PROXY STATEMENT
PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the Appropriate Box:
[ ] Preliminary Information Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
KELLEY OIL & GAS CORPORATION
(Name of Registrant as Specified in its Charter)
and
(Name of Person Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed per Exchange Act Rules 14a-6(i)(4) and 0-11
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
<PAGE>
[KELLEY OIL & GAS CORPORATION LOGO]
KELLEY OIL & GAS CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 28, 1998
To Our Stockholders:
The Annual Meeting of Stockholders of Kelley Oil & Gas Corporation (the
"Company") will be held at the Chase Conference Center on the eleventh floor,
270 Park Avenue (between 47th and 48th Streets), New York, New York 10017, at
10:30 a.m. EDT on Thursday, May 28, 1998. The stockholders will be asked to vote
on the following:
1. The election of a Board of Directors comprised of seven members to
serve until their successors have been elected or appointed; and
2. Any other business matter that may properly come before the meeting.
Stockholders of record as of the close of business on Monday, April 20,
1998 are entitled to this notice and to vote at the meeting.
You are cordially invited to attend the meeting. Stockholders who do not
expect to attend the meeting in person and stockholders who plan to attend are
requested to complete, date and sign the enclosed proxy card and return it
promptly in the envelope provided. If you attend the meeting, you may vote
either in person or by your proxy. The Company values your opinion and
encourages your participation. The enclosed proxy is being solicited by the
Board of Directors.
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
Houston, Texas
April 20, 1998
<PAGE>
[KELLEY OIL & GAS CORPORATION LOGO]
PROXY STATEMENT
KELLEY OIL & GAS CORPORATION
601 Jefferson Street
Suite 1100
Houston, Texas 77002
------------------------
1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 28, 1998
PROXY SOLICITATION
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors (the "Board") of Kelley Oil & Gas
Corporation, a Delaware corporation (the "Company"), to be voted at the 1998
Annual Meeting of Stockholders (the "Meeting"). The Meeting will be held in
Conference Room A at the Chase Conference Center on the eleventh floor, 270 Park
Avenue (between 47th and 48th Streets), New York, New York 10017, at 10:30 a.m.
EDT on Thursday, May 28, 1998.
All properly executed proxies received prior to the Meeting will be
voted in accordance with the instructions marked on the proxy cards. If no
instructions are made, the shares will be voted by the proxy holders "for"
Proposal 1, the election of the nominees to the Board. Management of the Company
knows of no other business to be presented for consideration at the Meeting. If
any other business matter is properly presented, the proxy holders will have
discretionary authority to vote in accordance with their best judgment. A
majority of the total shares represented in person or by proxy and entitled to
vote at the Meeting is required for any other matter brought to a vote at the
Meeting. A stockholder giving a proxy may revoke it at any time by giving
written notice to the Secretary of the Company before it is voted, by executing
a proxy bearing a later date or by attending the Meeting and voting in person.
The Company's 1997 Annual Report (the "Annual Report"), and the proxy
material is being mailed to stockholders on or about April 24, 1998. Upon
request, additional proxy materials will be furnished without cost to brokers
and other nominees for forwarding to beneficial owners of shares held in their
names. In addition to the use of the mails, proxies may be solicited by
directors, officers and employees of the Company, without additional
compensation, through personal interview, telephone or otherwise. All costs of
the solicitation will be borne by the Company.
STOCKHOLDERS ENTITLED TO VOTE
Stockholders of record of the Company's common stock, $.01 par value per
share (the "Common Stock") and the Company's $2.625 convertible exchangeable
preferred stock (the "Preferred Stock") as of the close of business on Monday,
April 20, 1998 are entitled to notice of and to vote at the Meeting. As of March
31, 1998, the Company had outstanding 125,709,593 shares of Common Stock, and
1,745,443 shares of Preferred Stock. Cumulative voting is not allowed in the
election of directors or for any other purpose. The Company's bylaws provide
that a majority of the outstanding shares entitled to vote and represented in
person or by proxy constitute a quorum at the Meeting. A list of stockholders
entitled to notice of and vote at the Meeting will be made available during
regular business hours at the offices of the Company, 601 Jefferson Street,
Suite 1100, Houston, Texas 77002 from May 2, 1998 through May 27, 1998, and at
the Meeting, for inspection by any stockholder for any purpose regarding the
Meeting.
1
<PAGE>
PROPOSAL - ELECTION OF DIRECTORS
GENERAL
At the Meeting, seven directors of the Company are to be elected. In
accordance with the terms of the agreements covering a two-stage equity
investment of $75 million in the Company by Contour Production Company L.L.C.
("Contour"), Messrs. John F. Bookout, Ogden M. Phipps, Michael B. Rothfeld and
Ward W. Woods, were added to the Board in February 1996. As of December 31,
1997, Contour completed the two-stage equity investment in the Company on
December 1, 1997 and owns 75 million issued shares of the Company's Common
Stock, representing 59% of the Company's voting power (the "Contour
Transactions"). Messrs. John J. Conklin, Jr., Ralph P. Davidson, and William J.
Murray were serving on the Board prior to the Contour Transaction. Mr. Michael
B. Rothfeld resigned effective March 16, 1998, and Mr. Adam P. Godfrey was
appointed by the Company's Board of Directors to replace Mr. Rothfeld. Pursuant
to an agreement, Contour is required to vote its shares of Common Stock for the
election of Mr. Bookout as a director of the Company.
Except where authority to vote for one or more nominees is withheld,
John F. Bookout and Thomas E. Baker, the designated proxy holders, will vote all
of the shares represented by an executed proxy for the election of the nominees
listed below. The Company expects each of the nominees to be able to serve as a
director. If any nominee should become unavailable to serve as a director for
any reason presently not known or contemplated, the proxy holders will have
discretionary authority to vote for a substitute designated by management.
NOMINEES
The names of the nominees to the Board, together with biographical
information, are set forth below.
JOHN F. BOOKOUT, AGE 75, 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 ("CPC") since its formation in 1993.
Before joining CPC as a founder, Mr. Bookout served in positions of increasing
responsibility for 38 years at Shell Oil Company, starting in 1950 as a
geologist and culminating as President, Chief Executive Officer and a director
from 1976 through June 1988. From 1988 through 1993, he served as a member of
the Supervisory Board of Royal Dutch Petroleum. He currently serves on the board
of trustees of the United States Counsel for International Business and various
civic and educational bodies.
JOHN J. CONKLIN, JR., AGE 67, has served as a director of the Company or
its predecessor since November 1993. Mr. Conklin has been a private investor
since his retirement in 1989 as a senior partner of Conklin, Cahill & Co., a
member firm of the New York Stock Exchange, where he was active for over 35
years. He has also served as a member of the Board of Governors of the New York
Stock Exchange, the Board of Directors of the New York Futures Exchange and the
National Market Advisory Board.
RALPH P. DAVIDSON, AGE 70, served as Chairman of the Board of the
Company from October 1995 through February 1996 and has served as a director of
the Company or its predecessor since November 1993. Mr. Davidson provides
consulting services to nonprofit organizations as President of Davidson
Associates. From 1980 through 1987, he was Chairman of the Board of Time, Inc.,
where he spent 21 years with TIME MAGAZINE in various executive capacities. Mr.
Davidson is a member of the Board of Trustees of Phoenix House, the National
Council for Adoption, the Emeritus Foundation and The American University in
Bulgaria.
ADAM P. GODFREY, AGE 35, has served as a director of the Company since
March 19, 1998, and, since January 1, 1998, 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 Bessemer and five of the other
affiliated 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 the 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. From August 1992 to July 1993, Mr. Godfrey was a
principal with Bessemer Securities Corporation ("BSC").
2
<PAGE>
WILLIAM J. MURRAY, AGE 83, has served as a director of the Company or
its predecessor since March 1984. Mr. Murray has been an independent petroleum
consultant for more than the past five years. He served on the Texas Railroad
Commission for 16 years, during six of which he served as Chairman. Mr. Murray
currently serves on a number of industry committees, including as Chairman of
the Industry Advisory Committee on Natural Gas Ratable Take and Chairman of the
Industry Voluntary Allocation Committee.
OGDEN M. PHIPPS, AGE 57, has served as a director of the Company since
his election in February 1996. He was Chairman of the Board of BSC from 1982
through 1994 and of The Bessemer Group, Incorporated ("BGI") from 1991 through
1994. Mr. Phipps continues to serve as a director of BSC and BGI and is also a
manager of Bessemer Securities, LLC ("BSLLC"). BSC is the principal limited
partner of Bessemer. BSC and BSLLC are principal limited partners in another
partnership in the BH Group. He also serves as a director of several private
companies and an officer and director of several nonprofit organizations.
WARD W. WOODS, AGE 55, has served as a director of the Company since his
election in February 1996. Since 1989, he has been the sole stockholder and
president of corporations that serve as the managing general partner or
principal manager of the general partner of Bessemer and other affiliated
investment partnerships including those comprising the BH Group. He is also the
sole stockholder and president of a corporation that is a managing general
partner of Bessemer Partners & Co. Mr. Woods is the President and Chief
Executive Officer of BSLLC and BSC (which he joined in 1989). He is Chairman of
the Board of Essex International Inc. and a director of Boise Cascade
Corporation, Graphic Controls Corporation and several private companies.
VOTE REQUIRED
Nominees receiving a plurality of votes cast at the Meeting will be
elected as directors. Abstentions and broker non-votes will not be treated as
votes cast for or against any particular director and will not affect the
outcome of the election of directors.
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
BOARD AND COMMITTEE MEETINGS
Since February 16, 1996, the Board has been comprised of Messrs.
Conklin, Davidson, Murray, Bookout, Phipps, Woods and in the case of Mr.
Rothfeld until March 16, 1998, and since then Mr. Godfrey. During the year, the
Board took action on a total of six meetings. No director attended or
participated in fewer than 75% of these meetings for which he was eligible.
COMMITTEES AND COMMITTEE MEETINGS
The Board has Audit, Compensation and Nominating Committees. The
assignments to these Committees, since April 1996, are as follows:
<TABLE>
<CAPTION>
AUDIT COMPENSATION NOMINATING
COMMITTEE COMMITTEE COMMITTEE
- ---------------------------- ------------------------ --------------------------
<S> <C> <C>
Ralph P. Davidson - Chairman Ward W. Woods - Chairman Ogden M. Phipps - Chairman
John J. Conklin, Jr. John J. Conklin, Jr. William J. Murray
Michael B. Rothfeld* Ralph P. Davidson Ward W. Woods
Adam P. Godfrey** Ogden M. Phipps
</TABLE>
* Resigned March 16, 1998
** Appointed March 19, 1998
3
<PAGE>
The Audit Committee is charged with various duties relating to the
Company's financial reporting obligations. These responsibilities include
recommending the appointment of independent auditors to the Board, reviewing the
compensation of the auditors, reviewing the scope and results of the annual
audit performed by the independent auditors, assuring that proper guidelines are
established for the dissemination of financial information, conferring with the
auditors to assure the adequate training and supervision of the Company's
accounting personnel, meeting periodically with the auditors, the Board and
senior management to ensure the adequacy of internal controls and reporting
functions and reviewing the Company's consolidated financial statements. The
Audit Committee held two meetings during 1997, with all members of the Committee
participating in the meetings.
The Compensation Committee has the authority and responsibility to
review the compensation policies of the Company, to administer and approve all
elements of compensation for elected corporate officers, to consider and
recommend to the Board succession plans for executive officers, and to grant
awards to key employees under the Company's incentive and performance plans. The
Compensation Committee held three meetings during 1997, with all members of the
Committee participating in the meetings.
The Nominating Committee was formed in 1996 to evaluate the size and
composition of the Board and establish guidelines for director qualifications.
Any recommendations by stockholders will be considered if received within 120
days prior to the anniversary date of the last annual meeting of stockholders.
The selection of all directors will be in accordance with established
guidelines. The Nominating Committee met once in 1997, with all of its members
participating in the meetings.
COMPENSATION OF DIRECTORS
The Company's nonmanagement directors receive $3,750 quarterly and
$1,000 for each committee meeting attended.
EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the current
executive officers of the Company. All officers hold office until their
successors are duly appointed and qualified.
<TABLE>
<CAPTION>
OFFICER OR
DIRECTOR OF
THE COMPANY
NAME AGE POSITION SINCE
---- --- -------- ------------
<S> <C> <C>
John F. Bookout............ 75 President, Chief Executive Officer and a Director 1996
David C. Baggett........... 36 Senior Vice President and Chief Financial Officer 1997
Dallas D. Laumbach......... 61 Senior Vice President-Exploration and Production 1996
Thomas E. Baker............ 67 General Counsel and Corporate Secretary 1996
</TABLE>
JOHN F. BOOKOUT joined the Company as Chairman of the Board, President
and Chief Executive Officer in February 1996 upon completion of the Contour
Transactions. He served as Chairman of the Board of Contour since its inception
in 1993 until February 1996.
DAVID C. BAGGETT was elected Senior Vice President and Chief Financial
Officer by the Board on March 20, 1997. Previously, he was a partner in Deloitte
& Touche LLP for more than the last five years.
DALLAS D. LAUMBACH has served as Senior Vice President-Exploration and
Production of the Company since February 1996. He served as Senior Vice
President of Contour from December 1993 to February 1996. Before joining
Contour, Mr. Laumbach served in positions of increasing responsibility at Shell
Oil Company, concluding as Manager-Business Development within the exploration
and production segment.
4
<PAGE>
THOMAS E. BAKER is an attorney and joined the Company in July 1996 as
General Counsel and Corporate Secretary. From August 1991 through June 1996, Mr.
Baker was engaged in a private consulting practice.
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following summary compensation table sets forth compensation paid
during the last three fiscal years to the Company's Chief Executive Officer and
the Company's other executive officers whose compensation exceeded $100,000
during 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
---------------------- ---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(5) OPTION/SAR AWARDS(#) COMPENSATION(2)
- ----------------------------------------- ---- ------- -------- ---------------------- ---------------
<S> <C> <C> <C> <C> <C>
David C. Baggett(4) ..................... 1997 148,000 -- 575,000 9,500
Senior Vice President and 1996 -- -- -- --
Chief Financial Officer 1995 -- -- -- --
Thomas E. Baker ......................... 1997 175,000 -- 98,000 9,500
General Counsel and Corporate 1996 80,681 -- -- 3,500
Secretary 1995 -- -- -- --
John F. Bookout(3) ...................... 1997 800,000 -- -- 8,000
Chairman, President and CEO 1996 700,000 -- 2,667
1995 -- -- -- --
Dallas D. Laumbach(3) ................... 1997 190,000 -- -- 9,500
Senior Vice President- 1996 166,250 -- 862,500 3,800
Exploration and Production 1995 -- -- -- --
William C. Rankin(3,4) .................. 1997 37,500 -- -- 167,063
Senior Vice President and 1996 144,375 862,500 3,300
Former Chief Financial Officer 1995 -- -- -- --
</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) 1997 and 1996 amounts include matching contributions by the Company to
the named executive officer's 401(k) account. 1995 amounts reflect the portion
of contributions to the ESOP attributable to the named executive officers. Prior
to 1996, the Company made annual contributions to the ESOP, on behalf of all
employees, in an amount equal to 15% of their cash compensation up to a
specified level. See "Employee Section 401(k) and Stock Ownership Plan."
(3) In February 1996, Mr. Bookout was appointed Chairman, President and CEO
of the Company. Mr. Laumbach was appointed Senior Vice President-Exploration and
Production, and Mr. Rankin was appointed Senior Vice President and Chief
Financial Officer.
(4) In March 1997, Mr. Baggett was appointed Senior Vice President and
Chief Financial Officer after Mr. Rankin left the employment of the Company. Mr.
Rankin was paid $165,000 in severance payments in accordance with his employment
agreement.
(5) Does not include annual performance awards granted in respect of 1997
under the 1997 Annual and Long-Term Incentive-Performance Plan. Awards are based
on 1997 performance criteria and were paid in 1998.
STOCK OPTIONS PLANS
The Company maintains stock option plans (collectively, the "Stock
Option Plans") providing for the authority to grant options intended to be (i)
not qualified ("NQSOs") under section 422 of the Internal Revenue Code of 1986,
as amended(the "Code") , (ii) qualified ("QSOs") under section 422 of the Code
or (iii) either NQSOs or QSOs. Stock Option Plans covering the grant of QSOs
only were adopted in 1987 (the "1987 Plan"), 1991 (the "1991 Plan"), 1995 (the
"1995 Plan") and 1996 (the "1996 Plan"), covering the grants of options for
500,000 shares, 500,000 shares, 1.5 million shares and 1 million shares,
respectively, of Common Stock. In February 1996 a Stock Option Plan covering the
grant of NQSOs only (the "1996 NQSO Plan") was adopted in accordance with the
terms of the Contour Agreements and provides for the grant of options to
purchase a total of 2.5 million shares of Common Stock to senior executives
designated by Mr. Bookout.
5
<PAGE>
In March 1997, the Board of Directors of the Company adopted, subject to
stockholder approval, the Company's 1997 Annual and Long-Term
Incentive-Performance Plan (the "1997 Plan"). The stockholders of the Company
approved the 1997 Plan on May 29, 1997. The 1997 Plan amended the 1996 Plan in
its entirety, with effect from January 1, 1997, except as to the 10,000
outstanding grant of options. Awards granted under the 1997 Plan may be (i)
annual performance awards ("Annual Performance Awards"); (ii) stock options
designated as either NQSOs or QSOs; or (iii) other forms of stock-based
performance awards (collectively, (i), (ii) and (iii) referred to as
"Awards").The total number of shares authorized for issuance under the 1997 Plan
is 4,200,000 shares.
The exercise price for NQSOs granted under the 1997 Plan and QSOs are
fixed either by the Compensation Committee of the Board or the Board at the fair
market value of the Common Stock at the time of the grant. Options granted under
the 1987, 1991 and 1995 Plans are exercisable during the term of the optionee's
employment and three years thereafter for up to ten years from the date of
grant. Options granted under the 1996 Plan, the 1996 NQSO Plan, and the 1997
Plan are exercisable after vesting (at the annual rates of 100%, 33 1/3%, 25%,
respectively) during the term of the optionee's employment and six months
thereafter for up to ten years from the date of grant. The exercise price for
options granted under the 1996 NQSO Plan was fixed in the plan. The QSO Plans
and 1996 NQSO Plan will terminate upon the earlier of (i) the date on which all
shares available for issuance have been issued upon the exercise of options
granted thereunder, or (ii) ten years from the date of adoption. Under the 1997
Plan, no award may be granted after May 29, 2001.
Under the 1987 Plan, options were granted to purchase a total of
185,000 shares of common stock of Kelley Oil Corporation (the Company's
predecessor) ("Kelley Oil") at $1.10 per share during 1988 and 315,000 shares at
$2.00 per share during 1989. Under the 1991 Plan, options were granted to
purchase a total of 219,000 shares of Kelley Oil's common stock at $7 5/8 per
share during 1991, 15,000 shares at $7.00 per share during 1993, 266,000 shares
of Common Stock at $2 3/8 per share during 1995, and 14,000 shares at $2 3/16
per share. The options granted under the 1991 Plan with an exercise price of $7
5/8 and $7.00 per share were repriced in 1995, to the extent then outstanding,
at $4 1/8 per share. Under the 1995 Plan, options to purchase a total of
1,500,000 shares of Common Stock were granted during 1995 at exercise prices
ranging from $1 3/4 to $2 3/8 per share. Under the 1996 Plan, options were
granted to purchase a total of 20,000 shares of Common Stock at $2 7/8 per share
during 1996, and 25,000 shares of Common Stock at $2 9/16 per share in February
1997. Under the 1996 NQSO Plan, options were granted to purchase a total of
2,500,000 shares of Common Stock at the exercise price of $1.00 per share. Under
the 1997 Plan, NQSOs were granted in 1997 to purchase a total of 442,500 shares
of Common Stock at prices ranging from $2 9/16 to $3 1/4 per share. In 1997,
1996 and 1995, options were exercised for a total of 415,400 shares; 35,600
shares; and 225,000 shares, respectively, at prices from $1.00 to $2 3/8 per
share during 1997. At December 31, 1997, options issued and outstanding to
purchase shares of Common Stock under the 1987, 1991, 1996, 1996 NQSO and 1997
Plans were 111,000 shares; 450,205 shares; 1,394,295 shares; 10,000 shares;
2,212,500 shares; and 422,500 shares, respectively, or a total of 4,600,500
shares of Common Stock subject to options under all of the Plans.
Mr. Bookout does not participate in any of the Stock Option Plans or in
the 1997 Plan.
6
<PAGE>
The following table provides information about NQSOs granted during 1997 under
the 1996 NQSO Plan and the 1997 Plan to the following Named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ----------------------------- ------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David C. Baggett ............ 575,000(2) 57.64% 1.00 3/20/2007 1,684,463 3,002,363
Thomas E. Baker ............. 98,000(3) 9.82% 2 9/16 5/29/2007 146,000 371,000
</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 the Company's future stock price
growth, which is dependent on future performance and stock market conditions.
(2) This was granted on March 20, 1997 by the Board in accordance with the
1996 NQSO Plan.
(3) This was granted on May 29, 1997 in accordance with the 1997 Plan.
The following table sets forth information on stock options exercised in
1997, unexercised stock options held, and option values held by the Named
Executive Officers as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN 1997
AND 1997 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT YEAR END YEAR END(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David C. Baggett ............ None N/A None 575,000(2) N/A $682,813(2)
Thomas E. Baker ............. None N/A None 98,000 N/A None(3)
John F. Bookout ............. None N/A None None N/A N/A
Dallas D. Laumbach .......... None N/A 287,500 575,000 $341,406 $682,813
William C. Rankin ........... 287,500(2) $483,615(4) None None N/A N/A
</TABLE>
(1) Calculated utilizing the closing price of the Common Stock listed on the
NASDAQ National Market System on December 31, 1997.
(2) Mr. Rankin left the employment of the Company in March 1997. At such
time, 287,500 options had vested. The remaining 575,000 options were forfeited
in accordance with the terms and conditions of the NQSO Plan, and those 575,000
options were granted to David C. Baggett on March 20, 1997.
(3) The exercise price exceeded the closing price of the Common Stock at
year end.
(4) This value was calculated by subtracting the exercise prices from the
closing prices on the NASDAQ National Market System of the underlying Common
Stock on the exercise dates. The value reflects the increase in the prices of
the Common Stock from the option grant dates to the option exercise dates, but
does not reflect actual proceeds received upon the option exercises.
7
<PAGE>
EMPLOYEE SECTION 401(K) AND STOCK OWNERSHIP PLAN
In 1984 an employee stock ownership plan ("ESOP") was established for
the benefit of substantially all of the employees. Effective September 1, 1996,
the ESOP was converted into a Section 401(k) Plan (the "401(k) Plan"). All
employees are eligible to participate in the 401(k) Plan. The Company previously
contributed to the ESOP an annual amount equal to 15% of each employee's
compensation (up to a specified level) to enable the ESOP to purchase qualifying
securities for the accounts of employees. Qualifying securities were allocated
to employees' accounts in the ESOP in amounts that were proportionate to the
ESOP's repayment of borrowings incurred to purchase those securities, all of
which are currently allocated following repayment of ESOP borrowings in 1995.
Employees become fully vested in their accounts in the 401(k) Plan after
two years of service. Prior to converting the ESOP into a Section 401(k) Plan,
the ESOP held Preferred Stock which the Board redeemed in exchange for the same
number of shares of Common Stock. Effective with the conversion of the ESOP into
a Section 401(k) Plan, participants have the opportunity to invest their
accounts in various mutual funds and in Common Stock. The Company matches 100%
of the employees' contributions to the 401(k) Plan in an amount up to 6% of the
employee's salary, subject to limits required by the Code.
EMPLOYMENT AGREEMENTS
In connection with the Contour Transactions, the Company entered into
three-year employment agreements with John F. Bookout and Dallas D. Laumbach at
base salaries of $800,000 and $190,000, respectively. In March 1997, the Company
entered into a three-year employment agreement with David C. Baggett at a base
salary of $190,000. Each of the agreements provides for a lump sum severance
payment if the covered executive is terminated without cause, as defined in the
agreements. The severance payment would be equal to one year's compensation
based on the salary and bonus rate at the time of termination, except that Mr.
Bookout would be entitled to a payment covering the balance of the three-year
term, and Mr. Baggett would be entitled to a severance payment equal to two
year's compensation. Each of the agreements provides for various other benefits
and for indemnification of the covered executive under certain conditions.
CHANGE OF CONTROL AGREEMENTS AND SEVERANCE PAYMENTS
In November 1995, the Company entered into change of control agreements
with 16 management and professional personnel, entitling them to severance
benefits in the event their employment with the Company was terminated prior to
February 15, 1998. For this purpose, the Contour Transactions constituted a
change of control. The severance benefits amount to salary continuation for
twelve months, based on the employee's highest compensation rate during the two
years prior to termination, for all covered employees other than three specified
persons, who were entitled upon termination of employment to salary continuation
for periods of 36, 24 and 18 months, respectively. Pursuant to the employment
agreement with Mr. Rankin, the Company became obligated upon his departure to
make payments to him of $165,000 in 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the directors serving on the Board's Compensation Committee (the
"Committee") has ever served as an officer or employee of the Company or any of
its subsidiaries, and are not eligible to participate in the 1997 Plan.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICY. In 1996, Deloitte & Touche LLP's Performance
Management and Compensation Group ("D&T PMC Group") was retained to review the
competitiveness of the Company's current compensation program ("Compensation
Review") including various comparisons by specific positions with a
representative peer group, consisting of base salary, annual incentives,
long-term incentives, retirement benefits and non-qualified deferred
compensation. Upon consideration of the Compensation Review, the Committee
requested D&T PMC Group to design an annual and long-term incentive plan which
8
<PAGE>
would permit the Company to be competitive with industry peers and linked to
corporate, team and individual performances. D&T PMC Group then in consultation
with the Committee developed the 1997 Annual and Long-Term Incentive-Performance
Plan (the "1997 Plan"), which was approved by the Committee and recommended to
the Board for its approval, subject to stockholder approval. As previously
mentioned, the 1997 Plan was approved on May 29, 1997 by stockholders.
The Committee's goal is to maintain executive compensation at levels
that are competitive with industry peers and linked to corporate performance;
nevertheless it recognizes that the actual compensation in any particular year
may be above or below published rates for competitors. In addition, due to the
volatility of the energy industry, the Company's compensation levels from year
to year may not correlate directly with various corporate performance measures
in a particular year. The Committee believes, however, that the Company's 1997
Plan enables it to balance the relationship between compensation and performance
in the best interests of the stockholders.
SALARY DETERMINATIONS. The salaries for Messrs. Bookout, Laumbach and
Rankin were established in contracts executed pursuant to the terms and
conditions in the initial Contour Transaction. The salary for Mr. Baggett in
1997 was established in his employment contract approved by the Committee, and
the salary for Mr. Baker was set by the Committee in July 1996 at the time of
his retention. There have been no other changes by the Committee or otherwise to
the Company's Named Executive Officers' salaries subsequent to the initial
Contour Transaction.
INCENTIVE-PERFORMANCE RECOMMENDATIONS. The Committee, in accordance with
the 1997 Plan, approved the specific individual NQSO grants and annual cash
incentive-performance awards in 1997, including specific criteria to be used in
determinating the amounts of 1997 awards payable in 1998. There have been no
bonuses paid to the Named Executive Officers in 1997.
THIS REPORT HAS BEEN APPROVED BY WARD W. WOODS, CHAIRMAN, JOHN J.
CONKLIN, JR., RALPH P. DAVIDSON AND OGDEN M. PHIPPS, COMPRISING ALL OF THE
MEMBERS OF THE COMPENSATION COMMITTEE.
9
<PAGE>
STOCK PERFORMANCE CHART
The following chart graphs the performance of the cumulative total
return to shareholders (stock price appreciation plus dividends) during the
previous five years in comparison to returns of the Standard & Poor's 500
Composite Stock Price Index, the peer group and the prior peer group. This chart
was prepared by using data provided by the Compustat division of Standard &
Poor, and is based on the following assumptions that $100 was invested at the
close of trading on the last trading day preceding the first day of 1992, and
the reinvestment of dividends. The companies in the peer group, the Morgan
Stanley, Inc. median gas independent peer group, have been modified to exclude
Wainoco Oil Corp. (who has significant activities other than exploration and
production). The new peer group includes companies more comparable in size to
the Company than the prior peer group, which was the Standard & Poor Midcap Oil
& Gas (Exploration and Production) Index.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------
KOGC ..................... 100.00 126.67 48.33 17.49 32.49 29.16
S & P 500 ................ 100.00 110.08 111.53 153.45 188.68 251.63
Peer Group ............... 100.00 145.03 127.21 147.98 246.95 188.39
Prior Peer Group ......... 100.00 137.68 131.15 156.53 207.78 191.38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 31, 1998 with
respect to the persons other than the 401(k) Plan known by the Company to own
beneficially more than five percent of any class of its capital stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- -------------- --------------------------------- ----------------------- ----------
<S> <C> <C> <C>
Common Bessemer Holdings, L.P. and 75,000,000 59.66%
Stock Contour Production Company L.L.C.
630 Fifth Avenue
New York, New York 10111
</TABLE>
Bessemer owns a majority of the membership interests in Contour. Based
on a Statement on Schedule 13-D filed with the SEC, Contour and Bessemer are
each deemed to beneficially own the shares of Common Stock held of record by
Contour. As of February 28, 1998, those shares represented 58.84% of the
Company's total voting power. JFB Squared, Ltd. and Bevairohn, Ltd.,
partnerships controlled by John F. Bookout, Chairman, President and CEO of the
Company, and three other investment partnerships having the same general partner
as Bessemer own the remaining interests in Contour and may be deemed to
beneficially own the Common
10
<PAGE>
Stock held by Contour. Contour has agreed, subject to certain limitations, to
vote for the election of Mr. Bookout as a director of the Company.
The following table sets forth information as of March 31, 1998 with
respect to the Company's Common Stock and its Preferred Stock beneficially
owned, directly or indirectly, by each of the Company's directors, by the Named
Executive Officers during 1997 and by all of its directors and Named Executive
Officers as a group.
<TABLE>
<CAPTION>
NAME OF COMMON PERCENT PREFERRED PERCENT
BENEFICIAL OWNER STOCK(1) OF CLASS STOCK OF CLASS(3)
- ----------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
David C. Baggett ........................ 191,666 0.15 -- --
Thomas E. Baker ......................... -- -- -- --
John F. Bookout(2) ...................... -- -- -- --
John J. Conklin, Jr ..................... 71,037 0.06 -- --
Ralph P. Davidson(3) .................... 154,862 0.12 -- --
Adam P. Godfrey(2) ..................... -- -- -- --
Dallas D. Laumbach(1) ................... 575,000 0.46 -- --
William J. Murray(4) .................... 81,805 0.07 2,000 .11
Ogden M. Phipps(2) ...................... -- -- -- --
William C. Rankin(5) ................... -- -- -- --
Ward W. Woods(2) ........................ -- -- -- --
All current directors and Named Executive
Officers as a group (10 persons)(1) ..... 1,074,370 0.86% 2,000 .11%
</TABLE>
(1) Represents shares of Common Stock owned directly and indirectly as
indicated below, including shares subject to vested options under the 1996 NQSO
Plan as follows: Mr. Baggett, 191,666 shares and Mr. Laumbach, 575,000 shares.
(2) Excludes 75.0 million shares of Common Stock held by Contour, in which
Messrs. Bookout, Godfrey and Woods and partnerships controlled by Mr. Bookout
have an indirect interest, and as to which each of Messrs. Godfrey and Woods
have disclaimed beneficial ownership.
(3) Includes 122,253 shares of Common Stock held by Mr. Davidson's wife and
609 shares of Common Stock held by his daughter.
(4) Includes 2,000 shares of Preferred Stock held in Mr. Murray's defined
benefit pension plan.
(5) Mr. Rankin left the Company in March 1997.
RELATED PARTY TRANSACTION
In connection with the Contour Transactions, the Company entered into an
agreement (the "Advisory Agreement") with BPC, providing for the engagement of
BPC to provide the Company with financial advisory services for a term expiring
at the end of 1998. Under the Advisory Agreement, BPC has assisted the Company
in arranging a new credit facility and negotiating the related agreements. BPC
has also agreed to assist the Company in restructuring its current capital
structure. For its services under the Advisory Agreement, BPC received in 1996
an advisory fee of $2 million at the closing of the Contour Transactions and
$500,000 received in each of December 1996 and 1997, and is also entitled to
receive $500,000 payable in 1998. In addition, BPC is entitled to reimbursement
of expenses incurred in connection with rendering advisory services. The Company
has also agreed to indemnify BPC and its affiliates against certain liabilities
under the Advisory Agreement. As previously mentioned, Mr. Woods is the sole
stockholder and president of a corporation that is the managing general partner
of BPC, and Mr. Godfrey is the sole stockholder and president of a corporation
that is a general partner of BPC.
It is the policy of the Company to structure any transactions between
the Company and its officers, directors, principal stockholders or other
affiliates only on terms no less favorable to the Company than terms that could
be obtained on an arms length basis from unrelated parties and only upon
approval by a majority of the Company's independent and disinterested directors.
11
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP AND REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission (the "SEC") reports of ownership and changes
in ownership of common stock and other equity securities of the Company. Based
on a review of reports and information provided to the Company by executive
officers, directors and greater than 10% stockholders, the Company believes all
reports required to be filed in 1997 were timely filed, except, as a result of
an administrative oversight, one report for Mr. Ralph P. Davidson was filed
shortly after the prescribed filing date.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP ("D&T") is engaged as the Company's principal
accountant to audit its financial statements. D&T audited the accounts and
financial statements of the Company for the years ended December 31, 1995, 1996
and 1997. Stockholder ratification of the appointment of auditors is not
required. D&T will be represented at the Meeting, will have the opportunity to
make statements, and will be available to respond to appropriate questions.
In connection with the Contour Transactions, the Company dismissed Ernst
& Young LLP ("E&Y") as its principal accountants, effective February 15, 1996.
The change in accountants was approved by the audit committee of the Company's
Board, contingent upon the closing of the first of the two Contour Transactions.
E&Y's report on the Company's financial statement for the year ended December
31, 1994, the last year it performed an audit, did not contain an adverse
opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles. During the preceding two
fiscal years and the interim period prior to the change in accountants, (i) the
Company had no disagreements with E&Y on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, (ii)
E&Y did not advise the Company of any "reportable event" as defined in
Regulation S-K under the Exchange Act and (iii) the Company did not consult with
D&T on any accounting, auditing, financial reporting or any other matters.
PROPOSALS BY STOCKHOLDERS
In accordance with rules of the Securities and Exchange Commission,
stockholders of the Company may present proposals to the Company for inclusion
in its proxy statement prepared in connection with the next regular annual
meeting of stockholders. Proposals to be included in that proxy statement must
be received by the Company no later than January 31, 1999 in order to be
considered for inclusion.
OTHER MATTERS
The Board knows of no business other than the matters discussed in this
Proxy Statement that properly may be, or is likely to be, brought before the
Meeting. In the event any other business is properly brought before the Meeting,
however, the proxyholder will vote in accordance with his best judgment on those
matters.
John F. Bookout
Chairman of the Board, President
and Chief Executive Officer
Houston, Texas
April 20, 1998
12
<PAGE>
PROXY
KELLY OIL & GAS CORPORATION
601 JEFFERSON STREET - SUITE 1100
HOUSTON, TEXAS 77002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John F. Bookout and Thomas E. Baker, and
each of the, the proxy and attorney-in-fact for the undersigned, with full power
of substitution, to vote, as designated hereon, all the shares of capital stock
of Kelley Oil & Gas corporation held of record by the undersigned on April 20,
1998 at the Annual Meeting of Stockholders to be held on May 28, 1998 or any
adjournment thereof.
- --------------------------------------------------------------------------------
^Fold and Detach Here^
<PAGE>
THIS PROXY, WHEN PROPERLY AMENDED, WILL BE VOTED IN THE MANNER SPECIFIED BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
ALL NOMINEES AND FOR APPROVAL OF THE 1998 ANNUAL AND LONG-TERM INCENTIVE-
PERFORMANCE PLAN.
Please mark your vote as
marked in this sample [X]
1. ELECTION OF DIRECTORS: IMPORTANT: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE
NOMINEE'S NAME IN THE LIST BELOW.
FOR all nominees WITHHOLD John F. Bookout
listed to the right AUTHORITY John J. Conklin, Jr.
(except as marked to vote for all nominees Ralph P. Davidson
to the contrary) listed to the right Adam P. Godfrey
William J. Murray
[ ] [ ] Ogden M. Phipps
Ward W. Woods
2. In their discretion, the Proxies are authorized to vote upon any other
matters that may properly come before the meeting.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney, executor,
administrator, trustee, guardian or officer,
please give full title as such. If a
corporation, please sign in full corporate name
by authorized officer. If a partnership, please
sign in partnership name by authorized person.
DATED: __________________________________, 1998
_______________________________________________
Signature
_______________________________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THE
PROXY USING THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
^Fold and Detach Here^
KELLY OIL & GAS CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 28, 1998
To Our Stockholders:
The Annual Meeting of Stockholders of Kelley Oil & Gas Corporation will
be held at the Chase Conference Center on the eleventh floor at 270 Park Avenue
(between 47th and 48th Streets), New York, New York 10017, at 10:30 a.m. EDT on
Thursday, May 28, 1998.
You are cordially invited to attend the meeting. Stockholders who do not
expect to attend the meeting in person are requested to complete, date and sign
the above proxy card and return it promptly in the envelope provided. If you
attend the meeting, you may vote either in person or by your proxy. The Company
values your opinion and encourages your participation.
