SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
AMENDMENT NO.1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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 - SUITE 1100
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 652-5200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------- ---------------------------------------
8 1/2% Convertible American Stock Exchange
Subordinated Debentures
due 2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock Nasdaq National Market
$2.625 Convertible Nasdaq National Market
Exchangeable Preferred
Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K under the Securities Exchange Act of 1934 is not contained
herein, and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated in Part III of this Form
10-K or any amendments to this Form 10-K. [ ]
As of March 25, 1997, 98,295,077 shares of Common Stock and 1,745,431 shares of
Preferred Stock were outstanding, and the aggregate market value of shares held
by unaffiliated stockholders was approximately $119,450,807 and $44,290,312,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
<PAGE>
Kelley Oil and Gas Corporation hereby amends and restates the following
sections of its Annual Report on Form 10-K for the year ended December 31, 1996
to include the effect of cumulative preferred stock dividends, whether declared
or not, on net loss applicable to common stock and loss per common share
disclosures (including related pro forma disclosures):
Part II, Item 6. Selected Financial Data
Part II, Item 8. Financial Statements and Supplementary Data
Part IV, Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
See Note 1 -"Loss Per Share" in the Notes to Consolidated Financial
Statements for further discussion of the restatement.
FORWARD-LOOKING STATEMENTS
FROM TIME TO TIME, THE COMPANY MAY PUBLISH 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, RESERVE ESTIMATES, RATES AND
TIMING OF FUTURE PRODUCTION OF OIL AND GAS, AND CHANGES IN THE LEVEL AND TIMING
OF FUTURE COSTS AND EXPENSES RELATED TO DRILLING AND OPERATING ACTIVITIES.
WORDS SUCH AS "ANTICIPATED," "EXPECT," "ESTIMATE," "PROJECT" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS MAY BE MADE IN MANAGEMENT'S STATEMENTS (ORALLY OR IN WRITING)
INCLUDING PRESS RELEASES, AND IN FILINGS OF THE SEC, INCLUDING THIS REPORT.
1
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical and pro forma
financial data for the Company. The historical financial information at and for
the years ended December 31 in each of the three years presented through 1994 is
derived from the audited consolidated financial statements of Kelley Oil. The
Consolidation was treated as a purchase of the Public Unitholders' interests in
Kelley Partners by the Company for financial accounting purposes. Accordingly,
the historical financial information for the year ended December 31, 1995
reflects Kelley Oil's historical results on a stand-alone basis through the date
of the Consolidation in February 1995, with the results of combined operations
recorded thereafter. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
Notes included elsewhere in this Report.
The pro forma financial information presented below is unaudited and
gives effect to the Consolidation as of January 1, 1994. This information is
presented for illustrative purposes only and is not necessarily indicative of
the Company's future financial performance or results of operations.
2
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
RESTATED
1992 1993 1994 1995 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
PRO FORMA PRO FORMA
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues.....................$ 18,098 19,711 15,487 36,042 42,348 38,550 59,016
Gas marketing revenues, net(1)........... 1,013 1,353 1,335 956 45 958 1,838
Interest and other income................ 1,386 1,506 1,416 1,763 1,593 1,768 1,429
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues........................ 20,497 22,570 18,238 38,761 43,986 41,276 62,283
---------- ---------- ---------- ---------- ---------- ---------- ----------
Production expenses...................... 3,478 3,993 3,760 10,835 12,318 11,461 10,709
Exploration costs........................ 7,126 14,226 7,404 23,387 18,083 23,727 5,438
General and administrative ..............
expenses.............................. 3,478 4,079 5,172 7,030 8,308 7,398 8,953
Interest and other debt expenses......... 2,684 6,638 4,571 21,956 12,361 22,763 24,401
Restructuring charge..................... -- -- 1,814 1,115 1,814 1,115 4,276
Depreciation, depletion and..............
amortization.......................... 9,768 18,857 20,474 35,591 39,727 36,190 20,440
Impairment of oil and gas
properties(2)......................... -- -- -- 150,138 -- 150,138 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before income taxes and
extraordinary item.................... (6,037) (25,223) (24,957) (211,291) (48,625) (211,516) (11,934)
Provision (benefit) for taxes............ (1,071) -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss before extraordinary item....... (4,966) (25,223) (24,957) (211,291) (48,625) (211,516) (11,934)
Extraordinary income (loss).............. -- -- -- -- -- -- (17,030)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................................. (4,966) (25,223) (24,957) (211,291) (48,625) (211,516) (28,964)
Preferred stock dividends................ 729 894 2,905 6,607 4,611 7,033 4,582
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss applicable to common and........
common equivalent shares..............$ (5,695) (26,117) (27,862) (217,898) (53,236) (218,549) (33,546)
========== ========== ========== ========== ========== ========== ==========
Loss per common share before
extraordinary item (primary and
assuming full dilution)...............$ (.39) (1.63) (1.58) (5.31) (1.39) (5.07) (.18)
Loss per common share (primary and
assuming full dilution)............... (.39) (1.63) (1.58) (5.31) (1.39) (5.07) (.37)
Average common and common equivalent
shares outstanding:
Primary and assuming full dilution.... 14,531 15,967 17,653 41,032 38,276 43,123 90,113
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................................$ 15,646 2,622 3,788 (9,233) (6,040)
Property and equipment, net(3)............................. 50,019 58,018 74,912 128,642 158,468
Long term debt, excluding current maturities............... 44,763 34,814 37,242 164,980 184,253
Stockholders' equity (deficit)............................. 24,411 27,415 45,180 (45,568) (30,535)
Total assets............................................... 95,562 87,145 106,513 151,342 189,227
</TABLE>
(1)Restated gas marketing revenues to reflect net of cost of gas sold.
(2) Reflects noncash impairment charges against the carrying value of
proved and unproved properties under FAS 121. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) Includes pipeline and other transportation assets.
3
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES: PAGE
<S> <C>
Independent Auditors' Reports............................................................................. 5
Consolidated Balance Sheets - December 31, 1995 and 1996.................................................. 7
Consolidated Statements of Loss - For the years ended December 31, 1994, 1995 and 1996.................... 8
Consolidated Statements of Cash Flows - For the years ended December 31, 1994, 1995 and 1996.............. 9
Consolidated Statements of Changes in Stockholders' Equity (Deficit) - For the years ended
December 31, 1994, 1995 and 1996....................................................................... 10
Notes to Consolidated Financial Statements................................................................ 11
</TABLE>
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kelley Oil & Gas Corporation
We have audited the accompanying consolidated balance sheets of
Kelley Oil & Gas Corporation and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of loss, cash flows, and changes in
stockholders' equity (deficit) for each of the two years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Kelley Oil & Gas
Corporation and subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 5, the accompanying 1996 financial
statements have been restated.
As discussed in Note 1 to the consolidated financial statements, in
1995 the Company changed its method of accounting for the impairment of
long-lived assets to conform with Statement of Financial Accounting Standards
No. 121.
DELOITTE & TOUCHE LLP
Houston, Texas
March 3, 1997
(March 6, 1998 as to Notes 1 and 5)
5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Kelley Oil & Gas Corporation
We have audited the consolidated balance sheet of Kelley Oil & Gas
Corporation (the Company) as of December 31, 1994, and the related statements of
loss, stockholders' equity, and cash flows of Kelley Oil & Gas Corporation and
Subsidiaries for the year ended December 31, 1994. The consolidated balance
sheet as of December 31, 1994 is not presented separately herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Kelley Oil & Gas Corporation and Subsidiaries at December 31, 1994
and consolidated results of their operations and their cash flows for the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Houston, Texas
March 6, 1995
6
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1996
------------ -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents..........................................................$ 6,352 4,070
Accounts receivable................................................................ 13,753 22,519
Accounts receivable - drilling programs............................................ 2,035 1,533
Prepaid expenses and other current assets.......................................... 557 1,347
------------ -----------
Total current assets............................................................ 22,697 29,469
------------ -----------
Oil and gas properties, successful efforts method:
Unproved properties, net........................................................ 13,050 12,521
Properties subject to amortization.............................................. 287,970 338,794
Pipelines and other transportation assets, at cost ................................ 4,723 4,689
Furniture, fixtures and equipment.................................................. 1,233 1,700
------------ -----------
306,976 357,704
Less: Accumulated depreciation, depletion and amortization........................ (178,334) (199,236)
------------ -----------
Total property and equipment, net............................................... 128,642 158,468
Other non-current assets, net...................................................... 3 1,290
------------ -----------
TOTAL ASSETS....................................................................$ 151,342 189,227
============ ===========
LIABILITIES:
Accounts payable and accrued expenses..............................................$ 23,502 31,093
Accounts payable - drilling programs............................................... 8,428 4,416
------------ -----------
Total current liabilities....................................................... 31,930 35,509
------------ -----------
Long term debt..................................................................... 164,980 184,253
------------ -----------
TOTAL LIABILITIES............................................................... 196,910 219,762
------------ -----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.50 par value, 20,000 shares authorized at December 31,
1995 and 1996; 4,304 and 1,746 shares issued and outstanding at December
31, 1995 and 1996, respectively
(liquidation value $61,058 and $48,219, respectively)........................... 6,456 2,618
Common stock, $.01 par value, 100,000 and 200,000 shares authorized at
December 31, 1995 and 1996, respectively; 44,041 and 98,293 shares
issued and outstanding at December 31, 1995 and 1996, respectively.............. 440 983
Additional paid-in capital......................................................... 225,804 273,096
Retained deficit................................................................... (278,268) (307,232)
------------ -----------
TOTAL STOCKHOLDERS' DEFICIT..................................................... (45,568) (30,535)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT........................................$ 151,342 189,227
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
RESTATED
1994 1995 1996
------------- ------------ -----------
<S> <C> <C> <C>
Oil and gas revenues...................................................$ 15,487 36,042 59,016
Gas marketing revenues, net............................................ 1,335 956 1,838
Interest and other income.............................................. 1,416 1,763 1,429
------------- ------------ ----------
Total revenues...................................................... 18,238 38,761 62,283
------------- ------------ ----------
Production expenses.................................................... 3,760 10,835 10,709
Exploration costs...................................................... 7,404 23,387 5,438
General and administrative expenses.................................... 5,172 7,030 8,953
Interest and other debt expenses....................................... 4,571 21,956 24,401
Restructuring expense.................................................. 1,814 1,115 4,276
Depreciation, depletion and amortization............................... 20,474 35,591 20,440
Impairment of oil and gas properties................................... -- 150,138 --
------------- ------------ ----------
Total expenses...................................................... 43,195 250,052 74,217
------------- ------------ ----------
Loss before income taxes and extraordinary item........................ (24,957) (211,291) (11,934)
Income taxes........................................................... -- -- --
------------- ------------ ----------
Net loss before extraordinary item..................................... (24,957) (211,291) (11,934)
Extraordinary item..................................................... -- -- (17,030)
------------- ------------ ----------
NET LOSS............................................................... (24,957) (211,291) (28,964)
Less: cumulative preferred stock dividends............................. 2,905 6,607 4,582
------------- ------------ ----------
NET LOSS APPLICABLE TO COMMON STOCK....................................$ (27,862) (217,898) (33,546)
============= ============ ==========
Loss per common share before extraordinary item
(primary and assuming full dilution)................................$ (1.58) (5.31) (.18)
============= ============ ==========
Loss per common share
(primary and assuming full dilution)................................$ (1.58) (5.31) (.37)
============= ============ ==========
Average common and common equivalent shares outstanding
(primary and assuming full dilution)................................ 17,653 41,032 90,113
============= ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996
---------- ----------- ----------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss..........................................................$ (24,957) (211,291) (28,964)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization....................... 20,474 35,591 20,440
Impairment of oil and gas properties........................... -- 150,138 --
Gain on sale of properties..................................... -- (777) (176)
Dry hole costs................................................. 4,751 18,152 35
Accretion and amortization of other debt expenses.............. 140 3,602 5,170
Debenture conversion costs..................................... 1,449 -- --
Restructuring expense.......................................... 1,814 1,115 4,276
Extraordinary loss............................................. -- -- 17,030
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
and other current assets..................................... (1,780) 9,457 (9,054)
Decrease (increase) in other non-current assets................ (2,274) 3,075 (1,945)
Decrease in accounts payable and accrued expenses.............. (3,942) (16,103) (2,953)
------------- ------------ -----------
Net cash provided by (used in) operating activities............... (4,325) (7,041) 3,859
------------- ------------ -----------
INVESTING ACTIVITIES:
Capital expenditures.............................................. (42,323) (47,005) (42,198)
Acquisition of oil and gas properties............................. -- -- (11,594)
Cash received in consolidation.................................... -- 1,596 --
Proceeds from sale of properties.................................. 265 7,420 5,803
------------- ------------ -----------
Net cash used in investing activities............................. (42,058) (37,989) (47,989)
------------- ------------ -----------
FINANCING ACTIVITIES:
Proceeds from long term borrowings................................ 34,302 37,100 50,000
Principal payments on long term borrowings........................ (19,000) (100,000) (58,500)
Proceeds from sale of notes, net.................................. -- 95,302 120,938
Debenture conversion costs........................................ (79) -- (1,100)
Proceeds from sale of common stock, net........................... 123 16,319 43,998
Proceeds from sale of preferred stock, net........................ 32,503 -- --
Retirement of senior notes........................................ -- -- (113,488)
Dividends on preferred stock...................................... (2,905) (6,607) --
------------- ------------ -----------
Net cash provided by financing activities......................... 44,944 42,114 41,848
------------- ------------ -----------
Decrease in cash and cash equivalents............................. (1,439) (2,916) (2,282)
Cash and cash equivalents, beginning of period.................... 10,707 9,268 6,352
------------- ------------ -----------
Cash and cash equivalents, end of period..........................$ 9,268 6,352 4,070
============= ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID IN RETAINED
STOCK STOCK CAPITAL DEFICIT
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Stockholders' equity at January 1, 1994.......................$ 5,055 176 57,638 (32,504)
Issuance of 1,380 shares of preferred stock,
$1.50 par value............................................ 2,070 -- 30,433 --
Issuance of 413 shares of preferred stock in..................
exchange for debentures, $1.50 par value................... 618 -- 10,454 --
Issuance of 66 shares of common stock......................... -- 1 122 --
Preferred stock cash dividends................................ -- -- -- (2,905)
Net loss...................................................... -- -- -- (24,957)
---------- ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1994............................... 7,743 177 98,647 (60,366)
---------- ---------- ----------- -----------
Additional paid in capital from issuance of preferred
and common stock in consolidation.......................... -- -- 108,632 --
Issuance of 650 shares of preferred stock,
$1.50 par value, in consolidation......................... 975 -- -- --
Issuance of 20,622 shares of common stock
in consolidation.......................................... -- 206 -- --
Issuance of 4,000 shares of common stock
in private placement....................................... -- 40 15,960 --
Conversion of 1,508 shares of preferred stock into
1,508 shares of common stock............................... (2,262) 15 2,247 --
Issuance of 225 shares of common stock........................ -- 2 318 --
Syndication costs............................................. -- -- -- (4)
Preferred stock dividends..................................... -- -- -- (6,607)
Net loss -- -- -- (211,291)
---------- ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1995............................... 6,456 440 225,804 (278,268)
---------- ---------- ----------- -----------
Issuance of 48,000 shares of common stock in
Contour Transaction........................................ -- 480 47,520 --
Conversion of 697 shares of preferred stock into
4,355 shares of common stock............................... (1,045) 44 1,001 --
Conversion of 1,862 shares of preferred stock into
1,862 shares of common stock............................... (2,793) 19 2,774 --
Issuance of 36 shares of common stock......................... -- -- 62 --
Syndication costs............................................. -- -- (4,065) --
Net loss...................................................... -- -- -- (28,964)
---------- ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1996...............................$ 2,618 983 273,096 (307,232)
========== ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
KELLEY OIL & GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Kelley Oil & Gas Corporation (the "Company") was
incorporated in Delaware in September 1994 for the purpose of effecting a
consolidation (the "Consolidation") of the equity interests in Kelley Oil
Corporation, a Delaware corporation ("Kelley Oil"), and Kelley Oil & Gas
Partners, Ltd., a Texas limited partnership ("Kelley Partners") of which Kelley
Oil was the managing general partner. In the Consolidation, each outstanding
unit of limited partner interest ("Units") in Kelley Partners owned by investors
other than Kelley Oil and its subsidiaries ("Public Unitholders") was converted
into 1.2188 shares of the Company's common stock ("Common Stock") or, at the
election of each Public Unitholder, .609 of a share of Common Stock and .127 of
a share of the Company's $2.625 convertible exchangeable preferred stock
("Preferred Stock"). Stockholders of Kelley Oil received equivalent securities
of the Company on a one for one basis. Kelley Oil's 19.9% ownership interest in
Kelley Partners was not converted into the Company's Common or Preferred Stock,
since that ownership interest was reflected in the valuation of Kelley Oil and
the consideration allocated to its stockholders. The Consolidation was completed
on February 7, 1995 upon approval by investors in Kelley Oil and Kelley
Partners. As a result of the Consolidation, Kelley Oil became a wholly owned
subsidiary of the Company, and Kelley Partners became a 99.99% owned subsidiary
partnership. The Company's operations, conducted through Kelley Oil and its
subsidiaries, include the development of oil and gas properties and the
purchase, sale and transportation of natural gas. In March 1996, Kelley Partners
was merged into the Company (the "Partnership Merger"). The Company, the
corporate subsidiaries and its proportionate partnership interests are referred
to herein as "Kelley."
ACCOUNTING TREATMENT OF THE CONSOLIDATION. At the time of the
Consolidation, the Company's capital stock received by Kelley Oil's stockholders
represented a majority of the total voting power of the combined capital stock
issued by the Company in the Consolidation. Accordingly, the Consolidation has
been treated as a purchase by the Company of the Public Unitholders' interests
in Kelley Partners. As a result of the purchase accounting treatment of the
Consolidation, the Company's consolidated financial statements through December
31, 1994 reflect only Kelley Oil's historical results, and its financial
statements for 1995 reflect Kelley Oil's historical results through the date of
the Consolidation, with results of combined operations recorded thereafter.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of (i) the Company, (ii) its corporate subsidiaries, all of
which are wholly owned, and (iii) the Company's proportionate interests in
Kelley Partners, its operating partnership, Kelley Operating Company, Ltd.
("Kelley Operating"), and development drilling programs sponsored by Kelley Oil
to conduct drilling operations on properties of Kelley Operating ("DDPs"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION. Kelley recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold in production operations is not significantly different
from Kelley's share of production. Revenues from gas marketing and
transportation of natural gas are recognized upon completion of the sale and
when transported volumes are delivered and are presented net of cost of gas sold
and related operating expenses.
OIL AND GAS PROPERTIES. All of Kelley's interests in its oil and gas
properties are located in the United States. Under the successful efforts
method, the costs of successful wells, development dry holes and leases
containing productive reserves are capitalized and amortized on a
unit-of-production basis over the life of the related reserves. Cost centers for
amortization purposes are determined on a field-by-field basis. Estimated future
abandonment and site restoration costs, net of anticipated salvage values, are
taken into account in depreciation, depletion and amortization. Exploratory
drilling costs are initially capitalized pending determination of proved
reserves but are charged to expense if no proved reserves are found. Other
exploration costs, including geological and geophysical expenses, leasehold
expiration costs and delay rentals, are expensed as incurred. Unproved
properties are periodically assessed for impairment in value, with any
impairment charged to expense.
11
<PAGE>
PROPERTY IMPAIRMENT UNDER FAS 121. In the fourth quarter of 1995,
Kelley implemented the Financial Accounting Standards Board's Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of ("FAS 121"). Under FAS 121, certain assets are required to be
reviewed periodically for impairment whenever circumstances indicate their
carrying amount exceeds their fair value and may not be recoverable. As a result
of its continuing operating losses and a decline in its proved reserves at
January 1, 1996 from year-earlier pro forma levels, Kelley performed an
assessment of the carrying value of its oil and gas properties indicating an
impairment should be recognized as of year end. Under this analysis, the fair
value for Kelley's proved oil and gas properties was estimated using escalated
pricing and present value discount factors reflecting risk assessments. The fair
value of Kelley's unproved properties was predicated on current acreage cost
estimates. Based on this analysis, Kelley recognized noncash impairment charges
against the carrying values of its proved and unproved oil and gas properties
under FAS 121 aggregating $83.4 million and $66.7 million, respectively, at
December 31, 1995.
PROPERTY AND EQUIPMENT. The costs of pipelines and other
transportation assets are depreciated using the straight-line method over the
estimated useful lives of the related assets. Furniture, fixtures and equipment
are recorded at cost and depreciated using the straight-line method over the
estimated useful life of five years. Maintenance and repairs are charged to
expense.
LOSS PER SHARE. Primary loss per share reflects net loss less
cumulative preferred stock dividends whether declared or not, divided by the
average number of common shares and equivalents outstanding during the
respective years. Common shares issuable under stock options and upon conversion
of convertible subordinated debentures and convertible preferred stock are added
to average common shares and equivalents outstanding when dilutive.
The Company has restated the 1996 net loss applicable to common stock
and loss per common share as shown on the Consolidated Statements of Loss and
Note 5 of the Notes to Consolidated Financial Statements to include the effect
of cumulative preferred stock dividends, whether declared or not. The
restatement changes previously reported net loss applicable to common stock from
$(29.0) million to $(33.5) million, previously reported loss per common share
before extraordinary item from $(0.13) to $(0.18) and previously reported loss
per common share from $(0.32) to $(0.37) for the year ended December 31, 1996.
INCOME TAXES. The tax effect of each item in the consolidated
statements of loss is recognized in the current period regardless of when the
tax is paid. Taxes on amounts that affect financial and taxable income in
different periods are reported as deferred income taxes. These temporary
differences relate primarily to (i) differences in financial reporting
provisions for depreciation and amortization and that of income tax reporting,
and (ii) the impairments to proved and unproved oil and gas properties expensed
for financial reporting but not for income tax reporting.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents.
FINANCIAL INSTRUMENTS. The Company's financial instruments consist of
cash and cash equivalents, payables and debt. As of December 31, 1996, the
estimated fair value of the Company's debt was $202.6 million. The fair value of
such financial instruments has been estimated based on quoted market prices and
the Black-Scholes pricing model. The carrying amount of the Company's other
financial instruments approximates fair value.
OTHER NON-CURRENT ASSETS. Other non-current assets at December 31,
1995 and 1996 consist of debt issue costs. In 1995, the Company charged to
expense prepaid financing costs of $1.7 million in connection with a debt
refinancing and recognized impairments of goodwill aggregating $0.7 million
associated with the acquisition costs of two subsidiaries. Accumulated
amortization at December 31, 1995 and 1996 was $0.3 million and $0.4 million,
respectively.
STOCK BASED COMPENSATION. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation ("FAS 123"), effective for the Company
on January 1, 1996. FAS 123 permits, but does not require, a fair value based
method of accounting for employee stock option plans, resulting in compensation
expense being recognized in the results of operations when stock options are
granted. The Company plans to continue the use of its current intrinsic value
based method of accounting for stock option plans where no compensation expense
is recognized.
RISKS AND UNCERTAINTIES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
12
<PAGE>
CHANGES IN PRESENTATION. Certain financial statement items in 1994
and 1995 have been reclassified to conform to the 1996 presentation.
NOTE 2 - AFFILIATED PROGRAMS
INTERESTS IN KELLEY PARTNERS AND KELLEY OPERATING. Through its
ownership in Kelley Oil, the Company had a 1.99% general partner interest in
Kelley Partners, and David L. Kelley, the former Chairman and Chief Executive
Officer of Kelley Oil, had a .01% general partner interest. The general partner
interests in Kelley Partners were retained by Kelley Oil and Mr. Kelley after
the Consolidation and were eliminated in the Partnership Merger. In connection
with the Partnership Merger, Kelley Partners' 98% limited partner interest in
Kelley Operating was transferred to Kelley Oil, and Petrofunds, Inc., an
indirect wholly owned subsidiary of the Company, was substituted for Mr. Kelley
as special general partner of Kelley Operating. Kelley Oil remains the managing
general partner.
STRUCTURE OF DEVELOPMENT PARTNERSHIPS. Kelley Oil and Mr. Kelley are
the general partners of the DDPs, with general partner interests of 3.94% and
.02%, respectively, for which they contributed a proportionate amount of
capital. In addition, Kelley Oil had undertaken to purchase for its own
investment account all units in DDPs that were not subscribed preemptively by
Unitholders of Kelley Partners. The DDPs have no officers, directors or
employees and utilize the management and staff of Kelley for all management and
administrative functions.
THE 1994 DDP. In February 1994, the 1994 DDP completed a public
offering of 20.9 million units of its limited and general partner interests at
$3.00 per unit. As of March 15, 1997, Kelley owned 19.2 million units (91.9%) in
the 1994 DDP, together with its 3.94% general partner interest. Kelley Oil's
subscription for units in the 1994 DDP, together with its 3.94% general partner
interest, represented a commitment aggregating $60.1 million or 92.15% of the
1994 DDP's total committed capital (the "KOIL Share"), with other unitholders
committing for the balance or 7.85% of the 1994 DDP's total committed capital
(the "Outside Share"), payable in each case 10% on subscription and the balance
through the end of November 1994. As of December 31, 1996, Kelley Oil had
contributed $50.2 million to the 1994 DDP.
The 1994 DDP's partnership agreement provides that any contributions
of the partners not used or committed to be used for drilling activities during
the two-year period from the commencement of operations through February 29,
1996 (the "Commitment Period") shall be distributed to the partners on a pro
rata basis as a return of capital. Based on the amount of committed capital
actually used and committed to drilling activities by the end of the Commitment
Period, Kelley Oil determined the adjusted level of committed partnership
capital at $60.7 million in accordance with the 1994 DDP's partnership
agreement, and the 1994 DDP then distributed the Outside Share of uncommitted
capital to its unitholders other than Kelley Oil aggregating $0.3 million in
March 1996. Because the KOIL Share of committed capital exceeded its capital
contributions at that time, Kelley Oil did not receive a distribution of
uncommitted capital. Kelley Oil intends to contribute the unfunded portion of
its commitment, currently aggregating $5.8 million (of which $5.3 million is
beneficially payable to itself), together with interest, as funds are needed for
completion of the 1994 DDP's drilling program.
THE 1992 DDP. During November 1992, the 1992 DDP completed a public
offering of 16.0 million units of limited and general partner interests at $3.00
per unit. As of March 15, 1997, Kelley Oil owned 13.4 million units (83.8%) in
the 1992 DDP, together with its 3.94% general partner interest. As of December
31, 1996, the 1992 DDP was indebted to Kelley Oil for loans and reimbursement
obligations aggregating $5.4 million. Kelley recorded interest income on this
indebtedness of $0.2 million in 1996, net of intercompany eliminations. No
interest income was recorded for 1994 or 1995.
REIMBURSEMENTS FROM AFFILIATED PROGRAMS. Kelley is reimbursed for
administrative and overhead expenses incurred in connection with the management
and administration of each of these affiliated programs. Such amounts, net of
intercompany eliminations, aggregated $1.9 million, $1.6 million and $0.2
million in 1994, 1995 and 1996, respectively.
INTEREST ON DDP COMMITMENTS. During 1994, 1995 and 1996, Kelley Oil
paid or accrued interest at a market rate in the amounts, net of intercompany
elimination, of $27,000, $229,000 and $91,000, respectively, on deferred
subscription commitments to DDPs.
13
<PAGE>
NOTE 3 - LONG TERM DEBT
LONG TERM DEBT. The Company's long term debt at December 31, 1995 and
1996 is comprised of the following items of indebtedness.
(IN THOUSANDS)
DECEMBER 31,
------------------------
1995 1996
-------- --------
Bank credit facilities ......................... $ 22,000 13,500
13 1/2% Senior Notes ........................... 95,926 435
10 3/8% Senior Subordinated Notes .............. -- 119,923
7 7/8% Subordinated Notes ...................... 25,360 27,486
8 1/2% Subordinated Debentures ................. 21,694 22,909
-------- --------
164,980 184,253
Less current maturities ..................... -- --
-------- --------
$164,980 184,253
======== ========
BANK CREDIT FACILITIES. In connection with the Consolidation, the
Company completed a refinancing in February 1995 for the outstanding bank debt
of Kelley Partners, Kelley Oil and the 1992 DDP. The refinancing was provided
under a $70 million revolving credit facility (the "Prior Credit Facility") and
a $20 million term loan facility (the "Term Facility"). The borrowers under the
facilities were Kelley Operating and Kelley Oil. Kelley Partners, the Company
and its other subsidiary partnerships were guarantors. Borrowings of $90 million
under the two facilities were used to refinance Kelley Partners' bank debt of
$69.9 million, Kelley Oil's debt of $9 million under one of its credit
facilities and borrowings of $6 million by the 1992 DDP, with the balance of
$5.1 million used for working capital, including expenses of the Consolidation.
In June 1995, proceeds from a public offering of the Company's 13
1/2% Senior Notes due June 15, 1999 in the aggregate principal amount of $100
million (the "13 1/2% Senior Notes") were used to repay all outstanding
borrowings under the two facilities, and the Term Facility was terminated. The
agreement covering the Prior Credit Facility was amended at that time to (i)
reduce the credit limit to $40 million, (ii) reduce the interest rate to the
agent bank's prime rate or, at the election of the Company, a rate ranging from
1 1/4% to 1 3/4% above a quoted Libor rate, together with a quarterly commitment
fee equal to 3/8% per annum of the unused borrowing base, (iii) eliminate all
financial covenants other than a working capital maintenance requirement and a
limitation on accounts payable above a specified level and (iv) conform the
borrowing base limitations with debt restrictions under the indenture for the 13
1/2% Senior Notes, resulting in a reduction of the borrowing base to $35
million.
In January 1996, the agreement covering the Prior Credit Facility was
further amended to (i) reduce the credit limit to $35 million, (ii) generally
limit the use of future borrowings to reduce trade payables, (iii) increase the
interest rate to 2% above the agent's prime rate and (iv) add certain financial
covenants. The financial covenants added to the Prior Credit Facility included a
current ratio test that the Company would have been unable to satisfy at the
initial measuring date on May 15, 1996 without a substantial equity infusion.
In February 1996, the Company repaid outstanding bank borrowings of
$30 million with proceeds from an equity infusion and replaced the Prior Credit
Facility with a $35 million revolving credit facility from a new bank group (the
"Interim Credit Facility"). Interest on borrowings under the Interim Credit
Facility was payable at a rate equal to (i) the higher of 1/2% above the agent
bank's prime rate or 1% above the federal funds rate in effect from time to time
or (ii) at the Company's election, 1 1/2% above a quoted Libor rate, together
with a quarterly commitment fee equal to 3/8% per annum of the unused portion of
the available borrowing base. The agreement for the Interim Credit Facility
required the payment of interest only until March 15, 1999, when all borrowings
were repayable, subject to mandatory prepayment with net proceeds from asset
sales in excess of related borrowing base reductions.
14
<PAGE>
The borrowers under the Interim Credit Facility were Kelley Operating
and Kelley Oil. The Company and its other subsidiary partnerships were
guarantors. Borrowings under the Interim Credit Facility were secured by
mortgages on all of Kelley's oil and gas and pipeline assets, together with a
security interest in production proceeds from oil and gas sales.
The Company replaced the Interim Credit Facility with a new credit
facility effective as of December 12, 1996 (the "New Credit Facility"). The
borrowers under the New Credit Facility are the Company, Kelley Oil and Kelley
Operating, with Concorde Gas Marketing, Inc. (a subsidiary of the Company) and
the Company's subsidiary partnerships as guarantors.
The New Credit Facility provides for a maximum $125 million revolving
credit loan and matures, with all amounts owed thereunder becoming due and
payable, effective December 12, 2000. Borrowings under the New Credit Facility
are subject to a borrowing base to be determined semi-annually by the lenders
(based in part on the proved oil and gas reserves and other assets of Kelley)
which may be redetermined more frequently at the election of the lenders or the
borrowers. Initially, the borrowing base is $57.5 million. To the extent that
the borrowing base is less than the aggregate principal amount of all
outstanding loans and letters of credit under the New Credit Facility, 50% of
such deficiency must be cured within 90 days and the balance must be cured
within the next 90 days unless such deficiency is a result of an asset sale, in
which case the deficiency must be cured on the date the borrowing base is
re-determined as a result of such sale. Borrowings under the New Credit Facility
are secured by substantially all of the oil and gas assets of the Company and
its subsidiaries and the proceeds therefrom.
So long as no default or event of default (as defined in the New
Credit Facility) is continuing, borrowings under the New Credit Facility bear
interest, at the option of the borrowers, at either (i) LIBOR plus 1.0% to 1.5%
(depending on the level of utilization of the borrowing base) or (ii) the higher
of (a) the agent's prime rate and (b) the federal funds rate plus 0.5%. The
Borrowers incur a quarterly commitment fee ranging from 0.30% to 0.375% per
annum on the average unused portion of the borrowing base, depending upon the
level of utilization.
The New Credit Facility contains covenants which, among other things,
limit the amount of debt Kelley may incur, limit the placement of liens on
Kelley's assets, limit lease transactions, limit Kelley's ability to enter into
certain hedging transactions, restrict the ability of the Company or any of its
subsidiaries to merge with or into another person and prevent the Company from
prepaying certain Subordinated Indebtedness unless certain conditions are met.
Further, covenants require that, for specified periods, the Company maintain
specified ratios between EBITDAX and senior indebtedness and EBITDAX and
interest on Indebtedness.
The New Credit Facility also prohibits the payment of dividends,
except that it permits the payment on or prior to May 1, 1997 of $4.6 million of
dividend arrearages on the outstanding preferred stock. In the event such
payment is not made, the preferred stockholders will be entitled to elect two
additional members to the Company's Board of Directors.
13 1/2% SENIOR NOTES. In June 1995, the Company issued $100 million
principal amount of its 13 1/2% Senior Notes and applied its net proceeds from
the offering primarily to repay outstanding bank debt of $90 million and fund
drilling operations. The 13 1/2% Senior Notes were senior unsecured obligations
of the Company, guaranteed by Kelley Oil, Kelley Operating and, prior to the
Partnership Merger, by Kelley Partners. The indenture for the 13 1/2% Senior
Notes generally limited additional borrowings by the Company and its
subsidiaries to the greater of 12 1/2% of adjusted consolidated net tangible
assets or $30 million for working capital purposes plus $5 million per year for
capital expenditures. The Company's ability to borrow the additional $5 million
per year for capital expenditures and to pay dividends on its Preferred Stock
were conditioned upon the absence of declines in oil and gas reserves from
estimated volumes at December 31, 1995. The 13 1/2% Senior Note indenture also
contained a number of other covenants that included limitations on mergers and
asset transfers, dividend and other payments and use of proceeds from asset
sales.
Pursuant to an offer to purchase and consent solicitation, dated
September 24, 1996, as amended , the Company offered to purchase for cash up to
the aggregate principal amount of $100 million of its 13 1/2% Senior Notes at a
cash price equal to $1,110 per $1,000 principal amount, plus interest accrued
and unpaid through the payment date. In conjunction with the offering, the
Company also solicited consents to the adoption of certain amendments to the 13
1/2% Senior Note indenture pursuant to which the 13 1/2% Senior Notes were
issued, and offered to pay each consenting holder of the 13 1/2% Senior Notes
$30 for each $1,000 principal amount of the 13 1/2% Senior Notes consenting. The
Company received the requisite consents
15
<PAGE>
which allowed it to amend the 13 1/2% Senior Note indenture on October 28, 1996.
The Company also received tenders from holders of approximately $99.6 million
principal amount of the 13 1/2% Senior Notes. On October 29, 1996, the Company
issued an aggregate principal amount of $125 million of 10 3/8% Senior
Subordinated Notes Due 2006 (the "10 3/8% Senior Subordinated Notes"), Series A,
to its placement agents pursuant to a placement agreement dated October 25,
1996. The Company used substantially all of the net proceeds from the offering
to pay tendering and consenting holders. The purpose of the refinancing was to
improve the Company's financial flexibility by (i) eliminating the covenants
applicable to the 13 1/2% Senior Notes that might impede future financing and
acquisition transactions, (ii) extending the maturities of the Company's
long-term debt and (iii) replacing senior debt with senior subordinated debt
(which provides the Company flexibility to pursue additional senior debt
financings).
FOURTH QUARTER EXTRAORDINARY LOSS. In connection with the refinancing
of the 13 1/2% Notes and the payment of Consent Payments pursuant to the Tender
Offer and the Solicitation, the Company incurred an extraordinary loss in the
fourth quarter of 1996 of approximately $17.0 million, representing the excess
of the aggregate purchase price of the 13 1/2% Notes (including Consent
Payments) over their carrying value as of the date of the consummation of the
Refinancing.
10 3/8% SENIOR SUBORDINATED NOTES. The 10 3/8% Senior Subordinated
Notes are redeemable at the option of the Company, in whole or in part, at
redemption prices declining from 105.19% in 2001 to 100% in 2003 and thereafter.
The 10 3/8% Senior Subordinated Notes represent unsecured obligations of the
Company and are subordinate in right of payment to all existing and future
senior indebtedness. The indenture for the notes contains conditions and
limitations, including but not limited to restrictions on additional
indebtedness, payment of dividends, redemption of capital stock, and certain
mergers and consolidations. The holder of the 10 3/8% Senior Subordinated Notes
also can require the Company to repurchase the notes at 101% of the principal
amount upon a Change of Control, as defined.
On February 3, 1997, the Company completed an exchange of
$125,000,000 aggregate principal amount of publicly registered 10 3/8% Senior
Subordinated Notes, Series B, for all of the then outstanding Series A notes.
The Series B notes were substantially identical to the Series A notes.
7 7/8% SUBORDINATED NOTES AND 8 1/2% SUBORDINATED DEBENTURES. Prior
to the Partnership Merger, Kelley Partners had outstanding 7 7/8% Convertible
Subordinated Notes due 1999 (the "7 7/8% Subordinated Notes") in the aggregate
principal amount at maturity of $34.4 million and 8 1/2% Convertible
Subordinated Debentures due April 1, 2000 (the "8 1/2% Subordinated Debentures")
in the aggregate principal amount of $26.9 million (together, the "Subordinated
Debt"). Under the terms of the Consolidation, the Subordinated Debt became
convertible into the Company's Common Stock or a combination of Common and
Preferred Stock instead of Units based on the exchange ratios for the Units in
the Consolidation. In connection with the Partnership Merger, the Subordinated
Debt became direct obligations of the Company.
ESOP LOANS. The Company historically maintained the ESOP to purchase
and hold qualifying securities for the accounts of its employees. To finance the
purchase of those securities, the ESOP obtained term loans bearing interest at
rates of prime plus 1% and 85% of that rate. The ESOP term loans were guaranteed
by Kelley Oil and were repaid in 1995.
INTEREST PAYMENTS. Cash payments attributable to interest on all
indebtedness, excluding the ESOP loans, aggregated $3.1 million, $14.2 million
and $19.2 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
DEBT MATURITIES. The Company has aggregate debt maturities of $34.7
million in 1999, $40.4 million in 2000 and $125 million in 2006.
NOTE 4 - STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK PRIVATE PLACEMENT. In February 1995, the Company
completed an institutional private placement of 4 million shares of its Common
Stock. Proceeds of $16 million from the private placement were used to fund
drilling activities and for working capital. Pending application, $10 million of
the proceeds were used to reduce borrowings under the Prior Credit Facility.
16
<PAGE>
CONTOUR STOCK PURCHASE. In February 1996, the Company issued 48
million shares of its Common Stock at $1.00 per share to Contour Production
Company L.L.C. ("Contour") upon the closing of a Stock Purchase Agreement
between the Company and Contour (the "Contour Transaction"). The newly issued
shares represented 49.8% of the Company's voting power. In connection with the
Contour Transaction, the Company (i) entered into an option agreement with
Contour (the "Contour Option Agreement"), (ii) obtained consents from its
principal stockholders, subject to compliance with applicable securities law, to
amend its Certificate of Incorporation to increase its authorized Common Stock
from 100 million shares to 200 million shares, (iii) entered into employment
agreements with John F. Bookout, President of Contour, and three other new
executives named by him, (iv) adopted a nonqualified stock option plan for the
new executives other than Mr. Bookout, (v) amended its existing incentive stock
option plans, (vi) reduced the size of its board of directors (the "Board") to
seven members and reconstituted the Board with three continuing directors and
four designees of Contour and (vii) replaced the Prior Credit Facility with the
Interim Credit Facility.
CONTOUR OPTION. Under the Contour Option Agreement, the Company
granted Contour an option (the "Contour Option") to purchase up to 27 million
shares (the "Maximum Option Number") of Common Stock at $1.00 per share (subject
to antidilution adjustments) upon satisfaction of certain conditions, including
the absence of any Company debt repurchase or redemption obligations as a result
of the purchase (a "Debt Event"). A Debt Event would occur upon (i) a "Change of
Control" as defined in the indenture for the 13 1/2% Senior Notes, (ii) a
"Change in Control" as defined in the indenture for the 7 7/8% Subordinated
Notes or (iii) a "Redemption Event" as defined in the indenture for the 8 1/2%
Subordinated Debentures. The refinancing eliminates the possibility of a Debt
Event as to the 13 1/2% Senior Notes. A Debt Event with respect to either the 7
7/8% Subordinated Notes or the 8 1/2% Subordinated Debentures would entitle each
holder of the affected securities to require the repurchase or redemption of the
holder's securities. Contour is required to exercise the Contour Option for the
Maximum Option Number within 30 days after it concludes in its sole discretion
that a Debt Event would not occur as a result of the purchase but in no event
later than January 2000. While the exercise of the Contour Option would not
cause a Debt Event under the indenture for the 8 1/2% Subordinated Debentures,
waivers from the holders of the 7 7/8% Subordinated Notes or amendments to the
Debt Event provisions of its indenture will require consents from holders of a
majority in aggregate principal amount of the 7 7/8% Subordinated Notes.
PREFERRED STOCK. In May 1994, Kelley Oil completed a public offering
of 1,380,000 shares of KOIL $2.625 Preferred Stock at $25 per share. The shares
were convertible into KOIL Common Stock at a conversion price of $7.20 per share
and exchangeable after April 1995 at Kelley Oil's option for its 10 1/2%
Convertible Subordinated Debentures due 2004. Net proceeds from the public
offering aggregated $32.5 million, of which $19 million was used to repay
outstanding borrowings under Kelley Oil's credit facilities and the balance was
applied primarily to finance ongoing drilling operations through its investment
in the 1994 DDP. In September 1994, an additional 412,516 shares of KOIL $2.625
Preferred Stock were issued in exchange for outstanding KOIL Debentures. During
1994, Kelley Oil paid quarterly dividends on outstanding KOIL $2.625 Preferred
Stock at the rate of $.65625 per share, aggregating $2,011,000. Each outstanding
share of KOIL $2.625 Preferred Stock was converted in the Consolidation into one
share of the Company's Preferred Stock, which has the same terms as the KOIL
$2.625 Preferred Stock except for expanded voting rights.
The Company issued 649,807 shares of its Preferred Stock to Public
Unitholders in the Consolidation, resulting in a total of 2,442,323 outstanding
shares of Preferred Stock after giving effect to the shares issued to holders of
KOIL $2.625 Preferred Stock. During 1995, the Company paid quarterly dividends
on its outstanding Preferred Stock at the rate of $.65625 per share, aggregating
$5,985,000. In January 1996, the Company suspended the payment of the quarterly
Preferred Stock dividend scheduled for February 1, 1996 to conserve cash. Future
dividends on the Preferred Stock are prohibited under the agreement covering the
New Credit Facility, except that a one time payment of up to $4.6 million is
permitted prior to May 1, 1997. No interest is payable on Preferred Stock
arrearages; however, the terms of the Preferred Stock enable holders, voting
separately as a class, to elect two additional directors to the Board at each
meeting of stockholders at which directors are to be elected during any period
when Preferred Stock dividends are in arrears in an aggregate amount equal to at
least six quarterly dividends, whether or not consecutive.
Each share of Preferred Stock is convertible, at the holder's option,
into 3.4722 shares of Common Stock, equivalent to a conversion price of $7.20
per share of Common Stock relative to the $25 per share liquidation preference
of the Preferred Stock (the "Preferred Conversion Price"). Under the terms of
the Certificate of Designation governing the Preferred Stock, the Contour
Transaction triggered a special conversion right under which the Preferred
conversion price
17
<PAGE>
was reduced to $4.00 for a period of 45 days commencing March 12, 1996. On April
25, 1996, 696,823 shares of Preferred Stock were converted into 4,355,040 shares
of Common Stock under the special conversion right.
ESOP PREFERRED STOCK. From 1987 through 1992, a total of 3,370,000
shares of KOIL ESOP Preferred Stock in four separate series were issued to the
ESOP for a total of $8,948,000. Each share of KOIL ESOP Preferred Stock had
voting rights equivalent to one share of KOIL Common Stock. The KOIL ESOP
Preferred Stock was convertible into KOIL Common Stock, at any time at the
option of the ESOP, at the rate of one share of KOIL Common Stock for each share
of KOIL ESOP Preferred Stock. During 1994, Kelley Oil paid quarterly dividends
on outstanding KOIL ESOP Preferred Stock at rates ranging from $0.0375 per share
to $0.25 per share, aggregating $894,000 for the year, which were used to
service ESOP loans. In January 1995, a total of 1,135,263 shares of KOIL ESOP
Preferred Stock were converted into the same number of shares of KOIL Common
Stock upon distribution to employees affected by the year-end restructuring.
The outstanding shares of KOIL ESOP Preferred Stock were converted in
the Consolidation into four equivalent series of the Company's cumulative
convertible preferred stock ("ESOP Preferred Stock"), which ranks junior in
dividend and liquidation rights to the Company's Preferred Stock. Each share of
ESOP Preferred Stock is convertible into one share of Common Stock. During 1995,
the Company paid quarterly dividends on outstanding ESOP Preferred Stock at
rates ranging from $0.0375 per share to $0.25 per share, aggregating $622,000
for the year. Dividends on the ESOP Preferred Stock during the first three
quarters of 1995 were used to service ESOP loans, which were repaid in full at
the end of the third quarter. A dividend paid in the fourth quarter of 1995 plus
the ESOP contribution for the quarter were invested in a certificate of deposit.
As of December 31, 1995, 1,861,619 shares of ESOP Preferred Stock were
outstanding. In June 1996, each of the 1,861,619 shares of ESOP Preferred Stock
was redeemed for one share of the Company's Common Stock.
NOTE 5 - EMPLOYEE STOCK PLANS
The Company has both qualified and nonqualified stock option plans
that provide for granting of options for the purchase of common stock to key
employees. These stock options may be granted for periods up to ten years and
are generally subject to vesting periods up to three years.
Stock option activity for the Company during 1994, 1995 and 1996 was
as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES 1994 1995 1996
- - ---------------- ------------- ------------- -------------
<S> <C> <C> <C>
Stock options outstanding, beginning of year................ 644,000 564,000 2,105,000
Granted:
1995 at $1.75 to $2.38................................ -- 1,766,000 --
1996 at $1.00 to $2.88................................ -- -- 2,520,000
Exercised:
1994 at $1.10 to $7.63................................ 66,000 -- --
1995 at $1.10 to $2.00................................ -- 225,000 --
1996 at $1.75......................................... -- -- 35,600
Forfeited:
1994 at $4.13......................................... 14,000 -- --
------------- ------------- -------------
Stock options outstanding, end of year
(per share: $1.00 to $4.12 at December 31, 1996)........ 564,000 2,105,000 4,589,400
============= ============= =============
</TABLE>
In February 1995, all previously issued options to the extent
outstanding, aggregating options to acquire 234,000 shares at prices from $7.00
to $7.63, were repriced at $4.13 per share. In February 1996, in connection with
the Contour Transaction, all unvested options then held by employees were fully
vested. Additionally, the then-existing plans were amended to extend the period
during which a terminated employee may exercise vested options to three years
after termination of employment.
18
<PAGE>
At December 31, 1996, options were exercisable for 2,069,400 shares
and 994,000 shares were available for future option grants.
During 1996 and 1995 the Company issued options under three stock
option plans as follows:
<TABLE>
<CAPTION>
ESTIMATED OPTION
FAIR MARKET VALUE
PLAN ISSUED OPTION PRICE GRANT DATE AT DATE OF GRANT
- - ---- ------- ------------ ---------- -----------------
<S> <C> <C> <C> <C>
1995 Incentive Stock Option Plan................. 1,099,000 $ 2.375 11/08/95 $ 1.38
1995 Incentive Stock Option Plan................. 401,000 1.75 12/12/95 1.02
1996 Nonqualified Stock Option Plan.............. 2,500,000 1.00 02/15/96 .58
1996 Incentive Stock Option Plan................. 20,000 2.875 09/20/96 1.67
</TABLE>
The fair value of the options granted was estimated on the date of
grant using the Black-Scholes option-pricing model assuming a risk-free interest
rate of 6.8%, no expected dividend yield, an expected life of five years and an
expected volatility of 60%.
The Company applies the Accounting Principles Board Opinion No. 25
and related Interpretations in accounting for stock option and purchase plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost been determined based upon the fair market value at
the grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net loss and earnings per share for the year ended
December 31, 1995 and 1996 would have been as reflected in the pro forma amounts
indicated below:
RESTATED
1995 1996
-------- ------
Net loss before extraordinary item (in thousands)......$(211,411) (14,172)
Loss per common share before extraordinary item........ (5.31) (.21)
Net loss (in thousands)................................ (211,411) (31,202)
Loss per common share.................................. (5.31) (.40)
As stated in Note 1, loss per common share has been restated for the
year ended December 31, 1996. The restatement changes previously reported pro
forma loss per common share before extraordinary item from $(0.16) to $(0.21)
and previously reported pro forma loss per common share from $(0.35) to $(0.40).
NOTE 6 - INCOME TAXES
The following table sets forth a reconciliation of the statutory
federal income tax for the years ended December 31, 1994, 1995 and 1996:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------------- ----------- -------
<S> <C> <C> <C>
Loss before income taxes...............................$ (24,957) (211,291) (28,965)
------------ ----------- ----------
Income tax benefit computed at statutory rates......... (8,485) (71,839) (9,848)
Increase in valuation allowance..................... 7,524 71,236 16,322
Adjustment to NOL carryforward (increase)........... -- -- (7,209)
Permanent differences:
Nondeductible expenses.............................. 922 567 735
Amortization........................................ 33 33 --
Other-net........................................... 6 3 --
------------ ----------- ----------
Tax benefit......................................$ -- -- --
============ =========== ==========
</TABLE>
19
<PAGE>
No federal income taxes were paid for the years ended December 31,
1994, 1995 and 1996.
DEFERRED INCOME TAXES. Deferred income tax provisions for the years
ended December 31, 1994, 1995 and 1996 result from the following temporary
differences:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- -------
<S> <C> <C> <C>
Temporary differences related to oil and gas properties:
Intangible drilling costs..........................................$ 4,985 6,387 5,523
Depreciation and depletion......................................... (5,540) (58,276) 1,034
Exploration and dry hole costs..................................... (2,517) (8,508) (1,849)
Lease rentals...................................................... 260 -- 1,279
Leasehold and equipment write-offs and sales....................... 1,152 1,611 5,375
Partnership income................................................. (419) -- --
Restructuring costs................................................... -- -- (807)
Net operating loss carryforward benefit............................... (5,418) (12,434) (26,998)
Valuation allowance................................................... 7,524 71,236 16,322
Other................................................................. (27) (16) 121
---------- ----------- ----------
Total deferred tax benefit.........................................$ -- -- --
========== =========== ==========
</TABLE>
The Company's deferred tax position reflects the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting.
Significant components of the deferred tax liabilities and assets are as
follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---------- -------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depletion, depreciation and
capitalization methods on oil and gas properties........$ -- --
Deferred tax assets:
Book over tax depletion, depreciation and
capitalization methods on oil and gas properties........ 53,312 42,696
Net operating loss carryforwards........................... 35,181 62,179
Charitable contribution carryforwards...................... 138 78
Alternative minimum tax credit carryforwards............... 21 21
Valuation allowance........................................ (88,652) (104,974)
---------- ----------
Total deferred tax assets.................................. -- --
---------- ----------
Net deferred tax liability....................................$ -- --
========== ==========
</TABLE>
NET OPERATING LOSS CARRYFORWARDS AND ALTERNATIVE MINIMUM TAX CREDITS.
As of December 31, 1996, the Company had cumulative net operating loss
carryforwards ("NOL") for federal income tax purposes of approximately
$182,879,000, which expire in 2000 through 2011, and net operating loss
carryforwards for alternative minimum tax purposes of approximately
$135,066,000, which expire in 2008 through 2011. Due to previous ownership
changes, future utilization of the net operating loss carry forwards will be
limited by Internal Revenue Code section 382. The Company also had approximately
$21,000 of alternative minimum tax credit carryforwards, which have no
expiration date.
20
<PAGE>
NOTE 7 - OTHER RELATED PARTY TRANSACTIONS
ADVISORY FEES. During 1996, pursuant to an agreement dated January
23, 1996, the Company paid Bessemer Partners & Co., an affiliate of the majority
stockholder of Contour Production Company L.P., a financial advisory fee of
$2,000,000 in connection with the Contour Transaction and an advisory fee of
$500,000 for ongoing advisory services. The Company is obligated to pay
additional advisory fees of $500,000 in each of 1997 and 1998.
NOTE 8 - EMPLOYEE STOCK OWNERSHIP PLAN
Kelley Oil established the ESOP effective January 1, 1984 for the
benefit of substantially all of its employees. Kelley Oil guaranteed the ESOP
loans referred to in Note 3 (collectively, the "ESOP Loans") and recorded
deferred employee compensation balances in a like amount, which were deducted
from stockholders' equity. Prior to 1996, Kelley Oil made contributions to the
ESOP for covered employees in amounts up to 15% of their annual salaries up to a
specified level. Contribution expense was recognized using the cash payments
method. Cumulative expense under this method is greater than 80% of the
cumulative expense that would have been recognized under the shares allocated
method before deduction of dividends. Contributions and dividend payments on the
KOIL ESOP Preferred Stock and ESOP Preferred Stock were used to make scheduled
payments of principal and interest on the ESOP Loans, which were repaid in full
during 1995. For the years ended December 31, 1994 and 1995, Kelley Oil paid to
the ESOP contributions of $1,160,000 and $736,000, respectively, plus dividends
of $894,000 and $622,000, respectively. No ESOP contributions were made in 1996.
As the term loans were repaid, a corresponding portion of the stock pledged to
secure the loans was released and allocated among the participants' accounts.
Effective September 1, 1996, the ESOP was amended to include a 401(k) feature
whereby the Company is obligated to make matching contributions up to 6% of each
employee's salary. The plan also provides for additional discretionary
contributions. For 1996 the Company made matching contributions totaling
$87,814.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
During 1995, the Company entered into change of control agreements
with 16 employees entitling them to severance benefits in the event their
employment is terminated under certain circumstances within two years after a
change of control, as defined in the agreements. For this purpose, the February
1996 closing under the Contour Transaction constituted a change of control. The
severance benefits amount to salary continuation for periods ranging from 12 to
36 months, depending on seniority of the covered employees, based on their
highest compensation rate during the two years prior to termination. As of March
15, 1997, ten of these agreements have been exercised obligating the Company to
aggregate severance payments of $2.1 million through August 1999. The Company's
anticipated maximum liability under the remaining agreements was $0.6 million.
Substantially all of the Company's receivables are due from a limited
number of natural gas transmission companies and other gas purchasers. To date,
this concentration has not had a material adverse effect on the consolidated
financial condition of the Company.
The Company is involved from time to time in various claims and
lawsuits incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material effect on the financial
statements of the Company.
The Company leases office space and equipment under operating leases
with options to renew. Rental expenses related to these leases for the years
ended December 31, 1994, 1995 and 1996 were $2.3 million, $1.9 million and $1.3
million, respectively. For the balance of the lease terms, minimum rentals are
as follows:
1997............................... 1,142,220
1998............................... 494,425
1999............................... 16,829
--------------
Total..............................$ 1,653,474
==============
21
<PAGE>
NOTE 10 - LITIGATION SETTLEMENT
Following Kelley Oil's announcement of the initial proposal for the
Consolidation in August 1994, four separate lawsuits were filed against Kelley
Oil and its directors relating to the Consolidation and the 1991 DDP Exchange.
In November 1994, Kelley Oil entered into a memorandum of understanding with the
plaintiffs in three of the lawsuits, providing for a proposed settlement based
on a revised Consolidation proposal negotiated by a special committee of Kelley
Oil's nonmanagement directors and the settling plaintiffs. A stipulation and
agreement of compromise, settlement and release reflecting the terms of the
proposed settlement was filed in the United States District Court for the
Southern District of Texas on November 23, 1994. At a hearing held on the same
date, the court approved the consolidation of all four lawsuits and the
certification of a Unitholder class requested by the settling parties. On March
3, 1995, following a hearing on the fairness of the settlement, the court
entered a final order approving the settlement, dismissing the consolidated
lawsuits with prejudice and reducing the award of attorneys' fees and
disbursements contemplated by the stipulation to $1,479,000, payable $300,000 in
cash and the balance in Common Stock. The Company believes a pending appeal by
the non-settling plaintiff is without merit.
NOTE 11 - HEDGING ACTIVITIES
Kelley periodically has used forward sales contracts, natural gas
swap agreements and options to reduce exposure to downward price fluctuations on
its natural gas production. The swap agreements generally provide for Kelley to
receive or make counterparty payments on the differential between a fixed price
and a variable indexed price for natural gas. Gains and losses realized by
Kelley from hedging activities are included in oil and gas revenues and average
sales prices. Kelley's hedging activities also cover the oil and gas production
attributable to the interest in such production of the public unitholders in
Kelley's subsidiary partnerships. Through a combination of natural gas swap
agreements, forward sales contracts and options, approximately 55% of Kelley's
natural gas production for 1996 was affected by Kelley's hedging transactions at
an average NYMEX quoted price of $2.25 per MMBtu before transaction and
transportation costs. Approximately 44% of Kelley's anticipated natural gas
production for the first eight months of 1997 has been hedged by natural gas
swap agreements at an average NYMEX quoted price of $2.42 per MMBtu before
transaction and transportation costs. Hedging activities related to swaps and
options reduced revenues by approximately $3.1 million in 1996 and increased
revenues by approximately $1.8 million in 1995 as compared to estimated revenues
had no hedging activities been conducted. Hedging activities were not material
in 1994. At December 31, 1996, the Company had an unrealized loss of $2.6
million.
The credit risk exposure from counterparty nonperformance on natural
gas forward sales contracts and derivative financial instruments is generally
the amount of unrealized gains under the contracts. The Company has not
experienced counterparty nonperformance on these agreements and does not
anticipate any in future periods.
NOTE 12 - RESTRUCTURING EXPENSE
In each of 1994, 1995 and 1996 the Company incurred restructuring
charges of $1.1 million, $1.8 million and $4.3 million, respectively, associated
primarily with staff reductions of approximately and 36, 7 and 41 employees in
1994, 1995, and 1996, respectively, related severance settlements and
reorganization costs. Approximately $3.7 million of these expenses has been paid
through December 31, 1996. Accrued expenses on the balance sheet include $1.0
million and $3.5 million at December 31, 1995 and 1996, respectively, related to
the unpaid portion of these charges.
22
<PAGE>
NOTE 13 - SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."
CAPITALIZED COSTS. Capitalized costs and accumulated depreciation,
depletion and amortization relating to the Company's oil and gas producing
activities, all of which are conducted within the continental United States, are
summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------- ---------- ----------
<S> <C> <C> <C>
Unevaluated properties.................................................$ 1,430 13,050 12,521
Properties subject to amortization..................................... 129,883 287,970 338,794
------------ ---------- ----------
Capitalized costs...................................................... 131,313 301,020 351,315
Accumulated depreciation, depletion and amortization................... (59,108) (173,996) (194,367)
---------- ---------- ----------
Net capitalized costs..................................................$ 72,205 127,024 156,948
========== ========== ==========
</TABLE>
COSTS INCURRED. Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs:(1) (2)
Proved..............................................................$ 7,035 126,577 11,594
Unproved............................................................ 309 88,539 2,160
Exploration costs...................................................... 8,760 9,521 5,438
Development costs...................................................... 28,034 31,730 41,790
------------ ---------- ----------
Total costs incurred................................................$ 44,138 256,367 60,982
============ ========== ==========
</TABLE>
(1) Includes general and administrative costs directly related to
acquisition, exploration and development of oil and gas properties of
$2,909,000, $3,158,000 and $1,645,000 incurred in the years ended December 31,
1994, 1995 and 1996, respectively.
(2) Includes assets acquired in the Consolidation aggregating $207
million for the year ended December 31, 1995.
23
<PAGE>
RESULTS OF OPERATIONS. Results of operations for the Company's oil
and gas producing activities are summarized below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------- ------------ -----------
<S> <C> <C> <C>
Oil and gas revenues..................................................$ 15,487 36,042 59,016
Gain on sale of oil and gas properties................................ -- 777 176
Production costs...................................................... (3,760) (10,835) (10,709)
Exploration and dry hole costs........................................ (7,404) (23,387) (5,438)
Depreciation, depletion and amortization.............................. (19,997) (34,355) (19,901)
Impairment of oil and gas properties.................................. -- (150,138) --
------------ ----------- -----------
Results of operations..............................................$ (15,674) (181,896) 23,144
============ =========== ===========
</TABLE>
Results of operations from oil and gas producing activities are
determined using actual historical revenues, production costs (including
production related taxes), exploration and dry hole costs and depreciation,
depletion and amortization of the capitalized costs subject to amortization.
General and administrative expenses and interest expense are excluded from this
determination of results of operations. Income tax benefit is computed by
applying the statutory tax rates to earnings before income tax expense with
recognition of tax credits and allowances relating to oil and gas producing
activities. No income tax benefit was recognized during the reported periods.
RESERVES. The following table summarizes the Company's net ownership
interests in estimated quantities of proved oil and gas reserves and changes in
net proved reserves, all of which are located in the continental United States,
for the years ended December 31, 1994, 1995 and 1996 are summarized below.
Reserves estimates contained below were prepared by H.J. Gruy & Associates, Inc.
("Gruy"), independent petroleum engineers, for 1995 and 1996, and were prepared
by the Company and reviewed by Gruy for 1994. See "Estimated Proved
Reserves-Uncertainties in Estimating Reserves" under Items 1 and 2 of this
Report.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS LIQUIDS NATURAL GAS
(MBBLS) (MMCF)
------------------------------------ ------------------------------------
1994 1995 1996 1994 1995 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year ........................... 1,114 1,236 1,387 64,875 93,612 196,273
Revisions of previous estimates ............. 75 (1,324) (89) 16,055 (64,027) (30,519)
Purchases of oil and gas properties ......... -- 1,756 57 -- 127,962 30,844
Extensions and discoveries .................. 218 156 477 19,379 66,864 128,692
Sale of oil and gas properties .............. -- (118) (134) -- (10,388) (4,190)
Production .................................. (171) (319) (232) (6,697) (17,750) (23,466)
-------- -------- -------- -------- -------- --------
End of year ................................. 1,236 1,387 1,466 93,612 196,273 297,634
======== ======== ======== ======== ======== ========
Proved developed reserves
at end of year .............................. 674 1,197 977 48,482 111,287 173,465
======== ======== ======== ======== ======== ========
</TABLE>
STANDARDIZED MEASURE. The following table of the Standardized Measure
of Discounted Future Net Cash Flows concerning the standardized measure of
future cash flows from proved oil and gas reserves are presented in accordance
with Statement of Financial Accounting Standards No. 69. As prescribed by this
statement, the amounts shown are based on prices and costs at the end of each
period, and with a 10% annual discount factor. Extensive judgments are involved
in estimating the timing of production and the costs that will be incurred
throughout the remaining lives of the fields.
24
<PAGE>
Accordingly, the estimates of future net revenues from proved reserves and the
present value thereof may not be materially correct when judged against actual
subsequent results. Further, since prices and costs do not remain static, and no
price or cost changes have been considered, and future production and
development costs are estimates to be incurred in developing and producing the
estimated proved oil and gas reserves, the results are not necessarily
indicative of the fair market value of estimated proved reserves, and the
results may not be comparable to estimates disclosed by other oil and gas
producers.
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Future cash inflows.....................................................$ 175,052 431,351 1,099,089
Future production costs................................................. (34,472) (76,021) (113,178)
Future development costs................................................ (22,914) (36,524) (81,932)
Future income tax expenses.............................................. (6,016) (8,577) (162,887)
----------- ----------- -----------
Future net cash flows................................................ 111,650 310,229 741,092
10% annual discount for estimating timing of cash flows................. (40,810) (139,177) (307,321)
----------- ----------- -----------
Standardized measure of discounted future net cash flows.............$ 70,840 171,052 433,771
=========== =========== ===========
</TABLE>
Future cash inflows are computed by applying year-end prices of oil
and gas to year-end quantities of proved oil and gas reserves. Future production
and development costs are computed primarily by the Company's petroleum
engineers by estimating the expenditures to be incurred in developing and
producing the Company's proved oil and gas reserves at the end of the year,
based on year-end costs and assuming continuation of existing economic
conditions.
Future income taxes are based on year-end statutory rates, adjusted
for operating loss carryforwards and tax credits. A discount factor of 10% was
used to reflect the timing of future net cash flows. The standardized measure of
discounted future net cash flows is not intended to represent the replacement
cost or fair market value of the Company's oil and gas properties.
The standardized measure of discounted future net cash flows as of
December 31, 1994, 1995 and 1996 was calculated using prices in effect as of
those dates, which averaged $15.65, $19.73 and $25.18, respectively, per barrel
of oil and $1.66, $2.06 and $3.66, respectively, per Mcf of natural gas.
25
<PAGE>
CHANGE IN STANDARDIZED MEASURE. Changes in standardized measure of
future net cash flows relating to proved oil and gas reserves are summarized
below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Changes due to current year operations:
Sales of oil and gas, net of production costs...................$ (11,727) (25,207) (48,307)
Sale of oil and gas properties.................................. -- (5,884) (6,836)
Extensions and discoveries...................................... 16,290 62,407 192,174
Purchases of oil and gas properties............................. -- 90,660 11,594
Future development costs incurred............................... 7,242 10,216 24,500
Changes due to revisions in standardized variables:
Prices and production costs..................................... (20,609) 21,055 159,292
Revisions of previous quantity estimates........................ 3,432 (22,223) (50,594)
Revisions of purchased oil and gas properties................... -- (28,199) --
Estimated future development costs.............................. (1,949) 17,676 3,254
Income taxes.................................................... 6,104 (893) (82,831)
Accretion of discount........................................... 7,179 7,145 17,575
Production rates (timing) and other............................. (6,912) (26,541) 42,898
----------- ----------- -----------
Net increase (decrease)...................................... (950) 100,212 262,719
Beginning of year............................................... 71,790 70,840 171,052
----------- ----------- -----------
End of year..................................................$ 70,840 171,052 433,771
=========== =========== ===========
</TABLE>
Sales of oil and gas, net of production costs, are based on
historical pre-tax results. Extensions and discoveries, purchases of minerals in
place and the changes due to revisions in standardized variables are reported on
a pre-tax discounted basis, while the accretion of discount is presented after
tax. Extensions and discoveries include proved undeveloped reserves attributable
to Kelley Oil's interests in drill sites assigned to DDPs but do not give effect
to the Consolidation prior to 1995.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES:
(1) FINANCIAL STATEMENTS: The financial statements required to be
filed are included under Item 8 of this Report.
(2) SCHEDULES: All schedules for which provision is made in
applicable accounting regulations of the SEC have been omitted as the schedules
are either not required under the related instructions, are not applicable or
the information required thereby is set forth in the Company's Consolidated
Financial Statements or the Notes thereto.
(3) EXHIBITS:
EXHIBIT
NUMBER: EXHIBIT
- - ------- -------
2.1 Agreement and Plan of Consolidation among the Registrant, Kelley
Oil Corporation, Kelley Oil & Gas Partners, Ltd. ("Kelley
Partners") and the other parties named therein (incorporated by
reference to Exhibit 2.1 to the Registrant's Registration
Statement (the "Consolidation Registration Statement") on Form
S-4 (Reg No. 33-84338) filed September 26, 1994, as amended).
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Consolidation Registration
Statement).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant dated December 20, 1994 (incorporated by reference to
Exhibit 3.2 to the Consolidation Registration Statement).
3.3 Certificate of Correction to Certificate of Incorporation of the
Registrant dated February 12, 1996 (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
3.4 Certificate of Designation of $2.625 Convertible Exchangeable
Preferred Stock of the Registrant (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 10, 1995).
3.5 Certificate of Designations of Cumulative Convertible Preferred
Stock of the Registrant (incorporated by reference to Exhibit 3.2
to the Registrant's Current Report on Form 8-K (File No. 0-25214)
dated February 10, 1995).
3.6 Bylaws of the Registrant (incorporated by reference to Exhibit
3.5 to the Consolidation Registration Statement).
27
<PAGE>
4.1 Certificate representing Common Stock of the Registrant
(incorporated by reference to Exhibit 4.1 to the Consolidation
Registration Statement).
4.2 Certificate representing $2.625 Convertible Exchangeable
Preferred Stock of the Registrant (incorporated by reference to
Exhibit 4.2 to the Consolidation Registration Statement).
4.3 Supplemental Indenture dated February 7, 1995 among the
Registrant, Kelley Partners and United States Trust Company of
New York, relating to Kelley Partners' 8 1/2% Convertible
Subordinated Debentures (the "8 1/2% Debentures") due 2000
(incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K (File No. 0-25214) dated February 10,
1995).
4.4 Supplemental Indenture dated March 29, 1996 between the
Registrant and the United States Trust Company of New York,
relating to the 8 1/2% Debentures (incorporated by reference to
Exhibit 4.4 to the Registrant's Annual Report on Form 10-K (File
No. 0-25214) for the year ended December 31, 1995).
4.5 Supplemental Indenture dated February 7, 1995 among the
Registrant, Kelley Partners and United States Trust Company of
New York, relating to Kelley Partners' 7 7/8% Convertible
Subordinated Notes (the "7 7/8% Notes") due 1999 (incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on
Form 8-K (File No. 0-25214) dated February 10, 1995).
4.6 Supplemental Indenture dated March 29, 1996 between the
Registrant and the United States Trust Company of New York,
relating to the 7 7/8% Notes (incorporated by reference to
Exhibit 4.6 to the Registrant's Annual Report on Form 10-K (File
No. 0-25214) for the year ended December 31, 1995).
4.7 Indenture dated as of June 15, 1995 among the Registrant, as
issuer, Kelley Partners, Kelley Operating Company, Ltd. and
Kelley Oil Corporation, as guarantors, and Chemical Bank, as
trustee, relating to the Registrant's 13 1/2% Senior Notes due
1999 (incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form S-3 (Reg. No.
33-92214) dated June 9, 1995.
4.8 Supplemental Indenture dated as of October 28, 1996, among the
Registrant, as issuer, Kelley Operating Company, Ltd. and Kelley
Oil Corporation, as guarantors, and The Chase Manhattan Bank
(formerly Chemical Bank), as trustee, relating to the
Registrant's 13 1/2% Senior Notes due 1999 (incorporated by
reference to Exhibit 4.3 to the Registrant's Quarterly Report on
Form 10-Q (File No. 0-25214) for the quarterly period ended
September 20, 1996).
4.9 Indenture dated as of October 15, 1996, among the Registrant, as
issuer, Kelley Oil Corporation and Kelley Operating Company,
Ltd., as guarantors, and United States Trust Company of New York,
relating to the Registrant's 10 3/8% Senior Subordinated Notes
due 2006 (incorporated by reference to Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q (File No. 0-25214) for
the quarterly period ended September 30, 1996).
4.10 Form of the Registrant's 10 3/8% Senior Subordinated Note Due
2006, Series B (incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-18481) filed December 20, 1996, as amended).
4.11 Option Agreement dated as of February 15, 1996 between the
Registrant and Contour Production Company L.L.C. (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K (File No. 0-25214) dated February 15, 1996).
28
<PAGE>
10.1 Amended and Restated Employee Stock Ownership Plan of Kelley Oil
effective as of January 1, 1989 (incorporated by reference to
Exhibit 10.15 to Kelley Oil's Annual Report on Form 10-K (File
No. 0-17585) for the year ended December 31, 1991).
10.2 1987 Incentive Stock Option Plan (the "1987 Plan") of Kelley Oil
(incorporated by reference to Kelley Oil's Annual Report on Form
10-K (File No. 0-17585) for the year ended December 31, 1988).
10.3 1991 Incentive Stock Option Plan (the "1991 Plan") of Kelley Oil
(incorporated by reference to Exhibit 10.3 to Kelley Oil's Annual
Report on Form 10-K (File No. 0-175850 for the year ended
December 31, 1991).
10.4 1995 Incentive Stock Option Plan of the Registrant (the "1995
Plan") (incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K (File No. 0-25214) for
the year ended December 31, 1995).
10.5 Amendment to the 1987 Plan, 1991 Plan and 1995 Plan (incorporated
by reference to Exhibit 10.5 to the Registrant's Current Report
on Form 8-K (File No. 0-25214) dated February 15, 1996).
10.6 1996 Nonqualified Stock Option Plan of the Registrant
(incorporated by reference to Exhibit 10.4 to the Registrant's
Current Report on Form 8-K (File No. 0-25214) dated February 15,
1996).
10.7 Employment Agreement dated as of February 15, 1996 between the
Registrant and John F. Bookout, Jr. (incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File
No. 0-25214) dated February 15, 1996).
10.8 Form of Employment Agreements dated as of February 15, 1996
between the Registrant and each of Dallas Laumbach and William
Albrecht (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K (File No. 0-25214) dated
February 15, 1996).
10.9 Employment Agreement dated as of March 20, 1997 with David C.
Baggett (incorporated by reference to Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-25214) dated March 27,1997).
10.10 Amended and Restated Credit Agreement among Kelley Oil & Gas
Corporation, Kelley Oil Corporation and Kelley Operating Company,
Ltd., as Borrowers, Concorde Gas Marketing, Inc., Kelley Partners
1992 Development Drilling Joint Venture, Kelley Partners 1994
Development Drilling Joint Venture, Kelley Partners 1992
Development Drilling Program and Kelley Partners 1994 Development
Drilling Program, as Guarantors, Texas Commerce Bank National
Association, as Agent, Chase Securities Inc., as Arranger and
Syndication Agent, and the Lenders Signatory thereto, dated as of
December 12, 1996 (incorporated by reference to Exhibit 4.3 to
the Registrant's Registration Statement on Form S-4 (Reg. No.
333-18481) filed December 20, 1996, as amended).
10.11 1996 Incentive Stock Option Plan (the "1996 Plan") of the
Registrant (incorporated by reference to Exhibit 10.11 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-25214) dated March 27,1997).
21.1 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 (File No. 0-25214) dated March
27,1997).
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of H.J. Gruy & Associates, Inc.
(b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed by the
Registrant during the fourth quarter of 1996.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 27th day of
March, 1998.
KELLEY OIL & GAS CORPORATION
By: /s/ DAVID C. BAGGETT
David C. Baggett
Senior Vice President
and Chief Financial Officer
30
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-90932 on Form S-8, and Registration Statement No. 333-3132 on Form S-8 of
our report dated March 3, 1997, March 6 ,1998, as to Notes 1 and 5 (which
expresses an unqualified opinion and includes an explanatory paragraph relating
to the restatement described in Notes 1 and 5), appearing in the Annual Report
on Form 10-K/A of Kelley Oil & Gas Corporation for the year ended December 31,
1996.
DELOITTE & TOUCHE LLP
Houston, Texas
March 30, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-90932 and Form S-8 No. 333-3132) of Kelley Oil & Gas
Corporation and in the related Prospectuses of our report dated March 6, 1995,
with respect to the consolidated financial statements of Kelley Oil & Gas
Corporation included in this Annual Report (Form 10-K/A, Amendment No.1) for the
year ended December 31, 1996.
ERNST & YOUNG LLP
Houston, Texas
March 24, 1998
EXHIBIT 23.3
CONSENT OF H.J. GRUY AND ASSOCIATES, INC.
We hereby consent to the use of the name H.J. Gruy and Associates, Inc.
and of references to H.J. Gruy and Associates, Inc. and to the inclusion of and
references to our report dated February 25, 1997, prepared for Kelley Oil & Gas
Corporation in the Kelley Oil & Gas Corporation Annual Report on Form 10-K/A for
the year ended December 31, 1996.
H.J. Gruy and Associates, Inc.
/s/ JAMES H. HARTSOCK
James H. Hartsock, Ph.D., P.E.
Executive Vice President
March 23, 1998
Houston, Texas
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