CONTOUR ENERGY CO, S-4, 2000-05-18

CONTOUR ENERGY CO
S-4, 2000-05-18
NATURAL GAS TRANSMISSION

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 2000

REGISTRATION STATEMENT NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------

CONTOUR ENERGY CO.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 1311 76-0447267
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(Address, including ZIP Code, and telephone number, including area code, of
registrants' principal executive offices)
---------------------

RICK G. LESTER
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
601 JEFFERSON, SUITE 1100
HOUSTON, TEXAS 77002
(713) 652-5200
(Name, address, including ZIP Code, and telephone number, including area code,
of agent for service)

Copy to:

CHARLES H. STILL
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77010-3095
(713) 651-5151
---------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement and following receipt of the written consents required to make the
reclassification described herein effective.

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value.......... 1,365,173 shares $.25 $341,293.25 --
- ----------------------------------------------------------------------------------------------------------------------
$3.50 Redeemable Cash Equivalent
Preferred Stock, $1.50 par value.... 1,365,173 shares $3.50 $4,778,105.50 --
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Total........................ -- -- $5,119,398.75 $1,352.00
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</TABLE>

(1) Based on the maximum number of shares of Common Stock, $.10 par value
("Common Stock"), and $3.50 Redeemable Cash Equivalent Preferred Stock,
$1.50 par value ("Cash Equivalent Preferred Stock"), to be issued pursuant
to a proposed reclassification of each outstanding share of $2.625
Convertible Exchangeable Preferred Stock, $1.50 par value.

(2) Pursuant to Rule 457(f)(1), (f)(2), (f)(3) and (c) of the Securities Act of
1933, as amended, and solely for the purpose of calculating the registration
fee, the proposed maximum offering price is based upon the last trade price
of the Existing Preferred Stock on the OTC Bulletin Board on May 15, 2000
($3.75 per share), less the cash to be paid by the Registrant in connection
with the transaction ($3.50 per share), and with respect to the Cash
Equivalent Preferred Stock, its cash value of $3.50 per share for which it
will be immediately redeemable on issue.

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.
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<PAGE> 2

PROSPECTUS, CONSENT SOLICITATION
STATEMENT AND INFORMATION STATEMENT

CONTOUR ENERGY CO.

CONSENT SOLICITATION TO RECLASSIFY 1,365,173 SHARES OF $2.625 CONVERTIBLE
EXCHANGEABLE PREFERRED STOCK INTO 1,365,173 SHARES OF COMMON STOCK AND
1,365,173 SHARES OF $3.50 REDEEMABLE CASH EQUIVALENT PREFERRED STOCK, WHICH
WILL BE IMMEDIATELY REDEEMED UPON ISSUE FOR CASH AT A REDEMPTION PRICE OF
$3.50 PER SHARE

This document serves three purposes. It is

- the Prospectus of Contour Energy Co. relating to shares of our Common
Stock ("Common Stock") and $3.50 Redeemable Cash Equivalent Preferred
Stock ("Cash Equivalent Preferred Stock") to be issued pursuant to a
proposed Reclassification of our $2.625 Convertible Exchangeable
Preferred Stock ("Existing Preferred Stock"),

- the Consent Solicitation Statement to be used in soliciting consents to
the proposed Reclassification from Existing Preferred Stockholders and

- an Information Statement for holders of Common Stock informing them of
the proposed Reclassification. WE ARE NOT SOLICITING THE CONSENTS OF
HOLDERS OF COMMON STOCK AND REQUEST THAT COMMON STOCKHOLDERS NOT SEND
CONSENTS. THIS STATEMENT IS FOR INFORMATIONAL PURPOSES ONLY FOR HOLDERS
OF COMMON STOCK.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 11.

THE RECLASSIFICATION

WHAT EXISTING PREFERRED STOCKHOLDERS WILL GIVE UP

Each Share of $2.625 Convertible Exchangeable Preferred Stock, including all
accumulated and unpaid dividends

WHAT EXISTING PREFERRED STOCKHOLDERS WILL RECEIVE

One share of Common Stock; and

One Share of Cash Equivalent Preferred Stock, which will be immediately redeemed
upon issue for cash at a redemption price of $3.50 per share.

TO CONSENT TO THE RECLASSIFICATION, COMPLETE AND SIGN THE ACCOMPANYING FORM
OF CONSENT AND FORWARD IT TO THE CONSENT SOLICITATION AGENT TOGETHER WITH ANY
OTHER DOCUMENTS REQUIRED BY THE INSTRUCTIONS TO THE CONSENT.

Our Common Stock and Preferred Stock are traded on the OTC Bulletin Board
under the symbols CONCC.OB and CONCP.OB. The Cash Equivalent Preferred Stock to
be issued upon the Reclassification will be redeemed for cash immediately upon
issue and will not be traded on any market.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this Prospectus, Consent Solicitation Statement and
Information Statement. Any representation to the contrary is a criminal offense.

We are first mailing this document on or about May , 2000, to all holders
of record of our Preferred Stock and Common Stock as of the close of business on
May 17, 2000.

The date of this Prospectus, Consent Solicitation Statement and Information
Statement is May , 2000.
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<S> <C>
SUMMARY OF TERMS OF THE RECLASSIFICATION.................... 1
STATEMENT SUMMARY........................................... 2
CAUTION AS TO FORWARD-LOOKING STATEMENTS.................... 12
RISK FACTORS................................................ 12
Risk Factors for All Securityholders...................... 12
Risk Factors for Holders of Existing Preferred Stock...... 13
Risk Factors for Holders of Common Stock.................. 15
CAPITALIZATION.............................................. 16
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...... 17
SELECTED CONSOLIDATED FINANCIAL INFORMATION................. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 23
THE RECLASSIFICATION........................................ 33
Background................................................ 33
Purposes and Effects of the Reclassification.............. 34
Conditions to the Reclassification........................ 34
CONSENT SOLICITATION PROPOSAL............................... 35
The Reclassification...................................... 35
Conditions to Effectiveness............................... 36
TRADING AND MARKET PRICES................................... 37
BUSINESS AND PROPERTIES..................................... 38
1999 and 2000 Business Developments....................... 38
Company History........................................... 39
Operations and Properties................................. 40
Marketing of Natural Gas and Crude Oil.................... 45
Hedging Activities........................................ 46
Competition............................................... 46
Title to Properties....................................... 46
Employees................................................. 46
Regulation................................................ 47
Legal Proceedings......................................... 49
MANAGEMENT.................................................. 50
Directors................................................. 50
Executive Officers........................................ 51
Executive Compensation.................................... 51
Option Grants in 1999..................................... 52
Compensation of Directors................................. 52
Employment Agreements..................................... 52
SECURITY OWNERSHIP.......................................... 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 54
DESCRIPTION OF CAPITAL STOCK................................ 54
Common Stock.............................................. 54
Existing Preferred Stock.................................. 55
Cash Equivalent Preferred Stock........................... 56
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................... 57
CERTAIN BANKRUPTCY AND INSOLVENCY CONSIDERATIONS............ 59
</TABLE>

i
<PAGE> 4
<TABLE>
<S> <C>
LEGAL OPINIONS.............................................. 60
EXPERTS..................................................... 60
GENERAL INFORMATION CONCERNING CONSENTS..................... 61
Solicitation of Consents.................................. 61
Record Date............................................... 61
No Dissenters' Rights or Appraisal Rights................. 61
Voting Rights............................................. 61
Revocation of Consent..................................... 61
Expenses of Solicitation.................................. 61
WHERE YOU CAN FIND MORE INFORMATION......................... 62
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>

Appendix A -- The Reclassification Amendment
Appendix B -- Article 4 of current Certificate of Incorporation
Appendix C -- Certificate of Designation of Existing Preferred Stock

ii
<PAGE> 5

SUMMARY OF TERMS OF THE RECLASSIFICATION

WHAT EXISTING PREFERRED STOCKHOLDERS WILL GIVE UP

Each Share of $2.625 Convertible Exchangeable Preferred Stock, including all
accumulated and unpaid dividends
WHAT EXISTING PREFERRED STOCKHOLDERS WILL RECEIVE

One share of Common Stock; and

One Share of Cash Equivalent Preferred Stock, which will be immediately redeemed
upon issue for cash at a redemption price of $3.50 per share.

- - The holders of two-thirds of our Existing Preferred Stock must sign and return
the enclosed Form of Consent approving the Reclassification for it to be
effective. We are not soliciting Consents from Common Stockholders.

- - The Reclassification becomes effective and the Consent Solicitation expires
upon the later to occur of (a) 20 business days from the date of this
Statement and (b) the date, if any, on which we have received Consents of the
holders of two-thirds of the outstanding shares of Existing Preferred Stock.

- - No Consent will be effective unless, within 60 days of the date of the
earliest Consent we receive, we receive the Consents of the holders of
two-thirds of the outstanding shares of Existing Preferred Stock. Accordingly,
the Consent Solicitation for the Reclassification will terminate without
approval if we have not received the requisite Consents by that date. We have
no plans to extend the Consent Solicitation beyond that date.

- - No dissenters' rights or appraisal rights exist with respect to the
Reclassification.

- - Upon approval of the Reclassification by the requisite stockholder action, we
will distribute Letters of Transmittal pursuant to which you may exchange your
Existing Preferred Stock certificates for Common Stock certificates and cash
from the immediate redemption of the Cash Equivalent Preferred Stock.

- - For additional information on the Reclassification, see "The
Reclassification", "Consent Solicitation Proposal" and "General Information
Concerning Consents".

1
<PAGE> 6

STATEMENT SUMMARY

The following is a summary of certain information contained in this
Prospectus, Consent Solicitation Statement and Information Statement (this
"Statement") and is qualified in its entirety by the more detailed information,
consolidated financial statements, including the notes thereto (the "Financial
Statements"), and pro forma information contained elsewhere in this Statement,
all of which you should review carefully.

EXPLANATION OF THE TRANSACTION

We propose to reclassify (the "Reclassification") our outstanding shares of
Existing Preferred Stock into shares of Common Stock and Cash Equivalent
Preferred Stock. If we receive consents from the holders of two-thirds of the
outstanding Existing Preferred Stock, each outstanding share of Existing
Preferred Stock (including all accumulated and unpaid dividends) will be
reclassified into one share of Common Stock and one share of Cash Equivalent
Preferred Stock. Immediately after the effectiveness of the Reclassification,
each share of Cash Equivalent Preferred Stock will be mandatorily and
automatically redeemed for $3.50 in cash. Certificates for shares of Cash
Equivalent Preferred Stock will not be issued. At May 1, 2000, accumulated and
unpaid dividends on the Existing Preferred Stock (for the ten previous quarters)
aggregated $9.0 million ($6.5625 per share).

Over the past six months, the closing market price per share of the
Existing Preferred Stock has ranged from $1.75 to $4.25, with an average closing
price of $2.88, while the closing market price per share of the Common Stock has
ranged from $0.38 to $1.88, with an average closing price of $0.97. See "Trading
and Market Prices". Based on these market prices, the $3.50 in cash to be paid
on redemption of each share of Cash Equivalent Preferred and the share of Common
Stock to be issued for each share of Existing Preferred Stock represent a market
premium to holders of Existing Preferred Stock.

The Reclassification proposal requires the approval of the holders of
two-thirds of the outstanding shares of our Existing Preferred Stock, voting as
a class, and, separately, of the holders of a majority of our Common Stock and
Existing Preferred Stock voting together as a single class. Two holders of our
Common Stock, Contour Production Company L.L.C. and John F. Bookout, holding
together a majority of the total combined voting power of the Common Stock and
Existing Preferred Stock, have indicated their intention to consent to the
Reclassification. If these two holders of Common Stock vote in favor of the
Reclassification, and the Reclassification is approved by the holders of
two-thirds of the Existing Preferred Stock, the Reclassification will be
approved. We are not soliciting consents from other holders of Common Stock, as
their votes are not necessary for approval.

THE COMPANY

We incorporated in Delaware in 1994 under the name Kelley Oil & Gas
Corporation and changed our name to Contour Energy Co. in July 1999. We are
engaged in the acquisition, exploration, development and production of oil and
natural gas. Our strategy is to increase reserves, production and cash flows in
a cost efficient manner through strategic domestic acquisitions and a program of
balanced development and exploration activities. Our executive offices are
located at 601 Jefferson Street, Suite 1100, Houston, Texas 77002, and our
telephone number is (713) 652-5200.

BACKGROUND OF THE RECLASSIFICATION

Our operations over the past two years have not generated sufficient cash
to pay dividends on our Existing Preferred Stock. We have relied, in part, on
cash from the sale of some of our assets to meet our other cash requirements,
including debt service obligations. At present, we are current in payment of all
of our debt obligations, including our long-term debt issued under indentures
and our trade accounts payable. Given current market conditions and operating
performance, we believe we will be able to continue to service our debt
obligations for the foreseeable future, but we do not foresee the ability to pay
past accumulated and unpaid dividends or future dividends on our Existing
Preferred Stock.

2
<PAGE> 7

For a variety of reasons, including a high level of debt in relation to our
assets and cash flows, we believe that we must seek additional sources of equity
or pursue strategic alternatives. With our Existing Preferred Stock outstanding
and accumulated and unpaid dividends continuing to increase quarter by quarter,
we do not believe that we have the flexibility to pursue these two courses.
First, potential new equity sources are not likely to invest new cash equity
into the Company that is junior to the claim on cash of the Company represented
by our Existing Preferred Stock, the terms of which prohibit us from issuing
preferred stock senior to it. Secondly, we believe that other strategic
alternatives (which might include a combination or other transactions with
industry companies) are closed to us given the large dollar amount of our
Existing Preferred Stock's accumulated and unpaid dividends and liquidation and
redemption amounts. Of course, there is no assurance that we would be able to
achieve financing from new equity or accomplish a strategic transaction in any
event, but we have determined that, in light of the need for flexibility to
consider alternatives, it is desirable to reclassify our Existing Preferred
Stock into Common Stock and cash. This Reclassification would give holders of
our Existing Preferred Stock an immediate cash return (although far short of its
liquidation or redemption value) as well as an opportunity to participate in any
possible future upside our Common Stockholders might have.

Former holders of our Existing Preferred Stock will own approximately 9.4%
of our Common Stock after the Reclassification. The Reclassification will have
the effect of eliminating $9.0 million in accumulated but unpaid dividends on
our Existing Preferred Stock, will reduce possible future cash flow obligations
with respect to our Existing Preferred Stock for dividends or liquidation or
redemption amounts and will improve our attractiveness to new investors and
allow us to pursue other strategic alternatives. We have, at present, no plans
for any additional financing, equity or debt, and no plans for a strategic
transaction with another company, but believe we need the flexibility to quickly
and opportunistically pursue any such possibilities that may present themselves.

As further background for you on the Reclassification, we have considered
the current and historical market prices of our Common Stock and our Existing
Preferred Stock, the lack of liquidity of our Existing Preferred Stock, the
relatively greater liquidity of our Common Stock (although it is also somewhat
illiquid), the right of holders of Existing Preferred Stock to convert each
share into .347 shares of Common Stock, and discussions with one unrelated
holder of our Existing Preferred Stock (the largest record holder, owning
approximately 12% of the outstanding shares).

Based on all the foregoing considerations, we are proposing the
reclassification of our Existing Preferred Stock into an aggregate of 1,365,173
shares of our Common Stock and 1,365,173 shares of our Cash Equivalent Preferred
Stock. The Cash Equivalent Preferred Stock would, immediately upon effectiveness
of the Reclassification, be mandatorily and automatically redeemed by us for
cash at a price of $3.50 per share (an aggregate of approximately $4.8 million).
The cash portion of the Reclassification represents a premium to recent closing
market prices for Existing Preferred Stock, and the reclassification of each
share of Existing Preferred Stock into one share of Common Stock represents a
premium of 2.9 times the present conversion ratio. We believe this consideration
to be fair consideration to the holders of our Existing Preferred Stock under
current circumstances, but, of course, each holder of our Existing Preferred
Stock must decide for itself whether to grant or withhold its Consent.

We will not obtain any financing in connection with the Reclassification.
We have adequate cash on hand to fund the amounts payable pursuant to the
Reclassification and are permitted by the terms of our debt securities to make
such payments. We do not believe that the use of such cash will impair or impede
our operations in other respects.

If we are not able to secure new sources of equity, enter into a strategic
transaction or otherwise improve our longer term outlook through successful
drilling activities, we may be unable to continue to meet our debt service
obligations over the longer term and could be forced to seek protection under
the U.S. bankruptcy laws. If this were to happen, the holders of our Existing
Preferred Stock, as well as holders of our Common Stock, might receive nothing
or only nominal amounts in return for their holdings. (The Reclassification does
not, of course, assure our ability to avoid such circumstances.)

3
<PAGE> 8

For the foregoing reasons our Board of Directors has approved the proposal
made by this Statement as being in the best interests of our Company.

PURPOSES AND EFFECTS OF THE RECLASSIFICATION

The primary purposes of the Reclassification are to eliminate the senior
and preferred claim on our equity of the Existing Preferred Stock, to increase
our Common Stock equity capital, to provide flexibility for future equity
financings or strategic transactions and to allow our holders of Existing
Preferred Stock to realize immediate value for their shares higher than recent
market prices.

As a result of the Reclassification, the number of shares of Common Stock
outstanding will increase from 13,211,449 (based on shares outstanding on the
Record Date) to 14,576,622. All amounts in our accounts attributable to Existing
Preferred Stock, including accumulated and unpaid dividends of $9.0 million will
be eliminated and our cash will decrease by approximately $5.0 million
(including expected costs of the transaction). Because the Existing Preferred
Stock will be eliminated by the Reclassification, the existing right of such
holders to elect two directors to our Board of Directors will be extinguished.

CONDITIONS TO THE RECLASSIFICATION AND CONSENT REQUIREMENTS

The Reclassification proposal requires

- the approval of the holders of a majority of our outstanding shares of
Common Stock and Existing Preferred Stock voting together as a single
class pursuant to which each share thereof has one vote, and

- the approval of the holders of two-thirds of our outstanding shares of
Existing Preferred Stock, voting as a separate class pursuant to which
each share thereof has one vote.

Each share of Existing Preferred Stock is entitled to one vote per share
pursuant to the Consent Solicitation. Holders of such shares as of May 17, 2000
(the "Record Date") are entitled to consent. As of such date there were
1,365,173 shares of Existing Preferred Stock outstanding and entitled to consent
to the Reclassification. On such date there were 13,211,449 shares of Common
Stock outstanding. We are not soliciting consents of Common Stockholders because
holders of a majority of the Common Stock have indicated their intention to give
their consents to the Reclassification.

MARKET PRICE INFORMATION

Our Common Stock is quoted on the OTC Bulletin Board under the symbol
CONCC.OB. The last trade price for our Common Stock, on the OTC Bulletin Board
on May 15, 2000, was $1.38 per share. The Existing Preferred Stock is quoted on
the OTC Bulletin Board under the symbol CONCP.OB. The last trade price for our
Existing Preferred Stock on the OTC Bulletin Board on May 15, 2000 was $3.75 per
share.

CERTAIN RISK FACTORS

Investment in the Common Stock issuable in the Reclassification involves a
high degree of risk. See "Risk Factors" for a description of various risk
factors.

PROCEDURES

Holders of Existing Preferred Stock electing to consent to the
Reclassification must sign and date the form of Consent accompanying this
Statement in accordance with the instructions contained therein and forward it
to the Solicitation Agent at its address shown on the back cover of this
Statement or request a broker or bank to effect the transaction for such
holders. Existing Preferred Stockholders whose shares are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee are urged
to contact such registered holder promptly if they wish to give their Consents.
4
<PAGE> 9

WITHDRAWAL RIGHTS

Consents may be withdrawn by the person entitled to give such Consent at
any time before the effective date of the Reclassification (which will not be
earlier than [20 business days from the date of this Statement], 2000) by any
written form sent to the Consent Solicitation Agent stating that a Consent is no
longer effective.

CONSENT SOLICITATION AGENT AND INFORMATION AGENT

The solicitation agent in connection with the Consent Solicitation and in
connection with the Reclassification is D. F. King & Co., 77 Water Street, New
York, New York 10005, (800) 628-8532 or (212) 269-5550 (banks and brokers).

FEDERAL INCOME TAX CONSEQUENCES

For a discussion of certain federal income tax considerations that may be
applicable to you and relating to the Reclassification, see "Certain Federal
Income Tax Considerations".

NO APPRAISAL RIGHTS

No dissenters' rights or appraisal rights are available to you or any other
of our stockholders with respect to any aspect of the Reclassification.

NO REGULATORY APPROVALS

We are not aware of any regulatory approvals necessary to complete the
Reclassification.

COMPARISON OF EXISTING PREFERRED STOCK AND COMMON STOCK

The following is a comparison of the principal features of our Existing
Preferred Stock and our Common Stock. These comparisons are summaries and do not
purport to be complete. The documents governing the rights of holders of
Existing Preferred Stock and Common Stock are included in Appendices B and C.
Because the Cash Equivalent Preferred Stock will be outstanding only for an
instant after the Reclassification and will be immediately redeemed upon the
effectiveness of the Reclassification for cash at a price of $3.50 per share,
its features are not compared. Certificates for Existing Preferred Stock will,
after the effective date of the Reclassification, represent the right to receive
such cash as well as certificates for the appropriate number of shares of Common
Stock, subject only to the completion and delivery by holders of Existing
Preferred Stock of a Letter of Transmittal accompanied by certificates for the
Existing Preferred Stock.

<TABLE>
<CAPTION>
EXISTING PREFERRED STOCK COMMON STOCK
--------------------------------- ---------------------------------
<S> <C> <C>
Dividends................... Cumulative annual dividends of Dividends, when and as declared
$2.625 per share, payable on by the Board of Directors, but
February 1, May 1, August 1 and only out of funds legally
November 1 of each year ($9.0 available therefor, subject to
million in arrears at May 1, the rights of the holders of
2000), but only when, as and if shares ranking prior to Common
declared by the Board of Stock as to dividends and
Directors out of funds legally distributions. Ranks junior to
available therefor. Ranks senior the Existing Preferred Stock as
to the Common Stock as to to dividends. Under our
dividends. indentures, we are effectively
prohibited from paying cash
dividends on the Common Stock.
</TABLE>

5
<PAGE> 10

<TABLE>
<CAPTION>
EXISTING PREFERRED STOCK COMMON STOCK
--------------------------------- ---------------------------------
<S> <C> <C>
Rights on Failure to Pay
Dividends................. If we fail to pay dividends on None.
the Existing Preferred Stock for
at least six quarters (whether or
not consecutive), the holders of
the Existing Preferred Stock,
voting together as a single
class, have the right to elect
two additional members of the
Board of Directors. As of May 1,
2000, we had omitted dividends on
the Existing Preferred Stock for
a total of 10 quarters. While
such right exists, to date such
right to elect two directors has
not been exercised.
Liquidation Rights.......... Liquidation preference of $25 per After the amounts payable upon
share, plus accumulated and liquidation on any outstanding
unpaid dividends, before any preferred stock (currently only
distribution of assets is made to the Existing Preferred Stock)
holders of Common Stock. If have been paid, our remaining net
assets available for distribution assets, if any, would be
are insufficient to pay the full distributable pro rata to the
liquidation preference, the holders of Common Stock.
holders of such shares are
entitled to share ratably in any
distribution.
Voting Rights............... One vote per share, voting One vote per share for all
together as a single class with purposes.
the holders of shares of Common
Stock, on all matters on which
the shares of Common Stock may
vote, including elections of
directors.
Holders of two-thirds of the
outstanding shares, voting as a
separate class, are required,
among other matters: (i) to
authorize or increase the
authorized amount of any
additional class of stock ranking
prior or senior to the Existing
Preferred Stock, or (ii) to
amend, alter or repeal any
provisions of our Certificate of
Incorporation (including any
reclassification of such shares)
or By-laws so as to affect the
rights of the Existing Preferred
Stock in any respect adverse to
the holders thereof.
</TABLE>

6
<PAGE> 11

<TABLE>
<CAPTION>
EXISTING PREFERRED STOCK COMMON STOCK
--------------------------------- ---------------------------------
<S> <C> <C>
Optional Redemption......... At our option, on a pro rata None.
basis, currently* at $25.79 per
share plus accumulated and unpaid
dividends (totaling $6.5625 per
share at May 1, 2000), but only
out of funds legally available
therefor. Also, at our option, we
can issue 10 1/2% Convertible
Subordinated Debentures due 2004
in exchange for shares of
Existing Preferred Stock at a
rate of $1,000 principal amount
of Debentures for each forty
shares of Existing Preferred
Stock.
Mandatory Redemption or
Offer to Purchase......... None. None.

Conversion.................. Convertible, at the option of the None.
holder, into .347 shares of
Common Stock for each share of
Existing Preferred Stock, subject
to adjustment. In the event of
certain fundamental changes or a
change of control, the conversion
ratio would, for a 45-day period,
be adjusted to .625 shares of
Common Stock for each share of
Existing Preferred Stock, subject
to adjustment.
Stock Exchange Listing...... None. Traded on the OTC Bulletin None. Traded on the OTC Bulletin
Board. Board.
</TABLE>

- ---------------

* Redemption price reduces pursuant to a scale to $25 by 2004.

7
<PAGE> 12

SUMMARY FINANCIAL INFORMATION

The following tables present summary historical consolidated financial data
and unaudited pro forma consolidated financial data for the Company to give
effect to the Reclassification. The historical financial information for the
years ended December 31, 1997, 1998 and 1999 and the three months ended March
31, 1999 is derived from our audited Financial Statements. The historical
financial information for the three months ended March 31, 2000 is derived from
our unaudited Financial Statements. The impact of the acquisition of the SCANA
Petroleum Resources, Inc. properties is reflected in the summary financial data
as of December 1, 1997. The historical financial information for the year ended
December 31, 1999 gives effect to the impact of the sale of properties to
Phillips, the Subordinated Repurchase, the repayment of all borrowings
outstanding under our revolving credit facility, our repurchase of $35 million
stated principal amount of our outstanding 14% Senior Secured Notes, the
exchange of 368,633 shares of our preferred stock for 5,529,495 shares of our
common stock and the reverse 1 for 10 common stock split. "Subordinated
Repurchase" means our purchase of an aggregate of approximately $46.1 million
aggregate principal amount of our 7 7/8% Convertible Subordinated Notes due 1999
and our 8 1/2% Convertible Subordinated Debentures due 2000 at a purchase price
of $590 per $1,000 principal amount pursuant to an Offer to Purchase dated April
19, 1999, as amended. The unaudited pro forma data are derived from the
Unaudited Pro Forma Consolidated Financial Information included elsewhere in
this Registration Statement. The unaudited pro forma income statement data give
effect to the Reclassification as if it occurred on January 1, 1999. The
unaudited pro forma balance sheet data as of March 31, 2000 give effect to the
Reclassification as if it occurred on March 31, 2000. The pro forma financial
information presented below is unaudited and is not necessarily indicative of
financial results that would have occurred had the Reclassification occurred on
January 1, 1999 and March 31, 2000, and should not be viewed as indicative of
operations in future periods. This information should be read in conjunction
with "Unaudited Pro Forma Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Financial Statements included elsewhere in this document.

8
<PAGE> 13

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------- ------------------------------
1997 1998 1999 1999 1999 2000 2000
--------- -------- -------- --------- -------- ------- ---------
PRO FORMA PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues.......... $ 75,864 $ 79,150 $ 54,107 $ 54,107 $ 15,507 $15,227 $15,227
Interest and other income..... 274 505 1,974 1,735 161 313 253
Gain on sale of
properties(1)............... -- -- 25,863 25,863 -- 3,361 3,361
--------- -------- -------- -------- -------- ------- -------
Total revenues....... 76,138 79,655 81,944 81,705 15,668 18,901 18,841
--------- -------- -------- -------- -------- ------- -------
Production expenses........... 10,955 19,878 15,541 15,541 5,284 2,855 2,855
Exploration expenses.......... 5,433 12,034 5,736 5,736 1,370 2,321 2,321
General and administrative
expenses.................... 6,875 7,077 7,463 7,463 1,374 1,630 1,630
Interest and other debt
expenses.................... 25,071 33,333 38,002 38,002 8,666 8,809 8,809
Depreciation, depletion and
amortization................ 25,853 38,602 35,986 35,986 9,960 8,023 8,023
Impairment of oil and gas
properties(2)............... -- 25,738 -- -- -- -- --
--------- -------- -------- -------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item........................ 1,951 (57,007) (20,784) (21,023) (10,986) (4,737) (4,797)
--------- -------- -------- -------- -------- ------- -------
Extraordinary gain(3)......... -- -- 11,051 11,051 -- -- --
--------- -------- -------- -------- -------- ------- -------
Net income (loss).... $ 1,951 $(57,007) $ (9,733) $ (9,972) $(10,986) $(4,737) $(4,797)
========= ======== ======== ======== ======== ======= =======
Basic and diluted loss per
common share before
extraordinary item(4)(5).... $ (.26) $ (4.89) $ (1.94) $ (1.38) $ (0.96) $ (0.43) $ (0.33)
========= ======== ======== ======== ======== ======= =======
Basic and diluted loss per
common share(4)(5).......... $ (.26) $ (4.89) $ (1.08) $ (0.60) $ (0.96) $ (0.43) $ (0.33)
========= ======== ======== ======== ======== ======= =======
Weighted average common shares
outstanding(5).............. 10,076 12,578 12,871 14,236 12,602 13,212 14,577
========= ======== ======== ======== ======== ======= =======
OTHER DATA:
Ratio of Earnings to Fixed
Charges(6).................. 1.1x N/A N/A N/A N/A N/A N/A
EBITDAX(7).................... $ 58,308 $ 52,700 $ 33,675 $ 33,436 $ 9,010 $11,055 $10,995
CASH FLOW DATA:
Cash provided by (used in)
operating activities........ $ 39,604 $ 22,302 $ (8,471) N/A $ 4,098 $ 8,195 N/A
Cash (used in) provided by
investing activities........ (164,275) (39,216) 67,338 N/A (5,823) 15,230 N/A
Cash provided by (used in)
financing activities........ 120,763 25,187 (56,932) N/A -- (244) N/A
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 33,551 $ 28,773
Property and equipment, net................................. 143,543 143,543
Long term debt, excluding current maturities................ 246,993 246,993
Stockholders' deficit....................................... (81,040) (85,818)
Total assets................................................ 209,330 204,552
</TABLE>

9
<PAGE> 14

- ---------------

(1) Reflects the gain on the sale of properties to Phillips in May 1999, and the
gain on the sale of a portion of the volumetric overriding royalty interest
in March 2000. See "Business and Properties", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements."

(2) Reflects noncash impairment charges against the carrying value of proved and
unproved properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes to Consolidated Financial
Statements.

(3) The 1999 extraordinary gain of $11.1 million was related to debt repurchases
and refinancings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Notes to Consolidated Financial
Statements."

(4) Accumulated dividends on our Existing Preferred Stock are deducted from "Net
Income (Loss) Before Extraordinary Item" and "Net Income (Loss)" in
calculating related per common share amounts, whether or not declared, and
amounted to $4.6 million, $4.6 million and $4.2 million for the years ended
December 31, 1997, 1998 and 1999, respectively, and $1.1 million and $0.9
million for the quarters ended March 31, 1999 and 2000, respectively. On a
pro forma basis, the undeclared dividends have been added back to net loss
along with the excess value attributable to the consideration issued (cash
consideration and common stock issued in excess of preferred stock
conversion requirements) in order to derive net loss applicable to common
shareholders and basic and diluted loss per common share.

(5) Reflects, for all periods, our 1 for 10 reverse stock split in 1999. See
Note 5 in Notes to Consolidated Financial Statements.

(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income from continuing operations, excluding interest
income of $0.2 million, $0.2 million, $1.6 million, $0.2 million, and $0.3
million for the years ended December 31, 1997, 1998 and 1999, and the three
months ended March 31, 1999 and 2000, respectively, and $1.4 million and
$0.3 million for the year ended December 31, 1999, Pro forma and the three
months ended March 31, 2000, Pro forma, respectively, plus fixed charges.
Fixed charges consist of interest expense and other debt expenses and
interest within rental expense of $0.3 million, $0.2 million, $0.2 million,
$0.1 million and $0.1 million for the years ended December 31, 1997, 1998
and 1999 and the three months ended March 31, 1999 and 2000, respectively,
and $0.2 million and $0.1 million for the year ended December 31, 1999, Pro
forma and the three months ended March 31, 2000, Pro forma, respectively.
For the years ended December 31, 1998 and 1999, and the three months ended
March 31, 1999 and 2000, earnings were insufficient to cover fixed charges
by $57.4 million, $22.5 million, $11.3 million and $5.1 million,
respectively, and $22.6 million and $5.1 million for the year ended December
31, 1999, Pro forma and the three months ended March 31, 2000, Pro forma,
respectively.

(7) EBITDAX is calculated as income (loss) before extraordinary items, excluding
interest expense and other debt expenses, income taxes, exploration
expenses, restructuring expense, depletion, depreciation, amortization, gain
on sale of oil and gas properties, impairment of oil and gas properties and
other non-cash charges of $0.6 million in 1999. EBITDAX is not a measure of
performance or cash flow as determined by generally accepted accounting
principles ("GAAP"). Certain items excluded from EBITDAX are significant
components in understanding and assessing a company's financial performance,
such as a company's cost of capital and tax structure, as well as historic
costs of depreciable assets, none of which are components of EBITDAX. The
Company uses EBITDAX as a measure to gauge its operating performance, with
emphasis placed on revenue and cost trends, changes from period to period
and variances from management forecasts. We have excluded restructuring
expenses, which management believes are nonrecurring, and excluded
exploration expenses, which management believes provides more consistency in
measuring operating performance of comparable companies, regardless whether
such companies use full cost accounting (and therefore do not expense
exploration costs) or successful efforts accounting. In conjunction with
EBITDAX, we use GAAP and other operating measures to evaluate our operating
performance. We do not, and did not during any of the periods presented
above, use any single specific measure, including EBITDAX, to evaluate or
modify the conduct of its operations. In addition, EBITDAX is a measure used
by certain investors in evaluating the operating performance of comparable
oil and gas exploration and production companies. EBITDAX should not be
considered as an alternative to, or more meaningful than, net income or cash
flow as determined in accordance with GAAP or as an indicator of our
operating performance or liquidity. EBITDAX is not necessarily comparable to
a similarly titled measure of another company.

10
<PAGE> 15

SUMMARY RESERVE AND OPERATING DATA

The following table shows certain summary reserve and operating data for
each of the three years in the period ended December 31, 1999. Our estimated net
proved reserves for each of the three years in the period ended December 31,
1999 are based on a reserve report prepared by H.J. Gruy & Associates, Inc.
("Gruy"), independent petroleum engineers. Detailed additional information
concerning our oil and natural gas production activities is contained in the
Supplementary Information in Note 12 to the Notes to Financial Statements.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
ESTIMATED PROVED RESERVES (PERIOD-END):
Oil and other liquid hydrocarbons (Mbbls).................. 2,953 5,294 7,623
Natural gas (Mmcf)......................................... 354,867 283,559 158,700
Natural gas equivalent (Mmcfe)............................. 372,585 315,323 204,438
% proved developed....................................... 73% 64% 68%
PV-10 Value(1) (in thousands).............................. $378,811 $234,284 $241,091
PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls).................. 226 375 367
Natural gas (Mmcf)......................................... 30,202 35,557 22,392
Natural gas equivalent (Mmcfe)............................. 31,558 37,807 24,594
AVERAGE SALES PRICE PER UNIT(2):
Oil and other liquid hydrocarbons (per Bbl)................ $ 19.34 $ 13.09 $ 16.77
Natural gas (per Mcf)...................................... 2.27 2.09 2.12
Natural gas equivalent (per Mcfe).......................... 2.31 2.10 2.18
AVERAGE PRODUCTION EXPENSES (PER MCFE)..................... $ 0.35 $ 0.53 $ 0.64
GENERAL AND ADMINISTRATIVE EXPENSES (PER MCFE)............. $ 0.22 $ 0.19 $ 0.30
</TABLE>

- ---------------

(1) PV-10 Value is not necessarily indicative of actual future cash flows. See
"Risk Factors -- Uncertainties in Estimating Reserves and Future Net Cash
Flows".

(2) Includes the effects of hedging activities.

11
<PAGE> 16

CAUTION AS TO FORWARD-LOOKING STATEMENTS

Statements contained in this document and other materials we have filed or
will file with the Securities and Exchange Commission (as well as information
included in oral or other written statements made or to be made by us or our
representatives) that are forward-looking in nature and relate to matters such
as our anticipated operating and financial performance, our business prospects
and our developments and results are "foward-looking statements". Our actual
performance, prospects, developments and results may differ materially from any
or all anticipated results due to economic conditions and other risks,
uncertainties and circumstances partly or totally outside our control, including
rates of inflation, crude oil and natural gas prices, uncertainty of reserve
estimates, rates and timing of future production of oil and gas, exploratory and
development activities, acquisition risks and activities, changes in the level
and timing of future costs and expenses related to drilling and operating
activities and those risks described under "Risk Factors" below.

Words such as "anticipated", "expect", "estimate", "project" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements include the risks described in "Risk Factors".

RISK FACTORS

The reclassification of shares of Existing Preferred Stock into shares of
Common Stock is subject to a number of risks, including those discussed below.
Before deciding whether to consent to the Reclassification, you should carefully
consider the following risk factors, together with all other information set
forth in this Statement. Risk factors have been listed in three sections: (i)
risk factors for all securityholders; (ii) risk factors relevant especially for
holders of Existing Preferred Stock; and (iii) risk factors for holders of
Common Stock.

RISK FACTORS FOR ALL SECURITYHOLDERS

We caution you that the following identified risks could affect our actual
results in the future in addition to those routine risks for exploration and
production companies similar to us generally discussed in "Estimated Proved
Reserves -- Uncertainties in Estimating Reserves and Future Net Cash Flows"
included elsewhere in this Statement.

Substantial Leverage; Inability to Service Debt; Lack of Liquidity;
Substantial Capital Requirements. As of March 31, 2000, we had approximately
$268.2 million principal amount of debt outstanding ($255.4 million recorded on
the balance sheet), a stockholders' deficit in our accounts of approximately
$81.0 million and cash on hand of approximately $33.6 million (excluding
restricted cash of $7.5 million). We made payments of principal and interest on
our debt of approximately $24.2 million in April 2000. We have interest payments
of $15.4 million due in October 2000. We have significant debt outstanding
relative to our asset base and cash flows. Our ability to service our debt is
primarily dependent on our operational cash flows which are, in turn, dependent
on various factors outside of our control, including the oil and natural gas
commodity markets, and upon our exploration and development drilling success. To
the extent such factors negatively affect cash flows, our ability to meet our
debt obligations may be impaired. Therefore, there can be no assurance that we
will have sufficient funds to meet all of our future debt obligations.

Historically, we have financed our operational activities (including
acquisitions, exploration and development of oil and natural gas properties)
primarily through the issuance of debt and equity securities, through various
credit facilities and with internally generated funds. We currently have plans
for capital expenditures to continue our operational activities. It is
ordinarily necessary for us, and for any exploration and production company, to
continue making capital expenditures for drilling activities to replace produced
reserves. However, we do not currently have ready access to additional sources
of financing for such activities outside of internally generated cash flows and
proceeds from asset sales. Therefore, no assurance can be given that we will
have adequate funds available to fund our operational activities and carry out
our

12
<PAGE> 17

strategy. While one purpose of the Reclassification is to improve our access to
possible additional equity financing, there is no assurance that we will be able
to obtain any such financing, particularly in light of our significant
outstanding debt and because of credit risk. Because we have virtually no assets
that are not mortgaged to existing debtholders, we also are effectively
precluded from additional debt financings, and, in any event, the terms of our
current debt instruments severely restrict our ability to incur additional debt
and also significantly restrict our ability to engage in asset sales without
applying at least some of the proceeds to the repayment of existing debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".

Depletion of Reserves; Necessity of Successful Exploration and
Development. Producing oil and natural gas reservoirs generally are
characterized by declining production rates that vary depending upon reservoir
characteristics and other factors. Our future oil and natural gas reserves and
production, and, therefore, our cash flow and income, are highly dependent upon
our success in efficiently developing our current reserves and acquiring
additional reserves that are economically recoverable.

Volatility of Crude Oil and Natural Gas. Our financial results are affected
significantly by the prices received for our crude oil and natural gas
production. Historically, including in recent years, the markets for crude oil
and natural gas have been volatile. The prices we receive for our crude oil and
natural gas production and the levels of our production are subject to
government regulation, legislation and policies. Our future financial condition
and results of operations will depend, in part, upon the prices received for our
oil and natural gas production, as well as the costs of finding, acquiring,
developing and producing reserves.

Operating Hazards, Risks of Transportation Access and Uninsured Risks. Oil
and gas drilling activities are subject to numerous risks, many of which are
uninsurable, including the risk that no commercially viable oil or natural gas
production will be obtained. Many of such risks are beyond our control. Our
decisions to purchase, explore or develop a prospect or property will depend in
part on our evaluation of data obtained through geophysical and geological
analyses, production data and engineering studies, the results of which are
often inconclusive or subject to varying interpretations. The cost of drilling,
completing and operating wells is often uncertain, and overruns in budgeted
expenditures are common risks that can make a particular project uneconomical.
Technical problems encountered in actual drilling, completion and workover
activities can delay such activities and add substantial costs to a project.
Further, drilling may be curtailed, delayed or canceled as a result of many
factors, including title problems, weather conditions, compliance with
government permitting requirements, shortages of or delays in obtaining
equipment, reductions in product prices and limitations in the market for
products.

The availability of a ready market for our oil and natural gas production
also depends on a number of factors, including the demand for and supply of oil
and natural gas and the proximity of reserves to pipelines or trucking and
terminal facilities. Natural gas wells may be partially or totally shut in for
lack of a market or because of inadequacy or unavailability of natural gas
pipeline or gathering system capacity.

Our oil and natural gas business also is subject to all of the operating
risks associated with the drilling for and production of oil and natural gas,
including, but not limited to, uncontrollable flows of oil, natural gas, brine
or well fluids into the environment (including groundwater and shoreline
contamination), blowouts, cratering, mechanical difficulties, fires, explosions,
pollution and other risks, any of which could result in substantial losses to
us. Although we maintain insurance at levels that we believe are consistent with
industry practices, we are not fully insured against all risks. Losses and
liabilities arising from uninsured and underinsured events could have a material
adverse effect on our financial condition and operations.

RISK FACTORS FOR HOLDERS OF EXISTING PREFERRED STOCK

No Assurance That Reclassification Will Keep Us out of Insolvency
Proceedings. The purpose of the Reclassification is to improve our financial
condition by eliminating the senior claim on our assets of Existing Preferred
Stock, including eliminating approximately $9.0 million in accumulated but
unpaid dividends on the Existing Preferred Stock, and thereby to provide
flexibility for possible future equity
13
<PAGE> 18

financings or a strategic transaction such as a combination with another
company. However, the Reclassification will not assure that we will be able to
avoid liquidation or bankruptcy, or proceedings relating thereto, in the future.
Even if the Reclassification is approved, we will still be dependent upon our
cash flow from operations to service our existing debt and may, over the longer
term, be unable to do so without additional outside financing or a strategic
combination, neither of which may be available to us. In the event of bankruptcy
or insolvency proceedings, our Common Stockholders, including holders of
Existing Preferred Stock who become Common Stockholders pursuant to the
Reclassification, may receive nothing or nominal amounts.

Loss of Preference. At present, our Existing Preferred Stock ranks senior
to our Common Stock upon our liquidation or bankruptcy. Following the
Reclassification, in the event of our liquidation or bankruptcy, former holders
of Existing Preferred Stock will share pro rata with other holders of Common
Stock in any distributions to be made to such holders and, therefore, may
recover in such events less than they would have recovered absent the
Reclassification. In addition, following the Reclassification and the
extinguishing of the Existing Preferred Stock, we would have the right under our
charter to establish one or more new series of preferred stock with a
liquidation preference over the Common Stock. Although we currently have no
intention of establishing such a series of preferred stock, our Charter would
allow us to do so without stockholder consent. Moreover, there is no assurance
that any amount would be available for holders of Common Stock in the event of
our liquidation, dissolution or reorganization under bankruptcy proceedings.

Elimination of Accumulated and Unpaid Dividends. At May 1, 2000, there were
approximately $9.0 million ($6.5625 per share) of accumulated and unpaid
dividends on the Existing Preferred Stock. As a result of the Reclassification,
all accumulated and unpaid dividends on the Existing Preferred Stock will be
extinguished. The $3.50 per share in cash to be received by holders of Existing
Preferred Stock is much less than the aggregate liquidation or redemption prices
for such stock, which would include accumulated but unpaid dividends thereon.

Elimination of Right to Elect Two Directors. Under the terms of the
Existing Preferred Stock, the holders thereof as a single class currently have
the right to elect two additional members to the Board of Directors due to the
Company's failure to pay dividends for six or more quarters. If the
Reclassification is consummated, the Existing Preferred Stock will cease to
exist and, therefore, its holders will no longer have a right to elect two
additional directors as a class.

Fraudulent Transfer. Under relevant federal and state fraudulent transfer
or conveyance statutes, generally stated, if a court found that we, in
effectively paying cash to the holders of Existing Preferred Stock pursuant to
the Reclassification by issuing and immediately redeeming the Cash Equivalent
Preferred Stock, (i) intended to hinder, delay or defraud creditors or (ii) were
insolvent or rendered insolvent by reason of such payment, (iii) were engaged in
a business or transaction for which our remaining assets constituted
unreasonably small capital or (iv) intended to incur, or believed that we would
incur, debts beyond our ability to pay as they matured, the court could take
action that could include, under certain circumstances, invalidating such
payment or recovering all or part of it from the former holders of Existing
Preferred Stock or otherwise unwind the Reclassification. We do not believe that
such payment would constitute a fraudulent transfer on any of the grounds
described above, but there is no assurance that a court would agree with such
belief or that an action seeking such result will not be brought. The measure of
insolvency for purposes of the foregoing tests for a fraudulent transfer will
vary depending upon the law of the jurisdiction which is being applied, and the
Company is unable to determine which law might apply at the present time.

Possible Taxable Income Recognition from Reclassification. Holders of
Existing Preferred Stock may be required to recognize gain from the
Reclassification up to the amount of the $3.50 cash received pursuant to the
Reclassification. For a detailed discussion, see "Certain United States Federal
Income Tax Consequences".

14
<PAGE> 19

RISK FACTORS FOR HOLDERS OF COMMON STOCK

Issuance of Additional Shares of Common Stock. If the Reclassification is
completed, 1,365,173 additional shares of Common Stock will be issued to holders
of Existing Preferred Stock, representing approximately 9.4% of the Common Stock
to be outstanding after the Reclassification. Accordingly, approval of the
Reclassification will result in dilution to holders of Common Stock.

Lack of Dividends. No dividends have ever been declared on our Common
Stock, and we do not anticipate paying dividends on our Common Stock in the
foreseeable future. Under the term of our debt securities, we are at present
prohibited from paying dividends on our Common Stock. For information on market
prices of our Common Stock, see "Trading and Market Prices".

15
<PAGE> 20

CAPITALIZATION

The following table shows our consolidated capitalization as of March 31,
2000 on a historical basis and pro forma to give effect to the Reclassification
as if it had occurred on March 31, 2000. You should read this in conjunction
with "Unaudited Pro Forma Consolidated Financial Information", "Selected
Consolidated Financial Information", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
included elsewhere in this document.

<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 33,551 $ 28,773
======== ========
Long-term debt, including current maturities:
14% Senior Secured Notes due 2003......................... $ 95,620 $ 95,620
10 3/8% Senior Subordinated Notes due 2006................ 151,373 151,373
8 1/2% Convertible Subordinated Debentures due 2000(1).... 8,406 8,406
-------- --------
Total long-term debt, including current
maturities...................................... 255,399 255,399
-------- --------
Stockholders' deficit....................................... (81,040) (85,818)
-------- --------
Total capitalization.............................. $174,359 $169,581
======== ========
</TABLE>

- ---------------

(1) Matured and paid in April 2000.

16
<PAGE> 21

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated balance sheet as of March
31, 2000 gives effect to the Reclassification as if had occurred on March 31,
2000. The following statements of operations for the year ended December 31,
1999, and for the three months ended March 31, 2000 give effect to the
Reclassification as if had occurred on January 1, 1999. The unaudited pro forma
consolidated balance sheet as of March 31, 2000 and statements of operations for
the year ended December 31, 1999 and for the three months ended March 31, 2000
are based upon the Financial Statements included elsewhere in this document.

The pro forma adjustments are based on available information and certain
assumptions that we believe are reasonable. The pro forma financial information
does not purport to represent what our results of operations or financial
position would actually have been had the Reclassification in fact occurred on
the assumed dates. In addition, the unaudited pro forma consolidated financial
statements are not necessarily indicative of the results of our future
operations and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this document.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Cash and cash equivalents........................... $ 33,551 $(4,778)(a) $ 28,773
Accounts receivable................................. 23,119 -- 23,119
Accounts receivable -- drilling programs............ 233 -- 233
Prepaid expenses and other current assets........... 892 -- 892
--------- ------- ---------
Total current assets...................... 57,795 (4,778) 53,017
--------- ------- ---------
Unproved properties................................. 21,914 -- 21,914
Properties subject to amortization.................. 403,135 -- 403,135
Pipelines and other transportation assets, at
cost.............................................. 1,582 -- 1,582
Furniture, fixtures and equipment................... 3,596 -- 3,596
--------- ------- ---------
Total property and equipment.............. 430,227 -- 430,227
Less: Accumulated depreciation, depletion and
amortization...................................... (286,684) (286,684)
--------- ---------
Total property and equipment, net......... 143,543 -- 143,543
Restricted cash..................................... 7,500 -- 7,500
Other non-current assets, net....................... 492 -- 492
--------- ------- ---------
Total assets.............................. $ 209,330 $(4,778) $ 204,552
========= ======= =========
Accounts payable and accrued expenses............... $ 34,808 $ -- $ 34,808
Accounts payable -- drilling programs............... 163 -- 163
Current portion of long-term debt................... 8,406 -- 8,406
--------- ------- ---------
Total current liabilities................. 43,377 -- 43,377
--------- ------- ---------
10 3/8% Senior Subordinated Notes................... 151,373 -- 151,373
14% Senior Secured Notes............................ 95,620 -- 95,620
--------- ------- ---------
Total long-term debt...................... 246,993 -- 246,993
--------- ------- ---------
Total liabilities......................... 290,370 -- 290,370
--------- ------- ---------
Commitments and Contingencies
Preferred stock..................................... 2,048 (2,048)(a) --
Common stock........................................ 1,321 137(a) 1,458
Additional paid-in capital.......................... 301,513 (2,867)(a) 298,646
Accumulated deficit................................. (385,922) -- (385,922)
--------- ------- ---------
Total Stockholders' deficit............... (81,040) (4,778) (85,818)
--------- ------- ---------
Total liabilities and stockholders'
deficit................................. $ 209,330 $(4,778) $ 204,552
========= ======= =========
</TABLE>

- ---------------

(a) Reflects the Reclassification of 1,365,173 shares of Existing Preferred
Stock into 1,365,173 shares of Common Stock and 1,365,173 shares of Cash
Equivalent Preferred Stock and the immediate and mandatory redemption of
each share of Cash Equivalent Preferred Stock at $3.50 per share in cash.

17
<PAGE> 22

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Oil and gas revenues...................................... $ 54,107 $ -- $ 54,107
Interest and other income................................. 1,974 (239)(a) 1,735
Gain on sale of oil and gas properties.................... 25,863 -- 25,863
-------- ------ --------
Total revenues.................................. 81,944 (239) 81,705
-------- ------ --------
Production expenses....................................... 15,541 -- 15,541
Exploration expenses...................................... 5,736 -- 5,736
General and administrative expenses....................... 7,463 -- 7,463
Interest and other debt expenses.......................... 38,002 -- 38,002
Depreciation, depletion and amortization.................. 35,986 -- 35,986
-------- ------ --------
Total expenses.................................. 102,728 -- 102,728
-------- ------ --------
Loss before income taxes.................................. (20,784) (239) (21,023)
Income taxes.............................................. -- -- --
-------- ------ --------
Net loss(d)............................................... (20,784) (239) (21,023)
Preferred stock dividends................................. (4,207) 5,633(b) 1,426
-------- ------ --------
Net loss applicable to common stock....................... $(24,991) $5,394 $(19,597)
======== ====== ========
Basic and diluted loss per common share................... (1.08) (0.60)
Weighted average common shares outstanding................ 12,871 1,365(c) 14,236
</TABLE>

- ---------------

(a) To record a reduction in interest income as a result of a use of cash for
the Reclassification.

(b) Reflects adjustment to Existing Preferred Stock dividends due to the
Reclassification.

<TABLE>
<S> <C>
Reduction of dividends...................................... $4,207
Excess carrying value....................................... 1,426
------
Increase in earnings available to common stockholders....... $5,633
======
</TABLE>

(d) Net loss excludes an extraordinary gain, net of $11.1 million related to the
repurchase of $46.1 million of the outstanding amount of the 7 7/8%
Convertible Subordinated Notes and the 8 1/2% Convertible Subordinated
Debentures, the repurchase of $35 million of 14% Senior Secured Notes at
104% of the stated principal amount, and the repayment of the Credit
Facility.

18
<PAGE> 23

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Oil and gas revenues........................................ $15,227 $ -- $15,227
Interest and other income................................... 313 (60)(a) 253
Gain on sale of oil and gas properties...................... 3,361 -- 3,361
------- ------ -------
Total revenues.................................... 18,901 (60) 18,841
------- ------ -------
Production expenses......................................... 2,855 -- 2,855
Exploration expenses........................................ 2,321 -- 2,321
General and administrative expenses......................... 1,630 -- 1,630
Interest and other debt expenses............................ 8,809 -- 8,809
Depreciation, depletion and amortization.................... 8,023 -- 8,023
------- ------ -------
Total expenses.................................... 23,638 -- 23,638
------- ------ -------
Loss before income taxes.................................... (4,737) (60) (4,797)
Income taxes................................................ -- -- --
------- ------ -------
Net loss.................................................... (4,737) (60) (4,797)
Preferred stock dividends................................... (895) 895(b) --
------- ------ -------
Net loss applicable to common stock......................... $(5,632) $ 835 $(4,797)
======= ====== =======
Basic and diluted loss per common share..................... $ (0.43) $ (0.33)
Weighted average common shares outstanding.................. 13,212 1,365(c) 14,577
</TABLE>

- ---------------

(a) To record a reduction in interest income as a result of a use of cash for
the Reclassification.

(b) Reflects adjustment to Existing Preferred Stock dividends due to the
Reclassification.

19
<PAGE> 24

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following tables present selected financial data derived from our
audited and unaudited Financial Statements. The historical financial information
for the year ended December 31, 1995 reflects the Consolidation (as defined
herein) in February 1995. Before the Consolidation, the financial information
reflects Kelley Oil's historical results of operations. The impact of the
acquisition of the SCANA Petroleum Resources, Inc. properties is reflected in
the selected financial data as of December 1, 1997. The historical financial
information for the year ended December 31, 1999 gives effect to the impact of
the sale of properties to Phillips, the Subordinated Repurchase, the repayment
of all borrowings outstanding under our revolving credit facility, our
repurchase of $35 million stated principal amount of the outstanding 14% Senior
Secured Notes, the exchange of 368,633 shares of our preferred stock for
5,529,495 shares of our common stock and the reverse 1 for 10 common stock
split. "Subordinated Repurchase" means our purchase of an aggregate of
approximately $46.1 million aggregate principal amount of our 7 7/8% Convertible
Subordinated Notes due 1999 and our 8 1/2% Convertible Subordinated Debentures
due 2000 at a purchase price of $590 per $1,000 principal amount pursuant to an
Offer to Purchase dated April 19, 1999, as amended. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Financial Statements included
elsewhere in this document.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------ ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- -------- --------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues....................... $ 36,998 $ 60,854 $ 75,864 $ 79,150 $ 54,107 $ 15,507 $ 15,227
Interest and other income.................. 1,763 1,429 274 505 1,974 161 313
Gain on sale of oil and gas
properties(1)............................ -- -- -- -- 25,863 3,361
--------- -------- --------- -------- -------- -------- --------
Total revenues..................... 38,761 62,283 76,138 79,655 81,944 15,668 18,901
--------- -------- --------- -------- -------- -------- --------
Production expenses........................ 10,835 10,709 10,955 19,878 15,541 5,284 2,855
Exploration expenses....................... 23,387 5,438 5,433 12,034 5,736 1,370 2,321
General and administrative expenses........ 7,030 8,953 6,875 7,077 7,463 1,374 1,630
Interest and other debt expenses........... 21,956 24,401 25,071 33,333 38,002 8,666 8,809
Restructuring expenses..................... 1,115 4,276 -- -- -- -- --
Depreciation, depletion and amortization... 35,591 20,440 25,853 38,602 35,986 9,960 8,023
Impairment of oil and gas properties(2).... 150,138 -- -- 25,738 -- -- --
--------- -------- --------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item....................... (211,291) (11,934) 1,951 (57,007) (20,784) (10,986) (4,737)
Provision for taxes........................ -- -- -- -- -- -- --
--------- -------- --------- -------- -------- -------- --------
Net income (loss) before extraordinary
item..................................... (211,291) (11,934) 1,951 (57,007) (20,784) (10,986) (4,737)
Extraordinary (loss) gain(3)............... -- (17,030) -- -- 11,051 -- --
--------- -------- --------- -------- -------- -------- --------
Net income (loss).......................... $(211,291) $(28,964) $ 1,951 $(57,007) $ (9,733) $(10,986) $ (4,737)
========= ======== ========= ======== ======== ======== ========
Basic and diluted loss per common share
before extraordinary item(4)(5).......... $ (53.11) $ (1.83) $ (.26) $ (4.89) $ (1.94) $ (0.96) $ (0.43)
Basic and diluted loss per common
share(4)(5).............................. $ (53.11) $ (3.72) $ (.26) $ (4.89) $ (1.08) $ (0.96) $ (0.43)
Weighted average common shares
outstanding(5)........................... 4,103 9,011 10,076 12,578 12,871 12,602 13,212
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(6)...... N/A N/A 1.1x N/A N/A N/A N/A
EBITDAX(7)................................. $ 20,896 $ 42,621 $ 58,308 $ 52,700 $ 33,675 $ 9,010 $ 11,055
Capital expenditures, including
acquisitions............................. 52,240 59,195 164,275 56,579 15,204 5,823 4,601
CASH FLOW DATA:
Net cash (used in) provided by operating
activities............................... $ (1,806) $ 9,262 $ 39,604 $ 22,302 $ (8,471) $ 4,098 $ 8,195
Net cash (used in) provided by investing
activities............................... (43,224) (53,392) (164,275) (39,216) 67,338 (5,823) 15,230
Net cash provided by (used in) financing
activities............................... 42,114 41,848 120,763 25,187 (56,932) -- (244)
</TABLE>

20
<PAGE> 25

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 6,352 $ 4,070 $ 162 $ 8,435 $ 10,370 $ 33,551
Property and equipment, net................ 128,642 158,468 293,613 256,455 165,756 143,543
Long term debt, excluding current
maturities............................... 164,980 184,253 286,183 287,500 246,165 246,993
Stockholders' deficit...................... (45,568) (30,535) (5,621) (66,939) (76,303) (81,040)
Total assets............................... 151,342 189,227 322,602 286,197 203,782 209,330
</TABLE>

- ---------------

(3) The extraordinary loss in 1996 was incurred in connection with the
refinancing of the 13 1/2% Senior Notes and represents the excess of the
aggregate purchase price of the 13 1/2% Senior Notes (including consent
payments) over their carrying value as of the date the refinancing was
consummated. The 1999 extraordinary gain of $11.1 million was related to
debt repurchases and refinancings. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements".

(4) Dividends on our cumulative preferred stock are deducted from "Net Income
(Loss) Before Extraordinary Item" and "Net Income (Loss)" in calculating
related per share amounts, whether or not declared, and amounted to $6.6
million, $4.6 million, $4.6 million, $4.6 million and $4.2 million for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999, respectively and
$1.1 million and $0.9 million for the three months ended March 31, 1999 and
2000, respectively.

(5) Reflects, for all periods, our 1 for 10 reverse stock split in 1999. See
Note 5 in Notes to Consolidated Financial Statements.

(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income from continuing operations, excluding interest
income of $0.6 million, $0.9 million, $0.2 million, $0.2 million, $1.6
million, $0.2 million, and $0.3 million for the years ended December 31,
1995, 1996, 1997, 1998 and 1999, and the three months ended March 31, 1999
and 2000, respectively, plus fixed charges. Fixed charges consist of
interest expense and other debt expenses and interest within rental expense
of $0.6 million, $0.4 million, $0.3 million, $0.2 million, $0.2 million,
$0.1 million and $0.1 million for the years ended December 31, 1995, 1996,
1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000,
respectively. For the years ended December 31, 1995, 1996, 1998 and 1999,
and the three months ended March 31, 1999 and 2000, earnings were
insufficient to cover fixed charges by $211.9 million, $12.8 million, $57.4
million, $22.5 million, $11.3 million and $5.1 million, respectively.

21
<PAGE> 26

expenses, which management believes provides more consistency in measuring
operating performance of comparable companies, regardless of whether such
companies use full cost accounting (and therefore do not expense exploration
costs) or successful efforts accounting. In conjunction with EBITDAX, we use
GAAP and other operating measures to evaluate its operating performance. We
do not, and did not during any of the periods presented above, use any
single specific measure, including EBITDAX, to evaluate or modify the
conduct of its operations. In addition, EBITDAX is a measure used by certain
investors in evaluating the operating performance of comparable oil and gas
exploration and production companies. EBITDAX should not be considered as an
alternative to, or more meaningful than, net income or cash flow as
determined in accordance with GAAP or as an indicator of our operating
performance or liquidity. EBITDAX is not necessarily comparable to a
similarly titled measure of another company.

22
<PAGE> 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the
information contained in our Financial Statements included elsewhere in this
document.

GENERAL

Introduction. We are engaged in oil and natural gas acquisition,
exploration, development and production. Our 1999 operational activities were
focused primarily on exploiting our north Louisiana properties and exploration
activities on our south Louisiana and offshore interests. In 1999, we drilled or
participated in drilling 11 gross (2.69 net) development wells and 3 gross (1.02
net) exploratory wells of which 8 gross (1.72 net) and 3 gross (1.02 net),
respectively, have been completed as producing wells.

General Conditions of the Oil and Natural Gas Industry and Commodity
Prices. The prices of oil and natural gas have improved significantly over the
past several months. However, cash prices and NYMEX based prices for both oil
and natural gas continue to fluctuate significantly on an intra-month,
month-to-month, and future year basis, reflecting the volatility of commodity
prices. We have benefited from these higher prices in the form of increased
operating cash flows and are dependent on such cash flows to fund future
obligations and capital expenditures. However, given the volatility of commodity
prices there can be no assurance that current levels can be sustained (see "Risk
Factors"). A decrease in the current level of commodity prices could have a
materially adverse impact on our results of operations, liquidity, and ability
to meet our future obligations. Additionally, we must provide cash collateral
for any hedges (through swap or other agreements) to cover counter-party risk.
Hence, the volume of oil and/or natural gas production we hedge is severely
limited, thereby reducing our ability to mitigate the impact of volatile
commodity prices.

Hedging Activities. We periodically use forward sales contracts, natural
gas and crude oil price swap agreements, natural gas basis swap agreements and
options to reduce exposure to downward price fluctuations on our natural gas and
crude oil production. We do not engage in speculative transactions. During 1999
and 2000, we used price and basis swap agreements. Price swap agreements
generally provide for us to receive or make counterparty payments on the
differential between a fixed price and a variable indexed price for natural gas
and oil. Basis swap agreements generally provide for us to receive or make
counterparty payments on the differential between a variable indexed price and
the price received from the sale of natural gas production, and are used to
hedge against unfavorable price movements in the relationship between such
variable indexed price and the price received for such production. Gains and
losses we realize from hedging activities are included in oil and gas revenues
and average sales prices in the period that the related production is sold. Our
hedging activities also cover the oil and gas production attributable to the
interest in such production of the public unitholders in our subsidiary
partnerships.

Through natural gas price swap agreements, we hedged approximately 65%, 49%
and 50% of our natural gas production for 1997, 1998 and 1999, respectively, at
average NYMEX quoted prices of $2.35, $2.31 and $2.17, per Mmbtu, respectively,
before transaction and transportation costs. Through crude oil price swap
agreements, we hedged approximately 29% of our crude oil production for 1999 at
an average NYMEX quoted price of $20.00 per bbl, before transaction and
transportation costs. No crude oil was hedged in either 1997 or 1998. Hedging
activities decreased crude oil and natural gas revenues by approximately $4.2
million in 1997 and $0.2 million in 1999, respectively, and increased such
revenues by approximately $3.5 million in 1998 as compared to estimated revenues
had no hedging activities been conducted. For the quarters ended March 31, 1999
and 2000, we hedged approximately 66% and 49% of our natural gas production,
respectively, at average NYMEX quoted prices of $2.27 and $2.48, per Mmbtu,
respectively, before transaction and transportation costs. Through crude oil
price swap agreements, we also hedged approximately 67% of our crude oil
production for the three months ended March 31, 2000 at an average NYMEX quoted
price of $25.09 per bbl, before transaction and transportation costs. No crude
oil was hedged in the three month period ended March 31, 1999. Hedging
activities increased oil and gas revenues by approximately $2.5 million in the
three months ended March 31, 1999, and decreased

23
<PAGE> 28

oil and gas revenues by approximately $0.2 million for the three months ended
March 31, 2000, as compared to estimated revenues had no hedging activities been
conducted.

As of March 31, 2000, 6,420,000 Mmbtus of natural gas production for April
through October 2000 has been hedged by natural gas price swap agreements at an
average NYMEX quoted price of $2.60 per Mmbtu before transaction and
transportation costs. As of March 31, 2000, 107,000 bbls of crude oil production
for April through August 2000 has been hedged by crude oil price swap agreements
at an average NYMEX quoted price of $27.00 per bbl before transaction and
transportation costs. At March 31, 2000, the unrealized loss on the Company's
existing hedging instruments for future production months in 2000 approximated
$1.9 million.

The credit risk exposure from counterparty nonperformance on natural gas
forward sales contracts and derivative financial instruments is generally the
amount of unrealized gains under the contracts. We have not experienced
counterparty nonperformance on these agreements and do not anticipate any in
future periods.

Other Developments. Effective July 30, 1999, we changed our name to Contour
Energy Co. and our NASDAQ ticker symbol to CONCC. Concurrent with the name
change, we established our authorized capital stock at 22 million shares, 20
million of which were designated as common stock and 2 million as preferred
stock, and effected a 1 for 10 reverse stock split, reducing the total
outstanding shares of Common Stock from approximately 126 million to
approximately 12.6 million (without giving effect to the preferred stock
exchange offer described in the following paragraph). On August 30, 1999, at
market close, the Common Stock and Existing Preferred Stock, which traded under
the symbols of CONCC and CONCP, were delisted from the Nasdaq SmallCap Market.
These actions were taken as a result of our failure to meet the requirements for
continued listing on this exchange. On August 31, 1999, at market open, our
stock began trading on the OTC Bulletin Board under the symbols of CONC and
CONCP.

On June 28, 1999, we began an offer to exchange 15 shares of Common Stock
(or 1.5 shares on a post-split basis) for each share of Existing Preferred
Stock. Pursuant to the exchange offer, 368,633 shares of Existing Preferred
Stock were tendered representing approximately 21% of the total Existing
Preferred Stock outstanding. In July 1999, the shares were exchanged for 552,950
shares of newly issued Common Stock (after giving effect to the 1 for 10 reverse
stock split), increasing the outstanding Common Stock to approximately 13.2
million shares. With the exchange, we eliminated dividend arrearages of
approximately $1.5 million.

In March 2000, we sold part of our volumetric overriding royalty interest
("VORI"). The net proceeds from the sale approximated $20 million. Since the
portion of the reserves sold (approximately 16.5 Bcf) includes production
beginning April 1, 2003, near-term cash flows of the company were not impacted.
In the first quarter of 2000, we recognized a gain of $3.4 million related to
this transaction.

24
<PAGE> 29

RESULTS OF OPERATIONS

Quarters Ended March 31, 2000 and 1999.

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
------- -------
<S> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................. 82.8 112.3
Natural gas (Mmcf)........................................ 7,247 4,808
Natural gas equivalent (Mmcfe)............................ 7,744 5,482
AVERAGE SALES PRICE PER UNIT (INCLUDING THE EFFECTS OF
HEDGING):
Oil and other liquid hydrocarbons (per Bbl)............... $11.63 $23.69
Natural gas (per Mcf)..................................... 1.97 2.51
Natural gas equivalent (per Mcfe)......................... 1.97 2.69
COST PER MCFE:
Lifting costs............................................. $ .59 $ .44
Severance and ad valorem taxes............................ .10 .08
General and administrative expenses....................... .18 .30
Depreciation, depletion and amortization (oil and gas
activities)............................................ 1.20 1.44
Interest expense, excluding accretion and amortization.... .96 1.44
</TABLE>

Our oil and gas revenues of $15.2 million for the first quarter of 2000
decreased 2% compared to $15.5 million in the same period of 1999 primarily as a
result of a decrease in gas production (34%) which was related to the sale of
interests in certain north Louisiana fields to Phillips Petroleum Company
("Phillips Transaction") in the second quarter of 1999 (see Liquidity and
Capital Resources). Partially offsetting this gas production decline was higher
oil production (36%) related to increases in offshore oil production, higher gas
prices (27%) and higher oil prices (104%). The first quarter of 2000 includes a
gain of $3.4 million on the sale of a portion of our VORI, (see Liquidity and
Capital Resources).

Interest and other income increased from $0.2 million in the first quarter
of 1999 to $0.3 million in the first quarter of 2000. This increase was due to
higher average cash balances in the current period and a $46,000 gain related to
the partial redemption of the Company's 8 1/2% Convertible Subordinated
Debentures.

Production expenses for the first quarter of 2000 decreased 45% to $2.9
million from $5.3 million in the same period last year, resulting primarily from
the Phillips Transaction and lower workover expenses. Lifting costs (production
expenses less ad valorem and severance taxes) per Mcfe for the first quarter of
2000 decreased 25% to $0.44, when compared to the same period in 1999,
reflecting higher workover expenses in the first quarter of 1999 and an ongoing
cost reduction program on our operated properties.

Exploration expenses totaled $2.3 million in the first quarter of 2000 and
$1.4 million in the corresponding period of 1999, an increase of 64%, due to
higher dry hole expenses and higher unevaluated leasehold abandonment expenses.

General and administrative (G&A) expenses of $1.6 million in the first
quarter of 2000 increased 14% compared to $1.4 million in the corresponding
period last year. Reductions of $0.4 million in G&A expense for allocations to
exploration expense and in overhead recovery masked an overall 8% decline in
total G&A expenses compared to the first quarter of 1999. On a unit basis, G&A
expenses were $0.30 per Mcfe in the first quarter of 2000 compared to $0.18 per
Mcfe in the corresponding quarter of 1999.

Interest and other debt expenses of $8.8 million in the first quarter of
2000 increased 1% from $8.7 million in the same period of 1999. The increase in
interest expense resulted primarily from higher

25
<PAGE> 30

average interest rates during the current period due to the issuance of the 14%
Senior Secured Notes in May 1999. In addition to 2000 cash interest expense of
$7.9 million, we recorded non-cash charges in the first quarter of 2000 of $0.6
million for amortization of debt issuance costs, $0.2 million for accretion of
note discount and $0.1 million for accretion of debt valuation discount.

Depreciation, depletion and amortization (DD&A) expense decreased 20% from
$10.0 million in the first quarter of 1999 to $8.0 million in the current
period, primarily as a result of lower natural gas production related to the
Phillips Transaction, partially offset by $1.3 million of DD&A expense in the
current period related to the Bayou Sauveur field (Bourg wells). This results
from the amortization of the total well costs of both the Bourg no.1 and Bourg
no. 2 wells over the current proved developed reserves in the Bayou Sauveur
field. The units-of-production DD&A rate for oil and gas activities was $1.20
per Mcfe in the first quarter 1999 compared to $1.44 per Mcfe in the current
period. Excluding the impact of the Bayou Sauveur field, the DD&A rate for the
first quarter of 2000 was $1.22 per Mcfe.

We recognized a net loss of $4.7 million in the first quarter of 2000 and a
net loss of $11.0 million in the same period last year. The reasons for the
increase in earnings are described in the foregoing discussion.

The results of operations for the quarter ended March 31, 2000 are not
necessarily indicative of results to be expected for the full year.

Years Ended December 31, 1999 and 1998. Our oil and gas revenues of $54.1
million for 1999 decreased 32% compared to $79.2 million in 1998 primarily as a
result of lower natural gas production (37%). The decrease in gas production is
primarily due to production associated with our interests in the Bryceland, West
Bryceland and Sailes fields in north Louisiana which were sold to Phillips in
the second quarter of 1999. See "Liquidity and Capital Resources" for further
discussion.

Interest and other income increased from $0.5 million in 1998 to $2.0
million in 1999 primarily due to higher cash balances in the current year.

Production expenses for 1999 decreased 22% to $15.5 million from $19.9
million in the prior year, resulting primarily from north Louisiana properties
sold to Phillips in the second quarter of 1999. Lifting costs (production
expenses less ad valorem and severance taxes) were $.54 per Mcfe in 1999
compared to $0.41 per Mcfe in 1998, a 32% increase, reflecting a higher
percentage of offshore properties at higher lifting costs per unit after the
second quarter 1999 sale of north Louisiana properties to Phillips.

Exploration expenses decreased 53% from $12.0 million in 1998 to $5.7
million in 1999 due to decreased dry hole, seismic and unproved property
abandonment expenses in the current year.

General and administrative ("G&A") expenses of $7.5 million included $1.9
million of costs of a non-recurring nature related to professional, consulting
and transaction costs. Ongoing G&A expenses of $5.6 million decreased 21%
compared to $7.1 million in 1998. On a unit of production basis, general and
administrative expenses were $0.30 per Mcfe in 1999 compared to $0.19 per Mcfe
in 1998 reflecting the higher non-recurring professional, consulting and
transaction costs. Excluding the non-recurring costs, G&A expenses were $0.23
per mcfe in 1999.

Interest and other debt expenses of $38.0 million in 1999 increased 14%
from $33.3 million in 1998. The increase in interest expense resulted primarily
from higher average interest rates during the current year. In addition to 1999
cash interest expense of $33.5 million, we recorded non-cash charges in 1999 of
$4.5 million for amortization of debt issuance costs, accretion of note discount
and accretion of debt valuation discount. The 1999 cash interest expense of
$33.5 million includes approximately $2.4 million of interest payments related
to debt that was redeemed in 1999.

DD&A expenses decreased 7% from $38.6 million in 1998 to $36.0 million in
1999, primarily as a result of lower production in 1999 due to the sale of north
Louisiana properties to Phillips partially offset by $6.9 million of DD&A
expense in the current year associated with the Bayou Sauveur field (Harry Bourg
wells). The $6.9 million of DD&A expense results from the amortization of the
total well costs of both the Bourg No. 1 and Bourg No. 2 wells over the current
proved developed reserves in the Bayou
26
<PAGE> 31

Sauveur field. The units-of-production DD&A rate for oil and gas activities was
$1.01 per Mcfe in 1998 compared to $1.43 per Mcfe in 1999. Excluding the impact
of the Bayou Sauveur field, the DD&A rate for 1999 was $1.17 per Mcfe.

In 1998, under Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", and SFAS No. 19, "Financial Accounting and Reporting
by Oil and Gas Producing Activities", we recognized noncash impairment charges
of $25.7 million against the carrying values of its proved and unproved oil and
gas properties, aggregating $21.6 million and $4.1 million, respectively, for
the year ended December 31, 1998 (see "Oil and Gas Properties" in Note 2 to
Consolidated Financial Statements). No impairment was required in 1999.

We recognized a net loss of $(9.7) million in 1999 and a net loss of
$(57.0) million in the prior year. The reasons for the earnings changes are
described in the foregoing discussion.

Years Ended December 31, 1998 and 1997. Our oil and gas revenues of $79.2
million for 1998 increased 4% compared to $75.9 million in 1997 primarily as a
result of an increase in gas production 18%, partially offset by lower oil
prices (32%) and gas prices (8%). The increase in gas production is primarily
due to our Scana Petroleum Resources ("SPR") acquisition and drilling activities
in north Louisiana.

Interest and other income increased from $0.3 million in 1997 to $0.5
million in 1998 primarily due to business interruption insurance proceeds
related to hurricane disruptions on offshore properties.

Production expenses for 1998 increased 81% to $19.9 million from $11.0
million in the prior year, resulting primarily from the SPR properties acquired
during the fourth quarter of 1997 and higher current period workover expenses.
Higher-cost production from the Gulf of Mexico properties acquired in the SPR
acquisition contributed to a 78% increase in lifting costs (production expenses
less ad valorem and severance taxes) per Mcfe to $.41 in 1998 as compared to
$0.23 in 1997.

Exploration expenses increased 122% from $5.4 million in 1997 to $12.0
million in 1998 due to increased dry hole, seismic and unproved property
abandonment expenses and higher overhead allocated to exploration activities.

G&A expenses of $7.1 million in 1998 increased 3% compared to $6.9 million
last year. On a unit of production basis, G&A expenses were $0.19 per Mcfe in
1998 compared to $0.22 per Mcfe in 1997.

Interest and other debt expenses of $33.3 million in 1998 increased 33%
from $25.1 million in 1997. The increase in interest expense resulted primarily
from higher average debt levels during the current period due to increased
borrowings under the Credit Facility and issuance of the Series C Notes. In
addition to its 1998 cash interest expense of $28.1 million, we recorded
non-cash charges in 1998 of $2.2 million for amortization of debt issuance
costs, $1.0 million for accretion of note discount and $2.0 million for
accretion of debt valuation discount.

Depreciation, depletion and amortization ("DD&A") expense increased 49%
from $25.9 million in 1997 to $38.6 million in 1998, as a result of higher 1998
production levels and an increase in the units-of-production DD&A rate for oil
and gas activities from $0.80 per Mcfe in 1997 to $1.01 in 1998.

In 1998, under Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", and SFAS No. 19, "Financial Accounting and Reporting
by Oil and Gas Producing Activities", we recognized noncash impairment charges
of $25.7 million against the carrying values of proved and unproved oil and gas
properties, aggregating $21.6 million and $4.1 million, respectively, for the
year ended December 31, 1998 (see "Oil and Gas Properties" in the "Notes to
Consolidated Financial Statements").

We recognized a net loss of $(57.0) million in 1998 and net income of $2.0
million in the prior year. The reasons for the earnings changes are described in
the foregoing discussion.

27
<PAGE> 32

LIQUIDITY AND CAPITAL RESOURCES

General. We had $268.2 million principal amount of debt outstanding as of
March 31, 2000 ($255.4 million recorded on the balance sheet), requiring
approximately $31.1 million in annual cash interest payments. The remaining
outstanding principal amounts of $8.4 million of our 8 1/2% Convertible
Subordinated Debentures were paid in full at maturity on April 1, 2000. We also
made interest payments totalling $15.8 million in April.

1997 and 1998 Actions. In December 1997, we purchased substantially all of
the assets of SCANA Petroleum Resources for $110 million, which we financed
primarily through borrowings under a credit facility. In May 1998, we issued
$30.0 million of 10 3/8% Senior Subordinated Notes due 2006 in a private
placement, which we exchanged in October 1998 for registered notes that were
substantially the same. We used the proceeds of the offering to repay amounts
under our credit facility. During 1998, the oil and natural gas industry
experienced a worldwide excess of supply over demand, resulting in sharply
reduced prices. As a result, many companies in the industry, including us,
experienced reduced profitability and cash flows, which, in turn, created
significant liquidity problems.

1999 Actions. In 1999, we undertook several strategic actions in response
to the severe downturn in the industry in 1998 caused by low commodity prices
and the closing of the capital markets to smaller oil and gas companies. These
actions, described below, were designed to increase our near-term liquidity,
provide capital for our ongoing capital expenditure programs and establish a
stronger base for future growth.

In April 1999, we entered into an Exploration and Development Agreement
with Phillips Petroleum Company ("Phillips") relating to certain of our
interests in the Bryceland, West Bryceland and Sailes fields in north Louisiana.
Pursuant to the agreement, we (1) received an $83 million cash payment, (2)
retained a 42 Bcf, 8-year volumetric overriding royalty interest (the "VORI")
and a 1% override on the excess of production above such royalty interest and
(3) retained 25% of our working interest in the Cotton Valley formation. In
addition, Phillips, will at its risk and expense, operate, develop, exploit and
explore the properties thereby relieving us of significant operating,
exploration and development costs in the future. The transaction closed on May
17, 1999. We recognized a gain of approximately $25.9 million in 1999 related to
this transaction.

In April 1999, we negotiated a private offering of $135.0 million principal
amount, 14% Senior Secured Notes (the "Notes"). The Notes are secured by a first
lien on substantially all of our proved oil and natural gas properties remaining
after the sale to Phillips and guaranteed by three entities wholly-owned by the
us. In accordance with the Notes indenture, on June 30, 1999, we funded $37.5
million to repurchase $35 million principal amount of the Notes at a repurchase
price equal to 104% of the principal amount, plus accrued and unpaid interest
and commitment fees to the date of the repurchase.

On May 17, 1999, we funded $28.5 million to repurchase $46.1 million of the
outstanding principal amounts of our 7 7/8% Convertible Subordinated Notes due
December 15, 1999 and our 8 1/2% Convertible Subordinated Debentures due April
1, 2000 (collectively, the "Securities") at a price equal to $590 per $1,000
principal amount (not including accrued interest paid of $1.2 million).

In addition, on May 17, 1999 we repaid all borrowings outstanding under our
revolving credit facility of $115.5 million plus accrued interest and terminated
the revolving credit facility and funded cash collateral for a $1.5 million
letter of credit which was subsequently increased to $7.5 million. We used net
proceeds remaining from the transactions for general corporate purposes. In
1999, we recognized an extraordinary gain of $11.1 million related to debt
repurchases and refinancings, comprised of: (i) a net gain on the Securities
tender offer and other debt retirements of $16.0 million, reduced by, (ii) a
$1.4 million premium on the $35 million Notes repurchase and the proportionate
write-off of debt issue costs of $2.4 million and (iii) the write-off of credit
facility debt issue costs of $1.1 million.

In the third and fourth quarters of 1999, we retired the remaining $5.2
million face amount of the 7 7/8% notes. The total principal paid was $4.9
million, which included $3.5 million retired at maturity in

28
<PAGE> 33

December 1999. We also retired $1.0 million face amount of the 8 1/2% debentures
at a cost of $0.9 million. The combination of these retirements resulted in an
extraordinary gain of $0.3 million.

2000 Actions. In March 2000, we sold part of the VORI (the "VORI Sale").
The net proceeds from the sale approximated $19.8 million. Since the portion of
the VORI sold (approximately 16.5 Bcf) represents production commencing April 1,
2003, the VORI Sale will not impact our operating cash flows until 2003. We
recognized a gain of $3.4 million in the first quarter 2000 related to this
transaction. Proceeds from the VORI Sale are included in the Company's cash
balance as of March 31, 2000.

In the first quarter of 2000, we retired an additional $0.3 million face
amount of Securities. The settlement payments included principal amounts of $0.2
million and accrued interest of $7,000. In April 2000, we retired the remaining
principal amount of the Securities at their maturity for $8.4 million and paid
interest of $0.4 million, including accrued interest.

Preferred Stock Dividends. Dividends on our preferred stock accumulate
quarterly at a rate of $0.65625 per share. On April 14, 1998, the Board of
Directors declared a dividend on our preferred stock of $2.625 per share
(approximately $4.6 million), which was paid on April 30, 1998. We have not
declared the quarterly dividends of $0.65625 for ten quarters including May 1,
2000 aggregating approximately $9.0 million. Further dividends are restricted
under our indentures governing our 10 3/8% Senior Subordinated Notes and our 14%
Senior Secured Notes. However, our outstanding preferred stock is cumulative,
requires dividends to accumulate currently at the rate of $3.6 million annually
and carries liquidation preferences over the Common Stock totaling $42.8 million
at March 31, 2000, including such dividend arrearages. Furthermore, since we
have not paid dividends on the preferred stock for a period of ten quarters the
holders of preferred stock, as a group, have the right to elect two additional
directors to our Board of Directors. See "Legal Proceedings".

We have benefited from a general increase in the level of commodity prices
over the past several months. This increase, combined with the actions described
above and the VORI Sale, have provided us with near-term liquidity and capital
for our ongoing operations. However, the commodity markets are volatile and
there is no certainty that current oil and natural gas prices can be sustained
at these levels. In addition, we continue to have significant debt outstanding
relative to our asset base and pay a high portion of our cash flow to service
such debt (see "Capital Resources"). Furthermore, as we do not have a revolving
credit facility, we do not have ready access to incremental sources of capital
to supplement our operational requirements. We believe that we have the ability
for the foreseeable future based on current market conditions and operating
performance, to meet all obligations as they come due and fund our current
capital expenditure program from cash on hand and operational cash flows.
However, because of the combination of the factors described herein (see "Risk
Factors"; "Liquidity"; and "Capital Resources") and the uncertainty of drilling
successes required to sustain or increase operational cash flows, there can be
no assurance that we will be able to fund future obligations.

Liquidity. For the year 1999, net cash used in operating activities, before
working capital adjustments, aggregated $(0.1) million. Funds provided by
investing activities were comprised of proceeds from the sale of north Louisiana
properties to Phillips of $83.2 million and a $6.9 million purchase price
adjustment related to a 1997 acquisition of oil and gas properties partially
offset by capital expenditures of $15.2 million and restricted cash of $7.5
million. Funds used in financing activities were comprised of net credit
facility principal payments of $111.5 million, redemption of a portion of the
Notes for $36.5 million and redemption of subordinated and senior notes of $34.9
million, partially offset by proceeds of $125.9 from the sale of the Notes. Cash
equivalents increased from $8.4 million at December 31, 1998 to $10.4 million as
of December 31, 1999. As of December 31, 1999, we had a working capital deficit
of $3.9 million, compared to a working capital deficit of $37.4 million at the
end of 1998.

For the quarter ended March 31, 2000 net cash provided by operating
activities, before working capital adjustments, aggregated $3.1 million. Funds
provided by investing activities were comprised of proceeds from the sale of oil
and gas properties of $19.8 million, partially offset by capital expenditures of
$4.6 million. Funds used in financing activities of $0.2 million were comprised
of the partial redemption of the Company's 8 1/2% Convertible Subordinated
Debentures. As result of these activities, cash and cash
29
<PAGE> 34

equivalents increased from $10.4 million at December 31, 1999 to $33.6 million
as of March 31, 2000. As of March 31, 2000, we had working capital of $14.4
million, compared to a working capital deficit of $3.9 million at the end of
1999. In April 2000, we expended $24.2 million for principal and interest,
including repayment of the remaining principal of $8.4 million and interest of
$0.4 million on the outstanding 8 1/2% Convertible Subordinated Debentures.

Capital Resources. After we paid all amounts outstanding under the Credit
Facility, the Credit Facility was terminated, and we are not likely to have
access to a revolving credit facility to supplement our cash needs.

The terms of the Notes and subordinated obligations significantly limit our
ability to incur additional funded indebtedness. Accordingly, we anticipate that
we will be required to meet our obligations during the remainder of 2000 from
the net proceeds of the transactions described above, cash on hand and cash
flows from operations. However, if we are unable to pay such obligations, a
default would occur under our indentures. In that event, we may be required to
refinance or restructure all or a portion of our indebtedness, to sell assets,
or become subject to various other creditor rights under the indentures.

The following table sets forth on an unaudited basis net cash provided by
operating activities before working capital adjustments, net cash used in
investing activities, net cash provided by financing activities and EBITDAX.

<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- MARCH 31,
1997 1998 1999 2000
--------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities
before working capital adjustments............... $ 37,534 $ 24,603 $ (101) 3,126
Net cash (used in) provided by investing
activities....................................... (164,275) (39,216) 67,338 15,230
Net cash (used in) provided by financing
activities....................................... 120,763 25,187 (56,932) (244)
EBITDAX(1)......................................... 58,308 52,700 33,675 11,055
</TABLE>

- ---------------

(1) EBITDAX is calculated as net income (loss) before extraordinary items,
excluding interest expense and other debt expenses, income taxes,
exploration expenses, depletion, depreciation, amortization, gain on sale of
oil and gas properties, impairment of oil and gas properties and other
non-cash charges of $0.6 million in 1999. EBITDAX is not a measure of cash
flow as determined by generally accepted accounting principles ("GAAP"). The
Company has included information concerning EBITDAX because EBITDAX is a
measure used by certain investors in determining a company's historical
ability to service its indebtedness. EBITDAX should not be considered as an
alternative to, or more meaningful than, net income or cash flow as
determined in accordance with GAAP as an indicator of the Company's
operating performance or liquidity. EBITDAX is not necessarily comparable to
a similarly titled measure of another company.

30
<PAGE> 35

Capital Commitments. Our 2000 capital expenditure budget provides for us to
spend $15.0 million on development drilling and exploratory activities primarily
in south Louisiana and the shallow waters of the Gulf of Mexico. However, our
ability to fund our 2000 capital expenditure budget will depend on the actual
amount of cash flow from operations and proceeds from oil and gas property
sales.

During 1999, we participated in drilling 14 gross (3.71 net) wells, of
which 11 gross (2.74 net) wells have been completed. We, with our partners,
continue exploration activities in south Louisiana and in the Gulf of Mexico. As
of December 31, 1999, we were participating in the drilling of 1 gross (.50 net)
well which was subsequently completed as a producing well.

In the first three months of 2000, we expended $2.4 million on exploration
and development drilling and participated in drilling 6 gross (1.38 net) wells,
of which 5 gross (1.07 net) wells were completed and 1 gross (0.31 net) well was
dry. As of the end of the quarter, we were participating in the
drilling/completing of 1 gross (0.33 net) well.

Inflation and Changing Prices. Oil and natural gas prices, as with most
commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation. The following table
shows the changes in the average oil and natural gas prices (including the
effects of hedging) we received during the periods indicated.

<TABLE>
<CAPTION>
AVERAGE AVERAGE
OIL PRICE GAS PRICE
($/BBL) ($/MCF)
--------- ---------
<S> <C> <C>
YEAR ENDED:
December 31, 1999........................................... $16.77 $2.12
December 31, 1998........................................... 13.09 2.09
December 31, 1997........................................... 19.34 2.27
</TABLE>

Accounting Pronouncements. In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") which was
amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133 -- an amendment of FASB Statement No. 133." SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000, and establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at its fair value. Depending on the intended use of the
derivative, changes in its fair value will be reported in the period of change
as either a component of earnings or a component of other comprehensive income.
Retroactive application to periods prior to adoption is not allowed. We have not
quantified the impact of adoption on our financial statements.

MARKET RISK

We use our Senior and Subordinated debt instruments to finance a
significant portion of our operations. We are exposed to market risk from
changes in commodity prices. In the normal course of business we enter into
hedging transactions, including forward sales contracts, natural gas and crude
oil price swap agreements, natural gas basis swap agreements and options to
mitigate our exposure to commodity price movements, but not for trading or
speculative purposes. In 1999 and 2000, we used price swap agreements to reduce
exposure to downward price fluctuations for our natural gas and crude oil
production. For debt obligations the table below presents principal cash flows
and weighted average interest rates by year of maturity. For natural gas price
and crude oil price swap agreements, the table presents notional amounts in
Mmbtus and bbls at weighted average prices for contracts in place at March 31,
2000.

31
<PAGE> 36

This information should be read in conjunction with Notes 4 and 10 to the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR OF MATURITY
--------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Debt (in thousands):
14.00% (Maturity)(1)......... $ 4,120 $ 100,720 $ 104,840
8.50% (Maturity)............. $ 8,406 8,406
10.38% (Maturity)............ $ 155,000 155,000
---------- ---------- ---------- ---------- ----------
Total Maturity......... $ 8,406 $ 4,120 $ 100,720 $ 155,000 $ 268,246
========== ========== ========== ========== ==========
Blended weighted average
interest rate................ 8.50% 14.00% 14.00% 10.38%
Commodity price derivatives:
Price swaps:
Notional amounts:
Natural gas (Mmbtus)......... 6,420,000
Weighted average price....... $ 2.60
Fair value at 3/31/00(2).....
Crude oil (bbls)............. 107,000
Weighted average price....... $ 27.00
Fair value at 3/31/00(2).....

<CAPTION>
FAIR VALUE
AT MARCH 31,
2000
--------------
(IN THOUSANDS)
<S> <C>
Fixed Debt (in thousands):
14.00% (Maturity)(1)......... $ 102,743
8.50% (Maturity)............. 8,406
10.38% (Maturity)............ 69,750
----------
Total Maturity......... $ 180,899
==========
Blended weighted average
interest rate................
Commodity price derivatives:
Price swaps:
Notional amounts:
Natural gas (Mmbtus).........
Weighted average price.......
Fair value at 3/31/00(2)..... $ (2,027)
Crude oil (bbls).............
Weighted average price.......
Fair value at 3/31/00(2)..... $ 101
</TABLE>

- ---------------

(1) The 14% notes mature in 2002 and 2003 at premiums ranging from 103% to 105%
of the stated principal amount.

(2) Represents estimated amounts to settle the contracts at March 31, 2000.

32
<PAGE> 37

THE RECLASSIFICATION

BACKGROUND

As further background for you on the Reclassification, we have considered
the current and historical market prices of our Common Stock and our Existing
Preferred Stock, the lack of liquidity of our Existing Preferred Stock, the
relatively greater liquidity of our Common Stock (although it is also somewhat
illiquid), the right of holders of Existing Preferred Stock to convert each
share into .347 shares of Common Stock, and discussions with one unrelated
holder of our Existing Preferred Stock (the largest record holder owning
approximately 12% of the outstanding shares).

Based on all the foregoing considerations, we are proposing the
reclassification of our Existing Preferred Stock into an aggregate of 1,365,173
shares of our Common Stock and 1,365,173 shares of our Cash Equivalent Preferred
Stock. The Cash Equivalent Preferred Stock would, immediately upon effectiveness
of the Reclassification, be mandatorily and automatically redeemed by us for
cash at a price of $3.50 per share (an aggregate of approximately $4.8 million).
Over the past six months, the closing market price per share of the Existing
Preferred Stock has ranged from $1.75 to $4.25, with an average closing price of
$2.88, while the closing market price per share of the Common Stock has ranged
from $0.38 to $1.88, with an average closing price of $0.97. See "Trading and
Market Prices". Based on these market prices, the additional $3.50 in cash to be
paid on redemption of each share of Cash Equivalent Preferred Stock, and the one
share of Common Stock to be received (a premium of 2.9 times the present
conversion ratio), the Reclassification represents a market premium to holders
of Existing Preferred Stock.

33
<PAGE> 38

We believe this consideration to be fair consideration to the holders of our
Existing Preferred Stock under current circumstances, but, of course, each
holder of our Existing Preferred Stock must decide for itself whether to grant
or withhold its Consent.

For the foregoing reasons our Board of Directors has approved the proposal
made by this Statement as being in the best interests of our Company.

PURPOSES AND EFFECTS OF THE RECLASSIFICATION

The Consent Solicitation. The proposal contemplated by the Consent
Solicitation consists of the proposal to approve the Reclassification. The Board
of Directors has proposed that each share of Existing Preferred Stock (including
all accumulated and unpaid dividends) be reclassified into one share of Common
Stock and one share of Cash Equivalent Preferred Stock. At May 1, 2000,
accumulated and unpaid dividends on the Existing Preferred Stock aggregated $9.0
million ($6.5625 per share).

CONDITIONS TO THE RECLASSIFICATION

The Reclassification proposal requires

- the approval of the holders of two-thirds of our outstanding shares of
Existing Preferred Stock, voting as a separate class pursuant to which
each share thereof has one vote.

Each share of Existing Preferred Stock is entitled to one vote per share
pursuant to the Consent Solicitation. Holders of such shares as of the Record
Date are entitled to consent. As of such date there were 1,365,173 shares of
Existing Preferred Stock outstanding and entitled to consent to the
Reclassification. On such date there were 13,211,449 shares of Common Stock
outstanding. We are not soliciting consents of Common Stockholders because
holders of a majority of the Common Stock have indicated their intention to give
their consents to the Reclassification.

34
<PAGE> 39

CONSENT SOLICITATION PROPOSAL

The Board of Directors has unanimously authorized amendments to Article 4
of our Certificate of Incorporation to give effect to the Reclassification of
the Existing Preferred Stock into Common Stock and Cash Equivalent Preferred
Stock (the "Reclassification Amendment"). A copy of the Reclassification
Amendment is set forth in full in Appendix A to this Statement. The following
description summarizes the material provisions of such Reclassification
Amendment but does not purport to be complete and is qualified in its entirety
by reference to Appendix A. A copy of Article 4 of our current Certificate of
Incorporation is set forth in full at Appendix B to this Statement. A copy of
the Certificate of Designation of Preferred Stock of the Company as to the
Existing Preferred Stock is set forth in full as Appendix C to this Statement.

THE RECLASSIFICATION

The Reclassification Amendment would reclassify each outstanding share of
Existing Preferred Stock (including accumulated and unpaid dividends) into one
share of Common Stock and one share of Cash Equivalent Preferred Stock. At May
1, 2000, accumulated and unpaid dividends on the Existing Preferred Stock
aggregated $9.0 million ($6.5625 per share).

As of the Record Date, 1,365,173 shares of Existing Preferred Stock were
outstanding with an aggregate liquidation value of $43.1 million and an
aggregate market value of $5.8 million (based on the last trade price of $4.25
per share on the Record Date). As of the Record Date, 13,211,449 shares of
Common Stock were outstanding. The last trade price per share of Common Stock
was $1.88 per share on the Record Date.

As the ratio for the Reclassification is one-to-one, no fractional shares
of Common Stock will be issued upon reclassification of the Existing Preferred
Stock in the Reclassification.

The Reclassification is being submitted for stockholder approval pursuant
to the Consent Solicitation. We believe that the benefits of the
Reclassification, which will result in the elimination of past and future
dividends and any future liquidation and redemption obligations relating to the
Existing Preferred Stock, will improve our financial position and increase our
flexibility in financing our future operations. See "The
Reclassification -- Background".

The Reclassification will eliminate the Existing Preferred Stock from our
capital structure, with the result that all powers and preferences, privileges,
voting and other special or relative rights and qualifications of the Existing
Preferred Stock will be terminated. See "Description of Capital Stock --
Existing Preferred Stock".

The issuance of 1,365,173 shares of Common Stock pursuant to the
Reclassification will result in dilution to holders of Common Stock.

The following table shows, as of May 1, 2000 (i) the aggregate voting power
of the holders of the indicated classes of securities at such date, and (ii) the
pro forma aggregate voting power of the former holders of Existing Preferred
Stock and the current holders of Common Stock, assuming completion of the
Reclassification. The table does not show the special class voting rights of
Existing Preferred Stock at May 1, 2000, and prior to the Reclassification.

<TABLE>
<CAPTION>
VOTING POWER
AT MAY 1, PRO FORMA
HOLDERS OF 2000 VOTING POWER
- ---------- ------------- ------------
<S> <C> <C>
Existing Preferred Stock.................................... 9.4% 9.4%
Common Stock................................................ 90.6% 90.6%
---- -----
100% 100%
==== =====
</TABLE>

D. F. King & Co. has been selected to act as Consent Solicitation Agent to
receive and tabulate Consents. ChaseMellon Shareholder Services, LLC, our
transfer agent, will facilitate the exchange of

35
<PAGE> 40

certificates representing Common Stock for certificates representing Existing
Preferred Stock and the distribution of cash after the Reclassification becomes
effective.

Pursuant to the Reclassification, each share of Existing Preferred Stock
will be reclassified into one share of Common Stock and one share of Cash
Equivalent Preferred Stock. Promptly after the Reclassification becomes
effective, former holders of Existing Preferred Stock will be sent detailed
instructions for exchanging certificates formerly representing Existing
Preferred Stock. Until they are surrendered for exchange, certificates formerly
representing Existing Preferred Stock will be deemed to represent the number of
shares of Common Stock into which such Existing Preferred Stock was reclassified
and the right to receive $3.50 in cash per such share of Existing Preferred
Stock, except that the right to receive this cash amount will be contingent on
surrender of the certificates pursuant to a validly completed and delivered
Letter of Transmittal, the form of which will be distributed to holders of
Existing Preferred Stock immediately upon the effectiveness of the
Reclassification.

William J. Murray, one of our directors, is the only officer or director
owning shares of Existing Preferred Stock. On the Record Date, Mr. Murray owned
2,000 shares of Existing Preferred Stock, which will be reclassified into 2,000
shares of Common Stock and 2,000 shares of Cash Equivalent Preferred Stock
immediately upon the effectiveness of the Reclassification. Mr. Murray has
informed us that he intends to give a Consent to the Reclassification in respect
of his 2,000 shares of Existing Preferred Stock.

THE BOARD OF DIRECTORS HAS DECLARED THE ADVISABILITY OF THE
RECLASSIFICATION AMENDMENT AND APPROVED THE PROPOSAL CONTEMPLATED BY THE CONSENT
SOLICITATION.

TO CONSENT TO THE AMENDMENT AND THE RECLASSIFICATION, SIGN AND DATE THE
ACCOMPANYING FORM OF CONSENT AND RETURN IT TO THE CONSENT SOLICITATION AGENT AT
THE ADDRESS ON THE BACK COVER PAGE OF THIS STATEMENT.

CONDITIONS TO EFFECTIVENESS

The Reclassification requires the approval of the holders of a majority of
the outstanding shares of Common Stock and Existing Preferred Stock, voting
together as a single class, and the approval of the holders of two-thirds of the
outstanding shares of Existing Preferred Stock, voting as a separate class.

36
<PAGE> 41

TRADING AND MARKET PRICES

The Common Stock and Existing Preferred Stock are traded on the OTC
Bulletin Board under the symbols "CONCC.OB" and "CONCP.OB". On August 30, 1999,
at market close, the Common Stock and Existing Preferred Stock, which previously
traded under the symbols of CONCC and CONCP, were delisted from the NASDAQ
SmallCap Market. These actions were taken as a result of our failure to meet the
requirements for continued listing on this exchange. On August 31, 1999, at
market open, our stock began trading on the OTC Bulletin Board. The price ranges
presented below represent high and low sale prices for each quarter, as reported
by the NASDAQ Stock Market, NASDAQ SmallCap Market and the OTC Bulletin Board.
Over-the-counter market quotations reflect interdealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
CONC CONCP
COMMON PREFERRED
STOCK MARKET STOCK MARKET
PRICES PRICES
------------- -------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1998:
First quarter............................................ $28 1/8 $17 1/2 $25 3/4 $20 3/4
Second quarter........................................... 28 1/8 19 3/8 28 1/2 22
Third quarter............................................ 23 1/8 10 23 3/8 16
Fourth quarter........................................... 16 1/4 4 11/16 16 1/2 8
1999:
First quarter............................................ $10 5/16 $ 4 3/8 $10 1/2 $ 3 11/16
Second quarter........................................... 8 3/4 2 3/16 6 3 3/8
Third quarter............................................ 5 1 6 1/2 3 1/4
Fourth quarter........................................... 1 5/16 3/8 5 3/4 1
2000:
First quarter............................................ $ 1 7/8 $ 31/64 $ 4 $ 1 3/4
Second quarter (through May 17, 2000).................... 1 3/4 1 1/32 4 1/4 2 7/8
</TABLE>

As of the Record Date, there were approximately record holders of
Common Stock and record holders of Existing Preferred Stock.

Dividends on the Existing Preferred Stock accumulate quarterly at the rate
of $.65625 per share. In January 1996, we announced the suspension of dividend
payments on the Existing Preferred Stock to conserve cash. On April 15, 1997,
the Board of Directors declared a dividend of $2.625 per Existing Preferred
Stock share (approximately $4.6 million), which was paid on May 1, 1997. On
April 14, 1998, we declared a dividend of $2.625 per share of Existing Preferred
Stock (approximately $4.6 million), which was paid on April 30, 1998. No
dividends have been paid on Existing Preferred Stock since such date. No
dividends have ever been paid on the Common Stock. Further, dividends on the
Existing Preferred Stock are restricted under indentures governing our 10 3/8%
Senior Subordinated Notes and our 14% Senior Secured Notes. As of May 1, 2000,
the total amount of dividend payments in arrears was $9.0 million covering ten
quarters. Since we have not paid dividends on the Existing Preferred Stock for a
period of more than six quarters, the holders of Existing Preferred Stock, as a
class, have the right to elect two additional directors to our Board of
Directors. See "Business and Properties -- Legal Proceedings".

37
<PAGE> 42

BUSINESS AND PROPERTIES

Contour, with its subsidiaries and subsidiary partnerships, is engaged in
the acquisition, exploration, development and production of oil and natural gas.
Our strategy is to increase reserves, production and cash flows in a
cost-efficient manner through strategic domestic acquisitions and a program of
balanced development and exploration activities. Our executive offices are
located at 601 Jefferson Street, Suite 1100, Houston, Texas 77002, and our
telephone number is (713) 652-5200.

As used in this Report, "Mcf" means thousand cubic feet, "Mmcf" means
million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel or 42
U.S. gallons liquid volume, "Mbbl" means thousand barrels, "Mcfe" means thousand
cubic feet of natural gas equivalent using the ratio of six Mcf of natural gas
to one Bbl of crude oil, condensate and natural gas liquids, "Mmcfe" means
million cubic feet of natural gas equivalent, "Bcfe" means billion cubic feet of
natural gas equivalent, and "Mmbtu" means million British thermal units. This
Report includes various other capitalized terms that are defined when first
used.

1999 AND 2000 BUSINESS DEVELOPMENTS

In 1999, we undertook several strategic actions in response to the severe
downturn in the industry in 1998 caused by low commodity prices and the closing
of the capital markets to smaller oil and gas companies. These actions,
described below, were designed to increase our near-term liquidity, provide
capital for our ongoing capital expenditure programs and establish a stronger
base for future growth.

In April 1999, we entered into an Exploration and Development Agreement
with Phillips Petroleum Company ("Phillips") relating to certain of our
interests in the Bryceland, West Bryceland and Sailes fields in north Louisiana
("Phillips Transaction"). Pursuant to the agreement, we (1) received an $83
million cash payment (2) retained a 42 Bcf, 8-year volumetric overriding royalty
interest (the "VORI") and a 1% override on the excess of production above such
royalty interest and (3) retained 25% of our working interest in the Cotton
Valley formation. In addition, Phillips, will at its risk and expense, operate,
develop, exploit and explore the properties thereby relieving us of significant
operating, exploration and development costs in the future. The transaction
closed on May 17, 1999. We recognized a gain of approximately $25.9 million in
1999 related to this transaction.

In April 1999, we negotiated a private offering of $135.0 million principal
amount, 14% Senior Secured Notes (the "Notes"). The Notes are secured by a first
lien on substantially all of our proved oil and natural gas properties remaining
after the sale to Phillips and guaranteed by three entities wholly-owned by us.
In accordance with the Notes indenture, on June 30, 1999, we funded $37.5
million to repurchase $35 million principal amount of the Notes at a repurchase
price equal to 104% of the principal amount, plus accrued and unpaid interest
and commitment fees to the date of the repurchase.

In March 2000, we sold part of our VORI. The net proceeds from the sale
approximated $19.8 million. Since the portion of the reserves sold
(approximately 16.5 Bcf) relates to production

38
<PAGE> 43

beginning April 1, 2003, cash flows from our operations before that date are not
impacted. In the first quarter of 2000, we recognized a $3.4 million gain on the
sale.

We have benefited from a general increase in the level of commodity prices
over the past several months. This increase, combined with the actions and the
sale described above, have provided us with near-term liquidity and capital for
our ongoing operations. However, the commodity markets are volatile and there is
no certainty that current oil and natural gas prices can be sustained at these
levels. In addition, we continue to have significant debt outstanding relative
to our asset base and pay a high portion of our cash flow to service such debt
(see "Capital Resources"). Furthermore, as we do not have a revolving credit
facility, we do not have ready access to incremental sources of capital to
supplement our operational requirements. We believe that we have the ability for
the foreseeable future based on our current market conditions, and operating
performance to meet all obligations as they come due and fund our current
capital expenditure program from cash on hand and operational cash flows.
However, because of the combination of the factors described herein (see "Risk
Factors"; "Liquidity"; and "Capital Resources") and the uncertainty of drilling
successes required to sustain or increase operational cash flows, there can be
no assurance that we will be able to fund future obligations.

COMPANY HISTORY

The Consolidation. We were formed in 1994 to consolidate the equity
ownership (the "Consolidation") of Kelley Oil & Gas Partners, Ltd. ("Kelley
Partners") and Kelley Oil Corporation ("Kelley Oil"). Before the Consolidation
in 1994, Kelley Partners and developmental drilling partnership subsidiaries of
Kelley Oil ("DDPs") jointly conducted drilling activities. Historically, Kelley
Oil (the managing general partner of Kelley Partners) participated
proportionately in these operations, with Kelley Partners retaining one-third of
its working interest in each prospect and assigning drilling rights for the
balance of its interest to a DDP. In addition to serving as managing general
partner of each DDP, Kelley Oil purchased for its own investment account all
units in DDPs that were not subscribed preemptively by other investors in Kelley
Partners. In the Consolidation, we acquired Kelley Oil's interests in the
remaining DDPs sponsored during 1994 and 1992 aggregating 92.2% and 84.3%,
respectively. The Consolidation was completed on February 7, 1995 upon approval
by investors in Kelley Partners and Kelley Oil.

In the Consolidation, the outstanding capital stock of Kelley Oil and units
in Kelley Partners ("Units") held by investors other than Kelley Oil and its
subsidiaries ("Public Unitholders") were converted into a total of 4.4 million
shares (after giving effect to the reverse stock split described below) of
Common Stock, 2.4 million shares of the Existing Preferred Stock and 2.2 million
shares of cumulative convertible preferred stock ("ESOP Preferred Stock") held
by its Employee Stock Ownership Plan (the "ESOP"). As a result of the
Consolidation, Kelley Oil became our wholly owned subsidiary, and Kelley
Partners became our 99.99%-owned subsidiary partnership. The Consolidation was
treated as a purchase of the Public Unitholders' interests in Kelley Partners by
us for financial accounting purposes. In 1996, Kelley Partners merged into us
and each of the then outstanding shares of ESOP Preferred Stock was redeemed for
one share of Common Stock.

Contour Transaction. In January 1996, we entered into financing and related
agreements with Contour Production Company L.L.C. ("Contour"), pursuant to which
Contour purchased 4.8 million (after giving effect to the reverse stock split
described below) newly issued shares of Common Stock for $48.0 million on
February 15, 1996, and an option (the "Contour Option") to purchase an
additional 2.7 million (after giving effect to the reverse stock split described
below) shares of Common Stock for $27.0 million, which was exercised on December
1, 1997. In February 1996, in connection with the first stage of Contour's
investment in the Company, John F. Bookout was appointed as our Chairman,
President and Chief Executive Officer, and certain other experienced oil
industry executives were appointed to senior management positions (all such
transactions are referred to collectively as the "Contour Transaction").

On June 28, 1999, we began an offer to exchange 1.5 shares of Common Stock
(on a post-split basis) for each share of our Existing Preferred Stock. Pursuant
to the exchange offer, 368,633 shares of Existing

39
<PAGE> 44

Preferred Stock were tendered representing approximately 21% of the total
Existing Preferred Stock outstanding. In July 1999, the shares were exchanged
for 552,950 shares of newly issued Common Stock (after giving effect to the 1
for 10 reverse stock split described below), increasing the shares of
outstanding Common Stock to approximately 13.2 million. The exchange eliminated
dividend arrearages of approximately $1.5 million. The acquisition of shares of
Existing Preferred Stock pursuant to this exchange offer is the only acquisition
of such shares by us in the last two years other than the shares acquired
pursuant to the conversion of shares of Existing Preferred Stock into Shares of
Common Stock pursuant to the terms of the Existing Preferred Stock certificate
of designation.

On July 30, 1999, we changed our name from Kelley Oil and Gas Corporation
to Contour Energy Co. Concurrent with the name change, we established the
authorized capital stock of the Company at 22 million shares, 20 million of
which were designated as Common Stock and 2 million as Preferred Stock, and
effected a 1 for 10 reverse stock split, reducing the total outstanding shares
of Common Stock from approximately 132 million to approximately 13.2 million.
These actions were consented to by our majority stockholder and became effective
on July 30, 1999. All historical share and per share data appearing in this
document have been restated to reflect this reverse stock split unless otherwise
noted.

On August 30, 1999, at market close, shares of Common Stock and Existing
Preferred Stock, which traded under the symbols of CONCC and CONCP, were
delisted from the NASDAQ SmallCap Market. These actions were taken as a result
of our failure to meet the requirements for continued listing on this exchange.
On August 31, 1999, at market open, the Common Stock and Existing Preferred
Stock began trading on the OTC Bulletin Board under the symbols of CONC.OB and
CONCP.OB.

OPERATIONS AND PROPERTIES

Operation Activities. We derive production primarily from four contiguous
fields in the Vacherie Salt Dome region of north Louisiana, south Louisiana and
the shallow waters of the Gulf of Mexico.

Development Activities. During 1999, we continued development drilling
activities within our existing properties in the Vacherie Salt Dome region of
north Louisiana, south Louisiana and in the Gulf of Mexico. In north Louisiana,
we drilled or participated in drilling 6 gross (1.36 net) development wells, all
of which were completed as producing wells. In south Louisiana, we drilled or
participated in drilling 1 gross (0.50 net) well, which was not productive.
Offshore, we drilled or participated in drilling 3 gross (0.54 net) wells, of
which 2 gross (0.36 net) wells were completed as producing wells.

Exploration Activities. We focus our exploration activities primarily on
our existing leaseholdings in Terrebonne and LaFourche Parishes, Louisiana, and
in the shallow waters of the Gulf of Mexico. The number, type and timing of
proposed wells in these regions is subject to continued revision as a result of
many factors, including test and drilling results on these properties and
others, the price of oil and natural gas, availability of capital funds and
drilling rigs, weather, and general economic factors. See "Caution as to
Forward-Looking Statements" and "Risk Factors".

We use sophisticated technologies to identify exploration prospects and
advanced geophysical techniques to continue to develop and refine
interpretations of our 3-D seismic database, which covers (i) 619 square miles,
a major portion of our existing leaseholdings in Terrebonne and LaFourche
Parishes, in south Louisiana, (ii) 153 square miles offshore, and (iii) 546
square miles of our Permian Basin exploratory prospects.

In 1999, we drilled 3 gross (1.02 net) exploratory wells, including 2 gross
(0.84 net) exploratory wells in southern Louisiana, and 1 gross (.18 net) well
in the offshore area, all of which have been completed as producing wells. As of
December 31, 1999, we had 1 gross (.50 net) exploration well in progress in
south Louisiana, that was completed as a producing well in January 2000.

Description of Properties. Our properties are located in Louisiana, and in
the Gulf of Mexico, Texas, New Mexico and Arkansas. As of January 1, 2000, we
owned interests in a total of 275 gross (81.0 net) producing wells. As of that
date, we had leaseholdings covering 165,205 gross (68,752 net) developed acres
and 250,796 gross (76,613 net) undeveloped acres. Approximately 78% of our
proved oil and natural
40
<PAGE> 45

gas reserves as of January 1, 2000, was natural gas on an energy content basis.
The reserves to production ratio for these properties (based on 1999 production)
was estimated to be 8.3 as of January 1, 2000.

Significant Properties. Our natural gas properties in north Louisiana are
located primarily in the Sailes, Sibley, West Bryceland and Ada fields of
Webster and Bienville Parishes. Our properties in south Louisiana are
concentrated in the Orange Grove/Humphreys, Lirette, Lake Pagie, Ouiski Bayou
and Bayou Sauveur fields in Terrebonne Parish. Production is primarily from the
Hosston (north Louisiana) and Miocene (south Louisiana) formations. Other
properties are located primarily in the shallow waters of the Gulf of Mexico,
south Louisiana, and Texas. Substantially all of our oil and natural gas
properties are pledged to secure borrowings under the Notes. The following table
sets forth certain information as of the dates indicated regarding our interests
by major geographic region. See "Estimated Proved Reserves -- Uncertainties in
Estimating Reserves and Future Net Cash Flows".

SIGNIFICANT PROVED PROPERTIES

<TABLE>
<CAPTION>
PRODUCTION
PROVED RESERVES AT JANUARY 1, 2000 -----------------------------
--------------------------------------------- YEAR ENDED
PRESENT VALUE DECEMBER 31, 1999
OF ESTIMATED -----------------------------
GAS FUTURE NET GAS
OIL GAS EQUIVALENT CASH FLOWS(1) OIL GAS EQUIVALENT
MBBLS MMCF (MMCFE) (IN THOUSANDS) (MBBLS) (MMCF) (MMCFE)
----- ------- ---------- -------------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
North Louisiana......... 230 106,595 107,975 $109,494 38 12,745 12,973
South Louisiana......... 4,750 20,433 48,933 66,175 133 3,921 4,719
Offshore................ 2,167 28,471 41,473 56,482 97 5,545 6,127
Other as a group........ 476 3,201 6,057 8,940 99 181 775
----- ------- ------- -------- --- ------ ------
Totals........ 7,623 158,700 204,438 $241,091 367 22,392 24,594
===== ======= ======= ======== === ====== ======
</TABLE>

- ---------------

(1) The estimates were prepared in accordance with SEC regulations using market
or contract prices at the end of each reported period. Prices and operating
and development costs are held constant over the estimated life of the
reserves. A discount factor of 10% was used to reflect the timing of future
net cash flow. See "Estimated Proved Reserves -- Uncertainties in Estimating
Reserves and Future Net Cash Flows" and Note 12 to the Consolidated
Financial Statements.

Additional information regarding these regions is set forth below. Unless
otherwise noted, acreage and well information is provided as of December 31,
1999, and reserve information is provided as of January 1, 2000.

North Louisiana. Our reserves in this region are 78% proved developed, and
our wells are typically drilled to a maximum depth of approximately 10,500 feet.
Operations in this region do not typically experience geopressured formations or
significant associated salt-water production. Our reserves to production ratio
in north Louisiana is approximately 8.3. Our lifting costs in this region are
generally low (approximately $0.14 per Mcfe in 1999) as a result of relatively
low formation pressures and minimal liquid hydrocarbon and salt water
production. Our share of proved reserves associated with these fields totaled
approximately 108.0 Bcfe at December 31, 1999. Included in the reserve base for
north Louisiana are proved reserves associated with the VORI we retained and
carved from the Sailes and West Bryceland fields sold pursuant to the Phillips
Transaction. These reserves total 40.9 bcfe at year-end 1999 and are non-cost
bearing to us except for related gathering, transmission, compression costs and
severance and production taxes. In March 2000, we sold part of our VORI for net
proceeds of approximately $20 million. The portion of the VORI reserves sold
(approximately 16.5 Bcf) relates to production beginning April 1, 2003.

South Louisiana. Our operations in this region are primarily focused on
five fields in the Houma Embayment and Terrebonne Trough areas. These areas
contain high-quality reservoir rock, contributing to high production rates.
Wells are typically drilled to a depth of approximately 11,000 to 19,000 feet.
Our share of proved reserves associated with these fields totaled approximately
48.9 Bcfe at December 31,

41
<PAGE> 46

1999. Production from our south Louisiana properties generally receives premium
wellhead prices because of the close proximity of the properties to
transportation and market locations, and because of their rich condensate
content. We believe these factors partially offset the higher operating costs
associated with higher formation pressures, salt water disposal and inland water
well locations associated with the region. At December 31, 1999, we were
drilling 1 gross (.50 net) well in this region, which was subsequently completed
as a producing well.

Offshore. Our operations in this region are primarily focused in the
shallow waters of the Gulf of Mexico, offshore Texas, Louisiana and Alabama. In
the Main Pass area, we participated in drilling 4 gross (.72 net) wells during
1999, of which 3 gross (.54 net) wells were successfully completed. We expect to
continue additional development and exploration activities in the Main Pass area
in 2000. We have also acquired 81 square miles of additional 3D seismic in the
Vermillion and Main Pass areas to complement our offshore development and
exploration efforts. Our share of proved reserves associated with the Gulf of
Mexico region totaled approximately 41.5 bcfe at December 31, 1999.

Joint Venture Partnerships. We participate in joint ventures with industry
partners to accelerate the exploration and evaluation of its properties and to
mitigate the risks associated with exploratory drilling projects.

We are 50/50 partners in a joint venture with Williams Production, Gulf
Coast Company ("Williams"), a unit of The Williams Companies, Inc., covering
27,000 net acres in the Houma Embayment in south Louisiana. We also have a joint
exploration & development agreement with Fina Oil and Chemical Company, a
subsidiary of FINA, Inc. ("Fina"), and Cobra Oil and Gas Corporation ("Cobra").
The Fina joint venture represents a joint exploration and development agreement
covering an area of mutual interest (the "AMI") of approximately 400,000 acres
in south Louisiana. The agreement provides for the parties to obtain 3-D seismic
coverage over all mutually agreeable prospective lands within the AMI. To date,
we and Fina have acquired 3-D seismic data covering approximately 450 square
miles within the AMI. The initial five-year term of the agreement with Fina
expired March 31, 2000, but there are provisions for extensions in the
agreements. We are now in discussions with Fina about the nature and extent of
an extension. We are also involved in a joint venture with Cobra Oil & Gas
Corporation covering approximately 68,000 acres in Texas, New Mexico, Arkansas,
Louisiana and Alabama and includes 3-D seismic data covering approximately 676
square miles.

Estimated Proved Reserves. The following table sets forth the estimated
quantities of proved and proved developed reserves of crude oil (including
condensate and natural gas liquids) and natural gas owned by us for the years
ended December 31, 1997, 1998 and 1999, which were prepared by H.J. Gruy &
Associates, Inc. ("Gruy") independent petroleum engineers.

42
<PAGE> 47

ESTIMATED PROVED RESERVES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1998 1999
----------------- ----------------- ------------------
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
Beginning balance................... 1,466 297,634 2,953 354,867 5,294 283,559
Revisions of previous estimates..... 106 21,831 (79) (31,674) 1,262 (10,774)
Purchases of reserves in place...... 1,351 51,712 -- -- -- --
Extensions and discoveries.......... 256 13,892 3,082 9,512 1,762 15,620
Sale of reserves in place........... -- -- (287) (13,589) (328) (107,313)
Production........................ (226) (30,202) (375) (35,557) (367) (22,392)
----- ------- ----- ------- ----- --------
Ending balance.................... 2,953 354,867 5,294 283,559 7,623 158,700
===== ======= ===== ======= ===== ========
PROVED DEVELOPED RESERVES:
Producing(1)........................ 1,856 180,307 1,062 129,787 2,039 94,798
Non-producing....................... 576 77,493 919 59,037 647 29,089
----- ------- ----- ------- ----- --------
Total proved developed.... 2,432 257,800 1,981 188,824 2,686 123,887
===== ======= ===== ======= ===== ========
</TABLE>

- ---------------

(1) 1999 includes 3 mbbls and 40,835 mmcf's associated with our interest in the
VORI. In March 2000, the Company executed a sale of a portion of its VORI
for net proceeds of approximately $19.8 million. The portion of the VORI
reserves sold (approximately 16.5 Bcf) relates to production beginning April
1, 2003.

The estimates of proved reserves set forth in the above table were prepared
in accordance with SEC regulations using market or contract prices at the end of
each reported period. Prices and operating and development costs are held
constant over the estimated life of the reserves.

Estimated proved developed reserves are reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserves that are expected to be
recovered from new wells drilled to known reservoirs on undrilled acreage for
which the existence and recoverability of reserves can be estimated with
reasonable certainty, or from existing wells where a relatively major
expenditure is required for recompletion.

Uncertainties in Estimating Reserves and Future Net Cash Flows. There are
numerous uncertainties in estimating quantities of proved reserves believed to
have been discovered and in projecting future rates of production and the timing
of development expenditures, including many factors beyond our control. The
reserve data set forth in this document are only estimates. Reserve estimates
are inherently imprecise and may be expected to change as additional information
becomes available. Furthermore, estimates of oil and natural gas reserves, of
necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured
exactly, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
Accordingly, estimates of the economically recoverable quantities of oil and
natural gas attributable to any particular group of properties, classifications
of such reserves based on risk of recovery and estimates of the future net cash
flows expected therefrom prepared by different engineers or by the same
engineers at different times may vary substantially. There also can be no
assurance that the reserves set forth herein will ultimately be produced or that
the proved undeveloped reserves set forth herein will be developed within the
periods anticipated. It is possible that variances from the estimates will be
material. In addition, the estimates of future net cash flows from our proved
reserves and the present value thereof are based upon certain assumptions about
future production levels, prices and costs that may not be correct when judged
against actual subsequent experience. We emphasize with respect to the

43
<PAGE> 48

estimates prepared by independent petroleum engineers that the discounted future
net cash flows should not be construed as representative of the fair market
value of our proved reserves since discounted future net cash flows are based
upon projected cash flows which do not provide for changes in oil and natural
gas prices from those in effect on the date indicated or for escalation of
expenses and capital costs subsequent to such date. The meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they were based. Accordingly, you are cautioned not to place undue reliance on
the reserve data included in this document.

We have not filed any estimates of reserves with any federal authority or
agency during the past year other than estimates contained in filings with the
SEC.

Production, Price and Cost History. The following table sets forth certain
production data, average sales prices and average production expenses
attributable to our properties for 1997, 1998 and 1999. Detailed additional
information concerning our oil and natural gas production activities is
contained in the Supplementary Information in Note 12 to the Consolidated
Financial Statements included elsewhere in this Statement.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls)................... 226 375 367
Natural gas (Mmcf).......................................... 30,202 35,557 22,392
Natural gas equivalent (Mmcfe).............................. 31,558 37,807 24,594
AVERAGE SALES PRICE PER UNIT (INCLUDING EFFECTS OF HEDGING):
Oil and other liquid hydrocarbons (per Bbl)................. $ 19.34 $ 13.09 $ 16.77
Natural gas (per Mcf)....................................... 2.27 2.09 2.12
Natural gas equivalent (per Mcfe)........................... 2.31 2.10 2.18
AVERAGE PRODUCTION EXPENSES PER MCFE........................ $ .35 $ .53 $ .64
</TABLE>

Productive Wells and Acreage. As of December 31, 1999, we had leaseholdings
comprising 165,205 gross (68,752 net) developed acres and 250,796 gross (76,613
net) undeveloped acres, all located within the continental United States. The
oil and gas leases in which we have an interest are for varying primary terms
and many, particularly in south Louisiana, require the payment of delay rentals
in lieu of drilling operations. In north Louisiana, most of our leasehold
interests are held by production; that is, so long as natural gas and oil are
produced from the properties covered thereby, the leases continue indefinitely.
The leases may be surrendered at any time by notice to the lessors, by the
cessation of production or by failure to make timely payment of delay rentals,
if applicable.

The following table sets forth our ownership interests in its leaseholds as
of December 31, 1999.

<TABLE>
<CAPTION>
DEVELOPED(1) UNDEVELOPED(2)
----------------------- -----------------------
GROSS ACRES NET ACRES GROSS ACRES NET ACRES
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Louisiana.......................................... 72,451 24,090 198,592 56,499
Texas.............................................. 24,682 4,070 8,899 1,424
Offshore........................................... 55,402 35,334 2,830 1,054
Other states....................................... 12,670 5,258 40,475 17,636
------- ------ ------- ------
Total.................................... 165,205 68,752 250,796 76,613
======= ====== ======= ======
</TABLE>

- ---------------

(1) Acres spaced or assignable to productive wells.

(2) Acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and gas,
regardless of whether that acreage contains proved reserves.

As of December 31, 1999, we had working interests in 224 gross (73.0 net)
productive gas wells and 51 gross (8.0 net) productive oil wells (including
producing wells and wells capable of production).

44
<PAGE> 49

Exploration and Development. The following table sets forth the number of
gross and net productive and dry exploratory and development wells we drilled.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------- ------------- ------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
NORTH LOUISIANA:
Exploratory wells:
Oil.............................................. -- -- -- -- -- --
Natural gas...................................... -- -- 2 .72 -- --
Dry.............................................. -- -- -- -- -- --
-- ----- -- ----- -- ----
Total.................................... -- -- 2 .72 -- --
== ===== == ===== == ====
Development wells:
Oil.............................................. -- -- -- -- -- --
Natural gas...................................... 82 34.96 43 20.68 6 1.36
Dry.............................................. -- -- 1 .46 -- --
-- ----- -- ----- -- ----
Total.................................... 82 34.96 44 21.14 6 1.36
== ===== == ===== == ====
Total north Louisiana:
Producing........................................ 82 34.96 45 21.40 6 1.36
Dry.............................................. -- -- 1 .46 -- --
-- ----- -- ----- -- ----
Total.................................... 82 34.96 46 21.86 6 1.36
== ===== == ===== == ====
SOUTH LOUISIANA, OFFSHORE AND OTHER:
Exploratory wells:
Oil.............................................. -- -- -- -- 1 .50
Natural gas...................................... 9 3.50 6 1.81 2 .52
Dry.............................................. 1 .50 7 3.22 -- --
-- ----- -- ----- -- ----
Total.................................... 10 4.00 13 5.03 3 1.02
== ===== == ===== == ====
Development wells:
Oil.............................................. -- -- 3 .04 1 .18
Natural gas...................................... -- -- -- -- 1 .18
Dry.............................................. -- -- -- -- 3 .97
-- ----- -- ----- -- ----
Total.................................... -- -- 3 .04 5 1.33
== ===== == ===== == ====
Total south Louisiana and other:
Producing........................................ 9 3.50 9 1.85 5 1.38
Dry.............................................. 1 .50 7 3.22 3 .97
-- ----- -- ----- -- ----
Total.................................... 10 4.00 16 5.07 8 2.35
== ===== == ===== == ====
</TABLE>

As of December 31, 1999, we had 1 gross (.50 net) exploratory well in
progress in south Louisiana which was subsequently completed as a producing
well.

MARKETING OF NATURAL GAS AND CRUDE OIL

We do not refine or process any of the oil and natural gas we produce.
Substantially all of our natural gas is sold under term contracts, contracts
providing for periodic price adjustments or in the spot market. Our revenue
streams are therefore sensitive to changes in current market prices. Our sales
of crude oil, condensate and natural gas liquids generally are made at prices
related to posted field prices.

In addition to marketing our natural gas production, we secure gas
transportation arrangements, provide nomination and gas control services,
supervise gas aggregation operations and perform revenue

45
<PAGE> 50

receipt and disbursement services as well as regulatory filing, recordkeeping,
inspection, testing, monitoring and marketing functions.

We believe that our activities are not currently constrained by a lack of
adequate transportation systems or system capacity and do not foresee any
material disruption in available transportation for our production. However,
there can be no assurance that we will not encounter these constraints in the
future. In that event, we would be forced to seek alternate sources of
transportation and may face increased costs.

HEDGING ACTIVITIES

We periodically use forward sales contracts, natural gas and crude oil
price swap agreements, natural gas basis swap agreements and options to reduce
exposure to downward price fluctuations on our natural gas and crude oil
production. We do not engage in speculative transactions. During 1999 and 2000,
we used price and basis swap agreements to hedge our exposure to possible
declines in natural gas and crude oil prices. Additional information concerning
our hedging activities during 1999 and 2000 is set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
Notes to the Consolidated Financial Statements contained elsewhere in this
document.

COMPETITION

We operate in a highly competitive environment with respect to exploring,
developing and acquiring reserves, marketing oil and natural gas and securing
trained personnel. Many of our competitors possess and employ financial and
personnel resources substantially greater than those available to us. Such
companies may be better able to financially withstand the costs of unsuccessful
exploration and development activities. Such companies may also be able to pay
more for productive oil and natural gas properties and to define, evaluate, bid
for and purchase a greater number of properties than our financial or personnel
resources permit. Our ability to acquire additional reserves in the future will
depend on our ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. In addition, there
is substantial competition for capital available for investment in the oil and
natural gas industry. There can be no assurance that we will be able to compete
successfully in the future in acquiring reserves, developing reserves, marketing
hydrocarbons, attracting and retaining quality personnel, and raising additional
capital.

TITLE TO PROPERTIES

Our properties, in addition to being mortgaged to secure the Notes, are
subject to royalty interests, liens incident to operating agreements, liens for
current taxes and other customary burdens, including other mineral encumbrances
and restrictions. We do not believe that any mortgage, lien or other burden
materially interferes with the use of such properties in the operation of our
business.

We believe that we have satisfactory title to or rights in all of our
producing properties. As is customary in the oil and natural gas industry, we
make minimal investigation of title at the time we acquire undeveloped
properties. We make title investigation, and we generally obtain title opinions
of local counsel before we commence drilling operations or at least in
connection with the preparation of division orders when production is obtained
and the revenues therefrom are allocated.

EMPLOYEES

As of December 31, 1999, we had 47 employees. Our staff includes employees
experienced in acquisitions, geology, geophysics, petroleum engineering, land
acquisition and management, finance and accounting. None of our employees are
represented by a union. We have not experienced an interruption in our
operations due to any labor dispute and believe that our working relationships
with our employees are satisfactory.

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<PAGE> 51

REGULATION

Our operations are subject to extensive and continually changing
regulation, as legislation affecting the oil and natural gas industry is under
constant review for amendment and expansion. Many departments and agencies, both
federal and state, are authorized by statute to issue and have issued rules and
regulations binding on the oil and natural gas industry and its individual
participants. The failure to comply with such rules and regulations can result
in substantial penalties. The regulatory burden on the oil and natural gas
industry increases our cost of doing business and, consequently, affects our
profitability. However, we do not believe that we are affected in a
significantly different manner by these regulations than are our competitors in
the oil and natural gas industry. Because of the numerous and complex federal
and state statutes and regulations that may affect us, directly or indirectly,
the following discussion of certain statutes and regulations should not be
relied upon as an exhaustive review of all matters affecting our operations.

Transportation and Production. Transportation and Sale of Natural Gas and
Crude Oil. We can sell natural gas, crude oil and condensate ("Products") at
market prices not subject at this time to price controls. The price that we
receive from the sale of these Products is affected by the ability to transport
and cost of transporting the Products to market. Under applicable laws, the
Federal Energy Regulation Commission ("FERC") regulates both the construction of
pipeline facilities and the transportation of Products in interstate commerce.

Regulation of Drilling and Production. Our drilling and production
operations are subject to regulation under a wide range of state and federal
statutes, rules, orders and regulations. State and federal statutes and
regulations govern, among other matters, the amounts and types of substances and
materials that may be released into the environment, the discharge and
disposition of waste materials, the reclamation and abandonment of wells and
facility sites and remediation of contaminated sites, and require permits for
drilling operations, drilling bonds and reports concerning operations. The
federal leases are administered by the Bureau of Land Management ("BLM") and the
Minerals Management Service ("MMS"), which are administered, along with the
Bureau of Indian Affairs, by the federal Department of the Interior. These
leases contain relatively standard terms and require compliance with detailed
MMS and BLM regulations and orders, which are subject to change. In addition to
permits required by other federal agencies (such as the Coast Guard, the Army
Corps of Engineers and the Environmental Protection Agency), lessees must obtain
a permit from the MMS or BLM prior to commencement of offshore or onshore
drilling. States in which we own and operate properties have varying laws and
regulations governing conservation matters, including provisions for the
unitization or pooling of oil and natural gas properties, the establishment of
maximum rates of production from oil and natural gas wells and the regulation of
the spacing, plugging and abandonment of wells. Many states also restrict
production to the market demand for oil and natural gas and several states have
indicated interest in revising applicable regulations. The effect of these
regulations is to limit the amount of oil and natural gas we can produce from
our wells and to limit the number of wells or the locations at which we can
drill. Moreover, each state generally imposes an ad valorem, production or
severance tax with respect to the production and sale of crude oil, natural gas
and gas liquids within its jurisdiction.

Environmental Regulations. We take seriously the various federal
environmental laws, including the National Environmental Policy Act; the Clean
Air Act of 1990, as amended ("CAA"); Oil Pollution Act of 1990, as amended
("OPA"); Water Pollution Control Act, as amended ("FWPCA"); the Resource
Conservation and Recovery Act as amended ("RCRA"); the Toxic Substances Control
Act; and the Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA"), and the various state and local environmental laws,
and the regulations adopted pursuant to such law, governing the discharge of
materials into the environment, or otherwise relating to the protection of the
environment. In particular, our drilling, development and production operations,
our activities in connection with storage and transportation of crude oil and
other liquid hydrocarbons and our use of facilities for treating, processing or
otherwise handling hydrocarbons and wastes therefrom are subject to stringent
environmental regulation, and violations are subject to reporting requirements,
civil penalties and criminal sanctions. As with the industry generally,
compliance with existing regulations increases our overall cost of
47
<PAGE> 52

business. The increased costs are not reasonably ascertainable. Such areas
affected include unit production expenses primarily related to the control and
limitation of air emissions and the disposal of produced water, capital costs to
drill exploration and development wells resulting from expenses primarily
related to the management and disposal of drilling fluids and other oil and
natural gas exploration wastes and capital costs to construct, maintain and
upgrade equipment and facilities and plug and abandon inactive well sites and
pits.

Environmental regulations historically have been subject to frequent change
by regulatory authorities, and we are unable to predict the ongoing cost of
compliance with these laws and regulations or the future impact of such
regulations on our operations. However, we do not believe that changes to these
regulations will materially adversely affect our competitive position because
our competitors are similarly affected. A discharge of hydrocarbons or hazardous
substances into the environment could subject us to substantial expense,
including both the cost to comply with applicable regulations pertaining to the
remediation of releases of hazardous substances into the environment and claims
by neighboring landowners and other third parties for personal injury and
property damage. We maintain insurance, which may provide protection to some
extent against environmental liabilities, but the coverage of such insurance and
the amount of protection afforded thereby cannot be predicted with respect to
any particular possible environmental liability and may not be adequate to
protect us from substantial expense.

The OPA and regulations thereunder impose a variety of regulations on
"responsible parties" related to the prevention of oil spills and liability for
damages resulting from such spills in United States waters. A "responsible
party" includes the owner or operator of an onshore facility, vessel, or
pipeline, or the lessee or permittee of the area in which an offshore facility
is located. The OPA assigns liability to each responsible party for oil removal
costs and a variety of public and private damages. The FWPCA imposes
restrictions and strict controls regarding the discharge of produced waters and
other oil and natural gas wastes into navigable waters. State laws for the
control of water pollution also provide varying civil, criminal and
administrative penalties and impose liabilities in the case of a discharge of
petroleum or its derivatives, or other hazardous substances, into state waters.
In addition, the Environmental Protection Agency ("EPA") has promulgated
regulations that require many oil and natural gas production operations to
obtain permits to discharge storm water runoff.

The CAA requires or will require most industrial operations in the United
States to incur capital expenditures in order to meet air emission control
standards developed by the EPA and state environmental agencies. Although no
assurances can be given, we believe implementation of such amendments will not
have a material adverse effect on our financial condition or results of
operations. RCRA is the principal federal statute governing the treatment,
storage and disposal of hazardous wastes. RCRA imposes stringent operating
requirements (and liability for failure to meet such requirements) on a person
who is either a "generator" or "transporter" of hazardous waste or an "owner" or
"operator" of a hazardous waste treatment, storage or disposal facility. At
present, RCRA includes a statutory exemption that allows oil and natural gas
exploration and production wastes to be classified as non-hazardous waste. As a
result, we are not required to comply with a substantial portion of RCRA's
requirements because our operations generate minimal quantities of hazardous
wastes.

CERCLA, also known as "Superfund", imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the "owner" or "operator" of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes the EPA and, in some instances, third parties to
act in response to threats to the public health or the environment and to seek
to recover from the responsible classes of persons the costs they incur. In the
course of its ordinary operations, we may generate waste that may fall within
CERCLA's definition of a "hazardous substance". As a result, we may be jointly
and severally liable under CERCLA or under analogous state laws for all or part
of the costs required to clean up sites at which such wastes have been disposed.
We currently own or lease, and have in the past owned or leased, numerous
properties that for many years have been used for the exploration and production
of oil and natural gas. Although we have used operating and disposal practices
that were standard in the industry at the time, hydrocarbons or other
48
<PAGE> 53

wastes may have been disposed of or released on or under the properties owned or
leased by us or on or under other locations where such wastes have been taken
for disposal. In addition, many of these properties have been operated by third
parties whose actions with respect to the treatment and disposal or release of
hydrocarbons or other wastes were not under our control. These properties and
wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws.
Under such laws, we could be required to remove or remediate previously disposed
wastes (including wastes disposed of or released by prior owners or operators),
to clean up contaminated property (including contaminated groundwater) or to
perform remedial plugging operations to prevent future contamination.

LEGAL PROCEEDINGS

We are involved in various claims and lawsuits incidental to our business.
In our opinion, the ultimate liability thereunder, if any, will not have a
material effect on our financial condition.

In March 2000, a class action suit was brought against us in the Court of
Chancery of the State of Delaware, complaining, among other things, that we had
not taken necessary steps to facilitate the election of two additional directors
to our board by preferred stockholders. Under the charter provisions relating to
our preferred stock, upon the occasion of the dividends not being paid on such
preferred stock for six quarters, the preferred stockholders are, as a class,
entitled to elect two directors to our board. Among the relief sought in such
proceeding are an injunction directing us to create new directorships for
nominations from preferred stockholders at the 2000 annual meeting of
stockholders, directing that past dividends be paid, declaring that our reverse
stock split in 1999, which involved the settlement of fractional shares by the
payment of a small amount of cash (less than $1,500) by us, constituted a
repurchase of common shares in violation of the preferred stock charter
provisions and was therefore void and other relief. We have consistently
acknowledged, publicly and privately, the rights of such preferred stockholders
to elect two directors and believe we have not in any way encumbered our
preferred shareholders from exercising such rights. We believe that the
complaint and the relief sought are wholly without merit and are vigorously
defending our positions in such proceedings.

49
<PAGE> 54

MANAGEMENT

DIRECTORS

The following are our directors.

John F. Bookout, age 77, has served the Company as Chairman of the Board,
President and Chief Executive Officer since February 1996 in connection with the
Contour Transactions. He had served as Chairman of the Board and President of
Contour Production Company since its formation in 1993. Before joining as a
founder, Mr. Bookout served in positions of increasing responsibility for 38
years at Shell Oil Company, starting in 1950 as a geologist and culminating as
President, Chief Executive Officer and a director from 1976 through June 1988.
From 1988 through 1993, he served as a member of the Supervisory Board of Royal
Dutch Petroleum.

John J. Conklin, Jr., age 69, has served as a director since November 1993.
Mr. Conklin has been a private investor since his retirement in 1989 as a senior
partner of Conklin, Cahill & Co., a member firm of the New York Stock Exchange,
where he was active for over 35 years. He has also served as a member of the
Board of Governors of the New York Stock Exchange, the Board of Directors of the
New York Futures Exchange and the National Market Advisory Board.

Ralph P. Davidson, age 72, served as Chairman of the Board from October
1995 through February 1996 and has served as a director since November 1993. Mr.
Davidson provides consulting services to nonprofit organizations as President of
Davidson Associates. From 1980 through 1987, he was Chairman of the Board of
Time, Inc., where he spent 21 years with Time Magazine in various executive
capacities. Mr. Davidson is a member of the Board of Trustees of Phoenix House,
the National Council for Adoption, the Emeritus Foundation and The American
University in Bulgaria.

Adam P. Godfrey, age 38, has served as a director since March 19, 1998,
and, since January 1, 1998, has been the sole shareholder and president of a
corporation that serves as a manager of the limited liability company that is
the general partner of Bessemer Holdings, L.P. ("Bessemer") and other affiliated
investment partnerships including investment partnerships that comprise the BH
Group (the "BH Group"). The BH Group owns a majority of the membership interests
in Contour. Mr. Godfrey is also the sole shareholder and president of a
corporation that is a general partner of Bessemer Partners & Co. ("BPC"), an
affiliate of Bessemer. From July 1993 to December 1997, Mr. Godfrey was a
principal with BPC, and a member of the general partner of Bessemer. Mr. Godfrey
is a director of several private companies.

William J. Murray, age 85, has served as a director since March 1984. Mr.
Murray has been an independent petroleum consultant for more than the past five
years. He served on the Texas Railroad Commission for 16 years, during six of
which he served as Chairman. Mr. Murray currently serves on a number of industry
committees, including as Chairman of the Industry Advisory Committee on Natural
Gas Ratable Take and Chairman of the Industry Voluntary Allocation Committee.

Edward Park, age 29, has served as a director since March 2000. Mr. Park is
a principal at BPC which he joined in 1994. Mr. Park is also a member of the
limited liability company that is the general partner of Bessemer Holdings, L.P.
("Bessemer") and other affiliated investment partnerships, including the
investment partnerships that comprise BH Group. Mr. Park is a director of
several private companies.

Ward W. Woods, age 57, has served as a director since his election in
February 1996. He is the sole stockholder and president of corporations that
from 1989 to 1999 served as a managing general partner or principal manager of
the general partner of Bessemer and other affiliated investment partnerships
including those comprising the BH Group. A partnership affiliated with Mr. Woods
is a member of the general partner of Bessemer and other affiliated partnerships
including BH Group. He is also the sole stockholder and president of a
corporation that until 1999 served as a managing general partner of BPC. Mr.
Woods was the President and Chief Executive Officer of Bessemer Securities, LLC
("BSLLC") and its wholly owned subsidiary Bessemer Securities Corporation
("BSC") (from 1989 to 1999). BSC is the primary limited partner of Bessemer, and
BSC and BSLLC are the primary limited partners in another partnership
50
<PAGE> 55

in the BH Group. Mr. Woods serves as a manager of BSLLC and a director of BSC.
He is a director of Boise Cascade Corporation and several private companies.

EXECUTIVE OFFICERS

The following are our current executive officers, all of whom hold office
until their successors are duly appointed and qualified.

<TABLE>
<CAPTION>
OFFICER OR
DIRECTOR OF THE
NAME AGE POSITION COMPANY SINCE
- ---- --- -------- ---------------
<S> <C> <C> <C>
John F. Bookout.......... 77 President, Chief Executive Officer and a Director February 1996
Rick G. Lester........... 48 Senior Vice President and Chief Financial Officer October 1998
Kenneth R. Sanders....... 50 Senior Vice President -- Exploration and August 1999
Production
</TABLE>

Rick G. Lester was elected Senior Vice President and Chief Financial
Officer in October 1998. Previously, he was Vice President and Chief Financial
Officer of Domain Energy Corporation ("Domain") until its merger into Lomak
Petroleum to form Range Resources Corporation. Mr. Lester served in various
positions with Tenneco, Inc. and its subsidiaries prior to his tenure at Domain.

Kenneth R. Sanders was elected Senior Vice President -- Exploration and
Production of the Company in August 1999. Before joining the Company, Mr.
Sanders served in positions of increasing responsibility at Seagull Energy E &
P, Inc. since 1991, concluding as Vice President -- Exploitation, Acquisitions &
Engineering.

EXECUTIVE COMPENSATION

The following shows compensation paid during the last three fiscal years to
our Chief Executive Officer and our other executive officers whose compensation
exceeded $100,000 in 1999 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------------------ ------------
CASH STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) BONUS ($) AWARDS (#) COMPENSATION ($)(2)
- --------------------------- ---- ---------- --------- --------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
John F. Bookout.................. 1999 800,000 187,500(3) 190,430(3) 10,000
Chairman, President and CEO 1998 800,000 10,000
1997 800,000 8,000
Dallas D. Laumbach(4)............ 1999 87,083 75,000(3) 76,172(3) 5,225
Former Senior Vice President 1998 190,000 10,000
1997 190,000 9,500
Rick G. Lester................... 1999 175,000 75,000(3) 76,172(3) 10,000
Senior Vice President & 1998 43,750 50,000 38,100 2,625
Chief Financial Officer
Kenneth R. Sanders(4)............ 1999 79,167 50,000(4) 62,500 2,850
Senior Vice President --
Exploration & Production
</TABLE>

- ---------------

(1) Perquisites and other benefits did not exceed 10% of any named officer's
total annual salary and bonus and therefore are excluded.

(2) Amounts include matching contributions by us to the named executive
officer's 401(k) account.

(3) Messrs. Bookout, Laumbach and Lester were awarded special bonuses on June 8,
1999 in recognition of extraordinary services performed on behalf of the
Company during 1998 and the first-half of 1999, consisting of each receiving
cash and shares of Common Stock (31,250 to Mr. Bookout, 12,500 to

51
<PAGE> 56

Mr. Laumbach and 12,500 to Mr. Lester, in each case as adjusted for the
1-for-10 stock split effected July 30, 1999) under the Company's 1997
Long-Term Incentive-Performance Plan. The closing price of the Company's
common stock as of close of June 7, 1999 on the NASDAQ was $6.09375 (as
adjusted for the 1-for-10 stock split effected July 30, 1999).

(4) Mr. Sanders was appointed Senior Vice President -- Exploration and
Production effective August 1, 1999 after Mr. Laumbach left the employment
of the Company effective June 15, 1999, and Mr. Sanders received an initial
bonus upon employment.

OPTION GRANTS IN 1999

The following table provides information about options granted during 1999
to the Named Executive Officers.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ------------ -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kenneth R. Sanders........... 37,500 14.82% 10.00 8/01/09 0 0
25,000 9.90% 3.4375 8/01/09 54,046 136,962
</TABLE>

- ---------------

(1) Potential realizable value is based on an assumption that the stock price of
the Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the 10-year option term. These
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect our future stock price
growth, which is dependent on future performance and stock market
conditions.

COMPENSATION OF DIRECTORS

Our non-management directors receive $3,750 quarterly and $1,000 for each
committee meeting attended.

EMPLOYMENT AGREEMENTS

In 1999 we extended for an additional three-year term the three-year
employment agreement with John F. Bookout at a base salary of $800,000. In
October 1998, we entered into a one-year evergreen employment agreement with
Rick G. Lester at a base salary of $175,000 and an initial bonus of $50,000. In
1999, we entered into a one-year evergreen employment agreement with Kenneth R.
Sanders at a base salary of $190,000 and an initial bonus of $50,000. Each of
the agreements provides for a lump sum severance payment if the covered
executive is terminated by us without cause or as otherwise permitted, as
defined in the agreements. Mr. Bookout would be entitled to a severance payment
covering the balance of the three-year term, Mr. Lester's severance payment
would be equal to one year's salary, and in the case of a change of control,
eighteen months' salary plus annual performance awards as defined in the
agreement and all unvested options accelerated to 100% vesting. Mr. Sander's
severance payment would be equal to one year's salary plus annual performance
award as defined in the agreement, and in the case of a change of control, two
year's salary and all unvested options accelerated to 100% vesting. Each of the
agreements provides for various other benefits and for indemnification of the
covered executive under certain conditions.

52
<PAGE> 57

SECURITY OWNERSHIP

The only person we know to have beneficially owned, as of the Record Date,
more than five percent of the Common Stock is Contour Production Company L.L.C.
("CPC"), which beneficially owned 7,214,405 shares of Common Stock. Bessemer
Holdings, L.P. ("Bessemer") owns a majority of the membership interests in CPC.
Based on a Statement on Schedule 13-D filed with the SEC, CPC and Bessemer are
each deemed to beneficially own the shares of Common Stock held of record by
CPC. As of the Record Date, those shares represented 49.5% of the total voting
power of our capital stock (consisting of shares of Common Stock and Existing
Preferred Stock). Bevairohn, Ltd., a partnership controlled by John F. Bookout,
Chairman, President and CEO, and six other investment partnerships having the
same general partner as Bessemer own the remaining interests in CPC.

The following table shows information as of the Record Date with respect to
the Common Stock and Existing Preferred Stock beneficially owned, directly or
indirectly, by each of our directors, by our executive officers and by all of
our directors and executive officers as a group.

<TABLE>
<CAPTION>
COMMON PERCENT PREFERRED PERCENT
NAME OF BENEFICIAL OWNER STOCK(1) OF CLASS STOCK OF CLASS(3)
- ------------------------ --------- -------- --------- -----------
<S> <C> <C> <C> <C>
CPC(1)............................................... 7,214,405 54.6% -- --
John Hancock Advisors, Inc.(2)....................... -- -- 165,000 12.1%
John F. Bookout(3)................................... 274,048 2.07 -- --
John J. Conklin, Jr. ................................ 9,104 * -- --
Ralph P. Davidson(4)................................. 9,725 * -- --
Adam P. Godfrey(3)................................... -- -- -- --
Dallas D. Laumbach(5)................................ -- * -- --
Rick G. Lester(6).................................... 12,700 -- -- --
William J. Murray(7)................................. 8,181 * 2,000 *
Edward Park(3)....................................... -- -- -- --
Kenneth R. Sanders................................... 2,000 * -- --
Ward W. Woods(3)..................................... -- -- -- --
All current directors and executive officers as a
group (9 persons).................................. 315,758 2.39 2,000 *
</TABLE>

- ---------------

* Less than 1%

(1) CPC's address is 630 Fifth Avenue, 39th Floor, New York, New York 10111.
Bessemer Holdings, L.P. owns a majority of the membership interests in CPC.
Based on a Statement on Schedule 13-D filed with the SEC, CPC and Bessemer
are each deemed to beneficially own the shares of common stock held of
record by CPC.

(2) According to a Schedule 13G filed with the SEC on February 14, 2000, John
Hancock Advisors, Inc. ("John Hancock") has sole voting power and sole
dispositive power over these shares. John Hancock's address is 101
Huntington Avenue, Boston, Massachusetts 02199.

(3) Excludes 7,214,405 shares of Common Stock held by CPC, in which Messrs.
Godfrey, Park and Woods have an indirect interest, and as to which each of
Messrs. Godfrey, Park and Woods have disclaimed beneficial ownership.

(4) Excludes 12,225 shares of Common Stock held by Mr. Davidson's wife as to
which Mr. Davidson has disclaimed beneficial ownership.

(5) Mr. Laumbach resigned June 15, 1999.

(6) Represents shares of Common Stock subject to vested options.

(7) Includes 2,000 shares of Preferred Stock held in Mr. Murray's defined
benefit pension plan.

53
<PAGE> 58

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have entered into an agreement with BPC pursuant to which BPC provides
us with financial advisory services. For its services under this agreement, we
paid BPC an advisory fee of $500,000 in December 1999 and we will pay an
additional $500,000 in each December of 2000 and 2001. In addition, we reimburse
BPC expenses it incurs in rendering advisory services. We have also agreed to
indemnify BPC and its affiliates against certain liabilities under this
agreement.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 20,000,00 shares of Common Stock,
and 2,000,000 shares of Preferred Stock, $1.50 par value per share, of which
1,365,173 shares are currently designated as Existing Preferred Stock. As of the
Record Date, there were outstanding 13,211,449 shares of Common Stock and
1,365,173 shares of Existing Preferred Stock. Upon the effectiveness of the
Reclassification, the shares of Existing Preferred Stock (including accumulated
and unpaid dividends) will be reclassified into shares of Common Stock and
shares of a new transitional preferred stock (the Cash Equivalent Preferred
Stock). At May 1, 2000, accumulated and unpaid dividends on the Existing
Preferred Stock aggregated $9.0 million ($6.5625 per share). Each share of
Existing Preferred Stock has a liquidation value of $25 (plus accumulated and
unpaid dividends). Chase-Mellon Securities L.L.C. is the transfer agent and
registrar for the Common Stock and the Existing Preferred Stock.

Each outstanding share of our capital stock is fully paid and
nonassessable.

The following descriptions summarize the material terms and provisions of
our capital stock but do not purport to be complete and are qualified in their
entirety by reference to the Certificate of Incorporation, which has been filed
as an exhibit to the Registration Statement of which this Statement forms a part
and which is incorporated herein by reference.

COMMON STOCK

Dividends

Holders of the Common Stock are entitled to dividends, when and if declared
by the Board of Directors, but only out of funds legally available therefor,
subject to (i) the rights of the holders of shares ranking prior to Common Stock
as to dividends and distributions, including the Existing Preferred Stock and
(ii) limitations on the payment of dividends on Common Stock contained in
certain of the Company's outstanding debt instruments. Holders of Existing
Preferred Stock are entitled to the payment of dividends for the current and all
prior quarterly periods before any dividend may be declared upon Common Stock or
before any other payment on account of, or the setting aside of money for, the
purchase, redemption or other retirement of Common Stock may be made. We are
effectively prohibited at present from paying dividends on our Common Stock and
Existing Preferred Stock.

Liquidation Rights

Upon the liquidation, dissolution or winding up of the affairs of Contour,
whether voluntary or involuntary, each share of Existing Preferred Stock is
entitled, before any distribution is made to holders of Common Stock, to receive
the amount of the liquidation value of such Existing Preferred Stock, which is
$25 per share, together with all accumulated and unpaid dividends to the date
fixed for distribution -- at present $6.5625 per share. After the stated amounts
payable upon liquidation on the Existing Preferred Stock have been paid in full
or provision for the payment has been made, our remaining net assets would be
distributed pro rata to the holders of Common Stock.

Voting Rights

Each share of Common Stock is entitled to one vote for all purposes, except
as otherwise provided by law or as expressly provided in the Certificate of
Incorporation.

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<PAGE> 59

EXISTING PREFERRED STOCK

Dividends

Holders of Existing Preferred Stock are entitled to receive cumulative cash
dividends at an annual rate of $2.625 per share payable quarterly in arrears on
February 1, May 1, August 1 and November 1, but only, when, and if declared by
the Board of Directors out of funds legally available therefor. We are
prohibited from declaring and paying dividends on any junior stock and from
redeeming, repurchasing or making a sinking fund payment on any junior stock
unless all prior dividends accumulated on the Existing Preferred Stock,
including the current quarterly period, have been paid or declared and set aside
for payment.

Liquidation Rights

The Existing Preferred Stock has a liquidation preference of $25 per share,
plus accumulated and unpaid dividends, before any distribution of assets is made
to holders of Common Stock. After payment in full of the liquidation preference
plus any accumulated and unpaid dividends on the Existing Preferred Stock, the
holders will not be entitled to any further participation in any distribution of
assets. Neither a consolidation or merger of the Company with another entity nor
a sale or transfer of all or part of our assets for cash, securities or other
property will be considered a liquidation, dissolution or winding up. If assets
available for distribution are insufficient to pay the full liquidation
preference, holders of Existing Preferred Stock are entitled to share ratably in
any such distribution based on their shareholding.

Redemption

The Existing Preferred Stock is redeemable, but only out of funds legally
available therefor, at our option, in whole or in part, on not more than 60 and
not less than 20 days' notice, currently at $25.79 per share (decreasing to $25
pursuant to a scale in 2004) plus dividends accumulated and unpaid to the
redemption date ($6.5625 per share at present).

Ranking

The Existing Preferred Stock ranks senior to the Common Stock as to
liquidation and dividends.

Conversion

The shares of Existing Preferred Stock are convertible, at the option of
the holder thereof, into shares of Common Stock at a rate of .347 shares of
Common Stock for each share of Existing Preferred Stock. No payment or
adjustment for accumulated dividends is to be made on conversion. The conversion
rate is subject to adjustment in certain events, including (i) dividends (and
other distributions) payable to all holders of Common Stock in shares of our
capital stock, including Common Stock, (ii) the issuance to all holders of
Common Stock of rights or warrants which entitle them to subscribe for or
purchase Common Stock at a price per share less than the current market price
(as defined), (iii) subdivisions, combinations and reclassifications of Common
Stock, and (iv) distributions to all holders of Common Stock of evidences of our
indebtedness or assets (including securities, but excluding those rights or
warrants referred to above and dividends and distributions paid in cash out of
current or retained earnings). In case of certain consolidations or mergers to
which we are a party or the sale or transfer of all or substantially all of our
assets, each share of Existing Preferred Stock then outstanding and entitled to
be converted after such consolidation, merger, sale or transfer would become
convertible into the kind and amount of securities, cash and other property
receivable upon the consolidation, merger, sale or transfer by a holder of a
number of shares of Common Stock equal to the number of shares into which such
share of Existing Preferred Stock might have been converted immediately prior to
such consolidation, merger, sale or transfer.

Special Conversion Rights. The Existing Preferred Stock has a special
conversion right that becomes effective upon the occurrence of certain types of
significant transactions affecting ownership or control of

55
<PAGE> 60

Contour. On the occurrence of a change in control or a fundamental change (as
defined) at a time when the market value (as defined) of the Common Stock is
less than the prevailing conversion price, the special conversion right would,
for a limited period, increase the conversion ratio to as high as .625 shares of
Common Stock per share of Existing Preferred Stock.

Voting Rights

The holders of Existing Preferred Stock are entitled to one vote per share,
voting together as a single class with the holders of shares of Common Stock, on
all matters on which the shares of Common Stock may vote, including the election
of directors. Holders of two-thirds of the outstanding shares, voting as a
separate class, are required, among other matters: (i) to authorize or increase
the authorized amount of any additional class of stock ranking prior to the
Existing Preferred Stock, or (ii) to amend, alter or repeal any provisions of
our Certificate of Incorporation or By-laws so as to affect the rights of the
Existing Preferred Stock in any respect adverse to the holders thereof.

Failure to Pay Dividends

If we fail to pay dividends on the Existing Preferred Stock in an amount
equal to at least six quarterly dividends (whether or not consecutive), the
number of directors then constituting the Board of Directors shall be increased
by two and the holders of the Existing Preferred Stock, voting together as a
single class, shall have the right to elect the two additional members of the
Board of Directors. Such right will expire when all accumulated but unpaid
dividends on the Existing Preferred Stock have been paid and dividends on the
Existing Preferred Stock for the then current quarterly period have been paid or
declared and set apart. As of May 1, 2000, we had omitted dividends on the
Existing Preferred Stock for a total of 10 quarters. See Note 5 of Notes to
Consolidated Financial Statements included elsewhere herein. As a result,
holders of the Existing Preferred Stock have the right, which has not been
exercised to date, to elect two additional members to the Board of Directors at
the Annual Meeting to serve until the earliest of (i) the completion of the
Reclassification, if it occurs, (ii) the date on which dividend arrearages on
the Existing Preferred Stock are eliminated or (iii) the date of the next annual
meeting of stockholders.

CASH EQUIVALENT PREFERRED STOCK

Because the Cash Equivalent Preferred Stock will be redeemed immediately
for cash at $3.50 per share on issue and is only a mechanism to facilitate the
Reclassification under Delaware law, its terms are limited to a statement of its
seniority over Common Stock upon the liquidation or dissolution of the Company,
a statement that its liquidation preference is $3.50 per share, a statement that
it has no voting, dividend or conversion right and provisions calling for its
immediate redemption for cash at $3.50 per share following the effectiveness of
the Reclassification.

Not later than the effective time of the Reclassification, we will
establish a purchase fund for the Cash Equivalent Preferred Stock by depositing
with a paying agent an amount of cash sufficient to pay the aggregate redemption
price for such shares.

The shares of Cash Equivalent Preferred Stock redeemed pursuant to the
procedure for its immediate redemption upon issue shall have the status of
authorized but unissued shares of the Company's preferred stock, without
designation as to series and will be subject to reissuance by the Board of
Directors.

56
<PAGE> 61

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes certain U.S. Federal income tax
consequences of the Reclassification which are generally applicable to holders
of the Existing Preferred Stock under the Internal Revenue Code of 1986, as
amended (the "Code"). Tax consequences which are different from or in addition
to those described herein may apply to holders of Existing Preferred Stock who
are subject to special treatment under the U.S. Federal income tax laws, such as
non-U.S. persons, tax-exempt organizations, financial institutions, insurance
companies, broker-dealers, stockholders who hold their Existing Preferred Stock
as part of a hedge, straddle, wash sale, synthetic security, conversion
transaction or other integrated investment comprised of Existing Preferred Stock
and one or more other investments, persons who acquired their shares in
compensatory transactions or other persons who do not hold their shares of
Existing Preferred Stock as capital assets. This discussion is limited to U.S.
Federal income tax consequences and does not address any other tax consequences,
including, without limitation, foreign, state or local tax consequences. This
summary is based on the Code, Treasury Regulations promulgated thereunder, and
judicial and administrative interpretations thereof all as of the date of this
offering memorandum. The statutory provisions, regulations and interpretations
on which this summary is based are all subject to change, possibly on a
retroactive basis, and to differing interpretations.

THE U.S. FEDERAL INCOME TAX CONSEQUENCES SUMMARIZED BELOW ARE FOR GENERAL
INFORMATION ONLY. THIS SUMMARY IS NOT A SUBSTITUTE FOR AN INDIVIDUAL ANALYSIS OF
THE TAX CONSEQUENCES OF THE RECLASSIFICATION TO A HOLDER OF EXISTING PREFERRED
STOCK. EACH HOLDER OF EXISTING PREFERRED STOCK SHOULD CONSULT A TAX ADVISOR
REGARDING THE PARTICULAR FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF
THE RECLASSIFICATION IN LIGHT OF SUCH HOLDER'S OWN SITUATION.

Reclassification. The Company is not aware of any authority which
specifically addresses the U.S. Federal income tax consequences of transactions
substantially the same as the Reclassification. However, the Company believes
that for U.S. Federal income tax purposes, the issuance of the Cash Equivalent
Preferred Stock and its immediate repurchase should be ignored and the
transaction should be viewed as a recapitalization described in Code Section
368(a)(1)(E) with each holder receiving one share of Common Stock and $3.50 of
cash (the "boot") in exchange for a share of Existing Preferred Stock. If the
transaction were viewed as such a recapitalization, the following U.S. Federal
income tax consequences should occur:

a. any gain on the Reclassification to a holder of Existing Preferred
Stock (the amount by which the sum of fair market value of the Common Stock
and boot received for a share of Existing Preferred Stock exceeds the
holder's tax basis of such Existing Preferred Stock) will be recognized for
U.S. Federal income tax purposes up to the amount of the boot; however, if
a holder of Existing Preferred Stock realizes a loss on the
Reclassification (that is the sum of fair market value of the Common Stock
and boot received in exchange for a share of Existing Preferred Stock is
less than the holder's tax basis of such Existing Preferred Stock), such
loss will not be recognized for U.S. Federal income tax purposes at the
time of Reclassification;

b. a holder of Existing Preferred Stock should have an adjusted tax
basis in the Common Stock received equal to such holder's basis in the
Existing Preferred Stock reduced by the boot received in the
Reclassification and increased by the amount of income recognized by the
holder with respect to the Reclassification; and

c. a holder of Existing Preferred Stock should have a holding period
in the Common Stock received in the Reclassification which is the same as
the holding period of such holder's Existing Preferred Stock held
immediately before the exchange.

Any gain (as described above) recognized in the Reclassification by a
holder of Existing Preferred Stock will be either a dividend to the extent of
the ratable share of current or accumulated earnings and profits of the Company,
if any, or gain from the sale or exchange of stock. For purposes of determining
the
57
<PAGE> 62

characterization as dividend or sale or exchange income, the transaction should
be tested as though shares of stock were actually issued to holders of Existing
Preferred Stock and then immediately redeemed for the boot. Under Code Section
302, the boot will be taxed as a dividend unless the deemed redemption (i)
results in a "complete termination" of the holder's stock interest in the
Company under Code Section 302(b)(3), (ii) is "substantially disproportionate"
with respect to the holder under Code Section 302(b)(2), or (iii) is "not
essentially equivalent to a dividend" under Code Section 302(b)(1). In
determining whether any of these tests have been met, shares of Company stock
considered to be owned by the holder by reason of certain constructive ownership
rules in Code Sections 302(c) and Section 318, as well as shares actually owned,
must be taken into account. If any of these tests are met, the gain from the
Reclassification will be treated as a gain from the sale or exchange of stock
for U.S. Federal income tax purposes.

A redemption will completely terminate a holder's interest in the Company
if as a result of the Reclassification immediately thereafter, the holder no
longer has any stock interest in the Company either directly or constructively
after application of the rules of Code Section 302(c). A redemption will be
substantially disproportionate with respect to the holder if (i) the ratio of
the voting stock owned by the holder (including stock attributed to the holder
under Code Section 302(c)) immediately after the Reclassification to all the
voting stock of the Company is less than 80% of the same ratio for the voting
stock owned by the holder immediately before the Reclassification, (ii) there is
a similar percentage reduction in the ownership by the holder of Common Stock of
the Company, and (iii) the holder owns less than 50% of the voting stock of the
Company. Whether a redemption is "not essentially equivalent to a dividend" with
respect to a holder will depend upon the holder's particular circumstances. The
Internal Revenue Service has ruled that a minority stockholder in a publicly
held corporation whose relative stock interest is minimal and who exercises no
control with respect to corporate affairs is considered to have a "meaningful
reduction" if such stockholder has a reduction in its percentage stock
ownership. In determining whether any of the foregoing tests have been
satisfied, the holder is deemed, under the constructive ownership rules of Code
Section 302(c), to own any shares in the Company owned by certain related
parties and entities and in any shares which the holder or certain related
persons and entities have an option to acquire. However, because of ambiguities
applying the foregoing rules, you should consult your tax advisor to determine
whether a deemed redemption of stock of the Company in exchange for the cash
boot should be treated as a dividend or as a payment in exchange for stock.

Back-up Withholding. A holder of Existing Preferred Stock may be subject to
back-up withholding at the rate of 31% with respect to cash proceeds received
pursuant to the Reclassification. The Company will be required to deduct and
withhold tax if (i) the payee fails to furnish a taxpayer identification number
("TIN") to the Company or establish an exemption from back-up withholding, (ii)
the IRS notifies the Company that the TIN furnished by the payee is incorrect,
(iii) there has been a notified payee underreporting with respect to interest,
dividends or original issue discount described in Code Section 3406(c), or (iv)
there has been a failure of the payee to certify under penalty of perjury that
the payee is not subject to withholding under Code Section 3406(a)(1)(C). As a
result, if any one of these occurs, the Company will be required to withhold a
tax equal to 31% from any cash payments made with respect to the Existing
Preferred Stock.

58
<PAGE> 63

CERTAIN BANKRUPTCY AND INSOLVENCY CONSIDERATIONS

Under the Bankruptcy Code, or other applicable bankruptcy and insolvency
laws, completion of the Reclassification may have, among other things, the
consequences indicated below.

If the Company voluntarily or involuntarily becomes a debtor under the
Bankruptcy Code, the ability of holders of the Company's debt to recover their
investment may be impaired. Given the risks inherent in the reorganization
process, including (i) the potential deterioration of the business of the
Company and its subsidiaries during a bankruptcy proceeding, (ii) the possible
loss of a significant number of employees, and (iii) the additional
administrative expense associated with a bankruptcy case, it is not possible to
determine what percentage of their investment debt holders of the Company are
likely to recover in a bankruptcy reorganization. Ultimate recovery would
depend, among other things, on the impact of the bankruptcy proceedings on the
business of the Company, the treatment of the debt in a plan of reorganization
and the length of time necessary to complete the reorganization process. It is
not unusual for complex bankruptcy proceedings to continue for a period of years
before a plan of reorganization is confirmed and payments under the plan are
made. A reorganization could affect the Company's ability to generate revenues
from operations or asset sales and could significantly diminish the saleable
value of its assets. Alternatively, the Company could be required to liquidate
its assets under Chapter 7 or a liquidating plan under Chapter 11. The foregoing
factors, in addition to those factors described below, could be applicable in
the event a bankruptcy petition is filed after completion of the
Reclassification. Because the Reclassification involves, in effect the payment
to Existing Preferred Stockholders of cash in the amount of $3.50 per share, it
is possible that debt holders may seek to recover cash amounts paid to Existing
Preferred Stockholders in any bankruptcy or insolvency proceeding involving the
Company or in other proceedings on the grounds that such payments constituted a
fraudulent transfer.

One of three fraudulent transfer statutes may be applicable to the
Reclassification: (i) the Uniform Fraudulent Transfer Act ("UFTA") as codified
by the state of Texas (the state in which the Company's headquarters are
located); (ii) the Uniform Fraudulent Conveyance Act ("UFCA") as codified by the
state of Delaware (the state in which the Company is incorporated); and (iii)
section 548 of the Bankruptcy Code. Section 548 of the Bankruptcy code governs
fraudulent conveyance as a matter of federal law applicable to persons or
corporations who are debtors in cases pending in the federal bankruptcy courts
and substantially based upon the UFCA. The UFTA is generally modeled after both
the UFCA and Section 548 of the Bankruptcy Code; each provides for the avoidance
of transfers made with actual intent to defraud creditors, or made with
constructively fraudulent intent.

To sustain a constructive fraud finding under section 548 of the Bankruptcy
Code, the UFCA and the UFTA, a two-prong test is applied involving: (1) the
value given and (2) the financial condition of the transferor. For the
constructive fraud provisions to apply, the court must find that the transfer or
obligation was for less than "fair consideration" (under the UFCA) or for less
than a "reasonably equivalent value" (under Section 548 of the Bankruptcy Code
or the UFTA). In addition to the finding of lack of fair consideration or
reasonably equivalent value, the court must find that the transfer (1) was made
while the transferor was insolvent or rendered the transferor insolvent, (2)
would leave the transferor with insufficient capital, or (3) would place the
transferor in a position to incur debts which it is unable to pay. The
definition of "insolvent" varies under the three statutes.

The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. The Company would be
considered insolvent, under Texas law, if the sum of all its liabilities is
greater than the value of all its assets at a fair valuation or if it were
generally not able to pay its debts as they become due. Under the Bankruptcy
Code, the Company would be considered insolvent if the sum of all its
liabilities is greater than the value of all its property at a fair valuation.
Under Delaware law, the Company would be insolvent if the present fair saleable
value of its assets is less than the amount required to repay its probable
liability on its debts as they become absolute and matured. The foregoing
italicized terms and are applied on a case-by-case basis to determine the
insolvency of a particular person. Because there can be no assurance which
jurisdiction's fraudulent

59
<PAGE> 64

transfer law would be applied by a court, there can be no assurance as to what
standard a court would apply in order to determine insolvency.

If a court in a lawsuit by or on behalf of an unpaid creditor or a
representative of creditors, such as a trustee in bankruptcy or the Company as
debtor-in-possession, were to find that, at the time of the Reclassification,
(a) the Company received less than fair consideration or reasonably equivalent
value in exchange for the Reclassification consideration paid to holders of
Existing Preferred Stock, and (b) the Company (i) was insolvent, or was rendered
insolvent as a result of the Reclassification, (ii) had unreasonably small
capital for its business, or (iii) intended to incur or believed it would incur,
debts beyond its ability to pay as such debts matured, such court could, among
other remedies, void the Reclassification and order the repayment to the
Company, or to a fund for the benefit of creditors, an amount equal to any
excess value the holders of Existing Preferred Stock received.

LEGAL OPINIONS

The validity of the shares of Common Stock and Cash Equivalent Preferred
Stock issuable in connection with the Reclassification is being passed upon by
Fulbright & Jaworski L.L.P., Houston, Texas.

EXPERTS

The financial statements as of December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.

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<PAGE> 65

GENERAL INFORMATION CONCERNING CONSENTS

SOLICITATION OF CONSENTS

This Statement is furnished in connection with the solicitation by our
Board of Directors. Consents should be sent to the Consent Solicitation Agent at
its address shown on the back cover of this Statement.

Solicitation is being made by the use of the mails, but may also be made by
telephone, telegram and personal interviews.

RECORD DATE

Holders of Existing Preferred Stock of record at the close of business on
May 17, 2000 are entitled to notice of this Consent Solicitation and to give
consents. On the Record Date, there were issued and outstanding 13,211,449
shares of Common Stock and 1,365,173 shares of Existing Preferred Stock.

NO DISSENTERS' RIGHTS OR APPRAISAL RIGHTS

No dissenters' rights or appraisal rights exist with respect to approval of
the Reclassification.

VOTING RIGHTS

The Reclassification proposal requires the approval of the holders of a
majority of the outstanding shares of Common Stock and Existing Preferred Stock
voting together as a single class pursuant to which each share thereof has one
vote, and the approval of the holders of two-thirds of the outstanding shares of
Existing Preferred Stock, voting as a separate class, as to which each share
thereof has one vote. The effect of giving your consent is to cast your votes in
favor of the Reclassification for purposes of your separate vote as a class as
well as your vote with Common Stock.

REVOCATION OF CONSENT

A holder of Existing Preferred Stock who has executed and returned a
Consent may revoke it at any time before the effective date of the
Reclassification (which will not be earlier than [20 business days from the date
of this Statement], 2000). A revocation may be in any written form as long as it
clearly states that the Consent is no longer effective.

EXPENSES OF SOLICITATION

We have engaged D.F. King & Co. to assist us in making the solicitation. We
have a contract with D.F. King & Co. calling for it to be paid $7,500 plus
expenses for its solicitation efforts. We will pay this amount. In addition, we
anticipate that we will incur and pay the following additional expenses in
connection with the Consent Solicitation and Reclassification:

<TABLE>
<S> <C>
Accounting fees and expenses.............................. $
Legal fees and expenses...................................
Printing costs............................................
Other miscellaneous expenses..............................
</TABLE>

Various officers and employees will also engage in solicitation efforts in
connection with the Consent Solicitation as part of their normal duties, and
they will not be compensated additionally for such efforts.

61
<PAGE> 66

WHERE YOU CAN FIND MORE INFORMATION

In connection with this Statement, we filed a registration statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933 with
the Commission as to the securities offered hereby. Because the Reclassification
may be viewed as a tender offer by us for our outstanding Preferred Stock, we
also filed a Schedule TO with the Commission in connection herewith. This
Statement omits certain information contained in the Registration Statement and
the Schedule TO. For further information pertaining to the securities offered
hereby, we refer you to the Registration Statement and the Schedule TO,
including the exhibits filed with the Registration Statement and the Schedule
TO. We are subject to the informational requirements of the Securities Exchange
Act of 1934 and file periodic reports, proxy statements and other information
with the Commission. The Registration Statement and the Schedule TO, including
the exhibits thereto, as well as such reports, proxy statements and other
information, can be inspected and copied at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Northwestern
Atrium Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
documents can be obtained from the Commission at prescribed rates at their
offices. You may obtain information on the operation of the Commission's Public
Reference Facilities by calling 1-800-SEC-0330. The Commission also maintains a
World Wide Web site that contains registration statements, reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of this site is
http://www.sec.gov.

Questions and requests for assistance or additional copies of this
Statement and the accompanying Consent may be directed to the Consent
Solicitation Agent as set forth on the back cover page of this Statement.

No person is authorized to give any information or to make any
representation not contained in this Statement in connection with the matters
contained in this Statement, and if given or made, such information or
representation must not be relied upon. This Statement does not constitute an
offer to sell, or a solicitation of an offer to purchase, any securities other
than the securities covered by this Statement, by us or any other person, or an
offer or solicitation of such securities, or the solicitation of a proxy or
consent, in any jurisdiction, to or from any person to whom it is unlawful to
make such offer or solicitation or such proxy or consent solicitation in such
jurisdiction. Neither the delivery of this Statement nor any distribution of the
securities made under this Statement shall, under any circumstances, create an
implication that there has been no change in our affairs or in the information
set forth herein since the date of this Statement.

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<PAGE> 67

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONTOUR ENERGY CO. AND SUBSIDIARIES:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets -- December 31, 1998 and 1999... F-3
Consolidated Statements of Income (Loss) -- For the years
ended December 31, 1997, 1998 and 1999.................... F-4
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Changes in Stockholders'
Deficit -- For the years ended December 31, 1997, 1998 and
1999...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets -- December 31, 1999 and March
31, 2000 (unaudited)...................................... F-29
Consolidated Statements of Loss -- For the three months
ended March 31, 1999 and 2000 (unaudited)................. F-30
Consolidated Statements of Cash Flows -- For the three
months ended March 31, 1999 and 2000 (unaudited).......... F-31
Notes to Consolidated Financial Statements (unaudited)...... F-32
</TABLE>

F-1
<PAGE> 68

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Contour Energy Co.:

We have audited the accompanying consolidated balance sheets of Contour
Energy Co. and subsidiaries (the "Company") as of December 31, 1998 and 1999,
and the related consolidated statements of income (loss), cash flows, and
changes in stockholders' deficit for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Houston, Texas
March 23, 2000

F-2
<PAGE> 69

CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 8,435 $ 10,370
Accounts receivable......................................... 18,071 18,389
Accounts receivable -- drilling programs.................... 624 199
Prepaid expenses and other current assets................... 1,121 1,042
--------- ---------
Total current assets.............................. 28,251 30,000
--------- ---------
Oil and gas properties, successful efforts method:
Unproved properties, net.................................. 38,293 22,260
Properties subject to amortization........................ 496,686 428,116
Pipelines and other transportation assets, at cost.......... 1,582 1,582
Furniture, fixtures and equipment........................... 3,554 3,596
--------- ---------
540,115 455,554
Less: Accumulated depreciation, depletion and
amortization.............................................. (283,660) (289,798)
--------- ---------
Total property and equipment, net................. 256,455 165,756
Restricted cash............................................. -- 7,500
Other non-current assets, net............................... 1,491 526
--------- ---------
Total assets...................................... $ 286,197 $ 203,782
========= =========
LIABILITIES:
Accounts payable and accrued expenses....................... $ 33,113 $ 25,207
Accounts payable -- drilling programs....................... 272 115
Current portion of long-term debt........................... 32,251 8,598
--------- ---------
Total current liabilities......................... 65,636 33,920
--------- ---------
Long term debt.............................................. 287,500 246,165
--------- ---------
Total liabilities................................. 353,136 280,085
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 2,000,000 shares
authorized at December 31, 1998 and 1999; 1,733,628 and
1,363,319 shares issued and outstanding at December 31,
1998 and 1999, respectively (liquidation value $48,977 and
$41,824, respectively).................................... 2,600 2,045
Common stock, $.10 par value, 20,000,000 shares authorized
at December 31, 1998 and 1999; 12,602,224 and 13,212,005
shares issued and outstanding at December 31, 1998 and
1999, respectively........................................ 1,260 1,321
Additional paid-in capital.................................. 300,653 301,516
Accumulated deficit......................................... (371,452) (381,185)
--------- ---------
Total stockholders' deficit....................... (66,939) (76,303)
--------- ---------
Total liabilities and stockholders' deficit....... $ 286,197 $ 203,782
========= =========
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE> 70

CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Oil and gas revenues........................................ $75,864 $ 79,150 $ 54,107
Interest and other income................................... 274 505 1,974
Gain on sale of properties.................................. -- -- 25,863
------- -------- --------
Total revenues.................................... 76,138 79,655 81,944
------- -------- --------
COSTS AND EXPENSES:
Production expenses......................................... 10,955 19,878 15,541
Exploration expenses........................................ 5,433 12,034 5,736
General and administrative expenses......................... 6,875 7,077 7,463
Interest and other debt expenses............................ 25,071 33,333 38,002
Depreciation, depletion and amortization.................... 25,853 38,602 35,986
Impairment of oil and gas properties........................ -- 25,738 --
------- -------- --------
Total expenses.................................... 74,187 136,662 102,728
------- -------- --------
Income (loss) before income taxes and extraordinary item.... 1,951 (57,007) (20,784)
Income taxes................................................ -- -- --
------- -------- --------
Net income (loss) before extraordinary item................. 1,951 (57,007) (20,784)
Extraordinary item.......................................... -- -- 11,051
------- -------- --------
Net income (loss)........................................... 1,951 (57,007) (9,733)
Less: cumulative preferred stock dividends.................. (4,582) (4,550) (4,207)
------- -------- --------
Net loss applicable to common stock......................... $(2,631) $(61,557) $(13,940)
======= ======== ========
Basic and diluted loss per common share before extraordinary
item...................................................... $ (.26) $ (4.89) $ (1.94)
======= ======== ========
Basic and diluted loss per common share..................... $ (.26) $ (4.89) $ (1.08)
======= ======== ========
Weighted average common shares outstanding.................. 10,076 12,578 12,871
======= ======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE> 71

CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................... $ 1,951 $(57,007) $ (9,733)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization................. 25,853 38,602 35,986
Impairment of oil and gas properties..................... -- 25,738 --
Gain on sale of properties............................... -- -- (25,863)
Exploration expenses..................................... 5,433 12,034 5,736
Accretion and amortization of other debt expenses........ 4,297 5,236 4,824
Extraordinary gain....................................... -- -- (11,051)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable and other
current assets........................................ (1,297) 6,880 186
Increase in other non-current assets..................... (1,203) (526) (493)
Increase (decrease) in accounts payable and accrued
expenses.............................................. 4,570 (8,655) (8,063)
--------- -------- ---------
Net cash provided by (used in) operating
activities..................................... 39,604 22,302 (8,471)
--------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures....................................... (53,140) (56,579) (15,204)
Proceeds from sale of oil and gas properties............... -- 17,363 83,153
Restricted cash investment................................. -- -- (7,500)
Acquisition of oil and gas properties...................... (111,135) -- --
Acquisition purchase price adjustment...................... -- -- 6,889
--------- -------- ---------
Net cash (used in) provided by investing activities........ (164,275) (39,216) 67,338
--------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from long term borrowings......................... 180,500 119,100 4,000
Principal payments on long term borrowings................. (82,700) (118,900) (115,500)
Proceeds from sale of notes, net........................... -- 29,526 125,938
Proceeds from sale of common stock, net.................... 27,545 273 --
Proceeds from conversion of preferred stock................ -- (2) --
Retirement of notes........................................ -- (228) (71,370)
Dividends on preferred stock............................... (4,582) (4,582) --
--------- -------- ---------
Net cash provided by (used in) financing
activities..................................... 120,763 25,187 (56,932)
--------- -------- ---------
(Decrease) increase in cash and cash equivalents........... (3,908) 8,273 1,935
Cash and cash equivalents, beginning of period............. 4,070 162 8,435
--------- -------- ---------
Cash and cash equivalents, end of period................... $ 162 $ 8,435 $ 10,370
========= ======== =========
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE> 72

CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
--------- ------ ---------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Stockholders' deficit at January 1, 1997............ $2,618 $ 983 $273,096 $(307,232)
Issuance of 2,700,000 shares of common stock in
Contour Transaction............................... -- 270 26,730 --
Issuance of 42 shares of common stock pursuant to
employee incentive stock options.................. -- 4 541 --
Preferred stock dividends........................... -- -- -- (4,582)
Net income.......................................... -- -- -- 1,951
------ ------ -------- ---------
BALANCE AT DECEMBER 31, 1997...................... 2,618 1,257 300,367 (309,863)
------ ------ -------- ---------
Conversion of 11,815 shares of preferred stock into
4,098 shares of common stock...................... (18) 1 17 --
Issuance of 27,217 shares of common stock pursuant
to employee incentive stock options............... -- 2 269 --
Preferred stock dividends........................... -- -- -- (4,582)
Net loss............................................ -- -- -- (57,007)
------ ------ -------- ---------
BALANCE AT DECEMBER 31, 1998...................... 2,600 1,260 300,653 (371,452)
------ ------ -------- ---------
Conversion of 1,676 shares of preferred stock into
582 shares of common stock........................ (2) -- 2 --
Issuance of 56,250 shares of common stock pursuant
to employee incentive stock options............... -- 6 (6) --
Conversion of 368,633 shares of preferred stock into
552,950 shares of common stock pursuant to tender
offer............................................. (553) 55 498 --
Issuance of restricted stock........................ -- -- 369 --
Net loss............................................ -- -- -- (9,733)
------ ------ -------- ---------
BALANCE AT DECEMBER 31, 1999...................... $2,045 $1,321 $301,516 $(381,185)
====== ====== ======== =========
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE> 73

CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- INDUSTRY CONDITIONS AND LIQUIDITY

In 1999, Contour Energy Co. (formerly Kelley Oil & Gas Corporation) ("the
Company") undertook several strategic actions in response to the severe downturn
in the industry in 1998 caused by low commodity prices and the closing of the
capital markets to smaller oil and gas companies. These actions, described
below, were designed to increase the near-term liquidity of the Company, provide
capital for its ongoing capital expenditure programs and establish a stronger
base for future growth.

In April 1999, the Company entered into an Exploration and Development
Agreement with Phillips Petroleum Company ("Phillips") relating to certain of
our interests in the Bryceland, West Bryceland and Sailes fields in north
Louisiana ("Phillips Transaction"). Pursuant to the agreement, the Company (1)
received an $83 million cash payment (2) retained a 42 Bcf, 8-year volumetric
overriding royalty interest (the "VORI") and a 1% override on the excess of
production above such royalty interest and (3) retained 25% of its working
interest in the Cotton Valley formation. In addition, Phillips, will at its risk
and expense, operate, develop, exploit and explore the properties thereby
relieving the Company of significant operating, exploration and development
costs in the future. The transaction closed on May 17, 1999. The Company
recognized a gain of approximately $25.9 million in 1999 related to this
transaction.

In April 1999, the Company negotiated a private offering of $135 million
principal amount, 14% Senior Secured Notes (the "Notes"). The Notes are secured
by a first lien on substantially all of our proved oil and natural gas
properties remaining after the sale to Phillips and guaranteed by three entities
wholly-owned by the Company. In accordance with the Notes indenture, on June 30,
1999, the Company funded $37.5 million to repurchase $35 million principal
amount of the Notes at a repurchase price equal to 104% of the principal amount,
plus accrued and unpaid interest and commitment fees to the date of the
repurchase.

On May 17, 1999, the Company funded $28.5 million to repurchase $46.1
million of the outstanding principal amounts of its 7 7/8% Convertible
Subordinated Notes due December 15, 1999 and its 8 1/2% Convertible Subordinated
Debentures due April 1, 2000 (collectively, the "Securities") at a price equal
to $590 per $1,000 principal amount (not including accrued interest paid of $1.2
million).

In addition, on May 17, 1999 the Company repaid all borrowings outstanding
under its revolving credit facility of $115.5 million plus accrued interest and
terminated the revolving credit facility and funded cash collateral for a $1.5
million letter of credit which was subsequently increased to $7.5 million. The
Company used net proceeds remaining from the transactions for general corporate
purposes. In 1999, the Company recognized an extraordinary gain of $11.1 million
related to debt repurchases and refinancings, comprised of: (i) a net gain on
the Securities tender offer and other debt retirements of $16.0 million, reduced
by, (ii) a $1.4 million premium on the $35 million Notes repurchase and the
proportionate write-off of debt issue costs of $2.4 million and (iii) the
write-off of credit facility debt issue costs of $1.1 million.

The remaining outstanding amounts of our 8 1/2% Convertible Subordinated
Debentures of $8.4 million (including the effect of $0.3 million of retirements
in the first quarter of 2000) are due on April 1, 2000. In addition, the Company
has interest payments due in April and October, 2000 of $15.7 million and $15.4
million, respectively. In March 2000, the Company sold a portion of the VORI
(the "VORI Sale"). The net proceeds from the sale approximated $20 million.
Since the portion of the VORI sold (approximately 16.5 Bcf) represents
production commencing April 1, 2003, the VORI Sale will not impact our operating
cash flows until 2003.

The Company has received the benefits of a general increase in the level of
commodity prices over the past several months. The Company believes that this
increase, combined with the cash on hand subsequent to the sale of a portion of
the VORI will sustain its operations over the near term. However,
F-7
<PAGE> 74
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the commodity markets are volatile and there is no certainty that current oil
and natural gas prices can be sustained at these levels. In addition, the
Company continues to have significant debt outstanding relative to its asset
base and pays a high portion of its cash flow to service such debt. Furthermore,
the Company does not have ready access to incremental sources of capital to
supplement its operational requirements. The combination of the factors
described herein and industry conditions beyond its control, may adversely
offset our financial condition, results of operations and cash flows.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Operations. Contour Energy Co. (formerly Kelley Oil & Gas
Corporation), a Delaware Corporation, its corporate subsidiaries and
proportionate partnership interests are referred to herein as the "Company". The
Company is an independent oil & gas company engaged in the exploration,
development and acquisition of domestic oil and gas properties, principally in
the Gulf Coast region and northern Louisiana.

Principles of Consolidation. The consolidated financial statements include
the accounts of (i) the Company, (ii) its corporate subsidiaries, all of which
are wholly-owned, and (iii) our indirect 100% owned partnership, Kelley
Operating Company, Ltd., and (iv) its proportionate interest in development
drilling programs sponsored by Kelley Oil Corporation to conduct drilling
operations on properties of Kelley Operating Company, Ltd. ("1992 DDP" and "1994
DDP"). All significant intercompany accounts and transactions have been
eliminated in consolidation.

Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents. Cash payments attributable to interest on all indebtedness
aggregated $19.6 million, $26.5 million and $34.1 million for the years ended
December 31, 1997, 1998 and 1999, respectively.

Financial Instruments. The Company's financial instruments consist of cash
and cash equivalents, receivables, payables, long term debt and commodity
derivatives (see Note 10). As of December 31, 1999, the estimated fair value of
the Company's long-term debt was $181.2 million. The fair value of such long-
term debt has been based on estimated market prices indicative of potential
transactions between a "willing buyer" and a "willing seller". The carrying
amount of the Company's other financial instruments approximates fair value.

Oil and Gas Properties. All of the Company's interests in its oil and gas
properties are located in the United States and are accounted for using the
successful efforts method. Under the successful efforts method, the costs of
successful wells, development dry holes and leases containing productive
reserves are capitalized and amortized on a unit-of-production basis over the
life of the related reserves. Estimated future abandonment and site restoration
costs, net of anticipated salvage values, are amortized on a unit-of-production
basis over the life of the related reserves. Exploratory drilling costs are
initially capitalized pending determination of proved reserves but are charged
to expense if no proved reserves are found. Other exploration costs, including
geological and geophysical expenses, leasehold expiration costs and delay
rentals, are expensed as incurred.

Unproved leasehold costs are capitalized and are not amortized pending an
evaluation of the exploration results. If unproved properties are determined to
be productive, the related costs are transferred to proved oil and gas
properties. If unproved properties are determined not to be productive, or if
such properties have been otherwise impaired, the excess carrying value is
charged to expense. Unproved properties are assessed quarterly for impairment in
value, with any impairment charged to expense. The Company recognized non-cash
impairment charges of $4.1 million related to unproved properties for the year
ended December 31, 1998.

F-8
<PAGE> 75
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Our proved oil and gas properties are reviewed for indications of
impairment whenever events or circumstances indicate that the carrying value of
its oil and gas properties may not be recoverable. As a result of a decline in
its proved reserves at January 1, 1999 from year-earlier levels, the Company
performed an assessment of the fair value of its oil and gas properties
indicating an impairment should be recognized as of year end. Under this
analysis, the fair value for the Company's proved oil and gas properties was
estimated using escalated pricing and present value discount factors reflecting
risk assessments. Based on this analysis, the Company recognized noncash
impairment charges against the carrying values of its proved oil and gas
properties aggregating $21.6 million for the year ended December 31, 1998.

Other Property and Equipment. The costs of pipelines and other
transportation assets are depreciated using the straight-line method over the
estimated useful lives of the related assets. Furniture, fixtures and equipment
are recorded at cost and depreciated using the straight-line method over the
estimated useful lives of three to five years. Maintenance and repairs are
charged to expense as incurred.

Other Non-Current Assets. Other non-current assets consist primarily of
debt issue costs, net of accumulated amortization. These costs are amortized
over the anticipated term of the related debt.

Income Taxes. Deferred income taxes are provided on a liability method
whereby deferred tax assets and liabilities are established for the difference
between the financial reporting and income tax basis of assets and liabilities
as well as operating loss and tax credit carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

Oil and Gas Revenues. The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold is not significantly different from the Company's
production entitlement. Revenues from gas marketing, net of cost of gas sold,
are included in oil and gas revenues and amounted to $2.8 million, $1.3 million
and $1.4 million for the years ended December 31, 1997, 1998 and 1999,
respectively.

Earnings per Share. The basic loss per common share before extraordinary
item and the basic loss per common share as shown on the Consolidated Statements
of Income (Loss) reflects net income (loss) before extraordinary item and net
income (loss), respectively, cumulative preferred stock dividends, whether or
not declared, less the excess of the fair value of our preferred stock exchange
offer (see Note 5) over the fair value of the original terms ($1.6 million at
July 28, 1999), divided by the weighted average number of common shares
outstanding during the respective years. The extraordinary gain per common share
for the year ended December 31, 1999 was $.86. In calculating diluted income
(loss) per share, common shares issuable under stock options and upon conversion
of convertible subordinated debentures and convertible preferred stock are added
to the weighted average common shares outstanding when dilutive. For the years
ended December 31, 1997, 1998 and 1999, all potentially dilutive securities are
anti-dilutive and therefore are not included in the EPS calculations.
Potentially dilutive securities which could impact EPS in the future include
stock options granted to employees to purchase 0.4 million common shares, the
Company's 8 1/2% Convertible Subordinated Debentures which can be converted into
45 thousand common shares and the Company's $2.625 Convertible Preferred Stock
("Preferred Stock") which can be can be converted into 0.5 million common
shares.

Stock Based Compensation. The Company applies Accounting Principles Board
Opinion No. 25 ("APB 25") and related Interpretations in accounting for stock
option and purchase plans. Under APB 25, compensation expense, if any, is based
on the intrinsic value of the equity instrument at the measurement

F-9
<PAGE> 76
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

date. The Company has not recognized any compensation expense because the
exercise price of employee stock options equals the market price of the
underlying stock on the date of the grant.

Derivatives and Hedging Activities. See Note 10 for a discussion of the
Company's accounting policies related to hedging activities. In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which was amended in June 1999 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- an amendment of FASB Statement No.
133." SFAS No. 133, as amended, is effective for fiscal years beginning after
June 15, 2000, and establishes accounting and reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as an asset or liability measured at its fair value. Depending on
the intended use of the derivative, changes in its fair value will be reported
in the period of change as either a component of earnings or a component of
other comprehensive income. Retroactive application to periods prior to adoption
is not allowed. The Company has not quantified the impact of adoption on its
financial statements.

Comprehensive Income. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
and displaying comprehensive income and its components. SFAS 130 is effective
for periods beginning after December 15, 1997. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as owners.
As of December 31, 1999, there are no adjustments ("Other Comprehensive Income")
to net income in deriving comprehensive income.

Risks and Uncertainties. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Changes in Presentation. Certain financial statement items in 1997 and 1998
have been reclassified to conform to the 1999 presentation.

NOTE 3 -- ACQUISITION OF OIL AND GAS PROPERTIES

SPR Acquisition. On December 1, 1997, the Company purchased from SCANA
Petroleum Resources, Inc. ("SPR") substantially all of SPR's assets, including
its oil and gas properties, exploratory leasehold interests and associated
obligations, in exchange for approximately $110 million ("SPR Acquisition"),
subject to adjustment as provided by the Purchase and Sale Agreement between the
Company and SPR. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the purchase price has been preliminarily allocated
to the assets acquired based on estimated fair values at the date of
acquisition. The operating results of the assets acquired from SPR have been
included in Contour's Statements of Income (Loss) since December 1, 1997. The
pro forma information shown below assumes that the acquisition occurred at the
beginning of 1997. Adjustments have been made to reflect changes in the
Company's results from the revenues and direct operating expenses of the
producing properties acquired from SPR, additional interest expense to finance
the acquisition, depreciation, depletion and amortization based on assigned fair
values to the assets acquired and general and administrative expenses incurred
from hiring additional employees. The unaudited pro forma financial

F-10
<PAGE> 77
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

data are not necessarily indicative of financial results that would have
occurred had the SPR Acquisition occurred January 1, 1997, and should not be
viewed as indicative of operations in future periods.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
Revenues.................................................... $112,142
Income (loss) before extraordinary item..................... 1,315
Net income (loss)........................................... 1,315
Loss per common share....................................... (0.30)
</TABLE>

NOTE 4 -- LONG TERM DEBT

Long Term Debt. The Company's long term debt at December 31, 1998 and 1999
is comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
14% Senior Secured Notes.................................... $ 0 $ 94,930
Bank credit facilities...................................... 111,500 0
13 1/2% Senior Notes........................................ 435 0
10 3/8% Senior Subordinated Notes........................... 150,662 151,235
7 7/8% Convertible Subordinated Notes....................... 31,816 0
8 1/2% Convertible Subordinated Debentures.................. 25,338 8,598
-------- --------
319,751 254,763
Less current maturities................................... (32,251) (8,598)
-------- --------
$287,500 $246,165
======== ========
</TABLE>

14% Senior Secured Notes. In April 1999, the Company negotiated a private
offering of $135 million principal amount, 14% Senior Secured Notes (the
"Notes"). The Notes are secured by a first lien on substantially all of our
proved oil and natural gas properties remaining after the Phillips Transaction
and guaranteed by three entities wholly-owned by the Company. In accordance with
the Notes indenture, on June 30, 1999, the Company funded $37.5 million to
repurchase $35 million principal amount of the Notes at a repurchase price equal
to 104% of the principal amount, plus accrued and unpaid interest and commitment
fees to the date of the repurchase.

In September 1999, the Company completed an exchange of publicly registered
14% Senior Secured Notes, Series B for all of the then outstanding Series A
notes. The Series B notes are substantially identical to the Series A notes. The
Notes mature in 2002 and 2003 at premiums ranging from 103% to 105% of their
stated principal amount. The Notes are redeemable at our option on or after
April 15, 2001 at 105% of the stated principal amount. Beginning July 15, 2002,
and thereafter on a quarterly basis, the Company will be obligated to redeem
$2.0 million of the stated principal amount of the Notes at a redemption price
equal to 103% of the stated principal amount. The Company will be obligated to
offer to repurchase a portion of the Notes at a repurchase price equal to 104%
of the stated principal amount if our oil and gas revenues, as determined by
independent petroleum engineers on a quarterly basis, fall below defined levels.
In the event of certain other asset sales, the Company will be obligated to
repurchase a portion of the Notes at a repurchase price equal to 105% of the
stated principal amount. Upon a change

F-11
<PAGE> 78
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of control, as defined, the Company is obligated to offer to repurchase each
holder's Notes at a repurchase price equal to 101% of the stated principal
amount. The indenture for the notes contains conditions and limitations,
including but not limited to, restrictions on (1) payments of cash dividends,
(2) redemptions of capital stock for cash, (3) repayments of subordinated
indebtedness with cash and (4) making investments, including capital
expenditures.

Interest expense on the Notes is payable semi-annually on each April 15 and
October 15. The Company is recognizing interest expense using an effective rate
of 15.3%.

10 3/8% Senior Subordinated Notes. In connection with the refinancing of
the 13 1/2% Senior Notes, the Company issued an aggregate principal amount of
$125.0 million of 10 3/8% Senior Subordinated Notes due 2006 (the "10 3/8%
Senior Subordinated Notes"). The 10 3/8% Senior Subordinated Notes are
redeemable at the option of the Company, in whole or in part, at redemption
prices declining from 105.19% in 2001 to 100% in 2003 and thereafter. The
10 3/8% Senior Subordinated Notes represent unsecured obligations of the Company
and are subordinate in right of payment to all existing and future senior
indebtedness. The indenture for the notes contains conditions and limitations,
including but not limited to restrictions on additional indebtedness, payment of
dividends, redemption of capital stock, and certain mergers and consolidations.
The holder of the 10 3/8% Senior Subordinated Notes also can require the Company
to repurchase the notes at 101% of the principal amount upon a Change of
Control, as defined. Kelley Oil Corporation, a wholly-owned subsidiary of the
Company and Kelley Operating Company, Ltd., an indirect wholly-owned partnership
of the Company are guarantors of the 10 3/8% Senior Subordinated Notes.

On February 3, 1997, the Company completed an exchange of $125.0 million
aggregate principal amount of publicly registered 10 3/8% Senior Subordinated
Notes, Series B, for all of the then outstanding Series A notes. The Series B
notes were substantially identical to the Series A notes.

In May 1998, the Company sold $30.0 million principal amount of our 10 3/8%
Senior Subordinated Notes due 2006, Series C ("Series C Notes") at a cash price
of $1,015 per $1,000 principal amount. The net proceeds received were used to
reduce outstanding borrowings under our bank credit facility. The Series C Notes
are redeemable at the option of the Company, in whole or in part, at redemption
prices declining ratably from 105.19% on October 15, 2001 to 100% at October 15,
2003 and thereafter. The Company may redeem up to 35% of the original principal
amount of the Series C Notes before October 15, 1999 at 110.38% with the
proceeds of an equity offering (provided that either at least $18.0 million
aggregate principal amount of such notes remains outstanding or such redemption
retires such notes in their entirety). The Series C Notes represent unsecured
obligations of the Company and are subordinate in right of payment to all
existing and future senior indebtedness. The indenture for the notes contains
conditions and limitations, including but not limited to restrictions on
additional indebtedness, payment of dividends, redemption of capital stock, and
certain mergers and consolidations. The holders of the Series C Notes also can
require the Company to repurchase the notes at 101% of the principal amount upon
a Change of Control, as defined. Kelley Oil Corporation, a wholly owned
subsidiary of the Company, and Kelley Operating Company, Ltd., an indirect
wholly owned partnership of the Company, are guarantors of the Series C Notes.

The Series C Notes were sold pursuant to Rule 144A of the Securities Act of
1933. In issuing the Series C Notes, the Company agreed to use its best efforts
to register under the Securities Act notes identical in terms to the Series C
Notes ("Series D Notes"). The Company completed the exchange of the Series C
Notes for the Series D Notes on November 12, 1998.

7 7/8% Convertible Subordinated Notes and 8 1/2% Convertible Subordinated
Debentures. In December 1999, the Company paid off the remaining principal of
$3.5 million and interest of $0.1 million on its outstanding 7 7/8% Convertible
Subordinated Notes. At December 31, 1999, the Company had outstanding

F-12
<PAGE> 79
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8 1/2% Convertible Subordinated Debentures due April 1, 2000 (the "8 1/2%
Subordinated Debentures") in the aggregate principal amount of $8.6 million (the
"Subordinated Debt"). Each $1,000 face value amount of the 8 1/2% Subordinated
Debentures is convertible into 5.1864 shares of the Company's Common Stock or
2.5932 shares of the Company's Common Stock and 5.411 shares of Preferred Stock.
In the fourth quarter of 1999, the Company retired $1.0 million face amount of
its 8 1/2% Subordinated Debentures. The settlement payments included principal
amounts of $0.9 million and accrued interest of $10,000 and the fourth quarter
of 1999 includes an extraordinary gain of $0.1 million for these transactions.
In the first quarter of 2000, the Company retired $0.3 million face amount of
its 8 1/2% Subordinated Debentures. The settlement payments included principal
amounts of $0.2 million and accrued interest of $7,000.

Debt Maturities. The Company has aggregate debt maturities of $8.7 million
in 2000, $4.1 million in 2002, $100.7 million in 2003 and $155.0 million in
2006.

NOTE 5 -- STOCKHOLDERS' DEFICIT

On June 28, 1999, the Company announced that its board of directors
approved changing our name to Contour Energy Co. and its NASDAQ ticker symbol to
CONCC. Concurrent with the name change, the Company established the authorized
capital stock of the Company at 22 million shares, 20 million of which were
designated as common stock and 2 million as preferred stock, and effected a 1
for 10 reverse stock split, reducing the total outstanding shares of common
stock from approximately 126 million to approximately 12.6 million (without
giving effect to the preferred stock exchange offer described in the following
paragraph). These actions were consented to by our majority stockholder and
became effective on July 30, 1999. All historical share and per share data
appearing in this document have been restated to reflect this reverse stock
split.

On August 30, 1999, at market close, our shares of common stock and
convertible Preferred Stock, which traded under the symbols of CONCC and CONCP,
were delisted from the Nasdaq SmallCap Market. These actions were taken as a
result of our failure to meet the requirements for continued listing on this
exchange. On August 31, 1999, at market open, our stock began trading on the OTC
Bulletin Board under the symbols of CONC and CONCP.

Contour Stock Purchase. In February 1996, the Company issued 4.8 million
shares of its Common Stock at $10.00 per share to Contour Production Company
L.L.C. ("Contour") upon the closing of a Stock Purchase Agreement between the
Company and Contour (the "Contour Transaction"). The newly issued shares
represented 49.8% of the Company's voting power. In connection with the Contour
Transaction, the Company (i) entered into an option agreement with Contour (the
"Contour Option Agreement"), (ii) obtained consents from its principal
stockholders, subject to compliance with applicable securities law, to amend its
Certificate of Incorporation to increase its authorized Common Stock from 100
million shares to 200 million shares, (iii) entered into employment agreements
with John F. Bookout, President of Contour, and three other new executives named
by him, (iv) adopted a nonqualified stock option plan for the new executives
other than Mr. Bookout, (v) amended its existing incentive stock option plans,
(vi) reduced the size of its board of directors (the "Board") to seven members
and reconstituted the Board with three continuing directors and four designees
of Contour and (vii) replaced its credit facility.

Contour Option. Under the Contour Option Agreement, the Company granted
Contour an option (the "Contour Option") to purchase up to 2.7 million shares
(the "Maximum Option Number") of Common Stock at $10.00 per share (subject to
antidilution adjustments) upon satisfaction of certain conditions, including the
absence of any Company debt repurchase or redemption obligations as a result of

F-13
<PAGE> 80
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the purchase. Contour voluntarily exercised its option in full on December 1,
1997 to partially fund the SPR Acquisition.

Preferred Stock. The Company is authorized to issue up to 2 million shares
of $1.50 par value preferred stock. At December 31, 1998, 1,733,628 shares of
preferred stock were outstanding. On June 28, 1999, the Company began an offer
to exchange 15 shares of its common stock (or 1.5 shares on a post-split basis)
for each share of its $2.625 convertible exchangeable preferred stock
("Preferred Stock"). Pursuant to the exchange offer, 368,633 shares of Preferred
Stock were tendered representing approximately 21% of the total Preferred Stock
outstanding. In July 1999, the shares were exchanged for 552,950 shares of newly
issued common stock of the Company (after giving effect to the 1 for 10 reverse
stock split), increasing our shares of outstanding common stock to approximately
13.2 million. With the exchange, the Company eliminated dividend arrearages of
approximately $1.5 million.

In January 1996, the Company suspended the payment of the quarterly
Preferred Stock dividend scheduled for February 1, 1996 to conserve cash. On
April 15, 1997, the Board of Directors of the Company declared a dividend of
$2.625 per preferred share (approximately $4.6 million), which was paid on May
1, 1997. On April 14, 1998, the Company declared a dividend of $2.625 per share
of Preferred Stock (approximately $4.6 million), which was paid on April 30,
1998. The Company has not declared the quarterly dividends of $0.65625 per
preferred share for February 1, 1998, May 1, 1998, August 1, 1998, November 1,
1998, February 1, 1999, May 1, 1999, August 1, 1999, November 1, 1999 and
February 1, 2000, aggregating approximately $8.1 million (after giving effect to
the preferred stock exchange in the third quarter of 1999), covering nine
quarters. Future dividends on the Preferred Stock are prohibited under the
indenture governing the Notes. No interest is payable on Preferred Stock
arrearages; however, the terms of the Preferred Stock enable holders, voting
separately as a class, to elect two additional directors to the Board at each
meeting of stockholders at which directors are to be elected during any period
when Preferred Stock dividends are in arrears in an aggregate amount equal to at
least six quarterly dividends, whether or not consecutive. Since the Company has
not paid dividends on the Preferred Stock for a period of nine quarters, the
holders of the Preferred Stock, as a group, have the right to elect two
additional directors to our Board of Directors. See "Legal Proceedings".

Each share of Preferred Stock is convertible, at the holder's option, into
.347 shares of Common Stock, equivalent to a conversion price of $72.00 per
share of Common Stock relative to the $25 per share liquidation preference of
the Preferred Stock (the "Preferred Conversion Price").

Restricted Stock. In June 1999, the Company issued 56,250 shares (after
giving effect to the 1 for 10 reverse stock split) of restricted common stock to
three executives as compensation for services. The restrictions expired in 1999.
The Company recorded compensation expense and additional paid in capital based
on the fair market value of the shares issued.

NOTE 6 -- EMPLOYEE STOCK PLANS

Employee Stock Options. The Company has both qualified and nonqualified
stock option plans that provide for granting of options for the purchase of
common stock to key employees. These stock options may be granted for periods up
to ten years and are generally subject to vesting periods up to three years,
except options granted during 1997 and 1998 which are subject to a four year
vesting period.

F-14
<PAGE> 81
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock option activity for the Company during 1997, 1998 and 1999 was as
follows:

<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
(OPTIONS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding,
beginning of year............ 459 $16.30 460 $17.50 450 $18.70
Granted...................... 48 26.10 72 22.00 215 5.80
Exercised.................... (41) 13.10 (27) 10.00 -- --
Surrendered or expired....... (6) 26.20 (55) 17.30 (273) 17.30
--- --- ----
Stock options outstanding, end
of year...................... 460 $17.50 450 $18.70 392 $12.60
=== ====== === ====== ==== ======
</TABLE>

At December 31, 1999, approximately 0.4 million shares were available for
future option grants.

The following table summarizes information about the options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL LIFE EXERCISE EXERCISE
RANGE OF EXERCISE PRICE OPTIONS (YEARS) PRICE OPTIONS PRICE
- ----------------------- ------- ---------------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.44-10.00....................... 255 9.4 $ 7.00 13 $10.00
$17.50-25.60....................... 127 6.9 22.00 88 21.70
$27.20-41.30....................... 10 4.6 35.40 8 36.70
</TABLE>

The weighted average fair value of options granted during 1997, 1998 and
1999 was $15.10, $14.60 and $4.63, respectively. The fair value of the options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: weighted average risk-free
interest rate of 6.4% for 1997, 5.2% for 1998 and 6.6% for 1999; an expected
volatility of 60% for 1997, 78% for 1998 and 106% for 1999; expected life of
five years and no dividend yield for all three years.

The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for stock option and purchase plans. Accordingly,
no compensation cost has been recognized for the stock option plans. Had
compensation cost been recognized based upon the fair market value at the grant
dates for awards under those plans consistent with the method of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
compensation", the Company's net loss and earnings per share for the years ended
December 31, 1997, 1998 and 1999 would have been as reflected in the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
1997 1998 1999
------ -------- --------
<S> <C> <C> <C>
Net income (loss) before extraordinary item (in
thousands)........................................... $1,319 $(57,708) $(21,153)
Loss per common share before extraordinary item........ (0.32) (4.95) (1.97)
Net income (loss) (in thousands)....................... $1,319 $(57,708) $(10,102)
Loss per common share.................................. (0.32) (4.95) (1.11)
</TABLE>

ESOP/401K. Kelley Oil established the ESOP effective January 1, 1984 for
the benefit of substantially all of its employees. Effective September 1, 1996,
the ESOP was amended to include a

F-15
<PAGE> 82
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

401(k) feature whereby the Company is obligated to make matching contributions
up to 6% of each employee's salary. The plan also provides for additional
discretionary contributions. For 1997, 1998 and 1999, the Company made matching
contributions totaling $0.2 million, $0.3 million and $0.2 million,
respectively.

NOTE 7 -- INCOME TAXES

The following table sets forth a reconciliation of the statutory federal
income tax for the years ended December 31, 1997, 1998 and 1999:

<TABLE>
<CAPTION>
1997 1998 1999
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes...................... $ 1,951 $(57,007) $(9,733)
------- -------- -------
Income tax expense (benefit) computed at statutory
rates................................................ 663 (19,382) (3,309)
Increase (decrease) in valuation allowance........... (1,158) 18,735 3,150
Permanent differences:
Nondeductible expenses............................... 708 700 378
Other -- net......................................... (213) (53) (219)
------- -------- -------
Tax expense (benefit)........................ $ -- $ -- $ --
======= ======== =======
</TABLE>

No federal income taxes were paid for the years ended December 31, 1997,
1998 and 1999.

The Company's deferred tax position reflects the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting.
Significant components of the deferred tax liabilities and assets are as
follows:

<TABLE>
<CAPTION>
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depletion, depreciation and capitalization
methods on oil and gas properties...................... $ -- $ --
Deferred tax assets:
Book over tax depletion, depreciation and capitalization
methods on oil and gas properties...................... 37,430 40,624
Net operating loss carryforwards.......................... 77,741 77,721
Charitable contribution carryforwards..................... 54 30
Alternative minimum tax credit carryforwards.............. 21 21
Valuation allowance....................................... (115,246) (118,396)
--------- ---------
Total deferred tax assets................................. -- --
--------- ---------
Net deferred tax liability........................ $ -- $ --
========= =========
</TABLE>

Net Operating Loss Carryforwards and Alternative Minimum Tax Credits. As of
December 31, 1999, the Company had cumulative net operating loss carryforwards
("NOL") for federal income tax purposes of approximately $229 million, which
expire in 2000 through 2019, and net operating loss carryforwards for
alternative minimum tax purposes of approximately $218 million, which expire in
2008 through 2019. Due to previous ownership changes, future utilization of the
net operating loss carry forwards will be limited by Internal Revenue Code
section 382.

F-16
<PAGE> 83
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8 -- RELATED PARTY TRANSACTIONS

The 1994 DDP. In February 1994, the Company sponsored 1994 Development
Drilling Program (the "1994 DDP") completed a public offering of 20.9 million
units of its limited and general partner interests at $3.00 per unit. As of
December 31, 1999, the Company owned 19.2 million units (91.9%) in the 1994 DDP,
together with its 3.94% general partner interest.

The 1992 DDP. During November 1992, the Company sponsored 1992 development
Drilling Program (the "1992 DDP") completed a public offering of 16.0 million
units of limited and general partner interests at $3.00 per unit. As of December
31, 1998, Kelley Oil owned 13.4 million units (83.7%) in the 1992 DDP, together
with its 3.94% general partner interest. As of December 31, 1999, the 1992 DDP
was indebted to Kelley Oil for loans aggregating $0.2 million ($26,000, net of
intercompany eliminations). The Company recorded interest income on this
indebtedness of $27,000 in 1999, net of intercompany eliminations.

Reimbursements from Affiliated Programs. The Company is reimbursed for
administrative and overhead expenses incurred in connection with the management
and administration of each of these affiliated programs. Such amounts, net of
intercompany eliminations, aggregated $0.1 million in each of 1997, 1998 and
1999.

Advisory Fees. In connection with the Contour Transaction, the Company
entered into an agreement (the "Advisory Agreement") with Bessemer Partners &
Co. ("BPCO"), an affiliate of Bessemer, providing for the engagement of BPCO to
provide the Company with financial advisory services. Under the Advisory
Agreement, BPCO has provided certain financial advisory services. For its
services under the Advisory Agreement, BPCO received an advisory fee of $2.0
million at the closing of the Contour Transaction and $500,000 in each of
December 1997, 1998 and 1999, and will receive an additional $500,000 in each
December of 2000 and 2001. In addition, BPCO is entitled to reimbursement of
expenses incurred in connection with rendering advisory services. The Company
also has agreed to indemnify BPCO and its affiliates against certain liabilities
under the Advisory Agreement.

NOTE 9 -- COMMITMENTS AND CONTINGENCIES

Significant Customers. Substantially all of the Company's receivables are
due from a limited number of natural gas transmission companies and other gas
purchasers. During 1999, natural gas sales to three purchasers accounted for
35%, 28% and 26% of the Company's total sales. To date, this concentration has
not had a material adverse effect on the consolidated financial condition of the
Company.

Litigation. The Company is involved in various claims and lawsuits
incidental to its business. In the opinion of management, the ultimate liability
thereunder, if any, will not have a material effect on the financial statements
of the Company.

F-17
<PAGE> 84
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Leases. The Company leases office space and equipment under operating
leases with options to renew. Rental expenses related to these leases for the
years ended December 31, 1997, 1998 and 1999 were $0.8 million, $0.6 million and
$0.6 million, respectively. For the balance of the lease terms, minimum rentals
are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000.................................................. $ 670
2001.................................................. 328
2002.................................................. 10
2003.................................................. 2
2004.................................................. --
------
Total....................................... $1,010
======
</TABLE>

The terms of our office space lease provide that the Company may terminate
its rental obligation upon six months notice and incurring a maximum obligation
of $0.2 million.

NOTE 10 -- HEDGING ACTIVITIES

The Company periodically uses forward sales contracts, natural gas and
crude oil price swap agreements, natural gas basis swap agreements and options
to reduce exposure to downward price fluctuations on its natural gas and crude
oil production. The Company does not engage in speculative transactions. During
1999, the Company used price and basis swap agreements. Price swap agreements
generally provide for the Company to receive or make counterparty payments on
the differential between a fixed price and a variable indexed price for natural
gas and oil. Basis swap agreements generally provide for the Company to receive
or make counterparty payments on the differential between a variable indexed
price and the price it receives from the sale of natural gas production, and are
used to hedge against unfavorable price movements in the relationship between
such variable indexed price and the price received for such production. Gains
and losses realized by the Company from hedging activities are included in oil
and gas revenues and average sales prices in the period that the related
production is sold. Additionally, the Company must provide cash collateral for
any hedges (through swap or other agreements) to cover counter-party risk. The
Company's hedging activities also cover the oil and gas production attributable
to the interest in such production of the public unitholders in its subsidiary
partnerships.

Through natural gas price swap agreements, the Company hedged approximately
65%, 49% and 50% of its natural gas production for 1997, 1998 and 1999,
respectively, at average NYMEX quoted price of $2.35, $2.31 and $2.17 per Mmbtu,
respectively, before transaction and transportation costs. As of December 31,
1999, 1,550,000 Mmbtu's of natural gas production for 2000 has been hedged by
natural gas price swap agreements at an average NYMEX quoted price of $2.41 per
Mmbtu before transaction and transportation costs. Additional hedging activities
since December 31, 1999 have increased the volumes hedged in 2000 to 8,900,000
Mmbtus of natural gas at an average NYMEX quoted price of $2.56 per Mmbtu before
transaction and transportation costs. Through crude oil price swap agreements,
the Company hedged approximately 29% of its crude oil production for 1999 at an
average NYMEX quoted price of $20.00 per bbl, before transaction and
transportation costs. No crude oil production was hedged in either 1997 or 1998.
As of December 31, 1999, 30,000 bbls of crude oil production for January 2000
through March 2000 has been hedged by crude oil price swap agreements at an
average NYMEX quoted price of $25.05 per bbl before transaction and
transportation costs. Additional hedging activities since December 31, 1999 have
increased the volumes hedged in 2000 to 182,500 bbls of crude oil production at
an average NYMEX quoted price of $26.21 per bbl before transaction and
transportation costs. Hedging

F-18
<PAGE> 85
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

activities decreased crude oil and natural gas revenues by approximately $4.2
million in 1997 and $0.2 million in 1999, respectively, and increased such
revenues by approximately $3.5 million in 1998 as compared to estimated revenues
had no hedging activities been conducted. At December 31, 1999, the unrealized
gain on the Company's existing hedging instruments for future production months
in 2000 approximated $23,000.

The credit risk exposure from counterparty nonperformance on natural gas
forward sales contracts and derivative financial instruments is generally the
amount of unrealized gains under the contracts. The Company has not experienced
counterparty nonperformance on these agreements and does not anticipate any in
future periods.

NOTE 11 -- GUARANTOR FINANCIAL STATEMENTS

Kelley Oil Corporation, a wholly-owned subsidiary of the Company and Kelley
Operating Company Ltd., an indirect wholly-owned partnership of the Company are
guarantors of our Series B 14% Senior Secured Notes due 2002-2003 and of our
Series B and Series D 10 3/8 % Senior Subordinated Notes due 2006. Concorde Gas
Marketing, Inc. ("Concorde"), a wholly owned subsidiary of the Company, is also
a guarantor of our Series B 14% Senior Secured Notes due 2002-2003. The
following guarantor consolidating condensed financial statements present:

1. Consolidating condensed balance sheets as of December 31, 1998 and
1999, consolidating condensed statements of income (loss) for each of the
years ended December 31, 1997, 1998 and 1999 and consolidating condensed
statements of cash flows for each of the years ended December 31, 1997,
1998 and 1999.

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

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

CONSOLIDATING CONDENSED BALANCE SHEET

DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets.............. $ 424,609 $ 212,946 $7,863 $ 2,996 $(620,163) $ 28,251
Property and equipment,
net....................... -- 243,927 -- 14,008 (1,480) 256,455
Other non-current assets,
net....................... (165,642) 18,611 -- -- 148,522 1,491
--------- --------- ------ ------- --------- --------
Total assets...... $ 258,967 $ 475,484 $7,863 $17,004 $(473,121) $286,197
========= ========= ====== ======= ========= ========
LIABILITIES AND
STOCKHOLDERS' DEFICIT:
Current liabilities......... $ 38,406 $ 641,113 $3,646 $ 2,635 $(620,164) $ 65,636
Long-term debt.............. 287,500 -- -- -- -- 287,500
Stockholders' deficit....... (66,939) (165,629) 4,217 14,369 147,043 (66,939)
--------- --------- ------ ------- --------- --------
Total liabilities
and
stockholders'
deficit......... $ 258,967 $ 475,484 $7,863 $17,004 $(473,121) $286,197
========= ========= ====== ======= ========= ========
</TABLE>

F-19
<PAGE> 86
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets................... $ 334,360 $ 128,855 $6,317 $ 737 $(440,269) $ 30,000
Property and equipment, net...... -- 161,107 -- 6,141 (1,492) 165,756
Restricted cash.................. -- 7,500 -- -- -- 7,500
Other non-current assets, net.... (149,279) 11,540 -- -- 138,265 526
--------- --------- ------ ------- --------- --------
Total assets........... $ 185,081 $ 309,002 $6,317 $ 6,878 $(303,496) $203,782
========= ========= ====== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities.............. $ 15,219 $ 456,789 $1,501 $ 680 $(440,269) $ 33,920
Long term debt................... 246,165 -- -- -- -- 246,165
Stockholders' deficit............ (76,303) (147,787) 4,816 6,198 136,773 (76,303)
--------- --------- ------ ------- --------- --------
Total liabilities and
stockholders'
deficit.............. $ 185,081 $ 309,002 $6,317 $ 6,878 $(303,496) $203,782
========= ========= ====== ======= ========= ========
</TABLE>

CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $ 8 $ 57,064 $2,883 $16,625 $ (442) $ 76,138
Costs and expenses................ (27,196) (36,975) (962) (9,367) 313 (74,187)
Equity in earnings of
subsidiaries.................... 29,139 9,179 -- -- (38,318) --
-------- -------- ------ ------- -------- --------
Net income (loss)....... $ 1,951 $ 29,268 $1,921 $ 7,258 $(38,447) $ 1,951
======== ======== ====== ======= ======== ========
</TABLE>

F-20
<PAGE> 87
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues..................... $ (18) $ 69,958 $ 1,425 $ 8,290 $ -- $ 79,655
Costs and expenses........... (33,893) (94,457) (1,053) (6,689) (570) (136,662)
Equity in earnings of
subsidiaries............... (23,096) 1,973 -- -- 21,123 --
-------- -------- ------- ------- ------- ---------
Net income
(loss)........... $(57,007) $(22,526) $ 372 $ 1,601 $20,553 $ (57,007)
======== ======== ======= ======= ======= =========
</TABLE>

CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues..................... $ -- $ 75,145 $1,450 $ 6,324 $ (975) $ 81,944
Costs and expenses........... (38,616) (61,190) (851) (3,034) 963 (102,728)
Equity in earnings of
subsidiaries............... 17,832 3,889 -- -- (21,721) --
Extraordinary item........... 11,051 -- -- -- -- 11,051
-------- -------- ------ ------- -------- ---------
Net income
(loss)........... $ (9,733) $ 17,844 $ 599 $ 3,290 $(21,733) $ (9,733)
======== ======== ====== ======= ======== =========
</TABLE>

F-21
<PAGE> 88
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................. $ 1,951 $ 29,268 $ 1,921 $ 7,258 $(38,447) $ 1,951
Non-cash income (loss)
adjustments............... (24,842) 16,880 1 5,097 38,447 35,583
Changes in operating assets
and liabilities........... (97,813) 105,584 (2,801) (2,900) -- 2,070
--------- --------- ------- -------- -------- ---------
Net cash provided by (used
in) operating
activities................ (120,704) 151,732 (879) 9,455 -- 39,604
--------- --------- ------- -------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures........ -- (51,592) -- (1,548) -- (53,140)
Acquisition of oil and gas
properties................ -- (111,135) -- -- -- (111,135)
Capital contributed to
partnerships.............. -- (5,819) -- -- 5,819 --
Distributions from
partnerships.............. -- 14,014 -- -- (14,014) --
--------- --------- ------- -------- -------- ---------
Net cash used in investing
activities................ -- (154,532) -- (1,548) (8,195) (164,275)
--------- --------- ------- -------- -------- ---------
FINANCING ACTIVITIES:
Net proceeds on long term
borrowings................ 97,800 -- -- -- -- 97,800
Proceeds from sale of common
stock, net................ 27,545 -- -- -- -- 27,545
Distributions to partners... -- -- -- (14,014) 14,014 --
Capital contributed by
partners.................. -- -- -- 5,819 (5,819) --
Dividends on preferred
stock..................... (4,582) -- -- -- -- (4,582)
--------- --------- ------- -------- -------- ---------
Net cash provided by (used
in) financing
activities................ 120,763 -- -- (8,195) 8,195 120,763
--------- --------- ------- -------- -------- ---------
Increase (decrease) in cash
and cash equivalents...... 59 (2,800) (879) (288) -- (3,908)
Cash and cash equivalents,
beginning of period....... 58 2,804 879 329 -- 4,070
--------- --------- ------- -------- -------- ---------
Cash and cash equivalents,
end of period............. $ 117 $ 4 $ -- $ 41 $ -- $ 162
========= ========= ======= ======== ======== =========
</TABLE>

F-22
<PAGE> 89
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............. $(57,007) $(22,526) $ 372 $1,601 $ 20,553 $(57,007)
Non-cash income (loss)
adjustments................. 28,109 70,144 -- 3,687 (20,553) 81,387
Changes in operating assets
and liabilities............. 3,869 (7,976) (372) 2,401 -- (2,078)
-------- -------- ----- ------ -------- --------
Net cash provided by
(used in)
operating
activities........ (25,029) 39,642 -- 7,689 -- 22,302
-------- -------- ----- ------ -------- --------
INVESTING ACTIVITIES:
Capital expenditures.......... -- (56,579) -- -- -- (56,579)
Proceeds from sale of
property.................... -- 17,363 -- -- -- 17,363
Distributions from
partnerships................ -- 7,730 -- -- (7,730) --
-------- -------- ----- ------ -------- --------
Net cash used in
investing
activities........ -- (31,486) -- -- (7,730) (39,216)
-------- -------- ----- ------ -------- --------
FINANCING ACTIVITIES:
Payments on long term
borrowings............... (118,900) -- -- -- -- (118,900)
Net proceeds on long term
borrowings............... 119,100 -- -- -- -- 119,100
Redemption on subordinated
notes.................... (228) -- -- -- -- (228)
Proceeds from sale of common
stock.................... 273 -- -- -- -- 273
Proceeds from conversion of
preferred................ (2) -- -- -- -- (2)
Proceeds from sale of common
stock, net............... 29,526 -- -- -- -- 29,526
Distributions to partners... -- -- -- (7,730) 7,730 --
Dividends on preferred
stock.................... (4,582) -- -- -- -- (4,582)
-------- -------- ----- ------ -------- --------
Net cash provided by (used in)
financing activities........ 25,187 -- -- (7,730) 7,730 25,187
-------- -------- ----- ------ -------- --------
Increase (decrease) in cash
and cash equivalents........ 158 8,156 -- (41) -- 8,273
Cash and cash equivalents,
beginning of period......... 117 4 -- 41 -- 162
-------- -------- ----- ------ -------- --------
Cash and cash equivalents, end
of period................... $ 275 $ 8,160 $ -- $ -- $ -- $ 8,435
======== ======== ===== ====== ======== ========
</TABLE>

F-23
<PAGE> 90
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............ $ (9,733) $ 17,844 $ 599 $ 3,290 $(21,733) $ (9,733)
Non-cash income (loss)
adjustments................ (24,059) 13,267 -- (1,309) 21,733 9,632
Changes in operating assets
and liabilities............ 90,461 (98,536) (599) 304 -- (8,370)
--------- -------- ----- -------- -------- ---------
Net cash provided by (used
in) operating activities... 56,669 (67,425) -- 2,285 -- (8,471)
--------- -------- ----- -------- -------- ---------
INVESTING ACTIVITIES:
Capital expenditures......... -- (14,953) -- (251) -- (15,204)
Proceeds from sale of
property................... -- 73,727 -- 9,426 -- 83,153
Restricted cash investment... -- (7,500) -- -- -- (7,500)
Acquisition purchase price
adjustment................. -- 6,889 -- -- -- 6,889
Distributions from
partnerships............... -- 11,460 -- -- (11,460) --
--------- -------- ----- -------- -------- ---------
Net cash used in investing
activities................. -- 69,623 -- 9,175 (11,460) 67,338
--------- -------- ----- -------- -------- ---------
FINANCING ACTIVITIES:
Net payments on long term
borrowings................. (111,500) -- -- -- -- (111,500)
Proceeds from sale of notes,
net........................ 125,938 -- -- -- -- 125,938
Redemption of subordinated &
senior notes............... (34,865) -- -- -- -- (34,865)
Distributions to partners.... -- -- -- (11,460) 11,460 --
Redemption of senior secured
notes...................... (36,505) -- -- -- -- (36,505)
--------- -------- ----- -------- -------- ---------
Net cash provided by (used
in) financing activities... (56,932) -- -- (11,460) 11,460 (56,932)
--------- -------- ----- -------- -------- ---------
Increase (decrease) in cash
and cash equivalents....... (263) 2,198 -- -- -- 1,935
Cash and cash equivalents,
beginning of period........ 275 8,160 -- -- -- 8,435
--------- -------- ----- -------- -------- ---------
Cash and cash equivalents,
end of period.............. $ 12 $ 10,358 $ -- $ -- $ -- $ 10,370
========= ======== ===== ======== ======== =========
</TABLE>

F-24
<PAGE> 91
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- SUPPLEMENTARY FINANCIAL AND OPERATING INFORMATION ON OIL AND GAS
EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)

This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities".

Capitalized Costs. Capitalized costs and accumulated depreciation,
depletion and amortization relating to the Company's oil and gas producing
activities, all of which are conducted within the continental United States, are
summarized below.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Unevaluated properties.................................... $ 49,854 $ 38,293 $ 22,260
Properties subject to amortization........................ 463,263 496,686 428,116
--------- --------- ---------
Capitalized costs......................................... 513,117 534,979 450,376
Accumulated depreciation, depletion and amortization...... (221,729) (280,640) (286,020)
--------- --------- ---------
Net capitalized costs..................................... $ 291,388 $ 254,339 $ 164,356
========= ========= =========
</TABLE>

Costs Incurred. Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisition costs:
Proved.................................................... $ 73,190 $ 2,338 $ --
Unproved(1)............................................... 40,997 1,405 764
Exploration costs........................................... 9,525 25,414 7,912
Development costs........................................... 40,713 27,875 6,696
-------- ------- -------
Total costs incurred.............................. $164,425 $57,032 $15,372
======== ======= =======
</TABLE>

- ---------------

(1) Includes $40 million in unproved property acquired from SPR on December 1,
1997.

F-25
<PAGE> 92
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reserves. The following table summarizes the Company's net ownership
interests in estimated quantities of proved oil and gas reserves and changes in
net proved reserves, all of which are located in the continental United States,
for the years ended December 31, 1997, 1998 and 1999. Reserves estimates
contained below were prepared by H.J. Gruy & Associates, Inc. ("Gruy"),
independent petroleum engineers.

<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE AND
NATURAL GAS LIQUIDS NATURAL GAS
(MBBLS) (MMCF)
--------------------------- ----------------------------
1997 1998 1999 1997 1998 1999
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year...................... 1,466 2,953 5,294 297,634 354,867 283,559
Revisions of previous estimates........ 106 (79) 1,262 21,831 (31,674) (10,774)
Purchases of reserves in place......... 1,351 -- -- 51,712 -- --
Extensions and discoveries............. 256 3,082 1,762 13,892 9,512 15,620
Sale of reserves in place.............. -- (287) (328) -- (13,589) (107,313)
Production............................. (226) (375) (367) (30,202) (35,557) (22,392)
----- ----- ----- ------- ------- --------
End of year............................ 2,953 5,294 7,623 354,867 283,559 158,700
===== ===== ===== ======= ======= ========
Proved developed reserves at end of
year(1)................................ 2,432 1,981 2,686 257,800 188,824 123,887
===== ===== ===== ======= ======= ========
</TABLE>

- ---------------

(1) Includes 40.9 bcf of natural gas in 1999 related to our interest in the
VORI. In March 2000, the Company executed a sale of a portion of its VORI
for net proceeds of approximately $20 million. The portion of the VORI
reserves sold (approximately 16.5 Bcf) relates to production beginning April
1, 2003.

Standardized Measure. The following table of the Standardized Measure of
Discounted Future Net Cash Flows concerning the standardized measure of future
cash flows from proved oil and gas reserves are presented in accordance with
Statement of Financial Accounting Standards No. 69. As prescribed by this
statement, the amounts shown are based on prices and costs at the end of each
period, and assume continuation of existing economic conditions. Future income
taxes are based on year-end statutory rates, adjusted for operating loss
carryforwards and tax credits. A discount factor of 10% was used to reflect the
timing of future net cash flow. Extensive judgments are involved in estimating
the timing of production and the costs that will be incurred throughout the
remaining lives of the fields. Accordingly, the estimates of future net revenues
from proved reserves and the present value thereof may not be materially correct
when judged against actual subsequent results. Further, since prices and costs
do not remain static, and no price or cost changes have been considered, and
future production and development costs are estimates to be incurred in
developing and producing the estimated proved oil and gas reserves, the results
are not

F-26
<PAGE> 93
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

necessarily indicative of the fair market value of estimated proved reserves,
and the results may not be comparable to estimates disclosed by other oil and
gas producers.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows....................................... $ 930,357 $ 643,473 $ 519,875
Future production costs................................... (196,048) (159,378) (92,153)
Future development costs.................................. (106,123) (93,321) (57,862)
Future income tax expenses................................ (37,050) (1,627) (3,500)
--------- --------- ---------
Future net cash flows................................... 591,136 389,147 366,360
10% annual discount for estimating timing of cash flows... (227,249) (155,677) (127,705)
--------- --------- ---------
Standardized measure of discounted future net cash
flows................................................ $ 363,887 $ 233,470 $ 238,655
========= ========= =========
</TABLE>

The standardized measure of discounted future net cash flows as of December
31, 1997, 1998 and 1999 was calculated using prices in effect as of those dates,
which averaged $16.93, $10.81 and $24.54, respectively, per barrel of oil and
$2.49, $2.07 and $2.15, respectively, per Mcf of natural gas.

Change in Standardized Measure. Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Changes due to current year operations:
Sales of oil and gas, net of production costs............ $ (62,080) $ (57,940) $(38,566)
Sale of reserves in place................................ -- (15,424) (61,420)
Extensions and discoveries............................... 21,945 20,097 50,493
Purchases of reserves in place........................... 91,034 -- --
Future development costs incurred........................ 21,806 9,218 6,696
Changes due to revisions in standardized variables:
Prices and production costs.............................. (243,851) (94,569) 22,998
Revisions of previous quantity estimates................. 25,345 (29,853) (3,916)
Estimated future development costs....................... (17,413) (29,240) 31,603
Income taxes............................................. 69,489 (14,110) (1,873)
Accretion of discount.................................... 51,818 24,903 23,428
Production rates (timing) and other...................... (27,977) 56,501 (24,258)
--------- --------- --------
Net increase (decrease).......................... (69,884) (130,417) 5,185
Beginning of year.......................................... 433,771 363,887 233,470
--------- --------- --------
End of year................................................ $ 363,887 $ 233,470 $238,655
========= ========= ========
</TABLE>

Sales of oil and gas, net of production costs, are based on historical
pre-tax results. Extensions and discoveries, sales and purchases of reserves in
place and the changes due to revisions in standardized variables are reported on
a pre-tax discounted basis, while the accretion of discount is presented after
tax. Extensions and discoveries include proved undeveloped reserves attributable
to our interests in drill sites assigned to DDPs.

F-27
<PAGE> 94
CONTOUR ENERGY CO.
(FORMERLY KELLEY OIL & GAS CORPORATION) AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 13 -- QUARTERLY RESULTS (UNAUDITED)

<TABLE>
<CAPTION>
1998 1999
-------------------------------------- ---------------------------------------
1ST 2ND 3RD 4TH (1) 1ST 2ND (2) 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $23,047 $21,162 $18,630 $ 16,311 $ 15,507 $12,850 $ 12,120 $13,630
Operating profit.................... 3,245 (1,251) (85) (26,087) (2,481) (3,883) (4,629) 374
Net income (loss) before
extraordinary item................ (4,823) (9,433) (8,411) (34,340) (10,986) 11,410 (13,242) (7,966)
Basic and diluted income (loss) per
common share before extraordinary
item.............................. $(0.47) $(0.84) $(0.76) $ (2.82) $ (0.96) $ 0.82 $ (1.09) $ (0.67)
</TABLE>

- ---------------

(1) Reflects non-cash impairment charges against the carrying value of proved
and unproved oil and natural gas properties (see Note 2).

(2) Reflects gain on sale of properties in the Phillips Transaction.

F-28
<PAGE> 95

CONTOUR ENERGY CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 10,370 $ 33,551
Accounts receivable......................................... 18,389 23,119
Accounts receivable -- drilling programs.................... 199 233
Prepaid expenses and other current assets................... 1,042 892
--------- ---------
Total current assets.............................. 30,000 57,795
--------- ---------
Oil and gas properties, successful efforts method:
Unproved properties, net.................................. 22,260 21,914
Properties subject to amortization........................ 428,116 403,135
Pipelines and other transportation assets, at cost.......... 1,582 1,582
Furniture, fixtures and equipment........................... 3,596 3,596
--------- ---------
455,554 430,227
Less: Accumulated depreciation, depletion and
amortization.............................................. (289,798) (286,684)
--------- ---------
Total property and equipment, net................. 165,756 143,543
--------- ---------
Restricted cash............................................. 7,500 7,500
Other non-current assets, net............................... 526 492
--------- ---------
Total assets...................................... $ 203,782 $ 209,330
========= =========
LIABILITIES:
Accounts payable and accrued expenses....................... $ 25,207 $ 34,808
Accounts payable -- drilling programs....................... 115 163
Current portion of long-term debt........................... 8,598 8,406
--------- ---------
Total current liabilities......................... 33,920 43,377
--------- ---------
Long-term debt.............................................. 246,165 246,993
--------- ---------
Total liabilities................................. 280,085 290,370
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 2,000,000 shares
authorized at December 31, 1999 and March 31, 2000;
1,363,319 and 1,365,173 shares issued and outstanding at
December 31, 1999 and March 31, 2000, respectively
(liquidation values at December 31, 1999 and March 31,
2000 of $41,824 and $42,777, respectively)................ 2,045 2,048
Common stock, $.10 par value, 20,000,000 shares authorized
at December 31, 1999 and March 31, 2000; 13,212,005 and
13,211,449 shares issued and outstanding at December 31,
1999 and March 31, 2000, respectively..................... 1,321 1,321
Additional paid-in capital.................................. 301,516 301,513
Accumulated deficit......................................... (381,185) (385,922)
--------- ---------
Total stockholders' deficit....................... (76,303) (81,040)
--------- ---------
Total liabilities and stockholders' deficit....... $ 203,782 $ 209,330
========= =========
</TABLE>

See Notes to Consolidated Financial Statements.

F-29
<PAGE> 96

CONTOUR ENERGY CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
-------- -----------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
REVENUES:
Oil and gas revenues........................................ $ 15,507 $15,227
Interest and other income................................... 161 313
Gain on sale of oil and gas properties...................... -- 3,361
-------- -------
Total revenues.................................... 15,668 18,901
-------- -------
COSTS AND EXPENSES:
Production expenses......................................... 5,284 2,855
Exploration expenses........................................ 1,370 2,321
General and administrative expenses......................... 1,374 1,630
Interest and other debt expenses............................ 8,666 8,809
Depreciation, depletion and amortization.................... 9,960 8,023
-------- -------
Total expenses.................................... 26,654 23,638
-------- -------
Loss before income taxes.................................... (10,986) (4,737)
Income taxes................................................ -- --
-------- -------
Net loss.................................................... (10,986) (4,737)
Less: cumulative preferred stock dividends.................. (1,137) (895)
-------- -------
Net loss applicable to common stock......................... $(12,123) $(5,632)
======== =======
Basic and diluted loss per common share..................... $ (.96) $ (.43)
======== =======
Weighted average common shares outstanding.................. 12,602 13,212
</TABLE>

See Notes to Consolidated Financial Statements.

F-30
<PAGE> 97

CONTOUR ENERGY CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(10,986) $(4,737)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization.................. 9,960 8,023
Gain on sale of properties................................ -- (3,361)
Gain on debt redemption................................... -- (46)
Exploration expenses...................................... 1,370 2,321
Accretion and amortization of debt expenses............... 1,233 926
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable................ 196 (4,764)
Decrease in prepaid expenses and other current assets..... 353 150
Decrease in other non-current assets...................... 3 34
Increase in accounts payable and accrued expenses......... 1,969 9,649
-------- -------
Net cash provided by operating activities......... 4,098 8,195
-------- -------
INVESTING ACTIVITIES:
Capital expenditures........................................ (5,823) (4,601)
Proceeds from the sale of oil and gas properties............ -- 19,831
-------- -------
Net cash (used in) provided by investing
activities...................................... (5,823) 15,230
-------- -------
FINANCING ACTIVITIES:
Redemption of subordinated debentures....................... -- (244)
-------- -------
Net cash used in financing activities............. -- (244)
-------- -------
(Decrease) increase in cash and cash equivalents............ (1,725) 23,181
Cash and cash equivalents, beginning of period.............. 8,435 10,370
-------- -------
Cash and cash equivalents, end of period.................... $ 6,710 $33,551
======== =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-31
<PAGE> 98

CONTOUR ENERGY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

General. The accompanying unaudited interim consolidated financial
statements of Contour Energy Co. (the "Company") have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission in accordance with generally accepted accounting principles for
interim financial information. These financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair statement in all material respects of the results for the interim periods
presented. The results of operations for the three months ended March 31, 2000
are not necessarily indicative of results to be expected for the full year. The
accounting policies followed by the Company are set forth in Note 2 to the
financial statements in its Annual Report on Form 10-K for the year ended
December 31, 1999. These unaudited consolidated interim financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1999 Annual Report on Form 10-K.

The consolidated balance sheet as of December 31, 1999 has been derived
from the December 31, 1999 audited consolidated financial statements. The
consolidated statements of income and cash flows for the three months ended
March 31, 1999 have been derived from the March 31, 1999 audited consolidated
financial statements. The consolidating condensed balance sheet as of December
31, 1999 and the consolidating condensed statements of income (loss) and cash
flows for the three months ended March 31, 1999 have been derived from the Notes
to consolidated financial statements included in the March 31, 1999 audited
consolidated financial statements.

NOTE 2 -- SALE OF A PORTION OF VOLUMETRIC OVERRIDING ROYALTY INTEREST

In March 2000, the Company sold a portion of its volumetric overriding
royalty interest ("VORI") (the "VORI Sale"). The net proceeds from the VORI Sale
were approximately $19.8 million. Since the portion of the VORI sold
(approximately 16.5 Bcf) represents production commencing April 1, 2003, the
VORI Sale will not impact the Company's operating cash flows until 2003. In the
first quarter of 2000 the Company recognized a gain of approximately $3.4
million related to this transaction.

NOTE 3 -- REDEMPTION OF CONVERTIBLE SUBORDINATED DEBENTURES

In the first quarter of 2000, the Company retired $0.3 million face amount
of its 8 1/2% Convertible Subordinated Debentures. The settlement payments
included principal amounts of $0.2 million and accrued interest of $7,000. On
April 3, 2000, the Company paid off the remaining principal of $8.4 million and
interest of $0.4 million on its outstanding 8 1/2% Convertible Subordinated
Debentures.

NOTE 4 -- PREFERRED STOCK

The Company has not declared the quarterly dividends of $0.65625 per
preferred share for February 1, 1998 through May 1, 2000, aggregating
approximately $9.0 million, covering ten quarters. Further dividends are
restricted under the Company's indentures governing its 10 3/8% Senior
Subordinated Notes and its 14% Senior Secured Notes. No interest is payable on
Preferred Stock arrearages; however, the terms of the Preferred Stock enable
holders, voting separately as a class, to elect two additional directors to the
Board at each meeting of stockholders at which directors are to be elected
during any period when Preferred Stock dividends are in arrears in an aggregate
amount equal to at least six quarterly dividends, whether or not consecutive.

In March 2000, a class action suit was brought against the Company in the
Court of Chancery of the State of Delaware, complaining, among other things,
that the Company had not taken necessary steps to facilitate the election of two
additional directors to its board by preferred stockholders. Under the charter
provisions relating to the Company's preferred stock, upon the occasion of the
dividends not being paid on

F-32
<PAGE> 99
CONTOUR ENERGY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

such preferred stock for six quarters, the preferred stockholders are, as a
class, entitled to elect two directors to the Company's board. Among the relief
sought in such proceeding are an injunction directing the Company to create new
directorships for nominations from preferred stockholders at the 2000 annual
meeting of stockholders, directing that past dividends be paid, declaring that
the Company's reverse stock split in 1999, which involved the settlement of
fractional shares by the payment of a small amount of cash (less than $1,500) by
the Company, constituted a repurchase of common shares in violation of the
preferred stock charter provisions and was therefore void and other relief. The
Company has consistently acknowledged, publicly and privately, the rights of
such preferred stockholders to elect two directors and believes it has not in
any way encumbered the preferred shareholders from exercising such rights. The
Company believes that the complaint and the relief sought are wholly without
merit and will vigorously defend its positions in such proceedings.

NOTE 5 -- EARNINGS PER SHARE

The basic loss per common share as shown on the Consolidated Statements of
Loss reflects net loss less cumulative preferred stock dividends, whether or not
declared, divided by the weighted average number of common shares outstanding
during the respective periods. In calculating diluted loss per common share,
common shares issuable under stock options and convertible preferred stock are
added to the weighted average common shares outstanding when dilutive. For the
three months ended March 31, 2000 and 1999, all potentially dilutive securities
are anti-dilutive and therefore are not included in the diluted earnings per
share ("EPS") calculation. Potentially dilutive securities outstanding at March
31, 2000 that could impact EPS in the future include stock options granted to
employees to purchase 0.4 million common shares and the Preferred Stock which
can be converted into 0.5 million common shares.

In 1999, the Company effected a 1 for 10 reverse common stock split; all
historical share and per share data appearing in this document have been
restated to reflect this reverse stock split.

NOTE 6 -- GUARANTOR FINANCIAL STATEMENTS

Kelley Oil Corporation, a wholly-owned subsidiary of the Company and Kelley
Operating Company Ltd., an indirect wholly-owned partnership of the Company are
guarantors of the Company's Series B 14% Senior Secured Notes due 2002-2003 and
of the Company's Series B and Series D 10 3/8% Senior Subordinated Notes due
2006. Concorde Gas Marketing, Inc. ("Concorde"), a wholly-owned subsidiary of
the Company, is also a guarantor of the Company's Series B 14% Senior Secured
Notes due 2002-2003. The following guarantor consolidating condensed financial
statements present:

1. Consolidating condensed balance sheets as of December 31, 1999 and
March 31, 2000, consolidating condensed statements of income (loss) for the
three months ended March 31, 1999 and 2000 and consolidating condensed
statements of cash flows for the three months ended March 31, 1999 and
March 31, 2000.

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

F-33
<PAGE> 100
CONTOUR ENERGY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

CONSOLIDATING CONDENSED BALANCE SHEET

DECEMBER 31, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets............... $ 334,360 $ 128,855 $6,317 $ 737 $(440,269) $ 30,000
Property and equipment,
net........................ -- 161,107 -- 6,141 (1,492) 165,756
Restricted cash.............. -- 7,500 -- -- -- 7,500
Other non-current assets,
net........................ (149,279) 11,540 -- -- 138,265 526
--------- --------- ------ ------ --------- --------
Total assets........ $ 185,081 $ 309,002 $6,317 $6,878 $(303,496) $203,782
========= ========= ====== ====== ========= ========

LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities.......... $ 15,219 $ 456,789 $1,501 $ 680 $(440,269) $ 33,920
Long-term debt............... 246,165 -- -- -- -- 246,165
Stockholders' deficit........ (76,303) (147,787) 4,816 6,198 136,773 (76,303)
--------- --------- ------ ------ --------- --------
Total liabilities
and stockholders'
deficit........... $ 185,081 $ 309,002 $6,317 $6,878 $(303,496) $203,782
========= ========= ====== ====== ========= ========
</TABLE>

CONSOLIDATING CONDENSED BALANCE SHEET

MARCH 31, 2000
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets............... $ 334,063 $ 133,619 $10,722 $ 922 $(421,531) $ 57,795
Property and equipment,
net........................ -- 138,114 -- 5,811 (382) 143,543
Restricted cash.............. -- 7,500 -- -- -- 7,500
Other non-current assets,
net........................ (145,067) 11,765 -- -- 133,794 492
--------- --------- ------- ------ --------- --------
Total assets........ $ 188,996 $ 290,998 $10,722 $6,733 $(288,119) $209,330
========= ========= ======= ====== ========= ========

LIABILITIES AND STOCKHOLDERS'
DEFICIT:
Current liabilities.......... $ 23,043 $ 435,682 $ 5,485 $ 697 $(421,530) $ 43,377
Long-term debt............... 246,993 -- -- -- -- 246,993
Stockholders' deficit........ (81,040) (144,684) 5,237 6,036 133,411 (81,040)
--------- --------- ------- ------ --------- --------
Total liabilities
and stockholders'
deficit........... $ 188,996 $ 290,998 $10,722 $6,733 $(288,119) $209,330
========= ========= ======= ====== ========= ========
</TABLE>

F-34
<PAGE> 101
CONTOUR ENERGY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ -- $ 13,732 $ 603 $ 1,387 $ (54) $ 15,668
Costs and expenses............ (8,701) (16,684) (122) (1,003) (144) (26,654)
Equity in earnings (loss) of
subsidiaries................ (2,285) 865 -- -- 1,420 --
-------- -------- ----- ------- ------ --------
Net income (loss).... $(10,986) $ (2,087) $ 481 $ 384 $1,222 $(10,986)
======== ======== ===== ======= ====== ========
</TABLE>

CONSOLIDATING CONDENSED STATEMENTS OF INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ -- $ 16,904 $ 655 $ 763 $ 579 $ 18,901
Costs and expenses............. (8,950) (14,461) (235) (522) 530 (23,638)
Equity in earnings of
subsidiaries................. 4,213 659 -- -- (4,872) --
------- -------- ----- ----- ------- --------
Net income (loss)..... $(4,737) $ 3,102 $ 420 $ 241 $(3,763) $ (4,737)
======= ======== ===== ===== ======= ========
</TABLE>

F-35
<PAGE> 102
CONTOUR ENERGY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............ $(10,986) $(2,087) $481 $ 384 $ 1,222 $(10,986)
Non-cash income (loss)
adjustments................ 3,517 9,835 -- 433 (1,222) 12,563
Changes in operating assets
and liabilities............ 7,188 (4,370) (481) 184 -- 2,521
-------- ------- ---- ------- ------- --------
Net cash provided
by (used in)
operating
activities....... (281) 3,378 -- 1,001 -- 4,098
-------- ------- ---- ------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures......... -- (5,823) -- -- -- (5,823)
Distributions from
partnerships............... -- 1,001 -- -- (1,001) --
-------- ------- ---- ------- ------- --------
Net cash used in
investing
activities....... -- (4,822) -- -- (1,001) (5,823)
-------- ------- ---- ------- ------- --------
FINANCING ACTIVITIES:
Distributions to partners.... -- -- -- (1,001) 1,001 --
-------- ------- ---- ------- ------- --------
Net cash provided
by (used in)
financing
activities....... -- -- -- (1,001) 1,001 --
-------- ------- ---- ------- ------- --------
Decrease in cash and cash
equivalents................ (281) (1,444) -- -- -- (1,725)
Cash and cash equivalents,
beginning of period........ 275 8,160 -- -- -- 8,435
-------- ------- ---- ------- ------- --------
Cash and cash equivalents,
end of period.............. $ (6) $ 6,716 $ -- $ -- $ -- $ 6,710
======== ======= ==== ======= ======= ========
</TABLE>

F-36
<PAGE> 103
CONTOUR ENERGY CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2000

<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES CONCORDE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ -------- ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............. $(4,737) $ 3,102 $420 $ 241 $(3,763) $(4,737)
Non-cash income (loss)
adjustments................. (3,332) 7,213 -- 220 3,762 7,863
Changes in operating assets
and liabilities............. 8,313 (2,657) (420) (168) 1 5,069
------- ------- ---- ----- ------- -------
Net cash provided by
operating
activities........ 244 7,658 -- 293 -- 8,195
------- ------- ---- ----- ------- -------
INVESTING ACTIVITIES:
Capital expenditures.......... -- (4,708) -- 107 -- (4,601)
Proceeds from sale of
property.................... -- 19,831 -- -- -- 19,831
Distributions from
partnerships................ -- 400 -- -- (400) --
------- ------- ---- ----- ------- -------
Net cash provided by
investing
activities........ -- 15,523 -- 107 (400) 15,230
------- ------- ---- ----- ------- -------
FINANCING ACTIVITIES:
Redemption on subordinated
debentures.................. (244) -- -- -- -- (244)
------- ------- ---- ----- ------- -------
Distributions to partners..... -- -- -- (400) 400 --
------- ------- ---- ----- ------- -------
Net cash used in
financing
activities........ (244) -- -- (400) 400 (244)
------- ------- ---- ----- ------- -------
Increase in cash and cash
equivalents................. -- 23,181 -- -- -- 23,181
Cash and cash equivalents,
beginning of period......... 12 10,358 -- -- -- 10,370
------- ------- ---- ----- ------- -------
Cash and cash equivalents, end
of period................... $ 12 $33,539 $ -- $ -- $ -- $33,551
======= ======= ==== ===== ======= =======
</TABLE>

F-37
<PAGE> 104

APPENDIX A

THE RECLASSIFICATION AMENDMENT

(AMENDING ARTICLE 4 OF THE CERTIFICATE OF INCORPORATION OF CONTOUR ENERGY CO.
TO BE AND READ IN ITS ENTIRETY AS FOLLOWS)

"4. Number and Designation of Shares. The total number of shares of capital
stock that the Corporation shall have authority to issue is 22,000,000 shares,
which shall be divided into two classes as follows: 20,000,000 shares of Common
Stock, $.10 par value ("Common Stock"), and 2,000,000 shares of Preferred Stock,
$1.50 par value ("Preferred Stock"). The powers, designations, preferences,
rights and qualifications, limitations or restrictions on the Common Stock and
the Preferred Stock are set forth below.

(a) General. Subject to the applicable provisions of the Delaware General
Corporation Law (the "Delaware GCL") and the provisions of this Certificate of
Incorporation, the Corporation may issue shares of its Common Stock and
Preferred Stock from time to time, for such consideration (not less than the par
value thereof) as may be fixed by the Board of Directors, which is expressly
authorized to fix the same in its sole and absolute discretion. Shares so
issued, for which the consideration has been paid or delivered to the
Corporation, shall be deemed fully paid stock and shall not be subject to any
future call or assessment thereon, and the holders thereof shall not be liable
for any further payments in respect thereof.

(b) Common Stock. The shares of authorized Common Stock shall be identical
in all respects and shall have equal rights and privileges as follows:

(i) After the requirements for preferential dividends on the shares of
any outstanding series of Preferred Stock shall have been met and the
Corporation shall have complied with all of the requirements, if any, for
sinking funds or redemption or purchase accounts and satisfied any other
conditions that may be fixed in accordance with this Certificate of
Incorporation or the provisions of any resolution or resolutions adopted by
the Board of Directors pursuant to Section 4(c), then the holders of Common
Stock shall be entitled to receive such dividends, if any, as may be
declared from time to time by the Board of Directors on the Common Stock,
which dividends shall be paid out of assets legally available for the
payment of dividends and shall be distributed to the holders of Common
Stock pro rata in accordance with the number of shares of Common Stock held
by each of them.

(ii) After distribution in full of the preferential amounts, if any,
to be distributed to the holders of the shares of any outstanding series of
Preferred Stock in the event of voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding up of the
Corporation, the holders of Common Stock shall be entitled to receive all
the remaining assets of the Corporation, tangible and intangible, of
whatever kind, available for distribution to stockholders which assets
shall be distributed to the holders of the Common Stock pro rata in
accordance with the number of shares of Common Stock held by each of them.

(iii) Except as may otherwise be required by law, this Certificate of
Incorporation or the provisions of any resolution or resolutions adopted by
the Board of Directors pursuant to Section 4(c), each holder of Common
Stock shall have one vote per share of Common Stock on each matter voted
upon by the stockholders.

A-1
<PAGE> 105

optional or other special rights of the series, and the qualifications,
limitations or restrictions thereof, if any, including the following:

(i) The number of shares comprising the series and the distinctive
designation thereof;

(ii) The dividend rate or rates (which may be contingent upon the
happening of certain events), if any, on the shares of the series, the date
or dates from which dividends shall accrue, the dates on which dividends
thereon, if declared, shall be payable and a statement whether or not or in
what circumstances dividends may be cumulative;

(iii) Whether or not the shares of the series shall be redeemable and,
if so, the limitations and restrictions on redemption, the manner of
selecting shares of the series to be redeemed and the amount, if any, in
addition to any accrued and unpaid dividends thereon that the holders of
shares of the series shall be entitled to receive upon redemption thereof,
which amount may vary at different redemption dates and may be different
for shares redeemed through the operation of any purchase, retirement or
sinking fund;

(iv) The amount, if any, in addition to any accrued and unpaid
dividends thereon that the holders of shares of the series shall be
entitled to receive upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, which amount shall not be
less than the par value but otherwise may vary depending upon whether the
liquidation, dissolution or winding up is voluntary or involuntary and, if
voluntary, may vary at different dates;

(v) Whether or not the shares of the series shall be subject to the
operation of a purchase, retirement or sinking fund and, if so, whether the
purchase, retirement or sinking fund shall be cumulative or noncumulative,
the extent to and the manner in which the fund shall be applied to the
purchase or redemption of shares of the series for retirement or for other
corporate purposes and the terms and provisions for the operation thereof;

(vi) Whether or not the shares of the series shall be convertible into
or exchangeable for shares of capital stock of any other class or series
for other securities or property of the Corporation and, if so convertible
or exchangeable, the terms and conditions of conversion or exchange and the
method, if any, of adjusting the same;

(vii) The voting powers, if any, of shares of the series;

(viii) Any other powers, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof.

All shares of any one series of Preferred Stock shall be identical in all
respects, except that shares of any one series issued at different times may
have different dates from which dividends thereon shall accrue, and all series
shall rank equally and be identical in all respects, except as provided in
accordance with this Section 4(c). Shares of Preferred Stock that have been
redeemed, purchased or retired through the operation of a purchase, retirement
or sinking fund or shares of Preferred Stock that have been converted into
shares of any other class of capital stock of the Corporation or exchanged for
any other securities of the Corporation, upon compliance with any applicable
provisions of the Delaware GCL, shall have the status of authorized but unissued
shares of Preferred Stock and may be reissued (x) as part of the series in which
they were originally included (if the terms of that series do not prohibit the
reissuance), (y) as part of a new series of Preferred Stock to be created by
resolution of the Board of Directors or (z) as part of any other series of
Preferred Stock the terms of which do not prohibit the reissuance.

(d) Reclassification of $2.625 Convertible Exchangeable Preferred
Stock. Effective on the filing of this Amendment with the Secretary of State of
the State of Delaware (the "Effective Time"), each share of the Corporation's
$2.625 Convertible Exchangeable Preferred Stock, $1.50 par value, issued and
outstanding immediately prior to the Effective Time, together with all accrued
and unpaid dividends thereon, shall automatically be reclassified, changed and
converted, without any action on the part of the

A-2
<PAGE> 106

holder thereof, into one share of the Corporation's Common Stock, $.10 par
value, and one share of the Corporation's $3.50 Redeemable Cash Equivalent
Preferred Stock, $1.50 par value, as established by Section 4(e).

(e) $3.50 Redeemable Cash Equivalent Preferred Stock. Of the Corporation's
Preferred Stock, 1,400,000 shares are hereby designated as $3.50 Redeemable Cash
Equivalent Preferred Stock, $1.50 par value (the "Cash Equivalent Preferred
Stock"). The shares of authorized $3.50 Cash Equivalent Preferred Stock shall be
identical in all respects and shall have equal rights and privileges as follows:

(i) Immediately after the Effective Time, the Cash Equivalent
Preferred Stock shall be automatically redeemed by the Corporation for
$3.50 in cash per share and thereafter shall have the status of authorized
but unissued shares of Preferred Stock. Any authorized shares of Cash
Equivalent Preferred Stock not issued at the Effective Time pursuant to
Section 4(d) shall thereafter have the status of authorized but unissued
shares of Preferred Stock. No certificates shall be issued representing the
Cash Equivalent Preferred Stock. Not later than the Effective Time, the
Corporation shall establish a purchase fund for the Cash Equivalent
Preferred Stock by depositing with a paying agent an amount sufficient to
pay the aggregate redemption price of all shares of Cash Equivalent
Preferred Stock. The Corporation shall cause such paying agent to pay the
redemption price for the Cash Equivalent Preferred Stock (subject to
applicable required tax withholdings) upon the valid surrender of a
certificate or certificates formerly representing shares of the
Corporation's $2.625 Convertible Exchangeable Preferred Stock, $1.50 par
value.

(ii) The Cash Equivalent Preferred Stock shall, with respect to
payment of dividends, redemption payments and rights upon liquidation,
dissolution or winding up of the affairs of the Corporation, rank senior
and prior to the Common Stock and all other series or classes of Preferred
Stock. The liquidation preference of the Cash Equivalent Preferred Stock
shall be $3.50 per share.

(iii) The Cash Equivalent Preferred Stock shall have no voting rights
except as specifically required by the Delaware GCL.

(iv) The Cash Equivalent Preferred Stock shall not be entitled to
dividends. The Corporation shall not make any dividend or distribution of
cash or property on account of its Common Stock or any other series or
class of Preferred Stock, nor shall the Corporation redeem any shares of
Common Stock or any other series or class of Preferred Stock, while any
Cash Equivalent Preferred is outstanding.

(v) The Cash Equivalent Preferred Stock shall not be convertible into
any other security of the Corporation."

A-3
<PAGE> 107

APPENDIX B

ARTICLE 4 OF CONTOUR ENERGY CO.'S CURRENT CERTIFICATE OF INCORPORATION

4. Number and Designation of Shares. The total number of shares of capital
stock that the Corporation shall have authority to issue is 22,000,000 shares,
which shall be divided into two classes as follows: 20,000,000 shares of Common
Stock, $.10 par value ("Common Stock"), and 2,000,000 shares of Preferred Stock,
$1.50 par value ("Preferred Stock"). The powers, designations, preferences,
rights and qualifications, limitations or restrictions on the Common Stock and
the Preferred Stock are set forth below.

(b) Common Stock. The shares of authorized Common Stock shall be identical
in all respects and shall have equal rights and privileges as follows:

(c) Preferred Stock. Authority is hereby granted to the Board of Directors,
subject to the provisions of this Article 4, to authorize the issue of one or
more series of Preferred Stock and to fix, by resolution providing for the issue
of each such series, the powers, designations, preferences and relative,
participating, optional or other special rights of the series, and the
qualifications, limitations or restrictions thereof, if any, including the
following:

(i) The number of shares comprising the series and the distinctive
designation thereof;

(ii) The dividend rate or rates (which may be contingent upon the
happening of certain events), if any, on the shares of the series, the date
or dates from which dividends shall accrue, the dates on

B-1
<PAGE> 108

which dividends thereon, if declared, shall be payable and a statement
whether or not or in what circumstances dividends may be cumulative;

(vii) The voting powers, if any, of shares of the series;

(viii) Any other powers, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof.

(d) Effective as of 4:01 p.m. on July 30, 1999 (the "Effective Time"), each
share of Common Stock issued and outstanding immediately prior to the Effective
Time shall automatically be changed and converted, without any action on the
part of the holder thereof, into one-tenth of one share of New Common Stock, and
each holder of a number of shares of Common Stock not evenly divisible by ten
will receive for any remaining shares, in lieu of fractional shares, the right
to receive an amount in cash per share equal to the closing price of the Common
Stock on July 30, 1999 as reported by The Nasdaq Stock Market.

B-2
<PAGE> 109

APPENDIX C

CERTIFICATE OF DESIGNATION
OF
PREFERRED STOCK OF
KELLEY OIL & GAS CORPORATION

PURSUANT TO SECTION 151(g) OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

The undersigned DOES HEREBY CERTIFY that the following resolution was duly
adopted by the Board of Directors of Kelley Oil & Gas Corporation, a Delaware
corporation (the "Corporation"), at a meeting duly convened and held, at which a
quorum was present and acting throughout:

RESOLVED, that pursuant to the authority conferred on the Board of
Directors of the Corporation by Article FOURTH of the Corporation's Certificate
of Incorporation, as amended, and pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware, the President and Secretary or
Assistant Secretary of the Corporation be, and they hereby are, authorized and
directed to execute and file with the Secretary of State of the State of
Delaware the Certificate of Designation of Preferred Stock of the Corporation
fixing the designation, powers, preferences and rights of a new series of the
Corporation's Preferred Stock, $1.50 par value (the "Preferred Stock"), and the
qualifications, limitations or restrictions thereof, as follows:

1. Number of Shares; Designation. A total of 4,269,722 shares of Preferred
Stock of the Corporation are hereby designated as $2.625 Convertible
Exchangeable Preferred Stock (the "Series"). The number of authorized shares of
the Series may be increased or reduced by the Board of Directors of the
Corporation by the filing of a certificate pursuant to the provisions of the
General Corporation Law of the State of Delaware stating that the increase or
reduction has been so authorized.

2. Rank. (a) The Series shall, with respect to payment of dividends,
redemption payments and rights upon liquidation, dissolution or winding up of
the affairs of the Corporation, rank senior and prior to (i) the Common Stock,
par value $.01 per share, of the Corporation (the "Common Stock") and (ii) the
Corporation's $.15 Cumulative Convertible Preferred Stock, $.20 Cumulative
Convertible Preferred Stock, $1.00 Cumulative Convertible Preferred Stock, $.825
Cumulative Convertible Preferred Stock and any additional series of Preferred
Stock that may in the future be issued to the Corporation's Employee Stock
Ownership Plan (collectively, the "ESOP Shares").

(b) The Corporation may hereafter issue, without the approval of the
holders of shares of the Series, any other class or series of capital stock
ranking on a parity with shares of the Series with respect to the payment of
dividends ("Parity Dividend Shares") or redemption payments and rights upon
liquidation, dissolution or winding up of the Corporation ("Parity Liquidation
Shares").

(c) The Corporation shall not issue, without the approval of the holders of
at least 66 2/3% of the outstanding shares of the Series, as long as there is a
share of the Series outstanding, any other class or series of capital stock
ranking senior and prior to the Series with respect to the payment of dividends
("Senior Dividend Shares") or redemption payments and rights upon liquidation,
dissolution or winding up of the Corporation ("Senior Liquidation Shares").

3. Dividends. (a) The cash dividend rate on shares of the Series shall be
$2.625 per share per annum. Dividends on shares of the Series shall be fully
cumulative, accruing, without interest, from the date of original issuance of
shares of the Series, and shall be payable quarterly in arrears, when, as and if
declared by the Board of Directors out of funds legally available for the
payment of dividends, on February 1, May 1, August 1 and November 1 of each
year, commencing on the first such date after the issuance thereof, except that
if such date is not a business day then the dividend shall be payable on the
first immediately succeeding business day (as used herein, the term "business
day" shall mean any day except a Saturday, Sunday or day on which banking
institutions are legally authorized to close in the City

C-1
<PAGE> 110

of New York). Each dividend shall be paid to the holders of record of shares of
the Series as they appear on the stock register of the Corporation on the record
date, not exceeding 30 days preceding the payment date thereof, as shall be
fixed by the Board of Directors of the Corporation. Dividends payable for each
full quarterly dividend period shall be computed by dividing the annual dividend
by four. Dividends payable for any partial dividend period shall be computed on
the basis of a 360-day year of twelve 30-day months. Dividends on account of
arrears for any past dividend periods may be declared and paid at any time,
without reference to any regular dividend payment date, to holders of record on
that date, not exceeding 45 days preceding the payment date thereof, as may be
fixed by the Board of Directors of the Corporation. No interest shall be payable
with respect to any dividend payment that may be in arrears. Holders of shares
of the Series shall be entitled to receive dividends in preference to and in
priority over dividends upon (i) Common Shares (as defined in paragraph 12
below) and (ii) ESOP Shares and any other series or class of the Corporation's
capital stock that ranks junior as to dividends to the Series (collectively,
"Junior Dividend Shares"). The holders of shares of the Series shall be not
entitled to any dividends other than the cash dividends provided for in this
paragraph 3.

(b) No dividends or other distributions, other than dividends payable
solely in Common Shares or Junior Dividend Shares, shall be declared, paid or
set apart for payment on, and no purchase, redemption or other acquisition shall
be made by the Corporation of, any Common Shares or Junior Dividend Shares
unless and until all accrued and unpaid dividends on the Series, including the
full dividend for the then current quarterly dividend period, shall have been
paid or declared and set apart for payment.

(c) If at any time the Corporation issues any Senior Dividend Shares and
any dividend thereon shall be in default, in whole or in part, then (except to
the extent allowed by the terms of the Senior Dividend Shares) no dividend shall
be paid or declared and set apart for payment on the Series unless and until all
accrued and unpaid dividends with respect to the Senior Dividend Shares,
including the full dividends for the then current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any Parity
Dividend Shares for any period unless full cumulative dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Series
for all dividend payment periods terminating on or prior to the date of payment
of such full cumulative dividends. No full dividends shall be paid or declared
and set apart for payment on the Series for any period unless full cumulative
dividends have been, or contemporaneously are, paid or declared and set apart
for such payment on any Parity Dividend Shares for all dividend payment periods
terminating on or prior to the date of payment of such full cumulative
dividends.

(d) If at any time the Corporation has failed to pay accrued dividends on
any shares of the Series or any Parity Dividend Shares at the times such
dividends are payable, the Corporation shall not:

(i) declare or pay any dividend on any Common Shares or Junior
Dividend Shares or make any payment on account of, or set apart money for,
a sinking or other analogous fund for the purchase, redemption or other
retirement of, any Common Shares or Junior Dividend Shares or make any
distribution in respect thereof, either directly or indirectly and whether
in cash or property or in obligations or shares of the Corporation (other
than in Common Shares or Junior Dividend Shares),

(ii) purchase any shares of the Series or Parity Dividend Shares
(except for a consideration payable in Common Shares or Junior Dividend
Shares) or redeem fewer than all of the shares of the Series and Parity
Dividend Shares then outstanding, or

(iii) permit any corporation or other entity directly or indirectly
controlled by the Corporation to purchase any Common Shares or Junior
Dividend Shares, shares of the Series or Parity Dividend Shares,

unless, in the case of any such dividend, payment, distribution, purchase or
redemption, all dividends accrued and payable but unpaid on shares of the Series
and any Parity Dividend Shares have been or contemporaneously are declared and
paid in full or declared and a sum sufficient for the payment thereof set aside
for such payment. Unless and until all dividends accrued and payable but unpaid
on shares of the

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Series and any Parity Dividend shares at the time outstanding have been paid in
full, all dividends declared by the Corporation upon shares of the Series or
Parity Dividend shares shall be declared pro rata with respect to all shares of
the Series and Parity Dividend Shares then outstanding, so that the amounts of
any dividends declared on shares of the Series and the Parity Dividend Shares
shall in all cases bear to each other the same ratio that, at the time of the
declaration, all accrued and payable but unpaid dividends on shares of the
Series and the other Parity Dividend Shares, respectively, bear to each other.

(e) Any reference to "distribution" contained in this paragraph 3 shall not
be deemed to include any distribution made in connection with any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.

4. Optional Redemptions for Cash. (a) Subject to the restrictions in
paragraph 3 above, shares of the Series shall be redeemable, in whole or in
part, at the option of the Corporation commencing May 1, 1997, at the following
redemption prices per share if redeemed during the 12-month period ending April
30 in the year indicated below:

<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
1998......................... $26.58
1999......................... 26.31
2000......................... 26.05
2001......................... 25.79
</TABLE>

<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2002......................... $25.53
2003......................... 25.26
2004 and thereafter.......... 25.00
</TABLE>

plus, in each case, an amount equal to the dividends accrued and unpaid thereon,
whether or not declared, to the redemption date. The Corporation may not redeem
any shares of the Series prior to May 1, 1997, except pursuant to paragraph 5
below.

(b) Not less than 20 nor more than 60 days prior to the date fixed for any
redemption of shares of the Series pursuant to this paragraph 4, a notice
specifying the time and place of the redemption and the number of shares to be
redeemed shall be given by first-class mail, postage prepaid, to the holders of
record of the shares of the Series to be redeemed at their respective addresses
as the same shall appear on the books of the Corporation, calling upon each
holder of record to surrender to the Corporation on the redemption date at the
place designated in the notice his certificate or certificates representing the
number of shares specified in the notice of redemption. Neither failure to mail
such notice, nor any defect therein or in the mailing thereof, to any particular
holder shall affect the sufficiency of the notice or the validity of the
proceedings for redemption with respect to the other holders. Any notice mailed
in the manner herein provided shall be conclusively presumed to have been duly
given whether or not the holder receives the notice. On or after the redemption
date, each holder of shares of the Series to be redeemed shall present and
surrender his certificate or certificates for such shares to the Corporation at
the place designated in the redemption notice, and thereupon the redemption
price of the shares shall be paid to or on the order of the person whole name
appears on such certificate or certificates as the owner thereof, and each
surrendered certificate shall be canceled. In case less than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.

(c) If a notice of redemption has been given pursuant to this paragraph 4
and if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rate benefit of the holders of the shares
so called for redemption, then, notwithstanding that any certificates for such
shares have not been surrendered for cancellation, on the redemption date
dividends shall cease to accrue on the shares of the Series to be redeemed, and
at the close of business on the redemption date the holders of such shares shall
cease to be stockholders with respect to those shares, shall have no interest in
or claims against the Corporation by virtue thereof and shall have no voting or
other rights with respect thereto, except the right to receive the moneys
payable upon such redemption, without interest thereon, upon surrender (and
endorsement, if required by the Corporation) of their certificates, and the
shares evidenced thereby shall be deemed to be no longer outstanding. Subject to
applicable escheat laws, any moneys so set aside by the

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<PAGE> 112

Corporation and unclaimed at the end of two years from the redemption date shall
revert to the general funds of the Corporation, after which reversion the
holders of such shares so called for redemption shall look only to the general
funds of the Corporation for the payment of the redemption price. Any interest
accrued on funds so deposited shall be paid to the Corporation from time to
time.

(d) If a notice of redemption has been given pursuant to this paragraph 4,
and any holder of shares of the Series shall, prior to the close of business on
the date fixed for redemption, give written notice to the Corporation pursuant
to paragraph 7 below of the conversion of any or all of the shares to be
redeemed held by the holder (accompanied by a certificate or certificates for
such shares, duly endorsed or assigned to the Corporation, and any necessary
transfer tax payment, as required by paragraph 7 below), then such redemption
shall not become effective as to such shares to be converted and such conversion
shall become effective as provided in paragraph 7 below, whereupon any funds
deposited by the Corporation, or on its behalf, with a paying agent or
segregated and held in trust by the Corporation for the redemption of such
shares shall (subject to any right of the holder of such shares to receive the
dividend payable thereon as provided in paragraph 7 below) immediately upon such
conversion be returned to the Corporation or, if then held in trust by the
Corporation, shall be discharged from the trust.

(e) In every case of redemption of less than all of the outstanding shares
of the Series pursuant to this paragraph 4, the shares to be redeemed shall be
selected pro rata or by lot or in such other manner as the Board of Directors
may determine, as may be prescribed by resolution of the Board of Directors of
the Corporation, provided that only whole shares shall be selected for
redemption. Notwithstanding the foregoing, the Corporation shall not redeem less
than all of the shares of the Series at any time outstanding until all dividends
accrued and in arrears upon all shares of the Series then outstanding shall have
been paid for all past dividend periods.

5. Debenture Exchange. (a) Subject to the restrictions in paragraph 4 above
and paragraph 5(e) below, shares of the Series shall be exchangeable at the
option of the Corporation, in whole but not in part, on any February 1, May 1,
August 1 or November 1, commencing May 1, 1995 through the issuance, in
redemption of and in exchange for the shares of the Series, of the Corporation's
10 1/2% Convertible Subordinated Debentures due 2004 (the "Debentures") in the
manner provided in this paragraph 5. The Debentures will be subject to the terms
and conditions of an indenture (the "Indenture") with United States Trust
Company of New York, as Trustee, in substantially the form attached hereto as
Exhibit A and incorporated by reference herein. The Debentures shall be
convertible into Common Stock of the Corporation at the Conversion Price (as
determined pursuant to paragraph 7 below) applicable to the Series at the time
of exchange, subject to further adjustment as provided in the Indenture. If, for
any reason, prior to the execution and delivery of the Indenture, either the
Corporation or United States Trust Company of New York does not desire that
United States Trust Company of New York act as Trustee under the Indenture, the
Corporation may, in its sole discretion, appoint another entity to act as
Trustee under the Indenture, provided that the other entity meets the
qualification requirements to act as Trustee under the Indenture.

(b) The Debentures will be issued solely in redemption of and in exchange
for shares of the Series at the rate of $1,000 principal amount of Debentures
for each 40 shares of the Series (the "Exchange Multiple") outstanding on the
Debenture Exchange Date (as defined in paragraph 5(c)). In lieu of issuing
Debentures in a principal amount other than $1,000 or multiple thereof, the
Corporation shall redeem for cash, at the rate of $25 per share, any holder's
shares of the Series constituting less than a whole Exchange Multiple.

(c) Not less than 30 nor more than 60 days prior to the date fixed for the
issue of Debentures in redemption of and in exchange for shares of the Series
pursuant to this paragraph 5, a notice shall be given by first-class mail,
postage prepaid, to the holders of record of shares of the Series at their
respective addresses as the same shall appear on the books of the Corporation,
specifying the effective date of the exchange for the Debentures (the "Debenture
Exchange Date") and the place where certificates for shares of the Series are to
be surrendered for Debentures and stating that dividends on shares of the Series
will cease to accrue on the Debenture Exchange Date. Neither failure to mail
such notice, nor any defect

C-4
<PAGE> 113

therein or in the mailing thereof, to any particular holder shall affect the
insufficiency of the notice or the validity of the proceedings for redemption
and exchange with respect to the other holders. Any notice mailed in the manner
herein provided shall be conclusively presumed to have been duly given whether
or not the holder receives the notice.

(d) If notice of redemption and exchange has been given pursuant to this
paragraph 5, then (unless the Corporation shall default in issuing Debentures in
redemption of and in exchange for shares of the Series or shall fail to pay or
set aside accrued and unpaid dividends on shares of the Series as provided in
paragraph 5(e) and notwithstanding that any certificates for shares of the
Series have not been surrendered for exchange), on the Debenture Exchange Date,
the holders of such shares shall cease to be stockholders with respect to the
shares and shall have no interest in or claims against the Corporation by virtue
thereof (except the right to receive Debentures in exchange therefor and such
accrued and unpaid dividends thereon to the Debenture Exchange Date), shall have
no voting, conversion or other rights with respect to such shares, and the
shares of the Series shall be deemed to be no longer outstanding. Upon the
surrender (and endorsement, if required by the Corporation) of the certificates
for shares of the Series in accordance with such notice, such certificates shall
be exchanged for Debentures and such accrued and unpaid dividends in accordance
with this paragraph 5. If notice of redemption and exchange has been given
pursuant to this paragraph 5 and any holder of shares of the Series shall, prior
to the close of business on the Debenture Exchange Date, give written notice to
the Corporation pursuant to paragraph 7 below of the conversion of any or all of
the shares to be redeemed and exchanged held by the holder (accompanied by a
certificate or certificates for the shares, duly endorsed or assigned to the
Corporation, and any necessary transfer tax payment, as required by paragraph 7
below), then the redemption and exchange shall not become effective as to the
shares to be converted and the conversion shall become effective as provided in
paragraph 7 below.

(e) If on the Debenture Exchange Date the Corporation has failed to pay or
set aside, separate and apart from its other funds, in trust for the pro rata
benefit of the holders of shares of the Series, all dividends accrued and unpaid
on the shares of the Series to the Debenture Exchange Date then no shares of the
Series shall be redeemed or exchanged for Debentures.

6. Liquidation. (a) The liquidation value of shares of the Series, in case
of the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, shall be $25.00 per share, plus an amount equal to the dividends
accrued and unpaid thereon, whether or not declared, to the payment date.

(b) In the event of any voluntary or involuntary liquidation, dissolution
or wind-up of the Corporation, the holders of shares of the Series (i) shall not
be entitled to receive the liquidation value of the shares held by them until
the liquidation value of all Senior Liquidation Shares shall have been paid in
full and (ii) shall be entitled to receive the liquidation value of such shares
held by them in preference to and in priority over any distributions upon the
Common Shares, all ESOP Shares and any other series or class of the
Corporation's capital stock that ranks junior as to liquidation rights to the
Series (collectively, "Junior Liquidation Shares"). Upon payment in full of the
liquidation value to which the holders of shares of the Series are entitled, the
holder of shares of the Series will not be entitled to any further participation
in any distribution of assets by the Corporation. If the assets of the
Corporation are not sufficient to pay in full the liquidation value payable to
the holders of shares of the Series and the liquidation value payable to the
holders of any Parity Liquidation Shares, the holders of all such shares shall
share ratably in such distribution of assets in accordance with the amounts that
would be payable on the distribution if the amounts to which the holders of
shares of the Series and the holders of Parity Liquidation Shares are entitled
were paid in full.

(c) Neither a consolidation or merger of the Corporation with or into any
other entity, nor a merger of any other entity with or into the Corporation, nor
a sale or transfer of all or any part of the Corporation's assets for cash or
securities or other property shall be considered a liquidation, dissolution or
winding up of the Corporation within the meaning of this paragraph 6

7. Conversion. (a) Holders of shares of the Series will have the right,
exercisable at any time, except in the case of shares of the Series called for
redemption or to be exchanged for Debentures (as
C-5
<PAGE> 114

described in paragraph 4 or 5 above), to convert shares of the Series into
shares of Common Stock (calculated as to each conversion to the nearest 1/100th
of a share) at the conversion price of $7.20, subject to adjustment as described
below (the "Conversion Price"). The number of shares of Common Stock into which
a share of the Series shall be convertible shall be determined by dividing
$25.00 by the Conversion Price then in effect. In the case of shares of the
Series called for redemption or to be exchanged for the Debentures, conversion
rights will expire at the close of business on the redemption date or the
Debenture Exchange Date, as the case may be. No payment or adjustment for
accrued dividends on the shares of the Series is to be made on conversion, but
holders of record of shares of the Series on a record date fixed for the payment
of a dividend on such shares shall be entitled to receive the dividend
notwithstanding the conversion of the shares prior to the dividend payment date.

(b) Any holder of shares of the Series electing to convert the shares or
any portion thereof in accordance with paragraph 7(a) above shall deliver the
certificates therefor to the principal office of any transfer agent for the
Common Stock, with a form of conversion notice fully completed and duly
executed. The conversion right with respect to any shares of the Series shall be
deemed to have been exercised at the date upon which the certificates therefor
with the conversion notice duly executed shall have been so delivered, and the
person or persons entitled to receive the Common Stock issuable upon conversion
shall be treated for all purposes as the record holder or holders of such Common
Stock upon that date.

(c) No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon conversion of shares of the Series. If more than one
share of the Series shall be surrendered for conversion at one time by the same
holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of the
Series so surrendered. Instead of any fractional share of Common Stock otherwise
issuable upon conversion of any shares of the Series, the Corporation shall pay
a cash adjustment in respect to such fraction in an amount equal to the same
fraction of Sale Price of the Common Stock at the close of business on the day
of conversion. In the absence of a Sale Price, the Board of Directors shall in
good faith determine the current market price on the basis of such quotation as
it considers appropriate. As used in this Certificate, "Sale Price" means the
closing sales price of the Common Stock (or if no sale price is reported, the
average of the high and low bid prices) as reported by the principal national or
regional stock exchange on which the Common Stock is listed or, if the Common
Stock is not listed on a national or regional stock exchange, as reported by
National Association of Securities Dealers Automated Quotation System and, if
not so reported, then as reported by the National Quotation Bureau Incorporated.

(d) If a holder converts shares of the Series, the Corporation shall pay
any documentary, stamp or similar issue or transfer tax due on the issue of
shares or Common Stock upon the conversion. The holder, however, shall pay any
such tax that is due because the shares are issued in a name other than the name
of the holder.

(e) The Corporation shall reserve out of its authorized but unissued Common
Stock or its Common Stock held in treasury enough shares of Common Stock to
permit the conversion of all of the outstanding shares of the Series. For the
purposes of this paragraph 7(e), the full number of shares of Common Stock then
issuable upon the conversion of all outstanding shares of the Series shall be
computed as if at the time of computation all outstanding shares of the Series
were held by a single holder. The Corporation shall from time to time, in
accordance with the laws of the State of Delaware, increase the authorized
amount of its Common Stock if at any time the authorized amount of its Common
Stock remaining unissued shall not be sufficient to permit the conversion of all
shares of the Series at the time outstanding. If any shares of Common Stock
required to be reserved for issuance upon conversion of shares of the Series
hereunder require registration with or approval of any governmental authority
under any federal or state law before the shares may be issued upon conversion,
the Corporation will in good faith and as expeditiously as possible endeavor to
cause the shares to be so registered or approved. All shares of Common Stock
issued upon conversion of the shares of the Series shall be validly issued,
fully paid and nonassessable.

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<PAGE> 115

(f) The Conversion Price shall be subject to adjustment as follows:

(i) In case the Corporation shall (A) pay a dividend or make a
distribution on its Common Stock that is paid or made (1) in other shares
of stock of the Corporation or (2) in rights to purchase stock or other
securities if such rights are not separable from the Common Stock except
upon the occurrence of a contingency, (B) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of shares or (C)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Conversion Price in effect immediately prior thereto
shall be adjusted retroactively as provided below so that the Conversion
Price thereafter shall be determined by multiplying the Conversion Price at
which the shares of the Series were theretofore convertible by a fraction
of which the denominator shall be the number of shares of Common Stock
outstanding immediately following such action and of which the numerator
shall be the number of shares of Common Stock outstanding immediately prior
thereto. Such adjustment shall be made whenever any event listed above
shall occur and shall become effective retroactively immediately after the
record date in the case of a dividend and immediately after the effective
date in the case of a subdivision, combination or reclassification.

(ii) In case the Corporation shall issue rights or warrants to all
holders of its Common Stock entitling them (for a period expiring within 45
days after the record date therefor) to subscribe for or purchase shares of
Common Stock at a price per share less than the current market price per
share of Common Stock (as determined in accordance with the provisions of
paragraph 7(f)(iv) below) at the record date therefor (the "Current Market
Price"), or in case the Corporation shall issue other securities
convertible into or exchangeable for Common Stock for a consideration per
share of Common Stock deliverable upon conversion or exchange thereof less
than the Current Market Price, then the Conversion Price in effect
immediately prior thereto shall be adjusted retroactively as provided below
so that the Conversion Price therefor shall be equal to the price
determined by multiplying the Conversion Price at which shares of the
Series were theretofore convertible by a fraction of which the denominator
shall be the number of shares of Common Stock outstanding on the date of
issuance of the convertible or exchangeable securities, rights or warrants
plus the number of additional shares of Common Stock offered for
subscription or purchase and of which the numerator shall be the number of
shares of Common Stock outstanding on the date of issuance of such shares,
convertible or exchangeable securities, rights or warrants, plus the number
of additional shares of Common Stock which the aggregate offering price of
the number of shares of Common Stock so offered would purchase at the
Current Market Price per share of Common Stock (as determined in accordance
with the provisions of paragraph 7(f)(iv) below). Such adjustment shall be
made whenever such convertible or exchangeable securities, rights or
warrants are issued, and shall become effective retroactively immediately
after the record date for the determination of stockholders entitled to
receive such securities. However, upon the expiration of any right or
warrant to purchase Common Stock, the issuance of which resulted in an
adjustment in the Conversion Price pursuant to this paragraph 7(f)(ii), if
any such right or warrant shall expire and shall not have been exercised,
the Conversion Price shall be recomputed immediately upon such expiration
and effective immediately upon such expiration shall be increased to the
price it would have been (but reflecting any other adjustments to the
Conversion Price made pursuant to the provisions of this paragraph 7(f)
after the issuance of such rights or warrants) had the adjustment of the
Conversion Price made upon the issuance of such rights or warrants been
made on the basis of offering for subscription or purchase only that number
of shares of Common Stock actually purchased upon the exercise of such
rights or warrants actually exercised.

(iii) In case the Corporation shall distribute to all holders of its
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Corporation is the continuing
corporation) evidences of its indebtedness or assets (excluding ordinary
cash dividends paid out of retained earnings) or rights to subscribe
(excluding those referred to in paragraphs 7(f)(i) and 7(f)(ii) above),
then in each such case the number of shares of Common Stock into which each
share of the Series shall thereafter be convertible shall be determined by
multiplying the number of

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<PAGE> 116

shares of Common Stock into which such share of the Series was theretofore
convertible by a fraction of which the numerator shall be the number of
outstanding shares of Common Stock multiplied by the Current Market Price
per share of Common Stock (as determined in accordance with the provisions
of paragraph (7)(iv) below) on the date of such distribution and of which
the denominator shall be the product of the number of outstanding shares of
Common Stock and the Current Market Price per share of Common Stock, less
the aggregate fair market value (as determined by the Board of Directors of
the Corporation, whose determination shall be conclusive, and described in
a statement filed with the transfer agent for the shares of the Series) of
the assets or evidences of indebtedness so distributed or of such
subscription rights. Such adjustment shall be made whenever any such
distribution is made, and shall become effective retroactively immediately
after the record date for the determination of stockholders entitled to
receive the distribution.

(iv) For the purpose of any computation under paragraphs 7(f)(ii) and
7(f)(iii) above, the Current Market Price per share of Common Stock at any
date shall be deemed to be the average Sale Price (as defined in paragraph
7(c) above) for the 30 consecutive trading days commencing 45 trading days
before the day in question.

(v) No adjustment in the Conversion Price shall be required unless the
adjustment would require an increase or decrease of at least 1% in the
Conversion Price then in effect; provided, however, that any adjustments
that by reason of this paragraph 7(f)(v) are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this paragraph 7(f)(v) shall be made to the nearest
cent.

(vi) In the event that, at any time as a result of an adjustment made
pursuant to paragraph 7(f)(i) or 7(f)(iii) above, the holder of any share
of the Series thereafter surrendered for conversion shall become entitled
to receive any shares of the Corporation other than shares of the Common
Stock, thereafter the number of such other shares so receivable upon
conversion of any share of the Series shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained in paragraphs
7(f)(i) through 7(f)(v) above, and the other provisions of this paragraph
7(f) with respect to the Common Stock shall apply on like terms to any such
other shares.

(vii) Whenever the Conversion Price is adjusted, as herein provided,
the Corporation shall promptly file with the transfer agent for the Series
a certificate of an officer of the Corporation setting forth the Conversion
Price after the adjustment and setting forth a brief statement of the facts
requiring such adjustment and a computation thereof. The certificate shall
be conclusive evidence of the correctness of the adjustment. The
Corporation shall promptly cause a notice of the adjusted Conversion Price
to be mailed to each registered holder of shares of the Series.

(viii) In case of any reclassification of the Common Stock, any
consolidation of the Corporation with, or merger of the Corporation into,
any other entity, any merger of another entity into the Corporation (other
than a merger that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the
Corporation), any sale or transfer of all or substantially all of the
assets of the Corporation or any compulsory share exchange, pursuant to
which share exchange the Common Stock is converted into other securities,
cash or other property, then lawful provision shall be made as part of the
terms of such transaction whereby the holder of each share of the Series
then outstanding shall have the right thereafter, during the period such
share shall be convertible, to convert such share only into the kind and
amount of securities, cash and other property receivable upon the
reclassification, consolidation, merger, sale, transfer or share exchange
by a holder of the number of shares of Common Stock of the Corporation into
which a share of the Series might have been converted immediately prior to
the reclassification, consolidation, merger, sale, transfer or share
exchange. The Corporation, the person formed by the consolidation or
resulting from the merger or which acquires such assets or which acquires
the Corporation's shares, as the case may be, shall make provisions in its
certificate or articles of incorporation or other constituent document
shall provide for adjustments which, for events subsequent to the effective
date of the certificate or

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articles of incorporation or other constituent document, shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
paragraph 7. The provisions of this paragraph 7(f)(viii) shall similarly
apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.

(g) The Corporation from time to time may reduce the Conversion Price by
any amount for any period of time if the period is at least 20 days and if the
reduction is irrevocable during the period. Whenever the Conversion Price is so
reduced, the Corporation shall mail to holders of record of the Series a notice
of the reduction at least 15 days before the date the reduced Conversion Price
takes effect, stating the reduced Conversion Price and the period it will be in
effect. A voluntary reduction of the Conversion Price does not change or adjust
the conversion price otherwise in effect for purposes of paragraph 7(f) above.

8. Status of Shares. All shares of the Series that are at any time redeemed
pursuant to paragraph 4 or 5 above or converted pursuant to paragraph 7 above,
and all shares of the Series that are otherwise reacquired by the Corporation
and subsequently canceled by the Board of Directors shall have the status of
authorized but unissued shares of Preferred Stock, without designation as to
series, subject to reissuance by the Board of Directors as shares of the Series
or any one or more other series.

9. Voting Rights. Except as set forth below or otherwise required by law,
holders of shares of the Series shall have one vote for each share held on all
matters submitted to a vote of the stockholders of the Corporation, voting as a
single class with the outstanding Common Shares, ESOP Shares or any other series
of Preferred Stock with like voting rights. Any shares of the Series held by the
Corporation or any entity controlled by the Corporation shall not have voting
rights hereunder and shall not be counted in determining the presence of a
quorum.

(a) Dividend Defaults. (i) If and whenever accrued dividends on the shares
of the Series or any Parity Dividend Shares shall not have been paid in an
aggregate amount equal to or greater than the equivalent of six quarterly
dividends (whether or not consecutive) on shares of the Series or such Parity
Dividend Shares at the time outstanding, than the holders of shares of the
Series and the holders of such Parity Dividend Shares upon which like voting
rights have been conferred, voting together as a single class, shall be entitled
to elect two new directors to fill two new directorships. The holders of shares
of the Series and any such Parity Dividend Shares voting as a class shall have
the right to remove without cause at any time and replace any directors such
holders have elected pursuant to this paragraph 9. Such right to vote as a
single class to elect two directors shall, when vested, continue until all
dividends in default on the shares of the Series and such Parity Dividend Shares
shall have been paid in full and, when so paid, such right to elect two
directors separately as a class shall cease, subject to the same provisions for
the vesting of such right to elect two directors separately as a class in the
case of future dividend defaults.

(ii) So long as any share of the Series are outstanding, the By-laws shall
contain no provisions that would restrict the exercise, by the holders of shares
of the Series and the holders of Parity Dividend Shares, of the right to elect
directors under the circumstances provided in paragraph 9(a)(i) above.

(iii) Directors elected pursuant to paragraph 9(a)(i) shall serve until the
earlier of (A) the next annual meeting of the stockholders of the Corporation
and the election (by the holders of shares of the Series and the holders of
Parity Dividend Shares) and qualification of their respective successors or (B)
the date upon which all dividends in default on the shares of the Series and
such Parity Dividend Shares shall have been paid in full. If, Prior to the end
of the term of any director elected as aforesaid, a vacancy in the office of
that director shall occur during the continuance of a default in dividends on
the shares of the Series or such Parity Dividend Shares by reason of death,
resignation or disability, the vacancy shall be filled for the unexpired term by
the appointment by the remaining director elected as aforesaid of a new director
for the unexpired term of the former director.

(b) Miscellaneous. So long as any shares of the Series are outstanding,
without the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of the Series and any outstanding Parity

C-9
<PAGE> 118

Dividend Shares, voting as a single class (or, if less that all shares of the
Series and all series of Parity Dividend Shares then outstanding would be
adversely affected thereby, without the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of each series so affected, voting as a
separate class), the Corporation may not:

(i) amend, alter or repeal (by merger or otherwise) any provision of
the Corporation's Certificate of Incorporation or this Certificate or the
By-laws of the Corporation so as to adversely affect the relative rights,
preferences, qualifications, limitations or restrictions of the shares of
the Series (except as such relative rights, preferences, qualifications,
limitations or restrictions may be affected by the authorization of any new
series of Parity Dividend Shares having the same relative rights,
preferences, qualifications, limitations or restrictions as the Series);

(ii) authorize or issue, or increase the authorized amount of, any
Senior Dividend Shares or Senior Liquidation Shares;

(iii) effect any reclassification of the shares of the Series; or

(iv) make any change in the Indenture in a manner that adversely
affects or would adversely affect the rights of the holders of Debentures
issued thereunder.

The above notwithstanding, the Corporation's Certificate of Incorporation
may be amended to increase or decrease the number of authorized shares of
Preferred Stock (but not below the number of shares thereof then outstanding) by
the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote.

10. Mandatory Redemption. The shares of the Series are not subject to
mandatory redemption or sinking fund requirements.

11. Special Conversion Rights of Holders Upon Certain Events Following a
Fundamental Change or a Change of Control of the Corporation.

(a) Change of Control. Upon the occurrence of a Change of Control (as
defined in paragraph 11(e) below) with respect to the Corporation, each holder
of shares of the Series shall have the right, at the holder's option, for a
period of 45 days after the mailing of a notice by the Corporation that a Change
of Control has occurred, to convert all, but not less than all, of the holder's
shares of the Series into Common Stock of the Corporation at an adjusted
Conversion Price per share equal to the Special Conversion Price (as defined in
paragraph 11(e) below). The Corporation may, at its option, in lieu or providing
Common Stock upon any such special conversion, provide the holder with cash
equal to the Market Value (as defined in paragraph (e) below) of the Common
Stock multiplied by the number of shares of Common Stock into which shares of
the Series would have been convertible immediately prior to the Change of
Control at an adjusted conversion price equal to the Special Conversion Price.
The special conversion right arising upon a Change of Control shall only be
applicable with respect to the first Change of Control that occurs after the
date of issuance of any shares of the Series. Shares of the Series that becomes
convertible pursuant to a special conversion right shall, unless so converted,
remain convertible into the number of shares of Common Stock that the holders of
the shares would have owned immediately after the Change of Control if the
holders had converted the shares immediately before the effective date of the
Change of Control, subject to adjustment, as provided in paragraph 7(f) above.

(b) Fundamental Change. Upon the occurrence of a Fundamental Change (as
defined in paragraph 11(e) below) with respect to the Corporation, each holder
of shares of the Series shall have a special conversion right, at the holder's
option, for a period of 45 days after the mailing of a notice by the Corporation
that a Fundamental Change has occurred, to convert all, but not less than all,
of the holder's shares of the Series into the kind and amount of cash,
securities, property or other assets receivable upon the Fundamental Change by a
holder of the number of shares of Common Stock into which such shares of the
Series would have been convertible immediately prior to the Fundamental Change
at an adjusted Conversion Price equal to the Special Conversion Price. The
Corporation or a successor corporation, as the case may be, may, at its option
and in lieu of providing the consideration as required above upon such
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<PAGE> 119

conversion, provide the holder with cash equal to the Market Value of the Common
Stock multiplied by the number of shares of Common Stock into which such shares
of the Series would have been convertible immediately prior to the Fundamental
Change at an adjusted Conversion Price equal to the Special Conversion Price.
Shares of the Series that becomes convertible pursuant to a special conversion
right shall, unless so converted, remain convertible into the kind and amount of
cash, securities, property or other assets that the holders of the shares would
have owned immediately after the Fundamental Change if the holders had converted
the shares immediately before the effective date of the Fundamental Change,
subject to adjustment as provided in paragraph 7(f) above.

(c) Notice. Upon the occurrence of a Change of Control or a Fundamental
Change with respect to the Corporation, within 30 days after the occurrence, the
Corporation shall mail to each registered holder of shares of the Series a
notice of the occurrence (the "Special Conversion Notice") setting forth the
following:

(i) the event constituting the Change of Control of Fundamental
Change;

(ii) the conversion date upon exercise of the applicable special
conversion right;

(iii) the Special Conversion Price;

(iv) the Conversion Price then in effect under paragraph 7 and the
continuing conversion rights, if any, thereunder;

(v) the name and address of the paying agent and conversion agent;

(vi) that the holders who elect to convert shares of the Series must
satisfy the requirements of paragraph 7(b) and must exercise their
conversion right within the 45-day period after the mailing of the Special
Conversion Notice by the Corporation;

(vii) the exercise of such conversion right shall be irrevocable and
no dividends on shares of the Series (or portions thereof) tendered for
conversion shall accrue from and after the conversion date; and

(viii) that the Corporation (or a successor corporation, if
applicable) may, at its option, elect to pay cash (specifying the amount
thereof per share) for all shares of the Series tendered for conversion.

(d) Exercise Procedures. A holder of shares of the Series must exercise the
special conversion right within the 45-day period after the mailing of the
Special Conversion Notice or the special conversion right shall expire. Such
right must be exercised in accordance with paragraph 7(b) to the extent the
procedures therein are consistent with the provisions of this paragraph 11.
Exercise of such conversion right shall be irrevocable, to the extent permitted
by applicable law, and dividends on shares of the Series tendered for conversion
shall cease to accrue from and after the conversion date. The conversion date
with respect to the exercise of a special conversion right arising upon a Change
of Control or Fundamental Change shall be the 45th day after the mailing the
Special Conversion Notice. In taking any action in connection with any Change of
Control or Fundamental Change or related special conversion right, the
Corporation will comply with all applicable federal securities laws and
regulations.

(e) Definitions. The following definitions shall apply to terms used in
this paragraph 11:

(i) A "Change of Control" with respect to the Corporation shall be
deemed to have occurred at such time as any person (within the meaning of
Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), including a group (within the meaning of
Rule 13d-5 under the Exchange Act), together with any of its Affiliates (as
defined below), files or becomes obligated to file a report (or any
amendment or supplement thereto) on Schedule 13D or 14D-1 pursuant to the
Exchange Act disclosing that such person has become the beneficial owner of
either (A) more than 50% of the shares of Common Stock of the Corporation
then outstanding or (B) securities representing more than 50% of the
combined voting power of the Voting Stock (as

C-11
<PAGE> 120

defined below) of the Corporation then outstanding; provided that a Change
of Control shall not be deemed to have occurred with respect to any
transaction that constitutes a Fundamental Change. An "Affiliate" of a
specified person is a person that directly or indirectly controls, or is
controlled by, or is under common control with, the person specified. An
"Associate" of a person means (A) any corporation or organization, other
than the Corporation or any subsidiary of the Corporation, of which the
person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; (B) any
trust or estate in which the person has a substantial beneficial interest
or as to which the person serves as trustee or in a similar fiduciary
capacity; and (C) any relative or spouse of the person, or any relative of
the spouse, who has the same home as the person or who is a director or
officer of the person or any of its parents or subsidiaries. As used
herein, a person shall be deemed to have "beneficial ownership" with
respect to, and shall be deemed to "beneficially own," any securities of
the Corporation in accordance with Section 13 of the Exchange Act and the
rules and regulations (including Rule 13d-3, Rule 13d-5 and any successor
rules) promulgated by the Securities and Exchange Commission thereunder;
provided that a person shall be deemed to have beneficial ownership of all
securities that any such person has a right to acquire, whether such right
is exercisable immediately or only after the passage of time and without
regard to the 60-day limitation referred to in Rule 13d-3.

(ii) A "Fundamental Change" with respect to the Corporation means (A)
the occurrence of any transaction or event in connection with which 66 2/3%
or more of the outstanding Common Stock of the Corporation shall be
exchanged for, converted into, acquired for or converted solely into the
right to receive cash, securities, property or other assets (whether by
means of an exchange offer, liquidation, tender offer, consolidation,
merger, combination, reclassification, recapitalization or otherwise) or
(B) the conveyance, sale, lease, assignment, transfer or other disposal of
all or substantially all of the Corporation's property, business or assets;
provided, however that a Fundamental Change shall not be deemed to have
occurred with respect to either of the following transactions or events:
(1) any transaction or event in which more than 50% (by value as determined
in good faith by the Board of Directors of the Corporation) of the
consideration received by holders of Common Stock consists of Marketable
Stock (as defined below); or (2) any consolidation or merger of the
corporation in which, immediately prior to such transaction, the holders of
Common Stock and units in the development drilling partnerships sponsored
by the Corporation to conduct drilling operations on properties of the
Corporation own, directly or indirectly, (I) 50% or more of the common
stock of the sole surviving corporation (or of the ultimate parent of the
sole surviving corporation) outstanding at the time immediately after the
consolidation or merger and (II) securities representing 50% or more of the
combined voting power of the surviving corporation's Voting Stock (as
defined below) (or of the Voting Stock of the ultimate parent of such
surviving corporation) outstanding at such time.

(iii) "Voting Stock" means, with respect to any person, capital stock
of such person having general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees
of such person (irrespective of whether or not at the time capital stock of
any other class or classes shall have or might have voting power by reason
of the happening of any contingency).

(iv) The "Special Conversion Price" shall mean the higher of the
Market Value of the Common Stock or $4.00 per share, provided that each
time the then prevailing Conversion Price shall be adjusted as provided
elsewhere herein, such dollar amount shall likewise be adjusted so that the
ratio of such dollar amount to the then prevailing Conversion Price, after
giving effect to any such adjustment, shall always be the same as the ratio
of $4.00 to the initial Conversion Price (without giving effect to any
adjustment).

(v) The "Market Value" of the Common Stock or any other Marketable
Stock shall be the average of the last reported sales price of the Common
Stock or such other Marketable Stock, as the case may be, for the five
trading days ending on the last trading day preceding the date of the
Change of Control or Fundamental Change, provided that if the Marketable
Stock is not traded on any
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<PAGE> 121

national securities exchange or similar quotation system as described in
the definition of "Marketable Stock" during such period, then the Market
Value of such Marketable Stock shall be the average of the last reported
sales prices per share of such Marketable Stock during the first five
trading days commencing with the first day after the date on which such
Marketable Stock was first distributed to the general public and traded on
the New York Stock Exchange, the American Stock Exchange, the Nasdaq
National Market or any similar system of automated dissemination of
quotations of securities prices in the United States; and

(vi) "Marketable Stock" shall mean Common Stock or common stock of any
corporation that is the successor to all or substantially all of the
business or assets of the Corporation as a result of a Fundamental Change
(or of the ultimate parent of such successor), which is (or will, upon
distribution thereof, be) listed or quoted on the New York Stock Exchange,
the American Stock Exchange, the Nasdaq National Market or any similar
system of automated dissemination of quotations of securities prices in the
United States.

(f) Effect of Notice. The Special Conversion Notice shall be given by
first-class mail, postage prepaid, to the holders of record of the shares of the
Series at their respective addresses as the same shall appear on the books of
the Corporation. No failure of the Corporation to give the foregoing notice
shall limit any holder's right to exercise the special conversion right
hereunder.

12. Certain Definitions. As used in this Certificate, the following terms
shall have the following respective meanings:

"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under common control with such
specified person. For purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies
of such person, directly or indirectly, whether through the ownership of
voting securities or otherwise; and the term "controlling" and "controlled"
having meanings correlative to the foregoing.

"Common Shares" shall mean any stock of the Corporation which has no
preference in respect of dividends or of amounts payable in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation and which is not subject to redemption by the Corporation.
However, Common Shares issuable upon conversion of shares of this series
shall include only shares of the class designated as Common Shares as of
the original date of issuance of shares of the Series, or shares of the
Corporation of any class or classes resulting from any reclassification or
reclassifications thereof and which have no preference in respect of
dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation and
which are not subject to redemption by the Corporation, provided that if at
any time there shall be more than one such resulting class, the shares of
each such class then so issuable shall be substantially in the proportion
which the total number of shares of such class resulting from such
reclassifications bears to the total number of shares of all classes
resulting from all such reclassifications. Unless the context otherwise
specifies or requires, all references in this certificate to "Common
Shares" include the Common Stock.

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<PAGE> 122

IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed on its behalf by its undersigned President and attested to by its
Assistant Secretary this 6th day of February, 1995.

/s/ DAVID L. KELLEY
------------------------------------
David L. Kelley,
President

ATTEST:

/s/ SHIRLEY W. SMITH
- ------------------------------------
Shirley W. Smith,
Assistant Secretary

Exhibit A to this Certificate of Designation, which is the form of
Indenture that would be applicable to 10 1/2% Convertible Subordinated
Debentures should Contour ever elect to issue them, is not reproduced here
because it is voluminous and not meaningful.

C-14
<PAGE> 123

The Consent Solicitation Agent is

D.F. KING & CO.
77 WATER STREET
NEW YORK, NEW YORK 10005

telephone:

<TABLE>
<CAPTION>
<S> <C>
(800) 628-8532 (212) 269-5550
(banks and brokers)
</TABLE>
<PAGE> 124

PART II

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware Corporation Law permits a corporation to
include in its charter documents and in agreements between the corporation and
its directors and officers provisions as to the scope of indemnification.

Contour's Certificate of Incorporation provides for indemnification of
officers and directors to the fullest extent permissible under Delaware law.

Contour's By-laws provide for the indemnification of officers and directors
acting on behalf of Contour if any such person so indemnified acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of Contour, and, with respect to any criminal action or proceeding,
any such person had no reason to believe his or her conduct was unlawful.

Delaware law permits Contour to purchase and maintain insurance on behalf
of any director, officer, employee or agent of Contour against any liability
asserted against or incurred by any of them in such capacity or arising out of
the status thereof as such whether or not Contour would have the power to
indemnify such director, officer, employee or agent against such liability under
the applicable provisions of Delaware law, the Certificate of Incorporation or
the By-laws.

The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or director may be required to bear the
economic burdens of the liabilities and expenses arising from his or here
service as such.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Schedules: All schedules for which provision is made in applicable
accounting regulations of the SEC have been omitted as the schedules are either
not required under the related instructions, are not applicable or the
information required thereby is set forth in the Company's Consolidated
Financial Statements or the Notes thereto.

(b) Exhibits:

II-1
<PAGE> 125

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.5 -- Certificate of Designations of Cumulative Convertible
Preferred Stock of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's Current
Report on Form 8-K (File No. 0-25214) dated February 10,
1995).
3.6 -- Certificate of Merger of Kelley Oil & Gas Partners, Ltd.
into Kelley Oil & Gas Corporation dated March 28, 1996
(Incorporated by reference to Exhibit 3.6 to the
Company's Annual Report on Form 10-K (File No. 0-25214)
for the year ended December 31, 1997).
3.7 -- Certificate of Amendment to Certificate of Incorporation
of the Registrant dated April 29, 1996 (Incorporated by
reference to Exhibit 3.7 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1997).
3.8 -- Certificate of Amendment to Certificate of Incorporation
of the Registrant dated July 12, 1999 (incorporated by
reference to Exhibit 3.8 to the Registrant's Registration
Statement on Form S-4 (Reg. No. 333-84053) filed July 30,
1999).
3.9 -- Certificate of Correction to Certificate of Amendment
dated May 12, 2000.
3.10 -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.5 to the Consolidation Registration Statement).
4.1 -- Certificate representing Common Stock of the Registrant
(incorporated by reference to Exhibit 4.1 to the
Consolidation Registration Statement).
4.2 -- Certificate representing $2.625 Convertible Exchangeable
Preferred Stock of the Registrant (incorporated by
reference to Exhibit 4.2 to the Consolidation
Registration Statement).
4.3 -- Indenture dated as of October 15, 1996, among the
Registrant, as issuer, Kelley Oil Corporation and Kelley
Operating Company, Ltd., as guarantors, and United States
Trust Company of New York, relating to the Registrant's
10 3/8% Senior Subordinated Notes due 2006 (incorporated
by reference to Exhibit 4.1 to the Registrant's Quarterly
Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
4.4 -- Form of the Registrant's 10 3/8% Senior Subordinated Note
Due 2006, Series B (incorporated by reference to Exhibit
4.5 to the Registrant's Registration Statement on Form
S-4 (Reg. No. 333-18481) filed December 20, 1996, as
amended).
4.5 -- Indenture dated as of May 29, 1998, among the Company, as
issuer, Kelley Oil Corporation and Kelley Operating
Company, Ltd., as guarantors, and United States Trust
Company of New York, relating to the Company's 10 3/8%
Senior Subordinated Notes due 2006 (incorporated by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-61681) filed August
17, 1998).
4.6 -- Form of the Company's 10 3/8 Senior Subordinated Note Due
2006, Series D (incorporated by reference to Exhibit 4.8
to the Company's Registration Statement on Form S-4 (Reg.
No. 333-61681 filed August 17, 1998).
4.7 -- Indenture dated as of April 15, 1999 among the Company,
Kelley Oil Corporation, Kelley Operating Company, Ltd.
and Concorde Gas Marketing, Inc., as guarantors, and
Norwest Bank Minnesota, National Association, relating to
the Company's 14% Senior Secured Notes due 2003, maturing
at 105% of the stated principal amount B (incorporated by
reference to Exhibit 4.13 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-84053)
filed July 30, 1999).
</TABLE>

II-2
<PAGE> 126

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.8 -- Form of the Company's 14% Senior Secured Notes due 2003,
maturing at 105% of the stated principal amount
(incorporated by reference to Exhibit B of Exhibit 4.13
to the Registrant's Registration Statement on Form S-4
(Reg. No. 333-84053) filed July 30, 1999).
5.1* -- Opinion of Fulbright Jaworski L.L.P. regarding legality
of Common Stock and Cash Equivalent Preferred Stock.
10.1 -- Amended and Restated Employee Stock Ownership Plan of
Kelley Oil effective as of January 1, 1989 (incorporated
by reference to Exhibit 10.15 to Kelley Oil's Annual
Report on Form 10-K (File No. 0-17585) for the year ended
December 31, 1991).
10.2 -- 1987 Incentive Stock Option Plan (the "1987 Plan") of
Kelley Oil (incorporated by reference to Kelley Oil's
Annual Report on Form 10-K (File No. 0-17585) for the
year ended December 31, 1988).
10.3 -- 1991 Incentive Stock Option Plan (the "1991 Plan") of
Kelley Oil (incorporated by reference to Exhibit 10.3 to
Kelley Oil's Annual Report on Form 10-K (File No.
0-175850 for the year ended December 31, 1991).
10.4 -- 1995 Incentive Stock Option Plan of the Registrant (the
"1995 Plan") (incorporated by reference to Exhibit 10.4
to the Registrant's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1995).
10.5 -- Amendment to the 1987 Plan, 1991 Plan and 1995 Plan
(incorporated by reference to Exhibit 10.5 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated February 15, 1996).
10.6 -- 1996 Nonqualified Stock Option Plan of the Registrant
(incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated February 15, 1996).
10.7 -- Employment Agreement dated as of February 15, 1996
between the Registrant and John F. Bookout, Jr.
(incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated February 15, 1996).
10.8 -- Employment Agreement dated as of October 1, 1998 with
Rick G. Lester (incorporated by reference to Exhibit 10.9
to the Registrant's Annual Report on Form 10-K (File No.
001-14286) for the year ended December 31, 1998).
10.9 -- Employment Agreement dated as of July 31, 1999 with
Kenneth R. Sanders (incorporated by reference to Exhibit
10.9 to the Registrant's Annual Report on Form 10-K (File
No. 001-14286) for the year ended December 31, 1999).
10.10 -- 1996 Incentive Stock Option Plan of the Registrant
(incorporated by reference to Exhibit 10.11 to the
Registrant's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1996).
10.11 -- 1997 Annual and Long-Term Incentive-Performance Plan of
the Registrant (incorporated by reference to Exhibit
10.12 to the Registrant's Annual Report on Form 10-K
(File No. 001-14286) for the year ended December 31,
1997).
10.12 -- Purchase and Sale Agreement, dated October 21, 1997,
between the Company and SCANA Petroleum Resources, Inc.
(incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated December 1, 1997).
</TABLE>

II-3
<PAGE> 127

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
21.1 -- Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21.1 to the Registrant's Annual Report on Form
10-K (File No. 0-25214) for the year ended December 31,
1996).
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of H.J. Gruy & Associates, Inc.
23.3* -- Consent of Fulbright & Jaworski L.L.P. (included in
exhibit 5.1).
24.1 -- Powers of Attorney (included on page II-5).
99.1 -- Form of Consent.
</TABLE>

- ---------------

* To be filed by amendment.

ITEM 22. UNDERTAKINGS

The undersigned Registrant hereby undertakes that:

(1) Prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form; and

(2) Every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act, and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 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
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-4
<PAGE> 128

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, this 18th day of May 2000.

CONTOUR ENERGY CO.

By: /s/ JOHN F. BOOKOUT By: /s/ RICK G. LESTER
------------------------------------------------- -------------------------------------------------
John F. Bookout Rick G. Lester
Chief Executive Officer Senior Vice President
and Chief Financial Officer
</TABLE>

POWERS OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints John F. Bookout and Rick G. Lester, or
either of them, his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same and all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting said attorney-in-fact and agent, and any of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or any of them, or his or
their 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 report has
been signed as of the 18th day of May 2000 by the following persons in their
capacity as directors of the Registrant.

/s/ JOHN F. BOOKOUT /s/ ADAM P. GODFREY
- ----------------------------------------------------- -----------------------------------------------------
John F. Bookout Adam P. Godfrey

/s/ WILLIAM J. MURRAY
- ----------------------------------------------------- -----------------------------------------------------
John J. Conklin, Jr William J. Murray

/s/ RALPH P. DAVIDSON /s/ EDWARD PARK
- ----------------------------------------------------- -----------------------------------------------------
Ralph P. Davidson Edward Park
</TABLE>

/s/ WARD W. WOODS
------------------------------------------------------
Ward W. Woods

II-5
<PAGE> 129

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
2.1 -- Agreement and Plan of Consolidation among the Registrant,
Kelley Oil Corporation, Kelley Oil & Gas Partners, Ltd.
("Kelley Partners") and the other parties named therein
(incorporated by reference to Exhibit 2.1 to the
Registrant's Registration Statement (the "Consolidation
Registration Statement") on Form S-4 (Reg No. 33-84338)
filed September 26, 1994, as amended).
3.1 -- Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Consolidation Registration Statement).
3.2 -- Certificate of Amendment to Certificate of Incorporation
of the Registrant dated December 20, 1994 (incorporated
by reference to Exhibit 3.2 to the Consolidation
Registration Statement).
3.3 -- Certificate of Correction to Certificate of Incorporation
of the Registrant dated February 12, 1996 (incorporated
by reference to Exhibit 3.1 to the Registrant's Current
Report on Form 8-K (File No. 0-25214) dated February 15,
1996).
3.4 -- Certificate of Designation of $2.625 Convertible
Exchangeable Preferred Stock of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated February 10, 1995).
3.5 -- Certificate of Designations of Cumulative Convertible
Preferred Stock of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's Current
Report on Form 8-K (File No. 0-25214) dated February 10,
1995).
3.6 -- Certificate of Merger of Kelley Oil & Gas Partners, Ltd.
into Kelley Oil & Gas Corporation dated March 28, 1996
(Incorporated by reference to Exhibit 3.6 to the
Company's Annual Report on Form 10-K (File No. 0-25214)
for the year ended December 31, 1997).
3.7 -- Certificate of Amendment to Certificate of Incorporation
of the Registrant dated April 29, 1996 (Incorporated by
reference to Exhibit 3.7 to the Company's Annual Report
on Form 10-K (File No. 0-25214) for the year ended
December 31, 1997).
3.8 -- Certificate of Amendment to Certificate of Incorporation
of the Registrant dated July 12, 1999 (incorporated by
reference to Exhibit 3.8 to the Registrant's Registration
Statement on Form S-4 (Reg. No. 333-84053) filed July 30,
1999).
3.9 -- Certificate of Correction to Certificate of Amendment
dated May 12, 2000.
3.10 -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.5 to the Consolidation Registration Statement).
4.1 -- Certificate representing Common Stock of the Registrant
(incorporated by reference to Exhibit 4.1 to the
Consolidation Registration Statement).
4.2 -- Certificate representing $2.625 Convertible Exchangeable
Preferred Stock of the Registrant (incorporated by
reference to Exhibit 4.2 to the Consolidation
Registration Statement).
4.3 -- Indenture dated as of October 15, 1996, among the
Registrant, as issuer, Kelley Oil Corporation and Kelley
Operating Company, Ltd., as guarantors, and United States
Trust Company of New York, relating to the Registrant's
10 3/8% Senior Subordinated Notes due 2006 (incorporated
by reference to Exhibit 4.1 to the Registrant's Quarterly
Report on Form 10-Q (File No. 0-25214) for the quarterly
period ended September 30, 1996).
</TABLE>
<PAGE> 130

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.4 -- Form of the Registrant's 10 3/8% Senior Subordinated Note
Due 2006, Series B (incorporated by reference to Exhibit
4.5 to the Registrant's Registration Statement on Form
S-4 (Reg. No. 333-18481) filed December 20, 1996, as
amended).
4.5 -- Indenture dated as of May 29, 1998, among the Company, as
issuer, Kelley Oil Corporation and Kelley Operating
Company, Ltd., as guarantors, and United States Trust
Company of New York, relating to the Company's 10 3/8%
Senior Subordinated Notes due 2006 (incorporated by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-4 (Reg. No. 333-61681) filed August
17, 1998).
4.6 -- Form of the Company's 10 3/8 Senior Subordinated Note Due
2006, Series D (incorporated by reference to Exhibit 4.8
to the Company's Registration Statement on Form S-4 (Reg.
No. 333-61681 filed August 17, 1998).
4.7 -- Indenture dated as of April 15, 1999 among the Company,
Kelley Oil Corporation, Kelley Operating Company, Ltd.
and Concorde Gas Marketing, Inc., as guarantors, and
Norwest Bank Minnesota, National Association, relating to
the Company's 14% Senior Secured Notes due 2003, maturing
at 105% of the stated principal amount B (incorporated by
reference to Exhibit 4.13 to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-84053)
filed July 30, 1999).
4.8 -- Form of the Company's 14% Senior Secured Notes due 2003,
maturing at 105% of the stated principal amount
(incorporated by reference to Exhibit B of Exhibit 4.13
to the Registrant's Registration Statement on Form S-4
(Reg. No. 333-84053) filed July 30, 1999).
5.1* -- Opinion of Fulbright Jaworski L.L.P. regarding legality
of Common Stock and Cash Equivalent Preferred Stock.
10.1 -- Amended and Restated Employee Stock Ownership Plan of
Kelley Oil effective as of January 1, 1989 (incorporated
by reference to Exhibit 10.15 to Kelley Oil's Annual
Report on Form 10-K (File No. 0-17585) for the year ended
December 31, 1991).
10.2 -- 1987 Incentive Stock Option Plan (the "1987 Plan") of
Kelley Oil (incorporated by reference to Kelley Oil's
Annual Report on Form 10-K (File No. 0-17585) for the
year ended December 31, 1988).
10.3 -- 1991 Incentive Stock Option Plan (the "1991 Plan") of
Kelley Oil (incorporated by reference to Exhibit 10.3 to
Kelley Oil's Annual Report on Form 10-K (File No.
0-175850 for the year ended December 31, 1991).
10.4 -- 1995 Incentive Stock Option Plan of the Registrant (the
"1995 Plan") (incorporated by reference to Exhibit 10.4
to the Registrant's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1995).
10.5 -- Amendment to the 1987 Plan, 1991 Plan and 1995 Plan
(incorporated by reference to Exhibit 10.5 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated February 15, 1996).
10.6 -- 1996 Nonqualified Stock Option Plan of the Registrant
(incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated February 15, 1996).
10.7 -- Employment Agreement dated as of February 15, 1996
between the Registrant and John F. Bookout, Jr.
(incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated February 15, 1996).
</TABLE>
<PAGE> 131

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.8 -- Employment Agreement dated as of October 1, 1998 with
Rick G. Lester (incorporated by reference to Exhibit 10.9
to the Registrant's Annual Report on Form 10-K (File No.
001-14286) for the year ended December 31, 1998).
10.9 -- Employment Agreement dated as of July 31, 1999 with
Kenneth R. Sanders (incorporated by reference to Exhibit
10.9 to the Registrant's Annual Report on Form 10-K (File
No. 001-14286) for the year ended December 31, 1999).
10.10 -- 1996 Incentive Stock Option Plan of the Registrant
(incorporated by reference to Exhibit 10.11 to the
Registrant's Annual Report on Form 10-K (File No.
0-25214) for the year ended December 31, 1996).
10.11 -- 1997 Annual and Long-Term Incentive-Performance Plan of
the Registrant (incorporated by reference to Exhibit
10.12 to the Registrant's Annual Report on Form 10-K
(File No. 001-14286) for the year ended December 31,
1997).
10.12 -- Purchase and Sale Agreement, dated October 21, 1997,
between the Company and SCANA Petroleum Resources, Inc.
(incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K (File No.
0-25214) dated December 1, 1997).
21.1 -- Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21.1 to the Registrant's Annual Report on Form
10-K (File No. 0-25214) for the year ended December 31,
1996).
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of H.J. Gruy & Associates, Inc.
23.3* -- Consent of Fulbright & Jaworski L.L.P. (included in
exhibit 5.1).
24.1 -- Powers of Attorney (included on page II-5).
99.1 -- Form of Consent.
</TABLE>

- ---------------
* To be filed by amendment.

<PAGE> 1
EXHIBIT 3.9

STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:00 AM 05/12/2000
001242464 - 2436474

CERTIFICATE OF CORRECTION

CERTIFICATE OF AMENDMENT

CONTOUR ENERGY CO.

Contour Energy Co. (formerly known as "Kelley Oil & Gas Corporation"), a
Delaware corporation, pursuant to Section 103(f) of the Delaware General
Corporation Law, does hereby certify that:

FIRST: The Certificate of Amendment of Certificate of Incorporation of
Kelley Oil & Gas Corporation filed in the Office of the Secretary of State of
the State of Delaware on July 12, 1999, as corrected by the filing of a
Certificate of Correction on August 24, 1999 (the "Certificate of Amendment")
was an inaccurate record of the corporate action referred to therein.

SECOND: The Certificate of Amendment was an inaccurate record because the
text of the new paragraph (d) to be added to the end of Article 4 was not the
text approved by the Corporation's Board of Directors and its stockholders.

THIRD: The text of such paragraph (d) in correct form is as follows:

(d) Effective as of 4:01 p.m. on July 30, 1999 (the "Effective Time"),
each share of Common Stock issued and outstanding
<PAGE> 2
immediately prior to the Effective Time shall automatically be changed
and converted, without any action on the part of the holder thereof,
into one-tenth of one share of New Common Stock, and each holder of a
number of shares of Common Stock not evenly divisible by ten will
receive for any remaining shares, in lieu of fractional shares, the
right to receive an amount in cash per share equal to the closing
price of the Common Stock on July 30, 1999 as reported by The Nasdaq
Stock Market.

IN WITNESS WHEREOF, Contour Energy Co. has caused this Certificate of
Correction to be executed by a duly authorized officer this 11th day of May,
2000.

CONTOUR ENERGY CO.

BY: JOHN F. BOOKOUT
------------------------------
Name: John F. Bookout
Title: Chairman, President &
Chief Executive Officer

<PAGE> 1
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of Contour Energy Co. on
Form S-4 of our report dated March 23, 2000, appearing in the Prospectus, which
is part of this Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Prospectus.

/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP

Houston, Texas
May 17, 2000

<PAGE> 1
EXHIBIT 23.2

[H.J. GRUY AND ASSOCIATES, INC. LETTERHEAD]

CONSENT OF H.J. GRUY AND ASSOCIATES, INC.

We hereby consent to the use of the name H.J. Gruy and Associates, Inc. and of
references to H.J. Gruy and Associates, Inc. and to inclusion of and references
to our report, or information contained therein, dated February 8, 2000,
prepared for Contour Energy Co. in the Registration Statement on Form S-4 of
Contour Energy Co. for the filing dated May 18, 2000.

H.J. GRUY AND ASSOCIATES, INC.

by: /s/ MARILYN WILSON
-------------------------------------
Marilyn Wilson, PE
President and Chief Operating Officer

May 17, 2000
Houston, Texas

<PAGE> 1

EXHIBIT 99.1

CONTOUR ENERGY CO.

CONSENT

The board of directors of Contour Energy Co. is soliciting the consents of
holders of Contour's $2.625 Convertible Exchangeable Preferred Stock to the
adoption of an amendment to Contour's certificate of incorporation that would
reclassify each share of that preferred stock into one share of Contour's common
stock and one share of Contour's $3.50 Redeemable Cash Equivalent Preferred
Stock, as described in the accompanying Prospectus, Consent Solicitation
Statement and Information Statement. TO CONSENT TO THE AMENDMENT, PLEASE SIGN
AND DATE THE OTHER SIDE OF THIS CONSENT AND RETURN IT TO THE CONSENT
SOLICITATION AGENT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
- --------------------------------------------------------------------------------

I/we, being a holder of Contour Energy Co.'s $2.625 Convertible Exchangeable
Preferred Stock, consent to the adoption by Contour's stockholders of the
following resolution:

RESOLVED, that the amendment to Article 4 of Contour's Certificate of
Incorporation set forth in Appendix A to Contour's Prospectus, Consent
Solicitation Statement and Information Statement dated May , 2000 is
hereby approved.

x
------------------------------------

x
------------------------------------
Signature of Stockholder(s)

Please sign exactly as your name
appears hereon. Joint owners must
each sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
your full title.

Date: , 2000