as of the Record Date, executed a Stockholder Agreement agreeing to
vote any shares of Brock Common Stock owned by such holder in favor of the
Merger and adoption of the Merger Agreement, and against any business
combination proposal or other matter that may interfere with or be inconsistent
with the Merger or Merger Agreement (including any Competing Transaction), at
any meeting of stockholders of Brock (or consent in lieu thereof) and any
adjournment or adjournments thereof. The Stockholder Agreement currently covers
an aggregate of 325,811 shares of Brock Common Stock. The Stockholder Agreement
also provides for a right of first refusal for Key Production upon sales of
stock by the Brock Trust and obligates Key to register the Brock Trust's Key
Production Common Stock to be received in the Merger under the Securities Act.
An irrevocable trust administered by BankOne, Fort Worth, Texas, which owns
approximately 25% of the Brock Common Stock, has been granted registration
rights under the Securities Act with respect to the Key Production Common Stock
to be received by it in the Merger. Mr. and Mrs. Brock are the trust
beneficiaries. See "Stockholder Agreement."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Brock has received a tax opinion from its counsel that the Merger will
qualify as a reorganization under Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), that Key Production, Merger Sub and Brock
each will be a party to the reorganization and that holders of Brock Common
Stock will not recognize any gain or loss on the exchange of Brock Common Stock
for Key Production Common Stock, except to the extent of cash received in lieu
of a fractional share of Key Production Common Stock. For a discussion of these
and other federal income tax considerations in connection with the Merger, see
"The Merger--Certain Federal Income Tax Consequences."
11
<PAGE>
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "purchase" for financial
accounting purposes. See "The Merger--Accounting Treatment."
NO APPRAISAL RIGHTS
Under Delaware law, neither Key Production's nor Brock's stockholders will be
entitled to any appraisal or dissenter's rights in connection with the Merger.
See "The Merger--Rights of Dissenting Stockholders."
EXCHANGE OF BROCK COMMON STOCK CERTIFICATES
Promptly after consummation of the Merger, American Securities Transfer,
Incorporated (the "Transfer Agent") will mail a letter of transmittal with
instructions to the record holders of certificates which immediately prior to
the Effective Time evidenced shares of Brock Common Stock for use in exchanging
certificates formerly representing shares of Brock Common Stock for
certificates representing shares of Key Production Common Stock and cash in
lieu of any fractional shares. Certificates should not be surrendered by the
holders of Brock Common Stock until they have received the letter of
transmittal from the Transfer Agent. See "Certain Terms of the Merger
Agreement--Manner and Basis of Converting Shares."
Upon delivery of an executed transmittal letter and surrender of a Brock
Certificate to the Transfer Agent for cancellation, the holders of such Brock
Certificates shall be entitled to receive a certificate representing the number
of whole shares of Key Production Common Stock which such holder has the right
to receive under the terms of the Merger Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Brock's Board of Directors and management have certain
interests respecting the Merger separate from their interests as holders of
Brock Common Stock, including those referred to above under "--Brock Options;
- --Employee Benefits and Severance; and --Indemnification." Under Brock's
Directors Severance Plan, each of Messrs. Stucke, Seibert and Barham, who are
officers of Brock, will either be offered two year employment agreements with
Key at his current salary or will receive an amount equal to twice his then-
current annual compensation if the fair market value of all Brock Common Stock
at the Effective Time is $25 million or more, three times his then-current
monthly compensation if the fair market value is $3 million or less, or an
amount accordingly prorated if the fair market value is greater than $3 million
but less than $25 million. See "The Merger--Interests of Certain Persons in the
Merger."
COMPARATIVE RIGHTS OF BROCK AND KEY PRODUCTION STOCKHOLDERS
Rights of stockholders of Brock are currently governed by Delaware law, the
Certificate of Incorporation of Brock (the "Brock Charter") and Brock's Bylaws.
Upon consummation of the Merger, Brock stockholders will become stockholders of
Key Production and their rights as stockholders of Key Production will be
governed by Delaware law, the Certificate of Incorporation of Key Production
(the "Key Production Charter") and Key Production's Bylaws. There are various
differences between the rights of Brock stockholders and the rights of Key
Production stockholders. See "Comparative Rights of Key Production and Brock
Stockholders" and "Description of Key Production Capital Stock."
MARKET PRICES
The Key Production Common Stock is traded on the Nasdaq National Market under
the symbol "KPCI" and the Brock Common Stock is traded on the American Stock
Exchange under the symbol "BKE." The following table sets forth, for the
periods indicated, the range of high and low per share sale prices for Key
12
<PAGE>
Production Common Stock and Brock Common Stock as reported on the Nasdaq
National Market and the American Stock Exchange, respectively. No dividends
were paid in 1994 or in 1995 on either the Key Production Common Stock or the
Brock Common Stock.
<TABLE>
<CAPTION>
KEY PRODUCTION BROCK
--------------- -----------------
HIGH LOW HIGH LOW
------- ------- -------- --------
<S> <C> <C> <C> <C>
1994
First Quarter.......................... $4 $ 2 3/4 $3 3/4 $2 5/16
Second Quarter......................... 4 3/4 3 3 1/2 2 3/4
Third Quarter.......................... 4 3/4 3 5/8 3 11/16 2 11/16
Fourth Quarter......................... 5 3/8 3 1/2 4 1/8 2 3/8
1995
First Quarter.......................... $5 $ 4 1/2 $4 5/8 $3 9/16
Second Quarter......................... 6 3/8 4 5/8 4 3/8 3 1/4
Third Quarter.......................... 5 3/4 5 3 15/16 2 3/4
Fourth Quarter......................... 5 3/4 4 5/8 3 3/4 2 3/4
1996
First Quarter (through February ,
1996)................................. $ $ $ $
</TABLE>
On December 21, 1995, the last trading day prior to the announcement by Key
Production and Brock that they had executed the Merger Agreement, the closing
per share sale prices of Key Production Common Stock and Brock Common Stock, as
reported on the Nasdaq National Market and the American Stock Exchange,
respectively, were $5 and $3 5/8, respectively. The Merger Agreement does not
provide for any adjustment in the Exchange Ratio in the event that either the
Key Production Common Stock or Brock Common Stock should increase or decrease
in value. See the cover page of this Joint Proxy Statement/Prospectus for a
recent closing price of Key Production Common Stock and Brock Common Stock.
Following the Merger, Key Production Common Stock will continue to be traded
on the Nasdaq National Market. Following the Merger, Brock Common Stock will
cease to be traded on the American Stock Exchange, and there will be no further
market for such stock.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF KEY PRODUCTION COMPANY, INC.
The following table sets forth selected consolidated historical financial
data of Key Production and has been derived from the audited consolidated
financial statements of Key Production for each of the five fiscal years ended
December 31, 1994, and the unaudited interim consolidated financial statements
of Key Production for the nine month periods ended September 30, 1995 and
September 30, 1994. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for the fair presentation
have been included in the unaudited interim data. This historical data should
be read in conjunction with the financial statements and notes thereto which
are incorporated by reference herein. See "Available Information" and
"Incorporation of Certain Documents by Reference." The historical results are
not necessarily indicative of results which may be expected for future periods.
<TABLE>
<CAPTION>
AS OF AND
FOR THE NINE
MONTHS ENDED AS OF AND FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas production
revenues.............. $14,168 $11,709 $16,307 $11,658 $17,598 $22,171 $30,193
Other revenues......... 40 29 330 77 43 1,273 1,018
------- ------- ------- ------- ------- ------- -------
14,208 11,738 16,637 11,735 17,641 23,444 31,211
------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Depreciation, depletion
and amortization...... 5,393 3,763 5,328 3,902 7,476 9,002 13,035
Operating costs........ 4,792 3,548 5,103 3,207 5,732 6,672 7,731
Administrative, selling
and other............. 1,076 1,034 1,432 1,535 3,707 3,809 4,032
Financing costs........
Interest expense....... 164 86 137 125 461 881 2,071
Interest income........ (10) (103) (110) (282) (40) (24) (82)
------- ------- ------- ------- ------- ------- -------
11,415 8,328 11,890 8,487 17,336 20,340 26,787
------- ------- ------- ------- ------- ------- -------
Income before taxes,
extraordinary item and
accounting change..... 2,793 3,410 4,747 3,248 305 3,104 4,424
Provision for income
taxes................. (600) (1,296) (1,804) (1,234) (38) (667) (951)
Extraordinary item..... -- -- -- (122) -- -- --
Change in accounting
for income taxes...... -- -- -- 1,603 -- -- --
------- ------- ------- ------- ------- ------- -------
Net Income............. $ 2,193 $ 2,114 $ 2,943 $ 3,495 $ 267 $ 2,437 $ 3,473
======= ======= ======= ======= ======= ======= =======
Earnings Per Share:
Before extraordinary
item and accounting
change................ $ 0.23 $ 0.21 $ 0.30 $ 0.19 $ 0.03 $ 0.22 $ 0.30
Extraordinary item..... -- -- (0.01) -- -- --
Change in accounting
for income taxes...... -- -- -- 0.16 -- -- --
------- ------- ------- ------- ------- ------- -------
Net Income Per Share... $ 0.23 $ 0.21 $ 0.30 $ 0.34 $ 0.03 $ 0.22 $ 0.30
======= ======= ======= ======= ======= ======= =======
Average Shares Out-
standing.............. 9,623 9,996 9,808 10,252 10,427 11,201 11,631
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA:
Oil and Gas Properties,
net................... $51,279 $47,186 $48,229 $27,125 $32,963 $42,748 $56,371
Total Assets........... 55,830 51,547 52,611 39,805 41,040 46,995 62,558
Long-Term Debt......... 11,400 11,500 10,000 -- 2,708 4,661 14,193
Stockholders' Equity... 36,483 33,850 34,257 35,918 32,400 35,393 40,467
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF BROCK EXPLORATION CORPORATION
The following table sets forth consolidated historical financial data of
Brock and has been derived from the audited consolidated financial statements
of Brock for the year ended December 31, 1994, the nine-month period ended
December 31, 1993 and each of the three fiscal years ended March 31, 1993, and
has been derived from the unaudited interim consolidated financial statements
of Brock for the nine month periods ended September 30, 1995 and September 30,
1994. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for the fair presentation have been
included in the unaudited interim data. This historical data should be read in
conjunction with the financial statements and notes thereto which are
incorporated by reference herein. See "Available Information" and
"Incorporation of Certain Documents by Reference". The historical results are
not necessarily indicative of results which may be expected for future periods.
<TABLE>
<CAPTION>
AS OF AND
AS OF AND FOR THE
AS OF AND FOR THE NINE FOR THE NINE MONTHS
MONTHS ENDED YEAR ENDED ENDED AS OF AND FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31,
------------------------ ------------ ------------ -------------------------------
1995 1994 1994 1993 1993 1992 1991
----------- ----------- ------------ ------------ --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................ $ 7,299 $ 7,629 $11,129 $ 8,696 $ 10,433 $ 9,661 $ 11,916
Production Expenses.... 2,788 3,462 4,462 3,550 4,165 4,249 3,892
Abandonment Expenses &
Dry Hole Costs........ 225 114 123 132 428 300 985
Depreciation, Depletion
and Amortization...... 1,785 1,646 3,247 2,454 1,840 2,092 2,009
General and
Administrative
Expenses.............. 1,632 1,725 2,274 1,938 2,313 2,210 2,624
----------- ----------- ------- ------- --------- --------- ---------
Operating Income........ 869 682 1,023 622 1,687 810 2,406
Provisions for income
taxes................ (67) (13) -- (96) (344) (43) (430)
Change in accounting
for income taxes..... -- -- -- 186 -- -- --
Interest Expense....... (631) (618) (859) (445) (470) (524) (624)
----------- ----------- ------- ------- --------- --------- ---------
Net Earnings........... $ 171 $ 51 $ 164 $ 267 $ 873 $ 243 $ 1,352
=========== =========== ======= ======= ========= ========= =========
Average Common Shares
Outstanding........... 3,904 3,919 3,943 3,943 3,893 4,007 3,996
=========== =========== ======= ======= ========= ========= =========
Earnings Per Common
Share................. $ 0.04 $ 0.01 $ 0.04 $ 0.07 $ 0.22 $ 0.06 $ 0.34
=========== =========== ======= ======= ========= ========= =========
BALANCE SHEET DATA:
Property and Equipment,
net................... $ 15,287 $ 17,729 $14,661 $16,226 $ 14,994 $ 12,924 $ 12,147
Total Assets........... 20,789 24,012 21,038 22,219 20,449 17,737 16,232
Long-Term Debt......... 9,425 12,426 9,701 10,576 8,166 7,275 5,895
Stockholders' Equity... 8,645 8,375 8,449 8,405 8,181 7,406 7,552
</TABLE>
15
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected unaudited pro forma financial
information of Key Production giving effect to the Merger under the purchase
method of accounting for business combinations, assuming an Exchange Ratio of
.6897 shares of Key Production Common Stock for each share of Brock Common
Stock, and reflecting certain assumptions described in the notes to the
unaudited pro forma consolidated condensed financial statements. This pro forma
information is derived from and should be read in conjunction with the
unaudited pro forma consolidated condensed financial statements, including
notes thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus.
See "Accounting Treatment" and "Unaudited Pro Forma Condensed Financial
Information".
The Selected Pro Forma Consolidated Income Data set forth below assumes the
Merger was consummated January 1, 1994, and the Selected Pro Forma Consolidated
Balance Sheet Data set forth below assumes the Merger was consummated on
September 30, 1995. The unaudited pro forma income statement data are not
necessarily indicative of the operating results that would have occurred had
the Merger occurred on January 1, 1994, nor are they necessarily indicative of
future operating results of the combined companies.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue................. $21,522 $26,836
------- -------
Depreciation, depletion
and amortization....... 7,239 7,854
Operating costs......... 7,580 9,565
Administrative, selling
and other.............. 1,211 1,612
Financing costs, net.... 643 580
------- -------
16,673 19,611
------- -------
Income before income
taxes.................. 4,849 7,225
Provision for income
taxes.................. 1,358 2,683
------- -------
Net Income............ $ 3,491 $ 4,542
======= =======
Net Income Per Share.... $ 0.28 $ 0.36
======= =======
</TABLE>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1995
------------------
<S> <C>
Current Assets............................................... $ 7,861
Oil and Gas Properties, net.................................. 70,216
Other Assets, net............................................ 1,302
-------
Total Assets............................................... $79,379
=======
Current Liabilities.......................................... $ 4,050
Long-Term Debt............................................... 20,825
Deferred Credits and Other Non-Current Liabilities........... 7,153
Stockholders' Equity......................................... 47,351
-------
Total Liabilities and Stockholders' Equity................. $79,379
=======
</TABLE>
16
<PAGE>
COMPARATIVE PER SHARE DATA OF KEY PRODUCTION AND BROCK
Set forth below are the net income and book value per common share data of
Key Production and Brock on an historical basis, a pro forma basis for Key
Production, and an equivalent pro forma basis for Brock. The Key Production pro
forma data was derived by combining historical consolidated financial
information of Key Production and Brock, giving effect to the Merger under the
purchase method of accounting for business combinations. The equivalent pro
forma data for Brock was calculated by multiplying the Key Production pro forma
per common share data by the Exchange Ratio. Neither company paid dividends
during any of the periods presented below.
The information set forth below should be read in conjunction with the
respective audited and unaudited consolidated financial statements and related
notes of Key Production and Brock incorporated by reference and attached to
this Joint Proxy Statement/Prospectus and the unaudited pro forma condensed
financial information and notes thereto included in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
HISTORICAL UNAUDITED PRO FORMA
-------------------- -----------------------
BROCK
KEY EQUIVALENT
KEY PRODUCTION BROCK CONSOLIDATED (.6897X)
-------------- ----- ------------ ----------
<S> <C> <C> <C> <C>
Book value per share as of:
September 30, 1995.............. $3.79 $2.21 $3.82 $2.63
Income from continuing operations:
Nine months ended September 30,
1995........................... $0.23 $0.04 $0.28 $0.19
Year ended December 31, 1994.... $0.30 $0.04 $0.36 $0.25
</TABLE>
17
<PAGE>
THE COMPANIES
KEY PRODUCTION AND MERGER SUB
Key Production is an independent oil and gas company engaged in oil and gas
exploration, development and production in the continental United States. The
Company's exploration interests are spread over 13 states with primary focus
areas in the Anadarko Basin of Oklahoma, the Rocky Mountain region, the Gulf
Coast, and the Sacramento Basin in California.
History of Key Production. Key Production was formed in 1988 to succeed to a
portion of the assets and liabilities of Apache Petroleum Company L.P.
("APC"). From 1988 through the third quarter of 1992, Key Production used
operating cash flow and property sales proceeds to reduce debt, repurchase
shares of its common stock and pay dividends. In light of its depleting
reserves and increasingly disproportionate general and administrative costs,
Key Production chose to change strategic direction in 1992.
Since inception, all of Key Production's operating and managerial functions
had been performed by Apache Corporation ("Apache") under the terms of a
management agreement between Key Production and Apache. On September 9, 1992,
Key Production's Board of Directors announced its intention to establish a
management team independent of Apache and to engage Key Production in active
operations. They elected a new Board of Directors unrelated to Apache. The new
objective of Key Production was to pursue growth through drilling and
strategic acquisitions.
Key Production has grown from zero employees prior to September 1992 to 28
full time employees at year end 1995. Key Production's business strategy is to
follow a decentralized regional approach to competing for drilling and
acquisition opportunities. In addition to Key Production's headquarters and
Rocky Mountain regional office in Denver, Colorado, Key Production has
regional offices in Tulsa, Oklahoma and Houston, Texas.
Recent Developments. During 1995 Key Production participated in the drilling
of 49 gross wells and an additional 5 wells were drilling at year end. Of the
49 wells drilled in 1995, 41 wells were either completed as producers or were
in the process of being completed at year end and 8 wells were plugged as dry
holes.
Since December 31, 1994, Key estimates that its proved reserves have
increased by between 5% and 10%.
On October 23, 1995 Key Production announced that it had bought back 331,000
shares of its own stock from Apache at a price of $5.00 per share which
reduced the number of shares outstanding at that time to 8.84 million shares.
Merger Sub. Key Acquisition One, Inc. is a wholly-owned subsidiary of Key
Production incorporated on December 19, 1995 and has conducted no business
prior to entering into the Merger Agreement.
BROCK
Brock is an independent oil and gas company whose principal business is the
acquisition and development of producing oil and gas properties. As of
December 31, 1994, Brock had oil and gas interests in 12 states, with primary
activities in Louisiana, Texas, Oklahoma, New Mexico and Kansas. Oil and gas
activities are directed from Brock's corporate headquarters in New Orleans,
Louisiana.
History of Brock. Brock began in 1948 as Big Horn Powder River Corporation,
a publicly held corporation, headquartered in Denver. This corporation engaged
in exploring for and developing oil and gas properties in the Rocky Mountain
and Mid-Continent regions of the United States and Canada. The name was
subsequently changed to Plaza Petroleum, Inc. In 1973, Plaza and its three
wholly-owned subsidiaries, Gillette Royalty and Mineral Corp., Arapahoe
Production Company and Zol-Dan Oil Company, became Brock Exploration
Corporation as a result of a merger with a privately owned company, Precise
Exploration Corporation, founded by Lawrence E. Brock, Brock's current
Chairman of the Board. As of December 31, 1995, Brock had 14 employees.
18
<PAGE>
Since 1985, Brock's primary business strategy has consisted of the
acquisition and development of producing oil and gas properties. Specifically,
its objective has been to purchase producing properties with potential for
significant increases in production through waterflooding, workovers of
existing wells, development drilling or similar operations to improve
efficiency. Brock seeks to purchase a significant working interest in each
property acquired so as to influence or control the timing of development
drilling or other operational decisions. Whenever possible, Brock assumes
operations of purchased properties. Brock finances these activities through
the utilization of a portion of its current cash flow and its available line
of credit. Brock also periodically reviews its property base identifying
properties to sell or abandon that do not meet strict performance criteria.
Recent Developments. Effective January 1, 1995, Brock Oil and Gas
Corporation ("BOGC"), a wholly- owned subsidiary of Brock, dissolved five
limited partnerships in which BOGC was the general partner. Pursuant to the
terms of the liquidation of these partnerships, the remaining oil and gas
properties owned by these partnerships were purchased by BOGC for
approximately $900,000. In connection with these transactions, BOGC assumed,
as of the effective date, the liabilities associated with the oil and gas
properties acquired from the partnerships.
Since December 31, 1994, Brock estimates that its proved reserves have
increased by approximately 15%.
In March 1994, Brock purchased an interest in 21 oil wells located in the
Shafter Lake Field in Andrews County, Texas for $2.2 million. In December
1994, Brock sold approximately 60% of its interest in these wells for $2.2
million. The proceeds from this sale were used to reduce outstanding debt.
Effective August 1, 1995 Brock purchased an interest in 23 gas wells in the
Hooker Field in Texas County, Oklahoma for $925,000. The property currently
produces 1,000 Mcf per day net to Brock.
Effective September 1, 1995, BOGC entered into a 12 month agreement with an
industry partner to evaluate and acquire producing properties, leasehold,
mineral or fee acres to be potentially developed, and generate economically
feasible oil and/or gas prospects. BOGC's participation in any of these above
mentioned activities is 25%. BOGC has issued a letter of credit in favor of
the industry partner in the amount of $3 million to secure its obligations
under this agreement. As of January 5, 1996, expenditures of approximately
$293,000 have occurred or have been committed as a result of this agreement.
In the fourth quarter of 1995, the Pension Plan purchased annuities to
settle obligations owed to participants who were then receiving payments under
the Pension Plan. Obligations owed to these participants represented
approximately 77% of the total benefit obligations. Brock will accelerate the
amortization of the prepaid pension asset during the fourth quarter of 1995
resulting in a decrease of the prepaid pension asset of approximately
$235,000.
POST-MERGER PROFILE AND STRATEGY
Oil and Gas Interests. As a result of the Merger, Key will have interests in
the Rocky Mountains, California, the Mid-continent, and Gulf Coast. Based on
the Key 1994 10-K and Brock 1994 10-K, post-Merger Key will have interests in
682 gross (95.2 net) gas wells and 1148 gross (134.5 net) oil wells. The pro
forma December 31, 1994 undeveloped acreage post-Merger will be approximately
546,000 net acres.
Pro forma December 31, 1994 post-Merger reserves of Key will be 46.7 BCF of
natural gas and 6.1 million barrels of oil. Key estimates that as of December
31, 1995, the pro forma post-Merger reserves have increased by between 8% and
12% on an equivalent Mcf basis.
Strategy. After the Merger, Key intends to continue its strategy of growth
of reserves and production through a decentralized regional approach to
competing for drilling and acquisition opportunities. In addition to Key's
offices in Denver, Tulsa, and Houston, Key will open an exploration and
acquisition office in New Orleans with some of the former Brock employees.
Key anticipates that the combined entity will be able to realize substantial
reductions in general and administrative expenses from the pre-Merger combined
expenses of Brock and Key. All accounting and administrative functions will be
consolidated in Denver. It is expected that the majority of the cost
reductions will be through elimination of duplicative personnel, accounting
and other systems, and certain other administrative and fixed costs of the two
pre-Merger companies. The costs of the former Brock personnel who will become
Key's New Orleans regional exploration and acquisition employees will be
capitalized in accordance with full cost accounting rules.
19
<PAGE>
Key has a $50 million revolving line of credit with NationsBank subject to
borrowing base limits which are tied to the value of Key's oil and gas
reserves. The combined value of Key's and Brock's oil and gas reserves
subsequent to the Merger will be more than adequate to allow Key to increase
its currently elected $22 million borrowing base to the level necessary to
repay Brock's existing debt. Under this agreement, Key's interest rate is a
function of its debt to capitalization ratio. Immediately after the Merger,
Key's debt to capitalization ratio will be approximately the same as before
the Merger. This is because the new equity issued in the Merger is
approximately in the same proportion to the Brock debt assumed in the Merger
as Key's pre-Merger equity was to Key's pre-Merger debt. Since Key's current
interest rate of LIBOR plus .75% is substantially lower than Brock's interest
rate, Key will pay off Brock's debt after the Merger by borrowing under Key's
revolving line of credit with NationsBank.
The combined debt level immediately after the Merger is expected to be
approximately $26 million, leaving Key with substantial liquidity and the
ability to continue an active drilling program and make future acquisitions.
Management. Key's board of directors and officers will be unchanged after
the Merger. Certain information about Key's management is set forth below.
Information About Key Production's Directors.
Certain biographical information, including principal occupation and
business experience during the last five years, about each of Key Production's
directors is set forth below.
F. H. MERELLI, 59, has been chairman of the board of directors, president
and chief executive officer of Key Production since September 9, 1992. From
July 1991 to September 1992, Mr. Merelli was engaged as a private consultant
in the oil and gas industry. Mr. Merelli was president and chief operating
officer of Apache Corporation, and president, chief operating officer and a
director of Key from June 1988 to July 1991, at which time he resigned from
those positions in both companies. He was president of Terra Resources, Inc.
from 1979 to 1988.
CORTLANDT S. DIETLER, 74, is an advisory director of Panhandle Eastern
Corporation. He was chairman of the board and chief executive officer of
Associated Natural Gas Corporation from January 1987 and December 1985,
respectively, and chairman of the board and chief executive officer of that
company's principal operating subsidiary, Associated Natural Gas, Inc., from
December 1986 and January 1989, respectively. Effective March 1995, Mr.
Dietler resigned from each position with Associated Natural Gas Corporation
and its subsidiaries.
TIMOTHY J. MOYLAN, 39, has been the president and chief executive officer of
BelRad Group, Inc., successor to Mainline Enertech, since 1986. He served as
chief executive officer and president of Natural Resources Group, Inc. from
1983 to 1990. He is a director of Energy West Corporation.
Information About Standing Committees of Key Production's Board of Directors
and Meetings.
Key Production's board of directors has an audit committee. The audit
committee members are Cortlandt S. Dietler and Timothy J. Moylan. The audit
committee reviews Key Production's independent auditors' audit and review
programs and procedures and the scope and results of their examinations. It
also examines professional services provided by the auditors and evaluates
audit costs and related fees. Additionally, the audit committee reviews the
financial statements and the adequacy of Key Production's system of internal
accounting controls. The audit committee makes recommendations to the board of
directors relating to the independent auditors and to their engagement or
discharge.
Key Production's board of directors has established a compensation committee
for the purpose of determining compensation for executive officers of Key
Production. During fiscal year 1994, the compensation committee consisted of
Cortlandt S. Dietler and Timothy J. Moylan.
One meeting of Key Production's board of directors and one meeting of the
audit and compensation committees were held during 1994. Other board action
throughout the year was accomplished by written consent. Each incumbent
director attended all board meetings and all meetings of committees on which
he was a member.
20
<PAGE>
Information About Executive Officers of Key Production.
Certain biographical information concerning the executive officers of Key
Production is set forth below. Biographical information concerning F. H.
Merelli may be found under "--Information About Key Production's Directors."
MONROE W. ROBERTSON, 46, has been with Key Production since September 10,
1992. Since February 1994, he has served as senior vice president and
corporate secretary and prior to that time as vice president and corporate
secretary. From August 1988 to July 1992, he was employed by Apache
Corporation in various capacities, the most recent of which was director of
operational planning. From 1986 to 1988, Mr. Robertson was director of
corporate planning for Terra Resources, Inc. From 1973 to 1986, Mr. Robertson
was employed by Gulf Oil Corporation.
CATHY L. ANDERSON, 40, has been controller of Key Production since January
15, 1993. From July 1985 to January 1993, Ms. Anderson was employed by Arthur
Andersen & Co., a public accounting firm, in various capacities, the most
recent of which was audit manager.
STEPHEN P. BELL, 41, has been vice president--land of Key Production since
February 2, 1994. From March 1991 to February 1994, he was president of
Concord Reserve, Inc., a privately-held independent oil and gas company. He
was employed by Pacific Enterprises Oil Company (formerly Terra Resources,
Inc.) as mid-continent regional manager from February 1990 to February 1991
and as land manager from August 1985 to January 1990.
Key Production Executive Compensation.
Summary Compensation Table
The following table sets forth information concerning compensation earned in
1994, 1993 and 1992 by the Chief Executive Officer and the only executive
officer of Key Production whose salary exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------------- ---------------
SECURITIES
UNDERLYING ALL OTHER
NAME OF INDIVIDUAL AND POSITION FISCAL YEAR SALARY/(1)/ BONUS OPTIONS AWARDED COMPENSATION
- ------------------------------- ----------- -------------- ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
F. H. Merelli, Chairman, 1994 $150,000 -- -- $ 9,645 /(3)/
President and Chief 1993 $150,000 -- -- $ 8,732 /(3)/
Executive Officer 1992 $ 50,000 /(2)/ -- 500,000 $ 2,000 /(3)/
Monroe W. Robertson, 1994 $115,000 -- -- $ 4,662 /(3)/
Senior Vice President
and 1993 $115,000 -- 150,000 $ 4,600 /(3)/
Corporate Secretary 1992 $ 38,333 /(2)/ -- -- $ 1,533 /(3)/
</TABLE>
- ----------
/(1)/Includes amounts earned but deferred at the election of the officer.
/(2)/Salary paid from September 1, 1992, to December 31, 1992.
/(3)/Consists of Key Production's matching contribution pursuant to Key
Production's 401(k) plan in which all employees are eligible to
participate, and for Mr. Merelli includes the one-year term cost of life
insurance provided for the Chief Executive Officer, which in fiscal 1994
was $3,601.
Aggregated Option Exercises In Fiscal Year 1994 and 1994 Fiscal Year-End
Option Values
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-
MONEY
NUMBER OF UNEXERCISED OPTIONS AT
NUMBER OF OPTIONS AT FISCAL YEAR FISCAL YEAR
SHARES END END/(3)/
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
F. H. Merelli -- -- 333,334 166,666 /(1)/ $541,668 $270,832
Monroe W. Robertson -- -- 50,000 100,000 /(2)/ $106,250 $212,500
</TABLE>
- ----------
/(1)/Options were granted September 1, 1992, and vest at a rate of one-third
per year over three years. These options were not granted under Key
Production's 1992 Stock Option Plan.
/(2)/Options were granted on January 4, 1993, and vest at a rate of one-third
per year over three years. These options were granted under Key
Production's 1992 Stock Option Plan.
/(3)/Amount represents the closing price of Key Production's common stock at
December 30, 1994, on The NASDAQ Stock Market, less the exercise price
multiplied by the number of exercisable/unexercisable stock options at
December 31, 1994, that had an exercise price less than the market value
at that date.
21
<PAGE>
Director Compensation.
Key Production's current non-employee directors receive no compensation for
their affiliation with Key Production other than the stock options granted
under the Key Production 1992 Stock Option Plan for Non-Employee Directors.
Both Messrs. Dietler and Moylan were granted stock options for 45,000 shares
on December 9, 1992, at an exercise price of $2.875 per share. One-third of
these options vested on December 9, 1993, one-third vested on December 9,
1994, and the remaining one-third vested on December 9, 1995. The directors
are also reimbursed for out-of-pocket expenses relating to their attendance at
board of director meetings.
Employment Agreements and Change-in-Control Arrangements.
Key Production entered into an employment agreement with Mr. Merelli
pursuant to which he has agreed to serve in his present capacity for an
indefinite term. The employment agreement provides that Mr. Merelli shall
receive a base annual salary of $150,000. The base salary may be increased
(but not decreased) by the compensation committee of the board of directors.
In addition to the base salary, the employment agreement provides for the
grant to Mr. Merelli of a stock option covering 500,000 shares of Key
Production's Common Stock and also provides that Mr. Merelli shall be eligible
for incentive bonuses under any incentive program for executives of Key
Production which is adopted by the board of directors. No such incentive bonus
program has been adopted as of the date of this Joint Proxy
Statement/Prospectus.
The employment agreement further provides that in the event of termination
of his employment by Key Production without cause or by reason of death or
disability, Mr. Merelli or his estate shall receive his then current monthly
salary for a period of twenty-four months. Key Production is also obligated to
maintain insurance on the life of Mr. Merelli in the amount of $500,000. The
stock option agreement with Mr. Merelli provides that upon a change in control
of Key Production, all of Mr. Merelli's outstanding options will be
immediately vested. Mr. Merelli is a participant in the Key Production
Company, Inc. Income Continuance Plan which provides for the continuation of
salary and benefits for certain employees in the event of a change in control
of Key Production. Any benefits paid to Mr. Merelli pursuant to this plan
would be in lieu of and not in addition to any payments pursuant to his
employment agreement.
Key Production entered into an employment agreement with Monroe W. Robertson
in which he has agreed to serve in his present capacity for an indefinite
term. The agreement provides that Mr. Robertson shall receive a base annual
salary of $115,000. The base salary may be increased (but not decreased) by
the compensation committee of the board of directors. Mr. Robertson is also
eligible to receive incentive bonuses under any incentive program for
executives of Key Production which may be adopted by the board of directors.
The agreement also provides that if Mr. Robertson's employment is terminated
without cause or by reason of his death or disability, Mr. Robertson or his
estate shall receive his then current monthly salary for a period of twenty-
four months. The stock option agreement with Mr. Robertson provides that upon
a change in control of Key Production, all of Mr. Robertson's outstanding
options will be immediately vested. Mr. Robertson is a participant in the Key
Production Company, Inc. Income Continuance Plan which provides for the
continuation of salary and benefits for certain employees in the event of a
change in control of Key Production. Any benefits paid to Mr. Robertson
pursuant to this plan would be in lieu of and not in addition to any payments
pursuant to his employment agreement.
Compensation Committee Interlocks and Insider Participation.
Neither Mr. Moylan nor Mr. Dietler, the members of the compensation
committee, was at any time during fiscal year 1994 or any preceding fiscal
year an officer or employee of Key Production or any of its subsidiaries.
During fiscal year 1994, no executive officer of Key served as a director or
member of a compensation (or similarly empowered) committee for any entity
whose executive officer or officers served on Key Production's compensation
committee.
22
<PAGE>
Transactions With Affiliates
During 1994, Key Production entered into three transactions with Apache
Corporation which, at that time, was the beneficial owner of more than five
percent of Key Production's Common Stock. In July, 1994, Key Production
exchanged approximately 200,000 net undeveloped acres in the Green River Basin
of Wyoming for 800,000 shares of Key Production's Common Stock held by Apache.
Later in July, 1994, Key Production purchased 200,000 shares of Key Production
Common Stock from Apache at a price of $4.50 per share and in December, 1994,
Key Production purchased an additional 91,000 shares from Apache at $4.75 per
share. In October 1995, Key purchased 331,000 additional shares from Apache at
$5.00 per share.
THE SPECIAL MEETINGS
TIME, DATE, PLACE AND PURPOSE OF SPECIAL MEETINGS
The Key Production Special Meeting will be held on Thursday, March 28, 1996,
at 10:00 a.m., local time, at the University Club, 1673 Sherman Street,
Denver, Colorado, for the purpose of approving the issuance and reservation
for issuance of up to 2,800,000 shares of Key Production Common Stock (the
"Key Production Issuance of Common Stock") pursuant to the Merger Agreement,
as required by the rules of the Nasdaq National Market. The Brock Special
Meeting will be held at 10:00 a.m., local time, on March 28, 1996, at the City
Energy Club of New Orleans, 1100 Poydras Street, New Orleans, Louisiana for
the purpose of approving and adopting the Merger Agreement, as required under
Delaware law.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Key Production Common Stock outstanding at the
close of business on the Record Date (February 9, 1996) are entitled to notice
of, and to vote at, the Key Production Special Meeting. Only holders of record
of Brock Common Stock at the close of business on the Record Date are entitled
to notice of, and to vote at, the Brock Special Meeting.
On the Record Date, there were approximately 5,386 holders of record of Key
Production Common Stock, with 8,849,468 shares of Key Production Common Stock
issued and outstanding. Each share of Key Production Common Stock entitles the
holder thereof to one vote on each matter submitted for stockholder approval.
See "Principal Stockholders of Key Production and Brock--Key Production" for
information regarding persons known to the management of Key Production to be
the beneficial owners of more than 5% of the outstanding Key Production Common
Stock.
There were approximately 2,110 holders of record of Brock Common Stock on
the Record Date, with 3,815,181 shares of Brock Common Stock outstanding and
entitled to vote. Each such share of Brock Common Stock will be entitled to
one vote on each matter to be acted on at the Brock Special Meeting. See
"Principal Stockholders of Key Production and Brock--Brock" for information
regarding persons known to the management of Brock to be the beneficial owners
of more than 5% of the outstanding Brock Common Stock.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies that are not revoked will be voted at the Key
Production Special Meeting and the Brock Special Meeting, as applicable, in
accordance with the instructions contained therein. If a holder of Key
Production Common Stock executes and returns a proxy and does not specify
otherwise, the shares represented by such proxy will be voted "for" approval
of the Key Production issuance of Common Stock in accordance with the
recommendation of the Board of Directors of Key Production. If a holder of
Brock Common Stock executes and returns a proxy and does not specify
otherwise, the shares represented by such proxy will be voted "for" approval
and adoption of the Merger Agreement in accordance with the recommendation of
the Board of Directors of Brock. A stockholder of Key Production or a
stockholder of Brock who has executed and returned a proxy may revoke it at
any time before it is voted at the appropriate Special Meeting by (i)
executing and returning a proxy bearing a later date, (ii) filing written
notice of such revocation with the Secretary of Key
23
<PAGE>
Production or Brock, as appropriate, stating that the proxy is revoked or
(iii) attending the appropriate Special Meeting and voting in person.
VOTE REQUIRED
Key Production. Key Production's Bylaws provide that the presence at the Key
Production Special Meeting, in person or by proxy, of the holders of a
majority of the outstanding shares of Key Production Common Stock entitled to
vote thereat will constitute a quorum for the transaction of business. The
issuance of Key Production Common Stock does not, under state law, require
stockholder approval. However, the rules of the Nasdaq National Market
require, as a prerequisite to the listing on the Nasdaq National Market of the
shares of Key Production Common Stock that are issued pursuant to the Merger
Agreement, that such issuance be approved by Key Production's stockholders.
Approval of such issuance will require the vote of a majority of the shares
present, in person or by proxy, and entitled to vote. Key stockholders who do
not return proxies or attend the Key Production Special Meeting will have no
effect on the vote. Key Production Common Stock held by Key stockholders who
return proxies and abstain from voting on the proposal will be counted in
determining the number of shares present and entitled to vote and will have
the same effect as a vote against the proposal. Broker non-votes will have no
effect upon the outcome of the vote.
Brock. The presence at the Brock Special Meeting, in person or by proxy, of
the holders of a majority of the outstanding shares of Brock Common Stock
entitled to vote thereat will constitute a quorum for the transaction of
business, and approval and adoption of the Merger Agreement requires the
affirmative vote of two-thirds of the issued and outstanding Brock Common
Stock entitled to vote thereon. On the Record Date, there were 3,815,181
shares of Brock Common Stock outstanding and entitled to vote at the Brock
Special Meeting. In determining whether the Merger Agreement has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as a vote against the Merger Agreement. On the Record
Date, the directors and executive officers of Brock held approximately 39.39%
of the outstanding shares of Brock Common Stock entitled to vote on each
matter to be acted upon at the Brock Special Meeting. Each of Brock's officers
and directors has indicated his or her present intention to vote or direct the
vote of all such shares of Brock Common Stock entitled to vote in favor of the
proposal to approve the Merger Agreement. The Brock Trust, which held 325,811
shares of Brock Common Stock as of the Record Date (or approximately 8.5% of
the outstanding shares entitled to vote on each matter to be acted upon at the
Brock Special Meeting at such date), has agreed to vote such shares in favor
of approval and adoption of the Merger Agreement, and against any business
combination proposal or other matter that may interfere or be inconsistent
with the Merger or the Merger Agreement (including, without limitation, a
Competing Transaction). Such Stockholder Agreement is not subject to the
continued support of the Board of Directors of Brock in recommending approval
and adoption of the Merger Agreement (although such Stockholder Agreement
would terminate upon a termination of the Merger Agreement). See "Stockholder
Agreement."
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of each of Key Production and Brock may solicit proxies from their
respective stockholders by personal interview, telephone, telegram or
otherwise. Key Production and Brock will each bear the costs of the
solicitation of proxies from their respective stockholders, except that Key
Production and Brock will each pay one-half of the cost of printing this Joint
Proxy Statement/Prospectus and all regulatory filing fees other than SEC
filing fees. Arrangements will also be made with brokerage firms and other
custodians, nominees and fiduciaries who hold of record voting securities of
Key Production or Brock for the forwarding of solicitation materials to the
beneficial owners thereof. Key Production and Brock will reimburse such
brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket
expenses incurred by them in connection therewith. Brock has engaged the
services of Corporate Investor Communications, Inc. to distribute proxy
solicitation materials to brokers, banks and other nominees and to assist in
the solicitation of proxies from Brock stockholders for a fee of $4,000 plus
reasonable out-of-pocket expenses. Key Production has also engaged the
services of Corporate Investor Communications, Inc. to distribute proxy
solicitation materials to brokers, banks and other nominees and to assist in
the solicitation of proxies from Key Production stockholders for a fee of
$4,000 plus reasonable out-of-pocket expenses.
24
<PAGE>
OTHER MATTERS
At the date of this Joint Proxy Statement/Prospectus, the Boards of
Directors of Key Production and Brock do not know of any business to be
presented at their respective Special Meetings other than as set forth in the
notices accompanying this Joint Proxy Statement/Prospectus. If any other
matters should properly come before the respective Special Meetings, it is
intended that the shares represented by proxies will be voted with respect to
such matters in accordance with the judgment of the persons voting such
proxies.
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, Merger Sub will
merge with and into Brock with Brock becoming the Surviving Corporation, and
each outstanding share of Brock Common Stock (other than shares of Brock
Common Stock held in the treasury of Brock or owned by Key Production or by
any direct or indirect wholly-owned subsidiary of Key Production or of Brock,
all of which will be canceled), will be converted into .6897 shares of Key
Production Common Stock. Any resulting fractional shares will be settled in
cash.
Based on the number of shares of Key Production Common Stock and Brock
Common Stock outstanding as of the Record Date, approximately 2,800,000 shares
of Key Production Common Stock will be issuable pursuant to the Merger
Agreement (assuming exercise prior to the Effective Time of the Brock
Options), representing approximately 24% of the total Key Production Common
Stock to be outstanding after such issuance.
BACKGROUND
During the summer of 1993, Brock's Board of Directors determined that the
consolidation among independent oil and gas companies then taking place as
well as Brock's financial and operating circumstances justified exploring the
possibility of a business combination involving Brock in an effort to maximize
the value of Brock to the stockholders. As a result, the Board of Directors
authorized management to investigate the possibility of pursuing such a
transaction with certain oil and gas companies as well as certain public
utilities known to be active or interested in the acquisition of oil and gas
properties. In connection with these efforts, Brock's management retained an
investment advisor to assist it in compiling information and contacting
potentially interested third parties. Brock subsequently entered into
confidentiality agreements with certain of these companies and provided these
companies with detailed information on Brock's oil and gas properties and
other operations. These activities were terminated during the fall of 1993
when it was determined by the Board of Directors that sufficient interest from
these third parties in pursuing a business combination with Brock did not
exist. The Board of Directors determined to continue to evaluate and monitor
Brock's financial and operating conditions as well as conditions in the oil
and gas industry in the event that circumstances should again warrant
consideration of a business combination involving Brock.
Brock's Board of Directors, in connection with its semi-annual review of
Brock's overall performance and objectives, determined in November 1994 that
the conditions then existing in the oil and gas industry were such that it was
in the best interests of Brock's stockholders to explore the possible sale of
Brock in order to maximize the value of Brock to the stockholders. In response
to this decision, on November 18, 1994, Brock issued a press release
indicating that the Board of Directors had authorized management to solicit
indications of interest for a cash merger with Brock and would provide
detailed information on Brock's oil and gas properties and operations to
interested parties.
Following this announcement, management of Brock began contacting those
companies that it believed might be interested in exploring the possible
acquisition of Brock and responding to inquiries from additional companies.
During this period, Brock entered into confidentiality agreements with
approximately 40 companies
25
<PAGE>
and distributed a summary descriptive memorandum to each of these companies.
Subsequently, during February and March of 1995, management provided 17 of the
interested parties with more detailed information regarding Brock's oil and
gas properties, financial condition and operations. Brock also provided 12 of
these interested parties with presentations from Brock's management on Brock's
various properties and operations. Each of the parties expressing an interest
in exploring the acquisition of Brock was provided with the opportunity of
visiting Brock's facilities and reviewing Brock's books and records and was
also provided with a form of agreement and plan of merger providing for the
cash merger of Brock. Each of the interested parties was also informed that
any proposals for the acquisition of Brock should be submitted to Brock no
later than April 10, 1995. Brock also required that acquisition proposals from
interested parties be in the form of cash offers for all outstanding shares of
Brock Common Stock. On March 14, 1995, Brock retained Stephens to render an
opinion as to the fairness of the merger consideration from a financial point
of view to the public stockholders of Brock.
On April 10, 1995, Brock received five proposals for the acquisition of
Brock through a cash merger, one proposal for the acquisition of Brock through
a stock merger and one proposal contemplating a tender offer for a portion of
Brock's outstanding shares. Several of the proposals received were presented
in terms of being general indications of interest, subject to conditions such
as obtaining financing or indicating price ranges that were either deemed
inadequate or of such a preliminary or conditional nature that they were not
in a form capable of final evaluation by Brock's Board of Directors.
On April 18, 1995, Brock's Board of Directors met to review the results of
the solicitation process, to discuss the alternatives available to Brock and
to receive the results of Stephens' evaluation of Brock and the highest valued
proposal that had been received by Brock to that point. Following a review by
the Board of Directors of these various items, the Board of Directors
authorized senior management of Brock to explore further with those parties
submitting the highest valued proposals the definitive terms and conditions
upon which they would be willing to acquire Brock in an all cash merger and
their financial ability to consummate the acquisition of Brock.
During the period from April 18 through May 1, 1995 management of Brock
contacted two of the parties that had submitted proposals in an effort to
determine the definitive terms and conditions upon which either of these
parties would be willing to acquire Brock. Management then entered into
discussions with both of the bidders, but concluded in July 1995 that one
bidder did not have the ability to obtain financing and the other terminated
discussions when it entered into a binding agreement to acquire another oil
and gas company. In addition, during this period management also contacted two
other companies that had expressed an interest in acquiring Brock but that had
not submitted proposals to determine if any interest in pursuing the
acquisition of Brock on the part of either of these companies existed. Both of
these companies subsequently confirmed that they were not in a position to
pursue an acquisition of Brock.
On July 26, 1995, Brock's Board of Directors announced that it had decided
to terminate seeking indications of interest for a cash merger of Brock. The
Board determined that, due to an industry-wide decline in the price of natural
gas and, to a lesser extent, oil and the resulting impact on prices received
in cash sales of oil and gas properties, it was in the Brock stockholders'
interest to terminate exploring the possibility of selling Brock through a
cash merger. Brock also publicly announced that it intended to continue to
explore alternatives involving the sale or combination of Brock as well as
other transactions intended to maximize its value for its stockholders. After
exploring alternatives available for a cash merger, the Board of Directors
concluded that the most likely acquiror of Brock would be another independent
oil and gas company. The Board noted that traditionally independent oil and
gas companies have found stock-for-stock mergers more attractive, especially
in times of reduced cash flow as a result of reduced prices then being
received for gas and, to a lesser extent, oil.
Between July 15 and November 20, 1995 Brock either contacted or received
unsolicited contacts from 28 potential acquirors. These inquiries led to
several new indications of interest, including one from Key, and two re-
evaluations from parties which had previously submitted bids to Brock.
26
<PAGE>
Brock contacted Key on July 27, 1995 to explore the possibility of a merger
of Brock and Key. Due to the depressed futures market prices for natural gas,
Key informed Brock that a cash offer for Brock's assets would have to be too
low to be attractive to Brock. Key suggested a stock merger which could reduce
the combined general and administrative expense and provide economies of scale
for a combined company that would have good growth potential and provide Brock
shareholders with improved liquidity and the ability to continue to share in
the price upside which would occur if natural gas prices increase.
In mid August, Key prepared a comparison of Brock and Key ratios of income,
cash flow, book value, stock market price and liquidation value per share from
publicly available documents. As a result of this analysis, Key proposed a
merger with Brock shareholders receiving one Key share for each 1.6 Brock
shares.
Over the next several weeks, there were a number of discussions between the
chairmen of Brock and Key and among other senior officers of the two
companies. During this period, Brock's management also continued discussions
with other companies that had indicated an interest in acquiring Brock.
Representatives of Brock visited Key's offices in October.
In a meeting at Brock's offices on November 2, 1995, Brock made a counter
offer for a merger at a ratio of one Key share for each 1.3 Brock shares. At
that meeting Key rejected the Brock offer and provided an updated table of
ratios showing that the October 27, 1995 stock price was $3.125 for Brock and
$5.375 for Key, resulting in a 1.72 to one market price ratio. Key also
observed that third quarter earnings had been announced since Key's last offer
and Key's third quarter earnings were eight cents per share while Brock's were
zero.
During November and December, senior officers of Key visited Brock's offices
for a total of seven days to review their properties and accounts and
representatives of Brock and Stephens visited Key's offices for seven days to
review Key's properties, accounts, and drilling upside potential. Also during
this period Mr. Brock stayed in contact with members of the Brock Board of
Directors to brief them on the status and progress of negotiations and to
obtain the director's views on various matters, and Mr. Merelli stayed in
contact with members of the Key Board of Directors to brief them on the status
of negotiations. Through arms-length negotiations Brock and Key agreed upon an
exchange ratio of one share of Key Production Common Stock for each 1.45
shares of Brock Common Stock. All negotiations between Key and Brock were
conducted by the senior officers of each of the companies.
At a special meeting of Brock's Board of Directors held on December 21,
1995, the Board of Directors of Brock received detailed descriptions and
analyses of the Merger by its management and financial and legal advisors. At
the December 21st Board meeting, after consideration of the various factors
and for the reasons described below, the Board of Directors of Brock approved
by unanimous vote of all directors present at the meeting the Merger Agreement
and related transactions.
At a special meeting of Key's Board of Directors held on December 21, 1995,
Key's Board reviewed a detailed presentation and analysis of the Merger by
Key's management and legal advisors. At the December 21, 1995 Board meeting,
after consideration of the various factors and the reasons described below,
the Board of Directors of Key approved by a unanimous vote the Merger
Agreement and related transactions.
KEY PRODUCTION'S REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF DIRECTORS
OF KEY PRODUCTION
Key Production's Board of Directors believes the terms of the Merger are
fair to and in the best interests of Key Production and its stockholders and
has unanimously approved the Merger Agreement and recommends that Key
Production's stockholders vote FOR the issuance of Key Production Common Stock
in connection with the Merger Agreement.
In reaching its conclusion, Key Production's Board of Directors considered
among other factors:
(i) Information concerning the financial performance and condition,
business operations, and future prospects of both Key Production and
Brock;
(ii) The recent and prior market prices of Key Production Common Stock and
Brock Common Stock;
27
<PAGE>
(iii) Projections of results of the combined companies which indicate that
after reductions in overhead from consolidation and realization of
economies of scale the Merger would be non-dilutive and would
increase:
(a) Net income per share,
(b) Cash flow per share,
(c) Reserves per share,
(d) Production per share,
(e) Equity per share, and
(f) Market capitalization and liquidity.
During the negotiations, the relative market price of Key Production and
Brock Common Stock fluctuated between ratios of 1.8 to one to 1.38 to one.
Key's Board of Directors considered both stocks to be undervalued in the
market and that a trade based on a 1.45 ratio would lead to a stronger
combined company with improved prospects that would hopefully lead to higher
market valuations for the combined company. Key's Board of Directors did not
think that the fact that Brock Common Stock might trade at a higher or lower
ratio than 1.45 to one from day to day would affect the desireability of the
Merger. Brock Common Stock is relatively illiquid and large blocks of Brock
Common Stock could not be bought or sold at current market prices without
adversely affecting the market.
A projection of the results for the combined companies presented to Key
Production's Board of Directors by Key's management at the board meeting held
on December 21, 1995 showed increases in revenues, net income, cash flow,
production and equity per share for the combined entity, as well as an
increase in debt per share, based on the 1.45 to one Exchange Ratio. After
consideration of all of those factors, and without assigning weight to any
specific factor, the Board of Directors determined that the Merger was fair to
the Key stockholders.
BROCK'S REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF DIRECTORS OF BROCK
Brock's Board believes that the terms of the Merger are fair to and in the
best interests of Brock and its stockholders and has unanimously approved the
Merger Agreement and recommends that Brock's stockholders vote FOR approval
and adoption of the Merger Agreement and the Merger.
In reaching its conclusion, Brock's Board considered, among other factors:
(i) Information concerning the financial performance and condition,
business operations and prospects of Brock;
(ii) Current industry, economic and market conditions, which have
encouraged business combinations and other strategic alliances in the
oil and gas industry;
(iii) The process of soliciting indications of interests for the
acquisition of Brock;
(iv) Recent and prior market prices of Brock Common Stock;
(v) The structure of the transaction and terms of the Merger Agreement and
the exchange ratio which were the result of arm's length negotiations
between Key Production and Brock;
(vi) The financial analyses and opinion of Stephens described below;
(vii) The fact that the Merger would provide holders of Brock Common Stock
with the opportunity to maintain a continuing equity interest in the
combined companies that is more liquid than Brock Common Stock.
28
<PAGE>
Brock's Board of Directors did not assign weight to any specific factors and
generally considered all of the factors when evaluating the Merger Agreement.
In addition, the Board of Directors did not base its evaluation of the Merger
Agreement on the relative stock values at a single point in time. The Board of
Directors discussed the relative current and historical trading prices of
Brock Common Stock and Key Production Common Stock, the relative inactive
trading market for Brock Common Stock and the opinion rendered by Stephens
that the merger consideration was fair from a financial point of view to the
disinterested shareholders of Brock.
OPINION OF BROCK FINANCIAL ADVISOR
Brock retained Stephens Inc. ("Stephens") to review the financial terms of
the Merger and express an opinion as to the fairness from a financial point of
view of such terms to the disinterested shareholders of Brock. For the
purposes of the opinion, the term "disinterested shareholders" means holders
of Brock's one class of publicly traded common stock other than (1) directors
and officers of Brock and (2) Lawrence E. Brock, Mr. Brock's immediate family
or any entity for which a Brock family member is a beneficiary, either
directly or indirectly. Stephens excluded Brock's directors and officers and
the Brock family from their opinion because the Brock family and Brock's
directors and officers will receive no additional consideration for their
Brock Common Stock in connection with the Merger other than that received by
all of the holders of Brock Common Stock. Except as set forth under the
heading "The Merger--Interests of Certain Persons in the Merger," Brock is not
aware of any interest in the Merger than any such individuals have that is
separate from their interests as holders of Brock Common Stock. The summary
set forth below of Stephens' fairness opinion does not purport to be a
complete description of its analyses or presentation to the Board of Directors
of Brock. Each of its analyses must be considered as a whole and selecting
portions of the analyses and of the factors considered, without considering
all factors and analyses, will result in an incomplete view of the processes
underlying its opinion. In its analyses, Stephens made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of either Brock or Key
Production (collectively the "Companies"). Any estimates contained therein are
not necessarily indicative of actual values, which may be significantly more
or less favorable than as set forth therein. Estimates of value do not purport
to be appraisals or necessarily reflect the values which may be realized if
assets are sold separately. Because such estimates are inherently subject to
uncertainty, neither Brock, Key Production, Stephens nor any other person can
assume responsibility for their accuracy.
On December 21, 1995, Stephens delivered in writing its opinion that, as of
such date, the consideration to be received by Brock in connection with the
Merger is fair, from a financial point of view, to the disinterested
shareholders of Brock. The full text of Stephens' written opinion, which
contains a description of the assumptions made, the matters considered by
Stephens and the limits of its review, is attached hereto as Appendix II, and
is incorporated by reference herein. Shareholders of Brock are urged to read
the opinion carefully in its entirety. The following is a summary of selected
analyses presented by Stephens to the Brock Board of Directors on December 21,
1995 (the "Stephens Report") in connection with its December 21, 1995 opinion.
In connection with its opinion, Stephens, among other things, (i) analyzed
certain publicly available financial statements and reports regarding Brock
and Key Production; (ii) analyzed certain internal financial statements and
other financial and operating data (including financial projections)
concerning Brock and Key Production prepared by management of Brock and Key
Production; (iii) reviewed certain reserve information provided by Brock and
Key Production relating to the producing properties of Brock and Key
Production, including reserve reports prepared or audited by independent
petroleum engineers for Brock and Key Production; (iv) analyzed, on a pro
forma basis, the effect of the Merger on Key Production's balance sheet,
capitalization ratios, earnings, cash flow and book value both in the
aggregate and, where applicable, on a per share basis; (v) reviewed the
reported prices and trading activity for the common stock of Brock and Key
Production; (vi) compared the financial performance of Brock and Key
Production and the price and trading activity of the common stock of Brock and
Key Production with that of certain other comparable publicly-traded companies
and their securities; (vii) reviewed the financial terms, to the extent
publicly available, of certain comparable transactions; (viii) reviewed the
Merger Agreement and related documents; (ix) discussed with management of
29
<PAGE>
Brock the operations of and future business prospects for Brock; (x) discussed
with management of Key Production the operations of and future business
prospects for Key Production and the anticipated financial consequences of the
Merger to Key Production; and (xi) performed such other analyses and
examinations as it deemed necessary or appropriate.
Stephens did not independently verify the Brock and Key Production
information considered in its review, and for the purpose of its opinion
assumed and relied upon the accuracy and completeness of all such information.
With respect to the reserve reports and financial projections, Stephens
assumed that they had been reasonably prepared on bases reflecting the best
current available estimates and judgments relating to Brock and Key
Production's current oil and gas properties and their future financial
performance. Stephens did not make an independent evaluation or appraisal of
each of the Companies' properties, nor, except for the reserve reports and
estimates referred to above, had it been furnished with such an evaluation or
appraisal.
In connection with its opinion, Stephens arrived at reference values for the
common stock of Brock and for the common stock of the pro forma post-merger
combined companies ("Pro Forma Post-Merger Key") that the Brock shareholders
will receive as consideration in the Merger using three methodologies: a
discounted cash flow analysis, a comparable transaction analysis and a common
stock comparison. These methodologies are discussed below. Based upon these
values and subject to the assumptions and limitations set forth in its
opinion, Stephens came to a composite range of reference values for the common
stock of Brock of $10.71 million to $13.76 million and for the common stock of
the Pro Forma Post-Merger Key to be received by the Brock shareholders as
consideration in the Merger of $12.64 million to $15.27 million as of December
21, 1995.
In connection with the comparable transaction analysis and the common stock
comparison discussed below, the benchmark value multiples resulting from those
two valuation methodologies were applied to pro forma operating and valuation
statistics for Brock, Key Production and the Pro Forma Post-Merger Key. The
pro forma adjustments made to Brock, Key Production and the Pro Forma Post-
Merger Key were made to each company's financial statements to reflect the
anticipated financial condition of Brock, Key Production and the Pro Forma
Post-Merger Key at the anticipated consummation of the Merger.
Discounted Cash Flow Analysis. Under this method, Stephens calculated an
estimate of future discounted pre-tax cash flow of reserves for Brock, Key
Production and the Pro Forma Post-Merger Key as of September 30, 1995
utilizing reserve information prepared or provided by Brock and Key Production
under three pricing scenarios. In Scenario I, oil prices for West Texas
Intermediate spot equivalent crude oil were held flat at $17.30 per barrel.
Gas prices for Henry hub spot equivalent natural gas were held flat at $1.82
per thousand cubic feet ("Mcf"). In Scenario II, oil prices were assumed to be
$17.30 per barrel during the remaining months of 1995 and throughout 1996,
$17.82 per barrel in 1997, $18.35 per barrel in 1998, $18.90 per barrel in
1999, and to escalate 3.0% per year thereafter to a maximum of $36.00 per
barrel; gas prices were assumed to be $1.82 per Mcf during the remaining
months of 1995 and throughout 1996, $1.91 per Mcf in 1997, $2.01 per Mcf in
1998, $2.11 per Mcf in 1999, and to escalate at 3.0% per year thereafter to a
maximum of $4.25 per Mcf. In Scenario III, oil prices were assumed to be
$17.30 per barrel during the remaining months of 1995 and throughout 1996,
$18.08 per barrel in 1997, $18.89 per barrel in 1998, $19.74 per barrel in
1999, and to escalate 4.5% per year thereafter to a maximum of $36.00 per
barrel; gas prices were assumed to be $1.82 per Mcf during the remaining
months of 1995 and throughout 1996, $1.96 per Mcf in 1997, $2.10 per Mcf in
1998, $2.26 per Mcf in 1999, and to escalate at 4.5% per year thereafter to a
maximum of $4.25 per Mcf. These factors included adjustments to such pricing
scenarios to reflect transportation and quality differentials, potential
changes in tax bases and pre-tax discount rates ranging from 10.0% to 30.0%.
Such pre-tax discount rates are those generally relied upon in the industry to
value oil and gas reserves. To the resulting present values, Stephens added
reference values for the undeveloped acreage and other assets of Brock, Key
Production and the Pro Forma Post-Merger Key to arrive at a range of reference
values for the common stock of Brock, Key Production and the Pro Forma Post-
Merger Key of $11.95 million to $14.50 million, of $39.82 million to $47.89
million, and $55.02 million to $66.68 million, respectively.
30
<PAGE>
Comparable Transaction Analysis. In this analysis, Stephens reviewed nine
comparable transactions which it deemed relevant to the Merger. The total
consideration for such transactions (the "Comparable Transactions") ranged in
value from $15.25 million to $189.76 million, and averaged $69.84 million in
value. The Comparable Transactions are composed of the acquisition of Parker &
Parsley Petroleum Co.'s Appalachian assets by Lomak Petroleum, Inc., the
acquisition of American Exploration and affiliated companies' West Texas
Sawyer Field assets by Louis Dreyfus Natural Gas Corp., the acquisition of
Consolidated Oil & Gas by Hugoton Energy Corp., the acquisition of Diamond
Energy by Coda Energy, Inc., the acquisition of American Natural Energy Corp.
by Alexander Energy Corp., the acquisition of Alta Energy Corp. by Devon
Energy Corp., the acquisition of KP Exploration, Inc. by United Meridian
Corporation, the acquisition of American National Petroleum Company by Patrick
Petroleum Company, and the acquisition of certain ARCO Oil and Gas Co. Texas
and New Mexico assets by Anadarko Petroleum Corporation. Reference values for
reserves for Brock, Key Production and the Pro Forma Post-Merger Key were
determined by multiplying a benchmark value multiple for various operating and
financial statistics, including earnings before income taxes, depreciation and
amortization plus exploration expense ("EBITDE"), cash flow, future discounted
pre-tax cash flow of reserves and Mcf equivalent reserves (converting one
barrel of oil to 6 Mcf) from the comparable transactions, by the EBITDE, cash
flow, future discounted pre-tax cash flow of reserves and Mcf equivalent
reserves for Brock, Key Production and the Pro Forma Post-Merger Key. Using
its subjective professional judgment, Stephens determined a single value range
for the reserves of each of Brock, Key Production and the Pro Forma Post-
Merger Key. To each of these reference ranges Stephens added reference values
for undeveloped acreage and other assets for Brock, Key Production and the Pro
Forma Post-Merger Key to arrive at a range of reference values for the common
stock of Brock, Key Production and the Pro Forma Post-Merger Key of $9.47
million to $13.02 million, of $36.98 million to $46.98 million, and $53.68
million to $65.68 million, respectively.
Based on the mid-point of the reference values established above for Brock
and the Pro Forma Post-Merger Key, Stephens calculated transaction multiples
for the merger and compared these multiples to the range of multiples for the
Comparable Transactions. A comparison of these multiples is as follows: with
respect to EBITDE, the multiples for the Comparable Transactions ranged from
3.35x to 8.88x with a mean of 6.02x, as compared to a transaction multiple for
the Merger of 6.50x; with respect to cash flow, the multiples for the
Comparable Transactions ranged from 3.68x to 8.16x with a mean of 6.01x, as
compared to a transaction multiple for the Merger of 4.80x; with respect to
future discounted pre-tax cash flow of reserves, the multiples for the
Comparable Transactions ranged from 42.2% to 151.8% with a mean of 94.0%, as
compared to a transaction multiple for the Merger of 91.2%; with respect to
Mcf equivalent reserves, the multiples for the Comparable Transactions ranged
from $0.57 to $1.43 with a mean of $0.76, as compared to a transaction
multiple for the Merger of $0.69.
Common Stock Comparison. Using publicly available information, Stephens
calculated multiples of various operating and financial statistics, including
EBITDE, cash flow, future discounted pre-tax cash flow of reserves and Mcf
equivalent reserves, for certain publicly-traded oil and gas companies it
deemed relevant. The total market capitalization for such companies (the
"Comparable Companies") ranged in value from $87.7 million to $361.4 million,
and averaged $205.1 million in value. The Comparable Companies are composed of
Coho Energy, Inc., HS Resources, Inc., Nuevo Energy Company, PetroCorp. Inc.,
Unit Corporation and The Wiser Oil Company. Using its subjective professional
judgment, Stephens applied benchmark multiples to the EBITDE, cash flow,
future discounted pre-tax cash flow of reserves and Mcf equivalent reserves of
Brock, Key Production and the Pro Forma Post-Merger Key to arrive at a single
reference value range for the reserves of each of Brock, Key Production and
the Pro Forma Post-Merger Key. To each of these reference ranges Stephens
added reference values for undeveloped acreage and other assets for Brock, Key
Production and the Pro Forma Post-Merger Key to arrive at a range of reference
values for the common stock of Brock, Key Production and the Pro Forma Post-
Merger Key of $11.67 million to $15.70 million, of $43.22 million to $53.22
million, and $62.86 million to $74.86 million, respectively.
Based on the mid-point of the reference values established above for Brock
and the Pro Forma Post-Merger Key, Stephens calculated transaction multiples
for the merger and compared these multiples to the range of
31
<PAGE>
multiples for the Comparable Companies. A comparison of these multiples is as
follows: with respect to EBITDA, the multiples for the Comparable Companies
ranged from 5.10x to 8.80x with a mean of 7.40x, as compared to a transaction
multiple for the Merger of 6.50x; with respect to cash flow, the multiples for
the Comparable Companies ranged from 4.50x to 7.80x with a mean of 6.00x, as
compared to a transaction multiple for the Merger of 4.80x; with respect to
future discounted pre-tax cash flow of reserves, the multiples for the
Comparable Companies ranged from 79.4% to 137.2% with a mean of 108.7%, as
compared to a transaction multiple for the Merger of 91.2%; with respect to
Mcf equivalent reserves, the multiples for the Comparable Companies ranged
from $0.58 to $0.92 with a mean of $0.70, as compared to a transaction
multiple for the Merger of $0.69.
The summary of the Stephens Report set forth above does not purport to be a
complete description of the main elements of Stephens' presentation to the
Brock Board of Directors on December 21, 1995. It does not purport to be a
complete description of the analyses performed, or the matters considered, by
Stephens in rendering its opinion. Stephens believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of such analyses, without considering all analyses, or of the above
summary, without considering all factors and analyses, would create an
incomplete view of the processes underlying the analyses set forth in the
Stephens Report and its fairness opinion. The fact that any specific analysis
has been referred to in the summary above is not meant to indicate that such
analysis was given greater weight than any other analysis.
In rendering its fairness opinion, Stephens applied its judgment to a
variety of complex analyses and assumptions. Stephens may have given various
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions. The assumptions made
and the judgments applied by Stephens in rendering its opinion are not readily
susceptible to description beyond that set forth in the written text of the
fairness opinion itself.
In developing its view of the consideration to be received in the Merger,
Stephens assumed that, because of common practices used in the oil and gas
industry to evaluate assets, the methodologies described above provided a
reasonable and consistent basis for determining the reference values for the
common stock of Brock, Key Production and the Pro Forma Post-Merger Key.
The engagement letter between Brock and Stephens provides that Stephens is
to receive a fee of $100,000 upon delivery of its fairness opinion. Brock also
has agreed to reimburse Stephens for its reasonable out-of-pocket expenses,
including fees and expenses of counsel, and to indemnify Stephens and its
affiliates against certain claims, losses and expenses in connection with its
services as financial advisor, including those arising under the federal
securities laws.
Stephens was selected by the Brock Board of Directors as Brock's financial
advisor at a meeting of the Brock Executive Committee held on March 14, 1995.
This decision was made after several other investment banking firms, in
addition to Stephens, made proposals to Brock.
Stephens, a regional investment banking firm headquartered in Little Rock,
Arkansas, engages in, among other things, the valuation of businesses and
their securities in connection with mergers and acquisitions, leveraged buy-
outs, negotiated underwritings, private placements of debt and equity and for
corporate and estate purposes. Stephens has been in business since 1933 and
presently employs approximately 600 persons.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Brock's Board of Directors with respect
to the Merger, Brock's stockholders should be aware that certain members of
Brock's Board and management have certain interests respecting the Merger
separate from their interests as holders of Brock Common Stock, including
those referred to below.
32
<PAGE>
The currently unvested portion of the Brock Options will be vested and
exercisable in full as a result of the Merger. See "Certain Terms of the
Merger Agreement--Brock Options." The following directors of Brock hold the
following Brock Options:
<TABLE>
<CAPTION>
TOTAL UNVESTED PRICE
------ -------- -----
<S> <C> <C> <C>
Kenneth J. Stucke.............. 70,000 29,750 $1.65
Michael R. Barham.............. 50,000 21,750 $1.64
Robin A. Seibert............... 45,000 16,250 $1.65
</TABLE>
Pursuant to Brock's Change of Control Bonus Plan, Messrs. Stucke, Barham and
Seibert, who are officers of Brock, are expected to receive approximately
$40,000, $20,000 and $20,000, respectively, upon consummation of the Merger.
Under Brock's Directors Severance Plan, each of Messrs. Stucke, Seibert and
Barham, who are officers of Brock, will either be offered two year employment
agreements with Key at his current salary or will receive an amount equal to
twice his then-current annual compensation if the fair market value of all
Brock Common Stock at the Effective Time is $25 million or more, three times
his then-current monthly compensation if the fair market value is $3 million
or less, or an amount accordingly prorated if the fair market value is greater
than $3 million but less than $25 million.
Pursuant to his Consulting Agreement, Lawrence E. Brock, an officer and
director of Brock, will receive $32,308 upon consummation of the Merger as
severance for termination of his Consulting Agreement.
The Merger Agreement provides that Key Production will maintain certain
indemnification and limitation of liability provisions in Brock's Charter and
Bylaws for a period of five years after the Effective Time and will provide a
limited guarantee of those indemnification obligations during such period. See
"Certain Terms of the Merger Agreement--Indemnification."
See "Certain Terms of the Merger Agreement--Certain Benefit Plans and
Severance" as to post-Merger arrangements respecting Brock employee benefit
plans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the Merger to the holders of Brock Common Stock and is based upon current
provisions of the Code, existing regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change
which changes could be applied retroactively. No attempt has been made to
comment on all federal income tax consequences of the Merger that may be
relevant to particular holders, including holders that are subject to special
tax rules such as dealers in securities, foreign persons, mutual funds,
insurance companies, tax-exempt entities and holders who do not hold their
shares as capital assets. No attempt has been made to discuss the state law
consequences of the Merger. Holders of Brock Common Stock are advised and
expected to consult their own tax advisers regarding the federal income tax
consequences of the Merger in light of their personal circumstances and the
tax consequences to them under state, local and foreign tax laws.
No ruling from the Internal Revenue Service ("IRS") has been or will be
requested in connection with the Merger. Brock has received from its counsel,
Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., an opinion that
the Merger will be treated for federal income tax purposes as a reorganization
under Section 368(a) of the Code, that Key Production, Merger Sub and Brock
will each be a party to the reorganization and that holders of Brock Common
Stock will not recognize any gain or loss on the exchange of Brock Common
Stock for Key Production Common Stock in the Merger, except to the extent of
cash received in lieu of a fractional share of Key Production Common Stock. It
is a condition to the obligation of Brock to consummate the Merger that such
opinion shall not have been withdrawn or modified in any material respect. The
opinion is subject to certain assumptions and is based on certain
representations from the parties.
33
<PAGE>
The following federal income tax consequences will occur as a result of the
Merger qualifying as a reorganization under Section 368 of the Code:
(a) no gain or loss will be recognized by Key Production, Merger Sub or
Brock in connection with the Merger;
(b) no gain or loss will be recognized by a holder of Brock Common Stock
upon the exchange of all of such holder's shares of Brock Common Stock
for shares of Key Production Common Stock in the Merger;
(c) the aggregate tax basis of the shares of Key Production Common Stock
received by a Brock stockholder in the Merger (including any fractional
share deemed received) will be the same as the aggregate basis of the
shares of Brock Common Stock surrendered in exchange therefor;
(d) the holding period of the shares of Key Production Common Stock
received by a Brock stockholder in the Merger will include the holding
period of the shares of Brock Common Stock surrendered in exchange
therefor, provided that such shares of Brock Common Stock are held as
capital assets at the Effective Time; and
(e) a stockholder of Brock who receives cash in lieu of a fractional share
will recognize gain or loss equal to the difference, if any, between
such stockholder's basis in the fractional share (as described in
paragraph (c) above) and the amount of cash received. Such gain or loss
will be a capital gain or loss if the Brock Common Stock is held by
such stockholder as a capital asset at the Effective Time.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for using the "purchase" method of
accounting. Key Production will record the assets and liabilities of Brock at
their fair values, based upon the average price of Key Production Common Stock
at the time the transaction was agreed upon. Key Production's financial
statements will include the accounts of Brock from the date of acquisition.
See the Unaudited Pro Forma Condensed Financial Information and notes thereto
included elsewhere in this Joint Proxy Statement/Prospectus.
Key Production has been preliminarily advised by its independent public
accountants, Arthur Andersen LLP, that the Merger should be treated as a
purchase in accordance with generally accepted accounting principles.
GOVERNMENTAL AND REGULATORY APPROVALS
Key Production and Brock are aware of no governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
applicable securities laws.
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Key Production Common Stock to be received by Brock
stockholders in connection with the Merger have been registered under the
Securities Act and, except as set forth in this paragraph, may be traded
without restriction. The shares of Key Production Common Stock to be issued in
connection with the Merger and received by persons who are deemed to be
"affiliates" (as that term is defined in Rule 144 under the Securities Act) of
Brock prior to the Merger may be resold by them only in transactions permitted
by the resale provisions of Rule 145 under the Securities Act (or, in the case
of such persons who become affiliates of Key Production, Rule 144 under the
Securities Act) or as otherwise permitted under the Securities Act.
Accordingly, the Merger Agreement provides that it is a condition to Key
Production's obligations thereunder that Brock cause its affiliates to execute
a written agreement to the effect that such persons will not sell, transfer or
otherwise dispose of Key Production Common Stock at any time in violation of
the Securities Act or the rules and regulations promulgated thereunder,
including Rule 145.
Key Production has agreed to register shares of Key Production Common Stock
received by certain affliates of Brock in the Merger under the Securities Act.
See "Stockholder Agreement."
RIGHTS OF DISSENTING STOCKHOLDERS
Under Delaware law, neither Key Production's nor Brock's stockholders will
be entitled to any appraisal or dissenter's rights in connection with the
Merger.
34
<PAGE>
CERTAIN TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified
by reference to the Merger Agreement, a copy of which is attached as Appendix
I to this Joint Proxy Statement/Prospectus and is incorporated herein by
reference.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, as promptly as practicable after the
satisfaction or waiver of the conditions to closing the Merger, the parties
shall cause the Merger to be consummated by filing a Certificate of Merger
with the Secretary of State of the State of Delaware, in such form as required
by, and executed in accordance with the relevant provisions of, Delaware law
(the date and time of such filing, or such later date or time agreed upon by
Key Production and Brock and set forth therein, being the "Effective Time").
It is anticipated that, if the issuance of Key Production Common Stock is
approved at the Key Production Special Meeting and the Merger Agreement is
approved and adopted at the Brock Special Meeting and all other conditions to
the Merger have been satisfied or waived, the Effective Time will occur on the
date of the Special Meetings or as soon thereafter as practicable.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, each outstanding share of Brock Common Stock, other
than certificates which immediately prior to the Effective Time evidenced
shares of Brock Common Stock held in the treasury of Brock or owned by Key
Production or any direct or indirect wholly-owned subsidiary of either Key
Production or Brock, which shares will be canceled at the Effective Time, will
be converted into the right to receive .6897 shares of Key Production Common
Stock. Notwithstanding the foregoing, if between the date of the Merger
Agreement and the Effective Time the outstanding shares of Key Production
Common Stock or Brock Common Stock shall have been changed into a different
number of shares or a different class, by reason of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or
exchange of shares, the Exchange Ratio shall be correspondingly adjusted to
reflect such stock dividend, subdivision, reclassification, recapitalization,
split, combination or exchange of shares.
As soon as practicable following the Effective Time, the Transfer Agent will
mail to each record holder of Brock Common Stock a letter of transmittal and
other information advising such holder of the consummation of the Merger and
for use in exchanging Brock Common Stock certificates for Key Production
Common Stock certificates and cash in lieu of a fractional share. Letters of
transmittal will also be available following the Effective Time at the offices
of Key Production in Denver, Colorado. Upon delivery of an executed
transmittal letter and surrender of a Brock certificate to the Transfer Agent
for cancellation, the holders of such Brock Certificates will be entitled to
receive a certificate representing the number of whole shares of Key
Production Common Stock which such holder has the right to receive under the
terms of the Merger Agreement. After the Effective Time, there will be no
further registration of transfers on the stock transfer books of Brock of
shares of Brock Common Stock that were outstanding immediately prior to the
Effective Time. Share certificates should not be surrendered for exchange by
stockholders of Brock prior to the Effective Time and the receipt of a letter
of transmittal.
No fractional shares of Key Production Common Stock will be issued in the
Merger. Each stockholder of Brock entitled to a fractional share will receive
an amount in cash equal to the value of such fractional share based upon the
closing price of Key Production Common Stock on the Nasdaq National Market on
the date of the Effective Time. No interest will be paid on such amount, and
all shares of Brock Common Stock held by a record holder shall be aggregated
for purposes of computing the amount of such payment.
Until so surrendered and exchanged, each certificate previously evidencing
Brock Common Stock shall represent solely the right to receive Key Production
Common Stock and cash in lieu of fractional shares. Unless and until any such
certificates shall be so surrendered and exchanged, no dividends or other
distributions payable
35
<PAGE>
to the holders of record of Key Production Common Stock as of any time on or
after the Effective Time shall be paid to the holders of such certificates
previously evidencing Brock Common Stock; provided, however, that, upon any
such surrender and exchange of such certificates, there shall be paid to the
record holders of the certificates issued and exchanged therefor (i) the
amount, without interest thereon, of dividends and other distributions, if
any, with a record date on or after the Effective Time theretofore paid with
respect to such whole shares of Key Production Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions, if
any, with a record date on or after the Effective Time but prior to surrender
and a payment date occurring after surrender, payable with respect to such
whole shares of Key Production Common Stock.
BROCK OPTIONS
All options to purchase Brock Common Stock will become fully vested prior to
the Effective Time and will expire upon the Effective Time unless exercised
prior to the Effective Time.
CONDITIONS TO THE MERGER
The respective obligations of Key Production and Brock to consummate the
Merger are subject to the satisfaction of the following conditions, any or all
of which may be waived in writing by the parties hereto, in whole or in part,
to the extent permitted by applicable law: (a) the Registration Statement
shall have been declared effective by the Commission under the Securities Act,
no stop order suspending the effectiveness of the Registration Statement shall
have been issued by the Commission and no proceedings for that purpose shall
have been initiated by the Commission, and Key Production shall have received
all "Blue Sky" permits and other authorizations necessary to consummate the
transactions contemplated by the Merger Agreement; (b) the Merger Agreement
and the Merger shall have been approved and adopted by the requisite vote of
the stockholders of Brock, and the issuance of the Key Production Common Stock
in the Merger shall have been approved by the requisite vote of the
stockholders of Key Production; and (c) no Governmental Entity or federal or
state court of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent) which
is in effect and which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger.
The obligation of Key Production to effect the Merger is also subject to the
satisfaction at or prior to the Closing Date of the following conditions, any
or all of which may be waived in writing by Key Production, in whole or in
part, to the extent permitted by applicable law: (a) each of the
representations and warranties of Brock contained in the Merger Agreement
shall be true and correct as of the Closing Date as though made on and as of
the Closing Date (except to the extent such representations and warranties
specifically relate to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date); (b) Brock shall
have performed or complied with all agreements and covenants required by the
Merger Agreement to be performed or complied with by it on or prior to the
Closing Date; (c) since the date of the Merger Agreement, there shall have
been no change, occurrence or circumstance in the current or future business,
financial condition or results of operations of Brock or any of its
subsidiaries having or reasonably likely to have, individually or in the
aggregate, a material adverse effect on the financial condition, results of
operations or current or future business of Brock and its subsidiaries, taken
as a whole, except as to changes in general economic conditions that affect
each of Key and Brock substantially equally; (d) there shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Merger, by any Governmental Entity in connection with
the grant of a regulatory approval necessary, in the reasonable business
judgment of Key Production, to the continuing operation of the current or
future business of Brock, which imposes any condition or restriction upon Key
Production or the business or operations of Brock which, in the reasonable
business judgment of Key Production, would be materially burdensome in the
context of the transactions contemplated by the Merger Agreement; (e) Jones,
Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. shall have delivered to
Key Production its written opinion substantially to the effect that (x) the
Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code, (y) Key Production, Merger Sub and Brock will each be a party to
that reorganization within the meaning of Section 368(b) of the Code, and
36
<PAGE>
(z) Key Production, Merger Sub and Brock will not recognize any gain or loss
for U.S. federal income tax purposes as a result of the Merger, and such
opinion shall not have been withdrawn or modified in any material respect.
The obligation of Brock to effect the Merger is also subject to the
satisfaction at or prior to the Closing Date of the following conditions, any
or all of which may be waived in writing by Brock, in whole or in part, to the
extent permitted by applicable law: (a) each of the representations and
warranties of Key Production and Merger Sub contained in the Merger Agreement
shall be true and correct as of the Closing Date as though made on and as of
the Closing Date (except to the extent such representations and warranties
specifically relate to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date); (b) Key
Production and Merger Sub shall have performed or complied with all agreements
and covenants required by the Merger Agreement to be performed or complied
with by them on or prior to the Closing Date; (c) since the date of the Merger
Agreement, there shall have been no change, occurrence or circumstance in the
current or future business, financial condition or results of operations of
Key Production or any of its subsidiaries having or reasonably likely to have,
individually or in the aggregate, a material adverse effect on the financial
condition, results of operations or current or future business of Key
Production and its subsidiaries, taken as a whole; (d) there shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger, by any Governmental Entity in
connection with the grant of a regulatory approval necessary, in the
reasonable business judgment of Brock, to the continuing operation of the
current or future business of Key Production, which imposes any condition or
restriction upon Key Production or the business or operations of Key
Production which, in the reasonable business judgment of Brock, would be
materially burdensome in the context of the transactions contemplated by the
Merger Agreement; and (e) the shares of Key Production Common Stock to be
issued in the Merger shall have been approved for listing (subject to official
notice of issuance) on the Nasdaq National Market.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Brock, Merger Sub and Key Production relating to, among other things, (i) each
of their organization and similar corporate matters, (ii) each of their
capitalization, (iii) authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters, and the absence of
conflicts, violations and defaults under their respective charters and bylaws
and certain other agreements and documents, (iv) compliance with law, (v) the
documents and reports filed by them with the Commission and the accuracy of
the information contained therein, (vi) the absence of certain changes and
events, (vii) litigation, (viii) employee benefit matters, (ix) taxes and
matters relating to a tax-free reorganization, (x) certain business practices,
(xi) environmental matters, (xii) vote required, (xiii) brokers, (xiv)
insurance, (xv) properties, (xvi) certain contracts and restrictions, (xvii)
certain regulatory matters, (xviii) futures trading and (xix) the accuracy of
certain information provided. The representations and warranties expire at the
Effective Time.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Each of Brock and Key Production has agreed that, prior to the Effective
Time, unless otherwise expressly contemplated by the Merger Agreement or
consented to in writing by the other, it will and will cause its subsidiaries
to (a) operate its business in all material respects in the usual and ordinary
course consistent with past practices; (b) use all reasonable efforts to
preserve substantially intact its business organization, maintain its material
rights and franchises, retain the services of its respective officers and key
employees and maintain its relationships with its material customers and
suppliers; (c) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its customary
business practice; and (d) use all reasonable efforts to keep in full force
and effect insurance and bonds comparable in amount and scope of coverage to
that currently maintained.
37
<PAGE>
Brock has agreed that, prior to the Effective Time, except as expressly
contemplated by the Merger Agreement or otherwise consented to in writing by
Key Production, it will not do, and will not permit any of its subsidiaries to
do, any of the following: (a)(i) increase the compensation payable to or to
become payable to any director or executive officer, subject to certain
exceptions; (ii) grant any severance or termination pay to, or enter into or
amend any employment or severance agreement with, any director, officer or
employee, subject to certain exceptions; (iii) establish, adopt or enter into
any employee benefit plan or arrangement; or (iv) amend, or take any other
actions with respect to, any of Brock's benefit plans, subject to certain
exceptions; (b) declare or pay any dividend on, or make any other distribution
in respect of, outstanding shares of capital stock; (c)(i) except for certain
matters, redeem, purchase or otherwise acquire any shares of its or any of its
subsidiaries' capital stock or any securities or obligations convertible into
or exchangeable for any shares of its or its subsidiaries' capital stock, or
any options, warrants or conversion or other rights to acquire any shares of
its or its subsidiaries' capital stock or any such securities or obligations;
(ii) effect any reorganization or recapitalization; or (iii) split, combine or
reclassify any of its or its subsidiaries' capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of or
in substitution for, shares of its or its subsidiaries' capital stock; (d)(i)
except for certain matters, issue, deliver, award, grant or sell, or authorize
or propose the issuance, delivery, award, grant or sale of, any shares of any
class of its or its subsidiaries' capital stock, any securities convertible
into or exercisable or exchangeable for any such shares, or any rights,
warrants or options to acquire any such shares; (ii) amend or otherwise modify
the terms of any such rights, warrants or options the effect of which shall be
to make such terms more favorable to the holders thereof; (iii) take any
action to optionally accelerate the exercisability of Brock Options; (e)
acquire or agree to acquire any business or other entity, or otherwise acquire
or agree to acquire any assets of any other person (with certain exceptions)
in each case which are material, individually or in the aggregate, to Brock
and its subsidiaries, taken as a whole; (f) sell or otherwise dispose of any
of its material assets or any material assets of any of its subsidiaries, with
certain exceptions; (g) release any third party from its obligations, or grant
any consent, under any existing standstill provision relating to a Competing
Transaction or otherwise under any confidentiality or other agreement, or fail
to fully enforce any such agreement; (h) adopt or propose to adopt certain
amendments to its charter or bylaws; (i) change any of its methods of
accounting or take certain actions with respect to taxes; (j) incur any
obligation for borrowed money or purchase money indebtedness, with certain
exceptions; (k) enter into certain material contracts; or (l) agree in writing
or otherwise to do any of the foregoing.
Key Production has agreed that, prior to the Effective Time, except as
expressly contemplated by the Merger Agreement or otherwise consented to in
writing by Brock, it will not do, and will not permit any of its subsidiaries
to do, any of the following: (i) knowingly take any action which would result
in a failure to maintain the trading of the Key Production Common Stock on the
Nasdaq National Market; (ii) declare or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock; (iii) adopt
or propose to adopt any amendments to its charter or bylaws, which would have
an adverse impact on the consummation of the Merger; or (v) agree in writing
or otherwise to do any of the foregoing.
NO SOLICITATION
Additionally, Brock has agreed not to initiate, solicit or encourage
(including by way of furnishing information or assistance), or take any other
action to facilitate, any inquiries or the making of any proposal relating to,
or that may reasonably be expected to lead to, any Competing Transaction, or
enter into discussions or negotiate with any person or entity in furtherance
of such inquiries or to obtain a Competing Transaction, or agree to or endorse
any Competing Transaction, or authorize or permit any of the officers,
directors or employees of Brock or any of its subsidiaries or any investment
banker, financial advisor, attorney, accountant or other representative
retained by Brock or any of Brock's subsidiaries to take any such action, and
Brock shall promptly notify Key Production of all relevant terms of any such
inquiries and proposals received by Brock or any of its subsidiaries or by any
such officer, director, investment banker, financial advisor, attorney,
accountant or other
38
<PAGE>
representative relating to any of such matters and if such inquiry or proposal
is in writing, Brock shall promptly deliver or cause to be delivered to Key
Production a copy of such inquiry or proposal; provided, however, that the
Board of Directors of Brock may (i) furnish information to, or enter into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide proposal in writing by such person or entity to acquire
Brock pursuant to a merger, consolidation, share exchange, business
combination or other similar transaction or to acquire a substantial portion
of the assets of Brock or any of its Significant Subsidiaries, if, and only to
the extent that (A) the Board of Directors of Brock, after consultation with
and based upon the advice of independent legal counsel (who may be Brock's
regularly engaged independent legal counsel), determines in good faith that
such action is necessary for such Board of Directors to comply with its
fiduciary duties to stockholders under applicable law and (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity Brock (x) provides written notice to Key
Production to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity and (y) enters
into with such person or entity a confidentiality agreement in reasonably
customary form on terms not more favorable to such person or entity than the
terms contained in a Confidentiality Agreement between Key Production and
Brock; (ii) comply with Rule 14e-2 promulgated under the Exchange Act with
regard to a Competing Transaction; or (iii) fail to make or withdraw or modify
its recommendation of the Merger and the Merger Agreement if there exists a
Competing Transaction and the Board of Directors of Brock, after consultation
with and based upon the advice of independent legal counsel (who may be
Brock's regularly engaged independent legal counsel), determines in good faith
that such action is necessary for such Board of Directors to comply with its
fiduciary duties to stockholders under applicable law.
CERTAIN POST-MERGER MATTERS
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and Brock as the Surviving Corporation will succeed to all of the
assets, rights and obligations of Merger Sub.
Pursuant to the Merger Agreement, the Brock Charter and the Brock Bylaws, as
in effect immediately prior to the Effective Time, will be the certificate of
incorporation and bylaws of the Surviving Corporation until amended as
provided therein and pursuant to the Delaware General Corporation Law
("DGCL").
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the Merger Agreement and the Merger
by the stockholders of Brock: (a) by mutual consent of Key Production and
Brock; (b) by Key Production, upon a breach of any representation, warranty,
covenant or agreement on the part of Brock set forth in the Merger Agreement,
or if any representation or warranty of Brock shall have become untrue, in
either case such that Key Production's conditions to closing would be
incapable of being satisfied by June 30, 1996 (or as otherwise extended as
permitted by the Merger Agreement); (c) by Brock, upon a breach of any
representation, warranty, covenant or agreement on the part of Key Production
or Merger Sub set forth in the Merger Agreement, or if any representation or
warranty of Key Production or Merger Sub shall have become untrue, in either
case such that Brock's conditions to closing would be incapable of being
satisfied by June 30, 1996 (or as otherwise extended as permitted by the
Merger Agreement); (d) by either Key Production or Brock, if there shall be
any Order which is final and nonappealable preventing the consummation of the
Merger, subject to a limited exception; (e) by either Key Production or Brock,
if the Merger shall not have been consummated before June 30, 1996; provided,
however, that the Merger Agreement may be extended by written notice of either
Key Production or Brock to a date not later than September 30, 1996, if the
Merger shall not have been consummated as a direct result of Brock, Key
Production or Merger Sub having failed by June 30, 1996 to receive all
required regulatory approvals or consents with respect to the Merger; (f) by
either Key Production or Brock, if the Merger Agreement and the Merger shall
fail to receive the requisite vote for approval and adoption by the
stockholders of Brock at the Brock Special Meeting or if the issuance of the
Key
39
<PAGE>
Production Common Stock in connection with the Merger shall fail to receive
the requisite vote for approval by the stockholders of Key Production at the
Key Production Special Meeting; (g) by Key Production, if (1) the Board of
Directors of Brock withdraws, modifies or changes its recommendation of the
Merger Agreement or the Merger in a manner adverse to Key Production or shall
have resolved to do any of the foregoing; (2) the Board of Directors of Brock
shall have recommended to the stockholders of Brock any Competing Transaction
or shall have resolved to do so; (3) a tender offer or exchange offer for 20%
or more of the outstanding shares of capital stock of Brock is commenced, and
the Board of Directors of Brock does not recommend that stockholders not
tender their shares into such tender or exchange offer, or; (4) any person
(other than Key Production or an affiliate thereof) shall have acquired
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder), shall have been formed
which beneficially owns, or has the right to acquire beneficial ownership of,
20% or more of the then outstanding shares of capital stock of Brock; or (h)
by Brock, if the Board of Directors of Brock (x) fails to make or withdraws
its recommendation to Brock's stockholders of the Merger Agreement if there
exists at such time a Competing Transaction, or (y) recommends to Brock's
stockholders approval or acceptance of a Competing Transaction, in each case
only if the Board of Directors of Brock, after consultation with and based
upon the advice of independent legal counsel (who may be Brock's regularly
engaged independent legal counsel), determines in good faith that such action
is necessary for such Board of Directors to comply with its fiduciary duties
to stockholders under applicable law.
Subject to limited exceptions, including the survival of Brock's agreement
to pay a termination fee to Key Production under certain circumstances as
discussed below, in the event of the termination of the Merger Agreement, the
Merger Agreement shall become void, there shall be no liability on the part of
Key Production, Merger Sub or Brock to the other and all rights and
obligations of the parties thereto shall cease, except that no party will be
relieved of any liability for (i) any breach of such party's covenants or
agreements contained in the Merger Agreement, or (ii) any willful breach of
such party's representations or warranties contained in the Merger Agreement.
The Merger Agreement may be amended by the parties by action taken by or on
behalf of their respective Boards of Directors at any time prior to the
Effective Time; provided, however, that, after approval of the Merger by the
stockholders of Brock, (i) no amendment, which under applicable law may not be
made without the approval of the stockholders of Brock, may be made without
such approval, and (ii) no amendment, which under the applicable rules of the
National Association of Securities Dealers, may not be made without the
approval of the stockholders of Key Production, may be made without such
approval. At any time prior to the Effective Time, any party to the Merger
Agreement may (a) extend the time for the performance of any of the
obligations or other acts of the other party thereto, (b) waive any
inaccuracies in the representations and warranties of the other party
contained therein or in any document delivered pursuant thereto and (c) waive
compliance by the other party with any of the agreements or conditions
contained therein.
EXPENSES AND TERMINATION FEE
All expenses incurred by Key Production and Brock will be borne by the party
incurring such expenses; provided, however, that the allocable share of Key
Production and Brock for all expenses paid to financial printers for printing,
filing and mailing the Registration Statement, the Brock Proxy Statement and
the Key Production Proxy Statement and all regulatory filing fees (other than
the filing fee for registering Key Production Common Stock pursuant to the
Registration Statement, which shall be paid by Key Production) incurred in
connection with the Registration Statement, the Brock Proxy Statement and the
Key Production Proxy Statement shall be one-half each.
The Merger Agreement also provides that Brock will pay to Key Production a
fee equal to $1,000,000, which amount will be inclusive of all of Key
Production's expenses, if the Merger Agreement is terminated in accordance
with its terms (any of the following, a "Trigger Event"): (a) by Key
Production after a wilful breach by Brock, if Brock shall have had contacts or
entered into negotiations after the date of the Merger Agreement regarding a
Competing Transaction, and within 12 months of the termination of the Merger
Agreement Brock
40
<PAGE>
consummates a Business Combination (as defined below) or enters into a
definitive agreement providing for a Business Combination with any person with
whom such contacts had been made; (b) by either Key Production or Brock if the
Merger Agreement fails to receive the requisite vote for approval and adoption
by the stockholders of Brock at the Brock Special Meeting, and at the time of
such meeting there shall exist a Competing Transaction; (c) by Key Production
if the Board of Directors of Brock withdraws, modifies or changes its
recommendation of the Merger Agreement or the Merger in a manner adverse to
Key Production (or resolves to do so) and, at such time, there exists a
Competing Transaction; (d) by Key Production, if the Board of Directors of
Brock shall recommend any Competing Transaction to Brock's stockholders (or
resolves to do so); (e) by Key Production, if a tender or exchange offer for
20% or more of the capital stock of Brock is commenced, and Brock's Board of
Directors does not recommend that its stockholders not tender their shares
into such tender offer or exchange offer; or (f) by Brock, if the Board of
Directors of Brock (i) fails to recommend (or withdraws its recommendation of)
approval and adoption by its stockholders of the Merger and the Merger
Agreement and there exists a Competing Transaction, or (ii) recommends a
Competing Transaction, in each case upon a determination in good faith, after
consultation with and based on the advice of independent legal counsel, that
such action is necessary for such Board to comply with its fiduciary duties
under applicable law.
The Merger Agreement defines "Business Combination" as (i) a merger,
consolidation, share exchange, business combination or similar transaction
involving Brock, (ii) a sale, lease, exchange, transfer or other disposition
of 20% or more of the assets of Brock and its subsidiaries, taken as a whole,
in a single transaction or a series of transactions, or (iii) the acquisition,
by a person (other than Key Production or any affiliate thereof) or group (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of beneficial ownership (as defined in Rule 13d-3
under the Exchange Act) of 20% or more of the Brock Common Stock whether by
tender or exchange offer or otherwise.
CERTAIN BENEFIT PLANS AND SEVERANCE
The Merger Agreement provides that Key will honor all of Brock's severance
arrangements; provided, however, that prior to the Effective Time, Key
Production will notify Brock of the employees of Brock that Key desires to
retain following the Effective Time and if such persons are retained as
employees on a full-time basis by Key or any subsidiary in any capacity and at
their then-current salaries for a period longer than one year after the
Effective Time (and, in the case of Kenneth J. Stucke, Michael R. Barham and
Robin A. Seibert, they are offered an employment agreement with Key having a
term of at least two years at their then current salaries) and without any
requirements that they relocate their personal residence from the New Orleans,
Louisiana metropolitan area, no severance payments, including any amounts
payable under the Directors Severance Plan, will be due to such persons, and
Brock will amend such plans before the Effective Time to the extent necessary
to so provide. Key and Merger Sub agree that the consummation of the Merger
shall constitute a change of control for the purposes of all applicable
agreements of Brock. Key has agreed to honor Brock's Change of Control Plan
pursuant to which Kenneth J. Stucke, Michael R. Barham and Robin A. Seibert
are expected to receive approximately $40,000, $20,000 and $20,000,
respectively, upon consummation of the Merger. See "The Merger--Interests of
Certain Persons in the Merger."
Brock will amend its Pension Plan to provide that all benefit accruals will
cease 30 days after the Effective Time and Key will initiate procedures to
terminate such plan under the provisions of ERISA. All of the participants
covered by Brock's Supplemental Executive Retirement Plan will become 100%
vested in the benefits provided thereunder as a result of the Merger and such
plan will be terminated and Brock will distribute the present value of the
benefits to which a participant is entitled thereunder in a single lump sum
payment prior to the Effective Time.
Any employees of Brock who become employees of Key following the Effective
Time will participate in employee benefit plans maintained by Key pursuant to
the terms and conditions of such employee benefit plans. Such employees will
receive credit for prior service with Brock as follows: the lesser of actual
years of service or an amount equal to the period of time between January 1,
1993 and the Effective Time for purposes of
41
<PAGE>
participation and vesting in all of Key's benefit plans. All individuals who
were employed by Brock at the Effective Time and who are employed by Brock on
the day after the Effective Time will be offered group health plan coverage
under Key's group health plan effective the day after the Effective Time. Such
coverage will not exclude any pre-existing conditions. Any such Brock
employees who were covered under the Brock group health plan immediately
before the Effective Time and are terminated by Key after the Effective Time
will be offered COBRA continuation coverage under the Key group health plan.
Brock employees who are terminated at the Effective Time will be offered COBRA
continuation coverage under the Key group health plan. Former employees of
Brock or dependents thereof, who were receiving COBRA continuation coverage
under the Brock group health plan as of the Effective Time will be eligible to
elect, pursuant to COBRA, to continue coverage under Key's group health plan
for the remainder of the COBRA continuation period at such former employee's
or dependent's sole expense. Further, if such persons, and dependents thereof,
elect COBRA continuation coverage under Key's group health plan, such persons
will not be subject to any pre-existing condition limitation under Key's group
health plan.
The Brock 1979 Stock Option Plan will be amended to provide that all options
to purchase Brock Common Stock outstanding on the date of the Merger Agreement
will become fully vested prior to the Effective Time and will expire upon the
Effective Time unless exercised prior to the Effective Time.
INDEMNIFICATION
The Merger Agreement provides that, for a period of five years after the
Effective Time, Key Production (i) shall not amend or otherwise modify certain
limitation of liability and indemnification provisions of Brock's Charter and
By-laws in a manner that would adversely affect the rights thereunder of any
individuals who at any time prior to the Effective Time were directors or
officers of Brock in respect of acts or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated
by the Merger Agreement), unless such amendment or modification is required by
law, and (ii) shall guarantee the performance by Brock of its obligations
under such provisions to the extent of the excess, if any, of (A) the net
worth of Brock as of the Effective Time over (B) the net worth of Brock as of
the date of any claim under such provisions by a person referred to in the
foregoing clause (i).
STOCKHOLDER AGREEMENT
In consideration for Key Production's and Merger Sub's execution of the
Merger Agreement, the Brock Trust, the holder of 8.5% of the Brock Common
Stock, executed a Stockholder Agreement (the "Stockholder Agreement") agreeing
to vote any shares of Brock Common Stock owned by such holder (whether owned
on the date of such Stockholder Agreement or thereafter acquired) in favor of
the Merger and adoption of the Merger Agreement, and against any business
combination proposal or other matter that may interfere with or be
inconsistent with the Merger or the Merger Agreement (including any Competing
Transaction), at any meeting of stockholders of Brock (or consent in lieu
thereof) and any adjournment or adjournments thereof. The Stockholder
Agreement is not revocable, and provides that the shares of Brock Common Stock
subject to the Stockholder Agreement may not be transferred unless the
transfer is without consideration and the transferee agrees that the shares
transferred will remain subject to the Stockholder Agreement. The Stockholder
Agreement further provides that for a period of two years after the Effective
Time the Brock Trust will offer to Key Production a right of first refusal
before selling any of its shares received in the Merger. The Brock Trust is
granted registration rights under the Securities Act with respect to the Key
Production Common Stock received by it in the Merger for a period of two
years. An irrevocable trust administered by BankOne, Fort Worth, Texas, which
owns approximately 25% of the Brock Common Stock, has been granted
registration rights under the Securities Act with respect to the Key
Production Common Stock to be received by it in the Merger. Mr. and Mrs. Brock
are the trust beneficiaries.
The Stockholder Agreement has been filed as an Exhibit to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part, and is
incorporated herein by reference.
42
<PAGE>
MARKET PRICES OF COMMON STOCK AND DIVIDEND INFORMATION
The Key Production Common Stock is traded on the Nasdaq National Market
under the symbol "KPCI" and the Brock Common Stock is traded on the American
Stock Exchange under the symbol "BKE." The following table sets forth the
range of high and low per share sale prices for Key Production Common Stock
and Brock Common Stock for the periods indicated, as reported on the Nasdaq
National Market and American Stock Exchange, respectively. No dividends were
paid in 1995 or in 1994 on either the Key Production Common Stock or the Brock
Common Stock.
<TABLE>
<CAPTION>
KEY PRODUCTION BROCK
--------------- -----------------
HIGH LOW HIGH LOW
------- ------- -------- --------
<S> <C> <C> <C> <C>
1994
First Quarter.......................... $4 $ 2 3/4 $3 3/4 $2 5/16
Second Quarter......................... 4 3/4 3 3 1/2 2 3/4
Third Quarter.......................... 4 3/4 3 5/8 3 11/16 2 11/16
Fourth Quarter......................... 5 3/8 3 1/2 4 1/8 2 3/8
1995
First Quarter.......................... $5 $ 4 1/2 $4 5/8 $3 9/16
Second Quarter......................... 6 3/8 4 5/8 4 3/8 3 1/4
Third Quarter.......................... 5 3/4 5 3 15/16 2 3/4
Fourth Quarter......................... 5 3/4 4 5/8 3 3/4 2 3/4
1996
First Quarter (through February ,
1996)................................. $ $ $ $
</TABLE>
On December 21, 1995, the last trading day prior to the announcement by Key
Production and Brock that they had executed the Merger Agreement, the closing
per share sale prices of Key Production Common Stock and Brock Common Stock,
as reported on the Nasdaq National Market and American Stock Exchange,
respectively, were $5.00 and $3 5/8, respectively. See the cover page of this
Joint Proxy Statement/Prospectus for a recent closing price of Key Production
Common Stock and Brock Common Stock.
Following the Merger, Key Production Common Stock will continue to be traded
on the Nasdaq National Market. Following the Merger, Brock Common Stock will
cease to be traded on the American Stock Exchange, and there will be no
further market for such stock.
No dividends were paid in 1995 or in 1994 on either the Key Production
Common Stock or the Brock Common Stock and neither company has any present
intention of paying dividends in the immediate future. The terms of Brock's
current revolving credit facility includes restrictions on the payment of
dividends. Under its Credit Agreement with NationsBank, Key Production may not
make dividend payments exceeding $100,000 during any fiscal year, nor may
dividends exceed $.30 per share.
43
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed financial
statements reflect adjustments to the historical consolidated balance sheets
and income statements of Key Production and Brock giving effect to the Merger
under the purchase method of accounting for business combinations, assuming an
Exchange Ratio of .6897 shares of Key Production Common Stock for each share
of Brock Common Stock, and reflecting certain assumptions described in the
notes to the unaudited pro forma consolidated condensed financial statements.
The unaudited pro forma consolidated condensed balance sheet at September 30,
1995, assumes the Merger was consummated as of September 30, 1995 and the
unaudited pro forma consolidated condensed statements of income assume the
Merger was consummated as of January 1, 1994.
The following pro forma consolidated condensed financial statements have
been prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of Key Production and
Brock that are incorporated by reference into and attached to this Joint Proxy
Statement/Prospectus. The pro forma consolidated condensed statements of
income are not necessarily indicative of operating results that would have
occurred had the Merger been consummated as of January 1, 1994, nor are they
indicative of future operating results of the combined companies.
KEY PRODUCTION COMPANY, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- ------------------------
KEY BROCK ADJUSTMENTS CONSOLIDATED
------- ------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas production revenues.... $14,168 $6,650 $ -- $20,818
Other revenues..................... 40 649 15 704
------- ------ -------- -------
14,208 7,299 15 21,522
------- ------ -------- -------
Operating Expenses:
Depreciation, depletion and amorti-
zation............................ 5,393 1,785 61 7,239
Operating costs.................... 4,792 2,788 -- 7,580
Abandonment expenses/dry hole
costs............................. -- 225 (225) --
Administrative, selling and other.. 1,076 1,632 (1,497) 1,211
Financing costs:
Interest costs................... 586 631 (142) 1,075
Capitalized interest............. (422) -- -- (422)
Interest income.................. (10) -- -- (10)
------- ------ -------- -------
11,415 7,061 (1,803) 16,673
------- ------ -------- -------
Income Before Income Taxes........... 2,793 238 1,818 4,849
Provision for Income Taxes........... 600 67 691 1,358
------- ------ -------- -------
Net Income........................... $2,193 $ 171 $ 1,127 $3,491
======= ====== ======== =======
Net Income Per Common and Common
Equivalent Share.................... $ 0.23 $ 0.04 -- $ 0.28
======= ====== ======== =======
Weighted Average Common and Common
Equivalent Shares Outstanding....... 9,623 3,904 2,759 12,382
======= ====== ======== =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements.
44
<PAGE>
KEY PRODUCTION COMPANY, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------- ------------------------
KEY BROCK ADJUSTMENTS CONSOLIDATED
------- ------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas production revenues... $16,307 $ 9,042 $ -- $25,349
Other revenues.................... 330 2,087 (930) 1,487
------- ------- ------- -------
16,637 11,129 (930) 26,836
------- ------- ------- -------
Operating Expenses:
Depreciation, depletion and
amortization..................... 5,328 3,247 (721) 7,854
Operating Costs................... 5,103 4,462 -- 9,565
Abandonment expenses/dry hole
costs............................ -- 123 (123) --
Administrative, selling and
other............................ 1,432 2,274 (2,094) 1,612
Financing costs:
Interest costs.................. 446 859 (306) 999
Capitalized interest............ (309) -- -- (309)
Interest income................. (110) -- -- (110)
------- ------- ------- -------
11,890 10,965 (3,244) 19,611
------- ------- ------- -------
Income Before Income Taxes.......... 4,747 164 2,314 7,225
Provision for Income Taxes.......... 1,804 -- 879 2,683
------- ------- ------- -------
Net Income.......................... $ 2,943 $ 164 $ 1,435 $ 4,542
======= ======= ======= =======
Net Income Per Common and Common
Equivalent Share................... $ 0.30 $ 0.04 -- $ 0.36
======= ======= ======= =======
Weighted Average Common and Common
Equivalent Shares Outstanding...... 9,808 3,943 2,759 12,567
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements.
45
<PAGE>
KEY PRODUCTION COMPANY, INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------- ------------------------
KEY BROCK ADJUSTMENTS CONSOLIDATED
------- ------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........ $ 444 $ 2,385 $ -- $ 2,829
Receivables...................... 3,072 1,751 (350) 4,473
Prepaid expenses and deposits.... 412 147 -- 559
------- ------- ------- -------
3,928 4,283 (350) 7,861
------- ------- ------- -------
Oil and Gas Properties, net........ 51,279 15,316 3,621 70,216
Other Assets, net.................. 623 1,190 (511) 1,302
------- ------- ------- -------
$55,830 $20,789 $ 2,760 $79,379
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable................. $ 1,364 $ 1,185 $ -- $ 2,549
Accrued lease operating expense
and other....................... 1,520 31 (50) 1,501
------- ------- ------- -------
2,884 1,216 (50) 4,050
------- ------- ------- -------
Long-Term Debt..................... 11,400 9,425 -- 20,825
------- ------- ------- -------
Deferred Credits and Other
Noncurrent Liabilities:
Income taxes..................... 3,144 -- 997 4,141
Other............................ 1,919 1,503 (410) 3,012
------- ------- ------- -------
5,063 1,503 587 7,153
------- ------- ------- -------
Stockholders' Equity:
Common stock..................... 2,914 410 (340) 2,984
Paid-in capital.................. 34,397 755 587 35,739
Retained Earnings................ 8,628 8,156 (8,156) 8,628
Treasury stock, at cost.......... (9,456) (676) 10,132 --
------- ------- ------- -------
36,483 8,645 2,223 47,351
------- ------- ------- -------
$55,830 $20,789 $ 2,760 $79,379
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements
46
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The unaudited pro forma statements of income were prepared using Key
Production and Brock audited income statements for the year ended December 31,
1994 and Key Production and Brock unaudited income statements for the nine
month periods ended September 30, 1995, and using the adjustments and
assumptions described below. The unaudited pro forma balance sheet was
prepared using Key Production and Brock unaudited balance sheets dated
September 30, 1995 and the adjustments and assumptions described below.
NOTE 2--PRO FORMA ADJUSTMENTS
Key Production uses the full cost method of accounting (full cost) for oil
and gas producing activities whereas Brock uses the successful efforts method
of accounting (successful efforts). A major difference between the two methods
is that exploration costs are capitalized under full cost, but expensed under
successful efforts. The pro forma adjustments convert Brock's historical data
to the full cost method of accounting.
Other revenues--Other revenues have been reduced by the gain/loss on
disposal of oil and gas properties and equipment. The gain or loss would not
be recognized as other revenue under full cost accounting rules.
Depreciation, depletion and amortization--Depreciation, depletion and
amortization expense has been adjusted to reflect the differences between full
cost and successful efforts accounting.
Abandonment/dry hole costs--An adjustment has been made to remove these
costs from the income statement. Abandonment and dry hole costs would be
capitalized per full cost accounting rules.
Administrative, selling and other--General and administrative expense has
been reduced for anticipated economies of scale. As discussed in more detail
in "The Companies--Post-Merger Profile and Strategy," subsequent to the
Merger, Key expects to maintain an office in New Orleans. Staff in that office
will be involved in exploration and acquisition activities and therefore, in
accordance with the full cost accounting rules, the personnel and other
expenses related to operating that office will be capitalized. Accounting,
land and other functions relating to the existing Brock properties will be
performed by personnel in Key's corporate office in Denver. The pro forma
adjustment eliminates the actual administrative expense reported by Brock for
the nine months ended September 30, 1995 and the twelve months ended December
31, 1994 since all administrative support will be provided by the Denver
office of Key. An additional $15,000 per month is included in the pro forma
calculation to cover salaries, benefits and other expenses for four additional
accounting and land employees in the Denver office.
Interest expense--Subsequent to consummation of the Merger, Key intends to
utilize its existing revolving credit facility with NationsBank to repay
Brock's outstanding debt. This facility allows Key to borrow up to $50 million
subject to borrowing base limits which are tied to the value of Key's oil and
gas reserves. The combined value of Key's and Brock's oil and gas reserves
subsequent to the Merger will be more than adequate to allow Key to increase
its currently elected $22 million borrowing base to the level necessary to
repay Brock's existing debt. The interest rate terms in Key's facility are
tied to Key's debt-to-capitalization ratio. Consummation of the Merger is not
expected to negatively impact that ratio. Brock's debt was borrowed at the
prime rate which was higher than the interest rate that applied to Key
Production's debt for the same periods. Interest expense has been reduced to
reflect the difference in Key Production's and Brock's borrowing arrangements.
Provision for income taxes--A provision for income taxes has been calculated
on the above pro forma adjustments using a combined federal and state rate of
38 percent.
Receivables--In accordance with purchase accounting rules, Brock's assets
and liabilities are to be recorded at their fair market value at the date the
Merger is consummated. Subsequent to preparation of its September 30, 1995
balance sheet, Brock determined that a portion of its existing accounts
receivable balance may be uncollectible. An adjustment has been made to record
a provision for uncollectible receivables. This adjustment reduces the
carrying value of accounts receivable to an amount which approximates the fair
market value.
47
<PAGE>
Oil and gas properties--The adjustment to oil and gas properties reflects
the amount to be recorded based on purchase accounting rules including the
required provision for additional deferred taxes.
Other Assets, net--The Brock defined benefit pension plan will be
terminated. The prepaid pension asset has been eliminated and an accrual for
the anticipated costs relating to terminating the plan has been made.
Accrued lease operating expense and other--The net reduction in accrued
expenses is due to the accrual discussed above and to the elimination of the
current and long-term portions of the gas balancing liability reflected in
Brock's balance sheet. Key Production uses the cash method of accounting for
gas imbalances and therefore the balance sheet does not reflect these amounts.
Deferred taxes--A deferred tax liability was calculated on the estimated
increase in carrying value of the Brock oil and gas properties. The tax
liability was calculated at 38 percent.
Other noncurrent liabilities--Other liabilities had a net decrease due to
the following: 1) The long-term gas balancing liability of $718,000 will be
eliminated. (See accrued expenses.) 2) The Brock retirement liability will
become vested and increase by $308,000 due to a change in control provision.
Stockholders' Equity--Key Production will issue approximately 2,800,000
shares of common stock to accomplish the merger, or one Key Production share
for each 1.45 Brock share held. Key Production will use treasury shares first
(approximately 2,477,691 shares) and then issue new shares (approximately
281,309 shares) for the difference. Additional paid-in capital will be
increased based on the average Key Production Common Stock price at the time
of the merger announcement.
NOTE 3--EXPENSES OF THE MERGER
Direct expenses incurred by Key Production in connection with the Merger are
considered part of the cost of the company being acquired and will be
capitalized. These costs include fees paid to outside consultants for legal,
accounting and financial printing services and severance payments and change
of control bonuses that will be paid to Brock employees under the terms of
Brock's existing plans. The terms of the Brock severance and change of control
plans are discussed in more detail in "Certain Terms of the Merger Agreement--
Certain Benefit Plans and Severance."
NOTE 4--PRO FORMA OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The tables set forth below reflect unaudited pro forma disclosures of
certain oil and gas reserve information as of December 31, 1994. The
information was prepared from, and should be read in conjunction with, the
related information contained in the Key's 1994 10-K and Brock's 1994 10-K
that are incorporated by reference into and attached to this Joint Proxy
Statement/Prospectus.
Production Information, Average Sales Prices and Production Costs for the Year
Ended December 31, 1994
<TABLE>
<CAPTION>
Pro Forma
------------
Oil Gas
------ -----
<S> <C> <C>
Production (oil in thousands of barrels and gas in million cubic
feet).......................................................... 855 6,891
Average Sales Price (per barrel of oil and per Mcf of gas)...... $14.79 $1.88
Average Production Cost Per Equivalent Mcf...................... $.80
</TABLE>
48
<PAGE>
Productive Wells at December 31, 1994
<TABLE>
<CAPTION>
Pro Forma
----------------------
Oil Gas
----------- ----------
Gross Net Gross Net
----- ----- ----- ----
<S> <C> <C> <C> <C>
Midcontinent............................................. 164 34.7 412 66.9
Gulf Coast............................................... 284 35.4 165 24.1
Rocky Mountains.......................................... 699 64.3 105 4.2
California............................................... 1 .1 -- --
----- ----- --- ----
1,148 134.5 682 95.2
===== ===== === ====
</TABLE>
Net acres (pro forma) at December 31, 1994
<TABLE>
<S> <C>
Developed............................................................... 120,100
Undeveloped............................................................. 546,400
</TABLE>
Estimated Quantities of Proved Oil and Gas Reserves at December 31, 1994
<TABLE>
<CAPTION>
Pro Forma
----------------------
Gas (MMcf) Oil (MBbls)
---------- -----------
<S> <C> <C>
Total Proved Reserves--Developed and Undeveloped
Beginning of year....................................... 39,912 3,644
Revisions of Previous Estimates........................ (942) 71
Improved Recovery...................................... -- 245
Extensions and Discoveries............................. 5,574 690
Purchases of Reserves.................................. 9,169 2,494
Production............................................. (6,891) (855)
Sales of Properties.................................... (104) (148)
------ -----
End of year............................................. 46,718 6,141
====== =====
Proved Developed Reserves
Beginning of year....................................... 26,564 3,428
End of year............................................. 34,344 5,476
</TABLE>
Discounted Future Net Cash Flows and Changes Relating to Proved Reserves at
December 31, 1994
<TABLE>
<CAPTION>
Pro Forma
(IN THOUSANDS) ---------
<S> <C>
Cash Inflows........................................................ $182,946
Production and Development Costs.................................... (73,921)
Income Tax Expense.................................................. (22,877)
--------
Net Cash Flows...................................................... 86,148
10% Annual Discount Rate............................................ (28,136)
--------
Discounted Future Net Cash Flows.................................... $ 58,012
========
Following are the principal sources of changes in the discounted fu-
ture net cash flows:
Sales, net of production costs...................................... $(16,191)
Net change in prices and production costs........................... (5,838)
Extensions, discoveries and improved recovery, net of related
costs.............................................................. 7,989
Change in future development costs.................................. (477)
Revision of quantities.............................................. 305
Accretion of discount............................................... 5,129
Change in income taxes.............................................. (514)
Purchases of reserves in place...................................... 18,913
Sales of properties................................................. (550)
Change in production rates and other................................ (1,265)
--------
$ 7,501
========
</TABLE>
49
<PAGE>
PRINCIPAL STOCKHOLDERS OF KEY PRODUCTION AND BROCK
KEY PRODUCTION
The following table indicates the beneficial ownership as of the Record Date
of the Key Production Common Stock by each director, by each person known by
Key Production to own more than 5% of the outstanding shares of Key Production
Common Stock, Key Production's Chief Executive Officer and Key Production's
other executive officers whose total annual salary and bonus exceeds $100,000
and by all directors and executive officers of Key Production as a group.
Except as otherwise indicated below, the ownership reflects sole voting and
investment power by the beneficial owner.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF CLASS OF CLASS
BEFORE AFTER
SHARES OF CONSUMMATION CONSUMMATION
COMMON OF THE OF THE
BENEFICIAL OWNER STOCK MERGER MERGER
---------------- --------- ------------ ------------
<S> <C> <C> <C>
F.H. Merelli..................... 746,650(1)(4) 7.99% 6.17%
Cortlandt S. Dietler............. 85,500(2) .96% .73%
Timothy J. Moylan................ 90,600(2) 1.02% .78%
Monroe W. Robertson.............. 181,650(3)(4) 2.02% 1.55%
All Directors and Executive
Officers as a Group
(6 Persons)..................... 1,258,750(5) 12.88% 10.05%
</TABLE>
- --------
(1) Includes 151,000 shares held in Mr. Merelli's IRA account and options for
500,000 shares, one-third of which vested September 1, 1993, one-third of
which vested September 1, 1994, and one-third of which vested on September
1, 1995.
(2) Includes options for 45,000 shares of common stock, one-third of which
vested December 9, 1993, one-third of which vested December 9, 1994, and
one-third of which vested on December 9, 1995.
(3) Includes options for 150,000 shares of common stock, one-third of which
vested January 4, 1994, one-third of which vested January 4, 1995, and
one-third of which vested on January 4, 1996.
(4) Includes 25,650 shares held by Messrs. Merelli and Robertson as Trustees
of the Company's 401(k) retirement plan.
(5) Includes options for 920,000 shares of common stock, vesting at various
dates beginning September 1, 1993.
50
<PAGE>
BROCK
The following table indicates the beneficial ownership as of the Record Date
of the Brock Common Stock, and of Key Production Common Stock after the
Merger, by each director of Brock, by each person known by Brock to own more
than 5% of the outstanding shares of Brock Common Stock, Brock's Chief
Executive Officer and the Brock's other executive officers whose total annual
salary and bonus exceeds $100,000 and by all directors and executive officers
of Brock as a group. Except as otherwise indicated below, the ownership
reflects sole voting and investment power by the beneficial owner.
<TABLE>
<CAPTION>
PERCENTAGE OF
KEY PRODUCTION
SHARES OF PERCENTAGE COMMON STOCK AFTER
BENEFICIAL OWNER COMMON STOCK OF CLASS CONSUMMATION OF MERGER
---------------- ------------ ---------- ----------------------
<S> <C> <C> <C>
Lawrence E. Brock........... 325,811(a) 8.54% 1.94%
Lorena Rowan Brock.......... 325,811(a) 8.54% 1.94%
Brock Trust................. 325,811(a) 8.54% 1.94%
BancOne Forth Worth, Texas,
Trustee.................... 893,658(b) 23.42% 5.31%
Lawrence E. Brock, III--
Trust...................... 40,000(c) 1.05% .24%
Kenneth J. Stucke........... 82,700(d) 2.10% .49%
Michael R. Barham........... 35,950(d) .91% .21%
Robin A. Seibert............ 34,750(d) .88% .20%
E. Peter Corcoran........... 130,365 3.42% .77%
John W. Cooke, R. .......... 1,000 .03% *
John W. Owensby............. 5,000 .13% .02%
All Directors and Executive
Officers as a Group
(8 Persons)................ 1,549,234(d) 39.39% 9.44%
</TABLE>
- --------
* Less than one hundredth of one percent.
(a) These shares are held in a trust in which Mr. and Mrs. Brock are the
beneficiaries. As Trustee, Mr. Brock has voting and dispositive powers
with respect to the shares. Mr. Brock's address is 225 Baronne, Suite 700,
New Orleans, Louisiana 70112.
(b) These shares are held in an irrevocable trust administered by BancOne,
P.O. Box 2050, Fort Worth, Texas 73713. Mr. and Mrs. Brock are the trust
beneficiaries. BancOne has voting and dispositive powers with respect to
the shares.
(c) These shares are held in a trust for the benefit of Lawrence E. Brock,
III. Lawrence E. Brock, as Trustee, has voting and dispositive powers with
respect to the shares. Mr. and Mrs. Brock disclaim beneficial ownership of
these shares.
(d) Includes shares issuable pursuant to stock options exercisable currently
or within 60 days as follows: Mr. Stucke, 51,250 shares; Mr. Barham,
33,250 shares; Mr. Seibert, 33,750 shares and all executive officers and
directors as a group, 118,250 shares.
51
<PAGE>
DESCRIPTION OF KEY PRODUCTION CAPITAL STOCK
GENERAL
At the Record Date, the authorized capital stock of Key Production consisted
of 50,000,000 shares of common stock, of which 8,849,468 shares were
outstanding.
The description set forth below of the Key Production Common Stock
constitutes a brief summary of certain provisions of the Key Production
Charter and By-Laws, all of which are filed as exhibits to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part and are
incorporated herein by reference. Such summary does not purport to be complete
and is qualified by reference to such documents.
COMMON STOCK
Each share of Key Production Common Stock has one vote on all matters on
which stockholders are entitled or permitted to vote, including the election
or removal of directors. Holders of the Key Production Common Stock have no
redemption or conversion rights, participate ratably in any distribution of
assets to stockholders in liquidation, and have no preemptive or other
subscription rights. Cumulative voting is not permitted in the election of
directors. Holders of the Key Production Common Stock are entitled to receive
such dividends as may be declared by the Board of Directors of Key Production
out of funds legally available therefor. All outstanding shares of Key
Production Common Stock are, and the shares to be issued pursuant to the
Merger Agreement will be, fully paid and nonassessable. American Securities
Transfer, Incorporated is the Transfer Agent and Registrar for the Key
Production Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Key is subject to Section 203 of the DGCL, which generally prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
(i) prior to such date the Board of Directors of the corporation approved
either the business combination or the transaction in which the person became
an interested stockholder, (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock of the
corporation excluding shares owned by officers or directors of the corporation
and by certain employee stock plans, or (iii) on or after such date the
business combination is approved by the Board of Directors of the corporation
and by the affirmative vote of at least 66 3/4% of the outstanding voting
stock of the corporation that is not owned by the interested stockholder. A
"business combination" generally includes mergers, asset sales and similar
transactions between the corporation and the interested stockholder, and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of the corporation's voting stock or who is an
affiliate or associate of the corporation and, together with his affiliates
and associates, has owned 15% or more of the corporation's voting stock within
three years.
RESTRICTIONS ON DIVIDENDS
Under its Credit Agreement with NationsBank, Key Production may not make
dividend payments exceeding $100,000 during any fiscal year, nor may dividends
exceed $.30 per share. No dividends were paid in 1995 or in 1994 on the Key
Production Common Stock.
52
<PAGE>
COMPARATIVE RIGHTS OF KEY PRODUCTION AND BROCK STOCKHOLDERS
If the Merger is consummated, the stockholders of Brock will become
stockholders of Key Production. The rights of the stockholders of both Key
Production and Brock are governed by and subject to the provisions of the
DGCL. The rights of current Brock stockholders following the Merger will be
governed by the Key Production Charter and Key Production's By-Laws rather
than the provisions of the Brock Charter and Brock's By-Laws. The following is
a brief summary of certain differences between the rights of Key Production
stockholders and the rights of Brock stockholders, and is qualified by
reference to the relevant provisions of the DGCL, the Key Production Charter,
Key Production's By-Laws, the Brock Charter and Brock's By-Laws.
POWER TO CALL SPECIAL MEETINGS
Key Production's By-Laws provide that a special meeting of stockholders may
be called by a majority of directors then in office or by the Chief Executive
Officer of Key Production. Brock's By-Laws provide that a special meeting of
stockholders may be called by the President, a majority of the Board of
Directors or by the holders of at least two-thirds of the stock entitled to
vote at the meeting.
CERTAIN MATTERS PRESENTED AT STOCKHOLDERS MEETINGS BY STOCKHOLDERS
Key Production's By-Laws require that if a stockholder wishes to nominate
directors for election or present matters for consideration at a meeting of
stockholders, he generally must give notice to the secretary of Key Production
not less than 60 nor more than 90 days before the first anniversary of the
preceding year's annual meeting, with certain exceptions, and the notice must
contain certain specified information. In order for the stockholders to
approve any proposal to request the Board of Directors to take specified
action, a majority of the outstanding stock entitled to vote must be voted for
the proposal. The Brock Charter and Brock's By-Laws contain no similar
restrictions.
Also see "Description of Key Production Capital Stock."
INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of Arthur Andersen LLP will be present
at the Key Production Special Meeting and representatives of Ernst & Young LLP
will be present at the Brock Special Meeting to respond to appropriate
questions of stockholders and to make a statement if they so desire.
LEGAL MATTERS
The validity of the Key Production Common Stock offered hereby has been
passed upon for Key Production by Holme Roberts & Owen LLC, Denver, Colorado.
Certain tax consequences of the Merger have been passed upon for Brock by
Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., New Orleans,
Louisiana.
EXPERTS
The financial statements of Key Production as of December 31, 1993 and 1994
and for each of the three years in the period ended December 31, 1994,
included in Key Production's Annual Report on Form 10-K for the year ended
December 31, 1994, incorporated by reference in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority as said firm
as experts in giving
53
<PAGE>
said report. Reference is made to said report, which includes an explanatory
paragraph with respect to the change in the method of accounting for income
taxes as discussed in Note 3 to the financial statements.
The consolidated financial statements of Brock Exploration Corporation
appearing in Brock's Annual Report (Form 10-K) for the year ended December 31,
1994, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
STOCKHOLDERS' PROPOSALS
Any proposals of holders of Key Production Common Stock intended to be
presented at the Annual Meeting of Stockholders of Key Production to be held
in 1997 must be received by Key Production, addressed to the Corporate
Secretary at One Norwest Center, 20th Floor, 1700 Lincoln Street, Denver,
Colorado 80203-4520, no later than December 31, 1996, to be considered for
inclusion in the proxy statement and form of proxy relating to that meeting.
It is too late for stockholders of Key Production to submit proposals to be
presented at the 1996 Annual Meeting.
If the Merger is not consummated, any proposals of stockholders of Brock
intended to be presented at the Annual Meeting of Stockholders of Brock to be
held in 1996 must have been received by Brock, addressed to the Secretary at
225 Baronne Street, Suite 700, New Orleans, Louisiana 70112-1707, no later
than March 1, 1996, to be considered for inclusion in the proxy statement and
form of proxy relating to that meeting.
54
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 21, 1995 (this
"Agreement"), is by and among Key Production Company, Inc., a Delaware
corporation ("Key"), Key Acquisition One, Inc., a Delaware corporation and
wholly owned subsidiary of Key ("Merger Sub"), and Brock Exploration
Corporation, a Delaware corporation ("Brock"). Key and Merger Sub are
sometimes referred to herein as the "Key Companies."
WHEREAS, Merger Sub, upon the terms and subject to the conditions of this
Agreement and in accordance with the General Corporation Law of the State of
Delaware ("Delaware Law"), will merge with and into Brock (the "Merger"), and
pursuant thereto, the issued and outstanding shares of common stock, $.10 per
share, of Brock ("Brock Common Stock") not owned directly or indirectly by
Brock or the Key Companies or their respective subsidiaries will be converted
into the right to receive shares of common stock, $.25 par value, of Key (the
"Key Common Stock"), as set forth herein;
WHEREAS, the Board of Directors of Brock, after actively soliciting and
considering business combination proposals and indications of interest from
other persons, has determined that the Merger is consistent with and in
furtherance of the long-term business strategy of Brock and is fair to, and in
the best interests of, Brock and its stockholders and has approved and adopted
this Agreement and the transactions contemplated hereby, and recommended
adoption of this Agreement by the stockholders of Brock;
WHEREAS, the Board of Directors of Key has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of Key
and is fair to, and in the best interests of, Key and its stockholders and has
approved and adopted this Agreement and the transactions contemplated hereby,
and recommended approval by the stockholders of Key of the issuance of Key
Common Stock in connection with this Agreement;
WHEREAS, the Board of Directors of Merger Sub has approved and adopted this
Agreement and Key, as the sole stockholder of Merger Sub, will adopt this
Agreement promptly after the execution hereof by the parties hereto; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under the provisions of section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code") and that
this Agreement constitute a plan of reorganization;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with Delaware Law, at the Effective
Time (as defined in Section 1.02 of this Agreement), Merger Sub shall be
merged with and into Brock. As a result of the Merger, the separate corporate
existence of Merger Sub shall cease and Brock shall continue as the surviving
corporation of the Merger (the "Surviving Corporation"). Certain terms used in
this Agreement are defined in Section 9.03 hereof.
SECTION 1.02. Closing; Closing Date; Effective Time. Unless this Agreement
shall have been terminated pursuant to Section 8.01, and subject to the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VII, the consummation of the Merger and the closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Key Production as soon as practicable (but in any event within two business
days) after the satisfaction or, if permissible, waiver of the conditions set
forth in Article VII, or at such other date, time and place as Key and Brock
may agree; provided, that the conditions set
A-1
<PAGE>
forth in Article VII shall have been satisfied or waived at or prior to such
time. The date on which the Closing takes place is referred to herein as the
"Closing Date". As promptly as practicable on the Closing Date, the parties
hereto shall cause the Merger to be consummated by filing a Certificate of
Merger with the Secretary of State of the State of Delaware, in such form as
required by, and executed in accordance with the relevant provisions of,
Delaware Law (the date and time of such filing, or such later date or time
agreed upon by Key and Brock and set forth therein, being the "Effective
Time"). For all Tax purposes, the Closing shall be effective at the end of the
day on the Closing Date.
SECTION 1.03. Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
SECTION 1.04. Certificate of Incorporation; Bylaws. At the Effective Time,
the certificate of incorporation of Brock, as in effect immediately prior to
the Effective Time, shall be the certificate of incorporation of the Surviving
Corporation and thereafter shall continue to be its certificate of
incorporation until amended as provided therein and pursuant to Delaware Law.
The bylaws of Brock, as in effect immediately prior to the Effective Time,
shall be the bylaws of the Surviving Corporation and thereafter shall continue
to be its bylaws until amended as provided therein and pursuant to Delaware
Law.
SECTION 1.05. Directors and Officers. The directors of Merger Sub immediately
prior to the Effective Time shall be the directors of the Surviving
Corporation, each to hold office in accordance with the charter and bylaws of
the Surviving Corporation, and the officers of Merger Sub immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, each to
hold office in accordance with the bylaws of the Surviving Corporation, in each
case until their respective successors are duly elected or appointed and
qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. Merger Consideration; Conversion and Cancellation of
Securities. At the Effective Time, by virtue of the Merger and without any
action on the part of the Key Companies, Brock or their respective
stockholders:
(a) Subject to the other provisions of this Article II, each share of
Brock Common Stock issued and outstanding immediately prior to the
Effective Time (excluding any Brock Common Stock described in Section
2.01(b) of this Agreement) shall be converted into the right to receive
.6897 share of Key Common Stock (the "Exchange Ratio"). Notwithstanding the
foregoing, if between the date of this Agreement and the Effective Time the
outstanding shares of Key Common Stock or Brock Common Stock shall have
been changed into a different number of shares or a different class, by
reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, the Exchange
Ratio shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
(b) Notwithstanding any provision of this Agreement to the contrary, each
share of Brock Common Stock held in the treasury of Brock and each share of
Brock Common Stock owned by Key or any direct or indirect wholly owned
subsidiary of Key or of Brock immediately prior to the Effective Time shall
be canceled and extinguished without any conversion thereof and no payment
shall be made with respect thereto.
(c) All shares of Brock Common Stock shall cease to be outstanding and
shall automatically be canceled and retired, and each certificate
previously evidencing Brock Common Stock outstanding immediately prior to
the Effective Time (other than Brock Common Stock described in Section
2.01(b) of this Agreement) ("Converted Shares") shall thereafter represent
the right to receive, subject to Section 2.02(e) of this Agreement, that
number of shares of Key Common Stock determined pursuant to the Exchange
Ratio and, if applicable, cash pursuant to Section 2.02(e) of this
Agreement (the "Merger Consideration"). The holders of certificates
previously evidencing Converted Shares shall cease to have any
A-2
<PAGE>
rights with respect to such Converted Shares except as otherwise provided
herein or by law. Such certificates previously evidencing Converted Shares
shall be exchanged for certificates evidencing whole shares of Key Common
Stock upon the surrender of such Certificates in accordance with the
provisions of Section 2.02 of this Agreement, without interest. No
fractional shares of Key Common Stock shall be issued in connection with
the Merger and, in lieu thereof, a cash payment shall be made pursuant to
Section 2.02(e) of this Agreement.
(d) Each share of common stock, par value $1.00 per share, of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into one share of common stock, par value $.10 per share, of the
Surviving Corporation.
SECTION 2.02. Exchange and Surrender of Certificates.
(a) As of the Effective Time, Key shall deposit, or shall cause to be
deposited with American Securities Transfer, Inc. (the "Exchange Agent"), for
the benefit of the holders of certificates which immediately prior to the
Effective Time evidenced shares of Brock Common Stock (the "Brock
Certificates"), for exchange in accordance with this Article II, certificates
representing the shares of Key Common Stock (such certificates for shares of
Key Common Stock, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund") issuable
pursuant to Section 2.01 in exchange for such shares of Brock Common Stock.
(b) As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of shares of Brock Common Stock
immediately prior to the Effective Time (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Brock Certificates shall pass, only upon delivery of the Brock Certificates
to the Exchange Agent, and which shall be in such form and have such other
provisions as Key and Brock may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Brock Certificates in exchange for
certificates representing shares of Key Common Stock. Upon surrender of a Brock
Certificate for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, the holder of such Brock Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of Key Common Stock which such holder has the right to receive
in respect of the Brock Certificate surrendered pursuant to the provisions of
this Article II (after taking into account all shares of Brock Common Stock
then held by such holder), and the Brock Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Brock Common
Stock which is not registered in the transfer records of Brock, a certificate
representing the proper number of shares of Key Common Stock may be issued to a
transferee if the Brock Certificate representing such Brock Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 2.02, each Brock Certificate shall be deemed at any time after the
Effective Time to represent only the Key Common Stock into which the shares of
Brock Common Stock represented by such Brock Certificate have been converted as
provided in this Article II and the right to receive upon such surrender cash
in lieu of any fractional shares of Key Common Stock as contemplated by this
Section 2.02.
(c) After the Effective Time, there shall be no further registration of
transfers of Brock Common Stock. If, after the Effective Time, certificates
representing shares of Brock Common Stock are presented to Key or the Exchange
Agent, they shall be canceled and exchanged for the Merger Consideration
provided for, and in accordance with the procedures set forth, in this
Agreement.
(d) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 2.02(a) or the Exchange Fund that remains unclaimed
by the holders of shares of Brock Common Stock one year after the Effective
Time shall be returned to Key, upon demand, and any such holder who has not
exchanged its shares of Brock Common Stock in accordance with this Section 2.02
prior to that time shall thereafter look only to Key for payment of the Merger
Consideration in respect of its shares of Brock Common Stock. Notwithstanding
the foregoing, Key shall not be liable to any holder of Brock Common Stock for
any amount paid to a public official pursuant to applicable abandoned property
escheat or similar laws.
A-3
<PAGE>
(e) No dividends, interest or other distributions with respect to shares of
Brock Common Stock shall be paid the holder of any unsurrendered Brock
Certificates until such Brock Certificates are surrendered as provided in this
Section 2.02. Upon such surrender, there shall be paid, without interest, to
the person in whose name the certificates representing the shares of Key Common
Stock into which such shares of Brock Common Stock were converted all dividends
and other distributions payable in respect of such securities on a date
subsequent to, and in respect of a record date after, the Effective Time.
(f) No certificates or scrip evidencing fractional shares of Key Common Stock
shall be issued upon the surrender for exchange of certificates, and such
fractional share interests shall not entitle the owner thereof to any rights of
a stockholder of Key. In lieu of any such fractional shares, each holder of a
certificate previously evidencing Converted Shares, upon surrender of such
certificate for exchange pursuant to this Article II, shall be paid an amount
in cash (without interest), rounded to the nearest cent, determined by
multiplying (i) the per share closing price of Key Common Stock on the Nasdaq
National Market as reported in the Wall Street Journal for the date of the
Effective Time (or, if there is no trading activity in Key Common Stock on the
Nasdaq National Market on such date, the first date of trading of Key Common
Stock on the Nasdaq National Market after the Effective Time) by (ii) the
fractional interest to which such holder would otherwise be entitled (after
taking into account all Converted Shares held of record by such holder at the
Effective Time).
(g) Key shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any former holder of Converted
Shares such amounts as Key (or any affiliate thereof) is required to deduct and
withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by Key, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the former holder of the Converted Shares
in respect of which such deduction and withholding was made by Key.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BROCK
Brock hereby represents and warrants to the Key Companies that:
SECTION 3.01. Organization and Qualification; Subsidiaries. Each of Brock and
its subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization, has all requisite power and authority to own, lease and operate
its properties and to carry on its business as it is now being conducted and is
duly qualified and in good standing to do business in each jurisdiction in
which the nature of the business conducted by it or the ownership or leasing of
its properties makes such qualification necessary, other than where the failure
to be so duly qualified and in good standing would not have a Brock Material
Adverse Effect. The term "Brock Material Adverse Effect" as used in this
Agreement shall mean any change or effect that, individually or when taken
together with all other such changes or effects, would be materially adverse to
the financial condition, results of operations or current or future business of
Brock and its subsidiaries, taken as a whole. Schedule 3.01 of the disclosure
schedule delivered to Key by Brock on the date hereof (the "Brock Disclosure
Schedule") sets forth, as of the date of this Agreement, a true and complete
list of all Brock's directly or indirectly owned subsidiaries, together with
(A) the jurisdiction of incorporation or organization of each subsidiary and
the percentage of each subsidiary's outstanding capital stock or other equity
interests owned by Brock or another subsidiary of Brock, and (B) an indication
of whether each such subsidiary is a "Significant Subsidiary" as defined in
Section 9.03(g) of this Agreement. Neither Brock nor any of its subsidiaries
owns an equity interest in any other partnership or joint venture arrangement
or other business entity that is material to the financial condition, results
of operations or current or future business of Brock and its subsidiaries,
taken as a whole.
SECTION 3.02. Charter and Bylaws. Brock has heretofore furnished to Key
complete and correct copies of the charter and the bylaws or the equivalent
organizational documents, in each case as amended or restated, of Brock and
each of its subsidiaries. Neither Brock nor any of its subsidiaries is in
violation of any of the provisions of its charter or any material provision of
its bylaws (or equivalent organizational documents).
A-4
<PAGE>
SECTION 3.03. Capitalization.
(a) As of the date of this Agreement (1) 3,823,742 shares were issued and
outstanding, (2) authorized capital stock of Brock consists of (i) 8,000,000
shares of Brock Common Stock, of which 276,660 shares were held in treasury by
Brock and (3) 169,000 shares were reserved for future issuance pursuant to
outstanding stock options ("Stock Options") granted pursuant to Brock's 1979
Stock Option Plan (the "Option Plan"); and (ii) 1,000,000 shares of preferred
stock, par value $1.00 per share ("Brock Preferred Stock"), of which no shares
are issued and outstanding. Except as described in this Section 3.03 or in
Schedule 3.03(a) to the Brock Disclosure Schedule, as of the date of this
Agreement, no shares of capital stock of Brock are reserved for any purpose.
Each of the outstanding shares of capital stock of, or other equity interests
in, each of Brock and its subsidiaries is duly authorized, validly issued, and,
in the case of shares of capital stock, fully paid and nonassessable, and has
not been issued in violation of (nor are any of the authorized shares of
capital stock of, or other equity interests in, such entities subject to) any
preemptive or similar rights created by statute, the charter or bylaws (or the
equivalent organizational documents) of Brock or any of its subsidiaries, or
any agreement to which Brock or any of its subsidiaries is a party or bound,
and such outstanding shares or other equity interests owned by Brock or a
subsidiary of Brock are owned free and clear of all security interests, liens,
claims, pledges, agreements, limitations on Brock's or such subsidiaries'
voting rights, charges or other encumbrances of any nature whatsoever.
(b) Except as set forth in Section 3.03(a) above or in Schedule 3.03(b)(i) to
the Brock Disclosure Schedule, there are no options, warrants or other rights
(including registration rights), agreements, arrangements or commitments of any
character to which Brock or any of its subsidiaries is a party relating to the
issued or unissued capital stock of Brock or any of its subsidiaries or
obligating Brock or any of its subsidiaries to grant, issue or sell any shares
of the capital stock of Brock or any of its subsidiaries, by sale, lease,
license or otherwise. Except as set forth in Schedule 3.03(b)(ii) to the Brock
Disclosure Schedule, there are no obligations, contingent or otherwise, of
Brock or any of its subsidiaries to (i) repurchase, redeem or otherwise acquire
any shares of Brock Common Stock or other capital stock of Brock, or the
capital stock or other equity interests of any subsidiary of Brock; or (ii)
(other than advances to subsidiaries in the ordinary course of business)
provide material funds to, or make any material investment in (in the form of a
loan, capital contribution or otherwise), or provide any guarantee with respect
to the obligations of, any subsidiary of Brock or any other person. Except as
described in Schedule 3.03(b)(iii) to the Brock Disclosure Schedule, neither
Brock nor any of its subsidiaries (x) directly or indirectly owns, (y) has
agreed to purchase or otherwise acquire or (z) holds any interest convertible
into or exchangeable or exercisable for, 5% or more of the capital stock of any
corporation, partnership, joint venture or other business association or entity
(other than the subsidiaries of Brock set forth in Schedule 3.01 to the Brock
Disclosure Schedule). Except as set forth in Schedule 3.03(b)(iv) to the Brock
Disclosure Schedule and except for any agreements, arrangements or commitments
between Brock and its subsidiaries or between such subsidiaries, there are no
agreements, arrangements or commitments of any character (contingent or
otherwise) pursuant to which any person is or may be entitled to receive any
payment based on the revenues or earnings, or calculated in accordance
therewith, of Brock or any of its subsidiaries. There are no voting trusts,
proxies or other agreements or understandings to which Brock or any of its
subsidiaries is a party or by which Brock or any of its subsidiaries is bound
with respect to the voting of any shares of capital stock of Brock or any of
its subsidiaries.
(c) Brock has made available to Key complete and correct copies of (i) the
Option Plan and the forms of options issued pursuant to the Option Plan,
including all amendments thereto and (ii) all options that are not in the form
thereof provided under clause (i) above. Schedule 3.03(c) to the Brock
Disclosure Schedule sets forth a complete and correct list of all outstanding
options, restricted stock or any other stock awards (the "Stock Awards")
granted under the Option Plan or otherwise, setting forth as of the date hereof
(i) the number and type of Stock Awards, (ii) the exercise price of each
outstanding Stock Option, and (iii) the number of Stock Options exercisable.
SECTION 3.04. Authority. Brock has all requisite corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the Merger, the adoption of this Agreement by the stockholders
of Brock as described
A-5
<PAGE>
in Section 3.15 hereof). The execution and delivery of this Agreement by Brock
and the consummation by Brock of the transactions contemplated hereby have been
duly authorized by all necessary corporate action and no other corporate
proceedings on the part of Brock are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby (subject to, with respect to
the Merger, the adoption of this Agreement by the stockholders of Brock as
described in Section 3.15 hereof). This Agreement has been duly executed and
delivered by Brock and, assuming the due authorization, execution and delivery
thereof by the Key Companies, constitutes the legal, valid and binding
obligation of Brock.
SECTION 3.05. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Brock does not, and the
consummation of the transactions contemplated hereby in accordance with its
terms will not (i) conflict with or violate the charter or bylaws, or the
equivalent organizational documents, in each case as amended or restated, of
Brock or any of its subsidiaries, (ii) conflict with or violate any federal,
state, foreign or local law, statute, ordinance, rule, regulation, order,
judgment or decree (collectively, "Laws") applicable to Brock or any of its
subsidiaries or by which any of their respective properties is bound or subject
or (iii) except as described in Schedule 3.05 to the Brock Disclosure Schedule,
result in any breach of or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or require
payment under, or result in the creation of a lien or encumbrance on any of the
properties or assets of Brock or any of its subsidiaries pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Brock or any of its
subsidiaries is a party or by or to which Brock or any of its subsidiaries or
any of their respective properties is bound or subject, except for any such
conflicts or violations described in clause (ii) or breaches, defaults, events,
rights of termination, amendment, acceleration or cancellation, payment
obligations or liens or encumbrances described in clause (iii) that would not
have a Brock Material Adverse Effect. The Board of Directors of Brock has taken
all actions necessary under Delaware Law, including approving the transactions
contemplated by this Agreement and taking appropriate actions under Section 203
of Delaware Law, to ensure that the restrictions on business combinations set
forth in Section 203 of Delaware Law do not, and will not, apply with respect
to or as a result of the transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement by Brock does not, and
consummation of the transactions contemplated hereby will not, require Brock to
obtain any consent, license, permit, approval, waiver, authorization or order
of, or to make any filing with or notification to, any governmental or
regulatory authority, domestic or foreign (collectively, "Governmental
Entities"), except (i) for applicable requirements, if any, of the Securities
Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and state securities or blue sky laws
("Blue Sky Laws"), and the filing and recordation of appropriate merger
documents as required by Delaware Law, and (ii) where the failure to obtain
such consents, licenses, permits, approvals, waivers, authorizations or orders,
or to make such filings or notifications, would not, either individually or in
the aggregate, prevent Brock from performing its obligations under this
Agreement and would not have a Brock Material Adverse Effect.
SECTION 3.06. Permits; Compliance. Each of Brock and its subsidiaries and to
Brock's knowledge each third party operator of any of Brock's properties, is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "Brock Permits"), and there is
no action, proceeding or investigation pending or, to the knowledge of Brock,
threatened regarding suspension or cancellation of any of the Brock Permits,
except where the failure to possess, or the suspension or cancellation of, such
Brock Permits would not have a Brock Material Adverse Effect. Neither Brock nor
any of its subsidiaries is in conflict with, or in default or violation of (a)
any Law applicable to Brock or any of its subsidiaries or by or to which any of
their respective properties is bound or subject or (b) any of the Brock
Permits, except for any such conflicts, defaults or violations that would not
have a Brock Material Adverse Effect. During the period commencing on January
1, 1994 and ending on the date hereof, neither Brock nor any of its
subsidiaries has received from any Governmental Entity any written notification
A-6
<PAGE>
with respect to possible conflicts, defaults or violations of Laws, except as
set forth in Schedule 3.06 of the Brock Disclosure Schedule and except for
written notices relating to possible conflicts, defaults or violations that
would not have a Brock Material Adverse Effect.
SECTION 3.07. Reports; Financial Statements.
(a) Since December 31, 1992, Brock and its subsidiaries have filed (i) all
forms, reports, statements and other documents required to be filed with (A)
the Securities and Exchange Commission (the "SEC") including, without
limitation, (1) all Annual Reports on Form 10-K, (2) all Quarterly Reports on
Form 10-Q, (3) all proxy statements relating to meetings of stockholders
(whether annual or special), (4) all Current Reports on Form 8-K and (5) all
other reports, schedules, registration statements or other documents
(collectively referred to as the "Brock SEC Reports") and (B) any applicable
state securities authorities and (ii) all forms, reports, statements and other
documents required to be filed with any other applicable federal or state
regulatory authorities, except where the failure to file any such forms,
reports, statements or other documents would not have a Brock Material Adverse
Effect (all such forms, reports, statements and other documents in clauses (i)
and (ii) of this Section 3.07(a) being referred to herein, collectively, as the
"Brock Reports"). The Brock Reports, including all Brock Reports filed after
the date of this Agreement and prior to the Effective Time, (x) were or will be
prepared in all material respects in accordance with the requirements of
applicable Law (including, with respect to Brock SEC Reports, the Securities
Act and the Exchange Act, as the case may be, and the rules and regulations of
the SEC thereunder applicable to such Brock SEC Reports) and (y) did not at the
time they were filed, or will not at the time they are filed, contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in Brock SEC Reports filed prior to the
Effective Time (i) have been or will be prepared in accordance with the
published rules and regulations of the SEC and generally accepted accounting
principles applied on a consistent basis throughout the periods involved
(except (A) to the extent required by changes in generally accepted accounting
principles and (B) with respect to Brock SEC Reports filed prior to the date of
this Agreement, as may be indicated in the notes thereto) and (ii) fairly
present or will fairly present the consolidated financial position of Brock and
its subsidiaries as of the respective dates thereof and the consolidated
results of operations and cash flows for the periods indicated (including
reasonable estimates of normal and recurring year- end adjustments), except
that (x) any unaudited interim financial statements were or will be subject to
normal and recurring year-end adjustments and (y) any pro forma financial
statements contained in such consolidated financial statements are not
necessarily indicative of the consolidated financial position of Brock and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows for the periods indicated.
SECTION 3.08. Absence of Certain Changes or Events. Except as disclosed in
Brock SEC Reports filed prior to the date of this Agreement or as contemplated
by this Agreement or as set forth in Schedule 3.08 to the Brock Disclosure
Schedule, since September 30, 1995 Brock and its subsidiaries have conducted
their respective businesses only in the ordinary course and in a manner
consistent with past practice and there has not been: (i) any material damage,
destruction or loss (whether or not covered by insurance) with respect to any
material assets of Brock or any of its subsidiaries; (ii) any material change
by Brock or its subsidiaries in their accounting methods, principles or
practices; (iii) except for dividends by a subsidiary of Brock to Brock or
another subsidiary of Brock, any declaration, setting aside or payment of any
dividends or distributions in respect of shares of Brock Common Stock or the
shares of stock of, or other equity interests in, any subsidiary of Brock, or
any redemption, purchase or other acquisition by Brock or any of its
subsidiaries of any of Brock's securities or any of the securities of any
subsidiary of Brock; (iv) any increase in the benefits under, or the
establishment or amendment of, any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan, or any increase in the compensation payable or to become
payable to directors, officers or employees of Brock or its subsidiaries; (v)
any revaluation by Brock or any of its subsidiaries of any of their assets,
including the writing down of the
A-7
<PAGE>
value of inventory or the writing down or off of notes or accounts receivable,
other than in the ordinary course of business and consistent with past
practices; (vi) any entry by Brock or any of its subsidiaries into any
commitment or transaction material to Brock and its subsidiaries, taken as a
whole (other than this Agreement and the transactions contemplated hereby);
(vii) any material increase in indebtedness for borrowed money; or (viii) a
Brock Material Adverse Effect.
SECTION 3.09. Absence of Litigation. Except as disclosed in the Brock SEC
Reports filed prior to the date of this Agreement or as set forth in Schedule
3.09 to the Brock Disclosure Schedule, there is no claim, action, suit,
litigation, proceeding, arbitration or, to the knowledge of Brock,
investigation of any kind, at law or in equity (including actions or
proceedings seeking injunctive relief), pending or, to the knowledge of Brock,
threatened against Brock or any of its subsidiaries or any properties or rights
of Brock or any of its subsidiaries (except for claims, actions, suits,
litigation, proceedings, arbitrations or investigations which would not have a
Brock Material Adverse Effect), and neither Brock nor any of its subsidiaries
is subject to any continuing order of, consent decree, settlement agreement or
other similar written agreement with, or, to the knowledge of Brock, continuing
investigation by, any Governmental Entity, or any judgment, order, writ,
injunction, decree or award of any Government Entity or arbitrator, including,
without limitation, cease-and-desist or other orders, except for matters that
would not have a Brock Material Adverse Effect.
SECTION 3.10. Employee Benefit Plans; Labor Matters.
(a) Schedule 3.10(a) to the Brock Disclosure Schedule sets forth each
employee benefit plan (as such term is defined in ERISA section 3(3))
maintained or contributed to during the past five years by Brock or any member
of its ERISA Group or with respect to which Brock or any member of its ERISA
Group could incur liability under Section 4069, 4212(c) or 4204 of ERISA, and
any other retirement, pension, stock option, stock appreciation right, profit
sharing, incentive compensation, deferred compensation, savings, thrift,
vacation pay, severance pay, or other employee compensation or benefit plan,
agreement, practice, or arrangement, whether written or unwritten, whether or
not legally binding, except for any such plans, agreements, practices, or
arrangements (i) with respect to former employees who are not receiving or
entitled to benefits or (ii) with respect to which Brock could not incur more
than $20,000 of liability (collectively, the "Brock Benefit Plans"). For
purposes of this Agreement, "ERISA Group" means a controlled or affiliated
group within the meaning of Code section 414(b), (c), (m), or (o) of which
Brock is a member. Brock has made available to Key correct and complete copies
of all Brock Benefit Plans (including a detailed written description of any
Brock Benefit Plan that is unwritten, including a description of eligibility
criteria, participation, vesting, benefits, funding arrangements and assets and
any other provisions relating to Brock) and, with respect to each Brock Benefit
Plan, a copy of each of the following, to the extent each is applicable to each
Brock Benefit Plan: (i) the most recent favorable determination letter, (ii)
materials submitted to the Internal Revenue Service in support of a pending
determination letter request, (iii) the most recent letter issued by the
Internal Revenue Service recognizing tax exemption, (iv) each insurance
contract, trust agreement, or other funding vehicle, (v) the three most
recently filed Forms 5500 plus all schedules and attachments, (vi) the three
most recent actuarial valuations, and (vii) each summary plan description or
other general explanation or communication distributed or otherwise provided to
employees with respect to each Brock Benefit Plan during the past five years
that describes the terms of the Brock Benefit Plan.
(b) With respect to the Brock Benefit Plans, no event has occurred and, to
the knowledge of Brock, there exists no condition or set of circumstances, in
connection with which Brock or any member of its ERISA Group could be subject
to any liability under the terms of such Brock Benefit Plans, ERISA, the Code
or any other applicable Law which would have a Brock Material Adverse Effect.
Except as otherwise set forth on Schedule 3.10(b) to the Brock Disclosure
Schedule,
(i) As to any Brock Benefit Plan intended to be qualified under Section
401 of the Code, such Brock Benefit Plan satisfies the requirements of such
Section and there has been no termination or partial termination of such
Brock Benefit Plan within the meaning of Section 411(d)(3) of the Code;
A-8
<PAGE>
(ii) There are no actions, suits or claims pending (other than routine
claims for benefits) or, to the knowledge of Brock, threatened against, or
with respect to, any of the Brock Benefit Plans or their assets, any plan
sponsor, or any fiduciary (as such term is defined in Section 3(21) of
ERISA), and Brock has no knowledge of any facts that could give rise to any
actions, suits or claims;
(iii) All contributions required to be made to the Brock Benefit Plans
pursuant to their terms and provisions have been made timely;
(iv) As to any Brock Benefit Plan subject to Title IV of ERISA, there has
been no event or condition which presents the material risk of plan
termination, no accumulated funding deficiency, whether or not waived,
within the meaning of Section 302 of ERISA or Section 412 of the Code has
been incurred, no reportable event within the meaning of Section 4043 of
ERISA, no notice of intent to terminate the Brock Benefit Plan has been
given under Section 4041 of ERISA, no proceeding has been instituted under
Section 4042 of ERISA to terminate the Plan, and no liability to the
Pension Benefit Guaranty Corporation or to the Plan has been incurred;
(v) Neither Brock nor any party in interest (as such term is defined in
ERISA section 3(14)) nor any disqualified person has engaged in any
prohibited transaction within the meaning of ERISA section 406 or Code
section 4975 that would subject Brock to any liability;
(vi) Based on the Exchange Ratio set forth in Section 2.01 on the date
hereof and assuming no material increase in the market value of the Key
Common Stock through the Effective Time, the consummation of the
transactions contemplated by this Agreement will not give rise to any
acceleration of vesting of payments or options, the acceleration of the
time of making any payments, or the making of any payments, which in the
aggregate would result in an "excess parachute payment" within the meaning
of Section 280G of the Code and the imposition of the excise under Section
4999 of the Code;
(vii) All annuity contracts purchased to provide benefits under a Brock
Benefit Plan that is subject to Title IV of ERISA were purchased in
compliance with the requirements of Department of Labor, Pension and
Welfare Benefits Administration, Interpretive Bulletin 95-1 (March 3, 1995)
and the fiduciary responsibility requirements of ERISA; and
(viii) Brock has reserved funds that are at least equal to the present
value of the vested and unvested benefits under Brock's Supplemental
Executive Retirement Plan (SERP), and the SERP may be terminated without
the commitment of any additional funds.
(c) Neither Brock nor any member of its ERISA Group is or has ever been a
party to any collective bargaining or other labor union contracts. No
collective bargaining agreement is being negotiated by Brock or any of its
subsidiaries. There is no pending or threatened labor dispute, strike or work
stoppage against Brock or any of its subsidiaries which may interfere with the
respective business activities of Brock or any of its subsidiaries. To the
knowledge of Brock, none of Brock, any of its subsidiaries or any of their
respective representatives or employees has committed any unfair labor
practices in connection with the operation of the respective businesses of
Brock or its subsidiaries, and there is no pending or threatened charge or
complaint against Brock or any of its subsidiaries by the National Labor
Relations Board or any comparable state agency.
(d) Except as disclosed in Schedule 3.10(a) to the Brock Disclosure Schedule,
neither Brock nor any of its subsidiaries is a party to or is bound by any
severance agreements, programs or policies. Schedule 3.10(d) to the Brock
Disclosure Schedule sets forth, and Brock has made available to Key true and
correct copies of, (i) all employment agreements with officers of Brock or its
subsidiaries; (ii) all agreements with consultants of Brock or its subsidiaries
obligating Brock or any subsidiary to make annual cash payments in an amount
exceeding $50,000; (iii) all non-competition agreements with Brock or a
subsidiary executed by officers of Brock; and (iv) all plans, programs,
agreements and other arrangements of Brock or its subsidiaries with or relating
to its directors.
(e) Except as provided in Schedule 3.10(e) to the Brock Disclosure Schedule,
(x) no Brock Benefit Plan provides retiree medical or retiree life insurance
benefits to any person and (y) neither Brock nor any of its subsidiaries is
contractually or otherwise obligated (whether or not in writing) to provide any
person with life
A-9
<PAGE>
insurance or medical benefits upon retirement or termination of employment,
other than as required by the provisions of Sections 601 through 608 of ERISA
and Section 4980B of the Code and each such Brock Benefit Plan or arrangement
may be amended or terminated by Brock or its subsidiaries at any time without
liability.
(f) Neither Brock nor any member of its ERISA Group contribute to or has an
obligation to contribute to, and has not within six years prior to the date of
this Agreement contributed to or had an obligation to contribute to or has any
secondary liability under ERISA section 4204 to, a multiemployer plan within
the meaning of Section 3(37) of ERISA.
(g) Except as contemplated by this Agreement or as set forth in Schedule
3.10(g), Brock has not amended, or taken any other actions with respect to any
of the Brock Benefit Plans or any of the plans, programs, agreements, policies
or other arrangements described in Section 3.10(d) of this Agreement since
December 31, 1994.
(h) With respect to each Brock Benefit Plan that is a "group health plan"
within the meaning of Section 5000(b) of the Code, each such Brock Benefit Plan
complies and has complied with the requirements of Part 6 of Title I of ERISA
and Sections 4980B and 5000 of the Code, or, if ERISA and the Code do not
apply, the requirements of applicable state law, except where the failure to so
comply would not have a Brock Material Adverse Effect.
SECTION 3.11. Taxes.
(a) (1) Except to the extent that the applicable statute of limitations has
expired, all Returns required to be filed by or on behalf of Brock have been
duly filed on a timely basis and such Returns (including all attached
statements and schedules) are true, complete and correct. Except to the extent
that the applicable statute of limitations has expired, all Taxes shown to be
payable on the Returns or on subsequent assessments with respect thereto have
been paid in full on a timely basis, and no other Taxes are payable by Brock
with respect to items or periods covered by such Returns (whether or not shown
on or reportable on such Returns) or with respect to any period prior to the
Effective Time.
(2) Brock has withheld and paid over all Taxes required to have been
withheld and paid over (including any estimated taxes), and has complied in
all material respects with all information reporting and backup withholding
requirements, including maintenance of required records with respect
thereto, in connection with amounts paid or owing to any employee,
creditor, independent contractor, or other third party.
(3) Brock has disclosed on its income tax returns all positions taken
therein that could give rise to a substantial understatement penalty within
the meaning of Code Section 6662.
(4) There are no liens on any of the assets of Brock with respect to
Taxes, other than liens for Taxes not yet due and payable or for Taxes that
are being contested in good faith through appropriate proceedings and for
which appropriate reserves have been established.
(5) Brock does not have any liability under Treasury Regulation (S)
1.1502-6 or any analogous state, local or foreign law by reason of having
been a member of any consolidated, combined or unitary group, other than in
the current affiliated group of which Brock is the common parent
corporation.
(6) Except to the extent that the applicable statute of limitations has
expired, Brock has made available to Key complete copies of: (i) all
federal and state income and franchise tax returns of Brock for all periods
since the formation of Brock, and (ii) all tax audit reports, work papers
statements of deficiencies, closing or other agreements received by Brock
or on its behalf relating to Taxes, and
(7) Brock does not do business in or derive income from any state, local,
territorial or foreign taxing jurisdiction other than those for which
Returns have been furnished to Key.
(b) Except as disclosed on Schedule 3.11(b) of the Brock Disclosure Schedule:
(1) There is no audit of any Returns of Brock by a governmental or taxing
authority in process, pending or, to the knowledge of Brock, threatened
(formally or informally).
A-10
<PAGE>
(2) Except to the extent that the applicable statute of limitations has
expired and except as to matters that have been resolved, no deficiencies
exist or have been asserted (either formally or informally) or are expected
to be asserted with respect to Taxes of Brock, and no notice (either
formally or informally) has been received by Brock that it has not filed a
Return or paid Taxes required to be filed or paid by it.
(3) Brock is not a party to any pending action or proceeding for
assessment or collection of Taxes, nor has such action or proceeding been
asserted or threatened (either formally or informally) against it or any of
its assets, except to the extent that the applicable statute of limitations
has expired and except as to matters that have been resolved.
(4) No waiver or extension of any statute of limitations is in effect
with respect to Taxes or Returns of Brock.
(5) No action has been taken that would have the effect of deferring any
liability for Taxes for Brock from any period prior to the Effective Time
to any period after the Effective Time.
(6) There are no requests for rulings, subpoenas or requests for
information pending with respect to Brock.
(7) No power of attorney has been granted by Brock, with respect to any
matter relating to Taxes.
(8) Brock has never been included in an affiliated group of corporations,
within the meaning of section 1504 of the Code, other than in the current
affiliated group of which Brock is the common parent corporation.
(9) Brock is not (nor has it ever been) a party to any tax sharing
agreement between affiliated corporations.
(10) The amount of liability for unpaid Taxes of Brock for all periods
ending on or before the Effective Time will not, in the aggregate,
materially exceed the amount of the current liability accruals for Taxes,
as such accruals are reflected on the balance sheet of Brock as of the
Closing Date.
(c) Except as disclosed on Schedule 3.11(c) of the Brock Disclosure Schedule:
(1) Brock has not made an election, and is not required to treat any
asset as owned by another person for federal income tax purposes or as tax-
exempt bond financed property or tax-exempt use property within the meaning
of section 168 of the Code.
(2) Brock has not issued or assumed any indebtedness that is subject to
section 279(b) of the Code.
(3) Brock has not entered into any compensatory agreements with respect
to the performance of services under which payment would result in a
nondeductible expense pursuant to Section 280G of the Code or an excise tax
to the recipient of such payment pursuant to Section 4999 of the Code.
(4) No election has been made under Section 338 of the Code with respect
to Brock and no action has been taken that would result in any income tax
liability to Brock as a result of a deemed election within the meaning of
Section 338 of the Code.
(5) No consent under Section 341(f) of the Code has been filed with
respect to Brock.
(6) Brock has not agreed, nor is it required to make, any adjustment
under Code Section 481(a) by reason of a change in accounting method or
otherwise.
(7) Brock has not disposed of any property that is presently being
accounted for under the installment method.
(8) Brock is not a party to any interest rate swap, currency swap or
similar transaction.
(9) Brock has not participated in any international boycott as defined in
Code Section 999.
(10) There are no outstanding balances of deferred gain or loss accounts
related to deferred intercompany transactions with respect to Brock under
Treasury Regulations (S)(S) 1.1502-13 or 1.1502-14.
(11) Brock has not made and will not make any election under Treasury
Regulation (S) 1.1502-20(g)(1) (or any similar provision) with respect to
the reattribution of net operating losses of Brock.
A-11
<PAGE>
(12) There is no excess loss account under Treasury Regulation (S)1.1502-
19 with respect to the stock of Brock or any subsidiary.
(13) Brock is not subject to any joint venture, partnership or other
arrangement or contract that is treated as a partnership for federal income
tax purposes.
(14) Brock has not made any of the foregoing elections and is not
required to apply any of the foregoing rules under any comparable state or
local income tax provisions.
(15) Brock does not have and has never had a permanent establishment in
any foreign country, as defined in any applicable tax treaty or convention
between the United States and such foreign country.
(16) The Merger is not subject to the tax withholding provisions of
section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or
of any other provision of law.
(d) To the extent the following information is contained therein, the tax
returns and tax work papers provided by Brock to Key contained, as of the
respective dates thereof, accurate and complete information with respect to:
(1) All material tax elections in effect with respect to Brock;
(2) The current tax basis of the assets of Brock;
(3) The current and accumulated earnings and profits of Brock;
(4) The net operating losses of Brock by taxable year;
(5) The net capital losses of Brock;
(6) The tax credit carry overs of Brock;
(7) The overall foreign losses of Brock under section 904(f) of the Code
that is subject to recapture.
(e) The tax returns and tax work papers provided by Brock to Key contain
accurate and complete information with respect to the net operating losses, net
operating loss carry forwards and other tax attributes of Brock, and the extent
to which they are are subject to any limitation under Code sections 381, 382,
383, or 384, or any other provision of the Code or the federal consolidated
return regulations (or any predecessor provision of any Code section or the
regulations) and there is nothing that would prevent Brock from utilizing these
net operating losses, net operating loss carry forwards or other tax attributes
as so limited if it had sufficient income.
(f) (1) For purposes of this Agreement the term "Taxes" shall mean all taxes,
however, denominated, including any interest, penalties or other additions to
tax that may become payable in respect thereof, imposed by any federal,
territorial, state, local or foreign government or any agency or political
subdivision of any such government, which taxes shall include, without limiting
the generality of the foregoing, all income or profits taxes, payroll and
employee withholding taxes, unemployment insurance, social security taxes,
sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross
receipts taxes, business license taxes, occupation taxes, real and personal
property taxes, stamp taxes, environmental taxes, transfer taxes, workers'
compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar nature
to any of the foregoing, required to be paid, withheld or collected.
(2) For the purposes of this agreement, the term "Returns" shall mean all
reports, estimates, declarations of estimated tax, information statements
and returns relating to, or required to be filed in connection with, any
Taxes, including information returns or reports with respect to backup
withholding and other payments to third parties.
(3) All references to "Brock" in this section 3.11 shall include all
subsidiaries of Brock and where appropriate in this section 3.11, the
singular shall include the plural.
SECTION 3.12. Tax Matters.
(a) Neither Brock nor, to the knowledge of Brock, any of its affiliates has
taken or agreed to take any action that would prevent the Merger from
constituting a reorganization qualifying under the provisions of section 368(a)
of the Code.
A-12
<PAGE>
(b) There is no plan or intention by any stockholder of Brock who owns five
percent or more of Brock Common Stock, and to the knowledge of Brock there is
no plan or intention on the part of any of the remaining stockholders of Brock,
to sell, exchange or otherwise dispose of a number of shares of Key Common
Stock to be received in the Merger that would reduce the Brock stockholders'
ownership of Key Common Stock to a number of shares having a value, as of the
Effective Time, of less than 50 percent of the value of all of the Brock Common
Stock (including shares of Brock Common Stock exchanged for cash in lieu of
fractional shares of Key Common Stock) outstanding immediately prior to the
Effective Time.
(c) Immediately following the Merger, Brock will hold at least 90 percent of
the fair market value of its net assets and at least 70 percent of the fair
market value of its gross assets held immediately prior to the Merger. For
purposes of this representation, amounts used by Brock to pay Merger expenses
and all redemptions and distributions made by Brock will be included as assets
of Brock immediately prior to the Merger.
(d) Brock and the holders of Brock Common Stock will each pay their
respective expenses, if any, incurred in connection with the Merger.
(e) There is no intercorporate indebtedness existing between Brock and Key or
between Brock and Merger Sub that was issued, acquired or will be settled at a
discount.
(f) Brock is not an investment company as defined in section
368(a)(2)(F)(iii) and (iv) of the Code.
(g) Brock is not under the jurisdiction of a court in a title 11 or similar
case within the meaning of section 368(a)(3)(A) of the Code.
SECTION 3.13. Certain Business Practices. None of Brock, any of its
subsidiaries or any directors, officers, agents or employees of Brock or any of
its subsidiaries has (i) used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity, (ii)
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or
(iii) made any other unlawful payment.
SECTION 3.14. Environmental Matters. Except for matters disclosed in Schedule
3.14 to the Brock Disclosure Schedule and except for matters that would not
result, individually or in the aggregate with all other such matters, in
liability to Brock or any of its subsidiaries in excess of $500,000, (i) the
properties, operations and activities of Brock and its subsidiaries are in
compliance with all applicable Environmental Laws; (ii) Brock and its
subsidiaries and the properties and operations of Brock and its subsidiaries
are not subject to any existing, pending or, to the knowledge of Brock,
threatened action, suit, investigation, inquiry or proceeding by or before any
governmental authority under any Environmental Law; (iii) all notices, permits,
licenses, or similar authorizations, if any, required to be obtained or filed
by Brock or any of its subsidiaries under any Environmental Law in connection
with any aspect of the business of Brock or its subsidiaries, including without
limitation those relating to the treatment, storage, disposal or release of a
hazardous substance, have been duly obtained or filed and will remain valid and
in effect after the Merger, and Brock and its subsidiaries are in compliance
with the terms and conditions of all such notices, permits, licenses and
similar authorizations; (iv) Brock and its subsidiaries have satisfied and are
currently in compliance with all financial responsibility requirements
applicable to their operations and imposed by any governmental authority under
any Environmental Law, and Brock and its subsidiaries have not received any
notice of noncompliance with any such financial responsibility requirements;
(v) to Brock's knowledge, there are no physical or environmental conditions
existing on any property of Brock or its subsidiaries or resulting from Brock's
or such subsidiaries' operations or activities, past or present, at any
location, that would give rise to any on-site or off-site remedial obligations
imposed on Brock or any of its subsidiaries under any Environmental Laws; (vi)
to Brock's knowledge, since the effective date of the relevant requirements of
applicable Environmental Laws and to the extent required by such applicable
Environmental Laws, all hazardous substances generated by Brock and its
subsidiaries have been transported only by carriers authorized under
Environmental Laws to transport such substances and wastes, and disposed of
only at treatment, storage and disposal facilities authorized under
Environmental Laws to treat, store or dispose of such substances and wastes;
(vii) there has been no exposure of any person or property to hazardous
A-13
<PAGE>
substances or any pollutant or contaminant, nor has there been any release of
hazardous substances, or any pollutant or contaminant into the environment by
Brock or its subsidiaries or in connection with their properties or operations
that could reasonably be expected to give rise to any claim against Brock or
any of its subsidiaries for damages or compensation; and (viii) Brock and its
subsidiaries have made available to Key all non-privileged internal and
external environmental audits and studies and all non-privileged correspondence
on substantial environmental matters in the possession of Brock or its
subsidiaries relating to any of the current or former properties or operations
of Brock and its subsidiaries. To Brock's knowledge, except for matters
disclosed in Schedule 3.14 to the Brock Disclosure Schedule, the operations of
each third party operator of any of Brock or its subsidiaries' properties are
in compliance with the terms of this Section 3.14.
For purposes of this Agreement, the term "Environmental Laws" shall mean any
and all laws, statutes, ordinances, rules, regulations or orders of any
Governmental Entity pertaining to health or the environment currently in effect
in any and all jurisdictions in which the party in question and its
subsidiaries own property or conduct business, including without limitation,
the Clean Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal
Water Pollution Control Act, as amended, the Occupational Safety and Health Act
of 1970, as amended, the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Hazardous & Solid Waste Amendments Act
of 1984, as amended, the Superfund Amendments and Reauthorization Act of 1986,
as amended, the Hazardous Materials Transportation Act, as amended, the Oil
Pollution Act of 1990 ("OPA"), any state laws implementing the foregoing
federal laws, and any state laws pertaining to the handling of oil and gas
exploration and production wastes or the use, maintenance and closure of pits
and impoundments, and all other environmental conservation or protection laws.
For purposes of this Agreement, the terms "hazardous substance" and "release"
have the meanings specified in CERCLA, and the term "disposal" has the meaning
specified in RCRA; provided, however, that to the extent the laws of the state
in which the property is located establish a meaning for "hazardous substance,"
"release," or "disposal" that is broader than that specified in either CERCLA
or RCRA, such broader meaning shall apply.
SECTION 3.15. Vote Required. The only vote of the holders of any class or
series of Brock capital stock necessary to approve the Merger and adopt this
Agreement is the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Brock Common Stock.
SECTION 3.16. Brokers. Except as set forth in Schedule 3.16 to the Brock
Disclosure Schedule, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Brock. Prior to the date of this Agreement, Brock has made
available to Key a complete and correct copy of all agreements referenced in
Schedule 3.16 to the Brock Disclosure Schedule pursuant to which such firm will
be entitled to any payment relating to the transactions contemplated by this
Agreement.
SECTION 3.17. Insurance. Brock and each of its subsidiaries are currently
insured, and during each of the past five calendar years have been insured, for
reasonable amounts against such risks as companies engaged in a similar
business would, in accordance with good business practice, customarily be
insured.
SECTION 3.18. Properties.
(a) With respect to Brock and its subsidiaries' non-oil and gas properties,
except for liens arising in the ordinary course of business after the date
hereof and properties and assets disposed of in the ordinary course of business
after the date of the most recent balance sheet contained in the Form 10-Q
referred to below, Brock and its subsidiaries have good and marketable title
free and clear of all liens, the existence of which would have a Brock Material
Adverse Effect, to all their material properties and assets, whether tangible
or intangible, real, personal or mixed, reflected in Brock's most recent
consolidated balance sheet contained in Brock's most recent Brock SEC Report on
Form 10-Q filed prior to the date hereof as being owned by Brock and its
subsidiaries as of the date thereof or purported to be owned on the date
hereof. All buildings, and all fixtures, equipment and other property and
assets which are material to its business on a consolidated basis, held under
leases by any of
A-14
<PAGE>
Brock or its subsidiaries are held under valid instruments enforceable by Brock
or its subsidiaries in accordance with their respective terms. Substantially
all of Brock's and its subsidiaries' equipment in regular use has been well
maintained and is in good and serviceable condition, reasonable wear and tear
excepted.
(b) With respect to Brock and its subsidiaries' oil and gas properties,
Schedule 3.18(b) to the Brock Disclosure Schedule lists, as of the date of this
Agreement, all of the producing oil and gas properties owned by Brock and its
subsidiaries (the "Brock Oil and Gas Properties") and certain information with
respect thereto. Other than matters that do not have a Brock Material Adverse
Effect:
(i) Brock and its subsidiaries have Defensible Title to all of the Brock
Oil and Gas Properties, subject to and except for the Permitted
Encumbrances and as would be acceptable to a reasonably prudent operator of
oil and gas properties.
(A) As used herein, the term "Defensible Title" shall mean as to the
wells and properties described in the column "Lease Name" in Schedule
3.18(b) to the Brock Disclosure Schedule (individually called a
"Property"), such title as will enable Brock and its subsidiaries to
receive not less than the net revenue interests set forth on Schedule
3.18(b) to the Brock Disclosure Schedule of all hydrocarbons and other
minerals produced from each Property, and which will obligate Brock and
its subsidiaries to bear costs and expenses relating to the
maintenance, development, and operations of each Property not greater
than the working interests set forth on Schedule 3.18(b) to the Brock
Disclosure Schedule.
(B) As used herein, the term "Permitted Encumbrances" shall mean:
(1) lessors' royalties, overriding royalties, division orders,
reversionary interests and net profits interests and similar burdens
which do not operate to reduce the net revenue interests in any
Property below those set forth on Schedule 3.18(b) to the Brock
Disclosure Schedule;
(2) the terms and conditions of the oil, gas and mineral leases
(the "Brock Leases") related to the Brock Oil and Gas Properties and
all agreements, orders, instruments and declarations to which the
Brock Leases are subject and that are customary and acceptable in
the oil and gas industry in the area of the particular property;
(3) liens arising under operating agreements, pooling, unitization
or communitization agreements, and similar agreements of a type and
nature customary in the oil and gas industry and securing payment of
amounts not yet delinquent;
(4) liens securing payments to mechanics and materialmen, and
liens securing payment of taxes or assessments, which liens are not
yet delinquent or, if delinquent, are being contested in good faith
in the normal course of business;
(5) conventional rights of reassignment obligating Brock and its
subsidiaries to reassign their interests in a portion of the Brock
Oil and Gas Properties to a third party in the event Brock and its
subsidiaries intend to release or abandon such interest;
(6) calls on or preferential rights to purchase production at not
less than prevailing prices;
(7) covenants, conditions, and other terms to which the Brock Oil
and Gas Properties were subject when acquired by Brock and its
subsidiaries and are not such as to materially interfere with the
operation, value, use and enjoyment of the Brock Oil and Gas
Properties;
(8) rights reserved to or vested in any Governmental Entity to
control or regulate any of the Brock Oil and Gas Properties in any
manner, and all applicable laws, rules, regulations and orders of
any such Governmental Entity;
(9) easements, rights-of-way, servitudes, permits, surface leases,
and other surface uses on, over or in respect of any of the Brock
Oil and Gas Properties that are not such as to materially interfere
with the operation, value or use thereof; and
(10) all other liens, charges, encumbrances, limitations,
obligations, defects and irregularities affecting any portion of the
Brock Oil and Gas Properties which would not have a material adverse
effect on the operation, value, use and enjoyment thereof.
A-15
<PAGE>
(ii) Except as described in Schedule 3.18(b)(ii) to the Brock
Disclosure Schedule, the Brock Leases are in full force and effect, are
valid and subsisting, cover the entire estates they purport to cover
and contain no express provisions that require the drilling of
additional wells or other material development operations in order to
earn or to continue to hold all or any portion of the Brock Oil and Gas
Properties, and to its knowledge, Brock has never been advised directly
or indirectly by any lessor under any Brock Lease or by any other party
of a default under any such Lease or of any requirements or demands to
drill additional wells on any of the lands included within any of the
Brock Oil and Gas Properties.
(iii) Neither Brock nor any of its subsidiaries is in default under
any contract or agreement pertaining to the Brock Oil and Gas
Properties. Except as specifically indicated on Schedule 3.18(b)(iii)
to the Brock Disclosure Schedule and except for hydrocarbon sales
contracts with a term not greater than six months, no hydrocarbons
produced from the Brock Oil and Gas Properties are subject to a sales
contract or other agreement relating to the marketing of hydrocarbons,
and no person has any call upon, option to purchase or similar rights
with respect to the Brock Oil and Gas Properties or the rights
therefrom.
(iv) All royalties, rentals and other payments due under the Brock
Leases have been properly and timely paid, and all conditions necessary
to keep the Brock Leases in force have been fully performed.
(v) Except for gas balancing agreements containing customary
provisions, neither Brock nor any of its subsidiaries is obligated, by
virtue of a prepayment arrangement, a "take or pay" arrangement, a
production payment or any other arrangement, to deliver hydrocarbons
produced from the Brock Oil and Gas Properties at some future time
without then or thereafter receiving full payment therefor.
(vi) Except as set forth on Schedule 3.18(b)(vi) to the Brock
Disclosure Schedule, with respect to Authorizations for Expenditure
executed on or after September 30, 1995, and covering expenditures
exceeding $20,000 attributable to Brock or its subsidiaries' interest,
(1) there are no outstanding calls under Authorizations for Expenditures
for payments which are due or which Brock has committed to make which have
not been made;
(2) there are no material operations with respect to which Brock has
become a non-consenting party where the effect of such non-consent is not
disclosed on Schedule 3.18(b) to the Brock Disclosure Schedule, and
(3) there are no commitments for the expenditure of funds for drilling or
other capital projects other than projects with respect to which the
operator is not required under the applicable operating agreement to seek
consent.
(vii) Except as set forth on Schedule 3.18(b)(vii) to the Brock
Disclosure Schedule, there are no Brock Oil and Gas Properties to which
Brock or any of its subsidiaries is either "over-produced" or "under-
produced" which singly or in the aggregate would have a Brock Material
Adverse Effect.
SECTION 3.19. Certain Contracts and Restrictions. Other than agreements,
contracts or commitments listed elsewhere in the Brock Disclosure Schedule,
Schedule 3.19 to the Brock Disclosure Schedule lists, as of the date of this
Agreement, each agreement, contract or commitment (including any amendments
thereto) to which Brock or any of its subsidiaries is a party or by which Brock
or any of its subsidiaries is bound (i) involving consideration during the next
twelve months in excess of $50,000 or (ii) which is otherwise material to the
financial condition, results of operations or current or future business of
Brock and its subsidiaries, taken as a whole. As of the date of this Agreement
and except as indicated on the Brock Disclosure Schedule, (i) Brock has fully
complied with all the terms and conditions of all agreements, contracts and
commitments listed in the Brock Disclosure Schedule and all such agreements,
contracts and commitments are in full force and effect, (ii) Brock has no
knowledge of any defaults thereunder or any cancellations or modifications
thereof, and (iii) such agreements, contracts and commitments are not subject
to any memorandum or other written document or understanding permitting
cancellation.
A-16
<PAGE>
SECTION 3.20. Easements. The business of Brock and its subsidiaries has been
operated in a manner that does not violate the material terms of any easements,
rights of way, permits, servitudes, licenses and similar rights relating to
real property used by Brock and its subsidiaries in its business (collectively,
"Brock Easements") except for violations that have not resulted and will not
result in a Brock Material Adverse Effect. All material Brock Easements are
valid and enforceable and grant the rights purported to be granted thereby and
all rights necessary thereunder for the current operation of such business.
SECTION 3.21. Futures Trading and Fixed Price Exposure. None of Brock or any
of its subsidiaries engages in any natural gas or other futures or options
trading or is a party to any price swaps, hedges, futures or similar
instruments.
SECTION 3.22. Information Supplied. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of Brock and no statement by Brock or other information contained in the Brock
Disclosure Schedule or any document incorporated therein by reference or
delivered by Brock to Key since the date of the Confidentiality Agreement, as
of the date of such representation, warranty, statement or document, contains
or contained any untrue statement of material fact, or, at the date thereof,
omits or omitted to state a material fact necessary in order to make the
statements contained therein, in light of the circumstances under which such
statements are or were made, not misleading.
SECTION 3.23. Opinion of Financial Advisor. Brock has received the opinion of
Stephens Inc. to the effect that, as of the date of delivery of such opinion,
the Key Common Stock to be received by the holders of Brock Common Stock in the
Merger is fair, from a financial point of view, to such holders. Brock will
promptly deliver to Key a true and complete written copy of such opinion.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF KEY COMPANIES
THE KEY COMPANIES HEREBY REPRESENT AND WARRANT TO BROCK THAT:
SECTION 4.01. Organization and Qualification. Each of the Key Companies is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of the business conducted by
it or the ownership or leasing of its properties makes such qualification
necessary, other than where the failure to be so duly qualified and in good
standing would not have a Key Material Adverse Effect. The term "Key Material
Adverse Effect" as used in this Agreement shall mean any change or effect that,
individually or when taken together with all such other changes or effects,
would be materially adverse to the financial condition, results of operations
or current or future business of Key. Key has no subsidiaries and does not own
an equity interest in any other partnership or joint venture arrangement or
other business entity that is material to the financial condition, results of
operations or current or future business of Key.
SECTION 4.02. Charter and Bylaws. Key has heretofore furnished to Brock a
complete and correct copy of the charter and bylaws, as amended or restated, of
each of the Key Companies. None of the Key Companies is in violation of any of
the provisions of its charter or any material provision of its bylaws.
SECTION 4.03. Capitalization.
(a) The authorized capital stock of Key consists of 50,000,000 shares of Key
Common Stock, of which, as of the date of this Agreement, (i) 8,846,455 shares
were issued and outstanding, (ii) 2,809,895 shares were held in treasury by Key
and (iii) 1,090,000 shares were reserved for future issuance pursuant to
outstanding stock options. Except as described in this Section 4.03 or in
Schedule 4.03(a) of the disclosure schedule delivered to Brock by Key on the
date hereof (the "Key Disclosure Schedule"), as of the date of this Agreement,
no shares of capital stock of Key are reserved for any purpose. The outstanding
shares of capital stock of Key are duly
A-17
<PAGE>
authorized, validly issued, fully paid and nonassessable, and have not been
issued in violation of (nor are any of the authorized shares of capital stock
of Key subject to) any preemptive or similar rights created by statute, the
charter or bylaws of Key, or any agreement to which Key is a party or bound.
(b) Except as set forth in Section 4.03(a) above or in Schedule 4.03(b)(i) to
the Key Disclosure Schedule, there are no options, warrants or other rights
(including registration rights), agreements, arrangements or commitments of any
character to which Key is a party relating to the issued or unissued capital
stock of Key or obligating Key to grant, issue or sell any shares of the
capital stock of Key, by sale, lease, license or otherwise. Except as set forth
in Schedule 4.03(b)(ii) to the Key Disclosure Schedule, there are no
obligations, contingent or otherwise, of Key to (i) repurchase, redeem or
otherwise acquire any shares of Key Common Stock or other capital stock of Key;
or (ii) provide material funds to, or make any material investment in (in the
form of a loan, capital contribution or otherwise), or provide any guarantee
with respect to the obligations of, any person. Except as described in Schedule
4.03(b)(iii) to the Key Disclosure Schedule, Key (x) does not directly or
indirectly own, (y) has not agreed to purchase or otherwise acquire or (z) does
not hold any interest convertible into or exchangeable or exercisable for, 5%
or more of the capital stock of any corporation, partnership, joint venture or
other business association or entity. Except as set forth in Schedule
4.03(b)(iv) to the Key Disclosure Schedule, there are no agreements,
arrangements or commitments of any character (contingent or otherwise) pursuant
to which any person is or may be entitled to receive any payment based on the
revenues or earnings, or calculated in accordance therewith, of Key. Except as
set forth in Schedule 4.03(b)(v), there are no voting trusts, proxies or other
agreements or understandings to which Key is a party or by which Key is bound
with respect to the voting of any shares of capital stock of Key.
(c) The authorized capital stock of Merger Sub consists of 1,000 shares of
common stock, par value $1.00 per share ("Merger Sub Common Stock"). As of the
date of this Agreement, 1,000 shares of Merger Sub Common Stock were issued and
outstanding and held by Key, all of which are duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights created by
statute, Merger Sub's charter or bylaws or any agreement to which Merger Sub is
a party or is bound.
(d) The shares of Key Common Stock to be issued pursuant to the Merger (i)
will be duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights created by statute, Key's charter or bylaws or any
agreement to which Key is a party or is bound and (ii) will, when issued, be
registered under the Securities Act and the Exchange Act and registered or
exempt from registration under applicable Blue Sky Laws and (iii) listed on the
Nasdaq National Market.
SECTION 4.04. Authority. Each of the Key Companies has all requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby (subject to, with respect to the issuance of the Key Common Stock in the
Merger, the approval thereof by the holders of the Key Common Stock as
described in Section 4.11). The execution and delivery of this Agreement by
each of the Key Companies and the consummation by each of the Key Companies of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of any of the
Key Companies are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby (subject to, with respect to the issuance of
the Key Common Stock in the Merger, the approval thereof by the holders of the
Key Common Stock as described in Section 4.11). This Agreement has been duly
executed and delivered by each of the Key Companies and, assuming the due
authorization, execution and delivery thereof by Brock, constitutes the legal,
valid and binding obligation of each of the Key Companies.
SECTION 4.05. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by each of the Key Companies
does not, and the consummation of the transactions contemplated hereby will not
(i) conflict with or violate the charter or bylaws, or the equivalent
organizational documents, in each case as amended or restated, of Key, (ii)
conflict with or violate any Laws applicable to Key or by which any of its
properties is bound or subject, or (iii) result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the
A-18
<PAGE>
creation of a lien or encumbrance on any of the properties or assets of Key
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Key is a
party or by or to which Key or any of its properties is bound or subject,
except for any such conflicts or violations described in clause (ii) or
breaches, defaults, events, rights of termination, amendment, acceleration or
cancellation or liens or encumbrances described in clause (iii) that would not
have a Key Material Adverse Effect.
(b) The execution and delivery of this Agreement by each of the Key Companies
does not, and the consummation of the transactions contemplated hereby will
not, require any of the Key Companies to obtain any consent, license, permit,
approval, waiver, authorization or order of, or to make any filing with or
notification to, any Governmental Entities, except (i) for applicable
requirements, if any, of the Securities Act, the Exchange Act and Blue Sky Laws
and the filing and recordation of appropriate merger documents as required by
Delaware Law, and (ii) where the failure to obtain such consents, licenses,
permits, approvals, waivers, authorizations or orders, or to make such filings
or notifications, would not, either individually or in the aggregate, prevent
any of the Key Companies from performing its obligations under this Agreement
and would not have a Key Material Adverse Effect.
SECTION 4.06. Permits; Compliance. As of the date of this Agreement, Key and
to Key's knowledge each third party operator of any of Key's properties, is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "Key Permits"), and there is no
action, proceeding or investigation pending or, to the knowledge of Key,
threatened regarding suspension or cancellation of any of the Key Permits,
except where the failure to possess, or the suspension or cancellation of, such
Key Permits would not have a Key Material Adverse Effect. Key is not in
conflict with, or in default or violation of (a) any Law applicable to Key or
by or to which any of its properties is bound or subject or (b) any of the Key
Permits, except for any such conflicts, defaults or violations described in the
Key SEC Reports filed prior to the date hereof or which would not have a Key
Material Adverse Effect. During the period commencing on January 1, 1994 and
ending on the date hereof, Key has not received from any Governmental Entity
any written notification with respect to possible conflicts, defaults or
violations of Laws, except for written notices relating to possible conflicts,
defaults or violations described in the Key SEC Reports filed prior to the date
hereof or that would not have a Key Material Adverse Effect.
SECTION 4.07. Reports; Financial Statements.
(a) Since December 31, 1992, Key has filed (i) all forms, reports, statements
and other documents required to be filed with (A) the SEC, including, without
limitation, (1) all Annual Reports on Form 10-K, (2) all Quarterly Reports on
Form 10-Q, (3) all proxy statements relating to meetings of stockholders
(whether annual or special), (4) all Current Reports on Form 8-K and (5) all
other reports, schedules, registration statements or other documents
(collectively, the "Key SEC Reports") and (B) any applicable state securities
authorities and (ii) all forms, reports, statements and other documents
required to be filed with any other applicable federal or state regulatory
authorities, except where the failure to file any such forms, reports,
statements or other documents would not have a Key Material Adverse Effect (all
such forms, reports, statements and other documents in clauses (i) and (ii) of
this Section 4.07(a) being referred to herein, collectively, as the "Key
Reports"). The Key Reports, including all Key Reports filed after the date of
this Agreement and prior to the Effective Time (x) were or will be prepared in
all material respects in accordance with the requirements of applicable Law
(including, with respect to the Key SEC Reports, the Securities Act and the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Key SEC Reports) and (y) did not at the time they
were filed, or will not at the time they are filed, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Key SEC Reports filed prior to the
Effective Time (i) have been or will be prepared in accordance with the
published rules and regulations of the SEC and generally accepted accounting
principles
A-19
<PAGE>
applied on a consistent basis throughout the periods involved (except (A) to
the extent required by changes in generally accepted accounting principles and
(B) with respect to Key SEC Reports filed prior to the date of this Agreement,
as may be indicated in the notes thereto) and (ii) fairly present or will
fairly present the financial position of Key as of the respective dates thereof
and the results of operations and cash flows for the periods indicated
(including reasonable estimates of normal and recurring year-end adjustments),
except that (x) any unaudited interim financial statements were or will be
subject to normal and recurring year-end adjustments and (y) any pro forma
financial information contained in such financial statements is not necessarily
indicative of the financial position of Key as of the respective dates thereof
and the results of operations and cash flows for the periods indicated.
SECTION 4.08. Absence of Certain Changes or Events. Except as disclosed in
the Key SEC Reports filed prior to the date of this Agreement or as
contemplated by this Agreement or as set forth in Schedule 4.08 to the Key
Disclosure Schedule, since September 30, 1995, Key has conducted its business
only in the ordinary course and in a manner consistent with past practice, and
there has not been: (i) any material damage, destruction or loss (whether or
not covered by insurance) with respect to any material assets of Key; (ii) any
material change by Key in its accounting methods, principles or practices;
(iii) any declaration, setting aside or payment of any dividends or
distributions in respect of shares of Key Common Stock or any redemption,
purchase or other acquisition by Key of any of Key's securities; (iv) any
increase in the benefits under, or the establishment or amendment of, any
bonus, insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards, or restricted stock
awards), stock purchase or other employee benefit plan, or any increase in the
compensation payable or to become payable to directors, officers or employees
of Key; (v) any revaluation by Key of any of its assets, including the writing
down of the value of inventory or the writing down or off of notes or accounts
receivable, other than in the ordinary course of business and consistent with
past practices; or (vi) a Key Material Adverse Effect.
SECTION 4.09. Absence of Litigation. Except as disclosed in the Key SEC
Reports filed prior to the date of this Agreement or as set forth in Schedule
4.09 to the Key Disclosure Schedule, there is no claim, action, suit,
litigation, proceeding, arbitration or, to the knowledge of Key, investigation
of any kind, at law or in equity (including actions or proceedings seeking
injunctive relief), pending or, to the knowledge or Key, threatened against Key
or any properties or rights of Key (except for claims, actions, suits,
litigation, proceedings, arbitrations or investigations which would not have a
Key Material Adverse Effect) and Key is not subject to any continuing order of,
consent decree, settlement agreement or other similar written agreement with,
or, to the knowledge of Key, continuing investigation by, any Governmental
Entity, or any judgment, order, writ, injunction, decree or award of any
Governmental Entity or arbitrator, including, without limitation, cease-and-
desist or other orders, except for matters which would not have a Key Material
Adverse Effect.
SECTION 4.10. Tax Matters. None of the Key Companies nor, to the knowledge of
Key, any of their affiliates has taken or agreed to take any action that would
prevent the Merger from constituting a reorganization qualifying under the
provisions of section 368(a) of the Code.
SECTION 4.11. Vote Required. The only vote of the holders of any class or
series of Key capital stock necessary to approve the issuance of the Key Common
Stock in the Merger is, pursuant to the rules of the Nasdaq National Market and
Delaware Law, the affirmative vote of the holders of a majority of the shares
of Key Common Stock voted on the proposal to so issue the Key Common Stock.
Key, as the sole stockholder of Merger Sub, will promptly vote to approve the
Merger and adopt this Agreement.
SECTION 4.12. Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of any of the Key Companies.
SECTION 4.13. Information Supplied. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of the Key Companies and no statement by the Key Companies or other information
contained in the Key Disclosure Schedule or any document incorporated therein
by
A-20
<PAGE>
reference or delivered by Key to Brock since the date of the Confidentiality
Agreement, as of the date of such representation, warranty, statement or
document, contains or contained any untrue statement of material fact, or, at
the date thereof, omits or omitted to state a material fact necessary in order
to make the statements contained therein, in light of the circumstances under
which such statements are or were made, not misleading.
SECTION 4.14. Employee Benefit Plans; Labor Matters.
(a) Schedule 4.14(a) to the Key Disclosure Schedule sets forth each employee
benefit plan (as such term is defined in ERISA section 3(3)) maintained or
contributed to during the past five years by Key or any member of its ERISA
Group or with respect to which Key or any member of its ERISA Group could incur
liability under Section 4069, 4212(c) or 4204 of ERISA, and any other
retirement, pension, stock option, stock appreciation right, profit sharing,
incentive compensation, deferred compensation, savings, thrift, vacation pay,
severance pay, or other employee compensation or benefit plan, agreement,
practice, or arrangement, whether written or unwritten, whether or not legally
binding, except for any such plans, agreements, practices, or arrangements (i)
with respect to former employees who are not receiving or entitled to benefits
or (ii) with respect to which Key could not incur more than $20,000 of
liability (collectively, the "Key Benefit Plans"). For purposes of this
Agreement, "ERISA Group" means a controlled or affiliated group within the
meaning of Code section 414(b), (c), (m), or (o) of which Key is a member. Key
has made available to Brock correct and complete copies of all Key Benefit
Plans (including a detailed written description of any Key Benefit Plan that is
unwritten, including a description of eligibility criteria, participation,
vesting, benefits, funding arrangements and assets and any other provisions
relating to Key) and, with respect to each Key Benefit Plan, a copy of each of
the following, to the extent each is applicable to each Key Benefit Plan: (i)
the most recent favorable determination letter, (ii) materials submitted to the
Internal Revenue Service in support of a pending determination letter request,
(iii) the most recent letter issued by the Internal Revenue Service recognizing
tax exemption, (iv) each insurance contract, trust agreement, or other funding
vehicle, (v) the three most recently filed Forms 5500 plus all schedules and
attachments, (vi) the three most recent actuarial valuations, and (vii) each
summary plan description or other general explanation or communication
distributed or otherwise provided to employees with respect to each Key Benefit
Plan during the past five years that describes the terms of the Key Benefit
Plan.
(b) With respect to the Key Benefit Plans, no event has occurred and, to the
knowledge of Key, there exists no condition or set of circumstances, in
connection with which Key or any member of its ERISA Group could be subject to
any liability under the terms of such Key Benefit Plans, ERISA, the Code or any
other applicable Law which would have a Key Material Adverse Effect. Except as
otherwise set forth on Schedule 4.14(b) to the Key Disclosure Schedule,
(i) As to any Key Benefit Plan intended to be qualified under Section 401
of the Code, such Key Benefit Plan satisfies the requirements of such
Section and there has been no termination or partial termination of such
Key Benefit Plan within the meaning of Section 411(d)(3) of the Code;
(ii) There are no actions, suits or claims pending (other than routine
claims for benefits) or, to the knowledge of Key, threatened against, or
with respect to, any of the Key Benefit Plans or their assets, any plan
sponsor, or any fiduciary (as such term is defined in Section 3(21) of
ERISA), and Key has no knowledge of any facts that could give rise to any
actions, suits or claims;
(iii) All contributions required to be made to the Key Benefit Plans
pursuant to their terms and provisions have been made timely;
(iv) As to any Key Benefit Plan subject to Title IV of ERISA, there has
been no event or condition which presents the material risk of plan
termination, no accumulated funding deficiency, whether or not waived,
within the meaning of Section 302 of ERISA or Section 412 of the Code has
been incurred, no reportable event within the meaning of Section 4043 of
ERISA, no notice of intent to terminate the Key Benefit Plan has been given
under Section 4041 of ERISA, no proceeding has been instituted under
Section 4042 of ERISA to terminate the Plan, and no liability to the
Pension Benefit Guaranty Corporation or to the Plan has been incurred; and
A-21
<PAGE>
(v) Neither Key nor any party in interest (as such term is defined in
ERISA section 3(14)) nor any disqualified person has engaged in any
prohibited transaction within the meaning of ERISA section 406 or Code
section 4975 that would subject Key to any liability.
(c) Neither Key nor any member of its ERISA Group is or has ever been a party
to any collective bargaining or other labor union contracts. No collective
bargaining agreement is being negotiated by Key. There is no pending or
threatened labor dispute, strike or work stoppage against Key which may
interfere with the respective business activities of Key. To the knowledge of
Key, none of Key or any of its representatives or employees has committed any
unfair labor practices in connection with the operation of the business of Key,
and there is no pending or threatened charge or complaint against Key by the
National Labor Relations Board or any comparable state agency.
(d) Except as disclosed in Schedule 4.14(a) to the Key Disclosure Schedule,
Key is not a party to or is bound by any severance agreements, programs or
policies. Schedule 4.14(d) to the Key Disclosure Schedule sets forth, and Key
has made available to Brock true and correct copies of, (i) all employment
agreements with officers of Key; (ii) all agreements with consultants of Key
obligating Key to make annual cash payments in an amount exceeding $50,000;
(iii) all non-competition agreements with Key executed by officers of Key; and
(iv) all plans, programs, agreements and other arrangements of Key with or
relating to its directors.
(e) Except as provided in Schedule 4.14(e) to the Key Disclosure Schedule,
(x) no Key Benefit Plan provides retiree medical or retiree life insurance
benefits to any person and (y) Key is not contractually or otherwise obligated
(whether or not in writing) to provide any person with life insurance or
medical benefits upon retirement or termination of employment, other than as
required by the provisions of Sections 601 through 608 of ERISA and Section
4980B of the Code and each such Key Benefit Plan or arrangement may be amended
or terminated by Key at any time without liability.
(f) Neither Key nor any member of its ERISA Group contribute to or has an
obligation to contribute to, and has not within six years prior to the date of
this Agreement contributed to or had an obligation to contribute to or has any
secondary liability under ERISA section 4204 to, a multiemployer plan within
the meaning of Section 3(37) of ERISA.
(g) Except as contemplated by this Agreement or as set forth in Schedule
4.14(g), Key has not amended, or taken any other actions with respect to any of
the Key Benefit Plans or any of the plans, programs, agreements, policies or
other arrangements described in Section 4.14(d) of this Agreement since
December 31, 1994.
(h) With respect to each Key Benefit Plan that is a "group health plan"
within the meaning of Section 5000(b) of the Code, each such Key Benefit Plan
complies and has complied with the requirements of Part 6 of Title I of ERISA
and Sections 4980B and 5000 of the Code, or, if ERISA and the Code do not
apply, the requirements of applicable state law, except where the failure to so
comply would not have a Key Material Adverse Effect.
SECTION 4.15. Taxes.
(a) (1) Except to the extent that the applicable statute of limitations has
expired, all Returns required to be filed by or on behalf of Key have been duly
filed on a timely basis and such Returns (including all attached statements and
schedules) are true, complete and correct. Except to the extent that the
applicable statute of limitations has expired, all Taxes shown to be payable on
the Returns or on subsequent assessments with respect thereto have been paid in
full on a timely basis, and no other Taxes are payable by Key with respect to
items or periods covered by such Returns (whether or not shown on or reportable
on such Returns) or with respect to any period prior to the Effective Time.
(2) Key has withheld and paid over all Taxes required to have been
withheld and paid over (including any estimated taxes), and has complied in
all material respects with all information reporting and backup withholding
requirements, including maintenance of required records with respect
thereto, in connection with amounts paid or owing to any employee,
creditor, independent contractor, or other third party.
A-22
<PAGE>
(3) Key has disclosed on its income tax returns all positions taken
therein that could give rise to a substantial understatement penalty within
the meaning of Code Section 6662.
(4) There are no liens on any of the assets of Key with respect to Taxes,
other than liens for Taxes not yet due and payable or for Taxes that are
being contested in good faith through appropriate proceedings and for which
appropriate reserves have been established.
(5) Key does not have any liability under Treasury Regulation (S) 1.1502-
6 or any analogous state, local or foreign law by reason of having been a
member of any consolidated, combined or unitary group, other than in the
current affiliated group of which Key is the common parent corporation.
(6) Except to the extent that the applicable statute of limitations has
expired, Key has made available to Brock complete copies of: (i) all
federal and state income and franchise tax returns of Key for all periods
since the formation of Key, and (ii) all tax audit reports, work papers
statements of deficiencies, closing or other agreements received by Key or
on its behalf relating to Taxes, and
(7) Key does not do business in or derive income from any state, local,
territorial or foreign taxing jurisdiction other than those for which
Returns have been furnished to Brock.
(b) Except as disclosed on Schedule 4.15(b) of the Key Disclosure Schedule:
(1) There is no audit of any Returns of Key by a governmental or taxing
authority in process, pending or, to the knowledge of Key, threatened
(formally or informally).
(2) Except to the extent that the applicable statute of limitations has
expired and except as to matters that have been resolved, no deficiencies
exist or have been asserted (either formally or informally) or are expected
to be asserted with respect to Taxes of Key, and no notice (either formally
or informally) has been received by Key that it has not filed a Return or
paid Taxes required to be filed or paid by it.
(3) Key is not a party to any pending action or proceeding for assessment
or collection of Taxes, nor has such action or proceeding been asserted or
threatened (either formally or informally) against it or any of its assets,
except to the extent that the applicable statute of limitations has expired
and except as to matters that have been resolved.
(4) No waiver or extension of any statute of limitations is in effect
with respect to Taxes or Returns of Key.
(5) No action has been taken that would have the effect of deferring any
liability for Taxes for Key from any period prior to the Effective Time to
any period after the Effective Time.
(6) There are no requests for rulings, subpoenas or requests for
information pending with respect to Key.
(7) No power of attorney has been granted by Key, with respect to any
matter relating to Taxes.
(8) Key has never been included in an affiliated group of corporations,
within the meaning of section 1504 of the Code, other than in the current
affiliated group of which Key is the common parent corporation.
(9) Key is not (nor has it ever been) a party to any tax sharing
agreement between affiliated corporations.
(10) The amount of liability for unpaid Taxes of Key for all periods
ending on or before the Effective Time will not, in the aggregate,
materially exceed the amount of the current liability accruals for Taxes,
as such accruals are reflected on the balance sheet of Key as of the
Closing Date.
(c) Except as disclosed on Schedule 4.15(c) of the Key Disclosure Schedule:
(1) Key has not made an election, and is not required to treat any asset
as owned by another person for federal income tax purposes or as tax-exempt
bond financed property or tax-exempt use property within the meaning of
section 168 of the Code.
(2) Key has not issued or assumed any indebtedness that is subject to
section 279(b) of the Code.
A-23
<PAGE>
(3) No election has been made under Section 338 of the Code with respect
to Key and no action has been taken that would result in any income tax
liability to Key as a result of a deemed election within the meaning of
Section 338 of the Code.
(4) No consent under Section 341(f) of the Code has been filed with
respect to Key.
(5) Key has not agreed, nor is it required to make, any adjustment under
Code Section 481(a) by reason of a change in accounting method or
otherwise.
(6) Key has not disposed of any property that is presently being
accounted for under the installment method.
(7) Key is not a party to any interest rate swap, currency swap or
similar transaction.
(8) Key has not participated in any international boycott as defined in
Code Section 999.
(9) There are no outstanding balances of deferred gain or loss accounts
related to deferred intercompany transactions with respect to Key under
Treasury Regulations (S)(S) 1.1502-13 or 1.1502-14.
(10) Key has not made and will not make any election under Treasury
Regulation (S) 1.1502-20(g)(1) (or any similar provision) with respect to
the reattribution of net operating losses of Key.
(11) There is no excess loss account under Treasury Regulation (S)1.1502-
19 with respect to the stock of Key.
(12) Key is not subject to any joint venture, partnership or other
arrangement or contract that is treated as a partnership for federal income
tax purposes.
(13) Key has not made any of the foregoing elections and is not required
to apply any of the foregoing rules under any comparable state or local
income tax provisions.
(14) Key does not have and has never had a permanent establishment in any
foreign country, as defined in any applicable tax treaty or convention
between the United States and such foreign country.
(15) The Merger is not subject to the tax withholding provisions of
section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or
of any other provision of law.
(d) To the extent the following information is contained therein, the tax
returns and tax work papers provided by Key to Brock contained, as of the
respective dates thereof, accurate and complete information with respect to:
(1) All material tax elections in effect with respect to Key;
(2) The current tax basis of the assets of Key;
(3) The current and accumulated earnings and profits of Key;
(4) The net operating losses of Key by taxable year;
(5) The net capital losses of Key;
(6) The tax credit carry overs of Key;
(7) The overall foreign losses of Key under section 904(f) of the Code
that is subject to recapture.
(e) The tax returns and tax work papers provided by Key to Brock contain
accurate and complete information with respect to the net operating losses, net
operating loss carry forwards and other tax attributes of Key, and the extent
to which they are subject to any limitation under Code sections 381, 382, 383,
or 384, or any other provision of the Code or the federal consolidated return
regulations (or any predecessor provision of any Code section or the
regulations) and there is nothing that would prevent Key from utilizing these
net operating losses, net operating loss carry forwards or other tax attributes
as so limited if it had sufficient income.
A-24
<PAGE>
(f) Where appropriate in this section 4.15, the singular shall include the
plural.
SECTION 4.16. Certain Business Practices. None of Key or any directors,
officers, agents or employees of Key has (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties
or campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
SECTION 4.17. Environmental Matters. Except for matters disclosed in the Key
SEC Reports filed prior to the date hereof or disclosed in Schedule 4.17 to the
Key Disclosure Schedule, and except for matters that would not, individually or
in the aggregate, result in a Key Material Adverse Effect, (i) the properties,
operations and activities of Key are in compliance with all applicable
Environmental Laws; (ii) Key and the properties and operations of Key are not
subject to any existing, pending or, to the knowledge of Key, threatened
action, suit, investigation, inquiry or proceeding by or before any
governmental authority under any Environmental Law; (iii) all notices, permits,
licenses, or similar authorizations, if any, required to be obtained or filed
by Key under any Environmental Law in connection with any aspect of the
business of Key, including without limitation those relating to the treatment,
storage, disposal or release of a hazardous substance, have been duly obtained
or filed and will remain valid and in effect after the Merger, and Key is in
compliance with the terms and conditions of all such notices, permits, licenses
and similar authorizations; (iv) Key has satisfied and is currently in
compliance with all financial responsibility requirements applicable to their
operations and imposed by any governmental authority under any Environmental
Law, and Key has not received any notice of noncompliance with any such
financial responsibility requirements; (v) to Key's knowledge, there are no
physical or environmental conditions existing on any property of Key or
resulting from Key's operations or activities, past or present, at any
location, that would give rise to any on-site or off-site remedial obligations
imposed on Key under any Environmental Laws; (vi) to Key's knowledge, since the
effective date of the relevant requirements of applicable Environmental Laws
and to the extent required by such applicable Environmental Laws, all hazardous
substances generated by Key have been transported only by carriers authorized
under Environmental Laws to transport such substances and wastes, and disposed
of only at treatment, storage, and disposal facilities authorized under
Environmental Laws to treat, store or dispose of such substances and wastes;
(vii) there has been no exposure of any person or property to hazardous
substances or any pollutant or contaminant, nor has there been any release of
hazardous substances or any pollutant or contaminant into the environment by
Key or in connection with its properties or operations that could reasonably be
expected to give rise to any claim against Key for damages or compensation; and
(viii) Key has made available to Brock all non-privileged internal and external
environmental audits and studies and all non-privileged correspondence on
substantial environmental matters in the possession of Key relating to any of
the current or former properties or operations of Key. To Key's knowledge,
except for matters disclosed in Schedule 4.17 to the Key Disclosure Schedule,
the operations of each third party operator of any of Key's properties are in
compliance with the terms of this Section 4.17.
SECTION 4.18. Insurance. Key is currently insured, and during each of the
past five calendar years has been insured, for reasonable amounts against such
risks as companies engaged in a similar business would, in accordance with good
business practice, customarily be insured.
SECTION 4.19. Properties.
(a) With respect to Key's non-oil and gas properties, except for liens
arising in the ordinary course of business after the date hereof and properties
and assets disposed of in the ordinary course of business after the date of the
most recent balance sheet contained in the Form 10-Q referred to below, Key has
good and marketable title free and clear of all liens, the existence of which
would have a Key Material Adverse Effect, to all their material properties and
assets, whether tangible or intangible, real, personal or mixed, reflected in
Key's most recent consolidated balance sheet contained in Key's most recent Key
SEC Report on Form 10-Q filed prior to the date hereof as being owned by Key as
of the date thereof or purported to be owned on the date hereof. All buildings,
and all fixtures, equipment and other property and assets which are material to
its business
A-25
<PAGE>
on a consolidated basis, held under leases by Key are held under valid
instruments enforceable by Key in accordance with their respective terms.
Substantially all of Key's equipment in regular use has been well maintained
and is in good and serviceable condition, reasonable wear and tear excepted.
(b) With respect to Key's oil and gas properties, Schedule 4.19(b) to the Key
Disclosure Schedule lists, as of the date of this Agreement, the material
producing oil and gas properties owned by Key (the "Key Oil and Gas
Properties") and certain information with respect thereto. Other than matters
that do not have a Key Material Adverse Effect:
(i) Key has Defensible Title to all Key Oil and Gas Properties, subject
to and except for the Permitted Encumbrances and as would be acceptable to
a reasonably prudent operator of oil and gas properties.
(A) As used herein, the term "Defensible Title" shall mean as to the
wells and properties described in Schedule 4.19(b) to the Key
Disclosure Schedule (individually called a "Property"), such title as
will enable Key to receive not less than the net revenue interests set
forth on Schedule 4.19(b) to the Key Disclosure Schedule of all
hydrocarbons and other minerals produced from each Property, and which
will obligate Key to bear costs and expenses relating to the
maintenance, development, and operations of each Property not greater
than the working interests set forth on Schedule 4.19(b) to the Key
Disclosure Schedule.
(B) As used herein, the term "Permitted Encumbrances" shall mean:
(1) lessors' royalties, overriding royalties, division orders,
reversionary interests and net profits interests and similar burdens
which do not operate to reduce the net revenue interests in any
Property below those set forth on Schedule 4.19(b) to the Key
Disclosure Schedule;
(2) the terms and conditions of the oil, gas and mineral leases
(the "Key Leases") related to the Key Oil and Gas Properties and all
agreements, orders, instruments and declarations to which the Key
Leases are subject and that are customary and acceptable in the oil
and gas industry in the area of the particular property;
(3) liens arising under operating agreements, pooling, unitization
or communitization agreements, and similar agreements of a type and
nature customary in the oil and gas industry and securing payment of
amounts not yet delinquent;
(4) liens securing payments to mechanics and materialmen, and
liens securing payment of taxes or assessments, which liens are not
yet delinquent or, if delinquent, are being contested in good faith
in the normal course of business;
(5) conventional rights of reassignment obligating Key to reassign
their interests in a portion of the Key Oil and Gas Properties to a
third party in the event Key intends to release or abandon such
interest;
(6) calls on or preferential rights to purchase production at not
less than prevailing prices;
(7) covenants, conditions, and other terms to which the Key Oil
and Gas Properties were subject when acquired by Key and are not
such as to materially interfere with the operation, value, use and
enjoyment of the Key Oil and Gas Properties;
(8) rights reserved to or vested in any Governmental Entity to
control or regulate any of the Oil and Gas Properties in any manner,
and all applicable laws, rules, regulations and orders of any such
Governmental Entity;
(9) easements, rights-of-way, servitudes, permits, surface leases,
and other surface uses on, over or in respect of any of the Key Oil
and Gas Properties that are not such as to materially interfere with
the operation, value or use thereof; and
(10) all other liens, charges, encumbrances, limitations,
obligations, defects and irregularities affecting any portion of the
Key Oil and Gas Properties which would not have a material adverse
effect on the operation, value, use and enjoyment thereof.
A-26
<PAGE>
(ii) Except as described in Schedule 4.19(b) to the Key Disclosure
Schedule, the Key Leases are in full force and effect, are valid and
subsisting, cover the entire estates they purport to cover and contain no
express provisions that require the drilling of additional wells or other
material development operations in order to earn or to continue to hold all
or any portion of the Key Oil and Gas Properties, and to the knowledge of
Key has never been advised directly or indirectly by any lessor under any
such Lease or by any other party of a default under any Key Lease or of any
requirements or demands to drill additional wells on any of the lands
included within any of the Key Oil and Gas Properties.
(iii) Key is not in default under any contract or agreement pertaining to
the Key Oil and Gas Properties. Except as specifically indicated on
Schedule 4.19(b) to the Key Disclosure Schedule, and except for hydrocarbon
sales contracts with a term not greater than six months, no hydrocarbons
produced from the Key Oil and Gas Properties are subject to a sales
contract or other agreement relating to the marketing of hydrocarbons, and
no person has any call upon, option to purchase or similar rights with
respect to the Key Oil and Gas Properties or the rights therefrom.
(iv) All royalties, rentals and other payments due under the Key Leases
have been properly and timely paid, and all conditions necessary to keep
the Key Leases in force have been fully performed.
(v) Except for gas balancing agreements containing customary provisions,
Key is not obligated, by virtue of a prepayment arrangement, a "take or
pay" arrangement, a production payment or any other arrangement, to deliver
hydrocarbons produced from the Key Oil and Gas Properties at some future
time without then or thereafter receiving full payment therefor.
(vi) Except as set forth on Schedule 4.19(b) to the Key Disclosure
Schedule, with respect to Authorizations for Expenditure executed on or
after September 30, 1995 and covering expenditures exceeding $20,000
attributable to Key's interest,
(1) there are no outstanding calls under Authorizations for
Expenditures for payments which are due or which Key has committed to
make which have not been made;
(2) there are no material operations with respect to which Key has
become a non-consenting party where the effect of such non-consent is
not disclosed on Schedule 4.19(b) to the Key Disclosure Schedule, and
(3) there are no commitments for the expenditure of funds for
drilling or other capital projects other than projects with respect to
which the operator is not required under the applicable operating
agreement to seek consent.
(vii) Except as set forth on Schedule 4.19(b) to the Key Disclosure
Schedule, there are no Key Oil and Gas Properties to which Key is either
"over- produced" or "under-produced" which singly or in the aggregate would
have a Key Material Adverse Effect.
SECTION 4.20. Certain Contracts and Restrictions. Other than agreements,
contracts or commitments listed elsewhere in the Key Disclosure Schedule,
Schedule 4.20 to the Key Disclosure Schedule lists, as of the date of this
Agreement, each agreement, contract or commitment (including any amendments
thereto) to which Key is a party or by which Key is bound (i) involving
consideration during the next twelve months in excess of $50,000 or (ii) which
is otherwise material to the financial condition, results of operations or
current or future business of Key. As of the date of this Agreement and except
as indicated on the Key Disclosure Schedule, (i) Key has fully complied with
all the terms and conditions of all agreements, contracts and commitments
listed in the Key Disclosure Schedule and all such agreements, contracts and
commitments are in full force and effect, (ii) Key has no knowledge of any
defaults thereunder or any cancellations or modifications thereof, and (iii)
such agreements, contracts and commitments are not subject to any memorandum or
other written document or understanding permitting cancellation.
SECTION 4.21. Easements. The business of Key has been operated in a manner
that does not violate the material terms of any easements, rights of way,
permits, servitudes, licenses and similar rights relating to real property used
by Key in its business (collectively, "Key Easements") except for violations
that have not resulted and will not result in a Key Material Adverse Effect.
All material Key Easements are valid and
A-27
<PAGE>
enforceable and grant the rights purported to be granted thereby and all rights
necessary thereunder for the current operation of such business.
SECTION 4.22. Futures Trading. Except as set forth on Schedule 4.22 to the
Key Disclosure Schedule, Key does not engage in any natural gas or other
futures or options trading or is a party to any price swaps, hedges, futures or
similar instruments.
ARTICLE V
COVENANTS
SECTION 5.01. Affirmative Covenants of Brock. Brock hereby covenants and
agrees that, prior to the Effective Time, unless otherwise expressly
contemplated by this Agreement or consented to in writing by Key, Brock will
and will cause its subsidiaries to:
(a) operate its business in all material respects in the usual and
ordinary course consistent with past practices;
(b) use all reasonable efforts to preserve substantially intact its
business organization, maintain its material rights and franchises, retain
the services of its respective officers and key employees and maintain its
relationships with its material customers and suppliers;
(c) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its
customary business practice;
(d) use all reasonable efforts to keep in full force and effect insurance
and bonds comparable in amount and scope of coverage to that currently
maintained.
SECTION 5.02. Negative Covenants of Brock. Except as expressly contemplated
by this Agreement or otherwise consented to in writing by Key, from the date of
this Agreement until the Effective Time, Brock will not do, and will not permit
any of its subsidiaries to do, any of the foregoing:
(a) (i) increase the compensation payable to or to become payable to any
director or executive officer; (ii) grant any severance or termination pay
to, or enter into or amend any employment or severance agreement with, any
director, officer or employee; (iii) establish, adopt or enter into any
employee benefit plan or arrangement; or (iv) except as may be required by
applicable law and actions that are not inconsistent with the provisions of
Section 6.07 of this Agreement, amend, or take any other actions with
respect to, any of the Benefit Plans or any of the plans, programs,
agreements, policies or other arrangements described in Section 3.10(d) of
this Agreement;
(b) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of Brock to Brock or another wholly owned
subsidiary of Brock;
(c) (i) except as described in Schedule 3.03(b)(ii) to the Brock
Disclosure Schedule, redeem, purchase or otherwise acquire any shares of
its or any of its subsidiaries' capital stock or any securities or
obligations convertible into or exchangeable for any shares of its or its
subsidiaries' capital stock (other than any such acquisition directly from
any wholly owned subsidiary of Brock in exchange for capital contributions
or loans to such subsidiary), or any options, warrants or conversion or
other rights to acquire any shares of its or its subsidiaries' capital
stock or any such securities or obligations (except in connection with the
exercise of outstanding Stock Options in accordance with their terms); (ii)
effect any reorganization or recapitalization; or (iii) split, combine or
reclassify any of its or its subsidiaries' capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for, shares of its or its subsidiaries' capital
stock;
A-28
<PAGE>
(d) (i) except as described in Schedule 3.03(b)(i) to the Brock Disclosure
Schedule, issue, deliver, award, grant or sell, or authorize or propose the
issuance, delivery, award, grant or sale (including the grant of any security
interests, liens, claims, pledges, limitations in voting rights, charges or
other encumbrances) of, any shares of any class of its or its subsidiaries'
capital stock (including shares held in treasury), any securities convertible
into or exercisable or exchangeable for any such shares, or any rights,
warrants or options to acquire any such shares (except as permitted pursuant to
Section 6.07 of this Agreement or for the issuance of shares upon the exercise
of outstanding Stock Options or the vesting of restricted stock in accordance
with the terms of outstanding Stock Awards); (ii) amend or otherwise modify the
terms of any such rights, warrants or options the effect of which shall be to
make such terms more favorable to the holders thereof; or (iii) take any action
to optionally accelerate the exercisability of Stock Options;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets of any other person (other than the purchase of assets from
suppliers or vendors in the ordinary course of business and consistent with
past practice);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose
of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, any of its material assets or any material assets of any of its
subsidiaries, except for dispositions of oil and gas production in the ordinary
course of business and consistent with past practice and except for the sale of
oil and gas properties having an individual net present value of $5,000
(discounted at 10% per annum), as set forth in the Aries database provided by
Brock to Stephens Inc.;
(g) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably be
expected to lead to, any Competing Transaction (as defined below), or enter
into discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize or permit any of the officers, directors or
employees of Brock or any of its subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by
Brock or any of Brock's subsidiaries to take any such action, and Brock shall
promptly notify Key of all relevant terms of any such inquiries and proposals
received by Brock or any of its subsidiaries or by any such officer, director,
investment banker, financial advisor, attorney, accountant or other
representative relating to any of such matters and if such inquiry or proposal
is in writing, Brock shall promptly deliver or cause to be delivered to Key a
copy of such inquiry or proposal; provided, however, that nothing contained in
this subsection (g) shall prohibit the Board of Directors of Brock from (i)
furnishing information to, or entering into discussions or negotiations with,
any person or entity in connection with an unsolicited bona fide proposal in
writing by such person or entity to acquire Brock pursuant to a merger,
consolidation, share exchange, business combination or other similar
transaction or to acquire a substantial portion of the assets of Brock or any
of its Significant Subsidiaries, if, and only to the extent that (A) the Board
of Directors of Brock, after consultation with and based upon the advice of
independent legal counsel (who may be Brock's regularly engaged independent
legal counsel), determines in good faith that such action is necessary for such
Board of Directors to comply with its fiduciary duties to stockholders under
applicable law and (B) prior to furnishing such information to, or entering
into discussions or negotiations with, such person or entity Brock (x) provides
written notice to Key to the effect that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity and (y)
enters into with such person or entity a confidentiality agreement in
reasonably customary form on terms not more favorable to such person or entity
than the terms contained in that certain Confidentiality Agreement dated as of
October 3, 1995 between Key and Brock (the "Confidentiality Agreement"); (ii)
complying with Rule 14e-2 promulgated under the Exchange Act with regard to a
Competing Transaction; or (iii) failing to make or withdrawing or modifying its
recommendation referred to in Section 6.02(a) if there exists a Competing
Transaction and the Board of Directors of Brock, after consultation with and
based upon the advice of independent legal counsel (who may be Brock's
regularly engaged independent legal counsel), determines in good faith that
such action is necessary for such Board of Directors to comply with its
fiduciary duties to stockholders under applicable law. For purposes of this
Agreement, "Competing Transaction" shall mean any
A-29
<PAGE>
of the following (other than the transactions contemplated by this Agreement)
involving Brock or any of its subsidiaries: (i) any merger, consolidation,
share exchange, business combination or similar transaction; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more
of the assets of Brock and its subsidiaries, taken as a whole, (iii) any tender
offer or exchange offer for 20% or more of the outstanding shares of capital
stock of Brock or the filing of a registration statement under the Securities
Act in connection therewith; (iv) any person (other than stockholders as of the
date of this Agreement) having acquired beneficial ownership of, or any group
(as such term is defined under Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder) having been formed which beneficially
owns or has the right to acquire beneficial ownership of, 20% or more of the
outstanding shares of capital stock of Brock; or (v) any public announcement of
a proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing;
(h) release any third party from its obligations, or grant any consent, under
any existing standstill provision relating to a Competing Transaction or
otherwise under any confidentiality or other agreement, or fail to fully
enforce any such agreement;
(i) adopt or propose to adopt any amendments to its charter or bylaws, which
would alter the terms of its capital stock or would have an adverse impact on
the consummation of the transactions contemplated by this Agreement;
(j) (A) change any of its methods of accounting in effect at December 31,
1994, or (B) make or rescind any express or deemed election relating to Taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes (except
where the amount of such settlements or controversies, individually or in the
aggregate, does not exceed $20,000), or change any of its methods of reporting
income or deductions for federal income tax purposes from those employed in the
preparation of the federal income tax returns for the taxable year ended
December 31, 1994, except, in each case, as may be required by Law or generally
accepted accounting principles;
(k) incur any obligation for borrowed money or purchase money indebtedness,
whether or not evidenced by a note, bond, debenture or similar instrument,
except in the ordinary course of business consistent with past practice and in
no event in excess of $100,000 in the aggregate;
(l) enter into any material arrangement, agreement or contract with any third
party which provides for an exclusive arrangement with that third party or is
substantially more restrictive on Brock or substantially less advantageous to
Brock than arrangements, agreements or contracts existing on the date hereof;
(m) agree to or approve any commitment, including any authorization for
expenditure or agreement to acquire property, obligating Brock for an amount in
excess of $20,000, other than the Participation Agreement with Henry Holding
Corporation dated September 1, 1995; or
(n) agree in writing or otherwise to do any of the foregoing.
SECTION 5.03. Affirmative and Negative Covenants of Key.
(a) Key hereby covenants and agrees that, prior to the Effective Time, unless
otherwise expressly contemplated by this Agreement or consented to in writing
by Brock, Key will and will cause its subsidiaries to:
(i) operate its business in all material respects in the usual and
ordinary course consistent with past practices;
(ii) use all reasonable efforts to preserve substantially intact its
business organization, maintain its material rights and franchises, retain
the services of its respective officers and key employees and maintain its
relationships with its material customers and suppliers;
(iii) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its
customary business practice; and
(iv) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that
currently maintained.
A-30
<PAGE>
(b) Except as expressly contemplated by this Agreement or otherwise consented
to in writing by Brock, from the date of this Agreement until the Effective
Time, Key will not do, and will not permit any of its subsidiaries to do, any
of the following:
(i) knowingly take any action which would result in a failure to maintain
the trading of the Key Common Stock on the Nasdaq National Market;
(ii) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of Key to Key or another wholly owned subsidiary of
Key;
(iii) adopt or propose to adopt any amendments to its charter or bylaws,
which would have an adverse impact on the consummation of the transactions
contemplated by this Agreement; or
(iv) agree in writing or otherwise to do any of the foregoing.
SECTION 5.04. Access and Information.
(a) Brock shall, and shall cause its subsidiaries to (i) afford to Key and
its officers, directors, employees, accountants, consultants, legal counsel,
agents and other representatives (collectively, the "Key Representatives")
reasonable access at reasonable times, upon reasonable prior notice, to the
officers, employees, agents, properties, offices and other facilities of Brock
and its subsidiaries and to the books and records thereof and (ii) furnish
promptly to Key and the Key Representatives such information concerning the
business, properties, contracts, records and personnel of Brock and its
subsidiaries (including, without limitation, financial, operating and other
data and information) as may be reasonably requested, from time to time, by
Key.
(b) Key shall, and shall cause its subsidiaries to (i) afford to Brock and
its officers, directors, employees, accountants, consultants, legal counsel,
agents and other representatives (collectively, the "Brock Representatives")
reasonable access at reasonable times, upon reasonable prior notice, to the
officers, employees, accountants, agents, properties, offices and other
facilities of Key and its subsidiaries and to the books and records thereof and
(ii) furnish promptly to Brock and the Brock Representatives such information
concerning the business, properties, contracts, records and personnel of Key
and its subsidiaries (including, without limitation, financial, operating and
other data and information) as may be reasonably requested, from time to time,
by Brock.
(c) Notwithstanding the foregoing provisions of this Section 5.04, neither
party shall be required to grant access or furnish information to the other
party to the extent that such access or the furnishing of such information is
prohibited by law. No investigation by the parties hereto made heretofore or
hereafter shall affect the representations and warranties of the parties which
are herein contained and each such representation and warranty shall survive
such investigation.
(d) The information received pursuant to Section 5.04 (a) and (b) shall be
deemed to be "Confidential Information" for purposes of the Confidentiality
Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Meetings of Stockholders.
(a) Brock shall, promptly after the date of this Agreement, take all actions
necessary in accordance with Delaware Law and its charter and bylaws to convene
a special meeting of Brock's stockholders to act on this Agreement (the "Brock
Stockholders Meeting"), and Brock shall consult with Key in connection
therewith. Brock shall use its best efforts to solicit from stockholders of
Brock proxies in favor of the approval and adoption of this Agreement and to
secure the vote of stockholders required by Delaware Law and its charter and
bylaws to approve and adopt this Agreement, unless otherwise necessary due to
the applicable fiduciary duties of the directors of Brock, as determined by
such directors in good faith after consultation with and based upon the advice
of independent legal counsel (who may be Brock's regularly engaged independent
legal counsel).
A-31
<PAGE>
(b) Key shall, promptly after the date of this Agreement, take all actions
necessary in accordance with Delaware Law and its charter and bylaws to convene
a special meeting of Key's stockholders to approve the issuance of the Key
Common Stock in connection with the Merger pursuant to the requirements of the
rules of the Nasdaq National Market (the "Key Stockholders Meeting"). Key shall
use its best efforts to solicit from stockholders of Key proxies in favor of
the approval of such issuance of Key Common Stock and to secure the vote of
stockholders required by the rules of the Nasdaq National Market.
SECTION 6.02. Registration Statement; Proxy Statements.
(a) As promptly as practicable after the execution of this Agreement, Key
shall prepare and file with the SEC a registration statement on Form S-4 (such
registration statement, together with any amendments thereof or supplements
thereto, being the "Registration Statement"), containing a proxy
statement/prospectus for stockholders of Brock (the "Brock Proxy
Statement/Prospectus") and a proxy statement and form of proxy for stockholders
of Key (together with any amendments thereof or supplements thereto, in each
case in the form or forms mailed to Key's stockholders, the "Key Proxy
Statement"), in connection with the registration under the Securities Act of
the offer and sale of Key Common Stock to be issued in the Merger and the other
transactions contemplated by this Agreement. As promptly as practicable after
the execution of this Agreement, Brock shall prepare and file with the SEC a
proxy statement that will be the same as the Brock Proxy Statement/Prospectus,
and a form of proxy, in connection with the vote of Brock's stockholders with
respect to the Merger (such proxy statement and form of proxy, together with
any amendments thereof or supplements thereto, in each case in the form or
forms mailed to Brock's stockholders, being the "Brock Proxy Statement"). Each
of Key and Brock will use its best efforts to cause the Registration Statement
to be declared effective as promptly as practicable, and shall take any action
required to be taken under any applicable federal or state securities laws in
connection with the issuance of shares of Key Common Stock in the Merger. Each
of Key and Brock shall furnish to the other all information concerning it and
the holders of its capital stock as the other may reasonably request in
connection with such actions. As promptly as practicable after the Registration
Statement shall have been declared effective, Brock shall mail the Brock Proxy
Statement to its stockholders entitled to notice of and to vote at the Brock
Stockholders Meeting and Key shall mail the Key Proxy Statement to its
stockholders entitled to notice of and to vote at the Key Stockholders Meeting.
The Brock Proxy Statement shall include the recommendation of Brock's Board of
Directors in favor of the Merger and adoption of this Agreement, unless
otherwise necessary due to the applicable fiduciary duties of the directors of
Brock, as determined by such directors in good faith after consultation with
and based upon the advice of independent legal counsel (who may be Brock's
regularly engaged independent legal counsel). The Key Proxy Statement shall
include the recommendation of Key's Board of Directors in favor of approval of
the issuance of the Key Common Stock in the Merger.
(b) The information supplied by Brock for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The information supplied by Brock for
inclusion in (i) the Brock Proxy Statement to be sent to the stockholders of
Brock in connection with the Brock Stockholders Meeting shall not, at the date
the Brock Proxy Statement (or any supplement thereto) is first mailed to
stockholders, at the time of the Brock Stockholders Meeting or at the Effective
Time and (ii) the Key Proxy Statement to be sent to the stockholders of Key in
connection with the Key Stockholders Meeting shall not, at the date the Key
Proxy Statement (or any supplement thereto) is first mailed to stockholders, at
the time of the Key Stockholders Meeting or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to
Brock or any of its affiliates, or its or their respective officers or
directors, should be discovered by Brock that should be set forth in an
amendment to the Registration Statement or a supplement to the Brock Proxy
Statement or the Key Proxy Statement, Brock shall promptly inform Key thereof
in writing. All documents that Brock is responsible for filing with the SEC in
connection with the transactions contemplated herein will comply as to form in
all material respects with the applicable requirements of the Securities Act
and the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
A-32
<PAGE>
(c) The information supplied by Key for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The information supplied by Key for
inclusion in (i) the Brock Proxy Statement to be sent to the stockholders of
Brock in connection with the Brock Stockholders Meeting shall not, at the date
the Brock Proxy Statement (or any supplement thereto) is first mailed to
stockholders, at the time of the Brock Stockholders Meeting or at the Effective
Time and (ii) the Key Proxy Statement to be sent to the stockholders of Key in
connection with the Key Stockholders Meeting shall not, at the date the Key
Proxy Statement (or any supplement thereto) is first mailed to stockholders, at
the time of the Key Stockholders Meeting or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to Key
or any of its affiliates, or to their respective officers or directors, should
be discovered by Key that should be set forth in an amendment to the
Registration Statement or a supplement to the Brock Proxy Statement or the Key
Proxy Statement, Key shall promptly inform Brock thereof in writing. All
documents that Key is responsible for filing with the SEC in connection with
the transactions contemplated hereby will comply as to form in all material
respects with the applicable requirements of the Securities Act and the rules
and regulations thereunder and the Exchange Act and the rules and regulations
thereunder.
SECTION 6.03. Appropriate Action; Consents; Filings.
(a) Brock and Key shall each use, and shall cause each of their respective
subsidiaries to use, all reasonable efforts to (i) take, or cause to be taken,
all appropriate action, and do, or cause to be done, all things necessary,
proper or advisable under applicable Law or otherwise to consummate and make
effective the transactions contemplated by this Agreement, (ii) obtain from any
Governmental Entities any consents, licenses, permits, waivers, approvals,
authorizations or orders required to be obtained or made by Key or Brock or any
of their subsidiaries in connection with the authorization, execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby, including, without limitation, the Merger, (iii) make all
necessary filings, and thereafter make any other required submissions, with
respect to this Agreement and the Merger required under (A) the Securities Act
(in the case of Key) and the Exchange Act and the rules and regulations
thereunder, and any other applicable federal or state securities laws, and (B)
any other applicable Law; provided that Key and Brock shall cooperate with each
other in connection with the making of all such filings, including providing
copies of all such documents to the nonfiling party and its advisors prior to
filings and, if requested, shall accept all reasonable additions, deletions or
changes suggested in connection therewith. Brock and Key shall furnish all
information required for any application or other filing to be made pursuant to
the rules and regulations of any applicable Law (including all information
required to be included in the Brock Proxy Statement, the Key Proxy Statement
or the Registration Statement) in connection with the transactions contemplated
by this Agreement.
(b) Key and Brock agree to cooperate with respect to, and shall cause each of
their respective subsidiaries to cooperate with respect to, and agree to use
all reasonable efforts vigorously to contest and resist, any action, including
legislative, administrative or judicial action, and to have vacated, lifted,
reversed or overturned any decree, judgment, injunction or other order (whether
temporary, preliminary or permanent) (an "Order") of any Governmental Entity
that is in effect and that restricts, prevents or prohibits the consummation of
the Merger or any other transactions contemplated by this Agreement, including,
without limitation, by vigorously pursuing all available avenues of
administrative and judicial appeal and all available legislative action. Each
of Key and Brock also agree to take any and all actions, including, without
limitation, the disposition of assets or the withdrawal from doing business in
particular jurisdictions, required by regulatory authorities as a condition to
the granting of any approvals required in order to permit the consummation of
the Merger or as may be required to avoid, lift, vacate or reverse any
legislative or judicial action which would otherwise cause any condition to
Closing not to be satisfied; provided, however, that in no event shall either
party take, or be required to take, any action that would or could reasonably
be expected to have a Key Material Adverse Effect, and Brock shall not be
required to take any action which would be consummated prior to the Effective
Time and which would or could reasonably be expected to have a Brock Material
Adverse Effect .
A-33
<PAGE>
(c) (i) Each of Brock and Key shall give (or shall cause their respective
subsidiaries to give) any notices to third parties, and use, and cause their
respective subsidiaries to use, all reasonable efforts to obtain any third
party consents (A) necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, (B) otherwise required under any
contracts, licenses, leases or other agreements in connection with the
consummation of the transactions contemplated hereby or (C) required to prevent
a Brock Material Adverse Effect from occurring prior to the Effective Time or a
Key Material Adverse Effect from occurring after the Effective Time.
(ii) In the event that any party shall fail to obtain any third party
consent described in subsection (c)(i) above, such party shall use all
reasonable efforts, and shall take any such actions reasonably requested by
the other parties, to limit the adverse effect upon Brock and Key, their
respective subsidiaries, and their respective businesses resulting, or
which could reasonably be expected to result after the Effective Time, from
the failure to obtain such consent.
(d) Each of Key and Brock shall promptly notify the other of (w) any material
change in its current or future business, financial condition or results of
operations, (x) any complaints, investigations or hearings (or communications
indicating that the same may be contemplated) of any Governmental Entities with
respect to its business or the transactions contemplated hereby, (y) the
institution or the threat of material litigation involving it or any of its
subsidiaries or (z) any event or condition that might reasonably be expected to
cause any of its representations, warranties, covenants or agreements set forth
herein not to be true and correct at the Effective Time. As used in the
preceding sentence, "material litigation" means any case, arbitration or
adversary proceeding or other matter which would have been required to be
disclosed on the Brock Disclosure Schedule pursuant to Section 3.09 or the Key
Disclosure Schedule pursuant to Section 4.09, as the case may be, if in
existence on the date hereof, or in respect of which the legal fees and other
costs to Brock or Key (or their respective subsidiaries), as the case may be,
might reasonably be expected to exceed $100,000 over the life of the matter.
SECTION 6.04. Affiliates; Tax Treatment.
(a) Brock shall use all reasonable efforts to obtain from each affiliate of
Brock a written agreement substantially in the form of Exhibit A hereto.
(b) Key shall not be required to maintain the effectiveness of the
Registration Statement for the purpose of resale by stockholders of Brock who
may be affiliates of Brock or Key pursuant to Rule 145 under the Securities
Act.
(c) Each party hereto shall use all reasonable efforts to cause the Merger to
qualify, and shall not take, and shall use all reasonable efforts to prevent
any affiliate of such party from taking, any actions that could prevent the
Merger from qualifying, as a reorganization under the provisions of section
368(a) of the Code.
SECTION 6.05. Public Announcements. Key and Brock shall consult with each
other before issuing any press release or otherwise making any public
statements with respect to the Merger and shall not issue any such press
release or make any such public statement prior to such consultation. The press
release announcing the execution and delivery of this Agreement shall be a
joint press release of Key and Brock.
SECTION 6.06. Nasdaq Listing. Key shall use all reasonable efforts to cause
the shares of Key Common Stock to be issued in the Merger to be approved for
listing (subject to official notice of issuance) on the Nasdaq National Market
prior to the Effective Time.
SECTION 6.07. Employee Benefit Plans.
(a) Change of Control. Key and Merger Sub agree to honor, and to cause the
Surviving Corporation to honor, all severance agreements or other agreements,
contracts, plans, programs, policies, or arrangements for the payment of
severance or other benefits upon consummation of a change of control or other
business combination involving Brock in existence as of the date hereof;
provided, however, that prior to the Effective Time Merger Sub shall notify
Brock of the employees of Brock that Key desires to retain following the
Effective
A-34
<PAGE>
Time and if such persons are retained as employees on a full-time basis by Key
or any subsidiary in any capacity and at their then-current salaries for a
period longer than one year after the Effective Time (and, in the case of
Kenneth J. Stucke, Michael R. Barham and Robin A. Seibert, they are offered an
employment agreement with Key having a term of at least two years at their then
current salaries) and without any requirements that they relocate their
personal residence from the New Orleans, Louisiana metropolitan area, no
severance payments under the Brock Exploration Corporation Severance Plan or
the Directors Severance Plan shall be due to such persons, and Brock shall
amend such plans before the Effective Time to the extent necessary to so
provide. Key and Merger Sub agree to honor the Change of Control Bonus Plan
described in the Brock SEC Reports. Key and Merger Sub agree that the
consummation of the Merger shall constitute a change of control for the
purposes of all applicable agreements, contracts, plans, programs, policies or
other arrangements of Brock. Key and Merger Sub acknowledge that all payments
due upon consummation of the Merger under any such agreements, contracts,
plans, programs, policies or arrangements shall be made on the date of
termination of employment.
(b) Stock Options. The Brock 1979 Stock Option Plan shall be amended to
provide that all options to purchase Brock Common Stock outstanding on the date
hereof shall become fully vested prior to the Effective Time and shall expire
upon the Effective Time unless exercised prior to the Effective Time. The 1979
Option Plan shall terminate at the Effective Time.
(c) Pension Plan. Brock shall amend each Benefit Plan that is subject to
Title IV of ERISA to provide that all benefit accruals shall cease 30 days
after the Effective Time of the Merger. Key agrees that it shall initiate
procedures to terminate each Benefit Plan that is subject to Title IV of ERISA
if and when such Benefit Plan may be terminated in a standard termination under
ERISA section 4041.
(d) Supplemental Executive Retirement Plan. Key and Merger Sub acknowledge
and agree that as a result of the transactions contemplated hereby all of the
participants covered by Brock's Supplemental Executive Retirement Plan (the
"SERP") will be 100% vested in the benefits provided thereunder and that such
plan shall be terminated prior to the Effective Time. Prior to the Effective
Time, Brock will distribute the present value of the benefits to which a
participant is entitled thereunder in a single lump sum payment.
(e) Group Health Plan coverage. All individuals who were employed by Brock at
the Effective Time and who are employed by Brock on the day after the Effective
Time will be offered group health plan coverage under Key's group health plan
effective the day after the Effective Time. Such coverage shall not exclude any
pre-existing conditions. Any such Brock employees who are covered under the Key
group health plan and are terminated by Key after the Effective Time shall be
offered COBRA continuation coverage under the Key group health plan.
Brock employees who were covered under the Brock group health plan
immediately before the Effective Time and who are terminated at the Effective
Time shall be offered COBRA continuation coverage under the Key group health
plan. Former employees of Brock or dependents thereof, who were receiving COBRA
continuation coverage under the Brock group health plan as of the Effective
Time will be eligible to elect, pursuant to COBRA, to continue coverage under
Key's group health plan for the remainder of the COBRA continuation period at
such former employee's or dependent's sole expense. Further, if such persons,
and dependents thereof, elect COBRA continuation coverage under Key's group
health plan, such persons will not be subject to any pre-existing condition
limitation under Key's group health plan. All such persons, as of December 1,
1995, are listed on Schedule 6.07(e).
(f) Other Benefits. Except as provided in subsection 6.07(e) above, Brock
employees shall continue to be covered under the Brock Benefit Plans. Brock
employees who accept an offer of employment with Key after the Effective Time
shall be eligible to participate in all Key Benefit Plans (including those
implemented following the Effective Time) according to the terms and conditions
of each such Key Benefit Plan on an equal basis with Key's employees. All Brock
employees who accept an offer of employment with Key after the Effective Time
shall receive credit for prior service with Brock as follows: the lesser of
actual years of service or an amount equal to the period of time between
January 1, 1993 and the Effective Time for purposes of participation and
vesting in all of the Key Benefit Plans.
A-35
<PAGE>
SECTION 6.08. Merger Sub. Prior to the Effective Time, Merger Sub shall not
conduct any business or make any investments other than as specifically
contemplated by this Agreement and will not have any assets (other than a de
minimis amount of cash paid to Merger Sub for the issuance of its stock to Key)
or liabilities.
SECTION 6.09. Indemnification. For a period of five years after the Effective
Time, (i) Key shall not amend or otherwise modify Article 8 of the charter of
Brock (as in effect on the date hereof) in a manner that would adversely affect
the rights thereunder of any individuals who at any time prior to the Effective
Time were directors or officers of Brock in respect of acts or omissions
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement), unless such amendment or
modification is required by law; and (ii) Key shall guarantee the performance
by Brock of its obligations under Article 8 of the charter of Brock to the
extent of the excess, if any, of (A) the net worth of Brock as of the Effective
Time over (B) the net worth of Brock as of the date of any claim under such
provisions of the charter and bylaws of Brock by a person referred to in the
foregoing clause (i). This Section 6.09 is intended to be for the benefit of,
and shall be enforceable by, the persons referred to in clause (i) of the
foregoing sentence, their heirs and personal representatives, and shall be
binding on Key and its successors and assigns.
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.01. Conditions to Obligations of Each Party Under This
Agreement. The respective obligations of each party to effect the Merger and
the other transactions contemplated hereby shall be subject to the satisfaction
at or prior to the Closing Date of the following conditions, any or all of
which may be waived in writing by the parties hereto, in whole or in part, to
the extent permitted by applicable law:
(a) Effectiveness of the Registration Statement; Blue Sky. The
Registration Statement shall have been declared effective by the SEC under
the Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings
for that purpose shall have been initiated by the SEC. Key shall have
received all Blue Sky permits and other authorizations necessary to
consummate the transactions contemplated by this Agreement.
(b) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of Brock,
and the issuance of the Key Common Stock in the Merger shall have been
approved by the requisite vote of the stockholders of Key.
(c) No Order. No Governmental Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent) which is in
effect and which has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger.
SECTION 7.02. Additional Conditions to Obligations of the Key Companies. The
obligations of the Key Companies to effect the Merger and the other
transactions contemplated hereby are also subject to the satisfaction at or
prior to the Closing Date of the following conditions, any or all of which may
be waived in writing by Key, in whole or in part, to the extent permitted by
applicable law:
(a) Representations and Warranties. Each of the representations and
warranties of Brock contained in this Agreement shall be true and correct
as of the Closing Date as though made on and as of the Closing Date (except
to the extent such representations and warranties specifically relate to an
earlier date, in which case such representations and warranties shall be
true and correct as of such earlier date). The Key Companies shall have
received a certificate of the President and the Chief Financial Officer of
Brock, dated the Closing Date, to such effect.
(b) Agreements and Covenants. Brock shall have performed or complied with
all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Closing Date. The Key Companies
shall have received a certificate of the President and the Chief Financial
Officer of Brock, dated the Closing Date, to that effect.
A-36
<PAGE>
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no change, occurrence or circumstance in the current or
future business, financial condition or results of operations of Brock or
any of its subsidiaries having or reasonably likely to have, individually
or in the aggregate, a material adverse effect on the financial condition,
results of operations or current or future business of Brock and its
subsidiaries, taken as a whole, except as to changes in general economic
conditions that affect each of Key and Brock substantially equally. The Key
Companies shall have received a certificate of the President and the Chief
Financial Officer of Brock, dated the Closing Date, to such effect.
(d) Absence of Regulatory Conditions. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, by any Governmental Entity in
connection with the grant of a regulatory approval necessary, in the
reasonable business judgment of Key, to the continuing operation of the
current or future business of Brock, which imposes any condition or
restriction upon the Key Companies or the business or operations of Brock
which, in the reasonable business judgment of Key, would be materially
burdensome in the context of the transactions contemplated by this
Agreement.
(e) Tax Opinion. Prior to the effective date of the Registration
Statement, Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P.
shall have delivered its written opinion to Key, in form and substance
reasonably satisfactory to Key, to the effect that: (i) the Merger will
constitute a reorganization within the meaning of section 368(a) of the
Code; (ii) Key, Merger Sub and Brock will each be a party to that
reorganization within the meaning of section 368(b) of the Code; (iii) Key,
Merger Sub and Brock will not recognize any gain or loss for U.S. federal
income tax purposes as a result of the Merger; and (iv) the Federal Income
Tax Consequences section of the Proxy Statement (which constitutes the
prospectus included in the Registration Statement) describes the material
income tax consequences to Key, Brock and the Brock stockholders from the
Merger Transaction and fairly represents such counsel's opinion as to the
federal income tax matters discussed therein. Such firm shall have
consented to the filing of such opinion as an exhibit to the Registration
Statement and to the reference to such firm in the Registration Statement
and such tax opinion shall not have been withdrawn or modified in any
material respect prior to the Closing Date.
(f) Affiliate Letters. Key shall shall have received from each affiliate
of Brock a written agreement substantially in the form of Exhibit A hereto.
SECTION 7.03. Additional Conditions to Obligations of Brock. The obligations
of Brock to effect the Merger and the other transactions contemplated hereby
are also subject to the satisfaction at or prior to the Closing Date of the
following conditions, any or all of which may be waived in writing by Brock, in
whole or in part, to the extent permitted by applicable law:
(a) Representations and Warranties. Each of the representations and
warranties of the Key Companies contained in this Agreement shall be true
and correct as of the Closing Date as though made on and as of the Closing
Date (except to the extent such representations and warranties specifically
relate to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date). Brock shall
have received a certificate of the President and the Chief Financial
Officer of each of the Key Companies, dated the Closing Date, to such
effect.
(b) Agreements and Covenants. The Key Companies shall have performed or
complied with all agreements and covenants required by this Agreement to be
performed or complied with by them on or prior to the Closing Date. Brock
shall have received a certificate of the President and the Chief Financial
Officer of each of the Key Companies, dated the Closing Date, to that
effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no change, occurrence or circumstance in the current or
future business, financial condition or results of operations of Key or any
of its subsidiaries having or reasonably likely to have, individually or in
the aggregate, a material adverse effect on the financial condition,
results of operations or current or future business of Key and its
subsidiaries, taken as a whole. Brock shall have received a certificate of
the President and the Chief Financial Officer of each of the Key Companies,
dated the Closing Date, to such effect.
A-37
<PAGE>
(d) Absence of Regulatory Conditions. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, by any Governmental Entity in
connection with the grant of a regulatory approval necessary, in the
reasonable business judgment of Brock, to the continuing operation of the
current or future business of Key, which imposes any condition or
restriction upon Key or the business or operations of Key which, in the
reasonable business judgment of Brock, would be materially burdensome in
the context of the transactions contemplated by this Agreement.
(e) Nasdaq Listing. The shares of Key Common Stock to be issued in the
Merger shall have been approved for listing (subject to official notice of
issuance) on the Nasdaq National Market.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of this Agreement and
the Merger by the stockholders of Brock:
(a) by mutual consent of Key and Brock;
(b) by Key, upon a material breach of any representation, warranty,
covenant or agreement on the part of Brock set forth in this Agreement, or
if any representation or warranty of Brock shall have become untrue, in
either case such that the conditions set forth in Section 7.02(a) or
Section 7.02(b) of this Agreement, as the case may be, would be incapable
of being satisfied by June 30, 1996 (or as otherwise extended as described
in Section 8.01(e)); provided, that in any case, a wilful breach shall be
deemed to cause such conditions to be incapable of being satisfied for
purposes of this Section 8.01(b);
(c) by Brock, upon a material breach of any representation, warranty,
covenant or agreement on the part of the Key Companies set forth in this
Agreement, or if any representation or warranty of the Key Companies shall
have become untrue, in either case such that the conditions set forth in
Section 7.03(a) or Section 7.03(b) of this Agreement, as the case may be,
would be incapable of being satisfied by June 30, 1996 (or as otherwise
extended as described in Section 8.01(e)); provided, that in any case, a
wilful breach shall be deemed to cause such conditions to be incapable of
being satisfied for purposes of this Section 8.01(c);
(d) by either Key or Brock, if there shall be any Order which is final
and nonappealable preventing the consummation of the Merger, except if the
party relying on such Order to terminate this Agreement has not complied
with its obligations under Section 6.03(b) of this Agreement;
(e) by either Key or Brock, if the Merger shall not have been consummated
before June 30, 1996; provided, however, that this Agreement may be
extended by written notice of either Key or Brock to a date not later than
September 30, 1996, if the Merger shall not have been consummated as a
direct result of Brock or the Key Companies having failed by June 30, 1996
to receive all required regulatory approvals or consents with respect to
the Merger;
(f) by either Key or Brock, if this Agreement and the Merger shall fail
to receive the requisite vote for approval and adoption by the stockholders
of Brock at the Brock Stockholders Meeting or if the issuance of the Key
Common Stock in connection with the Merger shall fail to receive the
requisite vote for approval by the stockholders of Key at the Key
Stockholders Meeting;
(g) by Key, if (i) the Board of Directors of Brock withdraws, modifies or
changes its recommendation of this Agreement or the Merger in a manner
adverse to Key or shall have resolved to do any of the foregoing; (ii) the
Board of Directors of Brock shall have recommended to the stockholders of
Brock any Competing Transaction or shall have resolved to do so; (iii) a
tender offer or exchange offer for 20% or more of the outstanding shares of
capital stock of Brock is commenced, and the Board of Directors of Brock
does not recommend that stockholders not tender their shares into such
tender or exchange offer or; (iv) any person (other than Key or an
affiliate thereof, or any stockholder of Brock as of the date of this
Agreement) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of, or any "group" (as
A-38
<PAGE>
such term is defined under Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder), shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of, 20%
or more of the then outstanding shares of capital stock of Brock; or
(h) by Brock, if the Board of Directors of Brock (x) fails to make or
withdraws its recommendation referred to in Section 6.02(a) if there exists
at such time a Competing Transaction (as defined in Section 5.02(g)), or
(y) recommends to Brock's stockholders approval or acceptance of a
Competing Transaction, in each case only if the Board of Directors of
Brock, after consultation with and based upon the advice of independent
legal counsel (who may be Brock's regularly engaged independent legal
counsel), determines in good faith that such action is necessary for such
Board of Directors to comply with its fiduciary duties to stockholders
under applicable law.
The right of any party hereto to terminate this Agreement pursuant to this
Section 8.01 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.
SECTION 8.02. Effect of Termination. Except as provided in Section 8.05 or
Section 9.01 of this Agreement, in the event of the termination of this
Agreement pursuant to Section 8.01, this Agreement shall forthwith become void,
there shall be no liability on the part of the Key Companies or Brock to the
other and all rights and obligations of any party hereto shall cease, except
that nothing herein shall relieve any party of any liability for (i) any breach
of such party's covenants or agreements contained in this Agreement, or (ii)
any willful breach of such party's representations or warranties contained in
this Agreement.
SECTION 8.03. Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; provided, however, that, after approval of
the Merger by the stockholders of Brock, (i) no amendment, which under
applicable law may not be made without the approval of the stockholders of
Brock, may be made without such approval, and (ii) no amendment, which under
the applicable rules of the National Association of Securities Dealers, may not
be made without the approval of the stockholders of Key, may be made without
such approval. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
SECTION 8.04. Waiver. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or conditions contained herein. Any such extension
or waiver shall be valid only if set forth in an instrument in writing signed
by the party or parties to be bound thereby. For purposes of this Section 8.04,
the Key Companies as a group shall be deemed to be one party.
SECTION 8.05. Fees, Expenses and Other Payments.
(a) Except as provided in Section 8.05(c) of this Agreement, all Expenses (as
defined in paragraph (b) of this Section 8.05) incurred by the parties hereto
shall be borne solely and entirely by the party that has incurred such
Expenses; provided, however, that the allocable share of the Key Companies as a
group and Brock for (i) all Expenses paid to financial printers for printing,
filing and mailing the Registration Statement, the Brock Proxy Statement and
the Key Proxy Statement and (ii) all SEC and other regulatory filing fees
incurred in connection with the Registration Statement, the Brock Proxy
Statement and the Key Proxy Statement, shall be one-half each; and provided
further that Key may, at its option, pay any Expenses of Brock, and Key shall
pay all SEC filing fees.
(b) "Expenses" as used in this Agreement shall include all out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants to a party hereto and
its affiliates) incurred by a party or on its behalf in connection with or
related to the authorization, preparation, negotiation, execution and
performance of this Agreement, the preparation, printing, filing and
A-39
<PAGE>
mailing of the Registration Statement, the Brock Proxy Statement and the Key
Proxy Statement, the solicitation of stockholder approvals and all other
matters related to the consummation of the transactions contemplated hereby.
(c) Brock agrees that if this Agreement is terminated pursuant to:
(i) Section 8.01(b) and (x) such termination is the result of a willful
breach of any representation, warranty, covenant or agreement of Brock
contained herein, (y) Brock shall have had contacts or entered into
negotiations relating to a Competing Transaction, in any such case at any
time within the period commencing on the date of this Agreement through the
date of termination of this Agreement, and (z) within twelve months after
the date of termination of this Agreement, and with respect to any person
or group with whom the contacts or negotiations referred to in clause (y)
have occurred, a Business Combination (as defined in Section 8.05(e)) shall
have occurred or Brock shall have entered into a definitive agreement
providing for a Business Combination; or
(ii) Section 8.01(f) because this Agreement and the Merger shall fail to
receive the requisite vote for approval and adoption by the stockholders of
Brock at the Brock Stockholders Meeting and at the time of such meeting
there shall exist a Competing Transaction; or
(iii) Section 8.01(h)(i) and at the time of the withdrawal, modification
or change (or resolution to do so) of its recommendation by the Board of
Directors of Brock, there shall exist a Competing Transaction; or
(iv) Sections 8.01(h)(ii) or (iii); or
(v) Section 8.01(i);
then Brock shall pay to Key an amount equal to $1,000,000, which amount is
inclusive of all of Key's Expenses.
(d) Any payment required to be made pursuant to Section 8.05(c) of this
Agreement shall be made as promptly as practicable but not later than three
business days after termination of this Agreement, and shall be made by wire
transfer of immediately available funds to an account designated by Key, except
that any payment to be made as the result of an event described in Section
8.05(c)(i) shall be made as promptly as practicable but not later than three
business days after the occurrence of the Business Combination or the execution
of the definitive agreement providing for a Business Combination.
(e) For purposes of this Section 8.05, the term "Business Combination" means
(i) a merger, consolidation, share exchange, business combination or similar
transaction involving Brock, (ii) a sale, lease, exchange, transfer or other
disposition of 20% or more of the assets of Brock and its subsidiaries, taken
as a whole, in a single transaction or a series of transactions, or (iii) the
acquisition, by a person (other than Key or any affiliate thereof) or group (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of beneficial ownership (as defined in Rule 13d-3 under
the Exchange Act) of 20% or more of the Brock Common Stock whether by tender or
exchange offer or otherwise.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Effectiveness of Representations, Warranties and Agreements.
(a) Except as set forth in Section 9.01(b) of this Agreement, the
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party
or any of their officers, directors, representatives or agents, whether prior
to or after the execution of this Agreement.
(b) The representations, warranties and agreements in this Agreement shall
terminate at the Effective Time or upon the termination of this Agreement
pursuant to Article VIII, except that the agreements set forth in Articles I
and II and IX and Sections 6.07 and 6.09 shall survive the Effective Time and
those set forth in
A-40
<PAGE>
Sections 5.04(d), 8.02 and 8.05 and Article IX hereof shall survive
termination. Nothing herein shall be construed to cause the Confidentiality
Agreement to terminate upon the termination of this Agreement pursuant to
Article VIII.
SECTION 9.02. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
(a) If to any of the Key Companies, to:
Key Production Company, Inc.
One Norwest Center, 20th Floor
1700 Lincoln Street
Denver, Colorado 80203-4520
Attention: Monroe W. Robertson
Telecopier No.: (303) 830-7158
with a copy to:
Holme Roberts & Owen LLC
1700 Lincoln Street, Suite 4100
Denver, Colorado 80203
Attention: Thomas A. Richardson
Telecopier No.: (303) 866-0200
(b) If to Brock, to:
225 Baronne Street, Suite 700
New Orleans, Louisiana 70112-1707
Attention: President
Telecopier No.: (504) 589-9035
with a copy to:
Jones, Walker, Waechter, Poitevent,
Carrere & Denegre, L.L.P.
Place St. Charles
201 St. Charles Ave.
New Orleans, Louisiana 70170-5100
Attention: William B. Masters
Telecopier No.: (504) 582-8583
SECTION 9.03. Certain Definitions. For the purposes of this Agreement, the
term:
(a) "affiliate" means a person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person;
(b) a person shall be deemed a "beneficial owner" of or to have
"beneficial ownership" of Brock Common Stock or Key Common Stock, as the
case may be, in accordance with the interpretation of the term "beneficial
ownership" as defined in Rule 13d-3 under the Exchange Act, as in effect on
the date hereof; provided that a person shall be deemed to be the
beneficial owner of, and to have beneficial ownership of, Brock Common
Stock or Key Common Stock, as the case may be, that such person or any
affiliate of such person has the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise.
A-41
<PAGE>
(c) "business day" means any day other than a day on which banks in the
State of New York are authorized or obligated to be closed;
(d) "control" (including the terms "controlled," "controlled by" and
"under common control with") means the possession, directly or indirectly
or as trustee or executor, of the power to direct or cause the direction of
the management or policies of a person, whether through the ownership of
stock or as trustee or executor, by contract or credit arrangement or
otherwise;
(e) "knowledge" or "known" shall mean, with respect to any matter in
question, if an executive officer of Brock or Key, as the case may be, has
actual knowledge of such matter, and, with respect to Section 3.14, if
Robert Dixon has actual knowledge of such matter;
(f) "person" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as defined in
Section 13(d) of the Exchange Act);
(g) "Significant Subsidiary" means any subsidiary of Brock or Key, as the
case may be, that would constitute a Significant Subsidiary of such party
within the meaning of Rule 1-02 of Regulation S-X of the SEC; and
(h) "subsidiary" or "subsidiaries" of Brock, Key, the Surviving
Corporation or any other person, means any corporation, partnership, joint
venture or other legal entity of which Brock, Key, the Surviving
Corporation or any such other person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or
indirectly, 50% or more of the stock or other equity interests the holders
of which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal
entity.
SECTION 9.04. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Section references herein are, unless the
context otherwise requires, references to sections of this Agreement.
SECTION 9.05. Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that transactions contemplated hereby are fulfilled to the
extent possible.
SECTION 9.06. Entire Agreement. This Agreement (together with the Exhibits,
the Brock Disclosure Schedule and the Key Disclosure Schedule) and the
Confidentiality Agreement constitute the entire agreement of the parties, and
supersede all prior agreements and undertakings, both written and oral, among
the parties or between any of them, with respect to the subject matter hereof.
Brock agrees that nothing contained in this Agreement, the proxies granted by
certain officers and directors of Brock to Key on or about the date hereof or
the transactions contemplated hereby or thereby shall be deemed to violate the
Confidentiality Agreement, and that such agreements and proxies have been
entered into or granted with the prior written consent of Brock.
SECTION 9.07. Assignment. This Agreement shall not be assigned by operation
of law or otherwise.
SECTION 9.08. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied (other than as contemplated by Section 6.07 and
Section 6.09), is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 9.09. Specific Performance The parties hereby acknowledge and agree
that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary
A-42
<PAGE>
on its part to the consummation of the Merger, will cause irreparable injury to
the other parties for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder.
SECTION 9.10. Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement
herein, nor shall any single or partial exercise of any such right preclude
other or further exercise thereof or of any other right. All rights and
remedies existing under this Agreement are cumulative to, and not exclusive to,
and not exclusive of, any rights or remedies otherwise available.
SECTION 9.11. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of law.
SECTION 9.12. Counterparts. This Agreement may be executed in multiple
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
KEY PRODUCTION COMPANY, INC.
/s/ F. H. Merelli
By: _________________________________
F.H. MERELLI
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
KEY ACQUISITION ONE, INC.
/s/ F. H. Merelli
By: _________________________________
F.H. MERELLI
PRESIDENT
BROCK EXPLORATION CORPORATION
/s/ Lawrence E. Brock
By: _________________________________
LAWRENCE E. BROCK
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
A-43
<PAGE>
STEPHENS INC.
December 21, 1995
Board of Directors of
Brock Exploration Corporation
225 Baronne Street, Suite 700
New Orleans, LA 70112-1707
Gentlemen:
We have acted as your financial advisor in connection with the merger of
Brock Exploration Corporation (the "Company") with Key Production Company,
Inc. ("Key") (the "Transaction"). Upon the consummation of the merger, each
1.45 shares of the Common Stock of the Company shall be converted into the
right to receive one share of Key Common Stock. The terms and conditions of
the Transaction are more fully set forth in the Agreement and Plan of Merger
(the "Merger Agreement") dated December 21, 1995.
You have requested our opinion as to the fairness to the disinterested
shareholders of the Company from a financial point of view of the
consideration to be received by such shareholders in the Transaction. For
purposes of this opinion, the term "disinterested shareholders" means holders
of the Company's one class of publicly traded common stock (the "Common
Stock") other than (1) directors and officers of the Company and (2) Lawrence
E. Brock, his immediate family or any entity for which a Brock family member
is a beneficiary, either directly or indirectly.
In connection with rendering our opinion we have:
(i) analyzed certain publicly available financial statements and reports
regarding the Company and Key;
(ii) analyzed certain internal financial statements and other financial and
operating data (including financial projections) concerning the
Company and Key prepared by management of the Company and of Key;
(iii) reviewed certain reserve information provided by the Company and by
Key relating to the producing properties of the Company and of Key,
including reserve reports prepared or audited by independent
petroleum engineers for the Company and for Key;
(iv) analyzed, on a pro forma basis, the effect of the Transaction on Key's
balance sheet, capitalization ratios, earnings, cash flow and book
value both in the aggregate and, where applicable, on a per share
basis;
(v) reviewed the reported prices and trading activity for the common stock
of the Company and of Key;
(vi) compared the financial performance of the Company and of Key and the
prices and trading activity of the common stock of the Company and of
Key with that of certain other comparable publicly-traded companies
and their securities;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
Investment Bankers
333 Clay Street Suite 3030 Houston, Texas 77002 713-753-9000 Fax 713-753-9090
<PAGE>
December 21, 1995
PAGE 2
(viii) reviewed the Merger Agreement and related documents;
(ix) discussed with management of the Company the operations of and future
business prospects for the Company;
(x) discussed with management of Key the operations of and future business
prospects for Key and the anticipated financial consequences of the
Transaction to Key;
(xi) assisted in your deliberations regarding the material terms of the
Transaction; and
(xii) performed such other analysis and provided such other services as we
have deemed appropriate.
We have relied on the accuracy and completeness of the information and
financial data provided to us by the Company and Key, and our opinion is based
upon such information. We have inquired into the reliability of such
information and financial data only to the limited extent necessary to provide
a reasonable basis for our opinion, recognizing that we are rendering only an
informed opinion and not an appraisal or certification of value. With respect
to the financial projections prepared by management of the Company and of Key,
we have assumed that they have been reasonably prepared on bases reflecting
the best currently available estimates and judgements of the future financial
performance of the Company and of Key.
As part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions and valuations for estate,
corporate and other purposes. In the ordinary course of business, Stephens
Inc. and its affiliates at any time may hold long or short positions, and may
trade or otherwise effect transactions as principal or for the accounts of
customers, in debt or equity securities or options on securities of the
Company and of Key. Stephens is receiving a fee, and reimbursement of its
expenses, in connection with the issuance of this fairness opinion.
Based on the foregoing and our general experience as investment bankers, and
subject to the qualifications stated herein, we are of the opinion on the date
hereof that the consideration to be received by the disinterested shareholders
of the Company in the Transaction is fair to them from a financial point of
view.
This opinion and a summary discussion of our underlying analyses and role as
your financial advisor may be included in communications to the Company's
shareholders provided that we approve of such disclosures prior to
publication.
Very truly yours,
/s/ Stephens Inc.
<PAGE>
================================================================================
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
( x ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
-----------------
OR
(___) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934. (FEE REQUIRED)
Commission file number 1-9461
BROCK EXPLORATION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 72-0734844
(State of Incorporation) (I.R.S. Employer Identification No.)
225 Baronne Street, Suite 700
New Orleans, Louisiana 70112-1707
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (504) 586-1815
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered:
------------------- ---------------------
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of March 1, 1995, there were outstanding 3,811,190 shares of the
Registrant's Common Stock. Based upon the last sale price of the Common Stock
on the American Stock Exchange on such date, the aggregate market value of the
2,360,130 shares held by non-affiliates of the Registrant was approximately
$8,555,471.
DOCUMENTS INCORPORATED BY REFERENCE: None.
================================================================================
1
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
The Company
Brock Exploration Corporation is an independent oil and gas company whose
principal business is the acquisition of producing oil and gas properties and
the development of oil and gas properties. As used herein, unless the context
otherwise indicates, the term "Company" refers to Brock Exploration Corporation
and its consolidated subsidiaries. The Company is primarily engaged in one
industry segment and line of business which is the exploration for, and
development and production of oil and gas reserves.
The Company began in 1948 as Big Horn Powder River Corporation, a publicly
held corporation, domiciled in Denver. This corporation engaged in exploring for
and developing oil and gas properties in the Rocky Mountain and Mid-Continent
regions of the United States and Canada. The name was subsequently changed to
Plaza Petroleum, Inc. In 1973, Plaza and its three wholly owned subsidiaries,
Gillette Royalty and Mineral Corp., Arapahoe Production Company and Zol-Dan Oil
Company, became Brock Exploration Corporation as a result of a merger with a
privately owned company, Precise Exploration Corporation, founded by Lawrence E.
Brock, the Company's current Chairman of the Board.
The Company's primary business strategy has consisted of the acquisition of
producing oil and gas properties. Specifically, its objective has been to
purchase producing properties with potential for significant increases in
production through waterflooding, workovers of existing wells, development
drilling or similar operations to improve efficiency. The Company seeks to
purchase a significant working interest in each property acquired so as to
influence or control the quality and timing of development drilling or other
operational decisions. Whenever possible, the Company assumes operations of
purchased properties. The Company finances these activities through the
utilization of a portion of its current cash flow and its available line of
credit. The Company also periodically reviews its property base identifying
properties to sell or abandon that do not meet strict performance criteria.
On November 18, 1994, the Board of Directors announced that it had
determined to solicit indications of interest for the cash sale of the Company.
The Company has begun the process of qualifying potential bidders as to
financial capability and providing interested parties information on its oil and
gas properties and operations. The Company has indicated to potential bidders
that any offers for the acquisition of the Company must be received prior to
April 10, 1995. Following the receipt of any indications of interest for the
acquisition of the Company, the Board of Directors will determine whether or not
any acceptable bids have been received and whether or not the sale of the
Company is in the best interest of the Company's stockholders. Any merger
involving the Company will be subject to, among other things, the approval of
the holders of 66 2/3% of the outstanding shares of the Company's common stock.
On September 14, 1993, the Board of Directors elected to change the
Company's fiscal year end from March 31 to December 31. The Board of Directors
decided to change the Company's fiscal year end to coincide with the fiscal year
end of its controlling ownership interest in certain limited partnerships
managed by a subsidiary of the Company and to enhance the comparability of the
Company's results of operations with other companies operating in the oil and
gas industry.
As of December 31, 1994, the Company had oil and gas interests in twelve
states, with primary activities in Louisiana, Texas, Oklahoma, New Mexico and
Kansas. Oil and gas activities are directed from the Company's corporate
headquarters in New Orleans, Louisiana.
Employees
As of March 1, 1995, the Company had 19 employees. Included in this count
are five engineers, two accountants, and one certified public accountant.
2
<PAGE>
Producing Properties
The following table sets forth the producing oil and gas wells and
leasehold acreage in which the Company held an interest as of December 31, 1994.
Producing Properties
<TABLE>
<CAPTION>
Producing Wells Mineral, Royalty and
-------------------------------- Overriding Royalty
Gross Net Leasehold Acres Interests
----- --- --------------- ---------
Location Oil Gas Oil Gas Gross Net Gross Net
--- --- --- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arkansas......... -- 1 -- 0.1193 580 116 316 1
California....... 1 -- 0.1134 -- 461 52 -- --
Kansas........... 31 74 16.2173 48.3100 11,083 8,153 1,809 1,309
Louisiana........ -- 11 -- 0.4472 1,279 307 2,310 57
Mississippi...... 4 -- 0.4311 -- 595 30 -- --
New Mexico....... 24 3 5.3734 0.3054 4,487 523 -- --
Oklahoma......... 101 48 16.6935 7.0568 28,558 6,725 8,868 356
Texas............ 233 29 30.9111 11.0883 47,259 13,336 14,003 314
Wyoming.......... 12 -- 3.6435 -- -- -- 12,542 132
--- --- ------- ------- ------ ------ ------ -----
Totals........... 406 166 73.3833 67.3270 94,302 29,242 39,848 2,169
=== === ======= ======= ====== ====== ====== =====
</TABLE>
Substantially all of the producing oil and gas properties owned directly by
the Company are pledged to secure borrowings under the Company's revolving
credit facility. See Note 4 of Notes to Consolidated Financial Statements.
Reserves
Reference is made to Note 10 of Notes to Consolidated Financial Statements
included in Part II, Item 8 for information with respect to the estimated net
quantities of the Company's proved oil and gas reserves as of December 31, 1994,
and related information. Since December 31, 1994, no major discovery or other
favorable or adverse event has occurred which would cause a significant change
in the Company's proved reserves.
The Company filed no estimates of reserves with any federal authority or
agency since December 31, 1993, except for Form EIA-23 filed with the U. S.
Department of Energy on April 1, 1994, which reflects domestic oil and gas
reserve estimates for Company-operated properties for the calendar year 1993.
These estimates are consistent with the reserve estimates included in this
report.
Undeveloped Properties
As of December 31, 1994, the Company owned the following undeveloped oil
and gas interests, which are being held by production, under leases of varying
lengths, or require annual rentals if not developed. The overriding royalty,
royalty and mineral interests are substantially perpetual with no expiration
date.
3
<PAGE>
Undeveloped Properties
<TABLE>
<CAPTION>
Mineral, Royalty and
Overriding Royalty
Working Interests Interests
----------------- ----------------------
Gross Acres Net Acres Gross Acres Net Acres
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Alabama........... -- -- -- --
Arkansas.......... 1,507 190 -- --
Colorado.......... 80 20 -- --
Kansas............ -- -- -- --
Louisiana......... 3,442 378 640 10
Mississippi....... -- -- 29,718 538
Montana........... 1,540 192 1,035 755
North Dakota...... 480 41 320 300
Oklahoma.......... 26,240 7,040 999 221
Texas............. 35,475 3,522 1,018 130
Wyoming........... 614 10 6,419 55
------- ------- ------- -------
Totals............ 69,378 11,393 40,149 2,009
======= ======= ======= =======
</TABLE>
Historical Summary of Production
The following table summarizes the Company's net oil and gas production for
the three fiscal years ended March 31, 1993, the nine months ended December 31,
1993 and the fiscal year ended December 31, 1994:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
---------- ---------
<S> <C> <C>
Fiscal year ended March 31, 1991........... 223,320 2,549,432
Fiscal year ended March 31, 1992........... 238,633 2,238,786
Fiscal year ended March 31, 1993........... 237,221 2,204,572
Nine months ended December 31, 1993........ 244,070 1,906,783
Fiscal year ended December 31, 1994........ 350,637 2,369,075
</TABLE>
Average Sales Prices and Production Costs
Average prices received for oil and gas and average production costs per
equivalent unit of production for the year ended December 31, 1994, the nine
months ended December 31, 1993 and the year ended March 31, 1993:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
---- ---- ----
<S> <C> <C> <C>
Average prices per unit
Crude oil per Bbl............. $15.54 $16.10 $18.79
Natural gas per Mcf........... $ 1.67 $ 2.04 $ 1.71
Average production cost
Per equivalent barrel......... $ 5.99 $ 6.32 $ 6.19
</TABLE>
Substantially all of the Company's oil and gas production is sold at market
prices.
Drilling Results
The following table presents the results of the Company's drilling
activities for the year ended December 31, 1994, the nine months ended
December 31, 1993 and the year ended March 31, 1993:
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
----------------------------
Productive Dry
---------- ---
Gross Net Gross Net
----- ----- ----- -----
<S> <C> <C> <C> <C>
Exploratory.............. -- -- 1 .2215
Development.............. 4 .4660 -- --
----- ----- ----- -----
Total................. 4 .4660 1 .2215
===== ===== ===== =====
<CAPTION>
Nine Months Ended December 31, 1993
-----------------------------------
Productive Dry
---------- ---
Gross Net Gross Net
----- ----- ----- -----
<S> <C> <C> <C> <C>
Exploratory.............. 1 .1016 -- --
Development.............. 6 1.8770 -- --
----- ------ ----- -----
Total................. 7 1.9786 -- --
===== ====== ===== =====
<CAPTION>
Year Ended March 31, 1993
-------------------------
Productive Dry
---------- ---
Gross Net Gross Net
----- ------ ----- -----
<S> <C> <C> <C> <C>
Exploratory.............. -- -- -- --
Development.............. 8 2.7760 -- --
----- ------ ----- -----
Total................. 8 2.7760 -- --
===== ====== ===== =====
</TABLE>
The above table includes the Company's share of one gross well drilled by a
partnership managed by the Company during the nine months ended December 31,
1993 and the year ended March 31, 1993.
Present Activities
Acquisitions
In mid-February 1995, Brock Oil and Gas Corporation ("BOGC"), a wholly-
owned subsidiary of the Company, advised the limited partners in the five
limited partnerships in which BOGC was the general partner of the desire to
dissolve these partnerships. Pursuant to the terms of the liquidation of these
partnerships, the remaining oil and gas properties owned by these partnerships
will be purchased by BOGC for an amount determined in accordance with the
limited partner presentment right provisions of the partnership agreement for
each partnership. The effective date of the sale of these oil and gas properties
will be January 1, 1995, and in connection with these transactions, BOGC will
assume, as of the effective date, the liabilities associated with the oil and
gas properties acquired from the partnership. The Company has cash reserves in
an amount equal to the estimated value of certain liabilities associated with
over-produced positions on several gas wells in which certain of these
partnerships had an interest. The cash price of acquiring these properties from
the partnerships is approximately $900,000. The Company estimates that proven
reserves will be increased by approximately 1.577 billion cubic feet of natural
gas and 9,600 barrels of oil as a result of the acquisition of these oil and gas
properties. (See "Oil and Gas Drilling Programs").
In March 1994, the Company purchased an interest in 21 oil wells located in
the Shafter Lake Field in Andrews County, Texas for $2.2 million. It was
anticipated that this field would be unitized for a waterflood project ("Unit")
in late 1994 with the Company to own an approximate 16% Working Interest ("WI")
in the Unit. In December 1994, the Company sold approximately 60% of its
interest in these wells for $2.2 million. The proceeds from this sale were used
to reduce outstanding debt. The Unit was approved in January 1995 and as a
result the Company will have a 7.8% WI and a 6.5% Net Revenue Interest ("NRI")
in the Unit. When fully developed the proven reserves attributable to the
Company's interest in the unit
5
<PAGE>
are estimated to be 569 MBO and 605 MMcf. The Company anticipates spending
$640,000 for its share of development costs on the project over the next 18
months. Of this amount, the Company prepaid $160,000 in early 1995.
Waterfloods
The Company has a 17.4% WI and a 13.9% NRI in the Calumet Cottage Grove
Waterflood Unit in Canadian County, Oklahoma. Water injection began at the unit
in September 1992. Production from this unit has increased in response to the
waterflood operations. Currently the field is producing 3,500 BOPD which is
approximately 487 BOPD net to the Company. The Company recently approved
expenditures to drill one additional producing well, convert another well to
production and add two injection wells. The net cost to the Company is expected
to be approximately $130,000. It is currently anticipated that production will
continue to increase in 1995 up to an estimated 4,000 BOPD or approximately 560
BOPD net to the Company.
Drilling
In December 1994 one of the limited partnerships in which BOGC is the
General Partner, and a limited partner with a partnership interest of 75%,
participated via farmout in the drilling of a new well. The partnership retained
a 0.625% overriding royalty interest which will convert to a 7% WI in the well
at payout. In late February 1995, the well was completed and has tested at
approximately 4,220 Mcf per day. It is currently estimated that this well will
go on production in mid-1995 and achieve payout in approximately twelve months.
BOGC acquired the partnership's interest in this well, effective January 1,
1995, in connection with the liquidation of the partnership. (See "Oil and Gas
Drilling Programs").
The Company also owns an interest in a well which is currently drilling in
Brazoria County, Texas. The I.P. Farms #1 well is projected to drill to 13,000'
to test the I.P. Farms Sand. The Company owns a 5% WI and a 3.6% NRI before
payout and a 3.75% WI and a 2.6% NRI after payout in this well and approximately
2300 acres surrounding the well. The well is expected to reach total depth in
April 1995. The Company's net cost to drill and complete the well will be
approximately $106,000.
Oil and Gas Drilling Programs
BOGC serves as General Partner of five oil and gas drilling partnerships
organized from 1975 through 1984.
These partnerships were structured under varying arrangements whereby BOGC
received a management fee and was reimbursed for allocated general,
administrative and overhead expenses. In most cases, BOGC received an initial
participation in costs and revenues attributable to each partnership's oil and
gas properties and was entitled to an increased participation in the form of a
25% subordinated interest when "payout" (recoupment of limited partners' costs)
was attained with respect to a prospect. If the Company or any of its
subsidiaries acted as operator of a partnership property, it also received
reimbursement of its costs as operator and a monthly per well fee on producing
wells.
In mid-February 1995, BOGC advised the limited partners in these
partnerships of the desire to dissolve and liquidate the partnerships. BOGC
owned in excess of a majority of the limited partnership interests in four of
the five partnerships and accordingly exercised its right to liquidate, dissolve
and terminate these partnerships in accordance with the terms of the limited
partnership agreements. With respect to the remaining limited partnership, BOGC
owned 46% of the limited partnership interests and requested the consent of the
remaining limited partners to the liquidation, dissolution and termination of
the partnership. As of March 1, 1995, BOGC had received consent forms from a
majority of the limited partners consenting to the liquidation, dissolution and
termination of the partnership.
6
<PAGE>
Pursuant to the terms of the liquidation of these partnerships, BOGC will
acquire the remaining oil and gas properties owned by the partnerships,
effective January 1, 1995, for an amount determined in accordance with the
limited partner presentment right provisions provided for in the applicable
partnership agreement. In connection with the acquisition of these oil and gas
properties, BOGC will assume the liabilities associated with the oil and gas
properties arising after the effective date of the sale. BOGC has retained cash
in an amount equal to the estimated value of certain liabilities associated with
over-produced positions on gas wells in which certain of the partnerships had an
interest. The aggregate purchase price for all of the oil and gas properties
acquired from these partnerships is approximately $900,000. The Company
estimates that the reserves acquired from the partnerships are approximately
1.577 billion cubic feet of natural gas and 9,600 barrels of oil.
Gas Gathering Facility
The Company owns a 75% interest in a gas gathering facility located in
Johnson County, Kansas and a 75% WI in producing gas wells associated with the
facility. The Company's investment cost in this facility and the related wells
is approximately $575,000. The facility produces and distributes natural gas to
several industrial end users within a radius of approximately five miles
surrounding the facility. For the year ended December 31, 1994, the facility and
associated wells generated net operating income of approximately $163,000. The
Company also owns minority interests in similar facilities located in Oklahoma.
Office Facilities
The Company's headquarters office in New Orleans, Louisiana is leased under
an agreement from an unaffiliated party. Effective April 1, 1994, the Company's
lease agreement has been extended to March 31, 1997, with base rent payments of
$7,770 a month through September 30, 1996. There are no rent payments due for
the last six months of the lease.
Competition and Regulation
The Company encounters strong competition from major oil companies,
numerous other independent operators and other drilling and income fund programs
in attempting to acquire producing oil and gas properties. Many of those
competitors have larger staffs and greater financial resources than those of the
Company. The Company believes it has the sufficient engineering, financial and
accounting ability among the members of its staff to successfully undertake the
pursuit of acquisition opportunities.
Revenue generated from the sale of any oil and gas by the Company depends
on numerous factors beyond the Company's control, including the production of
other domestic crude oil and natural gas, crude oil and natural gas imports, the
marketing of competitive fuels, and the proximity and capacity of oil and gas
pipelines or other transportation facilities.
Various states have statutory provisions regulating the production of oil
and natural gas. The regulations extend to requiring permits for the drilling of
wells, the spacing of wells, the prevention of waste, the conservation of
natural gas and oil, and various other matters. Certain of these regulations may
impose restrictions on the production from individual wells below their actual
capacity to produce. Drilling activities and the production of oil and gas by
the Company are also subject to federal and state pollution and environmental
laws and regulations.
Environmental
The Company's operations are subject to extensive federal, state and local
laws and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Permits are
required for various aspects of the Company's operations, and these permits are
subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce compliance with
7
<PAGE>
their regulations, and violations are subject to fines, injunctions or both. The
Company is not aware of any violation of environmental regulations pending
against it which would have a material effect on its operations or financial
position.
Proposed Legislation
A number of legislative proposals have been made and introduced in Congress
and State Legislatures which, if enacted, could significantly affect the oil and
gas industry. No prediction can be made as to what legislation or administrative
regulations may be enacted, if any, affecting the taxation and competitive
status of an oil and gas producer, restricting the prices at which a producer
may sell its oil and gas, or the market demand for oil or gas, nor can it be
predicted which proposals, if any, might be enacted, nor when any such
proposals, if enacted, might be effective.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER
MATTERS.
Effective June 17, 1993, the Company's Common Stock began trading on both
the American Stock Exchange (AMEX) and the Pacific Stock Exchange (Symbol: BKE).
On September 14, 1993, the Board of Directors by unanimous consent resolved to
apply for de-listing on the Pacific Stock Exchange. The Securities and Exchange
Commission approved the de-listing application and effective February 25, 1994,
the Company's Common Stock ceased trading on the Pacific Stock Exchange.
The following table presents the quarterly range of high and low sales
prices for the Company's Common Stock on the American Stock Exchange and the
Pacific Stock Exchange as applicable.
<TABLE>
<CAPTION>
Year Ended December 31, 1994 High Low
- ----------------------------- ---- ---
<S> <C> <C>
Quarter Ended December 31, 1994............ $4.125 $2.375
Quarter Ended September 30, 1994........... 3.375 2.813
Quarter Ended June 30, 1994................ 3.250 2.813
Quarter Ended March 31, 1994............... 3.500 2.313
Nine Months Ended December 31, 1993
- -----------------------------------
Quarter Ended December 31, 1993............ $3.875 $2.625
Quarter Ended September 30, 1993........... 4.375 3.125
Quarter Ended June 30, 1993................ 3.625 2.500
Year Ended March 31, 1993
- -------------------------
Quarter Ended March 31, 1993............... $2.375 $1.750
Quarter Ended December 31, 1992............ 2.375 1.125
Quarter Ended September 30, 1992........... 1.500 1.125
Quarter Ended June 30, 1992................ 1.375 1.125
</TABLE>
As of March 1, 1995, there were approximately 2,216 holders of record of
the Company's Common Stock. The closing stock price of the Company's common
stock on March 1, 1995 was $3.625.
8
<PAGE>
The Company has never declared and has no present intention to declare
dividends. Future dividend policy will be determined by the Board of Directors
and based upon the Company's then existing earnings, cash flow, cash position
and related factors. See Note 4 of Notes to Consolidated Financial Statements.
The terms of the Company's current revolving credit facility includes
restrictions on the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below for the year ended December 31,
1994, the nine months ended December 31, 1993 and the three years ended March
31, 1993 should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the Consolidated Financial
Statements included under Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, December 31, Year Ended March 31,
1994 1993 1993 1992 1991
------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
Oil and Gas Revenues...... $ 9,042,000 $ 7,869,000 $ 8,867,000 $ 8,035,000 $ 9,693,000
Total Revenues............ $11,129,000 $ 8,696,000 $10,433,000 $ 9,661,000 $11,916,000
Net Earnings.............. $ 164,000 $ 267,000 (1) $ 873,000 $ 243,000 $ 1,352,000
Net Earnings Per Share... .04 .07 (1) .22 .06 .34
Total Assets at End of
Period.................. $21,038,000 $22,219,000 $20,449,000 $17,737,000 $16,232,000
Long-Term Debt at
End of Period........... $ 9,701,000 $10,576,000 $ 8,166,000 $ 7,275,000 $ 5,895,000
Production
Oil (Bbls).............. 350,637 244,070 237,221 238,633 223,320
Gas (Mcf)............... 2,369,075 1,906,783 2,204,572 2,238,786 2,549,432
Average Price
Per Bbl................. $ 15.54 $ 16.10 $ 18.79 $ 19.35 $ 23.62
Per Mcf................. $ 1.67 $ 2.04 $ 1.71 $ 1.33 $ 1.42
Average
Production Cost Per
Equivalent Barrels...... $ 5.99 $ 6.32 $ 6.19 $ 6.46 $ 6.41
</TABLE>
(1) Effective April 1, 1993, the Company adopted the provisions of FAS
Statement No. 109. The cumulative effect as of April 1, 1993, of adopting
Statement No. 109 increased net earnings by $186,000 or $.05 per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Oil and gas sales for the year ended December 31, 1994 were $9,042,000,
compared to oil and gas sales of $7,869,000 for the nine months ended December
31, 1993. Oil and gas sales for the year ended December 31, 1994 were 14% below
oil and gas sales for the comparable 12 month period ended December 31, 1993,
primarily as a result of a decline in natural gas prices and a decline in
natural gas production.
Natural gas prices decreased 18% during the year ended December 31, 1994 to
$1.67 per Mcf from $2.04 per Mcf for the nine months ended December 31, 1993.
The Company's natural gas production decreased to an average of 6,491 Mcf per
day from an average of 6,934 Mcf per day when comparing the year ended December
31, 1994 to the nine months ended December 31, 1993.
A portion of the reduction in the gas volume produced during the 1994
period was related to one well in Louisiana that had been shut-in by the
pipeline company for most of the third quarter of 1994 for pipeline repairs. As
of September 1994 the repairs had been completed and production had been
restored to ordinary levels.
The average price of oil per barrel received by the Company also decreased
from $16.10 to $15.54, or 3%, when comparing the nine months ended December 31,
1993 and the year ended December 31, 1994, respectively.
9
<PAGE>
Partially offsetting these reductions in gas production and product pricing
was an increase in the average daily oil production. The average daily oil
production increased 8% to 961 barrels per day from 888 barrels per day for the
year ended December 31, 1994 compared to the nine month period ended December
31, 1993.
During 1993, the Company entered into commodity swap transactions, or
hedges, to reduce the impact of fluctuations in the price of oil and natural
gas. These agreements involved monthly cash settlements of the difference
between the specified contract price and the average monthly spot price for oil
and natural gas. These agreements covered product delivery periods from January
1994 through December 1994. In January 1994, in response to the then existing
market conditions, the Company terminated all of these transactions. As a
result, in 1994, the Company paid $406,000 which represented the difference
between the contract price of the closing swaps and the contract price of the
original swaps. These payments have been recognized as a reduction of oil and
gas sales in the accompanying financial statements.
For the nine months ended December 31, 1993, oil and gas sales were
$7,869,000 which compares to $8,867,000 for the year ended March 31, 1993.
Included in the oil and gas sales during the year ended March 31, 1993 was
$634,000 which was received in settlement of a take-or-pay claim the Company had
against a pipeline company.
The increase in oil and gas sales for the nine months ended December 31,
1993 compared to the year ended March 31, 1993 was primarily related to an
increase in production volumes. The increase in oil volumes is attributable to
the Company's waterflood units responding to water injection and the increase in
gas volumes was attributable to the additional interest acquired in the
partnerships BOGC manages.
The average daily oil production was 888 barrels per day compared to 650
barrels and gas production was 6,934 Mcf per day compared to 6,040 Mcf per day
for the nine months ended December 31, 1993 and the year ended March 31, 1993,
respectively.
Gas prices averaged $2.04 per Mcf compared to $1.71 per Mcf and oil prices
averaged $16.10 per barrel compared to $18.79 per barrel for the nine months
ended December 31, 1993 and the year ended March 31, 1993, respectively.
The net administrative overhead billed to the five limited partnerships in
which BOGC is the General Partner decreased to $110,000 from $165,000 when
comparing the year ended December 31, 1994 to the nine months ended December 31,
1993, respectively. This reduction is related to the overall reduction in
general and administrative costs.
The net administrative overhead billed to limited partnerships decreased to
$165,000 from $516,000 when comparing the nine months ended December 31, 1993 to
the year ended March 31, 1993, respectively. The decrease during the nine months
ended December 31, 1993 is primarily the result of an increase in BOGC's
interest in the partnerships and the dissolution of six partnerships that were
managed by BOGC.
Well supervisory fees and other revenue increased from $645,000 for the
nine months ended December 31, 1993 to $1,047,000 for the year ended December
31, 1994. The increase is primarily related to increases in gas transportation
fees at the Company's Johnson County, Kansas facility (See "Gas Gathering
Facilities"), interest income, and well supervisory fees. The increase in
interest income is attributable to an increase in interest rates paid on cash
balances maintained by the Company, and the increase in well supervisory fees is
associated with the Company assuming operations on several properties located in
Texas.
Well supervisory fees and other revenue decreased to $645,000 for the nine
months ended December 31, 1993 as compared to $697,000 for the year ended March
31, 1993. Changes in the various components of other income are attributable to
a $30,000 increase in pipeline transportation fees and a $68,000 decrease in
well fees and supervisory fees on
10
<PAGE>
operated wells when comparing the nine months ended December 31, 1993 to the
year ended March 31, 1993.
The Company actively evaluates its properties to determine those properties
which should be sold because they have become only marginally profitable or are
no longer profitable. The Company expects to continue to follow this procedure
of disposing of marginal or unprofitable properties and utilizing the proceeds
from these sales to purchase new reserves or reduce indebtedness. Property sales
resulted in proceeds of $2,459,000, $211,000 and $923,000 and gains of $930,000,
$17,000 and $353,000 for the year ended December 31, 1994, the nine months ended
December 31, 1993, and the year ended March 31, 1993, respectively. Included in
the figures for the year ended December 31, 1994 are proceeds of $2,200,000 and
a gain of $885,000 related to the sale of approximately 60% of the Company's
interest in the Shafter Lake Unit in Andrews County, Texas (See "Present
Activities -- Acquisitions").
Production expenses were $4,462,000 and $3,550,000 for the year ended
December 31, 1994 and the nine months ended December 31, 1993, respectively.
Production expenses per equivalent barrels produced were $5.99 and $6.32 for the
comparable periods. The decrease in production expenses per equivalent barrels
for the year ended December 31, 1994 is attributable to an increase in
efficiency primarily related to the operations on the Company's secondary
recovery projects. Production expenses as a percentage of oil and gas sales for
the year ended December 31, 1994 were 49%. Included in production expenses are
workover costs of $409,000 for the year ended December 31, 1994 compared to
$122,000 for the nine months ended December 31, 1993.
Production expenses as a percentage of oil and gas sales were 45% for the
nine month period ended December 31, 1993. Production expenses as a percentage
of oil and gas sales for the year ended March 31, 1993 were 47%. Production
expenses per equivalent barrels produced were $6.32 and $6.19 for the nine
months ended December 31, 1993 and the year ended March 31, 1993, respectively.
In addition, the Company incurred $421,000 in legal fees in the fiscal period
ended December 31, 1993, which are classified as production expenses for related
wells, associated with a settlement of the take-or-pay claim previously
mentioned. The settlement was reached in September 1992.
Depreciation, depletion and amortization ("DD&A") was $3,247,000 for the
year ended December 31, 1994 compared to $2,454,000 for the nine months ended
December 31, 1993. DD&A is the Company's largest non-cash expense. DD&A expense
for the period ended December 31, 1994 was $4.36 per barrel equivalent produced
as compared to $4.38 per barrel equivalent produced for the nine month period
ended December 31, 1993. The Company experienced an increase in DD&A expense of
$900,000 for the year ended December 31, 1994 and $620,000 for the nine months
ended December 31, 1993 as a result of downward revisions of period end reserve
estimates, primarily due to lower product pricing at the end of each period as
compared to the prior period. DD&A is calculated for each property on the units
of production method (See Note 1 of Notes to Consolidated Financial Statements).
The reduction in product prices resulted in a portion of the reserves
attributable to certain properties being uneconomical to produce. Thus, the
elimination of proved reserves on these properties caused an increase in the
DD&A expense.
The substantial increase in DD&A for the period ended December 31, 1993
from the year ended March 31, 1993 was attributable to an increase in production
volumes and reserve revisions at December 31, 1993 on several individual
properties as a result of a decline in oil prices similar to the decline
experienced for the year ended December 31, 1994.
General and administrative expenses for the year ended December 31, 1994
were $2,274,000 compared to $1,938,000 for the nine months ended December 31,
1993. The Company experienced a reduction in general and administrative expense
per equivalent
11
<PAGE>
barrel of oil produced to $3.05 from $3.45 when comparing the year ended
December 31, 1994 to the nine months ended December 31, 1993. The Company
reduced several of its administrative costs such as rent, consulting fees, legal
and auditing fees and sundry taxes.
General and administrative expenses were $1,938,000 or $3.45 per equivalent
barrel produced for the nine months ended December 31, 1993 compared to
$2,313,000 or $3.83 per equivalent barrel produced for the year ended March 31,
1993.
Effective April 1, 1993, the Company adopted the provisions of Financial
Accounting Standards Board issued Statement No. 109, Accounting for Income Taxes
(Statement 109). As permitted by Statement 109, prior years' financial
statements have not been restated to reflect the change in accounting method.
The cumulative effect as of April 1, 1993, of adopting Statement 109 increased
net earnings by $186,000, or $.05 per share. For the nine months ended December
31, 1993, application of Statement 109 did not affect earnings before income
taxes.
The effective rate of income taxes incurred during the year ended December
31, 1994 was zero, as compared to 54% for the nine months ended December 31,
1993 and 28% for the year ended March 31, 1993. The effective rate of zero for
the year ended December 31, 1994 was the result of the Company utilizing net
operating loss carryovers available in 1994. The difference between the
effective and statutory rates for the nine months ended December 31, 1993 was
due to an increase in the valuation allowance with respect to the Company's
deferred tax assets. The difference between the effective and statutory rates in
the year ended March 31, 1993 is primarily related to the Company utilizing
statutory depletion.
Under the provisions of Statement No. 109, the Company was required to
establish a valuation allowance for any portion of the deferred tax asset that
management believes will not be realized. At December 31, 1994 the Company had a
valuation allowance for deferred tax assets of $1,067,000 as referenced in Note
5 of Notes to Consolidated Financial Statements. In the opinion of management,
it is more likely than not that the Company will not realize the benefit of the
deferred tax assets, and therefore, maintains a full valuation allowance. This
opinion is primarily due to limitations on the timing and use of the Federal net
operating loss carryover.
Interest expense for the year ended December 31, 1994 was $859,000 compared
to $445,000 for the nine months ended December 31, 1993. The increase is
directly related to the increase in the average interest rate of 7.29% compared
to 6.0% and the average outstanding debt balance being $11,783,000 compared to
$8,855,000 for the year ended December 31, 1994 and the nine months ended
December 31, 1993, respectively.
Interest expense decreased to $445,000 from $470,000 for the nine months
ended December 31, 1993 and for the year ended March 31, 1993, respectively.
Average interest rates were relatively stable at 6.00% and 6.17% for the
comparative periods and the average debt balance was higher thereby resulting in
an increase in the average monthly interest expense.
Financial Condition
The Company made capital expenditures for oil and gas exploration and
development activities and acquisitions (including its secondary recovery
projects) of $3,334,000 for the year ended December 31, 1994, while reducing
long-term debt by $875,000 to $9,701,000 at December 31, 1994 from $10,576,000
at December 31, 1993.
Liquidity and Capital Resources
Over the long term, the Company's liquidity will depend on its internal
cash flow, the success of its acquisitions and waterflood projects and the
continued availability of its external financing. The Company's cash flow will,
as is inherent in the industry, continue to be substantially dependent on the
prices of oil and gas.
12
<PAGE>
For the year ending December 31, 1995, the Company will continue to
evaluate producing property acquisitions and review drilling opportunities to
maintain a level most beneficial to the Company's overall objectives.
Net cash provided by operating activities was $2,108,000, $1,093,000,
$3,276,000, for the year ended December 31, 1994, the nine months ended December
31, 1993 and the year ended March 31, 1993, respectively.
The Company has a $30,000,000 secured line of credit with NationsBank of
Texas, N.A. that is available for working capital purposes. Amounts outstanding
under the line of credit are limited by a borrowing base calculated by reference
to the Company's oil and gas reserves. At December 31, 1994, the Company's
borrowing base under the line of credit was $12,500,000 and the Company had
approximately $2,800,000 of unused borrowing capacity under the line of credit.
Borrowings outstanding under the line of credit are due on August 31, 1996, and
bear interest at NationsBank's prime rate as in effect from time to time (8.5%
at December 31, 1994). The amounts outstanding under the line of credit are
secured by substantially all of the Company's oil and gas reserves.
As mentioned under the "Oil and Gas Drilling Programs" above, the Company
has elected to liquidate, dissolve and terminate the remaining five limited
partnerships that are managed by BOGC. This will result in the elimination of
reimbursed administrative overhead from these partnerships. Also being
eliminated is approximately $100,000 of direct general and administrative
expenses that the Company remits to the partnerships as its share of expenses
related to its ownership in the partnerships. In connection with the liquidation
of these partnerships, the Company has agreed to acquire the remaining oil and
gas properties owned by these partnerships effective January 1, 1995 for
approximately $900,000 in cash and assume all liabilities associated with these
properties. For the year ended December 31, 1995 it is anticipated that these
interests will generate approximately $400,000 in net operating income from oil
and gas sales based on current product prices.
At December 31, 1994 the Company was not a party to any product hedge
transactions.
13
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Brock Exploration Corporation
We have audited the accompanying consolidated balance sheets of Brock
Exploration Corporation and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of earnings, stockholders' equity, and cash
flows for the year ended December 31, 1994, the nine months ended December 31,
1993 and the year ended March 31, 1993. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Brock Exploration Corporation and subsidiaries at December 31, 1994 and
1993, and the consolidated results of their operations and their cash flows for
the year ended December 31, 1994, the nine months ended December 31, 1993 and
the year ended March 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, in 1993 the Company
changed its method of accounting for income taxes.
/s/ Ernst & Young LLP
New Orleans, Louisiana
March 1, 1995
14
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1994 1993
---------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $ 2,583,000 $ 2,267,000
Receivables:
Joint interest........................................ 337,000 243,000
Oil and gas sales..................................... 2,120,000 2,064,000
------------- -------------
2,457,000 2,307,000
Income taxes recoverable................................ 21,000 167,000
Prepaid expenses and other current assets............... 148,000 161,000
------------- -------------
TOTAL CURRENT ASSETS................................ 5,209,000 4,902,000
PROPERTY AND EQUIPMENT -- AT COST, SUCCESSFUL
EFFORTS USED FOR OIL AND GAS PROPERTIES:
Oil and gas properties and equipment:
Nonproducing leasehold costs........................ 637,000 646,000
Producing leasehold and equipment costs............. 26,454,000 25,958,000
Gas gathering facility.............................. 464,000 464,000
------------- -------------
27,555,000 27,068,000
Furniture, fixtures and equipment..................... 1,152,000 1,102,000
------------- -------------
28,707,000 28,170,000
Less accumulated depreciation, depletion and
amortization........................................ 14,046,000 11,944,000
------------- -------------
14,661,000 16,226,000
REAL ESTATE................................................ 150,000 150,000
OTHER ASSETS............................................... 1,018,000 941,000
------------- -------------
$ 21,038,000 $ 22,219,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................. $ 593,000 $ 765,000
Accrued liabilities..................................... 47,000 53,000
Oil and gas sales payable............................... 919,000 1,863,000
------------- -------------
TOTAL CURRENT LIABILITIES........................... 1,559,000 2,681,000
LONG-TERM DEBT............................................. 9,701,000 10,576,000
OTHER LIABILITIES.......................................... 1,329,000 557,000
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value per share --
authorized, 1,000,000 shares: none issued............. -- --
Common stock, $.10 par value per share -- authorized,
8,000,000 shares; issued 4,100,402 shares............. 410,000 410,000
Additional capital...................................... 775,000 775,000
Retained earnings....................................... 7,984,000 7,820,000
------------- -------------
9,169,000 9,005,000
Less common stock in treasury--at cost, 289,212
shares in 1994 and 250,104 shares in 1993............. 720,000 600,000
------------- -------------
TOTAL STOCKHOLDERS' EQUITY.......................... 8,449,000 8,405,000
------------- -------------
$ 21,038,000 $ 22,219,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Nine months
Year ended ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
-------------------------------------------
<S> <C> <C> <C>
Revenue:
Oil and gas sales................................. $ 9,042,000 $ 7,869,000 $ 8,867,000
Administrative overhead billed to
limited partnerships............................ 110,000 165,000 516,000
Well supervisory fees and other................... 1,047,000 645,000 697,000
Gain on disposal of oil and gas
properties and equipment........................ 930,000 17,000 353,000
----------- ----------- -----------
11,129,000 8,696,000 10,433,000
Costs and expenses:
Production expenses............................... 4,462,000 3,550,000 4,165,000
Abandonment expenses and dry holes costs.......... 123,000 132,000 428,000
Depreciation, depletion and amortization.......... 3,247,000 2,454,000 1,840,000
General and administrative expense................ 2,274,000 1,938,000 2,313,000
Interest expense.................................. 859,000 445,000 470,000
----------- ----------- -----------
10,965,000 8,519,000 9,216,000
----------- ----------- -----------
Earnings before income taxes and cumulative
effect of change in accounting principle.......... 164,000 177,000 1,217,000
Provision for income taxes.......................... -- 96,000 344,000
----------- ----------- -----------
Earnings before cumulative effect of change
in accounting principle........................... 164,000 81,000 873,000
Cumulative effect of change in accounting for
income taxes...................................... -- 186,000 --
----------- ----------- -----------
Net earnings........................................ $ 164,000 $ 267,000 $ 873,000
=========== =========== ===========
Earnings per common and common equivalent
share:
Earnings before cumulative effect of
change in accounting principle................ $ 0.04 $ 0.02 $ 0.22
Cumulative effect of change in accounting
for income taxes.............................. -- $ 0.05 --
----------- ----------- -----------
Net earnings.................................... $ 0.04 $ 0.07 $ 0.22
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding..................... 3,942,639 3,943,183 3,893,410
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Additional Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
--------- -------- ---------- ---------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1992........ 4,100,402 $410,000 $775,000 $6,680,000 176,240 $(459,000) $7,406,000
Purchase of treasury stock.... -- -- -- -- 59,764 (98,000) (98,000)
Net earnings for the year..... -- -- -- 873,000 -- -- 873,000
--------- -------- -------- ---------- ------- --------- ----------
Balance at March 31, 1993....... 4,100,402 410,000 775,000 7,553,000 236,004 (557,000) 8,181,000
Purchase of treasury stock.... -- -- -- -- 14,100 (43,000) (43,000)
Net earnings for the year..... -- -- -- 267,000 -- -- 267,000
--------- -------- -------- ---------- ------- --------- ----------
Balance at December 31, 1993.... 4,100,402 410,000 775,000 7,820,000 250,104 (600,000) 8,405,000
Purchase of treasury stock.... -- -- -- -- 39,108 (120,000) (120,000)
Net earnings for the year..... -- -- -- 164,000 -- -- 164,000
--------- -------- -------- ---------- ------- --------- ----------
Balance at December 31, 1994.... 4,100,402 $410,000 $775,000 $7,984,000 289,212 $(720,000) $8,449,000
========= ======== ======== ========== ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months
Year ended ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
--------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings for the period.......................... $ 164,000 $ 267,000 $ 873,000
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Cumulative effect of a change in accounting
principle...................................... -- (186,000) --
Depreciation, depletion and amortization......... 3,247,000 2,454,000 1,840,000
Abandonment expense.............................. 45,000 33,000 315,000
Deferred income taxes............................ -- -- 110,000
Gain on disposal of oil and gas
properties and equipment....................... (930,000) (17,000) (353,000)
Changes in operating assets and liabilities:
Receivables.................................... (150,000) (482,000) (524,000)
Income taxes................................... 146,000 (225,000) 239,000
Current liabilities............................ (374,000) (654,000) 769,000
Other.......................................... (40,000) (97,000) 7,000
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES............................... 2,108,000 1,093,000 3,276,000
INVESTING ACTIVITIES
Proceeds from sales of property and equipment........ 2,459,000 211,000 923,000
Purchases of property and equipment.................. (3,256,000) (3,913,000) (4,548,000)
----------- ----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES............................... (797,000) (3,702,000) (3,625,000)
FINANCING ACTIVITIES
Additions to long-term debt.......................... 2,600,000 2,585,000 3,741,000
Payments on long-term debt........................... (3,475,000) (175,000) (2,850,000)
Purchase of treasury stock........................... (120,000) (43,000) (98,000)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............................... (995,000) 2,367,000 793,000
----------- ----------- -----------
Change in cash and cash equivalents.................. 316,000 (242,000) 444,000
Cash and cash equivalents at beginning of
period............................................. 2,267,000 2,509,000 2,065,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD................................... $ 2,583,000 $ 2,267,000 $ 2,509,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Brock
Exploration Corporation, its wholly owned subsidiaries (the Company) and its
proportionate share of the assets, liabilities, revenue and expenses of all
limited partnerships for which the Company is the general partner. The Company's
principal operations are in the oil and gas industry. All significant
intercompany balances and transactions have been eliminated in consolidation.
Effective December 31, 1993, the Company changed its fiscal year end from
March 31 to December 31 in order to enhance comparability of the Company's
results of operations with other oil and gas companies, most of which report on
a calendar year basis. Accordingly, the accompanying financial statements
include the results of the Company's operations for the year ended December 31,
1994, the nine months ended December 31, 1993 and the year ended March 31, 1993.
On November 18, 1994, the board of directors announced that it had
determined to solicit indications of interest for the cash sale of the Company.
The Company has begun the process of qualifying potential bidders as to
financial capability and providing interested parties information on its oil and
gas properties and operations. The Company had indicated to potential bidders
that any offers for the acquisition of the Company must be received prior to
April 10, 1995. Following the receipt of any indications of interest for the
acquisition of the Company, the board of directors will determine whether or not
any acceptable bids have been received and whether or not the sale of the
Company is in the best interest of the Company's stockholders. Any merger
involving the Company will be subject to, among other things, the approval of
the holders of 66 2/3% of the outstanding shares of the Company's common stock.
The accompanying financial statements do not include the effects, if any, of
such a transaction. There can be no assurance that such a transaction will be
consummated.
Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Property and Equipment
The Company follows the successful efforts method of accounting for its oil
and gas producing activities. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are capitalized
when incurred, pending determination of whether the well will be productive. If
any exploratory well is nonproductive, the capitalized costs of drilling the
well, net of any salvage value, are charged to expense. The costs of development
wells are capitalized, whether the well is productive or nonproductive. Unproved
properties are assessed periodically to determine whether there has been a
decline in value, and if such decline is indicated, a loss is recognized. No
internal costs have been capitalized. Geological and geophysical costs and the
costs of carrying and retaining undeveloped properties, including delay rentals,
are expensed as incurred.
Depreciation, depletion and amortization are computed separately on each
individual prospect. Proved property leasehold and mineral rights are depleted
on the unit-of-production method over the estimated total proved reserves of the
individual prospects. Completed well costs are depreciated on the unit-of-
production method over the estimated proved developed reserves of each well. The
Company utilizes the most recent reserve estimates available provided by its
independent reserve engineers in calculating the depreciation, depletion and
19
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
amortization rate. The Company typically receives a report as of its fiscal year
end subsequent to such period end. These updated reserve estimates are used to
record a change in the estimated depreciation, depletion and amortization in the
last interim period of each fiscal year. As a result, volatile depreciation
amounts may be recognized in the Company's last interim period. Site
restoration, dismantlement and abandonment costs are not considered in the
Company's depreciation, depletion and amortization calculation because such
costs have historically been immaterial.
The Company evaluates possible impairment of its proved oil and gas
properties based on the undiscounted future net revenue of its proved
properties.
Furniture, fixtures and other equipment are depreciated on a straight-line
basis over their estimated useful lives.
Oil and Gas Sales Payable
On some properties, the Company receives proceeds of oil and gas sales on
behalf of others. The Company's liability for such proceeds is included in the
consolidated balance sheets as oil and gas sales payable.
Oil and Gas Sales
The Company recognizes nonrecoupable take-or-pay settlements received as
oil and gas sales. The Company recognizes revenue related to gas balancing
agreements based on the entitlement method. The Company includes any income or
expense associated with commodity swaps in oil and gas sales.
Income Taxes
Effective April 1, 1993, the Company changed its method of accounting for
income taxes to the liability method prescribed in FASB Statement 109,
Accounting for Income Taxes. Under that method, deferred tax assets and
liabilities are determined based on differences among financial reporting and
tax bases of assets and liabilties and are measured using the enacted tax rates
and laws. Prior to the adoption of Statement 109, income tax expense was
determined using the deferred method. Deferred tax expense was based on items of
income and expense that were reported in different years in the financial
statements and tax returns and were measured at the tax rate in effect in the
year the difference originated.
Earnings Per Common Share
Earnings per common share have been computed based upon the weighted
average number of common and common equivalent shares outstanding during each
year.
2. ACCOUNTING CHANGE
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, Accounting for Income Taxes (Statement 109). Effective April 1, 1993,
the Company adopted the provisions of Statement 109. As permitted by Statement
109, prior years' financial statements have not been restated to reflect the
change in accounting method. The cumulative effect as of April 1, 1993 of
adopting Statement 109 increased net earnings by $186,600, (or $.05 per share).
For the nine months ended December 31, 1993, application of Statement 109 did
not affect earnings before income taxes.
3. OIL AND GAS LIMITED PARTNERSHIPS
At March 31, 1993 and December 31, 1994, the Company served as managing
general partner of nine and five oil and gas limited partnerships, respectively.
In accordance with the
20
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. OIL AND GAS LIMITED PARTNERSHIPS (continued)
terms of the related partnership agreements, the Company is reimbursed by the
partnerships for certain general and administrative expenses incurred and
allocable, directly or indirectly, to the partnerships. Such reimbursements are
recognized as income as allocable partnership overhead costs are incurred by the
Company. Reimbursements for indirectly allocable general and administrative
expenses are subject to varying limitations as specified in the partnership
agreements. If the Company acts as operator of a partnership property, it is
entitled to a reimbursement of its costs as operator and to certain monthly fees
per well as compensation for management and overhead expenses.
The Company liquidated four limited partnerships in 1994. Management
intends to liquidate the remaining limited partnerships during 1995. The
Company, as general partner, expects to pay approximately $900,000 in cash to
the limited partners and assume their existing liabilities in exchange for the
remaining oil and gas properties owned by the partnerships.
4. LONG-TERM DEBT
The Company's long-term debt is borrowed under a Secured Revolving Credit
Agreement (Credit Agreement). The Credit Agreement, as amended, provides a line
of credit equal to the lesser of $30,000,000 or the Company's "borrowing base,"
generally determined by reference to the Company's oil and gas reserves. The
Company's "borrowing base" was $12,500,000 at December 31, 1994. The borrowings
are due at August 31, 1996, the expiration date of the Credit Agreement, and
bear interest at the NationsBank of Texas, N.A. prime rate (8.5% at December 31,
1994).
The debt is collateralized by substantially all of the Company's proved
oil and gas reserves. The terms of the Credit Agreement further provide for
certain positive and negative covenants, including restrictions on the payment
of dividends. The Company has never declared and has no present intention to
declare dividends. At December 31, 1994, the Company was in compliance with its
debt covenants.
The Company made interest payments of $859,000 during the year ended
December 31, 1994, $445,000 during the nine months ended December 31, 1993, and
$470,000 during the year ended March 31, 1993.
5. INCOME TAXES
The components of the Company's deferred tax liabilities and assets were as
follows:
<TABLE>
<CAPTION>
1994 1993
------------------------
<S> <C> <C>
Deferred tax liabilities:
Oil and gas properties and equipment............ $ 478,000 $ 627,000
Pension Costs................................... 46,000 51,000
---------- ----------
Total deferred tax liabilities..................... 524,000 678,000
Deferred tax assets:
Federal net operating loss carryovers........... 726,000 966,000
Depletion carryovers............................ 359,000 157,000
Minimum tax credit carryovers................... 506,000 542,000
---------- ----------
Total deferred tax assets.......................... 1,591,000 1,665,000
Valuation allowance for deferred tax assets..... 1,067,000 987,000
---------- ----------
Net deferred tax assets............................ 524,000 678,000
---------- ----------
Net deferred taxes................................. $ -- $ --
========== ==========
</TABLE>
21
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INCOME TAXES (CONTINUED)
Under the provisions of Statement No. 109, the Company is required to
establish a valuation allowance for any portion of the deferred tax asset that
management believes it is more likely than not that will not be realized. In the
opinion of management, it is more likely than not that the Company will not
realize the benefit of the deferred tax assets, and therefore, maintains a full
valuation allowance. This opinion is primarily due to limitations on the use of
the federal net operating loss carryovers and the depletion carryovers.
The Company's depletion and minimum tax credit carryovers do not expire.
The Company's federal net operating loss carryovers expire in years 1997 through
2003. The federal net operating losses are also subject to certain carryover
provisions and annual limitations under provisions of the Internal Revenue Code.
As a result of these carryover provisions and annual limitations, the Company
will have approximately $100,000 in tax benefits from the federal net operating
loss carryovers available in 1995 to offset tax expense.
Significant components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
-----------------------------------------
<S> <C> <C> <C>
Current................................. $ 84,000 $ 96,000 $ 158,000
Deferred................................ (164,000) (137,000) 186,000
Adjustment to the valuation allowance
for deferred tax assets............... 80,000 137,000 --
--------- --------- ---------
Provision for income taxes.............. $ -- $ 96,000 $ 344,000
========= ========= =========
</TABLE>
A reconciliation between the Company's provision for income taxes computed
at the statutory federal income tax rate on earnings before the provision for
income taxes is set forth below:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
-----------------------------------------
<S> <C> <C> <C>
Taxes at statutory rate.................. $ 56,000 $ 60,000 $ 414,000
Increase (decrease) resulting from:
State income taxes..................... 5,000 6,000 40,000
Statutory depletion.................... (164,000) (97,000) (131,000)
Adjustment to the valuation allowance
for deferred tax assets.............. 80,000 137,000 --
Other.................................. 23,000 (10,000) 21,000
--------- --------- ---------
Provision for income taxes............... $ -- $ 96,000 $ 344,000
========= ========= =========
</TABLE>
22
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INCOME TAXES (CONTINUED)
The components of the deferred income taxes for the year ended March 31,
1993 were as follows:
<TABLE>
<S> <C>
Exploration and development costs................. $ 92,000
Income from partnerships.......................... 99,000
Depreciation, depletion and amortization.......... 1,000
Pension Cost...................................... (10,000)
Other............................................. 4,000
---------
Deferred income tax expense....................... $ 186,000
=========
</TABLE>
The Company received net income tax refunds of $146,000 during the year
ended December 31, 1994, made income tax payments of $321,000 during the nine
months ended December 31, 1993 and received net income tax refunds of $5,000
during the year ended March 31, 1993.
6. COMMON STOCK OPTIONS
The Company's 1979 Stock Option Plan, as amended, provides for the granting
of options to purchase up to 200,000 shares of common stock to officers and key
employees selected by the stock option committee. Options are exercisable in
installments, subject to continued employment and such other conditions as
determined by the committee. All options granted under the plan shall be granted
at an exercise price not less than 50% of the fair market value of a share of
common stock at the time the option is granted. The options granted during the
nine months ended December 31, 1993 were granted at the fair market value at the
date of grant.
Information relating to the Company's stock option plan is summarized as
follows:
<TABLE>
<CAPTION>
Option
Price Range
Shares Per Share
-----------------------------
<S> <C> <C>
Options outstanding at March 31, 1993......... 187,000 $1.12 - $2.25
Granted..................................... 2,000 $3.50
Exercised................................... -- --
Expired..................................... -- --
-------
Options outstanding at December 31, 1993...... 189,000 $1.12 - $3.50
Granted..................................... -- --
Exercised................................... -- --
Expired..................................... -- --
-------
Options outstanding at December 31, 1994...... 189,000 $1.12 - $3.50
=======
Options exercisable at March 31, 1993......... 67,500 $1.50 - $2.25
=======
Options exercisable at December 31, 1993...... 91,250 $1.50 - $2.25
=======
Options exercisable at December 31, 1994...... 112,000 $1.12 - $2.25
=======
</TABLE>
23
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. OIL AND GAS SALES
The Company received $634,000 during the year ended March 31, 1993, from a
purchaser in settlement of take-or-pay claims. This amount was not recoupable by
the purchaser. No such payments were received during 1994 or the nine months
ended December 31, 1993.
During 1993, the Company entered into commodity swap transactions, that
were designated as hedges, to reduce the impact of fluctuations in the selling
prices of oil and natural gas. These agreements involved monthly cash settlement
of the difference between the contract price specified in the agreement and the
average monthly spot price of the commodity.
The Company closed all outstanding commodity swap transactions in January
1994. As a result, during 1994 the Company recognized as expense and paid
amounts totaling $406,000 which represented the difference between the contract
price of the closing swaps and the contract price of the original swaps. At
December 31, 1994, the Company was not involved in any commodity swap
transactions.
The Company's gas production imbalances (in Mcfs) are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
--------------------
<S> <C> <C>
Underproduced 41,326 76,445
Overproduced 681,646 764,937
</TABLE>
8. RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering all
employees of the Company and its subsidiaries meeting certain age, service and
remuneration basis requirements. Benefits are determined on a formula based on
the employee's age, years of service, and compensation at the time of
retirement. It is the Company's current policy to fund this pension plan at the
minimum required level.
Net pension cost for each of the periods below included the following
components:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
----------------------------------------
<S> <C> <C> <C>
Service cost..................... $ 30,000 $ 18,000 $ 22,000
Interest cost.................... 70,000 51,000 73,000
Actual return on plan assets..... (86,000) (62,000) (171,000)
Net amortization and deferral.... 14,000 8,000 92,000
--------- --------- ---------
Net pension cost................. $ 28,000 $ 15,000 $ 16,000
========= ========= =========
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Company's statement of financial position:
24
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. RETIREMENT PLANS (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $736,000 in 1994
and $806,000 in 1993.................................... $ 751,000 $ 811,000
============ ============
Plan assets at fair value, primarily equity and fixed
income securities......................................... $ 1,082,000 1,253,000
Projected benefit obligation for service rendered to
date...................................................... (896,000) $ (1,002,000)
------------ ------------
Plan assets in excess of projected benefit obligations...... 186,000 251,000
Prior service cost.......................................... 5,000 5,000
Unrecognized net loss....................................... 209,000 149,000
Unrecognized net transition asset........................... 164,000 187,000
------------ ------------
Prepaid pension cost........................................ $ 564,000 $ 592,000
============ ============
</TABLE>
The projected benefit obligation was determined using a discount rate of
8.0% and an assumed rate of salary increase of 5.5% as of December 31, 1994 and
7.25% and 6.5%, respectively, as of December 31, 1993. The expected long-term
rate of return on plan assets was 8% for the year ended December 31, 1994, and
for the nine months ended December 31, 1993 and 9% for the year ended March 31,
1993. The change to the assumptions noted above did not materially affect the
projected benefit obligation or the net pension cost.
As of December 31, 1994 and 1993, prepaid pension costs totaling $523,000
and $577,000 respectively, were classified as noncurrent since such amounts were
not expected to be included in operations during the ensuing fiscal year.
The Company also has a nonqualified supplemental retirement plan for key
executives. The executives to be covered by the plan and the funds to be set
aside for the plan are at the discretion of the board of directors, subject to
certain limitations. Benefits are payable upon the occurrence of certain events
and are limited to the funds set aside by the Company. At December 31, 1994 and
1993, securities, primarily U.S. Treasury Notes at December 31, 1994, with a
fair value of $439,000 and $487,000 (cost of $440,000 and $358,000),
respectively, were set aside for this plan and were classified as a noncurrent
asset. Vested benefits of $202,000 at December 31, 1994 and $178,000 at December
31, 1993 were accrued as a noncurrent liability.
9. QUARTERLY OPERATING RESULTS (Unaudited)
A summary of quarterly results of operations for the year ended December
31, 1994 and the nine months ended December 31, 1993 follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenue............................ $ 2,759 $ 2,476 $ 2,394 $ 3,500
======= ======= ======= =======
Gross margin on oil and gas sales.. $ 1,138 $ 1,011 $ 1,114 $ 1,317
======= ======= ======= =======
Net earnings (loss)................ $ 86 $ (60) $ 25 $ 113
======= ======= ======= =======
Net earnings (loss) per share...... $ .02 $ (.02) $ .01 $ .03
======= ======= ======= =======
</TABLE>
25
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. QUARTERLY OPERATING RESULTS (UNAUDITED) (CONTINUED)
During the three-month period ended December 31, 1994, the Company recorded
a gain on the sale of oil and gas properties of $884,000 (or $.22 per share) and
an adjustment to increase its depreciation, depletion and amortization expense
of $900,000 (or $.23 per share) based on the year-end updated reserve estimates.
<TABLE>
<CAPTION>
Three months ended
June 30, September 30, December 31,
1993 1993 1993
--------------------------------------
<S> <C> <C> <C>
Revenue........................................... $ 2,853 $ 3,055 $ 2,788
======== ======== =========
Gross margin on oil and
gas sales....................................... $ 1,538 $ 1,279 $ 1,502
======== ======== =========
Earnings before cumulative effect of change
in accounting principle......................... $ 250 $ 177 $ (346)
======== ======== =========
Net earnings (loss)............................... $ 436 $ 177 $ (346)
======== ======== =========
Per share data:
Earnings (loss) before cumulative effect of
change in accounting principle............... $ .06 $ .05 $ (.09)
======== ======== =========
Net earnings(loss)................................ $ .11 $ .05 $ (.09)
======== ======== =========
</TABLE>
During the three-month period ended December 31, 1993, the Company recorded
an adjustment to increase its depreciation, depletion and amortization expense.
This adjustment totaled $620,000 (or $.16 per share). This increased expense
resulted from the use of the period-end updated reserve estimates.
10. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited)
The Company follows the disclosure requirements of Statement of Financial
Accounting Standards No. 69 (Statement No. 69). Following are the aggregate
capitalized costs relating to oil and gas producing activities, and the
aggregate accumulated depreciation, depletion and amortization at each balance
sheet date. All properties are located in the United States.
<TABLE>
<CAPTION>
December 31,
1994 1993
-------------------------------
<S> <C> <C>
Aggregate capitalized costs:
Proved properties................. $ 26,454,000 $ 25,958,000
Unproved properties............... 637,000 646,000
------------ ------------
$ 27,091,000 $ 26,604,000
============ ============
Accumulated depreciation,
depletion and amortization........ $ 12,930,000 $ 10,944,000
============ ============
</TABLE>
Following are costs incurred in oil and gas property acquisition,
exploration and development activities:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
-------------------------------------------
<S> <C> <C> <C>
Property acquisition:
Proved................... $ 540,000 $ 2,391,000 $ 3,011,000
Unproved................. 2,090,000 120,000 59,000
Exploration................ 47,000 125,000 --
Development................ 657,000 1,344,000 1,571,000
</TABLE>
26
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited)(continued)
Estimated Quantities of Proved Oil and Gas Reserves
The following information summarizes the Company's net ownership interests
in proved oil and gas reserves. Proved reserves include those quantities of oil
and gas which can be expected to be recoverable commercially at current prices
and costs, under existing regulatory practices and with existing conventional
equipment and operating methods. Proved developed reserves are those which can
be expected to be recovered through existing wells with existing equipment and
operating methods.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
-------------------------
<S> <C> <C>
Estimated proved reserves at March 31, 1992.................... 1,982,483 12,193,030
Revisions of previous estimates............................... 71,559 1,260,470
Improved recovery............................................. 581,068 57,508
Purchases of minerals-in-place................................ 532,957 732,790
Extensions, discoveries and other additions................... 122,456 331,856
Production.................................................... (237,221) (2,204,572)
Sales of minerals-in-place.................................... (72,297) (201,963)
----------- -----------
Estimated proved reserves at March 31, 1993.................... 2,981,005 12,169,119
Revisions of previous estimates............................... (186,915) 1,301,544
Purchases of minerals-in-place................................ 51,019 3,383,320
Extensions, discoveries and other additions................... 14,985 818,827
Production.................................................... (244,070) (1,906,783)
Sales of minerals-in-place.................................... (19,560) (94,028)
----------- -----------
Estimated proved reserves at December 31, 1993................. 2,596,464 15,671,999
Revisions of previous estimates............................... 32,753 (1,081,796)
Improved recovery............................................. 132,550 --
Purchases of minerals-in-place................................ 182,386 17,119
Extensions, discoveries and other additions................... 73,366 987,453
Production.................................................... (350,637) (2,369,075)
Sales of minerals-in-place.................................... (148,326) (104,201)
----------- -----------
Estimated proved reserves at December 31, 1994................. 2,518,556 13,121,499
=========== ===========
Estimated proved developed reserves at March 31, 1992.......... 1,496,582 11,989,992
=========== ===========
Estimated proved developed reserves at March 31, 1993.......... 2,655,242 11,885,638
=========== ===========
Estimated proved developed reserves at December 31, 1993....... 2,423,650 15,113,772
=========== ===========
Estimated proved developed reserves at December 31, 1994....... 2,376,844 11,584,650
=========== ===========
</TABLE>
The revisions to previous estimates of proved gas reserves for all periods
presented were primarily due to changes in the sales prices of natural gas.
The reserves shown in the preceding tables are estimates only and should
not be construed as being exact quantities. They may or may not be actually
recovered, and if recovered, the revenue therefrom and actual costs related
thereto could be more or less than the estimated amounts shown below. Moreover,
estimates of proved reserves may increase or decrease as a result of future
operations of the Company.
27
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited) (continued)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserve Quantities
In accordance with the disclosure provisions of Statement No. 69, following
is the Company's standardized measure of discounted estimated future net cash
flows from proved oil and gas reserve quantities at December 31, 1994 and 1993,
and March 31, 1993.
Future net cash inflow estimates were computed using pricing at each
balance sheet date, giving effect only to those escalations in price which are
contractually defined. Future development and production costs include estimated
operating costs, production taxes, and estimated future capital expenditures to
complete development of the proved reserves. Such costs were estimated based on
current costs as of each balance sheet date, assuming continuation of existing
economic conditions, and were not adjusted in anticipation of increases due to
inflation or other factors. The estimates of future income taxes were calculated
by applying the appropriate statutory income tax rate to the estimated future
undiscounted pretax net cash flows from proved oil and gas reserves after
subtracting the tax basis of the oil and gas properties (including carryovers),
and considering estimates of permanent differences and tax credits. The discount
amounts were derived using a discount rate of 10% per year to reflect the timing
over a period of years of future net cash flows relating to proved oil and gas
reserves.
The above assumptions used to compute the standardized measure are those
specifically required by the Financial Accounting Standards Board and, as such,
do not necessarily reflect the Company's expectations of actual revenue to be
derived from those reserves nor their present worth.
<TABLE>
<CAPTION>
December 31,
1994 1993
--------------------------------
<S> <C> <C>
Future cash inflows.......................................... $ 60,718,000 $ 69,293,000
Future production costs...................................... (27,877,000) (29,099,000)
Future development costs..................................... (922,000) (467,000)
------------- -------------
Future net inflows before income taxes....................... 31,919,000 39,727,000
Future income taxes.......................................... (10,013,000) (12,667,000)
------------- -------------
Future net cash flows........................................ 21,906,000 27,060,000
Discount..................................................... (6,616,000) (8,659,000)
------------- -------------
Standardized measure of discounted future net cash flows..... $ 15,290,000 $ 18,401,000
============= =============
</TABLE>
28
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited) (continued)
The following are the principal sources of change in the Company's
standardized measure of discounted future net cash flows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
----------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period.............................................. $18,401,000 $20,445,000 $11,849,000
Sales of oil and gas, net of production costs.............................. (4,987,000) (4,080,000) (4,489,000)
Net changes in sales and transfer prices, net of production costs.......... (3,675,000) (6,229,000) 4,070,000
Extensions, discoveries and other additions................................ 2,297,000 1,274,000 9,550,000
Changes in estimated future development costs.............................. (455,000) (74,000) (902,000)
Revisions of previous quantity estimates................................... (156,000) (1,083,000) 1,354,000
Accretion of discount...................................................... 1,271,000 1,553,000 881,000
Net change in income taxes................................................. 1,625,000 1,079,000 (4,439,000)
Purchases of reserves-in-place............................................. 455,000 5,900,000 3,813,000
Sales of reserves-in-place................................................. (550,000) (116,000) (562,000)
Other, primarily timing.................................................... 1,064,000 (268,000) (680,000)
-------------- -------------- --------------
Balance at end of period.................................................... $15,290,000 $18,401,000 $20,445,000
============== ============== ==============
</TABLE>
29
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Company is
set forth below. All directors serve until the Company's next annual meeting of
stockholders, presently scheduled for June 13, 1995, and until their successors
are elected. All officers serve until the regular meeting of directors
immediately following the annual meeting of stockholders and until their
successors are elected.
The Directors and executive officers of the Company as of March 13, 1995,
are as follows:
<TABLE>
<CAPTION>
Position with Director
Name Age the Company or Since
Other Employment
- ---------------------- ------- --------------------- ------------
<S> <C> <C> <C>
Lawrence E. Brock..... 82 Chairman of the Board, 1973
Director and Chief Executive
Officer
Lorena Rowan Brock.... 73 Director and Secretary 1980
Kenneth J. Stucke..... 46 Director, President and Chief 1977
Operating Officer
Robin A. Seibert...... 38 Director, Treasurer, 1987
Controller and Chief Financial
Officer
Michael R. Barham..... 37 Director, Vice President of 1988
Operations
E. Peter Corcoran..... 66 Director -- Chairman of the 1991 (a)
Board -- Pride Refining, Inc.
John W. Cooke, Jr..... 72 Director, Independent 1993
Consultant
John W. Owensby....... 68 Director -- Chief Executive 1994
Officer -- Petro-Marine
Engineering of Texas, Inc.
</TABLE>
(a) Mr. Corcoran previously served as a director of the Company from 1980 to
1985.
LAWRENCE E. BROCK. Mr. Brock graduated from the University of Oklahoma with
degrees in Petroleum Engineering and Geological Engineering. He is a founder of
the Company and one of its predecessors and has served as Chief Executive
Officer and a Director since inception in 1973. Mr. Brock was previously
employed as a Vice President and Director of Amax Petroleum Corporation, a
wholly-owned subsidiary of American Metal Climax, Inc. Prior thereto, he was
employed by two international oil and gas corporations.
LORENA ROWAN BROCK. Mrs. Brock graduated from the University of Texas with
a degree in Business Administration. She has been employed by the Company and
its predecessor since its founding in 1971 by her husband, Lawrence E. Brock.
Mrs. Brock has been Secretary and a Director of the Company since 1980.
KENNETH J. STUCKE. Mr. Stucke graduated from Tulane University with a
Bachelor of Science degree in Mechanical Engineering. Prior to joining the
Company in January 1977, he was employed by Exxon Company, U.S.A. for seven
years in drilling, reservoir and
30
<PAGE>
production engineering capacities. Mr. Stucke was elected President of the
Company and Chief Operating Officer in September 1988.
ROBIN A. SEIBERT. Mr. Seibert graduated from Nicholls State University with
a Bachelor of Science degree in Accounting. Prior to joining the Company in
1981, he was employed by Texaco, Inc. for three years in various accounting
capacities. In June 1987, Mr. Seibert was elected Treasurer, Controller, Chief
Financial Officer and Director.
MICHAEL R. BARHAM. Mr. Barham graduated from Mississippi State University
with a Bachelor of Science degree in Petroleum Engineering. Prior to joining
the Company in 1981, he was employed by Amoco Production Company for two years
in operation and reservoir engineering capacities. Mr. Barham was elected Vice
President of Operations and Director in September, 1988.
E. PETER CORCORAN. Mr. Corcoran graduated from Yale University. He was a
partner of Lazard Freres and Company from 1968 to 1991. Mr. Corcoran is
Chairman of the Board and Director of Pride Refining, Inc., the general partner
of Pride Companies, L.P., a public limited partnership. Mr. Corcoran became a
Director of the Company in November 1991.
JOHN W. COOKE, JR. Mr. Cooke graduated from the University of Oklahoma
with a Bachelor of Science degree in Petroleum Geology. He is currently an
Independent Petroleum Consultant. Mr. Cooke served as Vice-President of
Business Development from November 1993 to December 1994. From January 1984 to
December 1992 he was Vice President of Hadson Petroleum and a Director of
Hadson Petroleum International. Prior to 1984 he was President and founder of
an independent oil and gas corporation and held various management positions
with several domestic and international corporations. Mr. Cooke was appointed
to the Board of Directors in January of 1993.
JOHN W. OWENSBY. Mr. Owensby graduated from the University of Oklahoma with
a Bachelor of Science degree in Civil Engineering and spent his entire
professional career in the oil and gas industry. He is currently the Chief
Executive Officer and Co-founder of Petro-Marine Engineering of Texas, Inc.,
Petro-Marine Engineering, Inc. and Datec, Inc. Mr. Owensby is also President
and Co-founder of Worknet Corporation and Vice-President and Co-founder of
Owensby and Kritikos, Inc. Mr. Owensby is a Registered Professional Engineer -
Louisiana and a Registered Land Surveyor - Louisiana. Mr. Owensby was appointed
to the Board of Directors in January of 1994.
Non-management directors of the Company which includes Mr. Cooke, receive
$750 per quarter and $500 for each meeting attended, plus travel expenses, for
their service as directors, except that Mrs. Brock has waived her rights to
receive such payments.
Under the federal securities laws, the Company's directors, its executive
officers and any persons holding more than 10% of the Company's Common Stock
are required to report their initial ownership of the Company's Common Stock
and any subsequent changes in ownership to the Securities and Exchange
Commission and the American Stock Exchange.
Specific due dates for these reports have been established and the Company
is required to disclose herein any failure to file by these dates during the
year ended December 31, 1994. All of these filing requirements were satisfied.
In making these disclosures, the Company has relied solely on written
representations of its directors, executive officers and 10% shareholders and
copies of the reports that they have filed with the Commission.
31
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Annual and Long-Term Compensation. The following table sets forth certain
information regarding the compensation of the Company's Chief Executive Officer
and each of the Company's executive officers whose total annual salary and bonus
exceeds $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
--------------------- --------------
Awards
--------
Name and Stock Option All Other
Principal Position Year Salary Bonus (Shares) Compensation
-------------------- ------ -------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Lawrence E. Brock........ Dec. 31, 1994 (1) $ 93,334 (3) $ 0 0 $66,317 (4)
Chairman of the Board Dec. 31, 1993 (2) 70,001 (3) 0 0 94,192 (5)
and Chief Executive Mar. 31, 1993 (1) 86,664 (3) 0 0 68,918 (6)
Officer
Kenneth J. Stucke........ Dec. 31, 1994 (1) $ 100,000 $ 20,620 0 $5,795 (7)
President, Chief Dec. 31, 1993 (2) 77,077 0 0 35,661 (8)
Operating Officer Mar. 31, 1993 (1) 100,000 10,300 25,000 9,006 (9)
</TABLE>
(1) Fiscal Year.
(2) Nine month transition period.
(3) Represents amounts paid to Mr. Brock under the terms of his consulting
agreement.
(4) Consists of $61,398 in pension entitlement benefits paid under the Company's
Pension Plan and $4,919 of contributions by the Company to the Company's
Supplemental Executive Retirement Plan ("SERP") attributable to Mr. Brock.
(5) Consists of $61,398 in pension entitlement benefits paid under the Company's
Pension Plan and $32,794 of contributions by the Company to the SERP
attributable to Mr. Brock.
(6) Consists of $61,398 in pension entitlement benefits paid under the Company's
Pension Plan and $7,520 of contributions by the Company to the SERP
attributable to Mr. Brock.
(7) Consists of $525 the Company paid in premiums for term life insurance on the
life of Mr. Stucke and $5,270 of contributions by the Company to the SERP
attributable to Mr. Stucke.
(8) Consists of $525 the Company paid in premiums for term life insurance on the
life of Mr. Stucke and $35,136 of contributions by the Company to the SERP
attributable to Mr. Stucke.
(9) Consists of $525 the Company paid in premiums for term life insurance on the
life of Mr. Stucke and $8,481 of contributions by the Company to the SERP
attributable to Mr. Stucke.
32
<PAGE>
Stock Options Exercises and Values. The following table sets forth certain
information concerning unexercised stock options at December 31, 1994, held by
the Company's Chief Executive Officer and each of the Company's other Executive
Officers whose total annual salary and bonus exceeds $100,000. None of the
options granted to such persons were exercised during the year ended
December 31, 1994.
<TABLE>
<CAPTION>
Option Values at December 31, 1994
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at December 31, 1994 December 31, 1994 (1)
---------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Lawrence E. Brock -- -- -- --
Kenneth J. Stucke 58,125 31,875 $132,031 $69,844
</TABLE>
(1) Computed on the basis of the difference between the aggregate fair market
value of the shares of the Company's Common Stock on December 31, 1994
attributable to such options and the aggregate exercise price for such
options.
Stock Options Grants
The Company did not grant any stock options to Mr. Brock or to Mr. Stucke
during the fiscal year ended December 31, 1994.
Pension Plan
The Company has a non-contributory, defined benefit pension plan. All
salaried employees of the Company and its subsidiaries are eligible to
participate in the plan after they have had one year of service and have reached
age 21.
<TABLE>
<CAPTION>
Estimated Annual Pension Benefits
Based on Years of Credited
Service Indicated
-------------------------------------------
Average Covered
Compensation 10 15 20 25
- --------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$ 25,000 $ 2,472 $ 3,707 $ 4,943 $ 6,179
50,000 6,222 9,332 12,443 15,554
75,000 9,972 14,957 19,943 24,929
100,000 13,722 20,582 27,443 34,304
120,000 16,722 25,082 33,443 41,804
</TABLE>
The above table sets forth the estimated annual pension benefits payable
under the plan on December 31, 1994 to persons retiring at age 65 in specified
compensation and service classifications. The amounts shown are based on
straight life annuity amounts and do not reflect any deduction for other offset
amounts.
Participants acquire vested rights in accrued benefits commencing with 20%
vesting after two years of service and increasing progressively to 100% vesting
after 6 years of service. The plan provides for a normal retirement date of the
later of age 65 or the completion of 5 years of plan participation with a
provision for deferred retirement and credit for years of service and
compensation while on deferred retirement.
Normal retirement benefits under the plan are computed as a function of
years of service and a percentage of average monthly compensation for a
participant's highest 5 consecutive years out of the last 10 years of
employment.
33
<PAGE>
The normal monthly retirement benefit under the plan, payable for the life
of the participant, is an amount equal to (i) eighty-five hundredths of one
percent (.85%) of a participant's average monthly compensation (base
compensation excluding bonus, overtime, and other compensation), multiplied by
the participant's years of credited service plus, (ii) sixty-five hundredths of
one percent (.65%) of a participant's average monthly compensation in excess of
his covered compensation, multiplied by his years of credited service, to a
maximum of 35 years.
Covered compensation under the plan is the monthly average (without
indexing) of the amount of compensation which would be used to calculate a
participant's old age benefit under the Federal Social Security Act if the
participant's annual compensation for each year taken into account in such
calculation equalled the maximum taxable wage base for such year.
This formula, which became effective April 1, 1989, reflects changes
necessary to comply with the provisions of the Tax Reform Act of 1986. In no
event will the benefit paid to a participant under the plan be less than that
which would have been paid if the participant had retired on March 31, 1989.
As of April 1, 1994, Mr. Stucke had seventeen years of credited service
under the plan. Mr. Brock has been receiving his pension entitlement under the
plan of $61,398 per year since January 1, 1987.
Termination Benefits
In August 1991, the Board of Directors adopted a plan which provides that
salaried directors with 10 or more years of service with the Company ("Eligible
Directors") will receive severance payments in the event of a change of control
of the Company ("Change of Control").
A Change of Control is deemed to have occurred if the Company's
shareholders have approved (i) any consolidation or merger of the Company or any
subsidiary where there is not at least 50% Company shareholder continuity in the
corporation issuing cash or securities in the transaction or where at least a
majority of the members of the board of directors of the issuing corporation do
not consist of members of the Board of the Company, (ii) any sale or other
transfer of all or substantially all of the assets of the Company or (iii) any
plan or proposal for the liquidation or dissolution of the Company. A Change of
Control is also deemed to have occurred if the members of the Board as of the
effective date of the plan (the "incumbent directors") cease to constitute at
least a majority of the Board of the Company, provided that any director whose
election, or nomination for election, was approved by a vote of at least a
majority of the then directors is considered to be an incumbent director.
The plan provides for severance payments to any Eligible Director who,
within 45 days after a Change of Control, has not been offered an employment
contract extending his employment for a period of two years after the Change of
Control at an annual salary at least equal to his annual salary just prior to
the Change of Control.
The severance pay payable to an Eligible Director in this event is based on
the fair market value of the Company at the time of a Change of Control. Fair
market value is to be the actual value placed on the Company in the Change of
Control transaction (using the per share value for all outstanding shares if
the transaction affects less than 100% of the Company's stock).
An Eligible Director would receive twice his then current annual
compensation if the fair market value of the Company at the time of a Change of
Control were $25 million or more, three times his then current monthly
compensation if the fair market value were $3 million or less, or an amount
accordingly prorated if the fair market value were greater than $3 million but
less than $25 million. Had a Change of Control occurred on December 31, 1994,
Kenneth J. Stucke, Michael R. Barham and Robin A. Seibert would have been
Eligible Directors under the plan and entitled to receive severance payments of
$115,000 $92,000 and $72,000, respectively (basing fair market value on the
closing price of the Company's Common Stock at such date).
34
<PAGE>
In May 1992, the Board of Directors approved the payment of cash bonuses to
Messrs. Stucke, Barham and Seibert of $40,000, $20,000 and $20,000,
respectively, upon the earlier of a Change of Control or January 1, 2001.
Life Insurance
In August 1991, the Board of Directors approved the payment by the Company
for ten years of premiums for policies providing $250,000 of life insurance for
each Eligible Director. Aggregate annual premiums for Eligible Directors
(Messrs. Stucke, Barham and Seibert) were $1,420 in fiscal year 1994. In March
1995, the Company made a payment of $7,443 to the insurance company to advance
pay the premiums for the remainder of the ten year term.
Consulting Agreement
Since January 1, 1987, Lawrence E. Brock, Founder, Chairman of the Board
and Chief Executive Officer, has been employed by the Company as a consultant.
In May 1993, the Board of Directors approved an amendment to Mr. Brock's five
year consulting contract so that, as amended, he will receive $93,334 per year
(current consulting fee), with annual upward adjustments to be no less (on a
percentage basis) than the increase in compensation that the President of the
Company receives.
The consulting contract shall remain in force as long as Lawrence E. Brock
and Lorena Rowan Brock, or a trust of which Lawrence E. Brock and Lorena Rowan
Brock are the beneficiaries, or their children or a trust of which their
children are the beneficiaries, individually or collectively, own 10% or more
of the outstanding shares of common stock of the Company.
Notwithstanding the foregoing, in the event of a change of control of the
Company the consulting contract will terminate 90 days after such change of
control. Futhermore, in the event Lawrence E. Brock is determined to be
incapable of managing the Lawrence E. Brock and Lorena Rowan Brock Trust III or
any successor Brock family trust in accordance with the procedures as therein
set out, this contract shall also terminate immediately upon such
determination. As a consultant, Mr. Brock is covered by the Company's health
and life insurance plans available generally to all salaried employees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates the beneficial ownership, as of March 13,
1995, of the Company's Common Stock by each director, each person known by the
Company to own beneficially more than 5% of the outstanding shares, the
Company's Chief Executive Officer and the Company's Executive Officers whose
salary and bonus exceed $100,000 and by all directors and officers of the
Company as a group.
35
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
<S> <C> <C>
Lawrence E. Brock and
Lorena Rowan Brock - Trust 325,811 sh. (a) 8.54%
Bank One 893,658 sh. (b) 24.50%
Fort Worth, Texas, Trustee 40,076 sh. (c)
Lawrence E. Brock, III - Trust 40,000 sh. (d) 1.05%
Kenneth J. Stucke 77,700 sh. (e) 1.97%
Michael R. Barham 30,700 sh. (e) .78%
Robin A. Seibert 29,750 sh. (e) .76%
E. Peter Corcoran 130,365 sh. 3.42%
John W. Cooke, Jr. 1,000 sh. .03%
John W. Owensby 5,000 sh. .13%
All Directors and
Officers as a Group (8) 1,574,060 sh. (e) 40.01%
</TABLE>
(a) These shares are held in a trust in which Mr. and Mrs. Brock are
beneficiaries. As Trustee, Mr. Brock has voting and dispositive powers with
respect to the shares. Mr. Brock's address is 225 Baronne Street, Suite 700,
New Orleans, LA 70112.
(b) These shares are held in an irrevocable trust administered by BankOne, P.O.
Box 2050, Fort Worth, Texas 73713 ("Bank"). Mr. and Mrs. Brock are the trust
beneficiaries. The Bank has voting and dispositive powers with respect to
the shares.
(c) These shares are held in irrevocable trusts administered by the Bank which
has voting power with respect to the shares. The primary beneficiaries are
Mr. and Mrs. Brocks' children. Mr. and Mrs. Brock disclaim beneficial
ownership of these shares.
(d) These shares are held in a trust for the benefit of Lawrence E. Brock, III.
Lawrence E. Brock, as Trustee, has voting and dispositive powers with
respect to the shares. Mr. and Mrs. Brock disclaim beneficial ownership of
these shares.
(e) Includes shares issuable pursuant to stock options exercisable currently or
within 60 days as follows: Mr. Stucke, 66,250 shares; Mr. Barham, 28,000;
Mr. Seibert, 28,750; and all officers and directors as a group, 123,000
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective October 1, 1993 the Company entered into an agreement to have Mr.
John W. Cooke, Jr. on retainer for one year or until the Company has merged or
liquidated whichever occurs first. Because of Mr. Cooke's knowledge and
experience in the oil and gas industry, his responsibilities were to seek oil
and gas reserve acquisitions, evaluate drilling prosepects and assist in finding
any other investment which would enhance the value of the Company.
Mr. Cooke received $40,000 yearly on a pro rata basis at the end of each
month. Mr. Cooke also was reimbursed for actual out-of-pocket expenses necessary
to provide this service.
On December 31, 1994, Mr. Cooke's agreement to remain on retainer was
terminated. For the three month period December 31, 1993 and the twelve month
period ended December 31, 1994, Mr. Cooke was paid $10,000 and $40,000
associated with his retainer and was paid $853 and $8,103 for reimbursement of
out-of-pocket expenses.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The consolidated financial statements and schedules listed below are
filed under Item 8 of Part II.
1. Financial Statements Page
Report of Independent Auditors................................ 14
Consolidated Balance Sheets at December 31, 1994 and
at December 31, 1993.......................................... 15
Consolidated Statements of Earnings for the fiscal year
ended December 31, 1994, the nine months ended
December 31, 1993 and the fiscal year ended
March 31, 1993................................................ 16
Consolidated Statements of Stockholders' Equity for the
fiscal year ended December 31, 1994, the nine months
ended December 31, 1993 and the fiscal year ended
March 31, 1993................................................ 17
Consolidated Statements of Cash Flows for the
fiscal year ended December 31, 1994, the nine months
ended December 31, 1993 and the fiscal year ended
March 31, 1993................................................ 18
Notes to Consolidated Financial Statements.................... 19-29
2. Schedules
No schedules are included as the information required to be set forth
therein is included in the finanacial statements or in the footnotes
thereto or the schedules are not applicable.
(b) Reports on Form 8-K.
The Registrant, during the last quarter of the fiscal year ended
December 31, 1994, did not file a Form 8-K.
(c) Exhibits.
3.1 Certificate of Incorporation, (incorporated by reference to
Exhibit 1 to Registration Statement, File No. 2-48383).
3.11 Certificate of Amendment of Articles of Incorporation,
(incorporated by reference to Exhibit 3.11 to Registrant's
Quarterly Report on Form 10-Q for the period ended
September 30, 1986, File No. 0-7610).
3.2 (b) By-laws as amended through September 14, 1993. (Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for
period ended September 30, 1993).
10.1 1979 Stock Option Plan, as amended September 12, 1989.
(Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended March 31, 1989).
37
<PAGE>
10.45 Brock Exploration Corporation Non-Qualified Supplemental
Executive Retirement Plan and Trust Agreement.
10.46 Second Restatement of Credit Agreement dated August 23, 1991
(Incorporated by reference to exhibit 10.42 to Form 10-Q for
the period ended September 30, 1991).
10.6 Consulting Agreement with Lawrence E. Brock.
10.7 Resolutions of the Board of Directors dated August 19, 1991
authorizing purchase of life insurance for eligible directors
and severance payments to eligible directors in the event of a
Change of Control.
10.8 Resolutions to the Board dated May 7, 1992 authorizing cash
bonus termination benefit.
10.9 Consulting Agreement with John W. Cooke, Jr. (Incorporated by
reference to Registrant's Annual Report on Form 10-K for the
transition period ended December 31, 1993).
10.10 May 12, 1993 Resolution regarding salary with Lawrence E.
Brock. (Incorporated by reference to Registrant's Annual Report
on Form 10-K for the transition period ended December 31,
1993).
22. List of Subsidiaries.
The Company's significant subsidiaries are as follows: Brock
Oil and Gas Corporation, a Delaware Corporation and Brock Gas
Systems and Equipment, Inc. (formerly Medallion Equipment
Company), a Texas Corporation, are wholly owned and included in
the Company's consolidated financial statements.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized.
BROCK EXPLORATION CORPORATION
(Registrant)
Dated: March 13, 1995 By /s/ Lawrence E. Brock
-----------------------------------------
Lawrence E. Brock, Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: March 13, 1995 /s/ Lawrence E. Brock
-----------------------------------------
Lawrence E. Brock, Director and
Principal Executive Officer
Dated: March 13, 1995 /s/ Robin A. Seibert
-----------------------------------------
Robin A. Seibert, Director and
Principal Financial and Accounting Office
Dated: March 13, 1995 /s/ Lorena Rowan Brock
-----------------------------------------
Lorena Rowan Brock, Director
Dated: March 13, 1995 /s/ Kenneth J. Stucke
-----------------------------------------
Kenneth J. Stucke, Director
Dated: March 13, 1995 /s/ Michael R. Barham
-----------------------------------------
Michael R. Barham, Director
Dated: March 13, 1995
-----------------------------------------
E. Peter Corcoran, Director
Dated: March 13, 1995
-----------------------------------------
John W. Cooke, Jr., Director
Dated: March 13, 1995
-----------------------------------------
John W. Owensby, Director
39
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 1995 .
----------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 1-9461
-------------
BROCK EXPLORATION CORPORATION
Delaware 72-0734844
------------------------ --------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
225 Baronne Street, Suite 700
New Orleans, Louisiana 70112-1707
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (504) 586-1815
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
------------------------------
Title of each class registered:
------------------- ----------
Common Stock, $.10 par value American Stock Exchange
As of September 30, 1995 the Registrant has issued and outstanding 3,829,242
--------------------
shares of Common Stock.
<PAGE>
BROCK EXPLORATION CORPORATION
FORM 10-Q
SEPTEMBER 30, 1995
INDEX
Page No.
--------
PART I. Financial Information
Consolidated Balance Sheets at
September 30, 1995 (Unaudited) and
December 31, 1994 3
Consolidated Statements of Earnings
for the three months and nine months
ended September 30, 1995 and 1994 (Unaudited) 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1995
and 1994 (Unaudited) 5
Notes to Consolidated Financial
Statements (Unaudited) 6
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7-11
PART II. Other Information
Items 1 - 6 12
Signature Page 13
- 2 -
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash And Cash Equivalents $ 2,385,000 $ 2,583,000
Receivables:
Joint Interest 231,000 337,000
Oil and Gas Sales 1,520,000 2,120,000
----------- -----------
1,751,000 2,457,000
Income Tax Recoverable 45,000 21,000
Prepaid Expenses and Other Assets 102,000 148,000
----------- -----------
Total Current Assets 4,283,000 5,209,000
----------- -----------
PROPERTY AND EQUIPMENT - AT COST,
SUCCESSFUL EFFORTS METHOD
Oil and Gas Properties and Equipment 27,810,000 27,555,000
Furniture, Fixtures and Equipment 1,152,000 1,152,000
Less Accumulated Depreciation, Depletion,
and Amortization (13,675,000) (14,046,000)
----------- -----------
15,287,000 14,661,000
REAL ESTATE 150,000 150,000
OTHER ASSETS 1,069,000 1,018,000
----------- -----------
$20,789,000 $21,038,000
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Trade Accounts Payable $ 536,000 $ 593,000
Accrued Liabilities 31,000 47,000
Oil and Gas Sales Payable 649,000 919,000
----------- -----------
Total Current Liabilities 1,216,000 1,559,000
----------- -----------
LONG-TERM DEBT 9,425,000 9,701,000
OTHER LIABILITES 1,503,000 1,329,000
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value -
Authorized 1,000,000 shares; Issued - None
Common Stock, $.10 par value -
Authorized 8,000,000 shares;
Issued - 4,100,402 shares 410,000 410,000
Additional Capital 755,000 775,000
Retained Earnings 8,156,000 7,984,000
----------- -----------
9,321,000 9,169,000
Less Treasury Stock - at cost (271,160
and 289,212 shares, respectively) (676,000) (720,000)
----------- -----------
Total Stockholders' Equity 8,645,000 8,449,000
----------- -----------
$20,789,000 $21,038,000
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 3 -
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Operating Revenues
Oil and Gas Sales $2,073,000 $2,122,000 $6,650,000 $6,725,000
Administrative Overhead Billed to Others 0 25,000 0 87,000
Well Supervisory Fees and Other 229,000 254,000 664,000 725,000
Gain (Loss) on Disposal of Oil and Gas
Properties and Equipment 20,000 (7,000) (15,000) 92,000
---------- ---------- ---------- ----------
2,322,000 2,394,000 7,299,000 7,629,000
---------- ---------- ---------- ----------
Operating Costs and Expenses
Production Expenses and Severance Taxes 932,000 1,008,000 2,788,000 3,462,000
Abandonment Expenses and Dry Hole Costs 98,000 13,000 225,000 114,000
Depreciation, Depletion and Amortization 600,000 518,000 1,785,000 1,646,000
General and Administrative Expenses 465,000 580,000 1,632,000 1,725,000
Interest Expense 203,000 240,000 631,000 618,000
---------- ---------- ---------- ----------
2,298,000 2,359,000 7,061,000 7,565,000
---------- ---------- ---------- ----------
Earnings before Income Taxes 24,000 35,000 238,000 64,000
---------- ---------- ---------- ----------
Income Tax Expense 9,000 10,000 67,000 13,000
---------- ---------- ---------- ----------
Net Earnings $ 15,000 $ 25,000 $ 171,000 $ 51,000
========== ========== ========== ==========
Net Earnings per Common Share $ 0.00 $ 0.01 $ 0.04 $ 0.01
========== ========== ========== ==========
Weighted Average Common Shares Outstanding 3,906,423 3,915,697 3,903,936 3,918,989
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 4 -
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1994
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings 171,000 51,000
Adjustments to net earnings for non-cash items 1,976,000 1,625,000
---------- ----------
Cash flow before changes in operating assets
and liabilities 2,147,000 1,676,000
Changes in operating assets and liabilities 508,000 (131,000)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,655,000 1,545,000
INVESTMENT ACTIVITIES
Purchase of investments (16,000) (17,000)
Purchase of property and equipment (3,151,000) (3,291,000)
Proceeds from sales of property and equipment 567,000 161,000
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (2,600,000) (3,147,000)
FINANCING ACTIVITIES
Purchase of treasury stock (7,000) (81,000)
Proceeds from exercising options 30,000 -0-
Additions to long-term debt 1,420,000 2,600,000
Payments on long-term debt (1,696,000) (750,000)
---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (253,000) 1,769,000
---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (198,000) 167,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,583,000 2,267,000
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,385,000 $ 2,434,000
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 5 -
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 1995
------------------
NOTE 1:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 1995 and December 31, 1994 and the results of operations and
cash flows for the three months and the nine months ended September 30, 1995
and 1994.
NOTE 2:
Earnings per common share have been computed based upon the weighted average
number of common and common equivalent shares outstanding during the period.
NOTE 3:
Reference is hereby made to "Notes to Consolidated Financial Statements"
included in the Form 10-K of the Annual Report for the fiscal year ended
December 31, 1994, filed with the Securities and Exchange Commission for
additional information pertaining to the financial statements of the Company.
NOTE 4:
The results of operations for the three months and the nine months ended
September 30, 1995 and 1994 are not necessarily indicative of the results to
be expected for the full year.
NOTE 5:
On July 26, 1995, the Company's Board of Directors announced that it has
decided to terminate seeking indications of interest for a cash merger of the
Company. The Board has determined that, based upon the current conditions in
the oil and gas industry, it is in our stockholders' interest to terminate
exploring the possibility of selling the Company through a cash merger. While
the Board received a number of proposals involving the cash merger of the
Company, it concluded that pursuing the proposals further was not in our
stockholders' best interests. The Board intends to continue to explore
alternatives involving the sale or combination of the Company as well as other
transactions intended to maximize our value for our stockholders.
- 6 -
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1995
--------------------------------
RESULTS OF OPERATIONS
- ---------------------
Revenues
- --------
Oil and Gas Sales decreased to $2,073,000 for the three months ended September
30, 1995 from $2,122,000 for the three months ended September 30, 1994. The
majority of this reduction in oil and gas sales is attributable to the decrease
in oil volumes produced as well as oil prices per barrel ("bbl") for the period
ended September 30, 1995. Oil volumes produced were 76,121 bbls and 85,836 bbls,
respectively, for the quarters ended September 30, 1995 and 1994. This
represents an 11% decrease in oil production for the comparative periods. The
majority of the decrease in oil volumes produced was related to the 37
properties that were sold in the first quarter of 1995. The properties sold were
primarily marginally profitable oil producing properties. Since the properties
have been sold, the average production cost per equivalent barrel produced has
been reduced by 23%. The price of oil per bbl averaged $16.26 compared to $16.97
for the three month periods September 30, 1995 and 1994, respectively. Also
attributing to the decline in oil and gas sales was a 14% decrease in the price
of natural gas sold. For the quarter ended September 30, 1995, gas prices per
mcf decreased to an average of $1.28 compared to $1.48 per mcf for the quarter
ended September 30, 1994. But offsetting the decrease in gas prices was an
increase in gas volumes produced, 659,598 mcf produced compared to 536,917 mcf
produced, for the comparative periods. The increase in the gas volume produced
was directly related to the 1.6 billion cubic feet of gas acquired in January
1995 and the latest acquisition of 2.4 billion cubic feet of gas in August 1995.
Administrative Overhead Billed to Limited Partnerships was $25,000 for the
period ended September 30, 1994. Effective January 1, 1995, the five remaining
limited partnerships in which the Company was the Managing General Partner were
liquidated and dissolved, thus eliminating administrative overhead billed to the
limited partnerships.
Well Supervisory Fees and Other remained relatively stable, $229,000 compared to
$254,000, for the periods ended September 30, 1995 and 1994, respectively.
Cost and Expenses
- -----------------
Production Expenses and Severance Taxes decreased 8% to $932,000 for the three
months ended September 30, 1995 from $1,008,000 for the three months ended
September 30, 1994. This decrease is a direct result of the sale of marginally
profitable properties.
- 7 -
<PAGE>
The average production cost per equivalent barrel was decreased to $5.01 from
$5.75 for the three months ended September 30, 1995 and 1994, respectively.
Abandonment Expenses and Dry Hole Costs during the quarter ended September 30,
1995 was $98,000 compared to $13,000 for the quarter ended September 30, 1994.
Depreciation, Depletion and Amortization increased by 16% to $600,000 from
$518,000 for the periods ended September 30, 1995 and 1994, respectively. This
increase is the result of having a larger property cost base and increased gas
production resulting from the gas reserves acquired in the first quarter of
1995.
General and Administrative Expenses decreased to $465,000 from $580,000 for the
three month period ended September 30, 1995 when compared to the three month
period ended September 30, 1994. The majority of the reduction in General and
Administrative Expenses are a result of a $46,000 decrease in labor costs, a
$28,000 decrease in legal and professional fees, and a $25,000 decrease in
general and administrative costs associated with the limited partnerships that
were liquidated in January 1995.
Interest Expense decreased to $203,000 from $240,000 for the quarters ended
September 30, 1995, and 1994, respectively, as a result of the outstanding debt
balance being approximately $3.6 million lower, while the average interest rate
was 8.75% and 7.58%, respectively.
Financial Condition
- -------------------
During the three month period ended September 30, 1995 the Company had
expenditures for oil and gas properties and equipment of $1,170,000 while
increasing long-term debt by only $490,000.
The majority of the expenditures made during the Company's third quarter ended
September 30, 1995 was on the purchase of 2.4 billion cubic feet of natural gas
in Texas County, Oklahoma, for $925,000. The package produces approximately
1,000 mcf per day net to the Company.
The I. P. Farms well in Brazoria County, Texas began producing on September 1,
1995. The well is producing 6000 million cubic feet of gas per day ("MCFD") and
200 barrels of oil per day ("BOPD"). Brock owns a 3.6% net revenue interest in
the well.
Also, in the same area as the I. P. Farms well, the Company owns a 20% working
interest in a well that is being reentered. If successful, it is anticipated
that this well should produce 2000 MCFD. Work on this well will be completed in
the fourth quarter of 1995. Brock's anticipated net cost is $50,000.
- 8 -
<PAGE>
The Shafter Lake Waterflood Unit in Andrews County, Texas began injecting water
in July 1995. Since injection began, the oil production rate has increased from
300 BOPD to 570 BOPD. Brock anticipates that the production rate will continue
to increase as the field fully responds to the waterflood. Phase II development
of the field is still scheduled for mid 1996.
The Calumet Cottage Grove Waterflood Unit in Canadian County, Oklahoma continues
to respond to waterflood operations. Currently, two new wells are being drilled
in the unit and two wells are being converted to injection wells to fully
exploit the field. The Company expects production to hold at the current level
of 3100 BOPD (450 BOPD net to the Company) through 1996.
Future property acquisitions and waterflood development costs will be funded
through existing working capital, cash flows from operations, and the unused
bank borrowing base available to the Company.
Effective September 1, 1995, Brock Oil and Gas Corporation entered into a twelve
month agreement, with an industry partner, to evaluate and acquire producing
properties, leasehold, mineral or fee acres to be potentially developed, and
generate economically feasible oil and/or gas prospects. The Company's
participation in any of the above mentioned activities is 25% and the Company
has issued a Letter of Credit in favor of the industry partner in the initial
amount of $3 million. As of this date, no expenditures have occurred as a
result of this agreement.
- 9 -
<PAGE>
BROCK EXPLORATION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Revenues
- --------
Oil and Gas Sales decreased to $6,650,000 for the nine months ended September
30, 1995 from $6,725,000 for the nine months ended September 30, 1994. The
majority of this decrease in oil and gas sales is attributable to the decrease
in gas prices for the period ended September 30, 1995. Although gas volumes
produced increased 12%, natural gas prices decreased 24%. Gas volumes produced
were 1,968,928 Mcf and 1,761,480 Mcf for the nine months ended September 30,
1995 and 1994, respectively. The average price of gas was $1.33 Mcf compared to
$1.76 Mcf for the comparative periods.
Oil prices increased 12% to $17.33 from $15.44, while oil volumes produced
decreased 10% to 232,966 barrels from 258,096 barrels for the nine months ended
September 30, 1995 and 1994, respectively.
As mentioned in the quarterly discussion, the reduction in oil volumes was
primarily related to the marginally profitable oil properties that were sold.
Administrative Overhead Billed to Limited Partnerships was $87,000 for the nine
months ended September 30, 1994. Effective January 1, 1995, the five remaining
limited partnerships in which the Company was the Managing General Partner were
liquidated and dissolved, thus eliminating administrative overhead billed to the
limited partnerships.
Well Supervisory Fees and Other decreased to $664,000 from $725,000 for the
periods ended September 30, 1995 and 1994, respectively.
Cost and Expenses
- -----------------
Production Expenses and Severance Taxes decreased to $2,788,000 for the nine
months ended September 30, 1995 from $3,462,000 for the nine months ended
September 30, 1994. Production expenses per equivalent barrel produced
decreased 23% to $4.85 from $6.28 for the nine months ended September 30, 1995
and 1994, respectively. The decrease in production cost is a result of the sale
of marginally profitable wells in the second and third quarters of 1994 and the
first quarter of 1995. Also, expense workover cost was $67,000 for the nine
months ended September 30, 1995 compared to $333,000 for the nine months ended
September 30, 1994.
The Company had Abandonment Expenses and Dry Hole Costs during the nine months
ended September 30, 1995 of $225,000 and had $114,000 during the nine months
ended September 30, 1994.
- 10 -
<PAGE>
Depreciation, Depletion and Amortization ("DD&A") increased to $1,785,000 from
$1,646,000 for the periods ended September 30, 1995 and 1994, respectively.
DD&A expense was $3.18 and $2.98 per equivalent barrel produced for the periods
ended September 30, 1995 and 1994, respectively. This increase is the result of
having a larger property cost base and increased gas production resulting from
the gas reserves acquired in the first quarter of 1995.
General and Administrative Expenses decreased to $1,632,000 from $1,725,000 for
the nine month period ended September 30, 1995 when compared to the nine month
period ended September 30, 1994. The decrease in General and Administrative
Expenses is primarily related to a $115,000 reduction in labor cost and a
$55,000 decrease in cost associated with the limited partnerships that were
liquidated in January 1995. These decreases were partially offset by the
expenses related to activities associated with the anticipated sale of the
Company.
Interest Expense increased to $631,000 from $618,000 for the nine months ended
September 30, 1995, and 1994, respectively, as a result of the average interest
rate being 8.86% and 6.89% for the comparable periods, while the outstanding
debt balance was approximately 2.7 million lower.
Financial Condition
- -------------------
During the nine month period ended September 30, 1995 the Company had
expenditures for oil and gas properties and equipment of $3,151,000 and the
Company had borrowings for those acquisitions of $1,420,000 and made payments on
long-term debt of $1,696,000.
Net cash provided by operating activities was $2,655,000 for the nine months
ended September 30, 1995 compared to $1,545,000 for the nine months ended
September 30, 1994. The Company has proceeds on the sale of property and
equipment of $567,000 and $161,000 for the nine months ended September 30, 1995
and 1994, respectively.
Future property acquisitions and waterflood development costs will be funded
through existing working capital, cash flows from operations, and the unused
bank borrowing base available to the Company.
Effective September 1, 1995, Brock Oil and Gas Corporation entered into a twelve
month agreement, with an industry partner, to evaluate and acquire producing
properties, leasehold, mineral or fee acres to be potentially developed, and
generate economically feasible oil and/or gas prospects. The Company's
participation in any of the above mentioned activities is 25% and the Company
has issued a Letter of Credit in favor of the industry partner in the initial
amount of $3 million. As of this date, no expenditures have occurred as a
result of this agreement.
- 11 -
<PAGE>
PART II. Other Information
---------------------------
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On October 17, 1995, the Company held its annual meeting of
stockholders. The only matters voted upon at the meeting were the
approval of appointment of Ernst & Young, L.L.P. as independent
auditors of the Corporation and the election of the Company's
Board of Directors. The following directors were elected:
Lawrence E. Brock
Lorena R. Brock
Kenneth J. Stucke
Michael R. Barham
Robin A. Seibert
E. Peter Corcoran
John W. Cooke, Jr.
John W. Owensby
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) 10.49 Fourth Amendment to Second Restatement of Credit
Agreement dated April 18, 1995.
(b) The Registrant, during the quarter ended September 30, 1995,
did not file any reports on Form 8-K.
- 12 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Brock Exploration Corporation
-----------------------------
DATE: BY: /s/ Robin A. Seibert
----------------------- ------------------------------
Robin A. Seibert, Controller
and Chief Accounting Officer
and duly authorized signatory
on behalf of the Registrant
- 13 -
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL"), a Delaware corporation has the power, under specified
circumstances, to indemnify its directors, officers, employees and agents in
connection with threatened, pending or completed actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in right of the corporation), brought against them by
reason of the fact that they were or are such directors, officers, employees
or agents, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in any such action, suit or proceeding.
Article 6 of Key Production's Bylaws provides for indemnification of each
person who is or was or is threatened to be made a party to any threatened,
pending or completed civil, administrative, criminal, arbitrative or
investigative action, suit or proceeding because such person is or was a
director, officer or employee of Key Production or is or was serving at the
request of Key Production as a director, officer, partner, trustee, fiduciary,
agent or employee of another corporation or of a partnership, joint venture,
trust, employee benefit plan or other enterprise, against judgments, fines,
penalties, amounts paid in settlement, reasonable expenses and other
liabilities arising in connection with such action, suit or proceeding, to the
fullest extent permitted by law.
Key Production also maintains policies of directors and officers liability
insurance.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) or (iv) for any transaction from which the director derived an
improper personal benefit. Article IV of the Key Production's Charter contains
such a provision.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 --Agreement and Plan of Merger dated December 21, 1995 among Key
Production Company, Inc., Key Acquisition One, Inc. and Brock
Exploration Corporation (included as Appendix I to the Joint Proxy
Statement/Prospectus)
2.2 --Stockholder Agreement executed by the Lawrence E. Brock and Lorena
Rowan Brock-Trust No. 2-A
4.1 --Certificate of Incorporation of Key Production Company, Inc
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4, File No. 33-23533 filed with
the SEC on August 5, 1988)
4.2 --By-Laws of Key Production Company, Inc. (incorporated by reference
to Exhibit 3.3 to Form 10-Q of Key Production for quarter ended
June 30, 1995, File Number 0-17162)
5.1 --Opinion of Holme Roberts & Owen LLC regarding the legality of the
securities
8.1 --Opinion of Jones, Walker, Waechter, Poitevent, Carrere & Denegre,
L.L.P., New Orleans, Louisiana regarding tax matters
23.1 --Consent of Holme Roberts & Owen LLC (set forth in Exhibit 5.1)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
23.2 --Consent of Jones, Walker, Waechter, Poitevent, Carrere & Denegre,
L.L.P., New Orleans, Louisiana (set forth in Exhibit 8.1)
23.3 --Consent of Arthur Andersen LLP (Key Production)
23.4 --Consent of Ernst & Young LLP (Brock)
23.5 --Consent of Stephens Inc.
23.6 --Consent of Ryder Scott Company Petroleum Engineers (Brock)
23.7 --Consent of Ryder Scott Company Petroleum Engineers (Key
Production)
99.1 --Form of Key Production Proxy
99.2 --Form of Brock Proxy
</TABLE>
(b) Financial Statement Schedules:
None required.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) 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; and
(2) 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant 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 Act and will be governed by the final adjudication
of such issue.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DENVER, STATE OF
COLORADO, ON FEBRUARY 12, 1996.
Key Production Company, Inc.
/s/ F.H. Merelli
By: ___________________________________________
F.H. MERELLI
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below does hereby make, constitute and
appoint each of F.H. Merelli and Monroe W. Robertson as such person's true and
lawful attorney-in-fact and agent, with full power of substitution,
resubstitution and revocation to execute, deliver and file with the Securities
and Exchange Commission, for and on such person's behalf, and in any and all
capacities, this Registration Statement on Form S-4, and any and all
amendments (including post-effective amendments) thereto, with all exhibits
thereto and other documents in connection therewith, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or such
person's substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON FEBRUARY 12, 1996.
NAME AND SIGNATURE TITLE
/s/ F.H. Merelli Chairman, President and Chief
- ------------------------------------- Executive Officer (Principal
F.H. MERELLI Executive Officer)
/s/ Monroe W. Robertson Senior Vice President and Secretary
- ------------------------------------- (Principal Financial Officer)
MONROE W. ROBERTSON
/s/ Cathy L. Anderson Controller (Principal Accounting
- ------------------------------------- Officer)
CATHY L. ANDERSON
/s/ Cortlandt S. Dietler Director
- -------------------------------------
CORTLANDT S. DIETLER
/s/ Timothy J. Moylan Director
- -------------------------------------
TIMOTHY J. MOYLAN
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 --Agreement and Plan of Merger dated December 21, 1996 among Key
Production Company, Inc., Key Acquisition One, Inc. and Brock
Exploration Corporation (included as Appendix I to the Joint Proxy
Statement/Prospectus)
2.2 --Stockholder Agreement executed by the Lawrence E. Brock and Lorena
Rowan Brock-Trust No. 2-A
4.1 --Certificate of Incorporation of Key Production Company, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4, File No. 33-23533 filed with the
SEC on August 5, 1988)
4.2 --By-Laws of Key Production Company, Inc. (incorporated by reference
to Exhibit 3.3 to Form 10-Q of Key Production for quarter ended June
30, 1995, File Number 0-17162)
5.1 --Opinion of Holme Roberts & Owen LLC regarding the legality of the
securities
8.1 --Opinion of Jones, Walker, Waechter, Poitevent, Carrere & Denegre,
L.L.P., New Orleans, Louisiana regarding tax matters
23.1 --Consent of Holme Roberts & Owen LLC (set forth in Exhibit 5.1)
23.2 --Consent of Jones, Walker, Waechter, Poitevent, Carrere & Denegre,
L.L.P., New Orleans, Louisiana (set forth in Exhibit 8.1)
23.3 --Consent of Arthur Andersen LLP (Key Production)
23.4 --Consent of Ernst & Young LLP (Brock)
23.5 --Consent of Stephens Inc.
23.6 --Consent of Ryder Scott Company Petroleum Engineers (Brock)
23.7 --Consent of Ryder Scott Company Petroleum Engineers (Key Production)
99.1 --Form of Key Production Proxy
99.2 --Form of Brock Proxy
</TABLE>
<PAGE>
Exhibit 2.2
-----------
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (this "Agreement") is dated as of December
21, 1995 between Lawrence E. Brock and Lorena Rowan Brock - Trust No. 2-A
("Stockholder") and Key Production Company, Inc., a Delaware corporation
("Key").
Key and Brock Exploration Company, a Delaware corporation ("Brock"),
propose to enter into an Agreement and Plan of Merger (the "Merger Agreement")
on the date of this Agreement pursuant to which a newly formed wholly owned
subsidiary of Key will be merged with and into Brock (the "Merger"). As a
result of the Merger, each outstanding share of Common Stock, $0.10 par value,
of Brock (the "Brock Common Stock") would be converted into the right to receive
.6897 shares of Common Stock, $.25 par value (the "Key Common Stock"), of Key.
Stockholder owns 325,811 shares and the Lawrence E. Brock, Jr. and
Lorena Brock Irrevocable Trust ("BankOne Trust") owns 893,658 shares of Brock
Common Stock (the "Shares").
Stockholder desires to induce Key to enter into the Merger Agreement
by entering into this Agreement.
Accordingly, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
<PAGE>
1. Registration of Key Common Stock. Key shall cause a Registration Statement
--------------------------------
on Form S-3 (the "Resale Registration Statement") covering the resale by
Stockholder and BankOne Trust of the Key Common Stock to be filed with the
Securities and Exchange Commission (the "SEC") promptly after the Effective Time
and shall use its best efforts to have the Resale Registration Statement
declared effective by the SEC as soon thereafter as practicable. Key further
agrees to cause the Resale Registration Statement to remain effective for a
period of two years after the Effective Time. Stockholder and BankOne Trust
agree from time to time not to sell any Key Common Stock pursuant to the Resale
Registration Statement if Stockholder and BankOne Trust have received written
notice from Key in accordance with this Section 1 that the Resale Registration
Statement is not then available to effect resales of the Key Common Stock. Key
may suspend the ability of Stockholder and BankOne Trust to resell Key Common
Stock pursuant to the Resale Registration Statement for up to no more than 30
days if (i) in Key's good faith judgment after consultation with counsel, Key
would thereby be required to disclose information relating to pending corporate
developments or business transactions involving Key or its subsidiaries not
otherwise then required by law to be publicly disclosed and (ii) in the good
faith judgment of Key such disclosure at such time would adversely affect Key in
regard to any such corporate developments or business transactions contemplated
by Key or its subsidiaries. If at any time Key suspends the ability of
Stockholder and BankOne Trust to sell Key Common Stock pursuant to the Resale
Registration Statement, Key shall use its best efforts to permit resales of the
Key Common Stock pursuant to the Resale Registration Statement as soon as
thereafter practicable and Key shall notify Stockholder and BankOne Trust
promptly after the Resale Registration Statement again becomes available for
sales of any Key Common Stock. In no event, however, shall Key have the ability
to restrict the Stockholder's and BankOne Trust's right to sell any Key Common
Stock pursuant to the Resale Registration Statement more than two times in any
12 month period.
2. Covenants of Stockholder.
------------------------
(a) During the period from the date of this Agreement until the Termination
Date (as defined in Section 18 hereof), except in accordance with the provisions
of this Agreement and subject to the provisions of Section 2(d), Stockholder
agrees that it will not:
(i) Transfer (as defined in Section 17 hereof) any Shares; provided
that Stockholder may Transfer Shares to any Person without consideration if any
such Shares which are so Transferred shall continue to be subject to the
provisions of Section 6 hereof, and, as a condition to any such Transfer of
Shares, the transferee shall enter into a written agreement with Key, in form
and substance satisfactory to Key, assuming such obligations;
2
<PAGE>
(ii) deposit any Shares into a voting trust, or grant any proxies or
enter into a voting agreement with respect to any Shares; or
(iii) initiate, solicit or encourage, directly or indirectly,
or engage in any negotiations concerning an Competing Transaction (as defined in
the Merger Agreement), or provide any confidential information or data to, or
have any discussions with, any Person relating to an Competing Transaction, or
otherwise facilitate any effort or attempt to make or implement an Competing
Transaction.
(b) Any additional shares of Brock Common Stock, warrants, options or other
securities or rights exercisable for, exchangeable for or convertible into
shares of Brock Common Stock acquired by Stockholder will become subject to this
Agreement and shall, for all purposes of this Agreement, be considered "Shares."
(c) Subject to the provisions of Section 2(d), Stockholder agrees not to
take any action or omit to take any action which would have the effect of
preventing or disabling Stockholder from performing its obligations under this
Agreement.
(d) Notwithstanding the restrictions set forth in this Section 2, Lawrence
E. Brock and Lorena Rowan Brock may exercise their fiduciary duties in their
capacities as directors and officers of the Company, as opposed to taking action
with respect to the direct or indirect ownership (including, without limitation,
the Transfer or voting) of any Shares, and no such exercise of fiduciary duties
shall be deemed to be a breach of, or a violation of the restrictions set forth
in, this Section 2 and Stockholder shall have no liability hereunder for any
such exercise of fiduciary duties by Lawrence E. Brock and Lorena Rowan Brock in
their capacities as directors or officers of the Company.
3. Right of First Refusal; Voting. At all times during the period beginning at
------------------------------
the Effective Time (as defined in the Merger Agreement) and ending two years
after the Effective Time, Stockholder shall, prior to effecting any Transfer of
Key Common Stock (a "Sale"), offer Key a right of first refusal to purchase the
Common Stock proposed to be Transferred on the following terms. Stockholder
shall provide Key with written notice (the "Sale Notice") of any proposed Sale,
which Sale Notice shall contain the identity of the purchaser (if known), the
number of shares of Key Common Stock proposed to be Transferred, the proposed
purchase price for such shares and the form of consideration payable for such
shares. The Sale Notice shall also contain an irrevocable offer to sell the
shares subject to such Sale Notice to Key for cash at a price equal to the price
contained in such Sale Notice. Key shall have the right and option, by written
notice delivered to Stockholder (the "Purchase Notice") within two days of
receipt of the Sale Notice, to accept such offer as to all, but not less than
all, of the Key Common
3
<PAGE>
Stock subject to such Sale Notice. Key shall have the right to assign to any
Person such right to purchase the shares subject to the Sale Notice, provided
that Key shall remain liable for such transferee's performance of and compliance
with the obligations of Key under this Agreement. In the event Key (or its
assignee) elects to purchase the shares subject to the Sale Notice, the closing
of the purchase of the Key Common Stock shall occur at the principal office of
Key (or its assignee) on or before the third day following Stockholder's receipt
of the Purchase Notice. In the event Key does not elect to purchase the shares
subject to the Sale Notice, Stockholder shall be free, for a period of 90 days
following the receipt of notice from Key of its election not to purchase such
shares or, in the absence of any such notice, for a period of 90 days following
the third day after receipt by Key of the Sale Notice, to sell the shares
subject to the Sale Notice in accordance with the terms of, or at a greater
price, and to any Person identified in, the Sale Notice, subject to the
provisions of Section 12 hereof. If such sale is not effected within such 90 day
period such shares shall remain subject to all of the provisions of this
Agreement. Notwithstanding the foregoing, any Stockholder may Transfer any
number of Key Common Stock to any heirs, distributees, guardians,
administrators, executors, legal representatives or similar successors in
interest of such Stockholder, provided that (A) such transferee shall become a
party to this Agreement and agree in writing to perform and comply with all of
the obligations of such Stockholder under this Agreement, and thereupon such
transferee shall be deemed to be a party hereto for all purposes of this
Agreement, and (B) the transferor shall remain liable for such transferee's
performance of and compliance with the obligations of the transferor under this
Agreement, and (ii) Stockholder may Transfer Key Common Stock in a tender offer,
merger, or other similar business combination transaction approved by the Board
of Directors of Key. If the purchase price described in any Sale Notice is not
solely made up of cash or marketable securities, the Sale Notice shall include a
good faith estimate of the cash equivalent of such other consideration, and the
consideration payable by Key or its assignee (if Key elects to purchase (or to
have assignee purchase) the Key Common Stock described in the Sale Notice) in
place of such other consideration shall be cash equal to the amount of such
estimate; provided, however, that if Key in good faith disagrees with such
estimate and states a different good faith estimate in the Purchase Notice, and
if Key and the selling Stockholder cannot agree on the cash equivalent of such
other (i.e., other than cash or marketable securities) consideration, such cash
equivalent shall be determined by a reputable investment banking firm without
material connections with either party. Such investment banking firm shall be
selected by both parties or, if they shall be unable to agree, by an arbitrator
appointed by the American Arbitration Association. The fees and expenses of any
such investment banking firm and/or arbitrator shall be shared equally by Key
and the selling Stockholder, unless otherwise determined by such firm or
arbitrator. In the event of such differing estimates by Key and the selling
Stockholder, periods of time which would otherwise run under this Section 3 from
the date of such Stockholder's receipt of the Purchase Notice shall run instead
from the date on which the parties agree on such cash
4
<PAGE>
equivalent or, in the absence of such agreement, the date on which such cash
equivalent is determined by such investment banking firm. If the purchase price
described in any Sale Notice shall include marketable securities, the purchase
price payable by Key (or its designee) shall include, to the extent marketable
securities were included as a portion of the consideration provided for in the
Sale Notice, an amount in cash determined by reference to the Current Market
Price of such securities on the day the Purchase Notice is received by the
selling Stockholder. In connection with any proposed privately negotiated sale
by a Stockholder of Key Common Stock representing in excess of five% of the then
outstanding Key Common Stock, Key will cooperate with and permit the proposed
purchaser to conduct a due diligence review reasonable under the circumstances
of Key and its Subsidiaries and their respective business and operations,
including, without limitation, reasonable access during normal business hours to
their executive officers, and, if reasonable under the circumstances, their
properties subject to execution by such purchaser of a customary confidentiality
agreement; provided that Key shall not be required to permit more than two such
due diligence reviews in any twelve-month period.
4. Representations and Warranties of Stockholder. Stockholder represents and
---------------------------------------------
warrants to Key as follows:
(a) (i) Stockholder is the record and Beneficial Owner of the Shares, (ii)
such Shares are the only securities of Brock owned of record or Beneficially
Owned by Stockholder or in which Stockholder has any interest, and (iii)
Stockholder does not have any option or other right to acquire any other Shares;
(b) Such Stockholder has the right, power and authority to execute and
deliver this Agreement and to perform his obligations hereunder; the execution,
delivery and performance of this Agreement by such Stockholder will not require
the consent of any other Person and will not constitute a violation of, conflict
with or result in a default under (i) any contract, understanding or arrangement
to which such Stockholder is a party or by which such Stockholder is bound, (ii)
any judgment, decree or order applicable to such Stockholder, or (iii) any law,
rule or regulation of any governmental body applicable to such Stockholder; and
this Agreement constitutes a valid and binding agreement on the part of such
Stockholder, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity; and
(c) the Shares are held by such Stockholder free and clear of all adverse
claims, liens, encumbrances and security interests, and none of the Shares are
subject to any voting trust or other agreement or arrangement with respect to
the voting or disposition of the Shares; and there are no outstanding options,
warrants or rights to purchase or acquire, or agreements (except for this
Agreement) relating to, the Shares.
5
<PAGE>
5. Representations and Warranties of Key. Key hereby represents and warrants
-------------------------------------
to Stockholder that: it is a corporation duly formed under the laws of the
State of Delaware; it has all requisite corporate power and authority to enter
into and perform all its obligations under this Agreement; the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on its part;
this Agreement has been duly executed and delivered by it; and this Agreement
constitutes a valid and binding agreement on its part, enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
6. Voting of Shares. Subject to the absence of a preliminary or permanent
----------------
injunction or other final order by any United States federal court or state
court barring such action, Stockholder hereby agrees that, from the date of this
Agreement until the Termination Date, at any meeting of the stockholders of
Brock, however called, and in any action by written consent of the stockholders
of the Company, he shall (a) vote all Shares of Stockholder in favor of the
transactions contemplated by the Merger Agreement; (b) vote all Shares of
Stockholder against any action or agreement which would result in a breach in
any material respect of any covenant, representation or warranty or any other
obligation of Brock under the Merger Agreement; and (c) vote all Shares of
Stockholder against any action or agreement which would impede, interfere with
or attempt to discourage the transactions contemplated by the Merger Agreement,
including, but not limited to: (i) any Competing Transaction involving Brock or
any of its subsidiaries; (ii) any change in the management or board of directors
of Brock, except as otherwise agreed to in writing by Key; (iii) any material
change in the present capitalization or dividend policy of Brock; or (iv) any
other material change in Brock's corporate structure or business.
Notwithstanding the provisions of this Section 6, Stockholder may exercise his
fiduciary duties in his capacity as a director or officer of the Company, as
opposed to taking action with respect to the direct or indirect ownership
(including, without limitation, the Transfer or voting) of any Shares, and no
such exercise of fiduciary duties shall be deemed to be a breach of, or a
violation of the provisions set forth in, this Section 6 and Stockholder shall
have no liability hereunder for any such exercise of fiduciary duties by
Stockholder in his capacity as a director or officer of the Company.
7. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws. Each of Key and Stockholder hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Delaware and of the United States of America located in the
State of Delaware (the "Delaware Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the
6
<PAGE>
laying of venue of any such litigation in the Delaware Courts and agrees not to
plead or claim in any Delaware Court that such litigation brought therein has
been brought in an inconvenient forum.
8. Further Assurances. Each party hereto shall perform such further acts and
------------------
execute such further documents as may reasonably be required to carry out the
provisions of this Agreement.
9. Assignment. This Agreement may not be assigned by Stockholder or BankOne
----------
Trust. Key may assign its right to under this Agreement to one or more of its
Affiliates.
10. Remedies. The parties agree that legal remedies for breach of this
--------
Agreement will be inadequate and that this Agreement may be enforced by Key by
injunctive or other equitable relief.
11. Affiliate Letter. Stockholder and BankOne Trust hereby agree to execute
----------------
prior to the Effective Time an Affiliate Letter in the form attached to the
Merger Agreement.
12. Tax Representations. Neither Stockholder nor BankOne Trust has any plan
-------------------
or intention, and to the best knowledge of Stockholder and BankOne Trust there
is no plan or intention on the part of any of the remaining stockholders of
Brock, to sell, exchange or otherwise dispose of a number of shares of Key
Common Stock to be received in the Merger that would reduce the Brock
stockholders' ownership of Key Common Stock to a number of shares having a
value, as of the Effective Time, of less than 50 percent of the value of all of
the Brock Common Stock (including shares of Brock Common Stock exchanged for
cash in lieu of fractional shares of Key Common Stock) outstanding immediately
prior to the Effective Time.
13. Notices. All notices or other communications required or permitted
-------
hereunder shall be in writing (except as otherwise provided herein) and shall be
deemed duly given if delivered in person, by confirmed facsimile transmission or
by overnight courier service, addressed as follows:
To Key:
Key Production Company, Inc.
One Norwest Center, 20th Floor
1700 Lincoln Street
Denver, Colorado 80203-4520
Attention: Monroe W. Robertson
Telecopier No.: (303) 830-7158
7
<PAGE>
With a copy to:
Holme Roberts & Owen LLC
1700 Lincoln, Suite 4100
Denver, Colorado 80203
Attention: Thomas A. Richardson, Esq.
Facsimile: (303) 866-0200 With a copy to:
To Stockholder:
Lawrence E. Brock and Lorena Rowan Brock - Trust No. 2-A
1424 Kelving Way
Wharton, TX 77488
To BankOne Trust:
Lawrence E. Brock, Jr. and Lorena Brock Irrevocable Trust
Account No. 8336385800
BankOne Texas N.A.
P.O. Box 2050
Fort Worth, Texas 73713
14. Severability. Any term or provision of this Agreement which is invalid or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, such provision shall be interpreted to be only
so broad as is enforceable.
15. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original, but all of which together shall
constitute one and the same agreement.
16. Binding Effect; Benefits. This Agreement shall survive the death or
------------------------
incapacity of Stockholder and shall inure to the benefit of and shall be binding
upon the parties
8
<PAGE>
hereto and their respective heirs, legal representatives, successors and
permitted assigns, to the extent specifically provided herein. Nothing in this
Agreement, expressed or implied, is intended to or shall confer on any Person
other than the parties hereto and their respective heirs, legal representatives
and successors and permitted assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
17. Certain Definitions. Capitalized terms used and not defined herein have
-------------------
the respective meanings ascribed to them in the Merger Agreement. In addition,
for purposes of this Agreement:
(a) "Affiliate" shall mean, with respect to any specified Person, any
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Person
specified. For purposes of this Agreement, with respect to Stockholder,
"Affiliate" shall not include Brock or Key and the Persons that directly, or
indirectly through one or more intermediaries, are controlled by Brock or Key,
as the case may be.
(b) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities shall have the meanings set forth in Rule 13d-3 under the Exchange
Act. Any calculation of the percentage of the Key Common Stock owned by a Person
shall be made in accordance with Regulation 13D under the Exchange Act.
(c) "Current Market Price" shall mean, as applied to any class of stock on
any date, the average of the daily "Closing Prices" (as hereinafter defined) for
the 20 consecutive trading days immediately prior to the date in question. The
term "Closing Price" on any day shall mean the last sales price, regular way,
per share of such stock on such day, or if no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if shares of
such stock are not listed or admitted to trading on the New York Stock Exchange,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the shares of such stock are listed or admitted to trading, or, if the
shares of such stock are not listed or admitted to trading on any national
securities exchange on the NASDAQ National Market System or, if the shares of
such stock are not quoted on the NASDAQ National Market System, the average of
the high bid and low asked prices in the over-the-counter market as reported by
the National Association of Securities Dealers Inc.'s Automated Quotation
System.
9
<PAGE>
(d) "Person" shall have the meaning set forth in Section 13(d)(3) of the
Exchange Act.
(e) "Transfer" shall mean, with respect to a security, the sale, transfer,
pledge, hypothecation, encumbrance, assignment or disposition of such security
or the Beneficial Ownership thereof, and each option, agreement, arrangement or
understanding, whether or not in writing, to effect any of the foregoing.
18. Term. The provisions of this Agreement shall terminate upon the date of
----
termination of the Merger Agreement (the "Termination Date"), except that
Section 7, 9, 10, 12, 14, 15, 16 and 17 shall survive such termination. If the
Merger is consummated, the provisions of Sections 2, 6 and 11 shall terminate;
all other provisions of this Agreement shall survive the Merger.
10
<PAGE>
IN WITNESS WHEREOF, Stockholder and Key have entered into this Agreement
as of the date first written above.
KEY PRODUCTION COMPANY, INC.
By: /s/ F. H. Merelli
---------------------------------------------
STOCKHOLDER:
Lawrence E. Brock and Lorena Rowan Brock - Trust
No. 2-A
By: /s/ Lawrence E. Brock
---------------------------------------------
11
<PAGE>
[LETTERHEAD OF HOLME ROBERTS & OWEN APPEARS HERE]
February 12, 1996
Key Production Company, Inc.
One Norwest Center, 20th Floor
1700 Lincoln Street
Denver, Colorado 80203-4520
Attention: Monroe W. Robertson
Gentleman:
Reference is made to the registration statement on Form S-4, filed with
the Securities and Exchange Commission (the "Commission") on February 12, 1996
by Key Production Company, Inc., a Delaware corporation (the "Company"), for the
purpose of registering under the Securities Act of 1933, as amended (the "Act"),
2,800,000 shares of the Company's common stock, $0.25 par value (the "Common
Stock").
As counsel for the Company, we have examined such documents and reviewed
such questions of law as we have considered necessary or appropriate for the
purpose of this opinion. Based on the foregoing, we are of the opinion that the
shares of the Common Stock to be sold by the Company pursuant to the prospectus
contained in the Registration Statement (the "Prospectus") have been validly
authorized for issuance and, when issued against receipt of the purchase price
described in the Prospectus, will be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion with the Commission as an exhibit
to the Registration Statement and to the reference to us under the caption,
"Legal Matters" in the Prospectus. In giving this consent, we do not thereby
admit that we are within the category of persons whose consent is required under
Section 7 of the Act or under the rules and regulations of the Commission.
We do not express an opinion on any matter other then those expressly set
forth in this letter
Very truly yours,
Holmes Roberts & Owen LI.C
By /s/ Nick Nimmo
------------------------------
Nick Nimmo, Member
<PAGE>
[LETTERHEAD OF JONES, WALKER, WAECHTER, POITEVENT,
CARRERE & DENEGRE, L.L.P. TO APPEAR HERE]
February 12, 1996
Brock Exploration Corporation
225 Baronne St.
New Orleans, LA 70112-1707
Key Production Company, Inc.
One Norwest Center
20th Floor
1700 Lincoln St.
Denver, CO 80203-4520
Gentlemen:
We have acted as counsel to Brock Exploration Corporation ("Brock") in
connection with the proposed transaction described below and have been requested
to issue our opinion as to certain of the federal income tax consequences of
that transaction.
In connection with the foregoing, we have examined the Agreement and Plan
of Merger among Brock, Key Production Company, Inc. ("Key Production") and Key
Acquisition One, Inc. ("Merger Sub"), dated as of December 21, 1995 (together
with the exhibits and schedules thereto, the "Merger Agreement", the Joint Proxy
Statement/Prospectus of Key Production in the form contained in the Registration
Statement on Form S-4 (the "Proxy Statement"), and such other documents and
corporate records as we have deemed necessary or appropriate for purposes of our
opinion.
The Boards of Directors of Brock, Key Production and Merger Sub have
determined that it is desirable and in the best interests of their respective
corporations and stockholders that Merger Sub merge into Brock in accordance
with the laws of the State of Delaware (the "Merger"), that the separate
existence of Merger Sub shall cease and that Brock shall become a wholly-owned
subsidiary of Key Production. All of the outstanding shares of Brock Common
Stock, $.10 par value per share ("Brock Common Stock"), will be exchanged for
and converted into the right to receive .6897 shares of Key Production voting
common stock, $.25 par value ("Key Production Common Stock"). Cash will be
issued in lieu of the issuance of any fractional share of Key Production Common
Stock to which a holder of Brock Common Stock may be entitled.
The opinions contained herein are based upon the representations and
statements contained in the aforementioned documents and are limited in all
respects to matters of federal
<PAGE>
income tax law. In rendering our opinion, we have assumed the following:
(i) the Merger will be consummated in the manner contemplated by the Proxy
Statement and in accordance with the provisions of the Merger Agreement,
(ii) the statements concerning the Merger set forth in the Proxy Statement
(including the purposes of the parties for consummating the Merger) are accurate
and complete, and (iii) the representation made to us by Key Production, Merger
Sub, Brock and the stockholders of Brock in their respective Officer's
Certificates (the "Certificates") dated of even date with this letter and
delivered to us for purposes of this opinion are true and accurate.
Based upon the foregoing, and having considered the applicable federal
income tax law as it exists on the date hereof, we are of the opinion that:
(1) The Merger qualifies as a reorganization under Section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as amended (the "Code") which is not
disqualified by reason of the fact that Key Production Stock is used in the
Merger. Section 368(a)(2)(E) of the Code.
(2) Key Production, Merger Sub and Brock each will be a party to the
reorganization. Section 368(b) of the Code.
(3) Key Production, Merger Sub and Brock will not recognize any gain or
loss in the Merger.
(4) The holders of Brock Common Stock will not recognize any gain or loss
on the exchange of Brock Common Stock for Key Production Stock in the Merger,
except to the extent of cash received in lieu of a fractional share of Key
Production Common Stock.
(5) The "Certain Federal Income Tax Consequences" section of the Proxy
Statement describes the material income tax consequences of the Merger to Key
Production, Merger Sub, Brock and the Brock stockholder's and fairly represents
our opinion as to the federal income tax matters discussed herein.
No opinion is expressed as to any other aspect of the Merger other than
the opinions set forth above. These opinions represent our conclusions as to
the application of existing law to the facts of the proposed Merger. There can
be no assurance that contrary positions may not by successfully asserted by the
Internal Revenue Service, or that a court considering any issue would not hold
otherwise. Moreover, no opinion is rendered with respect to the effect, if any,
that pending or future legislation may have on any of the foregoing matters.
This opinion is based on various statutory provisions, regulations
promulgated thereunder, and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters as of and effective
on the date hereof, any one or more of which are subject to change either
prospectively or retroactively.
<PAGE>
This opinion is rendered for the benefit of Brock, its stockholders and
Key Production, and is not to be used, circulated or otherwise referred to in
connection with any transaction other than those contemplated by the Merger
Agreement and the Merger.
We consent to this opinion as an exhibit to the Registration Statement on
Form S-4, of which the Proxy Statement forms a part, and to the reference to us
in the Registration Statement under the caption "Certain Federal Income Tax
Consequences."
Sincerely,
/s/ Jones, Walker, Waechter,
Poitevent, Carrere & Denegre, L.L.P.
JONES, WALKER, WAECHTER, POITEVENT,
CARRERE & DENEGRE, L.L.P.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 24, 1995
included in Key Production Company, Inc.'s Form 10-K for the year ended
December 31, 1994 and to all references to our Firm included by reference in
this registration statement. We also consent to the incorporation of this Joint
Proxy Statement/Prospectus into the company's previously filed Prospectus
forming a part of Key Production Company, Inc.'s Registration Statement on Form
S-8, Registration No. 33-62355.
/s/ Arthur Andersen LLP
Denver, Colorado
February 12, 1996
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (S-4) and related Prospectus of Key Production
Company, Inc. and Joint Proxy Statement of Key Production Company, Inc. and
Brock Exploration Corporation and to the incorporation by reference therein of
our report dated March 1, 1995, with respect to the consolidated financial
statements of Brock Exploration Corporation included in its Annual Report (Form
10-K) for the year ended December 31, 1994, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New Orleans, Louisiana
February 12, 1996
<PAGE>
Exhibit 23.5
Stephens Inc. Consent
The undersigned hereby consents to the inclusion of its opinion as an
exhibit to the Registration Statement on Form S-4 of Key Production Company,
Inc. and to the references to the undersigned and the summarization of such
opinion in the Registration Statement.
February 12, 1996
STEPHENS INC.
By /s/ Eugene B. Shepherd, Jr.
Eugene B. Shepherd, Jr.,
Vice President
<PAGE>
[LETTERHEAD OF RYDER SCOTT COMPANY/PETROLEUM ENGINEERS APPEARS HERE]
Exhibit 23.6
RYDER SCOTT COMPANY CONSENT
We consent to the description of our report dated January 1, 1995, in the
Annual Report on Form 10-K of Brock Exploration Corporation for the year ended
December 31, 1994 which is incorporated by reference in the Proxy Statement of
Brock Exploration Corporation.
/s/ RYDER SCOTT COMPANY
/s/ PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
HOUSTON, TEXAS
February 12, 1996
<PAGE>
Exhibit 23.7
Consent of Ryder Scott Company Petroleum Engineers
We consent to the description of our report dated January 1, 1995, in the
Annual Report on Form 10-K of Key Production Company, Inc. for the year ended
December 31, 1994 which is incorporated by reference in the Registration
Statement on Form S-4 and Proxy Statement of Key Production Company, Inc. for
the registration of 2,800,000 shares of its common stock.
/s/ RYDER SCOTT COMPANY PETROLEUM ENGINEERS
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
February 12, 1996
<PAGE>
PROXY
KEY PRODUCTION COMPANY, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints F.H. Merelli, Monroe W. Robertson and Cathy L.
Anderson as Proxies, each with the power to appoint his or her substitute, and
authorizes them to represent and to vote upon the matters described in the
accompanying Joint Proxy Statement/Prospectus at the special meeting of
stockholders to be held March 28, 1996, or any adjournment thereof, all the
shares of common stock of Key Production Company, Inc. held of record by the
undersigned on February 9, 1996, as designated below. Receipt of a copy of the
Notice and Joint Proxy Statement/Prospectus is hereby acknowledged. The Board
of Directors recommends a vote "FOR" the proposal to issue shares.
1. Approval of the issuance and reservation for issuance by Key Production
Company, Inc. of shares of its common stock pursuant to the Agreement and
Plan of Merger among Key Production Company, Inc., Key Acquisition One,
Inc. and Brock Exploration Corporation.
[_] FOR [_] AGAINST [_] ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This proxy, when properly executed, will be voted in the manner directed by the
undersigned. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE
ISSUANCE OF SHARES AND IN THE DISCRETION OF THE PROXIES WITH RESPECT TO OTHER
BUSINESS.
(Sign on reverse side)
<PAGE>
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. If acting as attorney, executor, trustee or in any
other representative capacity, please sign name and give your full title. When
shares are held by a corporation, partnership or other entity, a duly
authorized individual must sign on its behalf and give title.
Dated: _______________________
______________________________
Signature
______________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD USING
THE ENCLOSED ENVELOPE.
<PAGE>
PROXY
BROCK EXPLORATION CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Lawrence E. Brock and Kenneth J. Stucke as
Proxies, each with the power to appoint his substitute, and authorizes them to
represent and to vote upon the matters described in the accompanying Joint
Proxy Statement/Prospectus at the special meeting of stockholders to be held
March 28, 1996, or any adjournment thereof, all the shares of common stock of
Brock Exploration Corporation held of record by the undersigned on February 9,
1996, as designated below. Receipt of a copy of the Notice and Joint Proxy
Statement/Prospectus is hereby acknowledged. The Board of Directors recommends
a vote "FOR" the proposal to approve and adopt the Merger Agreement.
1. Approval and adoption of the Agreement and Plan of Merger dated December
21, 1995, among Key Production Company, Inc., Key Acquisition One, Inc.
and Brock Exploration Corporation.
[_] FOR [_] AGAINST [_] ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This proxy, when properly executed, will be voted in the manner directed by the
undersigned. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND IN THE DISCRETION OF THE
PROXIES WITH RESPECT TO OTHER BUSINESS.
(Sign on reverse side)
<PAGE>
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. If acting as attorney, executor, trustee or in any
other representative capacity, please sign name and give your full title. When
shares are held by a corporation, partnership or other entity, a duly
authorized individual must sign on its behalf and give title.
Dated: _______________________
______________________________
Signature
______________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD USING
THE ENCLOSED ENVELOPE.
