<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 0-25214
KELLEY OIL & GAS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0447267
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
601 JEFFERSON ST.
SUITE 1100
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 652-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
TITLE OF CLASS OUTSTANDING AT OCTOBER 31, 1998
<S> <S>
Common Stock 125,929,081
</TABLE>
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<PAGE> 2
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998 (unaudited)................... 2
Consolidated Statements of Income (Loss) for the three months and nine months ended
September 30, 1997 and 1998 (unaudited)................................................................ 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1998 (unaudited)................................................................ 4
Notes to Consolidated Financial Statements (unaudited)................................................... 5
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 12
PART II. OTHER INFORMATION................................................................................. 17
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents........................................................... $ 162 $ 6,752
Accounts receivable................................................................. 24,566 18,301
Accounts receivable - drilling programs............................................. 718 610
Prepaid expenses and other current assets........................................... 1,412 1,392
--------- ---------
Total current assets.............................................................. 26,858 27,055
--------- ---------
Oil and gas properties, successful efforts method:
Unproved properties, net.......................................................... 49,854 49,264
Properties subject to amortization................................................ 463,263 484,854
Pipelines and other transportation assets, at cost.................................. 4,690 1,582
Furniture, fixtures and equipment................................................... 2,969 3,453
--------- ---------
520,776 539,153
Less: Accumulated depreciation, depletion and amortization......................... (227,163) (254,444)
--------- ---------
Total property and equipment, net................................................. 293,613 284,709
--------- ---------
Other non-current assets, net....................................................... 2,131 1,566
--------- ---------
Total assets........................................................................... $ 322,602 $ 313,330
========= =========
LIABILITIES:
Accounts payable and accrued expenses............................................... $ 41,474 $ 43,523
Accounts payable - drilling programs................................................ 566 375
Current portion of long-term debt................................................... -- 435
--------- ---------
Total current liabilities......................................................... 42,040 44,333
--------- ---------
Long-term debt...................................................................... 286,183 301,835
--------- ---------
Total liabilities...................................................................... 328,223 346,168
--------- ---------
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 20,000,000 shares authorized at December
31, 1997 and September 30, 1998; 1,745,443 and 1,733,628 shares issued and
outstanding at December 31, 1997 and September 30, 1998 (liquidation value
at December 31, 1997 and September 30, 1998 of $48,977 and $47,496,
respectively)..................................................................... 2,618 2,600
Common stock, $.01 par value, 200,000,000 shares authorized at December 31, 1997
and September 30, 1998; 125,709,093 and 125,790,569 shares issued and outstanding
at December 31, 1997 and September 30, 1998, respectively......................... 1,257 1,258
Additional paid-in capital.......................................................... 300,367 300,415
Accumulated deficit................................................................. (309,863) (337,111)
--------- ---------
Total stockholders' deficit............................................................ (5,621) (32,838)
--------- ---------
Total liabilities and stockholders' deficit............................................ $ 322,602 $ 313,330
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 4
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
--------------------------- --------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas revenues .......................... $ 17,105 $ 18,630 $ 52,230 $ 62,839
Interest and other income ..................... 73 16 307 82
--------- --------- --------- ---------
Total revenues ................................ 17,178 18,646 52,537 62,921
--------- --------- --------- ---------
EXPENSES:
Production expenses ........................... 2,457 4,556 7,388 15,300
Exploration expenses .......................... 897 3,043 2,779 9,712
General and administrative expenses ........... 1,281 1,913 5,268 5,530
Interest and other debt expenses .............. 6,135 8,342 18,174 24,657
Depreciation, depletion and amortization ...... 6,349 9,203 18,414 30,389
--------- --------- --------- ---------
Total expenses ................................ 17,119 27,057 52,023 85,588
--------- --------- --------- ---------
Income (loss) before income taxes ................ 59 (8,411) 514 (22,667)
Income taxes ..................................... -- -- -- --
--------- --------- --------- ---------
Net income (loss) ................................ 59 (8,411) 514 (22,667)
Less: cumulative preferred stock dividends .... (1,145) (1,122) (3,436) (3,413)
--------- --------- --------- ---------
Net loss applicable to common stock .............. $ (1,086) $ (9,533) $ (2,922) $ (26,080)
========= ========= ========= =========
Basic and diluted loss per common share .......... $ (.01) $ (.08) $ (.03) $ (.21)
========= ========= ========= =========
Weighted average common shares outstanding ....... 100,342 125,769 98,400 125,740
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 5
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT 30,
--------------------------
1997 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ 514 $ (22,667)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization ............................. 18,414 30,389
Exploration expenses ................................................. 2,779 9,712
Accretion and amortization of debt expenses .......................... 3,206 3,811
Changes in operating assets and liabilities:
Decrease in accounts receivable ...................................... 3,212 6,373
Increase (decrease) in prepaid expenses and other current assets ..... (265) 20
Increase in other non-current assets ................................. (240) (206)
Increase (decrease) in accounts payable and accrued expenses ......... 2,854 1,858
--------- ---------
Net cash provided by operating activities .............................. 30,474 29,290
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ................................................... (38,692) (48,267)
Proceeds from sale of properties ....................................... -- 17,070
--------- ---------
Net cash used in investing activities .................................. (38,692) (31,197)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings ..................................... 66,000 102,600
Principal payments on long-term borrowings ............................. (57,500) (118,900)
Proceeds from sale of common stock, net ................................ 311 33
Proceeds from conversion of preferred stock ............................ -- (2)
Proceeds from sale of notes, net ....................................... -- 29,576
Dividends on preferred stock ........................................... (4,582) (4,582)
Redemption of subordinated notes ....................................... -- (228)
--------- ---------
Net cash provided by financing activities ................................. 4,229 8,497
--------- ---------
Increase (decrease) in cash and cash equivalents .......................... (3,989) 6,590
Cash and cash equivalents, beginning of period ............................ 4,070 162
--------- ---------
Cash and cash equivalents, end of period .................................. $ 81 $ 6,752
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 6
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
General. The accompanying unaudited interim consolidated financial
statements of Kelley Oil & Gas Corporation (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 of normal recurring adjustments) necessary for a fair
presentation, in all material respects, of the results for the interim periods.
The results of operations for the periods ended September 30, 1998 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 1 to the
financial statements in its Annual Report on Form 10-K for the year ended
December 31, 1997. These unaudited consolidated interim financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1997 Annual Report on Form 10-K.
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 is effective for periods beginning
after December 15, 1997. SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components. 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 September 30, 1998, there are no adjustments ("Other comprehensive
income") to net income in deriving comprehensive income.
Changes in Presentation. Certain 1997 financial statement items have
been reclassified to conform to the 1998 presentation.
NOTE 2 - LONG-TERM DEBT
10 3/8% Senior Subordinated Notes. In May 1998, the Company sold $30.0
million principal amount of the Company's 10 3/8% Senior Subordinated Notes due
2006, Series C ("Series C Notes") at a cash price of $1,015 per $1,000 principal
amount. The net proceeds received were used to reduce outstanding borrowings
under the Company's bank credit facility ("Credit Facility"). The Series C Notes
are redeemable at the option of the Company, in whole or in part, at redemption
prices declining ratably from 105.19% on October 15, 2001 to 100% at October 15,
2003 and thereafter. The Company may redeem up to 35% of the original principal
amount of the Series C Notes before October 15, 1999 at 110.38% with the
proceeds of an equity offering (provided that either at least $18.0 million
aggregate principal amount of such notes remains outstanding or such redemption
retires such notes in their entirety). The Series C Notes represent unsecured
obligations of the Company and are subordinate in right of payment to all
existing and future senior indebtedness. The indenture for the notes contains
conditions and limitations, including but not limited to restrictions on
additional indebtedness, payment of dividends, redemption of capital stock, and
certain mergers and consolidations. The holders of the Series C Notes also can
require the Company to repurchase the notes at 101% of the principal amount upon
a Change of Control, as defined. Kelley Oil Corporation, a wholly-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.
Bank Credit Facility. On July 24, 1998, the Company sold its entire
interest in the Waskom field in Harrison County, Texas for the total
consideration of $17.4 million (before purchase price adjustments). The proceeds
from the
5
<PAGE> 7
sale were used to reduce outstanding borrowings under the Credit Facility. As a
result of the sale of these properties, effective on the sale date, the
Company's borrowing base under the Credit Facility was reduced by $8.0 million,
to $130 million.
NOTE 3 - PREFERRED STOCK
As of September 30, 1998, $3.4 million in dividends were in arrears on
the Company's $2.625 Convertible Exchangeable Preferred Stock (the "Preferred
Stock"). The Company paid a dividend on its Preferred Stock of $2.625 per share
(approximately $4.6 million) on April 30, 1998. Future dividends on the
Preferred Stock are prohibited under the Credit Facility.
NOTE 4 - DERIVATIVE AND HEDGE ACCOUNTING
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at its fair value. Depending on the intended use of the
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.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application of SFAS 133 is encouraged, but not
prior to the beginning of any fiscal quarter that begins after issuance of the
Statement. Retroactive application to periods prior to adoption is not allowed.
The Company has not quantified the impact of adoption on its financial
statements or the date it intends to adopt.
NOTE 5 - ACQUISITION OF OIL AND GAS PROPERTIES
On December 1, 1997, the Company purchased from SCANA Petroleum
Resources, Inc. ("SPR") substantially all of SPR's oil and gas properties,
including its 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 the Company's Statements of Income (Loss) since December 1, 1997.
The pro forma information shown below adjusts the historical results of the
Company to reflect the revenues and direct operating expenses of the producing
properties acquired from SPR, assuming that the acquisition occurred at the
beginning of 1997. The pro forma information also contains adjustments for
additional interest expense to finance the acquisition, depreciation, depletion
and amortization based on assigned fair values to the assets acquired and
general and administrative expenses incurred from hiring additional employees.
The unaudited pro forma financial data should not be viewed as being indicative
of financial results that would have occurred had the SPR Acquisition occurred
on January 1, 1997, nor as indicative of operations in future periods.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPT 30, SEPT 30,
1997 1997
-------- --------
<S> <C> <C>
Pro forma Revenues .................................... $ 24,776 $ 82,435
Pro forma Net income .................................. 543 1,073
Pro forma Basic and diluted loss per common share ..... (.01) (.02)
</TABLE>
6
<PAGE> 8
NOTE 6 - EARNINGS PER SHARE
In 1997, the Company implemented the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") and is effective for financial statements issued for
periods ending after December 15, 1997. This statement requires restatement for
all prior-period EPS data presented, including interim periods. The basic loss
per common share as shown on the Consolidated Statements of Income (Loss)
reflects net income (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 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 nine
months ended September 30, 1997 and 1998, all potentially dilutive securities
are anti-dilutive and therefore are not included in the EPS calculations.
Potentially dilutive securities outstanding at September 30, 1998 that could
impact EPS in the future include stock options granted to employees to purchase
5.3 million common shares, the Company's 7 7/8% Convertible Subordinated Notes
and 8 1/2% Convertible Subordinated Debentures which can be converted into 2.4
million and 1.4 million common shares, respectively, and the Preferred Stock
which can be converted into 6.0 million common shares.
NOTE 7 - GUARANTOR FINANCIAL STATEMENTS
Kelley Oil Corporation, a wholly-owned subsidiary of the Company and
Kelley Operating Company, Ltd., an indirect wholly-owned partnership of the
Company are guarantors of the Company's Series B and Series D 10 3/8% Senior
Subordinated Notes due 2006. The following guarantor consolidating condensed
financial statements present:
1. Consolidating condensed balance sheets as of December 31, 1997 and
September 30, 1998, consolidating condensed statements of income
(loss) for the three months and nine months ended September 30,
1997 and 1998, and consolidating condensed statements of cash
flows for the nine months ended September 30, 1997 and 1998.
2. Kelley Oil & Gas Corporation (the "Parent"), combined Guarantor
Subsidiaries and combined Non-Guarantor Subsidiaries, all with
their investments in subsidiaries accounted for using the equity
method.
3. Elimination entries necessary to consolidate the Parent and all of
its subsidiaries.
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets ......................... $ 427,445 $ 212,780 $ 18,926 $ (632,293) $ 26,858
Property and equipment, net ............ -- 276,744 17,698 (829) 293,613
Other non-current assets, net .......... (141,957) 24,418 -- 119,670 2,131
------------ ------------ ------------ ------------ ------------
Total assets ......................... $ 285,488 $ 513,942 $ 36,624 $ (513,452) $ 322,602
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities .................... $ 4,926 $ 657,128 $ 12,279 $ (632,293) $ 42,040
Long term debt ......................... 286,183 -- -- -- 286,183
Stockholders' deficit .................. (5,621) (143,186) 24,345 118,841 (5,621)
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' deficit ............ $ 285,488 $ 513,942 $ 36,624 $ (513,452) $ 322,602
============ ============ ============ ============ ============
</TABLE>
7
<PAGE> 9
CONSOLIDATING CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets ......................... $ 419,461 $ 212,150 $ 9,647 $ (614,203) $ 27,055
Property and equipment, net ............ -- 269,574 15,110 25 284,709
Other non-current assets, net .......... (140,123) 113 -- 141,576 1,566
------------ ------------ ------------ ------------ ------------
Total assets ......................... $ 279,338 $ 481,837 $ 24,757 $ (472,602) $ 313,330
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities .................... $ 10,341 $ 643,805 $ 4,388 $ (614,201) $ 44,333
Long term debt ......................... 301,835 -- -- -- 301,835
Stockholders' deficit .................. (32,838) (161,968) 20,369 141,599 (32,838)
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' deficit ............ $ 279,338 $ 481,837 $ 24,757 $ (472,602) $ 313,330
============ ============ ============ ============ ============
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 8 $ 13,013 $ 4,229 $ (72) $ 17,178
Expenses .................................. (6,685) (9,693) (2,541) 1,800 (17,119)
Equity in earnings of subsidiaries ........ 6,736 1,688 -- (8,424) --
------------ ------------ ------------ ------------ ------------
Net income (loss) ...................... $ 59 $ 5,008 $ 1,688 $ (6,696) $ 59
============ ============ ============ ============ ============
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ -- $ 16,261 $ 2,442 $ (57) $ 18,646
Expenses .................................. (8,454) (16,964) (1,948) 309 (27,057)
Equity in earnings (loss) of subsidiaries . 43 494 -- (537) --
------------ ------------ ------------ ------------ ------------
Net income (loss) ....................... $ (8,411) $ (209) $ 494 $ (285) $ (8,411)
============ ============ ============ ============ ============
</TABLE>
8
<PAGE> 10
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 8 $ 37,996 $ 14,905 $ (372) $ 52,537
Expenses .................................. (19,749) (25,150) (8,727) 1,603 (52,023)
Equity in earnings of subsidiaries ........ 20,255 6,178 -- (26,433) --
------------ ------------ ------------ ------------ ------------
Net income .............................. $ 514 $ 19,024 $ 6,178 $ (25,202) $ 514
============ ============ ============ ============ ============
</TABLE>
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ (18) $ 54,844 $ 8,281 $ (186) $ 62,921
Expenses .................................. (25,056) (56,121) (5,702) 1,291 (85,588)
Equity in earnings of subsidiaries ........ 2,407 2,579 -- (4,986) --
------------ ------------ ------------ ------------ ------------
Net income (loss) ....................... $ (22,667) $ 1,302 $ 2,579 $ (3,881) $ (22,667)
============ ============ ============ ============ ============
</TABLE>
9
<PAGE> 11
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................ $ 514 $ 19,024 $ 6,177 $ (25,201) $ 514
Non-cash income adjustments ............... (17,049) 11,518 4,729 25,201 24,399
Changes in operating assets
and liabilities ......................... 12,283 (1,583) (5,139) -- 5,561
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ...................... (4,252) 28,959 5,767 -- 30,474
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures ...................... -- (36,951) (1,741) -- (38,692)
Capital contributed to partnerships ....... -- (5,819) -- 5,819 --
Distributions from partnerships ........... -- 11,011 -- (11,011) --
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ........ -- (31,759) (1,741) (5,192) (38,692)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Net proceeds on long term borrowings ...... 8,500 -- -- -- 8,500
Proceeds from sale of common stock, net ... 311 -- -- -- 311
Distributions to partners ................. -- -- (11,011) 11,011 --
Capital contributed by partners ........... -- -- 5,819 (5,819) --
Dividends on preferred stock .............. (4,582) -- -- -- (4,582)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................ 4,229 -- (5,192) 5,192 4,229
------------ ------------ ------------ ------------ ------------
Decrease in cash and cash equivalents ........ (23) (2,800) (1,166) -- (3,989)
Cash and cash equivalents,
beginning of period ....................... 58 2,804 1,208 -- 4,070
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ..... $ 35 $ 4 $ 42 $ -- $ 81
============ ============ ============ ============ ============
</TABLE>
10
<PAGE> 12
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ......................... $ (22,667) $ 1,302 $ 2,579 $ (3,881) $ (22,667)
Non-cash income (loss) adjustments ........ 1,405 36,281 2,344 3,881 43,911
Changes in operating assets
and liabilities ......................... 12,952 (8,320) 3,414 -- 8,046
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ...................... (8,310) 29,263 8,337 -- 29,290
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures ...................... -- (46,095) (2,172) -- (48,267)
Proceeds from sale of property ............ -- 17,070 -- -- 17,070
Distributions from partnerships ........... -- 6,206 -- (6,206) --
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities ........ -- (22,819) (2,172) (6,206) (31,197)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Net payments on long term borrowings ...... (16,300) -- -- -- (16,300)
Proceeds from sale of notes, net .......... 29,576 -- -- -- 29,576
Redemption of subordinated notes .......... (228) -- -- -- (228)
Proceeds from sale of common stock, net ... 33 -- -- -- 33
Proceeds from conversion of
preferred stock ......................... (2) -- -- -- (2)
Distributions to partners .................... -- -- (6,206) 6,206 --
Dividends on preferred stock ................. (4,582) -- -- -- (4,582)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................ 8,497 -- (6,206) 6,206 8,497
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents ............................... 187 6,444 (41) -- 6,590
Cash and cash equivalents,
beginning of period ....................... 117 4 41 -- 162
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents,
end of period ............................. $ 304 $ 6,448 $ -- $ -- $ 6,752
============ ============ ============ ============ ============
</TABLE>
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
General Conditions of the Oil and Natural Gas Industry and Commodity
Prices. The prices of oil and natural gas during the past several months have
fallen sharply and continue to reflect the volatility of commodity prices and
the industry generally. The Company cannot predict future prices of oil and
natural gas. Current low prices, if they continue, could adversely impact the
Company's results of operations and liquidity. The success of the Company is in
part dependent on factors outside the control of the Company, but which directly
affect the financial condition of the Company, including capital market
conditions and highly volatile oil and natural gas prices. Due to recent
industry conditions, the Company, as others within the industry, has been
required to reconsider its capital expenditures budgets, which could adversely
impact production levels, and to evaluate various financing alternatives.
Hedging Activities. The Company periodically uses forward sales
contracts, natural gas price swap agreements, natural gas basis swap agreements
and options to reduce exposure to downward price fluctuations on its natural gas
production. During the first nine months of 1998, the Company used price and
basis swap agreements. 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.
Through natural gas price swap agreements, approximately 62% and
44% of the Company's natural gas production for the third quarter of 1998 and
first nine months of 1998, respectively, was affected by its hedging
transactions at an average NYMEX quoted price of $2.29 per Mmbtu and $2.30 per
Mmbtu, respectively, before transaction and transportation costs. Hedging
activities increased revenues by approximately $1.2 million and $2.0 million in
the third quarter of 1998 and first nine months of 1998, respectively, as
compared to estimated revenues had no hedging activities been conducted. As of
September 30, 1998, approximately 48% of the Company's anticipated natural gas
production for the remainder of 1998 had been hedged by natural gas price swap
agreements at an average NYMEX quoted price of $2.34 per Mmbtu. The Company has
also hedged approximately 46% of its anticipated natural gas production for the
first four months of 1999 by natural gas swap agreements at an average NYMEX
quoted price of $2.36 per Mmbtu. At September 30, 1998, the unrealized loss of
the Company's existing hedging instruments for future production months in 1998
approximated $2.1 million.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". See Note 4 - Derivative and Hedge
Accounting to the Notes to Consolidated Financial Statements contained in this
Report for further discussion.
On July 24, 1998, the Company sold, effective June 1, 1998, its entire
interest in the Waskom field in Harrison County, Texas for total consideration
of $17.4 million (before purchase price adjustments). These non-core assets were
acquired by the Company in the December 1997 asset purchase from SCANA Petroleum
Resources, Inc. ("SPR"). The properties were producing approximately 4.5 million
cubic feet equivalent per day. The Company does not anticipate that the sale of
these properties will have a material impact on its financial position or
results of operations. See Capital Resources. .
RESULTS OF OPERATIONS
The following table sets forth certain operating data regarding net
production, average sales prices and expenses associated with the Company's oil
and natural gas operations for the periods indicated.
12
<PAGE> 14
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET PRODUCTION DATA:
Oil and other liquid hydrocarbons (Mbbls) ............................ 46 84 147 308
Natural gas (Mmcf) ................................................... 7,408 8,528 21,709 28,031
Natural gas equivalent (Mmcfe) ....................................... 7,684 9,032 22,591 29,879
AVERAGE SALES PRICE PER UNIT:
Oil and other liquid hydrocarbons (per Bbl) .......................... $ 18.68 $ 12.55 $ 19.76 $ 13.52
Natural gas (per Mcf) ................................................ 2.10 2.07 2.19 2.10
Natural gas equivalent (per Mcfe) .................................... 2.14 2.07 2.23 2.11
COST PER MCFE:
Lifting costs ........................................................ $ .20 $ .39 $ .22 $ .40
Severance and ad valorem taxes ....................................... .12 .11 .11 .12
General and administrative expenses .................................. .17 .21 .23 .19
Depreciation, depletion and amortization (oil and gas activities) .... .80 1.00 .80 1.00
Interest expense, excluding accretion and amortization ............... .66 .92 .66 .83
</TABLE>
Three Months Ended September 30, 1998 and 1997. The Company's oil and
gas revenues of $18.6 million for the third quarter of 1998 increased 9%
compared to $17.1 million in the same period of 1997 primarily as a result of
increases in gas production (15%) and oil production (83%) partially offset by a
decrease in oil prices (33%) and natural gas prices (1%). The increase in gas
and oil production is primarily attributable to properties acquired by the
Company during the fourth quarter of 1997.
Production expenses for the third quarter of 1998 increased 85% to $4.6
million from $2.5 million in the same period last year, resulting primarily from
properties acquired during the fourth quarter of 1997. Higher cost production
from the acquired Gulf of Mexico properties contributed to a 95% increase in
lifting costs (production expenses less ad valorem and severance taxes) per Mcfe
for the third quarter of 1998 to $0.39, when compared to the same period in
1997.
Exploration expenses totaled $3.0 million in the third quarter of 1998
and $0.9 million in the corresponding period of 1997, an increase of 239%,
primarily due to dry hole expenses ($1.1 million), unevaluated leasehold
abandonment expenses ($0.5 million) and higher current quarter seismic
expenditures ($0.2 million).
General and administrative ("G&A") expenses of $1.9 million in the
third quarter of 1998 increased 49% compared to $1.3 million in the
corresponding period last year reflecting an increase in staff as a result of
the SPR Acquisition. On a unit of production basis, general and administrative
expenses were $0.21 per Mcfe in the third quarter of 1998 compared to $0.17 per
Mcfe in the corresponding quarter of 1997 primarily reflecting higher production
levels in the current period associated with the increase in G&A expenses.
Interest and other debt expenses of $8.3 million in the current quarter
increased 36% from $6.1 million in the same period of 1997. The increase in
interest expenses 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 third quarter 1998 cash
interest expense of $7.1 million, the Company recorded non-cash charges in the
third quarter of 1998 of $0.4 million for amortization of debt issuance costs,
$0.3 million for accretion of note discount, net of accretion of note premium
and $0.5 million for accretion of debt valuation discount.
Depreciation, depletion and amortization ("DD&A") expenses increased
45% from $6.3 million in the third quarter of 1997 to $9.2 million in the
current period, primarily as a result of higher third quarter 1998 production
and an increase in the units-of-production DD&A rate for oil and gas activities
from $0.80 per Mcfe in the third quarter of 1997 to $1.00 per Mcfe in the
current period.
13
<PAGE> 15
The Company recognized a net loss of $8.4 million in the third quarter
of 1998 and net income of $.1 million in the same period last year. The reasons
for the decline in earnings are described in the foregoing discussion.
Nine Months Ended September 30, 1998 and 1997. The Company's oil and
gas revenues of $62.8 million for the first nine months of 1998 increased 20%
compared to $52.2 million in the same period of 1997 primarily as a result of an
increase in gas production (29%) and oil production (110%), partially offset by
decreases in gas prices (4%) and oil prices (32%). The increase in gas and oil
production is primarily attributable to properties acquired by the Company
during the fourth quarter of 1997.
Production expenses for the first nine months of 1998 increased 107% to
$15.3 million from $7.4 million in the same period last year, resulting
primarily from 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 an 82% increase in
lifting costs per Mcfe for the first nine months of 1998 to $0.40, when compared
to the same period in 1997.
Exploration expenses totaled $9.7 million in the first nine months of
1998 and $2.8 million in the corresponding period of 1997, an increase of 249%,
primarily due to higher current period seismic expenditures ($2.6 million), dry
hole expenses ($2.5 million), unevaluated leasehold abandonment expenses ($1.1
million) and allocated overhead ($.8 million).
General and administrative expenses of $5.5 million in the first nine
months of 1998 increased 5% compared to $5.3 million in the corresponding period
last year. On a unit of production basis, G&A expenses were $0.19 per Mcfe in
the first nine months of 1998 compared to $0.23 per Mcfe in the corresponding
period of 1997, primarily reflecting higher production levels in the current
period partially offset by a minor increase in G&A expenses.
Interest and other debt expenses of $24.7 million in the first nine
months of 1998 increased 36% from $18.2 million in the same period of 1997. The
increase in interest expenses 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
expenses of $20.9 million, the Company recorded non-cash charges in the first
nine months of 1998 of $1.5 million for amortization of debt issuance costs,
$0.8 million for accretion of note discount, net of accretion of note premium,
and $1.5 million for accretion of debt valuation discount.
Depreciation, depletion and amortization ("DD&A") expenses increased
65% from $18.4 million in the first nine months of 1997 to $30.4 million in the
current period, primarily as a result of higher production and an increase in
the units-of-production DD&A rate for oil and gas activities from $0.80 per Mcfe
in the first nine months of 1997 to $1.00 per Mcfe in the current period.
The Company recognized a net loss of $22.7 million in the first nine
months of 1998 and net income of $0.5 million in the same period last year. The
reasons for the decline in earnings are described in the foregoing discussion.
The results of operations for the quarter and nine months ended
September 30, 1998 are not necessarily indicative of results to be expected for
the full year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Net cash provided by operating activities, before working
capital adjustments, during the first nine months of 1998 aggregated $21.2
million. Funds used in investing activities were $31.2 million, comprised of
capital expenditures of $ 48.3 million, partially offset by proceeds from the
sale of the Waskom field. Funds provided by financing activities of $8.5 million
were comprised primarily of net proceeds of $29.6 million from the sale of the
Series C Notes (see Capital Resources) partially offset by net principal
repayments of $16.3 million on the bank credit facility and the payment of $4.6
million of preferred stock dividends. As a result of these activities, cash and
cash equivalents increased from $0.2 million at December 31, 1997 to $6.8
million at September 30, 1998. As of September 30, 1998,
14
<PAGE> 16
the Company had a working capital deficit of $16.8 million, compared to a
working capital deficit of $15.2 million at the end of 1997. The Company expects
to fund the balance of its working capital deficit through cash from operations,
redirected capital expenditures, borrowings and/or other financing arrangements.
However, there can be no assurance that sufficient capital will be available to
the Company on terms it considers reasonable. See "Capital Resources" and
"Capital Commitments."
Capital Resources. The Company's bank credit facility provides for a
maximum $140.0 million revolving credit loan and matures, with all amounts owed
thereunder becoming due and payable, effective December 1, 2000 (the "Credit
Facility"). Availability under the Credit Facility is limited to a borrowing
base (the "Borrowing Base") determined by, among other things, the proved oil
and natural gas reserves and other assets of the Borrowers (as defined) and the
value of those reserves based on the underlying prices for oil and natural gas.
The Borrowing Base is redetermined at least semiannually by the Agent, with the
consent of 75% of the lenders, and may be redetermined more frequently at the
election of the lenders or the Borrowers. On April 14, 1998, the Borrowing Base
was set at $138 million and the threshold amount (the "Threshold Amount"), which
is the amount that would ordinarily be made available by the lenders to a
similar borrower under a borrowing base, was set at $125 million. Following the
Company's sale of its interest in the Waskom field in July, 1998, the Borrowing
Base and Threshold Amount were reduced to $130 million and $117 million,
respectively. As provided in the Credit Facility, on November 1, 1998 the
Borrowing Base was reduced to equal the Threshold Amount.
At September 30, 1998, $95 million of borrowings and $1.5 million of
letters of credit were outstanding under the Credit Facility. The Company's
typical monthly cash flow cycle is such that the Company usually receives a
substantial portion of its proceeds from operations near the end of each month.
Accordingly, outstanding balances under the Credit Facility may be higher on any
given day during the month than at the end of the month.
As provided in the Credit Facility, a scheduled review of the Borrowing
Base is currently being performed by the Company's banks. While the amount of
the revised Borrowing Base will not be known until such time as the banks
complete the redetermination, the Company has been advised that the
redetermination likely will include a reduction due to the issuance of the
Series C Notes. It is possible that amounts outstanding under the Credit
Facility following the redetermination could exceed the revised Borrowing Base,
in which case, the Company would be required to repay 50% of the excess within
ninety days and the remaining 50% within an additional 90 days. Further, no
additional borrowings would be available to the Company under the Credit
Facility until amounts outstanding are less than the Borrowing Base. There can
be no assurance that the Company will be able to make required payments under
the Credit Facility resulting from a Borrowing Base redetermination or that
the Company will be able to secure alternative financing on terms it deems
reasonable.
Further, under the current terms of the Credit Facility, certain of the
Company's financial covenants thereunder become more restrictive in future
periods. Specifically, the interest coverage ratio increases from 2.0/1 to
2.25/1 beginning with the rolling four quarters ended March 31, 1999. If prices
for oil and gas do not increase from current low levels, the Company's decreased
revenues resulting from those low prices, coupled with expected interest
expenses, may cause the Company not to be in compliance with this covenant under
the Credit Facility in future periods, which, if the Company is not successful
in negotiating a waiver of such noncompliance, could result in all borrowings
under the Credit Facility being declared due and payable. The indebtedness under
the Credit Facility is secured by substantially all of the oil and natural gas
assets of the Company.
At September 30, 1998, the Company had $311.4 million face amount of
debt outstanding, requiring $28.2 million in annual cash interest payments. The
Company's outstanding $2.625 Convertible Exchangeable Preferred Stock (the
"Preferred Stock") is cumulative, requiring dividends to accumulate at the rate
of $4.6 million annually, and carries liquidation preferences over the Common
Stock totaling $47.5 million at September 30, 1998, including dividend
arrearages. 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 for February 1,
1998, May 1, 1998, or August 1, 1998, aggregating approximately $3.4 million.
Further dividends are prohibited under the Credit Facility.
15
<PAGE> 17
Included in the outstanding debt at September 30, 1998 was $30.0
million principal amount of the Company's Series C Notes issued in May 1998 at a
cash price of $1,015 per $1,000 principal amount. The net proceeds received were
used to reduce outstanding borrowings under the Credit Facility. See Note 2 -
Long Term Debt in the Notes to Consolidated Financial Statements contained in
this Report for further discussion. 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.
The Company has long-term debt obligations of $34.1 million maturing in
December 1999 and of $26.9 million maturing in April 2000. The Company is
considering various alternatives to refinance these debts as or before they
become due. The Company cannot guarantee that such refinancings will be
completed, or that if completed, will be on terms no less favorable to the
Company than the currently outstanding long-term debt.
Capital Commitments. The Company's 1998 capital expenditure budget
originally authorized the Company to spend up to $63 million on development
drilling and on exploratory prospects. Based on the level of cash flows from
operations in 1998 to date and the current status of commodity prices, the
Company expects ultimately to spend approximately $53 million on capital
expenditures in 1998. Although the Board of Directors of the Company has not yet
set the Company's capital expenditure budget for 1999, the Company believes that
if prices for oil and natural gas remain at current levels, budgeted capital
expenditures for 1999 could be lower than those for 1998. In the first nine
months of 1998, the Company participated in drilling 50 gross (23.13 net) wells,
of which 43 gross (19.79 net) wells were completed and 7 gross (2.88 net) wells
were non-commercial. As of the end of the quarter, the Company was participating
in the drilling/completing of 12 gross (4.37 net) wells.
Year 2000. The Company has instigated reviews and evaluations in
response to Year 2000 issues. These issues involve the potential disruption to
systems, processes, and business practices that may occur if system hardware and
software utilized by the Company, its vendors, and customers are unable to
process year 2000 data. The planning phase is nearing completion and the Company
is well into implementing internal corrective measures.
The Company is working closely with its information systems and
technology vendors to install updated software, where appropriate, that will be
Year 2000 compliant. Currently, more than 90% of the critical Year 2000 internal
systems issues have been corrected. The remainder are expected to be installed
and tested by mid-year 1999.
The Company has identified those vendors and others that it believes
provide material services or are vital to its business. Discussions with these
companies to determine their Year 2000 readiness are expected to be completed in
the first quarter 1999. By mid-year 1999 the Company plans to have completed its
Year 2000 review and implemented necessary corrective measures.
The cost of reviewing and implementing corrective measures for Year
2000 issues to date has not been material to the Company and has been limited to
use of Company and vendor personnel for review and implementation of corrective
measures. The Company expects the remainder of the Year 2000 review and
corrective measures to not involve significant costs.
Based on assessments to date and compliance plans in progress,
management is of the opinion that Year 2000 issues, including the cost of
implementing corrective measures, will not have a material impact on the
business or operations of the Company. Nevertheless, as indicated above,
achieving Year 2000 readiness is subject to risk and uncertainties, especially
regarding third parties, and there can be no assurance the Company will not be
adversely affected by Year 2000 issues.
The foregoing statements are intended to be and are hereby designated
"Year 2000 Readiness Disclosures" within the meaning of the Year 2000
Information and Readiness Act.
16
<PAGE> 18
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 gas prices received by the Company
during the periods indicated.
<TABLE>
<CAPTION>
Average
Oil Price Gas Price
Nine Months Ended: ($/bbl) ($/Mcf)
--------- ---------
<S> <C> <C>
September 30, 1998 $ 13.52 $ 2.10
Year Ended:
December 31, 1997 $ 19.34 $ 2.27
December 31, 1996 $ 22.11 $ 2.30
December 31, 1995 $ 17.37 $ 1.71
</TABLE>
FORWARD-LOOKING STATEMENTS
Statements contained in this Report and other materials filed or to be
filed by the Company with the Securities and Exchange Commission (as well as
information included in oral or other written statements made or to be made by
the Company or its representatives) that are forward-looking in nature are
intended to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, relating to matters such as anticipated
operating and financial performance, business prospects, developments and
results of the Company. 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 the control of the Company, including rates of inflation, natural gas
prices, uncertainty of reserve estimates, rates and timing of future production
of oil and gas, exploratory and development activities, acquisition risks,
changes in the level and timing of future costs and expenses related to drilling
and operating activities and those risk factors described on pages 11 and 12 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
Words such as "anticipates,""believes," "estimates," "expects,"
"projects" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include the risk factors described in the
Company's Form 10-K mentioned above.
PART II. OTHER INFORMATION
ITEM 3. ARREARAGES IN PAYMENT OF DIVIDENDS
As of September 30, 1998, total dividends in arrears on the Company's
$2.625 Convertible Exchangeable Preferred Stock ("Preferred Stock") were $3.4
million representing the quarterly dividends of $0.65625 per share for the
three-month periods ended February 1, 1998, May 1, 1998 and August 1, 1998.
ITEM 5. OTHER INFORMATION
The Company has contracted Lazard Freres & Co. LLC to assist in
assessment of potential financing alternatives and in evaluation of potential
merger and acquisition activities.
17
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER: EXHIBIT
27 Financial Data Schedule (included only in the electronic
filing of this document).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
third quarter of 1998.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KELLEY OIL & GAS CORPORATION
Date: November 16, 1998 By: /s/ Rick Lester
----------------------------------
Rick Lester
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
19
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
- ------- -------
<S> <C>
27 Financial Data Schedule (included only in the electronic
filing of this document).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,752
<SECURITIES> 0
<RECEIVABLES> 18,301
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,055
<PP&E> 539,153
<DEPRECIATION> 254,444
<TOTAL-ASSETS> 313,330
<CURRENT-LIABILITIES> 44,333
<BONDS> 301,835
0
2,600
<COMMON> 1,258
<OTHER-SE> (32,838)
<TOTAL-LIABILITY-AND-EQUITY> 313,330
<SALES> 62,921
<TOTAL-REVENUES> 62,921
<CGS> 0
<TOTAL-COSTS> 25,012
<OTHER-EXPENSES> 35,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,657
<INCOME-PRETAX> (22,667)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,667)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
